Scottish Court of Session Decisions

This was an action by William Stiven, trustee on the sequestrated estates of Paton, Gordon, & Co., merchants and commission agents, Dundee, against Scott & Simson, also merchants and commission agents there. The pursuer sought to reduce certain deliveries of jute made by Paton, Gordon, & Co., within sixty days of their bankruptcy, to the defenders, and also a payment of £237, 1s. 8d. (the price of certain jute), made under the same circumstances by the bankrupts to bank to meet bills current between them and the defenders. The summons further concluded for restitution of the jute so delivered, amounting to 902 bales, and failing restitution for payment of the sum of £2225, 7s. 8d., in addition to the sum of £237, 1s. 8d. The action was laid both on fraud at common law, and on the statute 1696, c. 5, but the challenge at common law was not insisted upon.

The transactions between the bankrupts and the defenders, which were the subject of the present action, were of the following nature:—On several occasions in the years 1869–1870, Messrs Scott & Simson made advances to Paton, Gordon, & Co., “against invoice.” These transactions, so far as shown by the letters passing between the parties, appear on each occasion to have been commenced by a letter from Paton, Gordon, & Co., inclosing bills for the acceptance of Scott & Simson, and also invoices of jute, requesting acceptance of the bills against the invoice. It was admitted that no real sale took place. The intention of parties was certainly to give Scott & Simson security for their advances, though what was the precise legal effect of the agreement was a matter of dispute. The goods invoiced remained in Paton, Gordon, & Co.'s warehouse, but were completely identified by marks or brands. On several occasions Paton, Gordon, & Co., notwithstanding that they had invoiced specific goods to Scott & Simson, sold these very goods without their knowledge or consent to other parties. On these occasions, however, they either invoiced new goods to Scott & Simson to take the place of those so disposed, or they paid the price of the goods so sold into bank to meet Scott & Simson's bills which were then current. On the 10th February 1870 Scott & Simson addressed the following letter to Paton, Gordon, & Co.:—“After consideration we have come to the conclusion that the only satisfactory security we can obtain over the jute against which the bills are current between us is that of actual delivery, and we have to ask you to make the necessary arrangements for to-morrow.” Paton, Gordon, & Co. proceeded to deliver the jute. As the delivery did not take place so rapidly as Scott & Simson wished, they made repeated applications to hurry on operations. It appears that Paton, Gordon, & Co. had removed a portion of the goods invoiced, but they never denied their obligation to deliver. On the 10th March 1870, they stopped payment, and on the 4th April their estates were sequestrated, and shortly after the pursuer was elected trustee thereon. By the date of their bankruptcy the whole goods had been removed from their warehouse

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with the exception of about £80 worth. On the 4th May the trustee raised the present action, concluding for restitution of the jute so delivered, amounting in all to 902 bales, and also of the sum of £237, 1s. 8d., as the price of a quantity of jute, which had been paid into the bank by the bankrupts, to meet pro tanto one of the bills current between them and the defenders. The questions between the parties substantially resolved themselves into the following:—What was the precise nature of the agreement made by Paton, Gordon, & Go. and Scott & Simson at the time the invoices were sent, and what was the legal effect of that agreement? The trustee contended that by the transmission of the invoices there was no absolute and unconditional obligation laid upon Paton, Gordon, & Co. to deliver the jute; that, in fact, there was an understanding that delivery should not be demanded unless Paton, Gordon, & Co.'s affairs should become embarrassed; and that, consequently, the delivery of the jute within sixty days of their bankruptcy by Paton, Gordon, & Co. was a further security voluntarily given to Scott & Simson in preference to their other creditors, and therefore challengeable under the Act 1696, cap. 5.

Messrs Scott & Simson, on the other hand, contended that by the transmission of the invoices it was agreed that they should have all the rights of a purchaser; that they were accordingly entitled to demand delivery of the jute at any time; and that the subsequent delivery to Paton, Gordon, & Co. was not a “further security,” but implement of a pre-existing obligation.

The Lord Ordinary ( Gifford) allowed parties a proof. A considerable body of evidence, both documentary and parole, was led. It appeared that the agreement between Paton, Gordon, & Co. and Scott & Simson was not reduced to writing, or even explicitly stated in words, but was left to tacit understanding and the usage of trade. Accordingly the most important evidence in the case was the construction put upon the contract by the parties as shown by their actings. The invoices were in ordinary form, headed by the word “bought,” and contained the following note—“The goods above invoiced we hold in our warehouse fully covered by insurance.” In regard to the sales of the invoiced goods, which were made by Paton, Gordon & Co., the evidence was not very clear whether it was part of the agreement that Scott & Simson should be consulted as to the persons to whom and the prices at which the goods were to be sold. In point of fact, it appeared that Paton, Gordon, & Co. made sales without consulting Scott & Simson, though on several occasions they intimated the sales to the latter. A circumstance strongly founded on by the trustee was that Paton, Gordon, & Co. made several out and out sales to Scott & Simson of the very goods which had been already invoiced to them.

