Scottish Court of Session Decisions

On 23d January 1868, the estates of Alexander Gordon Smith, residing at No. 20 Gardner's Crescent, Edinburgh, were sequestrated. The pursuer Mr Henry Budge, C.A., was elected trustee in the sequestration on 3d February 1868, and confirmed on the 7th.

The estate of the bankrupt chiefly consisted of house property in Edinburgh, yielding a gross rental of about £600 a-year, and burdened with heritable securities to the extent of £7082, 14s. 11d.

The first or leading security over the subjects was a bond and disposition in security for the sum of £6000, dated 13th May 1863, granted by the bankrupt in favour of Thomas Dall, C.A., as curator bonis and factor loco tutoris to the children of the late John Blair.

The subjects were also burdened with postponed bonds and dispositions in security in favour of Sutherland's trustees, Miss Margaret Johnston, and Miss Agnes Muir, for £282, 14s. 11d., £250, and £550 respectively. The bankrupt having failed to pay the interest due on the first-mentioned bond at Whitsunday 1867, Mr Dall, on 29th October 1867, raised an action of maills and duties, on which he obtained decree in absence on 19th November 1867, and thereupon entered into possession. The decree was extracted on 4th December 1867.

By assignation, dated 8th, and recorded 10th February 1868, Mr Dall assigned the bond and disposition in security in his favour to the defenders, Brown's Trustees and Thomas Balfour. He also assigned to the same parties the decree of maills and duties in his favour.

The rents of the subjects falling due at Martinmas 1867 were drawn partly by Mr Dall and partly by his assignees, and since that term down to and including the term of Whitsunday 1870, they were drawn by his assignees.

On 25th April 1871 Mr Budge, as trustee on the sequestrated estate, raised an action of count and reckoning against Brown's trustees and Mr Balfour, for their intromissions with the rents of the estate.

The pursuer founded on the 118th section of the Bankruptcy Act, which provides:—“No poinding of the ground which has not been carried into execution by sale of the effects sixty days before the date of the sequestration, and no decree of maills and duties on which a charge has not been given sixty days before the sequestration, shall (except to the extent hereinafter provided), be available in any question with the trustee, provided that no creditor who holds a security over the heritable estate preferable to the right of the trustee, shall be prevented from executing or poinding of the ground, or obtaining a decree of maills and duties after the sequestration; but such poinding or decree shall, in competition with the trustee, be available only for the interest of the debt for the current half-yearly term, and for the arrears of interest for one year immediately before the commencement of such term.”

The defenders maintained that they were entitled to appropriate the whole rents drawn by them in extinction of their debt.

The pursuer maintained that the defenders were only entitled to appropriate the rents to the extent of satisfying their preferable claim for interest accruing during the year and a-half allowed by section 118 of the Bankruptcy Act, and that they were bound to account for the surplus to him.

After the action was raised the subjects were sold by Miss Agnes Muir, one of the postponed bondholders, for £7150.

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The Lord Ordinary ( Ormidale) pronounced the following interlocutor;—

“ Edinburgh, 4 th July 1871 Finds that the accounting in this case must proceed on the footing that the rents in question are chargeable under the defenders' decree of maills and duties, with—(1) the interest resting owing to them in virtue of the bond founded on by them for the half-year from Whitsunday to Martinmas 1867; (2) Any arrears of interest resting owing to them under said bond for the year preceding said half-year; and (3) the necessary expenses of keeping the subjects yielding the rents in question in repair; as also the feu-duties, rates, taxes, or other burdens payable in respect of said subjects during said year and a-half.

Note,… The matter which has now been disposed of by the Lord Ordinary is regulated by section 118 of the Bankruptcy (Scotland) Act, 1856, quoted in article 9 of the pursuer's condescendence. It appears to the Lord Ordinary that, having regard to the terms of that section, and to the state of the facts, as referred to in article 10 of the pursuer's condescendence, and the defenders' answers to that article, and, in particular, to the fact that no charge was or could have been given under the defenders' decree of maills and duties sixty days prior to the sequestration in question. The finding in the interlocutor now pronounced is in accordance with the true meaning and construction of the statute, the general object of which, and the rights of a trustee in a sequestration, so far as the present dispute is concerned, are well explained by Mr Bell in the Commentaries published by him in 1840, for although these Commentaries related to the Bankruptcy Act of 1839 (2 and 3 Vict., cap. 41), and not that of 1856, they are, as regards the matter in question, equally applicable. And it farther appears to the Lord Ordinary that the construction of the statute contended for by the defenders, as referred to in their pleas in law, especially their second and third pleas, is inadmissible. The Lord Ordinary thinks it only necessary further to remark, that both parties were agreed that the ‘current half-yearly term,’ referred to in the statute must be held to be the half-year current at the date of the service of the summons of maills and duties.”

