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Scottish Court of Session Decisions
You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Thomas v. Waddell [1868] ScotLR 6_360 (23 February 1868)
URL: http://www.bailii.org/scot/cases/ScotCS/1868/06SLR0360.html
Cite as: [1868] ScotLR 6_360, [1868] SLR 6_360
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SCOTTISH_SLR_Court_of_Session
Page: 360↓
Court of Session Inner House Second Division.
v.
Facts:
(1) Circumstances in which held that a payment of money towards facilitating a bankrupt's discharge was an illegal preference in the sense of the 150th section of the Bankrupt Act; (2) Party succeeding in cause held entitled to expenses only since the date of the Lord Ordinary's interlocutor, although that interlocutor was affirmed in respect the transaction which grounded the action, and was now declared illegal, was the act of the defender, which the pursuer was entitled to hold by until there was a judgment against him.
This was an action brought by the pursuer to enforce implement of an obligation undertaken by the defender in the following circumstances:—The pursuer was a creditor to a large amount in the sequestration of R. S. Smith, Walkerton Mills, Leslie. For the amount of his debt he claimed to hold a security over the machinery in the bankrupt's mill. This security was disputed by the trustee,
Page: 361↓
who rejected the pursuer's claim for a preference. The bankrupt having offered a composition, and there being a difficulty in adjusting the same while the pursuer's claim to a preference remained undisposed of, the defender, who appears to have been a friend of the bankrupt, wrote to the pursuer, offering him £500 over and above the composition, provided he would not insist in his claim for a preference, and would give the defender a mandate to act for him at all meetings in reference to the composition. This offer was accepted by the pursuer. It did not appear that the bankrupt had any knowledge of the transaction, neither was it alleged that the body of creditors were aware of it. The pursuer now brought the present action to enforce the payment by the defender of the £500 referred to. The defender pleaded that the obligation founded on was void, as constituting an illegal preference in the sense of the 150th section of the Bankrupt Act.
The Lord Ordinary ( Manor) sustained this defence, and assoilzied the defender with expenses, adding the following note: — “ The pursuer, James Thomas, being a creditor of Robert Suttie Smith, a sequestrated bankrupt, for various sums, amounting to £2797, 17s. 6d. or thereby, lodged claims in Smith's sequestration for the sums so due to him, and, in particular, he lodged a claim for a sum of 1795, 1s. 4d., contained in a promissory-note granted to him by the bankrupt, stating, with reference to this debt, that he held no security for it except a certain policy of assurance, and certain machinery and effects belonging to him, situated in and at Walkerton Mills, occupied by the bankrupt as tenant, and which machinery and effects the bankrupt had right to purchase from him on certain conditions specified in a letter referred to in the claim. The trustee in the sequestration did not admit the pursuer's right of property in, or security over, said machinery and others, but claimed them as the property of the general creditors, which he was entitled to sell without regard to the pursuer.
“In the month of June 1867, which was after the pursuer received intimation of the trustee's rejection of his claim for a preference in respect of machinery, the bankrupt made overtures to his creditors, with the view to obtaining a discharge on payment of a composition. Meetings then took place, and a correspondence was opened between the defender, James Waddell, acting on behalf of the bankrupt, and the pursuer, with reference to the adjustment of the pursuer's rights to the machinery, and his preferable claims in respect thereof, without which, it is stated, the proposal of a composition was considered impracticable. There appear to have been frequent meetings on the subject, and numerous letters passed between the defender Waddell and the pursuer, the correspondence closing with the letter on which the present action is founded. It is in these terms— ‘175 Buchanan Street, Glasgow, 9th September 1867,— James Thomas, Esquire, Forthar—Sir,—In consideration of your taking the same dividend as the rest of the creditors will be offered and paid by the bankrupt on the sequestrated estate of Mr Robert S. Smith, spinner and manufacturer, Walkerton Mills, Leslie, Fife-shire, and giving me your mandate to act on your entire claim of £2797 or thereby, at all meetings in connection with offer, and acceptance of offer, on said bankrupt estate, I agree to see you paid, or to pay you, the sum of £500 sterling, payable as follows, viz., £300 within two months of the date of Mr Robt. S. Smith's discharge; £100 in eight months from date of E. S. Smith's discharge; and £100 in twelve months from the date of R. S. Smith's discharge; which £500 is over and above the composition upon your entire claim of £2797 or thereby, and all without prejudice or recourse.—I am yours respectfully, James Waddell.’
