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You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Peat & Co. v. Thomas [1872] ScotLR 10_75 (22 November 1872)
URL: http://www.bailii.org/scot/cases/ScotCS/1872/10SLR0075.html
Cite as: [1872] ScotLR 10_75, [1872] SLR 10_75
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SCOTTISH_SLR_Court_of_Session
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Court of Session Inner House First Division.
[
v.
Facts:
A creditor in a sequestration, claiming to hold a preferable security for part of his debt, agreed to accept a sum of money from a friend of the bankrupt with a view to a composition by the latter, and alleged his belief that the friend was acting on behalf of the trustee and creditors. Held that this was an illegal preference under section 150 of the Bankrupt Act of 1856, and that the bona fides of the creditor did not exempt him from the statutory penalty.
This was an action of multiplepoinding arising out of the sequestration of Robert Suttie Smith, Walkerton Mills, Leslie, Fife, and was brought by Messrs Peat & Co., Glasgow, the real raisers, against Mr James Thomas of Transy, Forthar, nominal raiser, and the other creditors on Smith's estate. The facts of the case will be found reported on February 23, 1869, ante, vol. vi., p. 360.
The Lord Ordinary (
“ Edinburgh, 25 th January 1872.—The Lord Ordinary having heard parties' procurators, and considered the closed record, Repels the first plea in law stated for the nominal pursuer and objector Mr James Thomas, and before farther answer, allows to both parties a proof of their respective averments, the proof to proceed before the Lord Ordinary under the Evidence (Scotland) Act, 1866, on Saturday the 24th February 1872, at half-past 10 o'clock, the real raiser to lead in the proof; and grants diligence to both parties against witnesses and havers.
Note.—The counsel for the nominal raiser supported his first plea in law by a very ingenious argument, founded on a critical construction of the 150th section of the Bankrupt Statute. He contended that, where the sequestration has been wound up, as in the present case, no penalty can be made good even where an illegal preference has
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“The Lord Ordinary, admitting the ingenuity of the argument, cannot give effect to it. He thinks that the clause must receive a fair and equitable, and not a judicial or malignant, interpretation. Although of a penal nature, it is intended to repress mischievous, if not fraudulent practices, and its true meaning must be sought from the words used. See the opinions of the Judges, particularly in the House of Lords, in Carter v. McLaren, October 26, 1869, 8 Macph. 64; H. of L., May 9, 1871, 9 Macph. 49. See also Murdoch v. Clydesdale Bank, January 29, 1864, 2 Macph. 515.
As this was the only objection on relevancy, the Lord Ordinary repels the first plea.
“But the objector pleads that in point of fact there was no contravention of the Bankrupt Statute; that no preference was given, stipulated, or promised; but that the real transaction was a compromise between the objector, on the one hand, and the whole body of creditors on the other, by which, for the sum stipulated, the objector gave up a security which he claimed over part of the bankrupt estate.
This was not pleaded in the direct action at the objector's instance to make good the alleged illegal preference; see Thomas v. Waddell. 23d February 1869, 7 Mcph. 558. Probably in that action it was competent and omitted, and such plea is now excluded in any question as to making good the obligation against Waddell. But Thomas v. Waddell does not constitute res judicata in the present action, and Mr Thomas' counsel explained that additional inquiry and information has shown that the transaction was not of the nature at first supposed. The Lord Ordinary thinks it is not too late for the defender and objector to show, if he can, in the present process, that the transaction was not a contravention of the statute. He has therefore allowed a proof before answer. It seems expedient to get in the correspondence and documents, which, though used in Thomas v. Waddell, were not formally proved in that process. All ulterior questions as to the amount of the penalty or debt forfeited, or the value of the security, will also arise better upon a completed proof,”
Edinburgh, 28 th March 1872.—The Lord Ordinary having heard parties' procurators, and having considered the closed record, proof adduced, productions, and whole process, Repels the objections stated by James Thomas, the nominal raiser, to the competency of the action: Finds that the action has been competently and properly brought: Finds the nominal raiser liable in only once and single payment of the fund in medio, and, with a view to the ascertainment of the amount of the fund in medio, appoints the nominal raiser to lodge a condescendence of the fund in medio by the second box-day in the present vacation, and appoints all concerned to lodge claims by the first sederunt day in May next: Finds the nominal raiser liable in expenses to the real raisers from the date of lodging defences or objections down to this date, and remits the account thereof, when lodged, to the Auditor of Court, to tax the same, and to report; and decerns.
