Scottish Court of Session Decisions

The Royal Bank of Scotland raised this action against Joseph Campbell Penney, C.A., trustee on the trust-estate of John Millar & Co., china-merchants in Edinburgh, conform to trust-deed granted by them for behoof of creditors dated 25th August 1880, and William Millar, designed in said trust-deed as sole partner of that firm, for declarator that the defender was bound to rank the bank as creditors on the trust-estate of the said firm for £6163, 5s. 2d., being the full amount of their claim thereon, and to pay them an equal dividend with the other creditors on that amount, and that the bank were not bound nor the defender entitled to deduct from the said claim, previous to the bank being ranked on the estate or drawing dividend therefrom, the sum of £4222, being the estimated value of certain securities consisting of Government bonds held by the bank as afterwards set forth.

The securities in question were at the date of the said trust-deed held by the bank, having been placed in their hands, as after mentioned, as against a cash-credit account which they had in April 1875 allowed the firm of Millar & Co. to open with them, and which at the date of the said deed showed a debt due to the bank of £6163, 5s. 2d.

The firm consisted in April 1875 of three partners, the said William Millar and his two brothers John and Leander. The firm having become bankrupt in 1880, and a trust-deed for behoof of creditors having been granted of date 25th August 1880 by John Millar & Co. and William Millar, then sole partner of the firm, in favour of the defender J. C. Penney, the bank claimed to rank on the trust-estate for the full amount due to them under the said cash-credit.

By the trust-deed it was provided that the ranking of creditors was to be in accordance with the provisions of the Bankruptcy Acts. The Bankruptcy 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.” …

The trustee pronounced this deliverance on the bank's claim:—“The trustee admits this claim to the extent of £1941, 5s. 2d. sterling, being £6163, 5s. 2d., the dr. balance on the cash-credit of the firm with the bank, and interest accrued thereon as at 25th August 1880, the date of the trust-deed, under deduction of £4222, being the value of the securities held by the bank. … These securities, with the exception of the Russian bond, which bore to be the property of the firm, having been blank indorsed by Leander Miller and delivered to the firm, thus became the property of the firm. These securities were thereafter handed by the firm to the bank as security for the cash-credit in favour of the firm, of which the above sum of £6163, 5s. 2d. is the dr. balance including interest.”

The bank accordingly raised this action of declarator to have their claim given full effect to. They stated on record—“It is believed and averred by the pursuers that the said securities belonged at the date when they were handed over to the bank to Leander Millar, or otherwise to John Millar, Madras They were at no time the property of the firm, and do not form securities over the bankrupt estate of John Millar & Company. The bank is therefore not bound to deduct their estimated value in claiming on that estate. The defender having intimated that he refuses to rank the pursuers for the full amount of their claim, or to pay a dividend thereon, the present action has been rendered necessary.”

They pleaded—“(1) The pursuers not having received any securities belonging to the firm of John Millar & Company, they are entitled to rank on the estate of said firm for the full amount of their debt. (2) The securities held by the pursuers against advances to the firm of John Millar & Company having been at no time the property of said firm, the bank is entitled to rank on the estate of said firm for the full amount of those advances. (3) The pursuers being creditors of said firm of John Millar &, Company in the amount condescended on they are entitled to draw a dividend on the full amount of their claim. (4) In the circumstances stated the pursuers are entitled to decree as concluded for.”

The defender averred—“Explained that in the whole transaction connected with the cash-credit the pursuers knew no other party than the firm of John Millar & Company. The pursuers received the securities in question as being the property of the said firm, and the pursuers have all along held the said securities and dealt with the same as such. The said securities were in point of fact the property of the firm when they were delivered to the bank. The said William Millar was sole partner of the said firm at the date of the said trust-deed.”

The defender pleaded—“(2) The securities in question being the property of the firm, and thereafter of the said William Millar as sole partner thereof, the pursuers are bound to value and deduct the same. (3) The pursuers having received and dealt with the said securities as the property of the firm, they are bound to value and deduct the same. (4) Any arrangement between the partners of the said firm regarding the securities is jus tertii to the pursuers.”

