Patel v Vora (Civil Appeal No. 84 of 1955) [1950] EACA 360 (1 January 1950)

H. M. COURT OF APPEAL FOR EASTERN AFRICA

Before SIR RONALD SINCLAIR (Acting President), BRIGGS (Acting Vice-President) and BACON, Justice of Appeal

NAGARBHAI RAMCHAND PATEL, Appellant (Original Respondent) ν.

## POPATLAL PREMCHAND VORA, Trustee of the property of BHAGUBHAI NAGARBHAI PATEL, Bankrupt, Respondent (Original Applicant)

Civil Appeal No. 84 of 1955

(Appeal from the decision of H. M. Supreme Court of Kenya, Cram, Ag. J.)

Bankruptcy—Collusive proceedings—Fraudulent preference by bankrupt—Judgment and payment thereunder void—Kenya Bankruptcy Ordinance, sections 48 and 49—Kenya Civil Procedure Ordinance, section 44 (1)—Kenya Civil Procedure (Revised) Rules, Order III, rule 6, Order XXII, rule 1, Order XXXVIII, rules 5 (1) and 7 and Appendix D, Form 16.

The appellant was the father of the bankrupt and it was agreed that a sum of Sh. 70,000 was due from the bankrupt to the appellant. In 1952 the bankrupt was unable to meet his debts as they became due, and was adjudicated bankrupt on 7th April, 1953, and the respondent was appointed trustee. The bankrupt was sued on 15th December, 1952, by the respondent for Sh. 82,000 and by the appellant on 30th December for Sh. 70,000 and judgment was entered in both cases for the amount claimed.

The bankrupt had agreed to sell certain property to a third party and completion was intended to take place in January, 1952. The bankrupt's advocates had the completed assignment of the property and the purchase money was held by the purchaser's advocates against whom both the appellant and the respondent had issued garnishee orders *nisi*. When the respondent applied to have his order made absolute his application was refused, the Court holding that the money was held by the purchaser's advocates as trustees for their client pending completion. The appellant then applied to have his order made absolute, and the purchaser's advocates offered to pay the money into Court for the credit of the suit provided that they obtained the completion documents. The Court gave leave to do this whereupon the bankrupt authorized the release of the documents and the sum of Sh. 74,700 was paid into Court and then paid out to the appellant.

The respondent then moved the Supreme Court for an order that the judgment and payment were void as against him as being a fraudulent preference and for an order for repayment of the sum of Sh. 74,700 which was granted and against which the appellant appealed.

Held (26-10-56).—(1) If the bankrupt had not deliberately and voluntarily effected completion the appellant could never have got the money.

(2) The appellant's suit against his son the bankrupt was mere facade and in substance the position was exactly as if there had been a normal completion and the bankrupt having received the money, had voluntarily handed it to his father.

Appeal dismissed and record directed to be sent to the Attorney-General for a decision as to whether criminal proceedings should be instituted.

Cases referred to: In re Jukes, (1902) 2 K. B. 58; In re Sharp, 83 L. T. 416; Shears v. Goddard, (1896) 1 Q. B. 406.

Nowrojee for appellant.

Salter, $Q. C.,$ and $D. V.$ Kapila for respondent.

BRIGGS, Acting Vice-President.—This is an appeal from an order of the Supreme Court of Kenya in a bankruptcy matter. The appellant, who is the father of the bankrupt, obtained a judgment against him for Sh. 70,000 and costs and after garnishee proceedings recovered a sum of Sh. 74,700, the property of the bankrupt. The respondent as trustee in the bankruptcy moved the Court to declare that the judgment and payment were void as against the trustee, as being a fraudulent preference, and for an order of repayment of the sum of Sh. 74,700. The Supreme Court made an order as prayed and the appellant appeals.

