Mohanlal, ex parte Official Receiver v Daya [1959] FJLawRp 16; [1960-1961] 7 FLR 10 (21 December 1959)

[1960-61] 7 FLR 10

IN THE SUPREME COURT OF FIJI

Civil Action No. 184 of 1959

In re MOHANLAL
(A Debtor)
ex parte THE OFFICIAL RECEIVER
Applicant

v

HEMRAJ DAYA
Respondent

Bankruptcy Ordinance (Cap. 37) — alleged fraudulent preference under s.46(1) — proof of dominant intent to prefer — equivocal inference from the facts.

The debtor Mohanlal was a Suva shopkeeper whose business deteriorated until, in December, 1956, he was being pressed for payment by some forty creditors, of whom the respondent was one. On the 5th December, 1956, he was served with a writ claiming £500 and interest by the respondent. An application by the respondent for leave to enter judgment against the debtor was set down by the Supreme Court for hearing on 21st December, 1956. Meanwhile the debtor was arranging to sell his business. On the 20th December the debtor received £990 from the purchaser of his business and forthwith paid the respondent the sum of £440. On the 16th January, 1957, the debtor petitioned in bankruptcy, disclosing debts of £6,028 3s. Od., and assets of £2,381 3s. 9d.

In this motion the Official Receiver sought a declaration that this payment of £440 to the respondent constituted a fraudulent preference under s. 46 (1) of the Bankruptcy Ordinance (Cap. 37). The Official Receiver contended that when the debtor paid this money to the respondent he must have known that he would be unable to pay all his creditors, and hence the only true explanation of his action must be a dominant intent to prefer the respondent.

On behalf of the respondent it was argued that at the time when this payment was made the debtor still hoped that the bank would stand behind him provided he could sell his business at a good price, and that it was the fear that the respondent would wreck this latter deal which led the debtor to pay him the £440.

Held—The facts relating to this payment to the respondent were at least equivocal, and an inference of preference will not be drawn if the inference from the facts equivocal. In re Cutts (1956) I WLR 728 per Lord Eveshed M. R. at p. 735 applied.

Motion dismissed.

Cases cited:

In re Mohanlal (a debtor) ex parte The Official Receiver v Bank of New South Wales 1958/59 FLR, 123; In re Cutts (1956) I WLR, 728; 100 SJ 449 (1956) 2 All ER, 537; ex parte Hall v Cooper [1882] UKLawRpCh 44; (1882) 19 Ch. D., 580; In re Bell ex parte the Official Receiver, English & Empire Digest Vol. 5, p. 873.

D. M. N. McFarlane for the applicant.

T. Rice for the respondent.

KNOX-MAWER, Ag. J. [21st December, 1959]—

In this motion the Official Receiver as the trustee in bankruptcy of Mohanlal (s/o Vanmali) seeks a declaration that the payment of £440 paid to the respondent by the bankrupt on the 20th December, 1956, constituted a fraudulent preference within the meaning of section 46(1) of the Bankruptcy Ordinance (Cap. 37), and as such is void against the applicant as the trustee in bankruptcy. The applicant seeks an order calling upon the respondent to pay to him as trustee this sum of £440.

The facts upon which this judgment is based are not in dispute. These are to be found in the notes of the public examination of the bankrupt and in the several affidavits filed. This is the second application made by the Official Receiver to set aside payments made by this bankrupt to his creditors in the period immediately preceding his bankruptcy petition. The judgment delivered in the earlier motion, In re Mohanlal (A debtor) ex parte The Official Receiver v Bank of New South Wales has been reported in 1958/59, Fiji Law Reports, 123. Reference is made to that judgment both for the facts which are summarised therein and for the English authorities cited.

Four conditions must be established under section 46(1) of the Bankruptcy Ordinance. Firstly, that at the time when the payment was made (that is, the 20th December, 1956) the debtor was unable to pay from his own money his debts as they were due. Secondly, that the transaction was in favour of a creditor or of some person in trust for a creditor. Thirdly, that the debtor was adjudged bankrupt within 3 months after the date of the transaction. Fourthly, that the debtor acted with a view of giving such creditor a preference over his other creditors. It is common ground that the first three conditions are established in this case. The question that arises here is whether the applicant has discharged the onus cast upon him of proving that the bankrupt paid the respondent with a view of giving him a preference over the other creditors. I refer in this connection to the passage cited in the judgment of this Court, in The Official Receiver v Bank of New South Wales supra at p. 128, from the judgment of Jenkins LJ in re Cutts (1956) 1 WLR at page 739 100 SJ 449 (1956) 2 All ER 537.

