Constructive Trusts VII.pptx

1
S. Selvakkunapalan LL.B., LL.M.
Attorney-at-Law, Additional Draftsman
Visiting Lecturer – Sri Lanka Law College.
https://selvakunapalan.blogspot.com/2019/
LAW OF TRUSTS
CHAPTER VII
CONSTRUCTIVE TRUSTS

What is constructive trust?
• An obligation in the nature of a trust created
under the following circumstances defined as
constructive trusts–(section 82 of the Trusts
Ordinance)
• Where it does not appear that transferor
intended to dispose of beneficial interest.
2

• A constructive trust is one which is not created
by express or implied act of the settlor, but
which is deemed by operation of law or arises
by the construction of law.
• Where a person who is the legal owner of the
property, but is in fiduciary position as regards
another person in respect of that property, he
is compelled by the doctrine of equity to hold
the property for the benefit of that other
person, it is constructive trust.
3

• Since section 5 is to be read with section 6, the
trusts created under Chapter II would be those
where there is an intention to create a trust, and
such intention may be manifested in the form
prescribed by 5(1) and (2), or on the proof of
fraud, by parole.
• A trust arising under Chapter IX must fall within
one of the categories specified in sections 82 to
98. Section 83 would include cases where there
is specific intention not formally expressed, to
create a trust in favour of the settlor.
4

• Chapter II (sections 5 and 6); Chapter IX
(sections 82 to 96) and section 107 of the Trusts
Ordinance govern the origins of trusts.
• Section 5(1) and (2) read with section 6 falls
within the category of express trusts.
• Section 5(3) read with section 5(1) and (2) and
section 6 falls within the category of informal
trusts.
• Chapter IX is headed constructive trusts.
5

• Under section 107 a trust may be arisen even
in the absence of a written declaration of trust
as required by section 5, or in the absence of a
valid legal conveyance to the trustee as
required by section 6, and such trust may be
imposed on a person who never agreed to be
trustee.
• In Muttammah vs. Thiyagarajah (62NLR559)
Sonsoni CJ said “the dividing the line between
express and constructive trust is very thin and
some cases fall within both categories.
6

• Where the owner of property transfers or
bequeaths it, and it cannot reasonably be
inferred consistently with the attendant
circumstances that he intended to dispose
of the beneficial interest therein, the
transferee or legatee must hold such
property for the benefit of the owner or his
legal representative. (sec 83 of the Trusts
Ordinance)
7

Notaries (Amendment) ACT 2024
• A Notary Public shall not directly or indirectly authenticate or
attest any deed of transfer in respect of a transaction, which is
in fact a mortgage, a conditional transfer, or any other similar
instrument or deed.- Section 38A(2).
• Any notary who shall knowingly and willfully execute a deed or
instrument in violation of subsection (2) above shall be guilty
of an offence, and be liable to a fine not exceeding five
hundred thousand rupees. Section 38A(3).
8

Chandradasa v. Hemalatha
SC Appeal 168/14 decided on August 8, 2017
The transferor is duty bound to adduce evidence
to show that he did not intend to dispose of the
beneficial interest of the property. He is obliged
to adduce evidence to show the attendant
circumstances that there was no intention to
transfer the beneficial interest.
9

• Section 83 declares that where property is
transferred or bequeathed and if it cannot be
inferred that the beneficial interest was
disposed of, the transferee or legatee is a
trustee of the property.
• Section 83 places the emphasis on the
intention of the transferor and does not refer
to payment of consideration. But whether
consideration has passed would be an
element in arriving at the transferor's
intention.
10

• (a) A conveys land to B without consideration
and declares no trust of any part. It cannot,
consistently with the circumstances under which
the transfer is made, reasonably be inferred that
A intended to transfer the beneficial interest in
the land. B holds the land for the benefit of A-
(illustration to the sec 83).
11

• (b) A transfers certain stock belonging to him
into the joint names of himself and B. It
cannot, consistently with the circumstances
under which the transfer is made, reasonably
be inferred that A intended to transfer the
beneficial interest in the stock during his life. A
and B hold the stock for the benefit of A
during his life-(illustration to the sec 83).
12

• (c) A makes a gift of certain land to his wife B. She takes
the beneficial interest in the land free from any trust in
favour of A, for it may reasonably be inferred from the
circumstances that the gift was for B's benefit-
(illustration to the sec 83).
13

Patrick Perera v. Linette Fernando
SC Appeal 101/16; decided on : 05.12.2017
“it is only the owner of a property who held the
property before transferring the same to
another who can claim the benefit of section 83
of the Trusts Ordinance.”
14

• Where a person has a notarial conveyance in
his favour, the courts have placed heavy burden
on the transferor to prove facts bringing himself
within the section 83.
• Proof by a person relying on section 83 that he
made a voluntary conveyance to a stranger is
not enough. He must prove that he did not
intend to transfer the beneficial interest.
15

• Section 83 refers to the “owner or legal
representative” would not apply where ‘A’
transfers the property to ‘B’, not stating in the
conveyance that he intended to benefit ‘C’.
• In Theevanapillai vs. Sinnapillai (22NLR316) The
land was conveyed to the first defendant on
an express verbal understanding that she was
to convey to her son ‘S’ when his debts were
settled.
16

