Lawful Trusts

1. 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 V
LAWFUL TEUSTS

2. • Sections 4 and 98 of the Trusts Ordinance require lawful
purpose of a trust created under Chapter II and Chapter IX
respectively.
• Even if sections 4 and 98 had been omitted from Trusts
Ordinance, the general law would have prevented the
operation of trusts for unlawful purpose.
2

3. A trust may be created for any lawful purpose. The purpose of a
trust is lawful, unless -
(a) it is forbidden by law;
(b) it is of such a nature that, if permitted, it would defeat the
provisions of any law;
(c) it is fraudulent;
(d) it involves or implies injury to the person or property of
another; or
(e) the court regards it as immoral or opposed to public policy.
(section 4 of the Trusts Ordinance)
3

4. A trust which purpose is unlawful shall be void; and where a
trust is created for two purposes one of which is unlawful
and non-separable from other purpose, the whole of such
trust shall be void. If the two types can be separated, the
trust as whole will fail but shall stand for those objects which
are lawful.- Section 4(2)
4

5. (a) A bequeaths property to B in trust to employ it in carrying
on a smuggling business, and out of the profits thereof to
support A's children. The trust is void.
(b) A, while in insolvent circumstances, transfers property to B
in trust for A during his life, and after his death to B. A is
declared an insolvent. The trust for A is invalid as against his
creditors. (illustration (a) and (b) of section 4)
5

6. • Unlawful trust and illegal contract are governed by almost
similar principles.
• Weeramantry divides illegal contracts into 3 categories;
(a) contracts illegal by statute;
(b) contracts contrary to the common law;
(c) contract contrary to public policy.
6

7. • Unlawful purpose is void.
• Where a trust has been created or arisen for unlawful purpose
and the trust property was transferred to another person,
what is the destination of the trust property which was
transferred to another person?
7

8. Destination of the trust property in the case of
an unlawful trust under Chapter II of the Trust
Ordinance
8

9. • 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. - (section 87(1)).
• In terms of section 4, if the purpose of a trust is unlawful, it is
void. However, the property had already been transferred to
another person.
9

10. • In terms of Roman-Dutch Rule, no one should be enriched in
the expenses of another.
• By operation of section 87 of the Trusts Ordinance, a trust
arises.
• One may argue that under section 85 also trust may arise;
because section 85 provides “where a trust is incapable of
being executed … a resulting trust arises. It does not speak
about unlawful purpose.
10

11. • If section 85 is held not to apply, in terms of section 87(1), the
trustee of the unlawful trust would hold on a resulting trust for
settlor in the exceptional cases allowed by the maxim of in pari
delicto or under section 86.
• 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.-
(Section 86)
11

12. Destination of the trust property in the case of
an unlawful trust under Chapter IX of the
Trust Ordinance
12

13. • Section 98 comes under Chapter IX (constructive trusts).
• Nothing contained in this Chapter 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 of the Trusts Ordinance)
13

14. What constitutes illegal purpose
1. ‘A’ transfers to or purchases in the name of ‘B’ a property-
(a) to enable ‘B’ to institute legal proceedings;
(b) to seek particular employment;
(c) to stand for election; or
(d) to act as surety.
• In the last instance, it has the illegal nature of the transaction
barred ‘A’s claim.- Sinna Lebbe v. Patuma (1921)
14

15. 2. Where ‘A’ is forbidden to purchase certain property in his
name ( because government servant can not purchase without
certificate) and provides the consideration and purchases in
‘B’s name. It is not illegal – Perera v. Gunawardena (1911).
3. A conveyance to or purchase of property in the name of ‘B’ by
‘A’. So that the tax on the property would be reduced, is an
illegal purpose. (Trusts by L.J.M Coorey, p94).
15

16. Saroja Nisansala vs. Aberfoyle ([2011]2SLR340)
The appellant had been Dubai, where she had been
working in several houses and had stayed at the
respondent’s house. She had not paid any rent and in
lieu of rent, she had helped to clean the garden.
Respondent agreed to purchase a house for appellant
and did so.
16

17. The issue was as to whether a purchase of a property by a
third party for and on behalf of a foreigner, allegedly in
order to evade the payment of 100% tax on the sale, could
create trust on the basis of sections 4(1) and 98 of the
Trusts Ordinance.
Section 98. (Saving right of bona fide purchasers).
17

18. Appellant contended that there is a breach of Revenue Law
and therefore the respondent cannot seek relief under
Trusts Ordinance.
The court cited as follows - Dr. L.J.M. Coorey in his work on
the subject of Trust has discussed the nature of an
unlawful trust. According to L.J.M. Coorey, if sections 4
and 98 of the Trusts Ordinance had been omitted, the
general law of the land would have prevented the
operation of trusts for unlawful purposes.
18

19. Referring to trusts for unlawful purpose, Dr. Coorey refers
to Prof. Weeramantry’s Treatise on the Law of Contract.
Prof. Weeamantry, referring to the breach of revenue
regulations clearly states that a mere breach of revenue
regulations would not itself render illegal a contract in
respect of which they are imposed.
19

20. Prof. Weeramantry stated that where a statute merely
imposes a penalty on the performance of certain acts
without declaring such acts to be illegal or void, the
question arises whether such acts are void. In such cases,
we must look to the intention of the legislature to see
whether the imposition of the penalty implies as to make
the resulting contract void.
20