A proof was allowed. It was proved that in 1875 William Millar and his two brothers John (who was absent at Madras, where he held a post under Government, and whose name did not appear in the contract of copartnery) and Leander, being desirous of taking over the then existing china business of John Millar & Company, of which they were thenceforth to be the partners, and having no available cash at their disposal to purchase it, agreed to raise money by means of a cash-credit with the Royal Bank. William and Leander accordingly called on the secretary, and left in his hands, as securities against an account to be opened in the firm's name to the extent of £4000 (afterwards extended to £6000), eight Indian Government bonds for 5000 rupees each at 4 per cent., two for 2000 rupees each at 5 1 2 per cent., two for 1000 rupees each at 5 1 2 per cent., and one Kussian Government bond for £500 sterling at 5 per cent., banding

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him at the same time a letter signed “John Millar & Company,” which noted the securities as above, and contained this passage—“The writer, Mr William Millar, having acquired from the trustees of the late Mr John Millar the business for so many years conducted by him as potter and glass merchant, intends to continue it under the same style and designation, viz., that of John Millar & Co.” The Russian bond was payable to bearer. The remaining bonds were at the meeting with the bank secretary blank endorsed by Leander (whose name was on them as last endorsee), and the bank thereafter put above his signature their stamp “Payable Royal Bank of Scotland, or order.” The four smaller Indian bonds and the Russian bond belonged at that time to Leander. The eight large Indian bonds belonged to John, and were uplifted from the Oriental Bank by Leander, as his brother's attorney, to be placed with the Royal Bank. No part of the paper belonged to William. The interest on each brother's securities was regularly credited to him in the books of the firm. The firm books contained no capital account. In the end of 1876 Leander retired from the firm, and died in 1880. On his retirement he was paid out in full. Certain of his securities were taken over by the company in their books at the price of the day, and securities exactly identical with the others were purchased for him in the market, and given to him, William Millar acquiring his one-third share in the business. No change of proprietorship in any of the securities was at any time intimated to the bank. John Millar died in March 1878.

The bank in their books and in their correspondence dealt with John Millar & Company throughout. William Millar deponed, inter alia—“I had power to pledge these securities. I don't think I had power to sell them. They were lent to me for a special purpose. I treated them as capital put in by my brothers. (Q) What do you mean by calling them capital?—(A) As partners my brothers were bound to provide their share of the capital; they had not cash, and I got these in security. (Q) Is this what you mean—that your brothers did not put in any other capital besides these securities?—(A) No other capital. When these securities were left in the bank I treated them and looked upon them as John Millar & Company's securities, just as I looked upon the cash advanced by the bank upon these securities as John Millar & Company's cash. “The secretary of the bank was unable to recollect distinctly what was said at the meeting in April 1875 as to the property of the deposited securities. He deponed—“It never occurred to me that the securities belonged to John Millar & Company as a firm. I never inquired who was the real owner. The bank had no interest in that question at that time.”

By the contract of copartnery, dated 15th April 1875, between William and Leander (John Millar not appearing therein as a partner), it was provided, inter alia—“(4) The partners shall be interested in the nett profit and loss in the following proportions, viz., one-third thereof shall belong to the said William Millar as his share, and two-thirds thereof shall belong to the said Leander Millar as his share; declaring always that notwithstanding what is above written it shall be in the power of the said William Millar at any time during the subsistence of the contract to acquire one-half of the said Leander Millar's share and interest in the capital, stock, and profits of the copartnership. … (5) In respect a cash-credit in name of the said copartnery of John Millar & Company has been granted by the Royal Bank of Scotland on deposit of certain securities, it is hereby expressly provided and declared that the proprietary interest in these securities shall not be changed in any way in respect of their being so deposited, and the said copartnery shall be bound, on the said cash-credit being paid up and discharged, to return the said securities to the respective owners thereof free and disencumbered in all respects as if the foresaid cash-credit had not been granted; declaring further, that during the existence of the foresaid copartnery, and so long as the fore-said securities are so deposited, the owners thereof shall be entitled to draw and receive all interest or dividends accruing thereon, the said copartnery being bound to pay all interest on over-drafts in respect of the foresaid cash-credit, and all expenses connected therewith.”

The Lord Ordinary (M'Laren) pronounced this interlocutor:—“Finds in fact that the securities of which the pursuers are the holders were not the property of John Millar & Company at the opening of the cash credit account referred to, but were the property partly of John Millar and partly of Leander Millar, individual partners of the company: Therefore sustains the pursuers' pleas, and finds and declares and decerns in terms of the conclusions of the libel,” &c.

