Official Receiver v Savadia and Co. (Civil Appeal No. 31 of 1951) [1951] EACA 119 (1 January 1951)

Full Case Text

## COURT OF APPEAL FOR EASTERN AFRICA

Before SIR NEWNHAM WORLEY, Acting President, LOCKHART-SMITH, Acting Vice-President, and SINCLAIR, Ag. C. J. (Tanganyika)

OFFICIAL RECEIVER, Appellant (Original Applicant)

MESSRS. SAVADIA & CO., Respondent (Original Respondent) Civil Appeal No. 31 of 1951

(Appeal from original Order in Bankruptcy Cause No. 1 of 1949 of H. M. High Court of Tanganyika in the District Registry at Tanga-Knight, J.)

Bankruptcy—Notice of available act of Bankruptcy—Trustee in Bankruptcy—Title relating back-Sections 39 and 47, Tanganyika Bankruptcy Ordinance-Jurisdiction of Tanganyika High Court to deal with goods removed to Kenya.

Debtor left Tanga ostensibly for medical treatment in Nairobi leaving a general power of attorney with his son and disclosing a list of creditors showing debts totalling over Sh. 600,000. Creditors of whom respondent from Mombasa was one, met at a debtor's shop at Tanga and forced son to distribute goods in shop in satisfaction of their debts. Debtor subsequently made bankrupt. Trustee applied to High Court of Tanganyika *inter alia* for declaration that the sale and delivery was void against trustee under provisions of sections 39 and 47 of Bankruptcy Ordinance as made after debtor had committed an act of bankruptcy to which title of trustee related back and for an order that respondent pay trustee value of merchandise. Question of court's jurisdiction to hear trustee's application raised.

Held (30-10-51).—(1) Section 159, Bankruptcy Ordinance, imposes a duty on trustee to take lawful steps in a reciprocating territory for the proper administration of the estate but his<br>power to request Bankruptcy Official in such territory to act as his agent is discretionary. Further, trustee can bring action where he thinks most convenient. Therefore, Tanganyika High Court had jurisdiction to entertain trustee's application.

(2) Section 47, Bankruptcy Ordinance, was not dependent upon section 46 and a transaction not a fraudulent preference under section 46 could nevertheless come within the scope of section 47 and be subject to the proviso to that section.

(3) At the date when the respondent acquired the goods he had notice of an available act of bankruptcy by reasonable inference.

Appeal allowed.

Cases referred to: Herbert's Trustee v. Higgins (1926) 1 Ch. 794 p. 800; Ex parte Snowball: in re Douglas, L. R. 7 Ch. A. C. 534.

Webster, Official Receiver, for appellant.

Budhdeo, for respondent.

JUDGMENT (WORLEY, Acting President).—The appellant, who is the Official Receiver of Tanganyika Territory, was appointed the trustee in bankruptcy of one Lalji Gordhandas (hereinafter called "the bankrupt"), who carried on business in piece goods and general merchandise at Tanga in Tanganyika Territory. On the 24th December, 1949, a receiving order was made against the bankrupt and the Official Receiver constituted receiver of his estate on a petition filed on the 19th December, 1949, by a creditor firm trading under the firm name and style of Lakhamshi Karamshi, the order setting out that it appeared to the Court—

"that the following acts of bankruptcy have been committed, viz.—

(a) that the said Lalji Gordhandas, with intent to defeat or delay his creditors, departed out of the territory;

## (b) that the said Lalji Gordhandas made a transfer of his property which would constitute a fraudulent preference if he were adjudged bankrupt."

An adjudication order was made on the 25th February, 1950.

