Scottish Court of Session Decisions

This was a petition presented to the Lord Ordinary on the Bills by the trustee on the sequestrated estate of Samuel James M'Millan, under the 116th section of the Bankruptcy Act 1856, for approval of a scheme of ranking and division of the price of the heritable property of the bankrupt among the heritable creditors. The heritable estate sold consisted of three-fourth parts of the lands of Maidenbower which belonged to the bankrupt. The remaining fourth belonged to his brother Robert M'MilIan. These lands were divided by decree of the Court, dated 23d May 1877, and the bankrupt's share was subsequently sold under the 113th section of the same Act.

By the scheme of ranking and division it was proposed in the first place to rank Mr J. A. Smyth on the price of the estate in respect of a bond for £1000, and there was no objection to this.

It was proposed, in the second place, to rank Mr Smyth as in right of a bond and disposition in security for £500, dated 16th and recorded 19th January 1863, granted by the bankrupt and his brother Robert M'Millan in favour of the trustees of Thomas Robinson Smyth. But as the bankrupt and Robert M'Millan were conjunctly and severally liable on the face of the bond, which was granted over the whole lands of Maidenbower, belonging to the two brothers, it was proposed to deduct one-half of the amount, £250, as being Robert M'Millan's share of the debt, and to rank the creditor for the sum of £250 only, leaving him to recover the other half from Robert M'Millan. This was objected to by Robert M'Millan, on the ground that the whole sum in the bond was truly the debt of the bankrupt, and he produced in support of his contention a holograph letter by the bankrupt, dated 25th February 1863, before the sequestration, acknowledging that the whole debt was his. The genuineness of this holograph letter was not disputed, but it had not been recorded. The heritable creditor, Mr Smyth, was also creditor in a subsequent bond for £1000 over Samuel M'Millan's portion of the estate.

Mr Smyth contended, inter alia—“(1) The bond for £500 is not due by the bankrupt only, but by him and the objector conjunctly and severally, and the respondent, who is creditor in that bond, cannot be affected by an unrecorded back letter between the debtors. … (4) The respondent, as postponed heritable creditor, when he took the postponed security was entitled to look to the Register of Sasines as disclosing the true position of the prior bond for £500, and to rely on the prior creditors proceeding under that bond unfettered by any latent back letter.” The balance of the price of the bankrupt's heritable estate was not nearly sufficient to pay in full Mr Smyth's claims under the third bond for £1000.

The Lord Ordinary ( Adam) sustained the objections for Robert M'Millan, and remitted to the trustee to alter and amend the scheme to the effect of ranking the bond for £500 to the full amount thereof on the price realised by the sale of the bankrupt's heritable estate. His Lordship added the following note to his interlocutor:—

“ Note.—[After stating the facts]—It appears to the Lord Ordinary that Robert M'Millan having shown by competent evidence that the debt in the bond for £500 was the proper debt of the bankrupt, would, if he had been called upon to pay it, have been entitled to demand an assignation to it, and so put himself in the place and acquired the rights of the creditors in the bond.

The Lord Ordinary does not think that the creditor in the subsequent bond, although he might have had an interest, would have had a title to object to such an assignation being granted, and he does not think that Mr Smyth, because he has acquired right to the bond for £500, could found upon his interest as a postponed creditor under the bond for £1000, to refuse to grant an assignation to the bond for £500 upon getting payment of it from Robert M'Millan.

But Mr Smyth maintains that in lending the sum of £1000 he was entitled to rely upon the facts as appearing on the face of the records, and that the records show that Robert M'Millan and his estates were conjunctly and severally liable for the debt of £500 with the bankrupt and his heritable estate. But the Lord Ordinary thinks that the records show that the bankrupt's estate was at the date of the second bond burdened with the previous debt of £500. Mr Smyth was entitled to rely upon the records as showing that the bankrupt's estates was not burdened to any further extent than with the sum of £500, but he was not entitled to rely upon them as showing that, to a greater or less extent, payment of the £500 might possibly be operated out of the estate of Robert M'Millan.

But if such would have been the rights of parties if there had been no sequestration, they do not appear to the Lord Ordinary to be affected by the fact of the sequestration. The practical result of the scheme of division is, that Robert M'Millan is to be called upon to pay £250 of the bond for £500. If he had in fact paid this sum, the Lord Ordinary thinks that to that extent he would have been entitled to be put into the place of the original creditors in the bond, who would have had right to demand that their bond should be paid in full out of the price of the bankrupt's heritable estate before any part of it was applied in payment of the subsequent bond for £1000, and the Lord Ordinary thinks that the scheme of division should be framed upon the same footing.”

Mr Smyth reclaimed, and argued—The objector and the bankrupt were bound conjunctly and severally ex facie as principals, and therefore each was liable for a half. As the back letter was res inter alios it could not affect creditors even if recorded; a fortiori if it was unrecorded. The result of the Lord Ordinary's interlocutor was to put the objector into the position of a cautioner.

Authorities—2 Bell Comm. 417, Ersk. 3, 12, 66; Steuart v. Maxwell, 11 Jan. 1814, F.C.; Scotland v. Bairdner, 3 January 1696, M. 3367; Preston v. Erskine, 22d February 1715, M. 3376; Austin v. Grant, 24th May 1827, 5 S. 654 (701); Sligo v. Menzies, 18th July 1840, 2 D. 1478.

Argued for respondent—He had shown the debt was a debt of the bankrupt only. He was therefore entitled to demand an assignation to it if he paid. Mr Smyth did not acquire any better right by becoming creditor in the subsequent bond. He was entitled to look to the record to

Page: 364↓

the effect only of seeing that the bankrupt's estates were not burdened to a greater extent than £500, he was not entitled to rely on the amount being less.

At advising—