Bankruptcy-Creditor or partner? -Creditor who has some control over the
business and whose interest rate varies with the profits of the vent IIre-
Right to share with general creditors in distribution of the estate

Partnership-Creditor or partnerl-c-lnterest on money advanced variable with
the profits of the venture

I. In a distribution of the estate of the bankrupt, or a composition fol-
lowing the adjudication in bankruptcy, one who provided £E.l.OOO in the
form of a loan as the capital of a retail business. who had some control in
the management of the business, and whose rate of interest on the loan
varied with the profits of the venture could be fairly described as a creditor

               and not a partner in the business.                                                                  -

2. Although the rule under the English bankruptcy and partnership
acts is that a creditor who has lent money in consideration of a share of
the profits of the business will be postponed until the general creditors have
been fully satisfied, the Sudanese Bankruptcy Ordinance provides no excep-
tion for such creditors and they are therefore entitled to participate equally
with other general creditors.

Bankruptcy

April 13, 1936. Judge in Bankruptcy: The Official Receiver has
asked for the directions of the court in the matter of a claim of Zenop
Khatchikian to prove as a creditor for £E.I,OOO. This claim is stated
in the affidavit in proof of debt as "amount of a loan as per agreement
dated the lOth of December, 1929." This agreement is that already
produced to' the court marked Exhibit C.

The points on which directions are required are stated by the
Official Receiver as: (a) Is this claim to rank pari passu with other
creditors in the distribution of the estate? (b) Is this claim to rank
pari passu with other creditors as a proved debt in a scheme
for composition after adjudication? The matter was adjourned to a
public hearing of the bankruptcy in order that the claims of any
interested creditors. might be heard.

It has now been submitted on behalf of a creditor that this claim
should not be admitted to rank with other creditors, that Zenop
Khatchikian's relationship with the bankrupt was that of a partner,
or that at least the sum was advanced in consideration of the profits
of the bankrupt's business, and that this creditor should be excluded
from participation until the creditors who are entitled to prove have
been satisfied.

I. I will first consider whether the agreement for the loan is
such as to constitute a partnership between the cfeditor and the
bankrupt. There is provision for the compulsory registration of cer-
tain partnerships (The Partnership Registration Ordinance 1926), and
therein a partnership is defined as "the association of two or more
persons for the purpose of carrying on business together and dividing
its profits between them .... " It may be observed shat if the relations

between this creditor and the bankrupt are those of partners then
the partnership is one that should have been registered under the
above Ordinance. It was not so registered, and. in fact, so far as
there has been registration, the bankrupt's business was registered
under the Business Names Ordinance as "Cent Mille Articles", Costa
Gunaropulo being the sale proprietor.

In so far as the intention of the parties is apparent from the
actual wording of the agreement their relationship was intended to
be that of creditor and debtor. The bankrupt's books give some
corroboration. The agreement is clearly drafted, and if there has
been an open intention to create a partnership no doubt it would
have been clearly expressed. The parties may, of course, have in-
tened their actual relationship to be obscure to leave a loophole
in such an eventuality as has now occurred, the transaction -"being
merely colourable as a loan. I have to decide whether the parties
to this agreement intended to create or did in fact create a partnership
by their agreement.

I do not agree that the court is bound to decide this matter in
accordance with the provisions of English Statute law, although in the
absence of local enactment the court will naturally examine the Eng-
lish law with a view to ascertaining the suitability of its application
in any particular case. I am referred to the Partnership Act 1890 and
in particular to section 2 which contains rules for determing the exist-
ence of partnerships. Subsection (3) is, J think. applicable. It
reads:

"The receipt by a person of a share of the profits of a
business is prima facie evidence that he is a partner in the
business, but the receipt of such a share, or of a payment
contingent on or varying with the profits of a business, does
n01 by itself make him a partner in the business; and in partie-
ular-(a) the receipt by a person of a debt or other liquidated
amount by instalments or otherwise out of the accruing profits
of a business does not of itself make him a partner in the
business or liable as such. . .. (d) the advance of money by
way of loan to a person engaged or about to engage in any
business on a contract with that person that the lender shall
receive a rate of interest varying with the profits, or shall receive
a share of the profits arising from carrying on the business, does
not of itself make the lender a partner with the person or persons
carrying on the business or liable as such.

From the above it seems that the English law is that a sharing
of profits is an evidence of a partnership, but it is not conclusive .

. The court will not look merely at the fact that profits are shared,
but at the real intention and contract of the parties as shown by
the whole facts of the case. Sharing profits, if unexplained, is evi-
dence of partnership, but where there is an express agreement the
agreement must from the first be looked to as a whole to arrive at
the true intention.

In this instance the bankrupt on oath has stated "I do not con-
sider I have a partner. Khatchikian was a creditor with special
conditions as to a ~hare in the profits." If there was in fact a
partnership it might have been in the interest of the bankrupt to
assert such a partnership and involve Khatchikian in this insolvency.
He has not done so.