The appellant owned some land at Dagoretti Corner and had a shop thereon. In 1948 he transferred the business to the bankrupt, but did not then receive any payment therefor. Disputes arose over rent, the price of the stock-in-trade, etc., and various other matters, and culminated in criminal proceedings being launched by both sides. On 10th July, 1952, there was at least a partial reconciliation. An agreement of settlement and a submission to arbitration were executed. Under the former the criminal proceedings were to be withdrawn, certain rent was agreed to be due, and Sh. 70,000 was admitted to be due by the bankrupt for stock-intrade, etc., sold in 1948. Other disputes were stated to be still unsettled and became the subject matter of the submission. The arbitration was abortive, since when the parties met they quarrelled so violently that the meeting broke up. The bankrupt claimed that some Sh. 450,000 were due to him. This was wholly denied, and the claim has since been reduced to about Sh. 240,000, but that reduced claim is considered by the trustee to be of some substance, since he sued on it in Civil Suit No. 1502 of 1953. This suit is defended and has not yet been heard.

Towards the end of 1952 the bankrupt was heavily indebted to many creditors and it was admitted by the appellant's counsel before us that the bankrupt could not pay his debts as they became due. On 15th December, 1952, the trustee, who carries on business under the name of Supreme Traders, sued the bankrupt for Sh. 82,000-odd in Civil Suit No. 1511 of 1952. On 30th December the appellant sued the bankrupt for Sh. 70,000 in Civil Suit No. 1577 of 1952. It is alleged by the trustee that this action was collusive and was part of an elaborate scheme to defraud the bankrupt's creditors.

The learned Judge wrote a judgment of some 85 pages. Of these the first 35 are devoted to an elaborate examination of the law regarding fraudulent preference. With great respect, I think much of this is unhelpful. Whatever difficulties may have existed in the distant past, the law is not now in doubt and is clearly and correctly stated in *Williams on Bankruptcy*, 16th ed., pp. 362-366. The dominant view of the bankrupt must be to prefer the creditor, and the onus of proof is always on the trustee. Particularly in cases where the facts alleged would indicate actual fraud, the onus is no less heavy than in other cases of fraud. The learned Judge correctly applied these standards. As regards the facts on which the learned Julge relied, his elaborate analysis of the case-records and other documents put in evidence and of the oral evidence is, I think, in general above criticism. I do not propose to recapitulate this analysis, or to attempt to summarize its reasoning. Indeed, I think it would be impossible to do justice to it on a summary, for it hangs largely on a great many matters of detail. I would remark, however, that the case-records are of fundamental importance and that we have referred to the originals, since many material documents have not been copied for inclusion in our records. The learned Judge remarked that the appellant's counsel had never really attempted to meet the arguments based on these records. Nor did he do so before us. I agree both with the learned Judge's reasoning and with his conclusions, except as regards some minor matters to which I shall specifically refer.

The fund of Sh. 75,000 on which the case centres was the purchase price of some leasehold property being sold by the bankrupt to a client of Messrs. Shapley, Barret & Co. It was intended that completion should take place on 16th January, 1952, and by that time Messrs. Amin & Patel for the bankrupt

the executed assignment and all other necessary documents, and held Messrs. Shapley, Barret & Co. held the money as trustees for their client pending completion. At that stage, therefore, there was no money of the bankrupt in the hands of Messrs. Shapley, Barret & Co. All they wanted was to ensure that completion took place and that the Sh. 75,000 should find its way to the right hands, whichever those might be. The prohibitory order served on 16th January was irregular, since there was no debt, but they did not wish to stand on technicalities and were willing to abide by any order which would allow completion. In this situation the bankrupt and his solicitors. Messrs. Amin & Patel were for the time being in control. If they declined to complete, no garnishee order could be made at the instance of the trustee's firm, and on this footing they had the trustee's prohibitory order discharged. There were other grounds, but one was certainly that the money was not attachable property. Leading counsel was retained and two counsel appeared to make this submission for the bankrupt. The appellant's application to make absolute his garnishee order nisi was decided immediately thereafter on the same day by the same Judge. The bankrupt appeared in person, and from the learned Judge's note it seems that he did not open his mouth. Even so, the Court held that there was no attachable debt and the application was to be dismissed, when Mr. Shapley offered to pay the money into Court to the credit of the appellant's suit if the completion documents were handed to him. On this the Court reviewed its ruling and made an order, which has not been drawn up, but the effect of which was merely to give leave to pay the money into Court if completion was effected. Mr. Nowrojee was constrained to admit that the garnishee was not ordered to pay the money into Court. The completion was effected, and the garnishee, having deducted Sh. 300 for his costs, paid in Sh. 74,700. From this it is obvious that, *qua* the bankrupt, the execution proceedings were never successfully taken *in invitum*. If he had not deliberately and voluntarily effected completion, the appellant could never have got the money, and Mr. Nowrojee's argument to the contrary is without substance. The appellant's suit was mere façade. In substance the position was exactly as if there had been a normal completion and the bankrupt, having received the money, had voluntarily handed it to his father. Indeed, Mr. Nowrojee for the appellant finally admitted that the bankrupt had deliberately steered the money into his father's pocket, though not for the father's own benefit. But he sought to support the transaction on various grounds. Some of these were so entirely lacking in substance that I do not propose to add anything to the reasons we expressed in the course of argument for rejecting them; but others require further consideration.

