Scottish Court of Session Decisions

This was an action at the instance of Mr Macfarlane, C.A., Glasgow, trustee on the sequestrated estate of Messrs William Marshall & Co., ship-brokers, Glasgow, for the purpose of reducing a bill for £1000, dated 3d September 1869, drawn by the defenders Messrs Robb & Co., ship-owners, Glasgow, on and accepted by Messrs Wm. Marshall & Co., on the ground that, being granted by an insolvent in security of prior debt within sixty days of bankruptcy, it was reducible, both at common law and under the statute 1696, c. 5.

The pursuer alleged— On 23d August 1869 the said William Marshall & Co. chartered from the defenders the ship ‘Asia ’ for a voyage from Glasgow to Melbourne. The vessel was of the burden of 2000 tons register, end was then lying in Port-Glasgow. The freight to be paid for the use and hire of the said vessel, in respect of the said voyage, was, by the charter-party agreed to be a guaranteed slump sum of £4500, and any excess beyond £4750 gross freight to be equally divided between owners and charterers, in full of all port charges and pilotages as customary; payment whereof to become due and be payable as follows, namely, by so much thereof as might be payable by freight of goods and merchandize by bills of lading at port of discharge, not exceeding £3250 at current rate of exchange, on unloading and right delivery of such goods and merchandize, and the balance to be paid in Glasgow in cash on final departure of vessel from the Tail of the Bank, Greenock, less one and one-fourth per cent. discount, on receipt of which charterers' responsibility concerning the charter to cease. The charter-party farther fixes thirty-five days, Sundays and holidays excepted, if not sooner dispatched, for loading said ship, to be computed from the day the vessel was placed at a loading quay berth at Glasgow, purchase rigged for taking in cargo and ready to load, notice whereof to be given in writing to the charterers. On the 3d day of September 1869 the defenders having, from information which they had received, become doubtful of the credit of the said William Marshall & Co., urged upon them to give them, the defenders, security for the fulfilment of the said charter-party, and the said William Marshall & Co. accordingly, as such security, gave the defenders their acceptance for £1000, dated the 3d day of September 1869, and payable fourteen days after date. Along with the said acceptance the said William Marshall & Co. delivered to the defenders a letter setting forth the terms of the transaction as follows:—‘ Glasgow, 3 d September 1869.—Messrs John Robb & Co., Port-Glasgow.— Dear Sirs,—As you have requested, in consequence of letters sent by Messrs Allan C. Gow & Co. to the shippers per ‘River Jumna,’ that some security should be given you for the fulfilment of the charter per ‘Asia,’ dated 23d August 1869; we now tender you our acceptance of this date in your favour for £1000 at fourteen days date, which, when retired by us, shall be imputed pro tanto in payment of chartered freight by said vessel.—We are, dear Sirs, yours faithfully, W. Marshall & Co.’ This letter was acknowledged by the defenders in the following terms:—‘ Port-Glasgow, 3 d September 1869.—Messrs Wm. Marshall & Co., Glasgow.— Dear Sirs,—We have your favour of this date, copy of which is annexed, and we confirm and agree to its contents, and hereby acknowledge receipt of your acceptance to us for One thousand pounds (£1000) at fourteen days from this date. Yours truly, John Robb & Co., 3d September 1869.’ The pursuer further alleged—“The said bill was given by the said William Marshall & Co. to and received by the defenders in security of the obligations in the charter-party, eleven days after the contract of charter-party of the ‘Asia’ had been definitely executed, at the time when the said William Marshall & Co. were under no obligation either to grant such a bill or to make any payment in cash to account of freight. Marshall & Co. were insolvent at the time this transaction was gone into.”

A charge having been given on the bill, it was paid by Marshall & Co. on 27th September 1869.

On 26th October 1869 the estates of William Marshall & Co. were sequestrated.