“ What was the nature of the defender Waddell's relation to the bankrupt, or his interest in his affairs, or from what source the money thus stipulated to be paid by him was to come, are facts nowhere disclosed on the record. It is merely stated that he was a friend of the bankrupt's. But it is sufficiently evident that the whole transaction, however it originated, and whatever its effect might be, was managed without the privity or knowledge of the other creditors. The bankrupt having made offer of a composition which, after consideration, was accepted, the defender Waddell became one of the cautioners for its payment, and at all the meetings of creditors held for the purpose of deciding on the offer of composition, Waddell was present, and voted and acted on a mandate which had been granted by the pursuer in his favour on his whole claims in the sequestration. The result was that the pursuer was reckoned as an ordinary concurring creditor for his whole debt of £2795, 17s. 6d.; and since the bankrupt's discharge, which was obtained on 21st November 1867, the pursuer has accepted payment of the instalment or instalments of the composition which have become due and payable. Ho has now brought this action against the defender for payment of £400, with interest, as concluded for, being the balance alleged to be due to him under the letter or obligation libelled, of 9th September 1867.
“ It was pleaded, in defence, that the said obligation is in violation of the 150th section of the Bankruptcy (Scotland) Act 1856, whereby it is declared that ‘all preferences, gratuities, securities, payments, or other considerations, not sanctioned by this Act, granted, made, or promised, and all secret or collusive agreements and transactions for concurring in, facilitating, or obtaining the bankrupt's discharge, either on or without an offer of composition, and whether the offer be accepted or not, or the discharge granted or not, shall be null and void.’ The defender further maintained that the obligation is void at common law, and cited various cases in support of his pleas.
“For the pursuer it was contended that the said letter or obligation does not fall within the meaning or intention of the statute, inasmuch as the bankrupt was no party to the transaction, and that the effect of it, so far from being to diminish the estate divisible among the creditors, is, on the contrary, to increase and enlarge it, by inducing the pursuer to accept the composition payable to an ordinary unsecured creditor, instead of leaving him to take steps for establishing his preference over the machinery, whereby the estate might have been materially lessened. The Lord Ordinary was struck with the force of this argument, but after carefully considering it, he has felt himself constrained to give effect to the defender's pleas, being of opinion that it would be dangerous to sanction a private transaction of this kind, which was plainly one for facilitating or obtaining the bankrupt's discharge. The pursuer not only bargained for and received from the defender a consideration for foregoing his claim to a preference, but, as part of the agreement, entrusted his whole rights and interests
Page: 362↓
in the sequestration to the absolute discretion of the defender as his mandatory. There may have been no fraud or unfairness intended in the matter, but the words of the statute, which are very broad, seem to exclude everything like such secret interposition on the part of friends of the bankrupt, even though he himself have no knowledge of what is done on his behalf. The case is in many respects a special one. and none of the authorities cited by the defender have any direct bearings upon it, but they show the extreme jealousy which the law entertains of the slightest interference in the procuring of concurrence to the discharge of a bankrupt. “ It is scarcely necessary to observe that the position and conduct of the defender, in repudiating his own obligation are anything but creditable to him. With that, however, the Lord Ordinary considers he has nothing to do, and he has accordingly, with some reluctance and hesitation, decided the case in the defender's favour, though, in its circumstances, it appears to him to be an extremely narrow one.”
The pursuer reclaimed.
Clark and Balfour for him.
Pattison and Crichton in answer.
At advising—
The claim lodged in the sequestration by the pursuer did not contain any estimate of the value of the alleged securities. It was not lodged with a view to voting, and therefore did not require to contain any such value; but it is said by the pursuer on record that the security was of very considerable value— in fact, equal or nearly equal to the debt. The right to the moveables in the mill was disputed by the trustee; but as the pursuer's estimate of their value was high, and his claim to a preference asserted, it is clear that if matters had proceeded in their ordinary course, the pursuer, Mr Thomas, must have deducted a very considerable sum from the amount of his total debt before he proceeded to vote on the question of the composition; for before he could have given such a vote he must have stated his securities, and put a value upon them, and deducted the value from the total amount of his debt. The vote would have been upon the difference alone between the debt and the estimate of the security, which would have reduced it to a vote for a small debt, if it afforded a vote at all.
Mr Waddel, the defender, was a friend of the bankrupt, and in order to secure the pursuer's vote in favour of the composition, he agreed to pay the sum sued for. Five hundred pounds in all was to be paid at certain periods from the date of the discharge being obtained, in certain specified instalments, for two of which the action is brought, over and above the amount of the composition, the counter-consideration being that the whole debt should be voted on in the question as to the composition, and no deduction being made on the ground of the securities, and that the defender should hold the pursuer's mandate, and so be enabled to vote at all meetings touching the acceptance of the composition on the total debt; an arrangement by which the vote was effectually secured.