His Lordship's opinion was as follows:—“In this case the Royal Bank of Scotland, who are creditors of John Millar & Company, claim to be entitled to rank for the whole balance due to them upon the cash-credit account upon the estate of the insolvent firm, and to operate payment of the remainder out of the securities held by them, treating those securities, which consist of negotiable documents, as securities received from parties independent of the firm. On the other hand, it is contended by the trustee that those securities, which admittedly were antecedently to the constitution of the firm the property of the individual partners, must be considered with reference to this claim as being the property of the firm. Accordingly they say that the rule of the Bankruptcy Act 1856, which is under the provisions of the trust-deed made applicable to this case, should be applied, and that these securities being, according to their contention, the property of the bankrupt firm must be valued and deducted. The question therefore is one of fact—whether at the time when the Royal Bank became vested in security in those Indian and Russian bonds they were either by direct transfer or by agreement the property of the firm?

Now, apart from whatever light is thrown on the question by documentary evidence, we have only the evidence of one witness—Mr William Millar, the surviving partner. I do not think that the evidence of the accountant who was examined has thrown very much light on the matter, though it has explained the entries in the books and shown their bearing upon the case; and Mr Huie, the secretary of the Royal Bank, really does not seem to recollect very much, except that a cash-credit was negotiated with the bank through him upon the security of those documents. It was immaterial to the bank

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whether the documents were the property of the firm or the property of the individuals. So far as they had any interest they had a better security if the documents were the property of the independent parties, as the contention in this case shows. But there is nothing in Mr Huie's evidence or that of Mr Millar to suggest that they had ever considered that question. The arrangement was for a cash-credit for a sum less than the value of the securities, and the bank was therefore amply secured by the documents put into their possession, no matter to whom the property represented by these documents belonged, and this question could never have arisen but for the circumstance that John Millar & Company obtained an overdraft beyond the amount to which the credit was secured.

Now, it is perfectly clear that antecedently to the agreement to grant a cash-credit the eight Indian bonds for 5000 rupees each were the property of Mr John Millar, of Madras, and that the other securities were the property of Mr Leander Millar, both brothers of William Millar, the acting partner, and the gentleman who alone was authorised to operate upon the cash-credit account; and the question is, whether in the course of the completion of the transaction by which the newly-constituted firm was to obtain a cash-credit these documents had been transferred by Leander and John to the firm with a view to the firm depositing them with the bank in security? The first observation that occurs to one is that such a transfer to the firm was entirely unnecessary for the purposes which the parties had in view. They wanted to give, not personal security, but real security to the bank, and it was utterly unimportant for that object whether the reversionary right after the cash-credit was squared off was to pass to the firm or to the individual partners. It was, however, very material to Mr John Millar and Mr Leander Millar that they should not part with the property of their bonds to a firm of which the only acting partner was a gentleman who had no capital. I do not in the least doubt that they, out of good feeling to their brother, and to put the transaction in a light that would be friendly to him, suggested as a reason for retaining their proprietory interest in the stock that it would be inconvenient to mix up any questions as to the profit or loss that might accrue through a change in the value of the bonds. But when brothers enter into a business transaction they must look to the protection of their own interests just as strangers do; and I cannot in the least doubt that the two brothers who contributed the capital desired, so far as possible, to retain their control over the securities which they were going to impress into the hands of the Royal Bank, and that it would be naturally a motive in their minds that their property would be safer in the form of the transaction that was adopted than by their making it the property of the firm over which the acting partner might operate at his pleasure. Well, what was actually done is just in accordance with what might be expected from business men under such an arrangement. Mr John Millar's securities, he being at the time in India, were in the hands of the Oriental Bank; the bank by his directions endorsed them, not to Mr William Millar, but to Leander Millar, the other contributory, and he goes with his brother William to the bank and is present when the securities are handed over and the cash-credit account opened in terms of the agreement.

Now, according to the form of the documents, the firm of John Millar & Company never were even ex facie proprietors of any of those securities. No doubt they are blank endorsed, and that blank endorsation might have passed the securities to the firm if such had been the intention of the parties, but if the securities had been blank endorsed to the firm with that intention they could not be legally transferred to the bank without the endorsement of the firm, and no en dorsement by the firm as bearing to be by any body on behalf of the firm appears on the back of these documents. So far as the written evidence goes, therefore, these securities were directly assigned by the individual owners of them to the bank as available securities for a cash-credit to be opened in the name of the firm.

Now, against that the only evidence we have is the impression stated—I have no doubt in perfect good faith—by Mr William Millar that he looked upon these funds as assets of the firm, and that the firm was to give them for the cash-credit. But that is the statement of a party who contributed nothing regarding the dealing with the property of the other parties who were owners, and I cannot receive his evidence in favour of his own claim, and against his brothers, as sufficient to outweigh the conclusions deducible from the real evidence in the case.