Note.—The Lord Ordinary is well assured that when the nominal raiser Mr Thomas, in September 1867, made the arrangement which be did with Mr Waddell, on behalf of the bankrupt, he was not aware that he was doing anything wrong, or that he was committing a violation of the Bankrupt Act. The Lord Ordinary thinks it certain that at that date the nominal raiser Mr Thomas had never read, and probably had never heard of, the 150th section of the Bankrupt Statute; and even Mr Waddell, who is an accountant in Glasgow, seems to have been quite unaware of the effect and scope of that section.
But the ignorance or the bona fides of the nominal raiser will not save him from the statutory consequences if he has really contravened the statute. In the recent case of Carter v. M'Laren & Co. it was ultimately held by the House of Lords, 9th May 1871 ( 9 Macpherson, 49), that the entire bona fides of Messrs M'Laren, even when coupled with the instant repayment of the illegal preference, did not save them from the statutory penalty, and that the Court had no discretion in the matter, but were bound to decern for the full amount thereof.
The only question in the present case, therefore, is, Was there or was there not on the part of Mr Thomas a violation of the 150th section of the Bankrupt Statute? If there was, then the present action of multiplepoinding has been well brought, in virtue of the express provision of the enactment in question. What the amount of the penalty or forfeiture—that is, of the fund in medio—may be, is another question, which has not been yet discussed. In particular, there is a very important question, whether the ‘amount of the debt’ means the gross sum ranked for, or only the dividend thereon; but this question only arises after the action is found competent.
In the previous action at Mr Thomas' instance against Mr Waddell, in which Mr Thomas sued Mr Waddell for the £500 stipulated in the letter of 9th September 1867. the illegality of the transaction seems to have been held by the Court (see Thomas v. Waddell, 23d February 1869, 7 Macpherson, 558); but as it appeared that in that case Mr Thomas' pleas were of a limited nature, and as the judgment was not res judicata in the present action, the Lord Ordinary thought it right to allow the nominal raiser to show, if he could, that the transaction was not a preference or an illegal agreement in the sense of the 150th section, but a proper compromise between Mr Thomas on the one hand, and the creditors on the other, whereby Mr Thomas, in consideration of the £500, renounced a security which he claimed over the estate of the bankrupt. It is certainly a little awkward for Mr Thomas that the judgment in Thomas v. Waddell stands, for the result would be, if he succeeded now, that the same agreement which in 1869 was held null and illegal under the 150th section, and enforcement of which was refused, should now, in 1872, be held legal, and not inferring statutory penalties.
On considering the proof and correspondence, the Lord Ordinary has come to be of opinion that the transaction in question, of September 1867, constituted in the sense of the statute a ‘preference,
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The Lord Ordinary feels obliged to hold that there was this in the present case:—
(1) The transaction is really embodied in Mr Waddell's letter to Mr Thomas of 9th September 1867, for although there is no written acceptance of this letter addressed to Mr Waddell, it is proved—indeed it is expressly admitted—that the letter was accepted by Mr Thomas, and that its conditions were implemented by him by taking the composition the same as the other creditors, and by granting the mandate to act and vote on his entire claim. Now, it is impossible to read the letter without seeing that it is an agreement for facilitating or concurring in the bankrupt's discharge on composition. This is the only consideration expressed in respect of which the £500 is promised. Without Mr Thomas' concurrence the composition-contract could not be carried through, and, so far as the letter of 9th September 1867 goes, it is simply a purchase of that concurrence for £500. As such the transaction is obviously illegal.