The question is, can such an obligation be enforced?
It is impossible to doubt as to this being a promise of a payment of money for facilitating the bankrupt's discharge on a composition, and it is not said to have been made known to the trustee or to any creditor in the sequestration. The pursuer refrained from deducting any estimated value on account of his holding a preference, voted on his whole debt through the defender as his mandatory, and the composition-contract was agreed to, and the bankrupt discharged on a composition.
Can we give decree in terms of such an agreement? Apart from the element of secrecy, on which there may be difference of opinion, as “ collusion ” has not been proved, there is present the statutory condition inferring nullity, viz., the payment promised for a facilitating of the bankbrupt's discharge.
The statute excludes from its operation all payments “sanctioned by the Act.” It applies to every description of transaction containing the element just adverted to, where the transaction is not sanctioned by the Act. There is unquestionably no provision in the Act which sanctions such a payment by a friend of the bankrupt for such a purpose. This seems to be the single exception to the application of the sanction of nullity, and the present case is not without it, because it is not a case where the act done is sanctioned.
The pursuer pleaded that the defender, though acting in the interest of the bankrupt in the facilitating of the bankrupt's discharge, was truly a third party generously devoting a portion of his property to the laudable endeavour to restore to the bankrupt the capacity of resuming trade, and that, as the fund did not in any way diminish the available assets, and, on the contrary, went to augment them by the withdrawal of a claim to a preference, this transaction was not contrary to the spirit of the Act.
I think that the statute, in so far as the nullity is concerned,— and that is all with which we have to do,— does not discriminate between the case of a stranger and the bankrupt. The provision does not introduce, as an essential element of nullity, the interference or knowledge of the bankrupt, and the 151st section proves this to demonstration, for it contemplates the case of the bankrupt being personally concerned or cognizant of the arrangement, and the case where there has been such an agreement without the personal interference or knowledge of the bankrupt. In the latter case the discharge is annulled, and the bankrupt is deprived of all the benefit which accrued from i t; in the other the consequence is the nullity of the obligation and the incurring of certain penalties.
I do not think that there is anything in the Act which can lead us to the conclusion that the provision is to apply only where the estate is diminished or the interests of the creditors affected in the amount of estate to be distributed. It must be admitted that although every farthing of available assets is divided, an engagement by the bankrupt
Page: 363↓
I think that a statute which should limit the remedy to cases where actual cognisance in the transactions on the part of the bankrupt can be proved— a matter of great difficulty even in cases where he truly was a party to the transaction— would altogether fail in meeting the exigency of the case, and that any limitation of the source of the consideration to a part of the bankrupt's estate would be equally deficient. The remedy, according to the spirit of the statute, can only be adequately carried out where transactions by which votes are unduly influenced are rendered null by whomsoever these transactions may be carried through, or whether the amount of the fund to be divided be affected or not.
The statute in the 150th section has made no distinction between the obligations of a friend of the bankrupt and those of the bankrupt himself, and the object of the statute would obviously be defeated if any such restriction were introduced. I do not find it necessary to go further, but it is certain that no body of creditors can be said to proceed to the consideration of a composition-contract where they are going on the footing of a large unsecured creditor taking his dividend on his apparent debt with others, while he has an engagement in his pocket giving him an additional sum. I do not believe that Mr Thomas intended any deception or fraud on the body of the creditors, but the effect of his vote was certainly to mislead them. They must have held that the composition was to be taken by Mr Thomas as it was proposed to be by themselves. The act operated unfairly in so far as the body of creditors is concerned.
On the whole I agree with the Lord Ordinary, who seems to me to have taken a sound view of the law of the case.
The other Judges concurred.
After hearing parties on the question of expenses, the defender was only held entitled to expenses since the date of the Lord Ordinary's interlocutor.
Their Lordships held (Lord Benholme dissenting) that the circumstances of the case were such as to put the defender in a very unfavourable position; and, although the transaction on which the pursuer founded was now ascertained to be illegal, yet it was a transaction into which the pursuer had been led by the defender, and which he was fairly entitled to hold by till its illegality was established by the judgment of a Court. The pursuer, therefore, should not be found liable in expenses prior to the date of the Lord Ordinary's judgment. Since, however, he should have been satisfied with that judgment, he must pay the expenses of the Inner-House procedure.
Solicitors: Agents for Pursuer— Hill, Reid, & Drummond, W.S.
Agent for Defender— J. T. Pullar, S.S.C.