Then, if any doubt can be entertained, I think it is entirely removed by the contract of co-partnery. It is rather a curious feature in this contract, which is evidently prepared with considerable care by a law-agent, that it does not say anything about the capital of the firm, and the reason for that apparently is that this firm was not to be constituted on the basis of having a capital, but solely and entirely on credit. There is nothing illegal or strange in that; credit, if perfectly secured, may be quite as good as capital, and quite sufficient for the purposes of carrying on the largest business; and that was the basis of this contract.

In the 4th article I observe the distinction very clearly marked. It provides, not as is usual in such deeds, that the stock of the company shall be shared in such and such portions, but that the partners shall be interested in the nett profit and loss in the following proportions, which are there stated. But then when the article goes on to provide for the acquisition by Mr William Millar of the half of Leander's share we have the word ‘capital’ introduced—that it shall be in the power of the said William Millar, with the consent of the said John Millar, at any time during the subsistence of the contract, to acquire one-half of Leander Millar's share of the capital, stock, and properties of the copartnery. So it was in the contemplation of the parties that the concern was to begin without any capital, but that it was to acquire capital through successful trading, and when that change of interest took place the capital as well as the right to the future profits should pass as part of the share and interest to be acquired by W. Millar. Then the 5th article provides in substance, that in respect of the arrangement for a cash-credit on the basis of security there shall be no change in the interest of the individual partners by whom those securities are contributed.

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Mr William Millar thinks that was merely for the purpose of excluding the company from gain or loss by any rise or fall in the value of these securities, but the article in the contract is not limited to any such purpose. It is a perfectly absolute and unqualified declaration that those securities shall remain the property of the partners by whom they are assigned to the bank, and that declaration appears to me to be entirely in harmony with the real evidence and with what was the natural and obvious interest of all the persons who were parties to this arrangement.

The only other point in the case is, whether the right of security on the part of the Royal Bank can be impaired in consequence of the acquisition by Mr William Millar of certain interests in the shares of the partnership and property of his brothers. It appears to me, not only on the authority of the case of M'Clelland, cited in argument, but on principle, that where a creditor acquires property by an ex facie absolute title, no change in the reversionary interest can lessen his security. It is a well-known principle in regard to all ex facie absolute assignations that the assignee is to be treated as a proprietor for every purpose except that of fulfilment of his obligation to restore upon his advances being paid up. Therefore any assignment is merely an assignment of the equitable or reversionary interest, the ex facie absolute assignee remaining for all purposes in which he is interested the true owner, with all the rights which an independent owner can maintain against third parties. Now, this is just an ex facie absolute assignment, because the securities are endorsed over, and there is no deed qualifying that endorsement.

“I therefore think the bank are entitled to claim their right as it stood at the date when they opened the cash-credit security, and are entitled to hold these documents as securities for any difference between the dividend that may be received from John Millar & Company's estate and the actual amount of their debt.”

The defender reclaimed, and argued—The bank were bound to value and deduct these securities in ranking on the firm's estate, they being securities over “part of the estate of the bankrupt.” They were given to the bank as the property of the firm, and the firm had at least a limited ownership in them. The bank dealt all along with the firm as owners of the securities; they knew nothing of, and had no concern with, the arrangements of the partners inter se, and were not now entitled to reap as a windfall the benefit of their discovery of these arrangements. They did not stipulate for any security other than “over the bankrupt estate.” In any view, the securities which originally belonged to Leander, and which had on his retirement became the property of the firm, should be valued and deducted from the bank's claim.

Replied for the bank—They were entitled to a ranking on their full claim. The securities having been at the date of their impignoration the property of the individual partners, who were in such a case “third parties,” were over no part of the estate of the bankrupt firm. They were given to the firm for the limited and sole purpose of pledging them to raise money. If the bank's understanding as to the real ownership of the securities in 1875 had been clearly established their case would have been irresistible. Even as it was, M'Clelland's case showed that no subsequent dealings of the partners inter se could prejudice the advantageous position of the bank.

Authorities— M'Clelland v. Bank of Scotland, February 27, 1857, 19 D. 574; British Linen Company v. Gourlay, March 13, 1877, 4 E. 651; Royal Bank v. Purdom, October 26, 1877, 15 Scot. Law Rep. 13; ex parte Brett, L.R. 6 Chan. App. 838; in re Collie, L.R. 3 Chan. Div. 481.

The Lords made avizaudum.

At advising—