Scottish Court of Session Decisions

The facts of this case have been already reported, ante, p. 359. The Court having remitted to the Lord Ordinary to take a proof, it was taken before Lord Young, who pronounced the following interlocutor:—

“ 2d July 1874.—The Lord Ordinary having heard counsel, reports the proof and whole case to the First Division of the Court, and grants warrant to enrol in the Inner-House Rolls.

Note.—Had I been at liberty to follow my own judgment in this case, I should have recalled the deliverance of the trustee, and remitted to him to set aside a dividend to abide the result, as regards the bankrupts, of the suit in Chancery, referred to on record; but the interlocutors already pronounced, whereby the first and second pleas for the appellants have been repelled, and a proof allowed on the merits of their claim, are an impediment, though I think not an insuperable impediment, to this course, should it be thought, now that the character of the case is more fully disclosed, that it is expedient; but being of opinion that it is in the circumstances fitting that the Court should judge both of the competency and expediency of disposing of the case otherwise than they contemplated, and indeed directed, when the case was before them on the record alone, I have reported the whole matter for their consideration and judgment. I am disposed to regard the interlocutors to which I have referred as relating to procedure merely, and therefore such as may be departed from at any stage of the cause, if the Court shall, on further consideration or more mature consideration, think it expedient to do so. The pleas in law which have been repelled are pleas relating to procedure. Therefore, although I deem it proper on my part to refer the whole matter to the Court, I shall not hesitate to state distinctly my opinion as to the proper course of procedure, notwithstanding that it greatly differs from that formerly entertained and expressed by the Court, and which possibly they may see no good ground for changing now.

The claim of the appellants is for the sum of £65,000, alleged to have been paid on 31st May 1871 by ‘the said Company’ (the appellants), ‘for the concession of the Island of Alto Vela by the Dominican Government to the deponents (should apparently have been the bankrupts), or to others at their request,’ with interest to the date of the sequestration.

The appellants are an English company, with an establishment, and so far as appears their only establishment, in London. The sale of the concession referred to in the claim took place in London, and was effected and completed by English deeds executed in London. The ground of the claim is that the sale was induced by fraud committed by various persons (including the bankrupts) acting in combination, so that, as expressed in the prayer of the bill in Chancery, it ought to be declared that the same ‘was fraudulent, and ought to be set aside,’ and that ‘the Company ought to be relieved of the consequences thereof.’ These consequences were the payment, on 21 st May 1871, of £65,000 out of the funds of the Company ‘to the bankrupts, or to others at their request.’ The directors who paid the money are alleged to have been parties to the fraudulent combination; and, accordingly, it is further prayed (in the bill) that it shall be declared that it was a breach of trust on their part ‘to pay the sum of £65,000 or permit the same to be paid in manner aforesaid out of the funds of the plaintiff Company for the purchase of the said concession,’ and that the whole parties to the fraudulent combination (including the bankrupts), ‘are jointly and severally liable to make good to the plaintiff Company the said sum of £65,000, with interest.”

“The appellants assert on the record (Condescendence 22), that the facts entitling them, as they conceive, to have the sale set aside as fraudulent, and to be relieved of the consequences thereof, only came to their knowledge in October 1872, up to which date the bankrupts ‘had studiously and successfully concealed them.’

The estates of the bankrupts, who were traders in London (where they had an establishment and a resident partner), as well as in Scotland, were sequestrated under the Scotch Bankrupt Act on 11th February 1873. The appellants had not at that date resorted to legal proceedings to have the sale in question set aside and to be relieved of its consequences; but having such proceedings in contemplation, they, on 14th March, lodged a claim with the trustee, in order to secure a dividend in the event of success, and I should not have doubted the propriety of their doing so without any intention on their part of submitting to the judgment of the trustee the question of their right to be relieved of the sale and its consequences. On 19th April they filed a bill in Chancery, and, without indicating an opinion on the merits of their case, I think it clear that they resorted to the proper and only proper Court to adjudicate upon it. They were an English company desiring to set aside and to be relieved of the consequences of a sale made to them in England by English parties, and through the instrumentality of English deeds, on the ground of fraud committed in England by various English parties acting in combination there. The case presented, having regard to the parties interested, the facts involved, and the law applicable, seems, on the face of it, to be altogether an English case. I cannot think it for a moment doubtful that the appellants resorted to the proper tribunal, nor am I able to attribute to them undue