The material facts are contained in affidavits sworn by Dwarkadas Lalji, a son of the bankrupt, and Nanchand Fulchand Savadia, the sole proprietor of the respondent firm, which carries on business under the firm name and style of Savadia and Company at Mombasa in the Kenya Protectorate. The facts are not in dispute except with regard to a few details which appear to be unimportant. It appears from these affidavits that the debtor left Tanga on December 3rd, 1949, telling his son that he was going to Nairobi for a fortnight's medical treatment. He left his son in charge of his business and handed him a general power of attorney dated the 17th October, 1949, to act on his behalf during his absence. He also gave his son a list of his creditors showing that his debts totalled over Sh. 600,000. According to the son's affidavit, a few days later Mr. Savadia called at the bankrupt's shop and demanded payment of the debt of Sh. 11,000 owing to him by the bankrupt. Mr. Savadia, however, has deposed that he arrived in Tanga in the afternoon of the 3rd December, 1949, and learnt from the son that the bankrupt had left Tanga that very day to go to Nairobi via Zanzibar and would return in about a fortnight. Whichever of these stories is true (and there is no finding on this point by the learned trial Judge) it is common ground that the respondent pressed Dwarkadas to pay off the debt due to him as he held cheques issued by the bankrupt which had been dishonoured. It is also common ground that the son refused to pay. He says he refused because he had not the money and Mr. Savadia says that the son also said he had no authority from the bankrupt to pay it. It is also alleged by Mr. Savadia that the son "dodged him" for three days and in the meantime continued to sell the goods in the bankrupt's shop.

On the 7th December, 1949, another creditor from Mombasa also arrived in Tanga and on the morning of the 8th of December six other creditors from Mombasa arrived; they all met at the bankrupt's shop and complained to his son that cheques and promissory notes issued by the bankrupt had been dishonoured, and demanded payment. They then summoned some of the bankrupt's Tanga creditors and when these had arrived the son closed the shop at their request. They then, according to Mr. Savadia's affidavit, demanded payment which the son refused, representing that he had no authority to settle their claims. One of the creditors then demanded to know why, in that case, he was disposing of the bankrupt's goods and threatened him with civil action and attachment and with a criminal prosecution for disposing of goods without the authority of the owner. The son then produced the power of attorney and informed the creditors that the total indebtedness of the bankrupt was over Sh. 600,000. The creditors then inspected the stock-in-trade, came to the conclusion that the value was more than 50 per cent of the total indebtedness, apart from book debts, and asked for goods worth 50 per cent of their claim. The son still refused, but eventually submitted when bankruptcy proceedings were threatened, and goods to this value were handed over to the creditors present. The son's affidavit shows that 13 creditors were present and shared in the distribution, including the respondent firm which received goods valued at Sh. 5,814 in settlement of their claim for Sh. 11,593. Invoices were made out and signed by the creditors. Mr. Savadia deposed in his affidavit sworn on the 17th November, 1950, that some of the goods delivered to him had already been sold but some were not then sold.

On these facts coming to the notice of the appellant he demanded the return of the goods, which demand was complied with by some of the creditors but not by the respondent. The appellant therefore applied to the High Court for-

- $(1)$ A declaration that the sale and delivery of certain merchandise by or on behalf of the bankrupt to the respondent was a fraudulent preference under section 46 of the Bankruptcy Ordinance (Cap. 25 of the Laws of Tanganyika, 1947), and an act of bankruptcy under the provisions of section 3 (1) (c) thereof and void as against the applicant as trustee in bankruptcy: - (2) further or alternatively for a declaration that the said sale and delivery was void against him (the appellant) under the provisions of sections 39 and 47 of the Bankruptcy Ordinance in that it was made after the bankrupt had committed an act of bankruptcy to which the title of the appellant as trustee relates back: - $(3)$ for an order that the respondent pay to the appellant as trustee the sum of Sh. 5.814, the value of the said merchandise."

Knight, J., dismissed the application on the ground that as the transfer of the property was made under pressure and not voluntarily by Dwarkadas (acting on his father's behalf), no question of fraudulent or voidable preference could arise in regard to it, basing his decision upon the following passage from the speech of Lord Halsbury, L. C., in Sharp v. Jackson, 1899, A. C. 425:-

"A bankrupt when in contemplation of his bankruptcy cannot by any voluntary act, favour any one creditor; but if under fear of legal process, he gives a preference, it is evidence that he did not do it voluntarily."

The question as to the jurisdiction of the Court to hear the application had been raised before Knight, J., but he deemed it unnecessary to consider this; neither does he appear to have considered the second declaration asked for in the application.