(2) But Mr Thomas contended that the letter of 9th September 1867 does not disclose the real transaction, which was a compromise of a security which he claimed over a part of the bankrupt's machinery: and he referred to his letter to the trustee of the same date, 9th September 1867, whereby he renounced his preferable claim. Now, it is quite true that Mr Thomas had stated a preferable claim or security over part of the bankrupt's machinery. His claim was reserved in the affidavit lodged by him in the sequestration, and it is proved by the correspondence that the preferential claim was stoutly insisted in in the sequestration. But neither the nominal raiser's letter of 9th September 1867, nor any of the other letters, prove that this preferable claim or security was the only consideration for the £500 for which the nominal raiser stipulated; The renunciation of the security was rather a consequence of the bargain by which Mr Thomas consented to the composition-contract than the bargain itself.
(3) Even if the security over the machinery entered to some extent into the bargain, this would not make the bargain legal, for it is beyond all doubt that at least part of the bargain was that Thomas should concur in the bankrupt'scomposition If he had not agreed to do this, it is as clear as day that the £500 would never have been either promised or paid. In the most favourable view, therefore, the £500 was promised partly for a legal and partly for an illegal consideration, and this would be enough to infer contravention of the statute.
(4) The evidence of Mr Waddell and that of Mr Thomas is in direct conflict, and the Lord Ordinary therefore is disposed to lay both out of view, and to proceed upon the evidence of the correspondence and writings passing at the time, and which seem to him to leave no doubt as to what was truly wanted by Mr Waddell and the bankrupt. The oral evidence of Mr Waddell is not very satisfactory, but he could scarcely be mistaken in supposing that he was stipulating for a concurrence in the discharge, and was not merely buying a security. It seems plain enough that, whatever Mr Thomas thought, Mr Waddell came simply and solely to purchase Mr Thomas' concurrence to the discharge.
(5) If Mr Thomas' view was correct, that he was to get the £500 as the price of the security, and nothing else, then this sum should have been deducted from his claim. He was not entitled to rank and vote on his full claim and realise the security besides. But it was expressly stipulated that the ranking should be for the full claim, and this itself constitutes an illegality; In many a contested vote a majority might be carried by means of the full claim, when a deduction of securities would throw the party into a minority.
(6) It is clear, contrary to the averment on record, that the trustee and general creditors were no parties whatever to the agreement with Mr Thomas. In this sense the agreement was collusive. Mr Thomas spoke of assigning his security to Mr Waddell, but if he was to rank for his full claim this was impossible, for ranking is equivalent to payment, and the security cannot be separated from the debt.
(7) It is scarcely an element in the present case, but so far as the Lord Ordinary can judge, the security claimed by Mr Thomas was bad in law, and it is hardly conceivable that the creditors, and much less Mr Waddell, viewed as an independent third party, should give £500, or anything approaching that sum, for an assignation or renunciation of the security. In the Lord Ordinary's view, however, this was not at all the nature of the transaction.
“It follows that the multiplepoinding has been competently brought under the statute, and the Lord Ordinary has pronounced the usual order of once and single payment, and ordered claims.”
Thomas reclaimed.
At advising—
Lord President—This multiplepoinding has been brought under section 150 of the Bankrupt Act. It appears to me indispensable, in the first place, to make it clear what is the charge against Mr Thomas. Now, section 150 provides “that all preferences, gratuities, securities, payments, or other consideration 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.” In section 140, which is one of a series of sections relating to discharge on composition, it is provided that the bankrupt shall make a declaration or oath, as the case may be, that he has made a full and fair surrender of his estate, and has not granted or promised any preference or security, or made or promised any payment, or entered into any secret or collusive agreement or transaction to obtain the concurrence of any creditor to such offer and security;” and in section 147, which applies to discharge without composition, there is a similar provision. It is needless to pause on the portion of section 150 next following, which applies only to a sequestration in dependence, but I pass on to the next part of the section, which applies to a closed sequestration.