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delay in resorting to their remedy, so as to raise any specialty on that head. I don't know why the claim of 14th March should have been withdrawn, and replaced by another in the same terms on 24th June, unless it may have been some notion (I think unfounded) that the appellants would stand better with a claim dated subsequent to their suit. But disregarding that as a trivial matter, and considering only the proper course to be followed in the circumstances, I find myself unable to assent to the notion that the bankruptcy of the Messrs Lawson and the sequestration in Scotland of their estates affects the jurisdiction of the Court of Chancery to determine whether or not the sale in question was fraudulent, so as to entitle the appellants to have it set aside, and to be relieved of the consequences by the parties to the alleged fraud. To suppose that such a question should be submitted to the judgment on its merits of the trustee in the Messrs Lawson's bankruptcy, is simply absurd. The Lord President says—and I quite agree—that it is not to be supposed that the trustee could ‘make such an investigation as would satisfy him regarding a claim of this peculiar nature. That is beyond what is to be expected of him.’ I think the appellants took the right view of their position when they regarded it as that of contingent creditors, the contingency being, that the proper Court to which they had resorted (or were about to resort without undue delay—for I can make no distinction) should set aside a sale on the ground of fraud, and find them entitled to be relieved of the consequences by the perpetrators of the fraud, including the bankrupts, to the amount, as regards the bankrupts, of the sum stated in their contingent claim. In this view of their position they craved that a dividend should be set aside. The trustee was no doubt entitled to consider whether the claim, though thus stated as contingent, was feasible, and not on the face of it inadmissible, or a mere pretence to delay proceedings in the bankruptcy; but if he had no reason—and I think he certainly had none—to regard it otherwise than as an honest claim, the grounds and foundations of which were sub judice in the proper Court, I cannot doubt that his duty was to set aside a dividend. The trustee, erroneously in my opinion, rejected the claim, of which he was admittedly incompetent to judge, and which was at the time sub judice of a Court proper and competent to judge of it. On appeal against this (I think, erroneous) deliverance, the Lord Ordinary and the First Division of the Court decided that the trustee had done right in rejecting the claim, not because he was satisfied regarding it, which was not to be expected of him, but in order to ‘allow the appellants to bring it here, and have it determined in the ordinary course.’ Had he dealt with it as a claim contingent on the result of the Chancery suit, and to set aside a dividend, there would have been no appeal, and it would have been determined, not here, but in the Court of Chancery in the ordinary course. The appellants urged that this was what he ought to have done, but the Court thought otherwise; the Lord President, apparently with the concurrence of the other Judges, observing, ‘Why it should be supposed that an investigation here would be less satisfactory than one in the Court of Chancery I am at a loss to understand.’ I do not, of course, question the competency or ability of this Court to investigate satisfactorily a case depending on English facts and English law, and involving other interests than those with regard to which the accident of a sequestration has given it jurisdiction; but when, as here, such a case is actually depend ing in an English Court, with all the parties interested before it, I am at no loss to understand why the proposal that there should be a separate and independent investigation in this Court with respect to one of the parties whose estates happen to be under sequestration here should not have been regarded with satisfaction. It involved two litigations on the same subject, one of them in a Court which does not administer the law applicable to it, and which has not jurisdiction over all the parties interested, but over one of them only, and that as the result of an accident. It was impossible not to contemplate the risk of conflicting decisions, or to avoid foreseeing that in this event an appeal to the Court of last resort would be irresistibly forced on one or other of the parties, so that, however this Court or the Court of Chancery might decide, the litigation here would be altogether fruitless. These are, I think, forcible considerations, and such as leave no room for surprise that the appellants should have resisted an investigation in this Court. I may be wrong in supposing that the appellants are serious in the prosecution of their Chancery suit, but having no reason to doubt it, I think I must, in justice to them, assume that they are. But if so, and if the Court of Chancery has jurisdiction over all the defendants, which the Lord President says he takes for granted, it seems nearly certain that the investigation here must be fruitless, and the expense of it absolutely thrown away. Should the decision be against the appellants, they will of course keep the matter open by an appeal, and should it be in their favour, it is highly improbable that the trustee and the creditors will discontinue their defence in Chancery, and if not, they will of course keep the matter open by an appeal. Conflicting decisions, both being allowed to stand, and each having execution and effect within the jurisdiction and territory of the Court that pronounced it, would be a scandal; and I assume that all available means will be taken to avoid it.