There is no appeal from the learned Judge's decision on the question of fraudulent preference but the appellant appeals to this Court on the grounds—

- (1) that the learned Judge erred in that he did not hold that on the 8th of December, 1949, the respondent had notice or must be deemed to have had notice of available acts of bankruptcy committed by the bankrupt on or prior to the 8th December, 1949; - (2) that he erred in that he did not hold that the title of the appellant to the goods delivered to the respondents on that day related back to such goods by virtue of sections 39 and 47 of the Bankruptcy Ordinance; - (3) that he erred in that he did not hold that the High Court of Tanganyika would have been acting within its jurisdiction in granting the order prayed for by the appellant.

It will be convenient to deal first with this third ground of appeal. Mr. Budhdeo based his objection to the jurisdiction of the High Court of Tanganyika on the provisions for reciprocity with other territories in Part IX of the Bankruptcy Ordinance of Tanganyika and similar provisions which are enacted in the corresponding legislation of the Colony and Protectorate of Kenya. It is admitted that Kenya is a reciprocating territory for the purposes of section 147 of the Tanganyika Bankruptcy Ordinance. Mr. Budhdeo has contended that it was not shown that the goods in dispute are, or were at the time of the application, still within the Territory of Tanganyika and asserted, though this does not appear in the affidavit, that the respondents had removed the goods into Kenya. From this he argued that the effect of the reciprocity provisions is to require in such case the trustee in bankruptcy in Tanganyika to pursue the goods in the Courts of Kenya appointing, if necessary, the proper official there as agent for that purpose, and that this obligation was not affected by the fact that the claim is for the value of the goods and not for the return of the specific goods themselves. No authority was cited in support of this argument and in my opinion there is no merit in it whatever. From a consideration of the provisions of section 159 of the Bankruptcy Ordinance (Cap. 25) it is clear that although the section imposes upon the Official Receiver or trustee appointed in this Territory a duty to take all such steps as may be lawful in any reciprocating territory for the proper administration of any property of the debtor or bankrupt situated in such territory, nevertheless his power to request any bankruptcy official in such territory to act as his agent is purely discretionary. The purpose of these reciprocal provisions is to help and not to hinder the administration of the bankrupt's estate and it is clearly within the discretion of the Official Receiver or trustee to bring his action in such territory as he thinks most convenient and most likely to be productive of benefit to the administration. If Mr. Budhdeo's argument that action must be taken in the territory where the goods are, were to prevail, it appears to me that a heavy burden would be cast upon the Official Receiver or trustee to ascertain the whereabouts of the property and also that a person improperly retaining them could evade the law by moving them at his will from one territory to another. In my opinion there can be no doubt that the High Court of Tanganyika had jurisdiction to entertain this application.

I pass on, therefore, to consider the appellant's prayer for a declaration that the sale and delivery of the goods in question to the respondent is void against the trustee in bankruptcy under the provisions of sections 39 and 47 of the Bankruptcy Ordinance. This prayer was not dealt with by the learned trial Judge for the reason, it would seem, that he accepted the submission put forward by Mr. Budhdeo for the respondent that if a transaction could not be brought within section 46 of the Bankruptcy Ordinance as a fraudulent preference neither could it come within the scope of section 47. The basis of the Official Receiver's application is section 39 (1) of the Bankruptcy Ordinance which provides: —

"The bankruptcy of a debtor, whether it takes place on the debtor's own petition or upon that of a creditor or creditors, shall be deemed to have relation back to, and to commence at, the time of the act of bankruptcy being committed on which a receiving order is made against him, or, if the bankrupt is proved to have committed more acts of bankruptcy than one, to have relation back to and commence at the time of the first of the acts of bankruptcy proved to have been committed by the bankrupt within three months next preceding the date of the presentation of the bankruptcy petition, but no bankruptcy petition, receiving order or adjudication shall be rendered invalid by reason of any act of bankruptcy anterior to the debt of the petitioning creditor."