$\mathbf{1}$

It was submitted that the learned Judge had not given sufficient weight to the evidence of the bankrupt when he said that he had in effect given this money to his father on the father's promise to pay all his creditors, or at least to pay them *pro tanto* and rateably. The evidence of subsequent conduct was such as to make this story quite impossible to believe, but it was said that we should disregard that evidence. I could not discover the reasons underlying this submission, and I reject it. The bankrupt was a hopelessly unreliable witness, who should not be believed on an important point unless supported by probabilities or other evidence; but I think one sentence of his evidence really carried conviction. He said his father had suggested to him that "this money should be kept in the family". I believe the other story was a mere invention which he hoped might help him to escape criminal proceedings.

Mr. Nowrojee's next point was one which in my opinion he should not have been allowed to raise at all. He said that the appellant was never a "creditor" within the meaning of section 48 of the Ordinance, and that accordingly the section could not operate. He admitted that the appellant had sworn in the Court below that he was a creditor for the Sh. 70,000 and costs and that there was no valid cross-claim against him. He admitted also that this point had never been

taken on the affidavits or in argument below. But he submitted that in law it was not open to the Court to find that the appellant was a creditor in the sense of a person entitled to prove in the bankruptcy. Indeed, he went further and suggested that the Court had not found that the appellant was a creditor. The finding is certainly not elaborately expressed, but it is there. The judgment sets out as one of four requirements of proof "(2) the transaction must be in favour of a creditor", and later says: "That is, three of the four conditions are satisfied and there remains" (the issue of dominant view). In other words, the transaction is found to be "in favour of a creditor". As this was always one of the few points on which the parties were agreed, one would expect no more. Mr. Nowrojee then said it was a bad finding. If the appellant was not a creditor, it seems to me that, although section 48 would not apply, an order having precisely the same result as this should have been made on the basis that this was a fraudulent gift or transfer. If the objection had been raised before, the pleadings could have been so amended that the point would not have assisted the appellant. It clearly involves an issue of fact. On the facts before the learned Judge, I think the point is unsound, but I also think it is not open to the appellant at this stage.

It was next submitted that, because in the trustee's suit the attachment of the "debt" had been an attachment before judgment, while in the appellant's suit it was an attachment in execution, the conclusions drawn by the learned Judge were unjustifiable. This was supported by the somewhat startling suggestion that in no case can a debt be attached before judgment in Kenya. We are here faced with one more of the difficulties which the legislature of Kenya has seen fit to create by combining features of English law with others of Indian law. But this time the difficulty is not serious. Having regard to Chitaley's comments on the Indian Order XXXVIII, rule 4 (5th ed., p. 3157 et sqq.) to section 44 (1) of the Civil Procedure Ordinance, to Kenya Order XXXVIII, rule 7, to Order XXII, rule 1, and to Form 16 of Appendix D, I think this submission is entirely without foundation, and I am unmoved by the argument that a debt cannot be "produced" to the Court. (Order XXXVIII, rule 5 (1).) Debts have always been subject to attachment before judgment in India, and they are so subject in Kenya now. Leaving aside this technicality, the general argument seems to have no validity at all.

