Scottish Court of Session Decisions

John White, builder, 18 Melville Terrace, Edinburgh, was sequestrated in January 1883, the first deliverance being on the 10th of that month, and John Walker, chartered accountant, Edinburgh, was appointed trustee upon the sequestrated estate.

The present action was raised in the Sheriff Court of the Lothians and Peebles at Edinburgh by Messrs Adam & Winchester, S.S.C., Edinburgh, against Mr Walker as White's trustee, and as an individual, and it concluded for the payment of a sum of £125.

The pursuer averred that from 12th July 1881 down to the date of the sequestration they had acted as law-agents for the bankrupt, and that he was due to them a sum of £196, 18s. 6d. for professional services and disbursements in connection with various actions and other business in which they had been employed by him.

They further alleged that in the way of business and in the course of their agency for the bankrupt they came into possession in November 1882 of the following documents:—(1) A bill for £94, 4s. 2d., drawn by William White, wood merchant, Edinburgh, on the bankrupt, and endorsed by Francis Allan, cab proprietor, Edinburgh, dated 4th August 1882, at 3 which the bankrupt had paid; (2) receipt and acknowledgment granted by the said William White to the bankrupt dated 13th November 1882, of the latter having placed with the former a horse, lorry, and harness, in security of the sum then due under said bill; (3) letter from James Drummond, W.S., on behalf of the said William White to the bankrupt anent said bill and security given, dated 15th November 1882; and (4) three letters from Mr Drummond to pursuers on same subject, dated 21st and 22d November 1883. These documents the pursuers averred to be the property of the bankrupt, and they also alleged that they remained in their hands from November 1882 to 5th June 1883; that they were thus in their hands at the date of the sequestration, and so became subject to their right of lien or hypothec in respect of their account for £196, 18s. 6d., or at least of the restricted sum of £125 sued for.

It was admitted that the pursuers on 5th June 1883 handed to the defender the documents above described, to be used by him as trustee in an action which he had raised against William White, on the ground that the manner in which he had received payment of the said bill through the pledging and sale of the said horse, lorry, and harness, amounted, in respect of the subsequent sequestration of the bankrupt within sixty days thereof, to an illegal preference by John White in favour of William White, under the Act 1696, cap. 5. The defender had desired to use them in modum probationis in the action against William White.

The following receipt was granted by the defender's agent to the pursuers at the time when he as trustee recovered the documents from them;—

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“ Edinburgh, 5th June 1883.

“Received by me on behalf of the trustee in John White's sequestration, the documents, of which the above is an inventory [being those above detailed], subject to and under reservation of the claim of hypothec of Messrs Adam & Winchester, S.S.C., if any, and to the trustee's defences thereto.

“ Knight Watson.”

In that action the trustee (the present defender) obtained decree for £40 with expenses.

The pursuers alleged that the amount of benefit derived by the defender from the documents obtained from them for use in the action was £125—the total of the sum recovered (£40) together with the expenses of both sides—and for this amount they concluded in the prayer of the petition, they being willing to restrict their account thereto. They averred that the documents were essential for that case, or at least the defender had deemed them so, and that he had recovered from the estate of the bankrupt funds sufficient to pay their business account, in security for which the documents obtained from them had been hypothecated; and further, that if he had failed to recover from the bankrupt's estate a sum sufficient to meet their lien, then he was liable to them as an individual with a right of relief against the estate, but had refused to make any payment to them either as trustee or as an individual, had denied their right of hypothec, and insisted on their proceeding by lodging a claim in the sequestration, to be adjudicated on by him in the statutory manner.

The defender admitted that he had found it to be his duty as trustee, to challenge the transaction between the bankrupt and William White, had used the documents in question, and had been successful in getting the transaction cut down by the Lord Ordinary as an illegal preference.

He averred that the documents came into the pursuers' possession after the time of the illegal transaction, and that none of them were received by the pursuers as security for their accounts, and that they were not capable of affording any such security; and he further alleged that he was quite willing that the pursuers should resume possession of them.

He averred further that he had not even sufficient funds to meet the preferable claims.

The pursuers pleaded, inter alia—“(2) The documents in question having come into pursuers' possession in the course of their law—agency for the said John White, in the manner condescended on, were, as at the date of his sequestration as well as at the delivery thereof to the defender, subject to the pursuers' claim or right of retention, lien, or hypothec, as against the said John White and the defender, his trustee, in respect of the pursuers' said business accounts against the said John White, incurred and due by him to them as condescended on. (9) In any event, whether there be sequestration funds or no, the pursuers are entitled to hold the defender personally liable in respect (1) of the nature of their lien, and (2) of the contract which subsequent to said sequestration defender personally entered into with them for delivery of the said documents on the terms condescended on.”