The defenders reclaimed.

After some discussion, the Court, on 24th November 1871, before further answer, ordered the pursuer and defenders to lodge a state of the debt due to the defenders as heritable creditors, giving effect to the sums received, or alleged to be received, by them out of the rents of the estate.

From the states lodged it appeared that the price obtained for the estate was sufficient to pay off the debt, principal and interest, of the defenders, the preferable security holders. It also appeared that, if effect were given to the intention of the defenders, viz., that they should be allowed to impute the rents drawn by them in extinction of their debt, and restrict their claim upon the proceeds of the sale to the balance, the price would be sufficient to pay the postponed bondholders in full, or very nearly so; whereas, if effect were given to the contention of the pursuer, and the surplus rents, after deducting the interest due to the defenders for the three half-years mentioned in section 118 of the statute, paid over to the trustee, the balance of the price available to meet the debts due to the postponed bondholders would be of comparatively small amount, and the greater part of these debts would be ranked as ordinary unsecured claims in the se questration.

The Court were accordingly of opinion that the question could not be satisfactorily tried between the pursuer and the only parties called as defenders, who had really no interest in the matter, the parties really interested being the postponed bondholders.

On 15th December 1871, the postponed bondholders, viz., Sutherland's Trustees, Miss Johnston, and Miss Muir, sisted themselves as defenders.

The pursuer was allowed to amend his summons and condescendence on payment to the original defenders of ten guineas.

The summons now concluded for declarator that the original defenders Brown's Trustees and Thomas Balfour “have a preferable claim, but only to the extent after-mentioned and no further, to retain out of the rents collected by them from the said heritable subjects so much thereof as will satisfy and pay the interest which became due on the bond at the term of Whitsunday 1868 for the half-year from Martinmas 1867, being the half-year current at the date of the sequestration, and also the arrears of interest due on the bond for the year preceding Martinmas 1867,” with an alternative conclusion to meet the case of section 118 of the Bankruptcy Act being held to apply to the half-year current at the date of raising the action of maills and duties, and the year preceding that half-year.

The pursuer pleaded—“(6) None of the defenders are entitled to claim from the rents of the heritable subjects belonging to the bankrupt more of said rents than will pay and satisfy the then preferable claims for interests under section 118 of the said Bankruptcy Act.”

The original defenders pleaded—“(1) The defenders are entitled, in virtue of their security, to a preference over the rents of the said heritable estate in competition with unsecured creditors. (2) The provisions of the Bankruptcy (Scotland) Act, section 118, only limit the defenders' security under their decree of maills and duties, in so far as regards arrears of interest, and do not prevent it from operating as a security for interest accruing after the date of the decree. (3) The defenders have a preference over the free rents accruing since their entry to possession for the interest of their debt during the same period, and for expenses covered by the penalty and termly failure clauses of the bond, in virtue of their recorded disposition and assignation to rents, and also in virtue of the said assignation to rents, and possession under their decree of maills and duties. (4) The defenders were entitled, in virtue of the said recorded bond, to let the said subjects, and to assert a preference over the rents thereof for the interest and expenses due to them for the period of their possession. (8) The defenders having intromitted with the said rents as creditors holding a preference over the same, are entitled to appropriate the free proceeds in extinction of their debt, and to restrict their claim upon the proceeds of the sale to the balance. (10) The pursuer having allowed the original defenders to continue in the administration of the subjects under their title of heritable creditors in possession, is barred from objecting to their said administration, and can only insist in the conclusions of this action on the footing that effect shall be given in it to the defenders' security over the rents.”