Section 46 of the Ordinance provides for the avoidance of fraudulent preferences to creditors and then section 47 provides: -

"Subject to the foregoing provisions of this Ordinance with respect to the effect of bankruptcy on an execution or attachment, and with respect to the avoidance of certain settlements, assignments and preferences, nothing in this Ordinance shall invalidate, in the case of bankruptcy-

(a) any payment by the bankrupt to any of his creditors;

$(b)$ ...

(d) any contract, dealing, or transaction by or with the bankrupt for $(d)$ valuable consideration:

Provided that both the following conditions are complied with. namely-

- (i) that the payment, delivery, conveyance, assignment, contract, dealing, or transaction, as the case may be, takes place before the date of the receiving order; and - (ii) that the person (other than the debtor) to, by, or with whom the payment, delivery, conveyance, assignment, contract, dealing, or transaction was made, executed, or entered into, has not at the time of the payment, delivery, conveyance, assignment, contract, dealing, or transaction, notice of any available act of bankruptcy committed by the bankrupt before that time."

In the present instance the receiving order was made on the 24th December. 1949, that is about three weeks after the debtor had absconded and about a fortnight after the meeting of his creditors in his shop and the delivery of the goods in question to the respondent. Therefore by virtue of section 39 the title of the trustee in bankruptcy relates back to these goods unless the transaction comes within the protection afforded to bona fide transactions without notice by section 47. The Official Receiver has admitted that the delivery or assignment of the goods by the bankrupt's son was made for valuable consideration in that they were taken in full settlement of the bankrupt's debt, and it is of course clear that the transaction fell within the limits of the first proviso in that it took place before the date of the receiving order. The appellant has, however, contended that the transaction was not within the terms of proviso (ii) in that the respondent at the time of the assignment to him of the goods had notice of an available act of bankruptcy committed by the bankrupt before the time of the transaction. That is a question which I will consider later in this judgment but I am at the moment confining myself to Mr. Budhdeo's submission that this transaction could not be deprived of the protection of section 47 unless it were shown to be a fraudulent preference within the meaning of section 46. Mr. Budhdeo argued that after the distribution the property distributed to the creditors was no longer the bankrupt's and therefore not properly available for the payment of his debts under section 36. He cited as authority Williams on Bankruptcy, 17th edition, at page 303, where under the heading "Assets divisible amongst creditors though not the bankrupt's", "Property available by virtue of the doctrine of relation back" the following comment occurs: -

"The trustee's title is by section 37 antedated to the earliest act of bankruptcy available at the date of the presentation of the petition, and the bankruptcy is to be deemed to have commenced at the moment of that act. This, however, is subject to the rights of persons taking from the bankrupt or contracting with the bankrupt, for valuable consideration, in good faith and without notice of an available act of bankruptcy, and of persons paying money to the bankrupt in good faith before the receiving order, and without notice of a presentation of a petition."

$\ddot{\cdot}$

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This passage, however, does not appear to me to take the matter any further since the exception as to the rights of persons taking from the bankrupt for valuable consideration and in good faith is still subject to their having done so without notice of an available act of bankruptcy, which in the instant case is the real question for decision. Apart from this, however, a general consideration of the terms of sections 46 and 47 show that they deal with entirely different types of transactions, the former dealing with voluntary payments to creditors by the

bankrupt in preference to other creditors, the latter dealing in paragraph (a) with any payments by the bankrupt to any of his creditors, and dealing in paragraphs (c) and (d) with transactions made for valuable consideration. If any authority is required for this it will, I think, be found in the observation of Mellish, L. J., which appears near the foot of page 542 in the report of $Ex$ p. Snowball, which I cite below in this judgment. In my view, therefore, there is no substance whatever in Mr. Budhdeo's submission on this point.

I may at this stage refer briefly to Mr. Budhdeo's further submission that the affidavit filed by the appellant should have set out the date of the receiving order and that there was no evidence before the learned trial Judge as to when that order was made so as to enable him to determine whether the first available act of bankruptcy was committed within three months of the order. It might perhaps have been more correct for the appellant's affidavit to have specified the date of the receiving order, or for a copy of the receiving order to have been produced and tendered in evidence during the hearing of the application, but there is no substance in the objection nor was the respondent in any way prejudiced because, when this objection was taken before Knight, J., the appellant referred to the record of the bankruptcy proceedings in Bankruptcy Cause No. 1 of 1949 which was, it may be presumed, in Court, and which is included in the record of this appeal.