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It is plain that every illegal payment is to be followed by penal consequences. We must consider therefore what is the charge actually made against Mr Thomas, in order to see if he has really subjected himself to these consequences. “In the month of June 1867, the said Robert Suttie Smith made overtures to his creditors, with the view of obtaining his discharge under said sequestration, on payment of a composition; and as the nominal pursuer's claim was a large one, and his consent was necessary, James Waddell, accountant, No. 175 Buchanan Street, Glasgow, on behalf of the bankrupt, had meetings, and entered into a correspondence with the nominal pursuer, for the purpose of obtaining his consent and concurrence thereto. A secret and collusive arrangement was at length concluded between the said James Waddell, on behalf of the bankrupt, and the nominal pursuer, which was embodied in a letter or obligation, granted to the nominal pursuer by the said James Waddell, of the date and in the terms following, viz..—'175 Buchanan Street, Glasgow, 9 th 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, Fifeshire, 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, namely,—£300 within two months of the date of Mr Rob. S. Smith's discharge, £100 in eight months from date of R. 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,—(Signed) James Waddell.’”
Thomas' answer to this is—“Admitted that the bankrupt made proposals with a view to a composition arrangement. Believed to be true that the objector's consent was necessary thereto. The letter is referred to.” The letter is not disputed, so we must see what it means. The bankrupt's discharge could not be obtained without Mr Thomas' consent, and he is to obtain by this arrangement a composition like all the other creditors, and over and above £500. Not a shilling of this is to be paid if the bankrupt is not discharged, so that it is impossible to dispute that this was an arrangement on behalf of the bankrupt; and in article 5 we find that the nominal pursuer accepted of this offer and acted upon it. “In implement of his part of said arrangement, and in pursuance thereof, he granted a mandate to the said James Waddell to act and vote for him at all meetings of the said Robert Suttie Smith's creditors, connected with the offer and acceptance of the offer of said composition, and to agree thereto for him as a creditor of the said bankrupt in said sum of £2797, 17s. 6d., and fulfilled the other conditions incumbent on him by said arrangement.”
Now, so far the main facts are pretty well ascertained by admission; also, I think it is proved that Waddell was acting on behalf of the bankrupt. Thomas says he did not know this, but thought he was acting on behalf of the creditors and trustee. “In the summer of 1867 James Waddell, accountant in Glasgow, acting on behalf of the creditors of the said Robert Suttie Smith other than the objector, and with the full knowledge and sanction of them, and of the trustee and commissioners on the sequestrated estate, had meetings, and entered into a correspondence with the objector, with a view to a compromise or adjustment of his rights to the said machinery and others, and his preferable claims in respect thereof.” This certainly was not the case, but Mr Thomas says that he thought so. Now, this seems to me not to found a relevant defence, because if Waddell was not representing the creditors, they cannot be barred from their right under section 150.
There were three grounds of defence stated on behalf of Mr Thomas—
1. That the transaction between him and Waddel was not an offence under section 150. I have already indicated my opinion on that point, and need say no more about it. There could have been nothing illegal in Mr Thomas compromising his claim, but as long as the sequestration lasted, the only party with whom he could deal was the trustee acting under the authority of the creditors, but until the bankrupt was discharged be had nothing to do with the matter, and to deal with anyone but the trustee was to run a great risk, if not to commit an illegality.
2. But secondly, it has been urged that Mr Thomas got nothing from Waddell. If so, it is very hard, but it is no answer. He certainly intended to do so.
3. Lastly, the defence most strongly maintained is that in point of fact this arrangement was assented to by the trustee and creditors. The first element of this defence is a clause in the offer of composition, dated September 6—“And will also take the entire responsibility of the claims made by Mr James Thomas against the estate; and offer for my securities Mr Murray Cowbrough, manufacturer, South Frederick Street, Glasgow, and Mr James Waddell, accountant, Buchanan Street, Glasgow, for payment of the same.” The meaning of this, so far as the cautioners are concerned, is that they were to join in the responsibility for Thomas' claim. It is said that this clause ought to have roused the attention of the trustee, but it does not seem to me that he need necessarily have been aware that any arrangement was going on. If Mr Thomas was satisfied that the estate when reinvested in the bankrupt gave him as good security, the trustee had nothing to do with it. There is a good deal of written evidence which we need not go through in detail. All that can be said is, that the trustee was made aware that an arrangement was being made, but that is no defence against Mr Peat's claim, unless the knowledge can be brought home to him; but, further, I do not think that the trustee had any reason to believe that any illegal arrangement was going on. On the whole matter, I come to the conclusion that the Lord Ordinary's interlocutor is well founded, so far as it supports the multiplepoinding and ordains the nominal raiser to lodge a condescendence of the fund in medio.