• The learned Judge also came to the conclusion
that no consideration was paid. He, therefore,
held that the defendant held the land in trust
for ‘S’ and decreed a conveyance.
• On appeal, Ennis ACJ held that there is no
reasons to interfere with the decision of the
District Court.
17

• In Goonewardena vs. Goonewardena
(24NLR385) ‘C’ argued that ‘B’ held the property
on trust for him. ‘C’ stated that his father asked
him by letter to quit Government service and
return home and that the father promised to
convey land on which mills were situated to
him; that ‘C’ acted on this promise and gave up
his job; that the father intended to carry out his
promise but died before doing so; that the
father’s will all his property was bequeathed to
his wife (C’s mother)
18

• Bertram C.J said that ‘C’ had an equitable claim
and also referred to C’s claim to an equitable to
an equitable right based upon a trust. Section
83 or any other section in the Trusts Ordinance
was not referred to.
• LJM Coorey suggested that this section could be
amended by the addition after words “legal
representative” of the words “or other person
intended to be benefited”.
19

• “attendant circumstances” in section 83 have been
described as those “which precede or follow the
transfer” … but are not too far removed in point of
time to be regarded as attendant …” Whether a
circumstance is attendant or not would depend on
the facts of the each case.
20

• In Premawathi vs. Gnanawathi (1994 2SLR 171) an
undertaking to re-convey the property sold was
by way of a non-notarial document which is of no
force or avail in law under section 2 of the
Prevention of Frauds Ordinance. However the
attendant circumstances must be looked into as
the plaintiff had been willing to transfer the
property on receipt of Rs. 6000/- within six
months but could not do so despite the tender of
Rs. 6000/- within the six months as she was in
hospital, and the possession of the land had
remained with the 1st defendant and the land
itself was worth Rs. 15,000/-. 21

• The court stated that the facts and
circumstances of the case point to a
constructive trust within the meaning of
section 83 of the Trusts Ordinance. The
"attendant circumstances" show that the
1st defendant did not intend to dispose of the
beneficial interest. in other words, “the
attendant circumstances" show that the 1st
defendant did not intend “to dispose of the
beneficial interest" in the land.
22

Agreement to re-convey?
• ‘A’ may transfer the property ‘B’ by a notarial
conveyance, for a stated price, subject to an
agreement to re-convey on tender of purchase
price with interest, within the stated period.
23

• The problems which confront the court
depend on whether the agreement to re-
convey is -
(i) notarially executed and signed by
transferee,
(ii) mentioned in the notarial document
conveying the property but not signed by
the transferee,
(iii) alleged by the transferor by parol evidence.
24

• In (i) the agreement to re-convey is enforceable
only if the purchase price is tendered within the
stated period, and after that ‘A’ cannot prove by
parol evidence that the transaction was in reality
a mortgage and thus rely on the maxim once a
mortgage always a mortgage, and enforce the
agreement after the specified period has
elapsed.
• (ii) has been held to fall within section 96.
25

• In (iii) where there is a notarial conveyance
absolute on the face of it, ‘A’ cannot prove by
parol evidence that the transfer was subject to
an agreement to re-convey on payment of the
purchase price with interest.
26

• Since parol evidence is admissible to prove a
trust, a party who has transferred the property
subject to an agreement to re-convey, either
after the specified period has elapsed, or
because of the agreement is a parol one, seeks to
argue that the transaction is a trust.
• In this situation the courts have posed the issue,
is there a plain agreement to re-convey or are
there other factors which show that the
agreement to re-convey amounts to a trust?
27

• It is submitted that some of the cases which have
decided that parol agreement to re-convey
amounts to a trust.
• In Carthelis vs. Perera (32NLR19) land was
transferred as security for debt of Rs. 5000/-,
subject to a re-conveyance on payment of that
amount, and this was regarded as creating trust.
28

• In Fernando vs. Fernando, ((1916) 19 NLR 210) a
notarial conveyance of land valued at Rs. 2000/-
by a man seriously ill for a stated purchased price
of Rs. 600/- the transferor remaining in
possession, subject to a parole agreement to re-
convey if the transferor recovered, was held not
to create a trust, the transferee being absolutely
entitled. In all probability the transfer was
effected on the tacit condition set out in the
plaint. But that condition the plaintiff is not in a
position to prove, as it was purely an oral
agreement, if it existed at all. The plaintiff cannot,
therefore, rely on a resulting trust. 29

• Where a person conveys land the transferee has
a notarial conveyance in his favour, and the
question is to be asked is, whether the
transferee has the beneficial interest in the
property, or are there any rights still outstanding
in the transferor.
• Among other factors which may be taken into
consideration are whether the consideration
paid adequate, whether the transferor
remained in possession and purpose for which
the property was transferred.
30

• In some of the cases, where there was held to
be no trust, either the transferor remained in
possession or the stated facts provided no
indication as to who was in possession.
• An agreement to re-convey could come within
the provisions of section 96 of the Trusts
Ordinance.
31

In any case not coming within the scope of any
of the preceding sections where there is no
Trust, but the person having possession of
property has not the whole beneficial interest
therein, he must hold the property for the
benefit of the persons having such interest, or
the residue thereof (as the case may be), to
the extent necessary to satisfy their just
demands.- section 96.
• Remaining in possession (transferor) is not
sufficient to prove the constructive trust.
32