I now pass on to consider the real question in this matter, that is to say, whether the respondent had at the time he received the goods in question from the bankrupt's son, notice of any available act of bankruptcy then already committed by the bankrupt. The Official Receiver has contended that it is clear from the admitted facts that on the 8th December, 1949, the creditors who assembled in the bankrupt's shop including the respondent, were convinced that the bankrupt had absconded for the purpose of avoiding the payment of his debts and that they resorted to the policy of "devil take the hindmost". Mr. Budhdeo, on the other hand, has submitted that there is no evidence to justify the inference that the respondent on that day knew or should have known that the debtor had absconded, that they could not suppose that his having gone away for a fortnight, ostensibly for medical treatment, was an available act of bankruptcy, and that so far from attempting to grab all his property for themselves, their conduct shows that they only wished to secure "fair shares for all".

In Herbert's Trustee v. Higgins (1926), 1 Ch. 794 at page 800, a case under section 38 (c) and section 45 of the Bankruptcy Act, 1914, which provided the model for the local Bankruptcy Ordinance, Lawrence, J., said: -

"The next question, which is a more difficult one, is whether the defendant has discharged the onus which lies upon him of proving that he took possession of the chattels without notice of an available act of bankruptcy committed by the bankrupt. The solution of that question depends upon whether the defendant has established that he had no knowledge or notice of any facts which would reasonably lead an ordinary man of business to conclude that an act of bankruptcy had been committed."

In $Ex$ p. Snowball: In re Douglas, L. R. 7 Ch. A. C. 534, a case under the now repealed Act 32-33 Vict. Ch. 83, section 20, Mellish, L. J., delivering the judgment of the Court said, at page 549 of the report: $-$

"It appears to us that if a person is proved to know facts which constitute an act of bankruptcy, or is proved to know facts from which a court or a jury, or any impartial person, would naturally and properly infer that an act of bankruptcy had been committed, he ought to be held to have had notice that an act of bankruptcy had been committed, and that the court ought not to enter upon the inquiry whether he did in his own

mind believe that an act of bankruptcy had been committed, or whether he did in his own mind draw the inference that the bankrupt intended to defeat and delay his creditors. A person may be proved to have had notice that an act of bankruptcy had been committed, either by proof that he had received a formal notice that an act of bankruptcy had been committed or by proof that he knew facts which were sufficient to inform him that an act of bankruptcy had been committed. If he is proved to have received a formal notice he is not allowed to escape from the effect of having had notice by saving he had not read it when he ought to have read it, or that he did not believe it when he had read it; and we think if he is proved to have known facts which were sufficient to have informed him that an act of bankruptcy had been committed he cannot be allowed to escape from the effect of having had notice by saying he did not draw the natural inference from the facts."

Applying these principles to the admitted facts in the present case, I have no hesitation in saying that the proper, and indeed, the only reasonable inference to be drawn from them is that on the 8th December, 1949, at the time when he received goods to the value of Sh. 5,814 from the bankrupt's son, the respondent had notice of an available act of bankruptcy committed by the bankrupt before that time namely, that he had departed out of the territory to defeat or delay his creditors. I would therefore allow the appeal, set aside the order of the High Court, and direct the substitution therefor of the declaration asked for in paragraph (2) of the appellant's application and of an order that the respondent pay to the applicant as trustee the sum of Sh. 5,814, the value of the merchandise in question. I would further grant the appellant his costs of this appeal and of the application to the High Court.

## LOCKHART-SMITH (Acting Vice-President).—I concur.

SINCLAIR, Ag. C. J. (Tanganyika).—I am in entire agreement with the judgment of the learned Acting President and I have been asked by him to enter a formal order in the terms proposed in the last two sentences of his judgment. Order accordingly.