There are conditions attached to the agreement (Exhibit C)
which show this creditor had a good deal of interest and control in
the business of "Cent Mille Articles"! and it is a little difficult to
decide whether this interest was that of a partner, perhaps a dormant
one, or merely an interest given to the creditor, who no doubt made
the acquisition of this business by Gunaropulo possible, in order that
he might keep an eye on the fate of his interest in the venture. The
money was lent to be employed in a particular manner and this
creditor was in fact finding the capital of the business. He was
entitled to receive in consideration of this advance and certain services
to be rendered 20% of the, profits of the business with a minimum of
£E.200 per year. The agreement, however, refers to the sum of
£ E.! ,000 as a loan and paragraph 7 provides for its repayment at
fixed dates.

Taking the agreement as a whole and considering such facts as
are before the court, I am of opinion that there was no intention
to create- a partnership-a joint business carried on behalf of the
two--but that the transaction -may fairly be described as one between
debtor and creditor, a loan bearing a certain interest in the profits
of the business it financed. I decide as a fact that this creditor and
the bankrupt were not related as partners.

_.". II. Even if there be no partnership it is submitted that this
creditor's claim may still be postponed until satisfaction of those of

1 It appears that the main service rendered by the creditor was an audit of the

           books. See Record at page 11.                             

the proved creditors. The English law as contained in the Partner
ship Act and the Bankruptcy Act is referred to. There seems little
doubt that had this question been before the English courts the
provisions of section 3 of the Partnership Act 1890 and sections 30
and 33 of the Bankruptcy Act 1914 would have been applicable.

I do not think it can be doubted that this was a loan which would
in England be postponed in case of an insolvency. Under the pro-
visions of section 3 of the Partnership Act 1890 "a creditor who has
lent money in consideration of a share of profits is excluded absolutely
and according to the literal terms of the Act from competing with
other creditors." Pollock, The Law of Partnership, p. 22.

Altbough there is no law of partnership in the Sudan there is
statutory provision relating to bankruptcy contained in the Bankruptcy
Ordinance 1928. If this contains directions as to the point now under
consideration it must be followed irrespective of the provisions of

        English law.                                                                                                                   .

The law ~elating to debts provable in bankruptcy is contained in
section 35 of the Ordinance, which I find on comparison with the
English Bankruptcy Act 1914 corresponds mutatis mutandis with sec-
tion 30 of that Act.

Williams, at page 140,2 in a footnote to this section, states, "There
are however certain debts which, though provable, are not provable
pari passu with the loans of other creditors. First in the case of loans
to traders, where a loan is made on a written contract, signed by or on
behalf of all the parties, that the lender is to receive a rate of interest
varying with the profits or a share of the profits, . . . in such cases
the creditor will not be entitled to recover anything until the claims
of the other creditors for valuable consideration in money or moneys
worth have been satisfied."

Williams is of course looking at this matter in the light of English
law and his note is based, as he states, on sections 2 and 3 of the
Partnership Act 1890. It is not an opinion necessarily to be followed
by this court as section 35 of the Ordinance has to be interpreted
without the aid of the Partnership Act or similar legislation. The above
footnote assumes the existence of legislation on the particular point.
Here if there is none the consideration rests upon section 9 of the Civil
Justice Ordinance: "In case not provided for by this or any other

2 Compare: Williams 011 Bankruptcy, 17th ed., p. 163

enactment for the time being in force the court shall act according
to justice, equity and good concience."

I am asked to apply a term corresponding to sections 2 and 3 of
the Partnership Act to this claim and it is said that I am enabled to do
so under the provisions of section 35 (4) Bankruptcy Ordinance 1928
which enacts that "An estimate shall be made by the Court or by the
Receiver of the value of any debt or liability provable as aforesaid,
which by reason of its being subject to any contingency, or for any
other reason, does not bear a certain value." In my view tbis sub-
section is not applicabJe to this claim at all. I find nothing in the
Bankruptcy Ordinance which would enable me to treat this claim other

/than as a claim in respect of a sum advanced to the bankrupt provable
as an ordinary claim. The provisions of section 35 (3) of the Ordi-
nance as to debts provable in bankruptcy are explicit and the exceptions
already stated.

Express direction as to distribution of ordinary proved debts is
contained in section 43 (6). It is again explicit. I have examined
the corresponding section of the Bankruptcy Act 1914, section 33. Sub-
section 7 has the same effect as subsection 6 of our Ordinance. But
there is an important addition. Subsection 9 of the English Act states
"Nothing in this section shall alter the effect of section three of the
Partnership Act 1890 .... " In England, in order to import the pro-
vision relating to postponement of a claim of this nature it seems to
have been necessary to add a saving section. Tnere is no saving to
section 43 of the Sudan Ordinance. Debts proved under the Ordinance,
with certain exceptions of which this debt does not appear to be one,
are to be paid "rateably" and "without any preference." I have given ,_
this matter arduous consideration; because to decide in favour of the
admission of the creditor's claim is to give him a benefit' which he
does not appear to merit. In England he would be postponed. In a
country where the law is based on the Code Napoleon, and Egypt is
a case in point, he would no doubt be postponed also.] He has become
in effect the commanditaire of French law. This creditor made the
continuance of this now derelict business possible and he seeks to
compete with its creditors in search of his capitaL Nevertheless in
my view there is positive bankruptcy legislation here and I am bound
to follow it. I cannot add to the law where it is already stated,

On the application for directions I hold that this creditor is en-
titled to prove his claim and to rank pari passu with other creditors