• In Valliyammai Atchi Vs. Abdul Majeed
(45NLR169) case, A’s affairs were in an
embarrassed condition due to want of liquid
cash and creditors pressing for payment. A
transferred absolutely by means of notarial
conveyance all his property to B who was the
one of the principal creditors, the stated price
being the amount of A’s debts to B.
33

The value of the properties was much more than
the amount of A’s debts. A sought to prove by
parol evidence that the transfer to B was effected
to enable B to manage A’s affairs collecting the
rents and profits, selling properties if necessary
and after paying A’s debts to retransfer the
residuary properties to A.
A had been in possession of some of the
properties. B was held to be a trustee for A of the
residuary properties.
34

• B’s argument was that there was no
declaration of trust notarially executed as
required by section 2 of the Prevention of
Frauds Ordinance. At this stage, B put forward
the argument that according to section 91
read with section 92 of the Evidence
Ordinance a written contract cannot be varied
by oral evidence.
35

• When the terms of a contract, or of a grant,
or of any other disposition of property have
been reduced by or by consent of the parties
to the form of a document, ….., no evidence
shall be given in proof of the terms of such
contract, Grant, or other disposition of
property,…, except the document itself, …
(Section 91 of the Evidence Ordinance)
36

• When the terms of any such contract, grant,
or other disposition of property, …have been
proved according to the last section, no
evidence of any oral agreement .. shall be
admitted as between the parties to any such
instrument, or their representatives in
interest, for the purpose of contradicting,
varying, adding to, or subtracting from its
terms. (section 92 of the Evidence Ordinance)
37

• Howard CJ rejected B’ argument citing the
proviso 1 to section 92 which is to the following
effect:
• Any fact may be proved which would invalidate
any document, or which would entitle any
person to any decree or order relating thereto,
such as fraud, intimidation, illegality, ……
• To summarize this situation, where a person
attempts to effectuate a fraud on another
person alleging that the other person had not
adhered to the provisions of section 5(1) in
38

respect of an immovable property and therefore
arguing that there is no valid trust, the other
person can resort to section 5(3) to prove a
constructive trust. In such instant, the other
person can cite section 83 or section 96 of the
Trusts Ordinance to prove the existence of a
constructive trust although the requirements in
section 5(1) or (2) have not been satisfied.
39

Bernedette valangenberg Vs. Hapuarachchige
Anthony ([1990] 1 SLR 190)
• The plaintiff Anthony lived with the defendant-
appellant Bernedette and mother of four
children as man and mistress. The plaintiff
proceeded to Sweden where he learned the
language and received an income of about Rs.
9.000/= a month. The defendant went over to
Sweden for a short spell and she too found
employment receiving about Rs.2,000/= a
month.
40

• The plaintiff purchased a house property in
1976 for Rs. 8,40,000/= paying the
consideration out of his earnings. In 1977 as
he had to go to Sweden again, he conveyed
the said house property to the defendant
appellant his mistress by a deed of transfer
in the attestation to which the consideration
of Rs. 40,000/= was acknowledged to have
been received earlier. The plaintiff sued the
defendant for a return of the house pleading a
trust.
41

• The defendant claimed the absolute title and
that she paid the consideration of Rs 40,000/=
on the deed in her favour.
The court stated that -
(1) section 2 of the Prevention of Frauds
Ordinance is not meant to govern trusts
arising under Chapter IX of the Trusts
Ordinance i. e. constructive or implied trusts.
Therefore, A person must make out a case
falling within the provisions of ss. 83 to 96 of
the Trusts Ordinance.
42

(2) The defendant's claim was very probably
false and her denial of the existence of a
constructive case amounts to fraud.
(3) Section 92 of the Evidence Ordinance does
not apply and plaintiff can lead parole
evidence of the existence of a constructive
trust in his favour on the basis that he
retained the beneficial interest in the property
at the time he transferred it to the defendant.
43

• In Thisa Nona and three others vs. Premadasa
(1997 1SLR169) it was said that the seller paid the
Notary's fees and stamp fees. If it was an outright
transfer, the purchaser would have had to pay the
charges. Why did seller willingly come forward to
pay same if the transaction was not beneficial to
her, in that, she was receiving a loan or had
received a loan for which a security was given in
the form of an outright transfer? In fact according
to the attestation clause most of the
consideration had been received by the transferor
prior to the signing of deed.
44

• The fact that document was admitted by the
plaintiff-respondent (purchaser), the fact that
the seller paid the stamp and Notary's charges,
the fact that deed was a document which came
into existence in the course of a series of
transactions between the plaintiff respondent
and the fact that the seller continued to possess
the premises in suit just the way she did before
the deed was executed, all go to show that the
transaction was a loan transaction and not an
outright transfer.
45

• The attendant circumstances show that
the seller did not intend to dispose of the
beneficial interest in the property
transferred.
46

• In Ehiya Lebbe v. A. Majeed [1947] [48 NLR
357], it was held that if the transferor paid the
whole costs of the conveyance, it would be a
test to find out the nature of the transaction. It
therefore appears that having taken the bulk of
the loan earlier, the 1st defendant-appellant was
forced to consent to the terms of the plaintiff-
respondent. By allowing the cost of the
conveyance to be paid by the 1st defendant-
appellant, the plaintiff-respondent exposed the
nature of the transaction.
47