The Lord Ordinary ( Gifford) pronounced the following interlocutor:—“Finds that the various quantities of jute delivered by Paton, Gordon, & Co. to the defenders in February 1870 set forth upon record, and the payment of £237, 1s. 8d. made by Paton, Gordon, & Co. to the Bank of Scotland in Dundee, on behalf of the defenders, on or about 25th February 1870, were so delivered and made in bona fide, and were not delivered and made illegally and fraudulently to disappoint the rights of the just creditors of the said Paton, Gordon, & Co.: Finds that the said deliveries and payment were not made in violation of the Act 1696, cap. 5, and are not challengeable either under the said statute or at common law: Therefore assoilzies the defenders from the whole conclusions of the libel, and repels the whole reasons and grounds of reduction, and decerns: Finds the defenders entitled to expenses.

“ Note.—This is a case of considerable importance in mercantile law, and the questions raised in it are attended with much delicacy and nicety.

Although the Lord Ordinary has come to be of opinion that the deliveries of jute and the bank payment made in 1870, within sixty days of the sequestration and not our bankruptcy of Paton, Gordon, & Co., are not challengeable either as being fraudulent at common law, or as being in contravention of the Act 1696, still he cannot help feeling that the practice pursued by Paton, Gordon, & Co., whereby they came under obligation to deliver to their creditors, in pledge or in security, special parcels of goods, of which, notwithstanding such obligations, they were allowed to retain actual custody and possession, is a practice inconsistent with healthy trading, and which ought not to be encouraged by the law. The parties have been sailing very near the wind, and it is not without some hesitation that the Lord Ordinary has reached the result, that the right which the creditors succeeded in getting completed in February 1870 was not cut down by the bankruptcy which followed within sixty days thereof, viz. on 4th April 1870.

Although the transactions between the bankrupts and the defenders took the form of sales, signed invoices as upon sale being delivered to the defenders in return for bills which the defenders granted to the bankrupts, it has been abundantly established in evidence, and is admitted by all parties, that no real sale took place. The goods invoiced to the defenders were not in reality sold to them; but what the parties intended to do was to give the defenders a security for their advances over the goods so invoiced—such a security as might at any time be completed and perfected by the defenders demanding and receiving actual delivery of the specific goods invoiced to them. The invoice was given not as evidence of sale, but as giving the defenders the title of a purchaser at any time to ask and take delivery of specific goods, as if these goods had been sold to them. The tacit understanding was, that the defenders should not actually demand or take delivery unless circumstances should make it necessary or advisable for them to perfect their security. But this was a mere tacit understanding, not reduced to writing, and not even, so far as appears, explicitly stated in words.

On various occasions Messrs Paton, Gordon, & Co., notwithstanding having invoiced specific goods to the defenders, sold these very goods, without the knowledge or consent of the defenders, to third parties. On these occasions, Paton, Gordon & Co. either invoiced new goods to the defenders to take the place of those so disposed of, or they paid the price of the goods so sold into bank, to meet pro tanto the defenders' bills which were then current.

The advances made by the defenders were always made ‘against invoice’—that is, they were always granted unico contain with a counter obligation by Paton, Gordon, & Co. in the shape of an invoice, to give security over certain specific goods. In this sense all the transactions were

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nova debita. The advances were not made without any obligation to give security, and then the invoice granted as a security for a debt already contracted. If this had been so, the case, in the Lord Ordinary's view, would have had a different result. His opinion rests on what seems clearly established by the evidence, that in each case the advance was made against, and in exchange for, a sale-invoice of specific goods, which could be easily and at once identified, such invoice constituting an unqualified obligation to deliver the goods on demand. It is in these circumstances that the Lord Ordinary thinks delivery obtained by the defenders of the very goods invoiced to them, completely identified by marks or brands, and requiring no weighing or measuring over, or separation from stock, and said delivery being made before the stoppage of the defenders, and While they were continuing to carry on business in ordinary course, is not struck at, either by common law or by the Act 1696.