The Lord President, taking for granted the jurisdiction of the Court of Chancery over all the defendants, entertained ‘great doubt whether any decree of that Court could affect the proceedings in this sequestration.’ If this means that it is greatly doubtful whether a decree of the Court of Chancery in the due and orderly exercise of its jurisdiction can be received as a valid constitution of a debt with a view to ranking in a Scotch sequestration, I must express my dissent, and say distinctly that in my opinion there is no ground whatever for such a doubt. If the appellants were to present to this Court a decree of the Court of Chancery in the now pending suit against the bankrupts for the amount of their claim, or any amount within it, I think it clear that the Court would be bound, and would not for a moment hesitate, to give it effect in the sequestration. So, on the other hand, I think it also clear that a decree of absolvitor in this suit in favour of the bankrupts would equally receive effect in the sequestration as absolutely conclusive against the appellants' claim for a ranking. These propositions are to my mind so clear, and they are so

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fundamental in the just consideration and decision of the present case, that, great doubt having been expressed regarding them, I deem it proper to state my own opinion upon them distinctly. In substance the appellants' case is this—that according to the law of England, as administered by the Court of Chancery, and which governs the whole deeds, transactions, and proceedings on which their claim is founded, they are entitled to have the sale referred to set aside as fraudulent, and to be relieved of the whole consequences thereof, with decree against the bankrupts, conjunctly and severally, with the other parties to the fraud, for £65,000, with interest, as the price paid for the subject fraudulently sold. They desired no adjudication by the trustee on the merits of their claim (to have done so would admittedly have been absurd), but only that a dividend should be set aside to abide the decision of the Court of Chancery in the suit they have instituted. In this Court they have consistently maintained the same view of their position as contingent creditors, their debt being contingent on the success of their English suit.

I have read, with respect certainly, but I confess also with surprise, Lord Shand's opinion, to the effect that all action at the instance of a creditor to constitute his debt is absolutely excluded by clauses 126, 127, and 169 of the Bankrupt Act, unless it may be under very special circumstances and ‘by arrangement, or on the call of the trustee.’ I may remark that if the clauses of the Act really bear the construction supposed, whereby action is incompetent, this construction cannot be effected by arrangement or the call of the trustee. If the question is put as one, not of competency, but of expediency, I agree, and think that the Court will not allow action to constitute a claim which a trustee can properly deal with under the Act. It is matter of common practice to sist the trustee in actions brought against the bankrupt before sequestration, the pursuers having dividends set aside for them as contingent creditors. The construction sought to be put on the Bankrupt Act would exclude this practice as incompetent; for that construction is that every claim for a ranking must be judged of on its merits in the sequestration itself, by the trustee, or the Sheriff, or Court on appeal from his judgment. Upon the question of expediency, there may or may not, according to circumstances, be a distinction between an action brought before and one brought after the sequestration. Cases in which there would clearly be none crowd on the mind. Suppose a claim by a joint-stock bank against a body of directors, conjunctly and severally, to reduce and set aside certain proceedings as fraudulent, and for the restoration of funds fraudulently misapplied, and that one of them has been sequestrated immediately before the action was brought, it is doubtful that the Court would allow the bankrupt director (with the trustee) to be included in the action in preference to the only other alternative of requiring that there should be a separate litigation with respect to him, with a distinct and independent record and trial in the appeal against the trustee's judgment? In the result, no doubt, every claim for a ranking, however it may be constituted, must be admitted or rejected by the trustee subject to appeal; but this consideration does not touch the question of the competency of constituting a claim by action, or the expediency of allowing or even peremptorily requiring, as a condition of receiving it, that it shall be so constituted, when that is the proper course, as it clearly must be in many cases—for example in claims of damages.