• Does it not show that the 1st defendant-
appellant had not intended to part with the
beneficial interest in the land to the plaintiff-
respondent?
• In Ehiya Lebbe v A. Majeed (Supra) it was held
that if the transferor continued to remain in
possession after the conveyance that would
also be a test to find out the nature of the
transaction.
48

W.C. K. Kulasuriya vs. W.H Gunathilaka
SC. Appeal 157/2011 (Decided on 04/04/2014)
This case relates to a block of land which was
conveyed by Deed of Transfer by Kulasuriya to
Mohotti for Rs. 10, 000/-. The premises in suit
was later transferred by Mohotti by Deed of
Transfer Gunathilake for Rs. 40, 000/-.
49

Kulasuriya took up the position that Deed No.
7948 was not in fact a Transfer, but was
executed in favour of Mohotti as security for a
loan and that he was holding the premises in
suit on a constructive trust for the Kulasuriya .
She further claimed that he had transferred the
land to the Gunathilake dishonestly and
fraudulently in order to place the property
beyond her reach and disallow the Kulasuriya to
make the requisite payments and re-convey the
property.
50

This particular Deed, was an absolute transfer
on the face of it, and made no mention
regarding a conditional agreement or an
agreement to re-transfer the property. The total
market value of the property ranges between
Rs. 11, 962.50 – Rs. 15, 950.00.
The Court held that the absence of a notarial
instrument to establish the agreement to re-
convey, or even a non-notarial agreement that
could have been taken into account as an
attendant circumstance, along with the fact that
51

adequate consideration has passed, there is
inconclusive proof of continued possession,
makes it impossible for this Court to accept the
existence of such an agreement to re-convey
through which a constructive trust could be
established. it is clear that a constructive trust
cannot arise in the present case.
52

Fernando vs. Thamel (47NLR297)
• Plaintiffs conveyed a land to the defendant for
sum of 650/-. The Defendant agreed to settle the
mortgage bond. On the same day, the defendant
gave the plaintiffs an informal document by
which he undertook to give a retransfer of the
land within a period of three years on payment of
certain sum.
53

• The evidence of the 2nd plaintiff expressed
that no money was paid by the defendant on
the day of transfer, that she merely undertook to
free the property from the mortgage, and that
she was reluctant to grant the transfer and only
did so, on an agreement to retransfer are
circumstances indicative of a trust.
• In this case, there are circumstances tending to
show that the transfer was to be in trust.
54

Moreover, there is a gross disparity in the price
of the property (Rs. 650) and the value of the
property at the time of the transfer was at Rs.
1,750 or Rs. 2,000.
The defendant admits the agreement to
retransfer the property and also that he had no
money at the time of the transfer. He also says
that when he gave the execution of deed, he
had no intention of retransferring the land, but
would do so now, if he was paid.
55

• It was proved that no money was paid by the
defendant, that the plaintiffs were reluctant to grant
the transfer and only did on an agreement to
retransfer and, that there was gross disparity
between the price and the value of the property. It
was held that the transfer of the land was to be in
trust and establishing fraud on the part of
defendant.
• The District Judge held that being an informal
document subsequently made cannot be used to
vary which is an outright transfer. He, however,
admitted the informal document to prove that the
defendant held the property in trust for the
plaintiffs.
56

• The Court held that the informal document
was admissible to prove that the defendant
held the property in trust for the plaintiffs and
further, that the informal document was not
admissible under proviso (3) to section 92 of
the Evidence Ordinance.
57

Dayawathie and others V. Gunasekera &
another (1991 1 SLR 115)
The Plaintiff, a building contractor, needed finances
in 1966 and sought the assistance of the 2nd
defendant with whom he had transactions earlier.
This culminated in a deed of transfer in favour of
the 1st Defendant, who is the mother of the 2nd
defendant and the 2nd defendant being a witness
to the deed.
58

The property was to be re-transferred within 3
years, if Rs. 17,000/- was paid. The Plaintiff
defaulted, in his action to recover the property,
the Plaintiff succeeded in the trial court in
establishing a constructive trust. The Court of
Appeal reversed the judgment on the sole
ground that the agreement was a pure and
simple agreement to retransfer.
59

The Supreme Court cited that “as was
emphasized by Sir John Beaumont in
Walliamma Atchi v. Abdul Majid one has to
bear in mind that the Trusts Ordinance is a later
enactment, and it deals expressly with trusts.
Naturally in any conflict of the provisions of the
Evidence Ordinance with the provisions of the
Trusts Ordinance, the later must undoubtedly
prevail. I think the best of all guides on this
question is the observation of H.N.G. Fernando
J. in Muttamma v Thiyagarajah he stated as
follows :-
60

"The plaintiff sought to prove the oral promise
to re-convey not in order to enforce that
promise but only to establish "attendant
circumstances" from which it could be inferred
that the beneficial interest did not pass.”
Although that promise was of no force or avail in
law by reason of section 2 of the Prevention of
Frauds Ordinance, it is nevertheless a fact from
which an inference of the nature contemplated
in section 83 of the Trusts Ordinance properly
arises.
61