It was admitted that after the contract of affreightment had been broken by Marshall & Co., the defenders, to save farther loss, advertised the “Asia,” completed her loading, and dispatched her about the beginning of December 1869. The sole partner of William Marshall & Co. had left Scotland without authorising any one to act for him with whom the defenders could communicate, and heavy loss was daily accruing from his breach of contract.

The defenders stated that “by the breach of the contract of charter-party of the ‘Asia,’ libelled on by the pursuer, the defenders have suffered loss, injury, and damage to the amount of not less than £3000.”

The Lord Ordinary ( Ormidale) pronounced this interlocutor and note:—

Edinburgh, 5 th July 1870.—The Lord Ordinary having heard counsel for the parties, and considered the argument and proceedings (including the proof), Finds it established—(1) That, by the charter-party libelled, entered into between William Marshall & Co. and the defenders on 23d August 1869, the former chartered from the latter a ship called the ‘Asia;’ and in respect thereof, besides other obligations, bound themselves to pay to the defenders the sum of £4500 of freight, partly at the port of discharge and partly at Glasgow, on the final departure of said ship from the Tail of the Bank, Greenock; (2) That on 3d September 1869, before any part of said freight had become due, William Marshall & Co. granted their acceptance to the defenders for £1000, payable fourteen days after date, as a security towards the fulfilment of their (William Marshall & Co.) pecuniary obligations under said charter-party; (3) That William Marshall & Co. were not under any obligation to grant said acceptance, or make any payment to account of their obligations under said charter-party; (4) That William Marshall & Co., on or about the 27th of September 1869, retired said acceptance by paying to the defenders £975, and granting to them an I O U for £25; and that at this time the payments which William Marshall & Co. had undertaken to make to the defenders under said charter-party had not to any extent become due; (5) That William Marshall & Co. and the defenders, in letters which passed between them at the time the said acceptance was granted, expressly referred to it as a security, and, when retired, as a payment pro tanto of the freight for which the former had become bound to the latter under the said charter-party; (6) That in

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this state of matters, and within sixty days of the date when said acceptance was granted, viz., on the 26th October 1869, William Marshall & Co. became bankrupt, and their estates were sequestrated in terms of the Bankruptcy Acts; (7) And that the pursuer is trustee confirmed on the sequestrated estates of William Marshall & Co., and as such represents parties who were creditors of that Company prior to the 3d of September 1869, when the acceptance above mentioned was granted by them to the defenders as aforesaid: Finds in these circumstances, that in law the said acceptance, and the transaction whereby the same was granted to the defenders, and afterwards retired as aforesaid by the bankrupts William Marshall & Co. are null and void, or at least reducible under the Act 1696, c. 5, as having been voluntarily made and entered into by the said William Marshall & Co. within sixty days of their bankruptcy for the satisfaction or security of the defenders in preference to other creditors: Therefore, Reduces, Decerns, and Declares in terms of the reductive and declaratory conclusions of the summons; and also decerns against the defenders for payment to the pursuer of the foresaid sum of £975, with interest at the rate of 5 per cent, per annum from the 27th of September 1869 till paid: Finds the pursuer entitled to expenses, allows an account thereof to be lodged, and remits it, when lodged, to the auditor to tax and report.

Note.—Upon a full and careful consideration of the circumstances of this case, the Lord Ordinary has been unable to arrive at any other conclusion than that the transaction challenged is of the nature of an illegal preference under the Act 1696, c. 5, against which the pursuer, as representing Marshall and Company's creditors, is entitled to be restored.