In the note appended to the interlocutor of 13th February, Lord Shand observes, that ‘it is contended by the respondent (the trustee), under reference to sections 126, 127, and 169 of the Bankrupt statute, that an action such as the appellants' suit in the Court of Chancery in England would be incompetent in this Court, and that even if the suit should be proceeded with in England, any decree pronounced in it could receive no effect, because the respondent in administering the estate under the Bankrupt statute is bound to adjudicate on the claims of the different creditors lodged with him (as he has done in the present instance); and the only remedy which creditors have under the statute to enable them to obtain a share of the bankrupt's estate is an appeal against the trustee's deliverance, if the creditor's claim has been rejected,’ and his Lordship gives the support of his authority to this contention. Now, while I agree that a party claiming a dividend cannot have it unless the trustee or the Court on appeal shall admit his claim, I am unable, for the reasons stated, to assent to the proposition that an action equivalent to the appellants' suit in Chancery would be incompetent in this Court, and that the decision in such action sustaining or rejecting on its merits a claim on which a party has founded in a sequestration, ‘could receive no effect’ from the trustee or Court of Appeal in the bankruptcy proceedings. Were a sale in Scotland challenged by the purchasers on the ground of fraud, perpetrated in Scotland by parties acting in combination here, I apprehend that an action of reduction, with suitable conclusions against the fraudulent parties, conjunctly and severally, for restoration of the price, would be competent, and substantially equivalent to the appellants' suit in Chancery. Further, assuming the bankruptcy and sequestration of one of the parties to the fraud, I am unable to think it doubtful that he and the trustee might competently be called as defenders along with the others against whom decree was sought. It would, unquestionably, be a serious blemish in the Bankrupt Act if it necessitated a separate litigation with respect to one of several parties to a combined fraud, if he happened to become bankrupt and be sequestrated. It has not hitherto, so far as I know, been suggested that the Act was open to this reproach. Two litigations on the same subject, proceeding at the same time, one in an action so far as regards the solvent defenders, and the other in an appeal against an almost pro forma and matter-of-course deliverance of a trustee in bankruptcy as regards one who has been sequestrated, would be a scandal. But the consequences of such a construction of the Act would not stop even here, for the construction would lead to this, that if several individuals of a body of alleged fraudulent directors, or any other body of persons alleged to have in combination committed an injurious fraud, became bankrupt and were severally sequestrated, a separate and independent record and litigation would be a statutory necessity in the sequestration of each. In opposition to all this, I venture to suggest, as the legal and reasonable view, that where the ground of a claim in bankruptcy is of such a character that it is fitting it should be constituted by action, and an action either has been

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brought or is undertaken to be brought forthwith for the purpose—and there is no reason to doubt the good faith of the undertaking—the claimant is entitled, and ought to be regarded as a creditor claiming on a contingent debt, and to have a dividend set aside. Should the action, if brought, or the ground of claim alleged as the subject of an intended action, be absurd on the face of it, the trustee may in his discretion deal with the matter accordingly; but a party who is in good faith, pursuing a probable or feasible ground of claim before a Court of competent jurisdiction, is, according to my clear opinion, a creditor in a contingent debt within the meaning of the Bankrupt Act, and ought not to be required to engage in a separate and fresh litigation in the sequestration following on the bankruptcy of any one or more of the parties against whom his action is directed, but ought to have a dividend set aside to await the contingency in any sequestration in which, according to the common rules of law, decree in his action would constitute his debt, so as to entitle him to be ranked for a dividend.

Applying these views to the present case, I think it is clear on the record and evidence that the appellants are in good faith (and on grounds which I cannot characterise as so absurd or improbable that success cannot be contemplated as a reasonably possible result), seeking in the proper, and I think only proper, Court to have the sale referred to set aside, and the bankrupts and others, by whose fraud, committed in combination, it was effected, found liable to restore the price. I state this as my opinion upon the evidence and productions as well as on the record, for it is conceivable that these might have exhibited the case and position of the appellants in such a light that they could not be regarded as honestly seeking to establish in the proper Court a claim of a probable or feasible character, and therefore entitled to have their claim in the sequestration dealt with as one which it was at least not unreasonable to suppose they might succeed in establishing. It would not not have occurred to me, on considering the record, to doubt the integrity of the appellants and the good faith of their proceedings, and I should therefore have been prepared to deal with them as contingent creditors without ordering a proof, but a proof having been taken, it is proper to say that it does not shake, but confirms, the opinion of their position which I should have formed on the record alone.