The Prevention of Frauds Ordinance does not
prohibit the proof of such an act. If the arguments
of counsel for the appellant based on the
Prevention of Frauds Ordinance and on section 92
of the Evidence Ordinance are to be accepted,
then, it will be found that not only section 83, but
also many of the other provisions in Chapter IX of
the Trusts Ordinance will be nugatory.
62

The Court held that the Prevention of Frauds
Ordinance and Section 92 of the Evidence
Ordinance do not bar parole evidence to prove
a constructive trust and that the transferor did
not intend to pass the beneficial interest in the
property, that extrinsic evidence to prove
"attendant circumstances" had been properly
received in evidence at the trial.
63

Hewage Don Piyasena Vs.
Karunasena Hathurusinghe
SC. Appeal 41/2013
Sections 91 and 92 of the Evidence Ordinance
prevents leading evidence to prove or disprove a
written document. But section 83 of the Trusts
Ordinance provides that, if one can prove that in
the attendant circumstances, the donor did not
intend to transfer the beneficial interest, even
though the written document appears to speak
otherwise, a constructive trust will be formed.
64

M.H.S. Zulfika vs. C.Seelavangsha
SC. (Appeal) No. 8A/2010; decided on : 07/12/2012
• The respondent instituted an action seeking a
declaration of title to the property, eviction of
the appellant, who was in unlawful possession
of the property. There had been an outright
transfer by the appellant to the respondent of
a land.
65

• This was challenged by the appellant who
alleged that the purported transfer on the deed
was merely to secure the loan of Rs 11,000/-
given by the respondent, and the property was
to be held on trust until the loan was repaid.
• Two attendant circumstances which the Court
considered were the allegations pertaining to
the undervaluing of the property in the deed of
transfer, and the respondent's husband's
alleged employment as a moneylender.
66

• Appellant alleges that the value of the property
mentioned in the deed was significantly below
the market value at the time, as the amount on
the deed was intended to reflect the sum
actually taken as a loan from the respondent.
67

• Appellant alleges that the value of the
property mentioned in the deed was
significantly below the market value at the
time, as the amount on the deed was
intended to reflect the sum actually taken as a
loan from the respondent.
• The Court notes that the deed of transfer in
1986 values the land at Rs.11,000/= and that
the previous deed valued such land at Rs.
5,600/=. The property had not been
undervalued on the deed of transfer.
68

• In addition, the deed of transfer occurred in the
presence of a Notary who would have expressly
indicated the conditions of the transfer, if there
were any, and in this instance, if such transfer
was to be temporary and if the intention of the
Appellant was not to transfer the beneficial
interest of the property, the notarial document
would have been a mortgage bond, rather than
an outright transfer.
• Court found that there were no attendant
circumstances to suggest the existence of a
constructive trust.
69

P.J.Fernando v. H.T.A.M.Fernando
S.C. Appeal No.175/2010; decided on 17.1.2017
• Once again the court held in the above-
mentioned case that section 2 of the Prevention
of Frauds Ordinance and section 92 of the
Evidence Ordinance do not operate as a bar to
lead parol evidence to prove a constructive trust
and to prove that the transferor did not intend to
dispose of beneficial interest in the property.
70

Section 84
• Where property is transferred to one person for
a consideration paid or provided by another
person, and it appears that such other person did
not intend to pay or provide such consideration
for the benefit of the transferee, the transferee
must hold the property for the benefit of the
person paying or providing the consideration.
71

‘A’ transfers to ‘B’
A B
‘C’ pays
consideration
Not for benefit of B
C
B holds the property for the benefit of C
72

• The English rule that where a purchase was made in the
name of a stranger, in the absence of proof to the
contrary, the transferee was a trustee, was adopted in Sri
Lanka before 1918.
• But section 84 of the Trusts Ordinance has effected a
change because a person who relies on it must prove,
(i) that he provided the consideration; and
(ii) that it was not for the benefit of the transferee.
73

• Where B is express trustee of a sum of money
for A and uses such money with A’s consent to
purchase a land, B is to be a trustee under
section 84.
• An alternative remedy which is open to A in this
situation is to follow the property in a changed
form in the trustee’s hand under section 65(2) of
the Trusts Ordinance.
74

• Where the trustee has disposed of trust property, and
the money or other property which he has received
therefor can be traced in his hands or the hands of his
legal representative or legatee, the beneficiary has, in
respect thereof, rights as nearly as may be the same as
his rights in respect of the original trust property-
65(2) of the Trusts Ordinance.
75

• Daniel v. Arnolis [30 NLR. at 247]
It was held that the plaintiff must prove that he paid the
consideration and he paid so not for the benefit of the
defendant, when claiming a constructive trust in terms of
section 84 of the Trusts Ordinance.
76

• In Marrikar vs. Lebbe (52NLR193) out of money which
defendant was holding in trust for the plaintiff, the
certain immovable property was bought in the name of
the defendant.
• Held, that, under section 84 of the Trusts Ordinance, the
plaintiff was entitled to a declaration that the defendant
held the property as trustee for the plaintiff and to a
conveyance of the premises by the defendant to the
plaintiff.
77