21. The imposition by the legislature of a penalty on any
specific act or omission is prima facie equivalent according
to Pollock to an express prohibition. Such provision is
however, only prima facie evidence and is not enough by
itself to make a contract to do that act illegal or void.
21

22. Court said the an act could not be treated as invalid
simply due to illegality.
The Court cited the case of Fernendo vs. Ramanathan, in
that case a full bench at that time had decided that a
deed is not invalid on the ground of illegality, because it
is contrary to what may be termed the policy of an
ordinance.
22

23. Court stated that no arguments were put forwarded that if
it was allowed, the transaction which took place would
defeat the provisions of any law, Similarly no material was
put forward to substantiate the fact that the transaction is
not one which is forbidden by law, fraudulent, involves or
injury to the person or property of another and the court
regards it as immoral or opposed to public policy.
23

24. The Court held that
(1) the Finance Act empowered the Commissioner to
recover the tax;
(2) the trust is not contrary to sections 4 and 98 of the
Trusts Ordinance;
(3) an unlawful intention bilaterally entertained is no
longer an absolute bar to restitution.
24

25. 4. A purchase by a judgment creditor of a property of his debtor
at a sale in execution without sanction of the court is unlawful. -
Ramanathan v. Clementi (1934 14CLR 170).
5. Where ‘C’ intending to gift property to ‘A’ did not do so,
because A was pressed by creditors and instead transferred to ‘B’
on B’s promise that he would transfer to a an appropriate time, A
can enforce the trust.- Theevanaipillai v. Sinnapillai (22NLR 316)
25

26. 6. A conveyance to or purchase of property in the name of ‘B’ by
‘A’, to put it beyond the reach of A’s creditors is unlawful.- Andris
Silva v. Ranmenike (5 NLR 188).
26

27. MAXIMS
• Actions on illegal agreements are governed by the principles
expressed by two maxims-
(i) ex turpi causa non oritur action; and
(ii) in pari delicto est potior est conditio defendentis
27

28. • Ex turpi causa non oritur actio is a Latin term which means
“from a dishonorable cause, an action does not arise.”
• Latin in pari delicto potior est conditio defendentis: "if both
(parties) are in the wrong, the position of the defendant is the
stronger".
28

29. • The first, Ex turpi causa non oritur actio prevents the party to
an illegal transaction from enforcing it by claiming
performance or damages.
• The second in pari delicto potior est conditio defendentis
applies to the case where a party to an illegal agreement is
seeking to recover the property which has changed hands
during illegal transaction, the court refusing to intervene.
29

30. • A court has no discretion to grant relief against the operation
of the first maxim.
But various exceptions to the application of the second maxim
have been admitted, all of them referable and subject to the
over-riding considerations of public policy and justice between
the parties. The transferee benefited from the illegal transaction.
Plaintiff may argue that he is not so guilty as defendant. The
illegal purpose has not been effected.
30

31. • The courts will grant relief where the parties are not in pari
delicto (where the plaintiff is not so guilty as the defendant), or
where the illegal purpose is wholly or substantially
unperformed.
• The Courts seem to have proceeded on the assumption that
the claim of the person who, transferred the property under
section 83 or paid the consideration under 84 fails unless his
case falls within one of the exceptions to the in pari delicto
maxim.
31

32. In the case of Emee Nona v. Winson (35NLR 221) where the
judgment creditor, (A) had purchased through a nominee (B),
the property of judgement debtor as Rs. 5000 which was less
than the appraised value (Rs. 14,000), which sum was less than
his debts. But A had not sued for the balance of the debt. A’s
action against B for the recovery of the property failed because
it was held that the illegal act was complete, when the
property was purchased at less than the appraised value.
This decision followed the English authorities and inconsistent to
the local case law Mohamadu v. Ibrahim.
32

33. • In Mohamadu v. Ibrahim (13 NLR 187) A had conveyed
property to B for no consideration so that it could not be
seized by A’s creditors. The court enforced a resulting trust
because no creditor was defrauded and therefore the
contemplated fraud has not be effected.
• The principle factor that influenced the court was the Roman
Dutch rule that no one should be enriched at the expense of
another.
33

34. • In Siyatu v. Banda (19 NLR 59) where A had transferred
property to B, a creditor of A sued in criminal proceedings, and
during the proceedings A paid the creditors in full. When A
later claimed that B held the property in trust, the court
seemed to think that A was entitled to relief because the
creditor had not been defrauded, since it could be said that the
illegal purpose has not been carried out.
34

35. • Saurmma v. Mohamadu Lebbe (44 NLR 397) Where a person
transferred property in the name of another in order to put it
beyond the reach of creditors at a time when those creditors
had instituted proceedings against him, the court held that the
effect of his action was to delay the payment of his debts and
that his illegal purpose was carried out, even if the debts were
paid in full. In such a case the maxim in pari delicto applies.
• Mohamadu’s case was wrongly distinguished on the ground
that the illegal purpose had not been carried out.-L.J.M Coorey.
35

36. • English decisions were followed in Saurmma v. Lebbe not only
in derogation of a line of local authorities, but contrary to an
express legislative provision –section 86 of the Trusts
Ordinance.- L.J.M Coorey; Reception in Ceylon of the English
Trust; p. 98.
36