The defender pleaded—(1) The action is irrelevant. They also pleaded that the documents in question were received by the pursuers within sixty days of John White's sequestration, and when he was bankrupt, and that they could not plead their right of retention so as to give them a preference over White's other creditors.

On 28th January 1884 the Sheriff-Substitute ( Rutherfurd) pronounced an interlocutor sustaining the defender's first plea-in-law, and dismissing the action as irrelevant.

“ Note.—It is not matter of dispute that the documents in question came into the pursuers' possession subsequent to the bankruptcy of their client, and the Sheriff-Substitute is therefore of opinion that they have no lien over them (Bell's Comm. 7th edition, vol. ii. p. 89).

But even if this were otherwise, the pursuers were bound to deliver the documents to the trustee, under reservation of the effect of their hypothec as conferring a preferable claim in the sequestration. The action of the trustee has proved beneficial to the estate on which the pursuers are creditors, and so far they have no ground of complaint. If they have a preferable claim it must receive effect in the ranking. It cannot be given effect to in the present action.”

The pursuers appealed to the Court of Session, and argued—(1) On the question whether any lien had been created over documents coming into the hands of pursuers as the bankrupts' agents in November, being within sixty days of his client's bankruptcy—that the account in respect of which a lien was claimed over the deeds in question was made up of disbursements and business charges, and not of cash advances; that the pursuers had a proper lien over these documents, because although they came into their hands within sixty days of White's bankruptcy, yet that bankruptcy was not notour bankruptcy such as Professor Bell evidently referred to in his Commentaries, at the passage cited by the Sheriff — Substitute, but only insolvency — see Menzies v. Murdoch, Dec. 15, 1841, 4 D. 257. In order effectually to reduce a transaction completed within sixty days of bankruptcy it was necessary either to prove fraud at common law or to bring the act done within the statute, otherwise the deed stood. In the present case, as the bankrupt had not been divested of his estate at the time when the documents were handed over to the trustee, the transaction stood good, and effect must be given to the appellants' lien. (2) As to the class of documents over which an agent's lien extended:—With regard to the defender's pleas that the documents in question were not of a nature to be the subject of lien, the authorities went to this length, that any document falling lawfully into his agent's hands founded a lien against the client — 2 Bell's Comm. p. 111; Finlay v. Sime, 1773, M. 6250; Bankton, i. 17, 15; Ersk. iii. 4, 21; Bell's Prins. 1428; Stair, vol. i. p. 85. There was no attempt in this case to give a preference to the appellants by handing them their documents; on the contrary, the documents came into their hands in the ordinary course of business the transaction, therefore, was not of the kind contemplated by the Act of 1696. The documents though other than title-deeds, were such documents as may form the subject of special lien

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— Renny & Webster v. Myles & Murray, Feb. 8, 1847, 9 D. 628; Meikle & Wilson v. Pollard, Nov. 6, 1880, 8 R. 69. This was a case of special lien; here the papers recovered by the trustee became the means of increasing the value of the bankrupt's estate. As the trustee had paid himself to a certain extent by means of these documents, he became thereby personally liable to the appellants, in respect of the receipt which he granted when the documents were handed over to him alternatively. The present action might be taken as one of constitution of debt, and the appellants were willing to take a decree against the estate.

Authorities— Benny v. Kemp, July 1, 1841, 3 D. 1134; Companies Act 1862, sec. 115; Skinner v. Henderson, June 2, 1865, 3 Macph. 867; Ferguson v. Grant, Feb. 8, 1856, 18 D. 536.

Argued for the respondent—(1) The transaction was within sixty days of White's bankruptcy, and so fell to be reduced, and the Sheriff's decision in the matter was right. The tenor of recent decisions was, that in the opinion of the Court writers' hypothec had been carried too far. (2) The action was irrelevant, so far at least as it was directed against the trustee as an individual, and the appellants could claim in the sequestration for any preference which they might think that they had over the estate. In so far as directed against the trustee as trustee, the action of the appellants was simply an attempt to oust the jurisdiction created in him by the Bankruptcy Act, and as such it fell to be dismissed as irrelevant. The present case differed materially from that of Webster & Renny, in so far as there the trustee had granted an obligation qua trustee. The documents were only required in modum probationis by the trustee, and could now be handed back to the appellants.

Authorities — 2 Bell's Comm. p. 89, 7th ed.; 2 Bell's Comm. p. 214, 5th ed.; M'Intosh v. Chalmers, Oct. 17, 1883, ante, p. 7, and 11 R. 8.

At advising—