The following situations may arise where A’s money is used –
(i) The money is used and the conveyance is taken with A’s
consent and the conveyance is taken in the name of B
(ii) The money is used with A’s consent, but B has
disregarded the instructions to purchase in A’s name.
(iii) The money is used without A’s consent, B having used A’s
money which was in his care and possession and the
conveyance is taken in the name of B.
78

(iv) The money is used with A’s consent, but B has
disregarded instructions to purchase in the name of C.
(v) A pays the money and directs that the conveyance be
issued to B.
In Gould vs. Innasithaby (9NLR177) The plaintiff employed
the defendant to purchase a property for him. It was
understood between the plaintiff and the defendant that
the plaintiff should pay the purchase money, and that the
defendant should get the conveyance in his own name,
and should subsequently re-convey the property to the
plaintiff.
79

• The defendant having refused to re-convey the property,
the plaintiff raised this action to compel him to do so. The
defendant pleaded section 2 of Prevention of Frauds
Ordinance in bar of the plaintiff's claim.
• Held, that the plaintiff was entitled to maintain the action,
notwithstanding the absence of any notarial instrument
signed by the defendant agreeing to re-convey the
property.
80

• In this case, Moncrieff J thought in situation (i) A’s right was
to conveyance, while in (ii) the transaction was set aside
because of fraud; perhaps on the basis that the former was a
resulting trust and the latter a constructive trust.
• In Arunasalam Chetty vs. Somasunderam Chetty (21NLR389)
Where a property was conveyed to a Chetty with the firm
name R. M. A. R. A. B., it was held that the property was
transferred to him as an agent of the firm, and not in his
private capacity.
81

•As the Chetty to whom the property was so conveyed was an
express trustee and not constructive trustee, it was not open
to him to plead prescription as against the other members of
the firm.
•"An express trust can only arise between the beneficiary and
his trustee. A constructive trust is one which arises when a
stranger to a trust already constituted is held by the court to
be bound in good faith and in conscience by the trust in
consequence of his conduct and behaviour.”
82

• In Sangarapilai vs. Kandiah (19NLR389), ‘A’ agreed to buy
a land from B and paid the purchase money, but, fearing
some litigation, obtained a conveyance in the name of C
without C 's knowledge. A informed C subsequently of the
execution of the deed in C's favour, and C acquiesced in it,
and agreed to transfer the land to A whenever called
upon.
• Held, that C held the land in trust for A, and that A could
maintain an action for a conveyance for the land from C,
or if C had parted with the land, to recover its value.
83

• If “paid or provided” implies a handing over of the
consideration, this might exclude (iii). But (iii) has
consistently has been assumed to fall within section 84.
• In (iv) there will be no trust for C, because according to
section 84, the results to the person providing the
consideration.
84

• Three other situations in which the application of 84 is
problematic.
(vi) A’s money which is loaned to B is used by B for a purchase in
B’s name.
(vii) A’s money which is loaned to B is used and the conveyance
is taken in A’s name with B’s consent to provide a security till
B’s pays.
85

In (vi) ‘A' may rely on section 84 and it is met by B’s claim that
A provided the consideration.
In (vii) B is seeking to set up a trust under section 84 on the
basis that he provided the consideration. Levin and Scott
both think (vi) and (vii) would give rise to a trust, and a
similar conclusion could be reached on a construction of
section 84.
86

• In Swaminathan vs. Vander Poorten (37 NLR 287) B
intending to purchase a property for Rs.275,000, paid
Rs.65,000 from his own money and borrowed Rs.210,000
from A, and the conveyance was taken in A’s name as
security for repayment for loan, the Privy Council held
there was a trust without reference any section.
87

• In Perera vs. Tissera (35 NLR 257) the widow of an intestate
transferred her half share of certain lands to the
administrator under an arrangement, the object of which
was to preserve the property for the minor children of the
intestate, and by a subsequent deed, which purported to
be a deed of agreement between the administrator and
the guardian ad litem of the children, the administrator
undertook to sell to the children the share of the lands,
which he obtained, upon payment of a certain sum of
money within a stated period.
88

• Held, that, in the circumstances, a trust had been
established in favour of the children and that all the
pecuniary advantages obtained by the administrator in
dealing with the lands transferred to him must be held by
him in trust for the benefit of the minors.
89

• It seems clear that under section 83 and 84 it is the
intention of the parties at the time transfer or purchase
that is most important.
• In Mendis vs. Paramaswami (62 NLR 302) it was said that
“where property is transferred to one person for a
consideration paid by another person, statements made by
the purchaser long after the transaction (about four and a
half years in the present case), and not
contemporaneously, are not relevant under section 84 of
the Trusts Ordinance to show that the consideration was
not paid for the benefit of the transferee”.
90

• In this case Basanayake CJ thought “that
contemporaneous statements alone are relevant on the
construction of section 84.
91

• In Adamjee vs. Board of Review, Ceiling on Housing Property and
others (1985 1SLR 169) the 5th respondent applied under section 13
of the Ceiling on Housing Property Law to the Commissioner of
National Housing to purchase premises. The 4th respondent refused
the application as the premises had been used as business premises-
being given to boarders and lodgers - from 1964 to 1972. The
premises had been purchased in 1964 by Alibhoy Adamjee father of
the petitioner. The application was resisted on the ground that these
were business premises and the petitioner was not in a position to
purchase the premises.
92