Should the Court resolve to decide upon the merits of the appellants' claim, I must confess with regret my inability to aid them in forming a judgment by the expression of any opinion, for I have felt myself incompetent to form an opinion on the question which is at the very foundation of the claim, namely, whether or not the appellants are entitled to have the purchase of the concession set aside on the head of fraud, and to be relieved of the consequences thereof. To set the purchase aside is of course beyond the jurisdiction of this Court, and for my part I am unable to say how the Court of Chancery, which has jurisdiction in the matter, ought or is likely to exercise it. If it were necessary (as under certain circumstances it might be) to form an opinion on the question, I think this Court would require information as to the law of England, either in the form of an opinion or evidence, or by stating a case under the recent Act for the opinion of an English Court. Should the latter course be taken, we might possibly be told that the very case being actually depending in the Court of Chancery we must await its judgment, and counsel could hardly advise us, except subject to correction, by the decision in that pending suit. I have, however, no hesitation in saying that the appellants' case against the bankrupts and others appears to me to be of a serious character. It is not alleged that they deceived the parties with whom they actually and directly transacted—these parties being themselves in the alleged fraudulent combination; and this may possibly be found to create an insuperable legal difficulty. The case alleged is that the projectors or promoters of the Company, the provisional committee, the original directors, and the bankrupts, all acted in combination to commit a gross fraud on those who now constitute the Company, and that they accomplished their purpose to the effect of taking £65,000 of the Company's money for a concession known to be worthless. The case against the bankrupts in particular is, that having, in March 1871, sold the concession, (or rather their chance of making money of it through the Company then in course of being got up) to Mr Hartmont for £17,000, they, in April and May following, professed to sell the concession to the Company for £65,000, and falsely and fraudulently represented and published, or allowed it to be represented and published, that they had expended £39,000 on the Island of Alto Vela. It is further alleged against them that at the date of the sale the concession was, as they knew, voidable at the pleasure of the Dominican Government, and that they not only concealed this, but by their assignation represented and covenanted to the contrary. I cannot regard this as other than a serious case, and in its main features it seems to me to be true in fact, although I should not be prepared on the evidence adduced to find that the bankrupts were actuated by any distinct fraudulent purpose with a view to their own advantage, or to impute to them any greater misconduct than that of allowing themselves to be put forward as sellers, and statements to be made in their name after they ceased to have interest, by those who had the real interest in the success of the scheme on foot. I am averse to express an unfavourable opinion of the conduct of parties who are defending themselves elsewhere, and are not before this Court; but if I am to state the impression made upon my mind by the evidence, I can hardly avoid it, and I certainly have an impression produced by the evidence that the Company was conceived and created as a scheme to defraud the public, the schemers themselves being the original partners, and the fraud being perpetrated by giving a specious but false appearance to the Company as being the proprietors, by purchase from the Messrs Lawson (then a well-known firm) of the concession by the Dominican Government, at the price of £65,000 paid to the Messrs Lawson for it, the truth being that the Messrs Lawson had previously sold it (or any chance of making money of it through the scheme) for £17,000, and that they were not the real sellers, but only for a deceitful purpose pretended to be the sellers to the Company for £65,000. The consummation of the fraud was effected, as it was intended from the first it should be, by the combination of schemers, who had the shares in their own names or those of their nominees, selling them to the public in the market, and so themselves getting out of the concern with the money of those whom

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they persuaded to come in. £65,000 of the money so obtained was pocketed by them as the price of the concession which they had made to stand on the books as an investment to that amount, although not truly of any value. The part which the bankrupts had in the accomplishment of this scheme I have already noticed. Whether, in such circumstances, the law of England (where everything occurred) will afford a remedy, or whether the appellants are seeking a right remedy, I am unable to decide. I only think that the bankruptcy of the Messrs Lawson cannot affect the question further than this, that only such dividend as their estate affords can be obtained on any claim established against them, and that a claim, if established, can only have effect given to it here.

I observe that the trustee disputes the jurisdiction of the Court of Chancery. His objection will probably be disallowed, for I agree with the Lord President in thinking that the Court of Chancery has jurisdiction over all the defendants; but should the Court agree with me in thinking that the decision of the Court of Chancery ought to be waited for, and when given respected and followed, in disposing of the claim on the bankrupt estate, the trustee will, no doubt, under the direction of the creditors, see that the interests of the estate are properly represented and defended.”

The case accordingly came before their Lordships on the proof.

At advising—