In the first place, the transaction seems unchallengeable at common law. The summons is laid on fraud at common law, as well as on the statute; but after the proof was adduced, it seemed to be conceded by the pursuers that they had not established fraud at common law. At all events, in the Ordinary's opinion, no case of common law fraud has been made out. Full value was given by the defenders for all the goods of which they received delivery. Indeed the goods delivered fell short of the value which the defenders have paid, and the defenders have not succeeded in making good the amount of their advances, but have lost between £400 and £500. It appears also that the defenders took the invoices in exchange for their money, with the view and intention of creating a security over the goods invoiced. This, of course, will not make the security good if it is invalid in law, but it is an answer to the charge of fraud, and establishes the bona fides of the parties. Then, lastly, delivery of the goods was obtained long before the actual stoppage of Paton, Gordon, & Co., and while they were carrying on business in the usual way. Paton, Gordon, & Co. did not stop payment in any sense till the 10th of March, when, for the first time, they became unable to meet their bills, and it seems proved that on the 9th of March the Bank of Scotland discounted one of their bills in the usual way, without asking security, and without imposing any condition or restriction. Notour bankruptcy and sequestration did not take place till 4th April.

No doubt it is true that in February the defenders began to suspect that the stability of Paton, Gordon, & Co. might be affected by certain failures which had taken place in Dundee, and this led to the defenders completing their securities by taking actual delivery of the goods invoiced to them. But a suspicion of this kind is not enough to constitute fraud, or to set aside the delivery of goods taken in virtue of a previous obligation, any more than it would set aside a payment in cash. At common law, therefore, it is thought the transactions are unchallengeable. In the next place, however, the question arises, and it is to this that the argument at the bar was exclusively directed, Are the transactions in question struck at by the Act 1696, cap. 5?

Now, the decisions on this subject have undoubtedly very much varied, and it is impossible to reconcile them all. The difficulties are fully stated by Professor Bell, and they have been illustrated by a series of cases which have occurred since the Commentaries were written. It may be convenient to note the leading cases:—2 Bell's Corns., 7th (M'Laren's) Ed., pp. 206 and 211; Inglis v. Mansfield, 28th June 1833, 11 S. 813, affd. (H.L.) 10th April 1835, 1 S. and M'L. 203; Bank of Scotland v. Stewart and Ross, 7th Feb. 1811, F.C.; Moncrieff v. Union Bank, 16 Dec. 1851, 14 D. 200; Taylor v. Farrie, 8th March 1855, 17 D. 639; Lindsay v. Shield, 19th March 1862, 24 D. 821; Rose v. Falconer, 26th June 1868, 6 Macph, 960.

In reference to the earlier conflicting cases, Professor Bell says—‘This series of cases will show a degree of uncertainty in the principle to be applied in questions of this kind, which is very distressing in practice. But the fair result seems to be (1) that wherever money is paid or advanced, or property made over in consideration of a general promise of security not over a specific subject, the distinction is sanctioned between the debt and the security subsequently granted; and in its true intent and meaning the rule of the statute is understood to apply to the security when it comes to be granted as being truly a security for a previous debt.’ After illustrating this, he goes on to say—‘But (2) it has also been held that wherever there is stipulated a specific security over a particular subject, in consideration and on the faith of which an advance of money or transfer of goods is made, the completion of that security, although after an interval of time, and after the term of constructive bankruptcy has begun, is not within the intent and meaning of the Act.’

The Lord Ordinary thinks that the doctrine thus laid down by Professor Bell may be held as fully borne out and fairly established by the later cases. The decision of Moncrieff v. The Union Bank can hardly be saved or reconciled with the principles announced by the whole Court in Taylor v. Farrie, in which, although the case was one of sale, the Court fixed the general rule, that a deed granted or an act done in specific implement of an absolute obligation undertaken prior to the sixty days, is not a voluntary deed in the sense of the statute. This was also very clearly laid down in Lindsay v. Shield; and in the late case of Rose v. Falconer, although it was found in point of fact that there was no prior obligation, the Court seemed clear that if there had been, the payment would have been unchallengeable. In Lindsay v. Shield the delivery was sustained, whether it was intended to operate as a security or as a sale, it being doubtful what was the true nature of the obligation. With great deference, therefore, it is thought the decision in Moncrieff v. The Union Bank cannot be safely followed.