• Held : There was prima facie evidence that the petitioner
was in a position to purchase the premises. Though she
had not the means, her son who was doing a lucrative
business would buy them for her. Such a purchase by the
son will not result in a constructive trust in favour of the
son because this would be a case where the son is
providing the consideration for the benefit of the
mother.
93

The presumption of Advancement
• Where an owner transfers the property to B, such owner
did not dispose of the beneficial interest; or A provides
the consideration, but the conveyance made to B, upon
the proof of such facts, a presumption of trust arises, and
the burden is on B to rebut this.
• But A is in loco parentis to B, the counter presumption
arises that the purchase was for the B’s benefit and the
burden is on A to rebut.
94

Section 83 of the Trusts Ordinance
A B /Husband Wife
Section 84 of the Trusts Ordinance
A B /Husband Wife
C
95

• A must prove under section 84 (i) he has paid the
consideration; (ii) he did not do so for B’s benefit,
otherwise no presumption of trust arises.
• In considering whether the beneficial interest has been
transferred under 83, and whether the consideration
provided for the benefit of transferee under section 84,
the relationship between parties would be very relevant
factor.
96

• In Fernando vs. Fernando (1918) 20 NLR 244) a
man bought a sweepstake ticket in the name of
his 16 years old son. When he won the first
prize, the court thought that the father, a poor
man, had no intention of making a gift of this
nature.
• In Perera vs. Scholastica, (1955) 57 NLR 265) a
case under section 84, Gratiean J thought that
the presumption could be given effect under
section 83. Two brothers held to be loco parentis
had deposited money in the saving bank in the
name of their orphan sister.
97

The court inferred from the fact they had
retained the saving book, that the beneficial
interest under section 83 had not been
transferred unconditionally and was subject to
condition that their sister married according
to their wishes. Therefore, where the girl
married a person of a different caste, she was
held to have forfeited her rights in the money.
98

Resulting Trust
• A resulting trust is one which implied in favour of
the settlor or his representatives. It may be
defined as the one where the property is
incompletely conveyed or where on a conveyance
the beneficial interest in property is incompletely
disposed of, and the property or the indisposed
beneficial interest reverts back to the settlor.
99

• Where a trust is incapable of being executed, or where the
trust is completely executed without exhausting the trust
property, the trustee, in the absence of a direction to the
contrary, must hold the trust property, or so much thereof
as is unexhausted, for the benefit of the author of the trust
or his legal representative. (section 85 of the Trusts
Ordinance)
100

• (a) A conveys certain land to B –
1."Upon trust", and no trust is declared; or
2. "Upon trust to be thereafter declared", and no such
declaration is ever made; or
3. Upon trusts that are too vague to be executed; or
4. Upon trusts that become incapable of taking effect; or
5. "In trust for C", and C renounces his interest under the trust.
In each of these cases, B holds the land for the benefit of A.
[illustration (a) to section 85]
101

• (b) A transfers Rs. 10,000 in the four per cents, to B, in
trust to pay the interest annually accruing due to C for
her life. A dies. Then C dies. B holds the fund for the
benefit of A's legal representatives.
102

• (c) A conveys land to B upon trust to sell it and apply one
moiety of the proceeds for certain charitable purposes,
and the other for the maintenance of a particular form of
worship. B sells the land, but the charitable purposes
wholly fail, and the maintenance of the worship does not
exhaust the second moiety of the proceeds. B holds the
first moiety and the part unapplied of the second moiety
for the benefit of A or his legal representative.
103

• (d) A bequeaths Rs.10,000 to B, to be laid out in buying land
to be conveyed for purposes which either wholly or partially
fail to take effect. B holds for the benefit of A's legal
representative the indisposed of interest in the money or
land, if purchased.
104

• According to section 85 of the Trusts Ordinance a resulting
trust arises in two situations namely,
(i) where a trust is incapable of being executed, and;
(ii) where the trust is completely executed without exhausting
the trust property. But a resulting trust can arise only in the
absence of a direction to the contrary contained in the
terms of the trust- Dwarkadas vs. CIT (1948)16 ITR 160 (Bom).
105

• A constructive trust is thus a relationship with respect to
the property subjecting the person by whom the title to
the property is held by an equitable duty to convey it to
another person on the ground that his acquisition or
retention of the property is wrongful and that he would
be unjustly enriched if he were permitted to retain the
property.
106

• Where the owner of property transfers it to another for an
illegal purpose, and such purpose is not carried out into
execution, or the transferor is not as guilty as the
transferee, or the effect of permitting the transferee to
retain the property might be to defeat the provisions of
any law, the transferee must hold the property for the
benefit of the transferor. (sec 86)
107

• Where a testator bequeaths certain property upon trust,
and the purpose of the trust appears on the face of the
will to be unlawful, or during the testator's lifetime the
legatee agrees with him to apply the property for an
unlawful purpose, the legatee must hold the property for
the benefit of the testator's legal representative. Where
property is bequeathed and the revocation of the bequest
is prevented by duress, the legatee must hold the property
for the benefit of the testator's legal representative-
section 87.
108

