Scottish Court of Session Decisions

By bond and disposition in security, dated 11th and recorded 13th November 1876, John Clark Yuill, wholesale saddlers' ironmonger, Glasgow, acknowledged to have received from the Principal and Professors of the University and College of Glasgow the sum of £9000, which sum he bound himself, his heirs and executors whomsoever, without the necessity of discussing them in their order, to repay with interest and penalty as therein written, and in security of the said personal obligation he disponed in their favour certain heritable subjects belonging to him in Glasgow.

By disposition, dated in May and recorded in June 1877, the said John Clark Yuill, considering that he sold the subjects thereinafter disponed to A. M. Glass, merchant in Glasgow, at the price of £12,200, and the said Glass, without obtaining a title thereto, resold the same to David Horne, builder in Glasgow, at the price of £14,500; and considering that Home had paid to Yuill £3200, and to Glass £2300, and that the remainder, £9000, was contained in the bond and disposition in security by Yuill in favour of the University of Glasgow, above recited, “which bond and disposition in security, and whole personal obligations therein contained, the said David Horne has become bound, as by acceptance hereof he agrees and binds himself, and his heirs, executors, and successors, to pay and implement, from and after the term of entry after mentioned, and so free and relieve me the said John Clark Yuill of the same, so that the said bond and disposition in security, together with all personal obligations to pay principal, interest, and penalty therein contained, may transmit against the said David Home and his foresaids, in terms of the Conveyancing (Scotland) Act 1874, as from and after the said term of entry;” therefore Yuill, with consent of Glass, sold and disponed to Home the said subjects over which security had been created by the previous deed.

Yuill having subsequently become insolvent, and his estates sequestrated, a claim was lodged in his sequestration for “William Stewart, D. D., as representing the University of Glasgow, to be ranked and draw a dividend for a debt of £9465, 7s. 8d., in respect of the said bond and disposition in security.

The Conveyancing (Scotland) Act 1874 enacts (section 47) that “Subject to the limitation hereinbefore provided as to the liability of an heir for the debts of his ancestor, an heritable security for money duly constituted upon an estate in land, shall, together with any personal obligation to pay principal, interest, and penalty contained in the deed or instrument whereby the security is constituted, transmit against any person taking such estate by succession, gift, or

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bequest, or by conveyance, when an agreement to that effect appears in gremio of the conveyance, and shall be a burden upon his title in the same manner as it was upon that of his ancestor or author, without the necessity of a bond of corroboration or other deed of procedure; and the personal obligation may be enforced against such person by summary diligence or otherwise, in the same manner as against the original debtor.”.…

The Bankruptcy (Scotland) Act 1856 enacts (section 65) that “To entitle any creditor who holds a security over any part of the estate of the bankrupt to be ranked in order to draw a dividend, he shall on oath put a specified value on such security, and deduct such value from his debt, and specify the balance; and the trustee, with consent of the commissioners, shall be entitled to a conveyance or assignation of such security at the expense of the estate, on payment of the value so specified out of the first of the common fund, or to reserve to such creditor the full benefit of such security, and in either case the creditor shall be ranked for and receive a dividend on the said balance, and no more, without prejudice to the amount of his debt in other respects.”

The trustee rejected the claim made for the University “in respect the claimants have not, for the purpose of ranking, valued and deducted the property…. held by them in security, and have not exhausted or discussed the said property, and David Horne, builder, Glasgow, their true and ultimate obligant in the premises.”

Against this deliverance the University appealed to the Sheriff-Substitute ( Erskine Murray), who recalled the deliverance of the trustee, and ordained him to admit the claimants to a ranking in terms of their claim.

He added the following note:—“The bankrupt Yuill in 1876 borrowed from the University of Glasgow (for whom the appellant Dr Stewart acts as Clerk to the Senatus) £9000, and granted a bond and disposition in respect thereof over certain house property at the corner of Bath Street and Buchanan Street. In 1877 he sold the property to one Glass, who again, without obtaining a title, sold to David Horne, in favour of whom, in June 1877, the bankrupt granted the disposition, containing a clause by which the personal obligation, as well as the heritable debt, is taken over by Horne, and declared to ‘transmit’ to him in terms of the Conveyancing Act of 1874. No consent was given by the University to this transaction, and indeed it appears to have been done without their knowledge. Yuill having now become bankrupt, the University through Dr Stewart has claimed on his estate for the amount of the personal obligation in the bond and disposition, with interest. The trustee has rejected their claim, in respect the appellant has not valued and deducted the property in question, held by them in security, and has not exhausted or discussed the said property and David Horne.