In the present case the Lord Ordinary cannot read the invoices otherwise than as an unqualified obligation to deliver the specific goods invoiced, and that upon demand. It was no doubt powerfully urged that the moment it was established that there was no real sale, the invoice went for nothing, and could not found a demand for delivery. The Lord Ordinary cannot hold this. There is nothing illegal in a lender stipulating for and obtaining an ex facie absolute title—the ex facie absolute title of a purchaser. Securities are often taken by way of absolute disposition or conveyance with or without a back-bond or back-letter; and, instead of being illegal, such securities are rather favoured by law. Whether the absolute conveyance bears to be as for a price, that is to be the title of a purchaser,

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or merely bears to be granted for good causes and considerations, it is true that when the real character of the transaction is proved the holder must account for the subject of the security, and for any surplus it may yield after paying his debt; but its ex facie absolute form in no way invalidates or affects his security right. The defenders actually stipulated (for so the Lord Ordinary reads the correspondence) for an absolute title to have the same effect as if they were purchasers, and accordingly they got signed invoices. It was ‘against’ these invoices that they granted the bills, and it must be held that they would not have made the advance unless they had got the invoice, with all the rights which an invoice confers when the price is paid. It cannot well be doubted that, supposing no bankruptcy had occurred, a good action would have lain at the defenders' instance for the delivery of the goods invoiced to them, and that either with or without the true nature of the transaction being disclosed or admitted. If so, it is thought that the deliveries in February cannot be held as voluntary acts in the sense of the Act 1696.

In short, the Lord Ordinary reads the invoices as express obligations to deliver the invoiced goods, and, whether such delivery is in implement of a sale or in security, in neither case is it a voluntary act struck at by the statute. If indeed it had been a sale, the Mercantile Amendment Act would have applied; but the taansaction not having been a sale, that Act has no application. The specific nature of the goods invoiced has already been adverted to. Not only were the bales numbered and marked with precise marks, but it was proved in evidence that Paton, Gordon & Company had no other goods with the same marks in their possession, excepting the goods specified in the invoices. There could, therefore, be no doubt or difficulty as to identification, and nothing in the way of measurement, weighing, separation, package, or anything else, remained to be done by the debtors. The payment to the Bank of Scotland depends on the same principles as the delivery of the jute. The sum paid was the price of a parcel invoiced to the defenders, but which, notwithstanding such invoicing, Paton, Gordon & Company had sold. They were required to pay the price or deliver the goods, and they paid over the price as a surrogatum for the goods. This was no more ‘voluntary’ than if the goods themselves had been delivered.

On these grounds, and although not without some misgivings as to the evil effect which may arise from the recognition of a practice which cannot be regarded as wholesome or commendable, the Lord Ordinary feels himself unable to sustain the pursuer's challenge.”

The trustee reclaimed.

Watson and Mackintosh, for the pursuer—What the trustee complains of is delivery made by the bankrupts, in answer to a letter of 10th February, within sixty days of bankruptcy. This is a demand made for the first time for delivery. The defenders seek to take the case out of the operation of the statute by saying that there was a pre-existing obligation to deliver; whereas we contend that the preceding contract did not impose an absolute obligation to deliver. Nothing but an absolute and unconditional obligation to deliver will prevent the application of the statute. This was an arrangement for enabling a man to go on having large quantities of goods in his warehouse and getting credit by selling them as his own, and then when he becomes insolvent another person steps in and claims them as his own in consequence of certain invoices.

The Solicitor-General and Guthrie-Smith, for the defenders—There was no attempt on the part of the bankrupts to dispute that they were under obligation to deliver. The delivery is now sought to be set aside on the ground that it was a voluntary act by the bankrupts in further security of the defenders—that is to say, one not stipulated for in the original agreement. If there was a legal obligation under which the bankrupts were bound to give delivery, it was not a voluntary security, but in implement of a previous obligation. And even supposing there was no obligation to deliver which could be legally enforced, provided it was really stipulated for, the subsequent delivery was not a further security, but that agreed upon. There are two things in the statute which it is necessary to distinguish—“voluntary,” and “in further security;” “voluntary,” i.e., opposed to all security that could be enforced at law; “in further security,” i.e. in addition to that stipulated for at the time of the original agreement. Where a person is challenged for taking a fraudulent security, he is not limited to prove that he was entitled to get that security by the same evidence that he would have required in order to enforce that security. It is sufficient to establish that the security which he got was one which he originally stipulated for. If so, it cannot be a fraud to take it. The nature of this transaction is fairly expressed in the face of the documents. It is admitted that the transaction took this shape for the purpose of giving a security. But though there was no actual sale, is there any reason why the transaction should not take this form, in order to give the lender all the rights of a purchaser? Suppose an action brought before bankruptcy to enforce delivery, would it have been possible for Paton, Gordon, & Co. to say, “You have got your invoice, that is all you ever stipulated for.” The invoice puts Paton, Gordon, & Co. in the position of having to submit to be dealt with as sellers. Having got their consideration (though not that stated in the invoice), they are not entitled to plead that they have not got payment. In short, before bankruptcy the nominal purchasers were entitled to enforce delivery whenever they chose. And it is ail important element in the case that they did get delivery whenever they asked it.

At advising—