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  • Gimhani Jayaweera

Constructive Trust

Updated: Feb 10

Section 82 of the Trust Ordinance states, an obligation in the nature of a trust (hereinafter referred to as a " constructive trust ") is created in the following cases. Section 83 of the Trust Ordinance states, 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. The formal source of Trusts law in Sri Lanka is the 1917 Trusts Ordinance. This was based on English law, being introduced during British rule of (what was formerly) Ceylon. In the century since its introduction, the law has certainly not stood still, and the cases and understanding of trusts laws both in England and in Sri Lanka have developed throughout that time. The modern Sri Lankan legal landscape takes a circumscribed approach towards constructive trusts, compared to English law. There is nothing in the Trusts Ordinance which prevents Sri Lankan judges from taking a more expansive approach — that an argument may be found for Sri Lankan Courts to take into account and apply developments in English law, should they wish to do so. However, Sri Lankan Courts have made numerous decisions on the topic of Constructive Trust which has in return expanded the law and set new standards to cater to the modern day. Justice Wigneswaran had considered along with other reasons in Thisa Nona and Three Others v. Premadasa (1997) 1 Sri L.R. 167 that the reason of continuation of possession of the premises in suit, just the way the transferor had done prior to execution of the transfer deed, and payment of stamp duties and Notary fees contribute to show that the transaction was a loan transaction and not an outright transfer.

In Fernando v. Fernando [S.C. Appeal 175/2010, Decided on 17.01.2017] Salam J. identified some of the other factors which would, usually, be relevant when determining whether a Constructive Trust has arisen. His Lordship, Justice Salam, citing the earlier decision of Ehiya Lebbe v. Majeed [48 NLR 357] stated, “The continued possession of the transferor after the conveyance, or if the transferor paid the whole cost of the conveyance or if the consideration expressed on the deed is utterly inadequate to what would be the fair purchase money for the property conveyed are circumstances which would show whether the transaction was a genuine sale for valuable consideration or something else.” Muniyandi Natchie v. Kayambo (1988) 2 CALR 56, the Defendant who did not challenge the findings of facts by the trial Judge, conceded that the fact established a trust under section 84 of the Trusts Ordinance, since the plaintiffs did not intend to provide the consideration for the benefit of the defendant transferee. The plaintiffs desired to own property that was sold through the Estate Fragmentation Board. They were both persons whose applications for citizenship in Sri Lanka were being finalized by the Registering Authorities of the State. Thus, they were non-citizens at the time of the sale. Under the Finance Act No. 11 of 1963 they were required to pay 100% tax if they purchased the property as non-citizens. In order to overcome this, they paid the purchase price for the land and had the deed written in the name of the defendant who was their sister and a citizen of Sri Lanka. After they became citizens, they filed this action in Court for a declaration that the defendant holds his property in trust and for the transfer of the title to the Plaintiffs. Defendant’s claim that she had bought the property out of her money, was totally rejected by the trial Judge, who found that the plaintiffs had provided the consideration for the purchase. However, counsel for the defendant contended that section 98 of the Trusts Ordinance read with section 4(1) of the same ordinance would prevent the creation of such a Trust in so far as the transfer of property was in evasion of section 58(1) of the Finance Act. Section 4(1) states that, a trust may be created for any lawful purpose. The purpose of a trust is lawful, unless it is (a) forbidden by law, or (b) is of such a nature that, if permitted, it would defeat the provisions of any law, or (c) is fraudulent, or (d) involves or implies injury to the person or property of another, or (e) the Court regards it as immoral or opposed to public policy. The relevant provisions of the Finance Act do not impose a prohibition on the transfer of land to the class of persons to whom the plaintiff belonged. Section 58(1) read with section 59 of the Finance Act imposed a tax and empowered the Commissioner of Inland Revenue to recover any unpaid tax from anyone from whom it has become due. If the plaintiffs are found to be non-citizens at the time of the re-transfer of the land, then the obligation casts on such transferees to pay the hundred percent tax could not be evaded. The breach of a revenue law has not been within contemplation of section 4(1) of the Trusts Ordinance. It is the prohibition by law or the immorality or objectionable nature regarding public policy that has to be considered in assessing this matter. It is often said that express trusts arise in response to the intention of a settlor to create a trust, while constructive and resulting trusts arise by operation of law. But one can be more specific about constructive trusts. Consider first the relationship between express trusts and constructive trusts.

Nanayakkara Associates is a Law Firm specialized in Civil Law, Commercial Law, Conveyancing and Company Secretarial work.

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