“The rejection is under sec. 65 of the Bankruptcy (Act 19 and 20 Vict. c. 79), which provides, that to entitle any creditor who holds a security over any part of the estate of the bankrupt, to be ranked, he shall on oath value and deduct the amount, so that the creditor is only to get a dividend on the balance. It is not the holding of any security that obliges the creditor to value it,—it must be a security over the estate of the bankrupt. Now, at the date of the bond and disposition by Yuill to the University in 1876, the security was undoubtedly one over part of Yuill's estate, but at the date of Yuill's sequestration the subjects had ceased to be Yuill's; they had been formally and really disponed to Horne; and therefore at the date of Yuill's sequestration the security was no longer—in any ordinary sense of the word—a security over a part of Yuill's estate. Still the respondent contends that this must, nevertheless, be held to fall under the terms of the Act.

The three main questions that arise are—(1) Does the personal obligation by the bankrupt still subsist in spite of his disposition to Horne and the clause of transmission therein contained? (2) If it still subsists, is the University bound to discuss Horne first as if Yuill were only a caution? and (3) If it subsists, and the University is not bound to discuss Horne first, are they bound to value and deduct the amount of the security and only rank on the balance?

The first and second questions depend upon the meaning to be attributed to the Act of 1874 when it says that the personal obligation is to ‘transmit’

It appears to the Sheriff-Substitute that it is impossible that the Legislature meant to enact that the granter of a personal obligation could escape liability under it by simply getting anybody—it may be a man of straw—to undertake the liability in his place. All that can be meant is just that when a party acquires the heritable property over which a bond and disposition in security has been given by a disposition which contains a declaration that the personal obligation in the bond is to ‘transmit’ to the purchaser, the purchaser agrees to undertake responsibility for the personal obligation, but then that it is only in a question with the seller and his representatives.

It cannot relieve the seller in a question with a third party, the grantee of the bond and disposition in security, unless he became a consenter to the transmission, and discharged the original borrower. It just gives the seller relief against the purchaser for anything he may have to pay under his personal obligation. No doubt it also provides that the personal obligation may be enforced against the purchaser in the same manner as against the original debtor. This may, perhaps, only refer to the case where the grantee of the bond is a party to the transmission, for except in that case it seems difficult for the grantee of the bond to be able to avail himself of the transmission. But even if the scope of the transmission is wider, it is a privilege given to the grantee of the bond, from which it cannot be inferred that behind his back an act may be done greatly to his prejudice. So the College may claim, in the first instance, against Yuill's estate if they please.

The first two questions must therefore be decided in favour of the appellant. But the third is more difficult. No doubt the property over which the security exists forms at present no part of the estate of the bankrupt, but can it be held that because at the date of the bond it did form part of the bankrupt's estate it is still so in the eyes of the law, and for the decision of such a case?

There are several cases more or less bearing on the present. In M'Clelland v. Bank of Scotland, 19 D. 574, Feb. 27, 1857, a copartnery granted a

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cash-credit bond to a bank, and two partners gave the bank in security absolute dispositions (with back-letters) of their own heritable property, and after the death of the original partners the new firm purchased their estate, payable by instalments, with an obligation on their trustees to grant conveyances when the whole was paid. The bank were no parties to the agreement. One instalment was paid when the new company became bankrupt. The bank claimed on the firm's estate for the sum due under the cash-credit. The trustee in the sequestration objected that they should have valued and deducted their security. It was held that the estate as originally conveyed to the bank formed a collateral security, and was separate from and independent of the company estate, and that the partners could not by a transaction to which the bank was not a party injure the position of advantage in which the bank was originally placed, and that therefore the security was not one over the estates of the bankrupt under sec. 37 of 2 and 3 Vict, c 41, and that therefore the bank was not bound to deduct the security.

The principle thus established was that the granter of a security over a property could not by transferring that property to another prejudice the position of the grantee of the security, and that therefore the transfer was ineffectual in so far as it injured the rights of the grantee. In other respects it might be effectual.

It was also remarked in that case by the Lord Ordinary that the expression ‘estate of the bankrupt’ appears to mean nothing more than the estates carried by the sequestration, and available as a fund of division among the creditors, and that no one should be admitted to claim in the sequestration who holds a security over the property of the bankrupt which, but for such security, would go to the trustee for general distribution, without valuing and deducting such security. This view was also adopted by the majority in the Inner House.

“In the case of the British Linen Company v. Gourlay, March 13, 1877 ( 4 R. 651), A, the owners of certain goods, got an advance thereon from B, made out the bills of lading in his name, and authorised him to pledge the goods, with liability to account for any surplus. B discounted the bills with the bank, and gave the bills of lading in security. Both A and B failed. The bank claimed in respect of the bills on A's estate. The trustee called upon them to value and deduct the security. It was held that the bank was not bound to do so, as in a question with the bank the goods must be held the property of B.

This was just a confirmation of the doctrine in M'Clelland; for it was held that the bank, receiving as security for bills by A property apparently belonging to B, were not bound to deduct it in claiming on A's estate. On the face of the documents, B's title to the property was absolute.