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I do not see sufficient ground, or indeed any ground, for imputing to Mr Thomas fraud or corrupt intention, or even a desire to take an unfair advantage. But if the act complained of, and proved, is a violation of the statutory law, so as to incur the statutory penalty, we cannot avoid coming to that conclusion; and, having reached it, we cannot escape, and must not shrink, from imposing the penalty.
Mr Thomas held a security, and he honestly thought he had a preference. In this the case differs from the case of M'Laren. He stoutly maintained his preference, and seems to have been so advised. He agreed to surrender it for a consideration, and to accede to the composition. I give him credit for believing that he was doing no wrong. Had the transaction been made with the creditors, or sanctioned by the creditors, it would not have been illegal. Had the trustee been made aware of it, it would have been his duty to communicate it to the creditors, and I have no doubt he would have done so, for I see no reason for questioning the fairness of the conduct of the trustee. But the serious point, which I cannot get over, is, that the creditors were not informed that this purchase was to be made, this bonus to be given; and that, in the letter of Mr Thomas to the trustee, of 9th September—just after the transaction, and on the same day—he does not communicate to the trustee the terms or the particular nature of Waddell's letter and his own agreement, nor does he mention the promise of a sum of money, payable on the discharge, and as contingent on the discharge, of the bankrupt—a sum promised and agreed to in order to facilitate the bankrupt's discharge.
I agree with your Lordship in holding that the reference to Thomas' claim in the offer of composition was not sufficient intimation to the creditors of this transaction. Nor is any such intimation to be gathered from the subsequent correspondence. The fact that Mr Thomas did not send the letter to the trustee, or communicate to the trustee the promise, and the fact that, through Mr Waddell as mandatory, and according to the agreement with Waddell, he voted on his whole claim without deducting the security, makes it too clear to need further remark, that, in regard to the trustee and creditors, the agreement was “secret,” and that between the bankrupt and Waddell and Mr Thomas, it was, in relation to the creditors, collusive. That the bankrupt and Waddell meant by the payment of £500 to secure the accession of Mr Thomas to the composition, I have no doubt, and the transaction has been already found by the Court to be, as regards both parties, illegal; Thomas v. Waddell, Feb. 23, 1869.
I agree with the Lord Ordinary in thinking the testimony of Mr Waddell in this cause, and the conduct of Mr Waddell in the transaction, very unsatisfactory. But Mr Thomas was, to say the least, incautious and indiscreet, and the statutory penalty has been incurred.
A separate argument was ingeniously urged by Mr Asher, to the effect that since Waddell's promise to pay has been escaped from by him, on the ground, pleaded by himself, that it was illegal and void, and therefore that it is not to be valued—and, indeed, has no appreciable value—as it was not fulfilled. This plea cannot possibly be sustained. The meaning of it is, that the more manifest the illegality of the proceeding, the safer is the wrong-doer—that the transaction is so clearly illegal that the promise to pay is null and void, and therefore the penalty is escaped from. Not even the ability of my friend Mr Asher can make such an argument successful.
I am—though not without some regret—of the opinion expressed by your Lordship, that we must apply the statute and the penalty.
Counsel for Mr Thomas—Solicitor-General ( Clark) and Asher.
Agents— Hill, Reid, & Drummond, W.S.
Counsel for Messrs Peat & Co.— Pattison and Watson.
Agent— J. Y. Pullar, S.S.C.