The next submission raises unfortunate issues concerning persons not before the Court. The learned Judge undoubtedly considered that Mr. S. G. Amin of Messrs. Amin & Patel approached, if he did not pass, the boundary of professional misconduct by acting, as he did, for both the appellant and the bankrupt in various matters related to these proceedings. In one respect I must accept Mr. Nowrojee's submission that the learned Judge was in error. He considered that in Suit No. 1577 of 1952, Mr. Amin, having been acting up to the time of decree for the appellant as plaintiff, and not having filed any notice of change of advocate under Order III, rule 6, was still in law on the record for the plaint it at the time of the garnishee proceedings. Having regard to the last words of that rule, "until the issue of a decree in the cause or matter", which are apparently peculiar to Kenya, and seem to have been introduced to enable advocates to refuse service of proceedings in appeal on which they have no instructions, I think an advocate is entitled at any time after decree to say that he is no longer on the record in the suit. If he chooses to take that attitude, there is no obligation on another advocate who wishes to act in his place to file notice of change. Nor is there any provision in Kenya for the filing of any signed retainer, or appointment of solicitor. I think, therefore, that it is not proper to consider, as the learned Judge did, that Mr. Anand's official status was merely that of counsel retained by Mr. Amin. I think Mr. Anand was, at the relevant time, on the record for the appellant. But I think also that this slip on the part of the learned Judge does nothing to invalidate, or even weaken, the general conclusion which he formed concerning Mr. Amin's conduct in this matter. I should myself comment further, were it not for two considerations. In the first place, I am satisfied that, as between the parties to these proceedings, the learned Judge was entitled to draw inferences from the conduct of Mr. Amin in relation to the affairs of the appellant and the bankrupt, and that the inferences which he drew were, as against the appellant, reasonable and proper. Secondly, it is not impossible that these matters will later be considered elsewhere, and I do not wish to say anything which might even appear to prejudge any issues then arising. Mr. Nowrojee submitted to us that the inferences drawn by the learned Judge from the appellant's failure to call Mr. Amin or Mr. Anand were unjustifiable, since Mr. Amin had acted for the bankrupt and the trustee could have called him. I am by no means convinced that the bankrupt's right to waive privilege as regards his communications with Mr. Amin vested in the trustee. If it did not, I see no reason to suppose that the bankrupt would have exercised that right of waiver. But in any event. I think the matters concerning Mr. Amin alleged in these proceedings were such that it was for the appellant, and not the bankrupt, to explain them, if he could, I think the learned Judge's inferences were entirely proper.

It was stated from the bar, though it does not appear from the record, that the learned Judge had in the course of argument suggested to counsel that, the money being in the appellant's hands, the principle of res ipsa loquitur applied, and it was for him to justify the transaction as a whole. Had we thought that such a remark, if made, could be of any importance, we should have insisted on affidavits being filed to establish that it was made; but. even if made, it was clearly of no importance. The judgment shows beyond doubt that, whatever the learned Judge may have thought earlier, he took a correct view of the *onus* when writing his judgment. I think that, if the remark was made, the learned Judge probably referred, not to the fact that the appellant had got the money, but to the way he got it, as proved beyond dispute by the Court's own records. They certainly spoke for themselves. There is no substance in this objection.

The appellant complains that the learned Judge attached undue importance to a letter written by the appellant to the bankrupt "long after" the proceedings in question. The letter is exhibit 12 at p. 160 of our record. It is dated 20th March, 1953, and purports to be a reply to a letter of the bankrupt which the appellant has failed to produce. It is an affectionately phrased assurance that the bankrupt may safely lie hid in India, and will escape all criminal proceedings if he will use due caution and take good advice. Paternal blessings are conferred. Remembering the story that the father had promised to pay off the bankrupt's creditors and then pocketed the money, it is apparent that this letter is of the first importance. It would hardly have been possible to attach too much importance to it. This submission fails.