In the Royal Bank v. Purdom, 26th October, 1877 (15 Scot. Law Rep. 13), which was decided by Lord Ordinary Adam and acquiesced in, a bank gave a cash-credit to a firm, and got in security a disposition to subjects ex facie of the titles the absolute property of one of the partners. When the firm was sequestrated, the bank claimed, and the trustee called upon the bank to deduct the value of the property forming the security. It was held that the rights of parties fell to be determined by the terms of the cash credit bond, which specified the particular security which the appellants agreed to take and receive; and (2) that it was immaterial whether the bank knew that the partner only held in trust for the firm. In his note Lord Adam remarks that as the company consented to the subjects being disponed in security by a partner, as apparently his absolute property, they, or their trustees as representing them, cannot object to this agreement receiving effect. To do so would be to diminish the security intended to be given at the time by all parties concerned. He adds—' The subjects in question were not at the date of the sequestration, in the sense of the Bankruptcy Act, any part of the estate of the bankrupts. They were then vested in A. J. Donaldson; the right of the trustee was to demand from him a conveyance of the subjects vested in him, but subject only to all rights and burdens, &c., on it, of which this was one.'

This, therefore, was still a case where the security was over the estate of a third party, and not either in form or in reality over the estate of the bankrupt.

In all the cases it was held that after a security is granted nothing can be done without consent of the grantee to lessen the security. But it does not follow that the granter may not do something which may increase the value of the security. He may build valuable buildings on the property, or increase the value of the security in many other ways. It seems, therefore, in principle, that there is no bar to his increasing the value of the security by disposing of the property for his own purposes to someone else. He is thereby not lessening his estate, for he is getting a quid pro quo, the price of the land. His right course is to get the grantee of the bond to consent to the transaction and to discharge him, which can probably be easily got if the purchaser's personal obligation is as good as his own. If it is not, and if that is the reason why he does try to get such a consent and discharge, this only shows how iniquitous it would be if the original debtor were enabled to get rid of his liability by simply selling the subject of the security to another.

Altogether, the Sheriff-Substitute sees no reason for holding that by a presumption of law (contrary to the fact) the property in question must be dealt with as still part of the bankrupt's estate. In both M'Clelland's and Purdom's cases the property formed, as here, no part of the sequestrated estate (though perhaps in Purdom's it may originally have done so), and it was held that for this reason, and also because the grantee of the bond ought not to be prejudiced, he was not bound to deduct the security. In the British Linen Bank case, though there might be questions as to the real ownership, it was held that as parties had agreed to the property being held B's, the grantee could not be prejudiced by its being held to be A's. But, as above remarked, this only shows that the grantee of the obligation cannot be prejudiced behind his back, but not that he cannot be benefited.

The bond and disposition to the College was only a burden on the property. It noway affected Yuill's right to dispone the property subject to the burden. By the disposition to Horne the

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property became part of Horne's estate. It cannot be held any part of Yuill's estate, which would otherwise form a fund for division among Yuill's creditors. So Yuill's creditors are noway wronged by the security not being deducted, and it is a fallacy to argue that because a presumption beyond the fact may be adopted to prevent prejudice to the grantee of a security through a transaction to which he is not a party, it must also be adopted to prevent his getting any advantage by a similar transaction.”

The trustee appealed to the Court of Session, and argued—(1) By the 47th section of the Conveyancing Act, the terms of the disposition of 1877 discharged Yuill's personal obligation to the University, and transmitted it to Horne. Yuill's estate was therefore only liable for the debt after Horne had been discussed. See dicta in Carrick and Others v. Rodger, Watt, & Paul, December 3, 1881, 19 Scot. Law Rep. 179. (2) Under the 65th section of the Bankruptcy Act the University could not rank on Yuill's estate without valuing and deducting this security, which undoubtedly at the time of the contract between them was “over part of the estate of the bankrupt.” The radical right was still in the bankrupt. See Lord Shand's opinion in Gourlay's case, quoted by the Sheriff-Substitute, and the English case of Brett, referred to in his Lordship's opinion. This particular creditor was not entitled to take benefit, to the prejudice of the others, from an accidental and unforeseen advantage happening since the original contract. That would be obviously inequitable, and there was nothing in the statute to warrant it.

The Court having intimated that they desired no reply to the appellant's first point, the respondent replied only on the second branch, and argued—The University were not bound to value and deduct this security. It was over “no part of the bankrupt's estate.” These words had been judicially construed in M'Clelland's and the other cases cited by the Sheriff-Substitute. The appellant's contention would come to this, that the University was to suffer without any remedy in consequence of a change made by Yuill as to the security for their debt, that change being made without their knowledge or authority. The security was now over a third party's estate. The real right of ownership in the property was in Horne. The debtor had no doubt slightly increased the creditor's security by the addition of Horne's liability, but there was no rule of law against his doing so. The question was not one of equity, but depended on the construction of a statutory provision.

At advising—