The compearing defenders pleaded—“(1) The

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pursuer is not entitled to decree in terms of the declaratory or petitory conclusions of the summons, in respect 1st, that Mr Dall and his assignees—the original defenders Brown's Trustees—and Mr Balfour were both entitled and bound to apply the whole rents of the said heritable estate uplifted by them, whether in virtue of their decree of maills and duties or otherwise in extinguishing their entire debt, principal and interest, to the extent of the sums so uplifted, after deducting necessary expenses, including repairs on the property, and the feu-duties, taxes, and public burdens applicable to the period in respect of which the said rents were uplifted by them; and 2d, that the unsecured creditors of the bankrupt are not entitled to any portion of the rents of the heritable property of the bankrupt until the whole debts of the creditors holding securities are satisfied. (2) Mr Dall and his assignees having uplifted the rents of the properties under a good and valid title, their claims for principal and interest were thereby satisfied and extinguished to the extent of the free rents received by them. (3) In any view, the pursuer is bound to apply all rents which may be recovered by him under this action in paying the debts due to the present defenders before applying any portion thereof in paying the general creditors of the bankrupt. (5) The present defenders are entitled to have a state adjusted in this process ascertaining 1st, the amount of the debt due under the first security for £6000, and interest, after applying in extinction thereof the free rents intromitted with by the original defenders; and 2d, the free balance of the price of the property available for their respective debts after extinguishing the remainder of the said first security, and on that being done the whole defenders should be assoilzied from the action, and the present defenders found entitled to expenses.”

Solicitor-General and M'Laren, for the original defenders, and Marshall, for the compearing defenders, argued—The right of a heritable creditor to the rents of the estate over which his security extends is not dependent on his obtaining a decree of maills and duties. It is true that he cannot without such decree compel the tenants to pay their rents to him. But though a decree of maills and duties is necessary to give him an active title to uplift the rents, his right to the rents, so far as not uplifted, is equally good without such decree—Bell's Commentaries, i, 793 (M'Laren's ed.); Lady Kelhead, 1748, M. 2785; Webster v. Donaldson, 1780, M. 2902, in both which cases a heritable creditor was, in virtue of his infeftment alone, preferred to an arrester of the rents; see also Ersk. 3, 5, 5. The right of the heritable creditor to the rents being created by his infeftment and not by the decree of maills and duties, the limitation of the effect of a decree of maills and duties by section 118 of the Bankruptcy Act cannot affect the creditor's right to the rents. The object of that section, and the only object, is to prevent an heritable creditor from interfering with the management of the trustee, except to a certain limited extent. The right of administration of the heritable estate may often be a very valuable one, and it is the policy of the Act that this shall be in the discretion of the trustee. But that does not affect the right of the heritable creditor to the rents, by whomsoever they are drawn. The trustee holds the estate, subject to such preferable securities as existed at the date of the sequestration (sec. 102). In this case the creditor has a power of sale. But in determining the meaning of the statute this specialty must be set aside, and the case of a heritable creditor considered who has no power of sale. According to the interpretation contended for by the trustee, such a security-holder could be kept for an indefinite period, at the pleasure of the trustee, out of all benefit of his security, if the trustee chooses not to sell. Assuming the defenders' contention to be right, the preferable securityholders were not only entitled, but bound, in justice to the postponed bond-holders, to apply the rents in extinction of their debt, and not to hand them over to the trustee.

Watson and Scott for the pursuer—It is admitted on the other side that the heritable creditor cannot compel payment of the rents without a decree of maills and duties, and therefore the trustee has the right to uplift the rents, except to the extent provided by section 118. As soon as rents come into the possession of the proprietor, they are funds available for all his creditors; there is no nexus in favour of the creditor who holds a security over the subjects from which they are drawn. And the same holds good when the trustee is substituted for the proprietor. The rents that come into the hands of the trustee, except as otherwise provided, are funds available for the whole creditors. If the defender's interpretation of the statute were correct, the result would be very singular. For a certain period the heritable creditor would have the right to draw the rents and pay himself the three half-years' interest allowed by the statute. Any surplus he would have to account for to the trustee, but this very surplus, according to the defender's contention, falls to be paid back by the trustee to him. In regard to securities without a power of sale, the unfortunate result which the defenders have mentioned, is merely the consequence of the creditor having taken an imperfect security; sibi imputet.

At advising—