This Court has to decide whether the applicant has shown that upon the facts of the case the dominant intent in the mind of the debtor to prefer the respondent was so much the most probable of the possible explanations of his action on the 20th December, 1956, in paying the respondent the £440, that this Court can properly hold it to be the true explanation. It must be shown that the debtor's act was voluntary in the sense of deliberate or spontaneous. A deliberate choice must be proved. Payment made under pressure, where proceedings have been instituted or threatened by the creditor or where the debtor has acted through fear of such proceedings would not be voluntary payment. As is stated in Halsburys Laws of England, 3rd Edition Vol. 2, p. 557, paragraph 1105:—

"That the transaction was not the voluntary act of the debtor can best be established by proving that it was the result of pressure brought to bear on the debtor either by a creditor or a surety. The pressure must be real; the debtor must have been under some genuine apprehension; it must have been operative on his mind, and the dominant influence affecting it; the transaction must have been entered into by reason of it; and it must not have been fraudulent.
If pressure is proved to exist, but there was also present to the debtor's mind a desire to prefer, a payment is a fraudulent preference if the court comes to the conclusion that the dominant view of the debtor was to prefer, even though but for the importunity the payment might not have been made."

In brief summary the material facts are as follows. The debtor Mohanlal had for some years prior to his bankruptcy carried on a retail business in Suva. In March, 1956, according to the debtor his "position got bad" and he considered selling his business. Business continued to be very poor during 1956. During December, 1956, there were about forty creditors pressing the debtor for payment. On the 5th December, 1956, the respondent instituted legal proceedings against the debtor in the Supreme Court. On that date he was served with a writ by the respondent claiming £500 and interest. An application by the respondent for leave to enter judgment against the debtor was set down for hearing on 21st December, 1956. In about mid-December the respondent told the bankrupt that he was going ahead with the legal proceedings and that if he was not paid he would issue a writ of fi fa against him. The debtor was at that time arranging to sell his business and the respondent pointed out to him that if he was not paid and became obliged to seize the debtor's goods then the sale of the latter's business, which he was then negotiating, would probably fall through. On the 20th December, 1956, the debtor received in part payment £990 from the purchasers of his business. Out of this sum he handed over to the respondent the sum of £140 in the form of a cheque drawn by the purchasers. On the 16th January, 1957, the debtor presented his bankruptcy petition before the Supreme Court. He disclosed debts of £6,028 3s. Od, and assets of £2,381 3s. 9d.

There are two English authorities in particular upon which the Official Receiver would place reliance. These are ex parte Hall v Cooper 1882 19 Chancery Division 580 and in re Bell ex parte the Official Receiver, English and Empire Digest Vol. p. 5 873. In Hall v Cooper, Jessel MR pointed out that the threat to bring an action could have no influence on a man who is just about to become bankrupt. In Bell ex parte the Official Receiver, it was held that "it is not sufficient to prevent a payment being a fraudulent preference, that honest pressure had something to do with bringing about such payment, if the Court comes to the conclusion that the dominant view of the bankrupt was to prefer the creditor. If it is the fact that the desire to prefer the creditor was a substantial motive operating on the mind of the bankrupt who has made the payment, in such a sense that it can be said to be the dominant motive such payment will be a fraudulent preference notwithstanding that but for the importunity of the creditor, the payment might never have been made."

It is argued on behalf of the Official Receiver that on the 20th December, 1956, the bankrupt must have known that even if he received in respect of his goods the £1,000 for which he hoped, from the purchasers of his business, he would still be unable to pay all his creditors. Accordingly the only true explanation of his action in paying the respondent must be a dominant intent to prefer him over other creditors. Learned Counsel for the applicant has argued that such a "view to prefer "is made more apparent by the fact that, another creditor, Mr. Narsey had been pressing for payment for sometime, yet he was not paid.

On the other hand, in the respondent's favour, there are the following facts. On the 20th December the debtor paid £550 into his bank account and during the following week the bank honoured a number of his cheques. The respondent had indeed given Mr. Narsey two post-dated cheques, although these were not ultimately honoured. The debtor may possibly have hoped that they would be. Certainly it was not until the 28th December, 1956, that the bank informed Mohanlal that no further cheques would be honoured. It seems likely that it was only at that time that he became finally aware that his only recourse was to file a petition in bankruptcy. As Mohanlal himself had said, he wished to file his petition "in early January." It was probably not until the end of December that he finally decided upon this and there and then resolved to hand over the cheque which he was to receive for his stock to the Official Receiver. In the outcome, of course, he did not do this, but also paid this money to the bank and to two other creditors. I have already held in respect of the amount then paid to the bank that to constituted a fraudulent preference. No application has yet been made in respect of the money which he then paid to the other two creditors. The transaction which is attacked in the present application was at an earlier date (20th December) and, as I have stressed, prior to the bank's final ultimatum of 28th December. I think it is probable that on the 20th December the debtor still hoped that the bank would stand behind him and enable him to weather the financial storm provided he could sell his business and stock at a good price. It was essentially the fear that the respondent would wreck his latter deal, that led the debtor to pay the respondent this £440.

As was stated by Lord Eveshed MR in re Cutts (Supra at page 735), art inference of preference "will not be drawn if the inference from the facts is equivocal". Certainly I think the facts relating to the payment to the respondent on the 20th December are at least equivocal. Accordingly I find that the applicant has failed to discharge the onus cast upon him of proving a fraudulent preference in this instance. This motion is therefore dismissed.