Where property is transferred in pursuance of a contract
which is liable to rescission or induced by fraud or mistake,
the transferee must, on receiving notice to that effect, hold
the property for the benefit of the transferor, subject to
repayment by the latter of the consideration actually paid,
and subject to any compensation or other relief to which
the transferee may be by law entitled-sec 88
Where a debtor becomes the executor or other legal
representative of his creditor, he must hold the debt for the
benefit of the persons interested therein – sec 89.
109

• Where a trustee, executor, partner, agent,
director of a company, legal adviser, or other
person bound in a fiduciary character to protect
the interests of another person, by availing
himself of his character, gains for himself any
pecuniary advantage, or where any person so
bound enters into any dealings under
circumstances in which his own interests are, or
may be, adverse to those of such other person
and thereby gains for himself a pecuniary
advantage, he must hold for the benefit of such
other person the advantage so gained- sec 90.
110

• A, an executor, buys at an under-value from B, a
legatee, his claim under the will. B is ignorant of
the value of the bequest. A must hold for the
benefit of B the difference between the price and
value. (illus (a))
• A, a trustee, retires from his trust in consideration
of his successor paying him a sum of money. A
holds such money for the benefit of his
beneficiary. (illus (b))
• A, a partner, buys land in his own name with
funds belonging to the partnership. A holds such
land for the benefit of the partnership-(illus (c)
111

• A, a partner, employed on behalf of himself and
his co-partners in negotiating the terms of a
lease, clandestinely stipulates with the lessor
for payment to himself of a lakh of rupees. A
holds the lakh for the benefit of the
partnership-(illus (d)
• A and B are partners. A dies. B, instead of
winding up the affairs of the partnership,
retains all the assets in the business. B must
account to A's legal representative for the
profits arising from A's share of the capital.
(illus (e))
112

• A, an agent employed to obtain a lease for B,
obtains the lease for himself. A holds the lease
for the benefit of B. (illus (f))
• A, a guardian, buys up for himself
incumbrances on his ward B's estate at an
under-value. A holds for the benefit of B the
incumbrances so bought, and can only charge
him with what he has actually paid- (illus (g))
113

• The words of section 90 have the effect of
constituting an executor, partner, agent, director
of a company or legal representative, a trustee in
all circumstances where such a person gains a
“pecuniary advantage,” by “availing himself of his
character” or by entering into dealings where his
“interest are…adverse” to that of the person
whom he is bound to protect.
• Under section 90, an agent or any fiduciary would
be trustee of a secret commission.
114

• In England, a person with a beneficial interest in
property which is in the hands of fiduciary can
follow the property, until it reaches the hands of
a bona fide purchaser without notice, or until it
has ceased to be identifiable. This principle has
been incorporated into the law of Sri Lanka by
sections 65 to 69 of the Trusts Ordinance, but is
available only against a transferee from the
trustee.
• Please refer the sections 90 to 98.
115

Trustees of the trusts arising under
Chapter IX of the Trusts Ordinance on the
same footing as trustees of the trust
created under Chapter II
116

• Section 97 places trustees of the trusts arising
under Chapter IX of the Trusts Ordinance on
the same footing as trustees of the trust
created under Chapter II, subject to two
exceptions, stated in section 97.
• (a) where he rightfully cultivates the property
or employs it in trade or business, he is
entitled to reasonable remuneration for his
trouble, skill, and loss of time in such
cultivation or employment; and
117

• (b) where he holds the property by virtue of a
contract with a person for whose benefit he
holds it, or with anyone through whom such
person claims, he may, without the permission
of the court, buy or become lessee or
mortgagee of the property or any part thereof.
• Section 52 which applies to trusts created
under Chapter II states that a trustee may not
charge for his services, except where there is
“an Order of court”.
118

• While section 52 leaves the award of the
remuneration to the discretion of the court,
but 97 (b) gives a trustee a right to it.
• In Phipps vs. Boardman (1965) the court in
granting limited remuneration to a constructive
trustee stressed that he had acted bona fide.
But it may be argued that the effect to
‘rightfully’ is that he must employ the trust
property in circumstances in which as a trustee
it is proper for him to do so.
119

The person who accepts the confidence is called
the "trustee“ – section 3(d). The person holding
property in accordance with any of the
preceding sections of this Chapter must, so far
as may be, perform the same duties, and, save
as in this Ordinance otherwise provided, is
subject, so far as may be, to the same liabilities
and disabilities, as if he were a trustee of the
property for the person for whose benefit he
holds it… – section 97.
120

Therefore the combined effect of the sections 3
and 97 of the Trusts Ordinance is that a trustee
includes a ‘constructive trustee’.
121

• Nothing contained in Chapter IX shall impair the
rights of transferees in good faith for valuable
consideration, or create an obligation in
evasion of any law for the time being in force-
(section 98).
• The first part of this section is a remainder that
section 69 to 72 apply to Chapter IX. Those are
wrongful employment by partner trustee of
trust property for partnership purposes; liability
of beneficiary joining in breach of trust; rights
and liabilities of beneficiary's transferee
122

• In second part, the word ‘evasion’ implies an
intentional attempt to circumvent the existing
law and does not touch a case which merely
happens to conflict with the strict law.
• Therefore, section 98 does not require trust of a
land arising under Chapter IX to be notarially
executed.
• End
123

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