At the date when the bill or acceptance in question was granted to the defenders they were creditors of the bankrupts Marshall and Company, under the charter-party libelled, to a large amount, no part of which, however, was then due, and that the granting of the acceptance was a voluntary act on the part of the bankrupts, in the sense of the statute 1696, c. 5, cannot well be disputed, for they were under no antecedent obligation to grant such an acceptance. That the acceptance was granted for the satisfaction or security of the defenders seems clear enough, and, indeed, is so expressly acknowledged in the letters which passed between the parties at the time, and which are set out in article 3 of the pursuer's condescendence. Not only so, but Mr Somerville, the partner of the defender's firm who managed the transaction for them, after stating in the course of his examination as a witness for the defenders that the bankrupt William Marshall, after failing to find such a security as was at first contemplated, goes on to say, ‘On 3d September he (Marshall) granted a bill for £1000 at fourteen days' date. He himself proposed that as a substitute for the security.’ That the transaction was and must also be held to have been of the nature of a preference in favour of the defenders over others of their creditors appears also to the Lord Ordinary to be sufficiently established, for, by and in consequence of the transaction the defenders succeeded in obtaining payment to the extent of £975 of their claims, in place of being left to their ranking in the bankrupts' sequestration along with the other creditors. And that this preference was conferred within sixty days of the bankrupts' sequestration, and therefore within the period of Marshall and Company's constructive bankruptcy, is plain enough. It has been proved that, at the date when the acceptance was granted Marshall and Company had creditors who continued to be their creditors at the date of their sequestration. It was moreover in consequence of the fears entertained of Marshall and Company's solvency, or ability to meet their engagements, which fears turned out to be well-founded, that the transaction was entered into and completed.

There thus appears to be in this case all the elements necessary to make out such a preference as is struck at by the Act 1696, c. 5. Nor does it bring the case from under the operation of the statute that the transaction took the shape of a bill or acceptance by the bankrupts in favour of the defenders, which was retired and paid at maturity, for it has been repeatedly held that such a mode of effecting a preference may be equally a contravention of the statute as any other, where, as in the present instance, the bill and payment were not granted and made in the ordinary course of trade, but resorted to expressly for the purpose of securing to the defenders payment or security pro tanto of a debt not then due to them, and payment of which they could not then have demanded and enforced.

But, on the part of the defenders it was contended, as the Lord Ordinary understood the argument of their counsel, that the transaction in question was of the nature of novum debitum, and so is not struck at by the Act 1696, c. 5. In support of this view, it was explained, with reference to the proof, that the defenders, unless they had obtained the acceptance of Marshall & Co. for £1000, would have refused to implement their part of the charter-party, and brought it to a termination; that they were entitled to have taken this course, and would have done so if the acceptance had not been granted to them; and that, as it was in consideration of their having received the acceptance, they for the time allowed the contract of charter-party to stand, there was thus a new contract, of which the acceptance, and payment of its contents, were merely fulfilment by Marshall & Co., and not a preference struck at by the statute. The Lord Ordinary does not think that this is a sound or maintainable view of the transaction. It appears to him that in substance and reality the prior contract of charter-party, after the bill was granted to the defenders, remained just as it had ever been, and therefore that the transaction challenged cannot be said to have constituted a new contract, or altered the relative positions of the bankrupts and the defenders. According, indeed, to the defenders' theory, the granting of a security by a bankrupt in favour of a prior creditor might, in many cases to which the Act 1696, c. 5, has been held clearly to have applied, be said to displace the original by a new debt. And it is a somewhat singular, and, as the Lord Ordinary ventures to think, fallacious, plea for avoiding the operation of the statute, to maintain that the transaction challenged was gone into by the bankrupts in order to prevent the defenders violating or breaking their engagements under the charter-party.

“Disposing of the case as the Lord Ordinary has done, any consideration of the defenders' plea of retention, or set-off in respect of alleged damages sustained by them, was unnecessary, or rather has been excluded. The defenders may or may not have such a claim of damages which they may or may not be entitled to make effectual by a ranking

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in the sequestration or otherwise, and, in regard to that matter, the Lord Ordinary determines nothing. Neither has the Lord Ordinary determined anything in regard to the I O U for £25, as it has not been brought under challenge in the present action, and does not appear to have been paid.”

Robb & Co. reclaimed.

Horn and Harper for them.

Watson and Lancaster in answer.

At advising—