Mr. Nowrojee next argued that the learned Judge had made an erroneous approach to the evidence in going outside the issues and finding, first, actual fraud in obtaining the judgment and "garnishee order", secondly that Suit No. 1577 was a "sham", and, thirdly that the payment which Mr. Anand received out of Court for the appellant was a voluntary payment by the bankrupt and tainted with fraud. He said the Court was never asked to find fraud. These points are bound up with one another, and the answer to all of them is to be found in section 49 of the Ordinance, on which the appellant sought to rely as protecting the transaction. In order to establish that section 49 could not protect the appellant, it was necessary to show that he and the bankrupt had acted in collusion to defraud the creditors generally. There was not, it seems, any available prior act of bankruptcy, knowledge of which might have been brought home to the appellant. It was therefore necessary, as the learned Judge rightly appreciated, to bring the case within the principles enunciated in In re Jukes, (1902) 2 K. B. 58, In re Sharp,

83 L. T. 416, and in particular Shears v. Goddard, (1896) 1 Q. B. 406, where it is said that fraud in the creditor will always take the transaction outside the protection of the section. "Fraud" includes any collusion with knowledge that the bankrupt intends to defeat his creditors. In this sense fraud was always in issue, and that the learned Judge was right in finding fraud I have no doubt whatever.

Mr. Nowrojee finally contended that the evidence of the trustee and of one of his witnesses, Mr. T. K. Pandit, was unreliable. Whatever the force of his arguments on this point might have been, it could not substantially assist him, since it was not shown that there had been any material conflict between the evidence of the trustee and that of the appellant, while Mr. Pandit's evidence was confined to matters of only collateral importance.

I conclude that all the appellant's arguments fail, and I would dismiss this appeal with costs. I am obliged to add that the conduct of the appellant and the bankrupt in this matter appear to call for examination with a view to possible criminal proceedings. I would therefore direct that the record be sent to the Attorney-General. There is one further matter which may be either of general, or of particular, importance. Messrs. Amin & Patel on taxing their bill for the appellant in Suit No. 1577 charged and were allowed a sum of Sh. 2,000 for "instructions to file action". The plaint was three folios long and was a common form claim for money due under an agreement. Judgment was entered in default of appearance. The bill did not include any work done after decree. It consists of 19 items of which nine relate to taxation or disbursements. If it was usual under the old scales to allow such fees for instructions in undefended cases of this kind, I think grave injustice was being done to judgment debtors generally. Such a sum could not conceivably be justified on a basis of work properly involved, and that is the only basis on which costs can be allowed as between party and party. Under the present scales, the instruction fee would normally be Sh. 750 if the suit were fought out, but if it is not defended that is "good cause" for reducing the amount. In a case as simple as this, I think Sh. 100 would probably be generous. If it was not usual at the relevant date to allow such fees as this, these facts may be relevant at another time and in another connexion. The bankrupt was apparently not served with the bill, and he was Messrs. Amin and Patel's client both in other matters and at a later stage in this very suit.

BACON, J. A.-I have had the advantage of seeing the judgment of Briggs, J. A., and it seems unnecessary to say more than a few words since I agree that the learned Judge at first instance was unquestionably right in the conclusion at which he arrived. I think it is clearly shown that the studied machinations of the appellant and his son, the bankrupt, in December, 1952, and January, 1953, constituted a fraud on the bankrupt's creditors other than the appellant himself, there never having been any intention in the mind either of the appellant or of his son to safeguard the fund in question for the purpose of a distribution. In those circumstances the appellant is precluded from praying in aid section 49 of the Bankruptcy Ordinance, since fraudulent collusion with the bankrupt such as was established here removes the transaction from the ambit of the section. The trustee (the respondent) was thus left to discharge the onus of proving the elements required to bring the transaction within section 48. This he did. I agree that for the reasons expressed by Briggs, J. A., the various arguments advanced by Mr. Nowrojee for the appellant fail. I also would direct that the record be sent to the Attorney-General for a decision as to whether criminal proceedings should be instituted. I would dismiss the appeal with costs.

SINCLAIR, Acting President.—I agree with the judgments which have just been read and have nothing to add. The appeal will be dismissed with costs and the record will be sent to the Attorney-General.