Scottish Court of Session Decisions

The estates of Charles Stewart & Company, who carried on business as wholesale boot manufacturers at Gorgie Road, Edinburgh, and of Charles Stewart, the sole partner, were sequestrated on the bankrupts' own petition on 10th September 1883.

H. M. Horsbrugh, C.A., was elected and confirmed trustee.

Stewart, the bankrupt, had been embarrassed in 1881, and had compounded with his principal creditors for a dividend of 6s. 8d. per £. This dividend was paid except to the Royal Bank, his bankers and also his creditors for a large sum, who did not receive their whole dividend.

After this composition the bankrupt's bills were not discounted at the bank, and as he required the cash he drew in his business for payment of wages, &c., he frequently endorsed and handed to his creditors his customers' bills, i.e., acceptances which he had received from the persons whom he supplied with goods, in payment of their debts to him.

The bankrupt had various dealings of this kind with, inter alios, James Ramsay & Company, leather merchants, with whom he had dealings for a considerable period, but of small extent. They knew nothing of the composition arrangement with the large creditors in 1881, and entertained no suspicion of the state of Stewart's affairs till his sequestration took place. When they received his customers' bills they placed them as cash against his account, and if they were duly retired by the customer the bankrupt heard no more of them. If they were not retired they required payment from him.

Within 60 days of 10th September, the date of the sequestration, Ramsay & Company received in this way from the bankrupt, and put to his credit in their account with him, three bills for £15, 4s. 7d., £8, 10s. 3d., and £24, 3s. 2d., drawn by the bankrupt and accepted respectively by J. M. Balfour, M. A. Aitken, and C. & J. Stewart, all customers of the bankrupt. These bills were payable in December 1883 and January 1884.

At the date of sequestration the bankrupt was indebted to Ramsay & Company to the extent of £37, 10s., on an acceptance by him to them, and

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£83, 2s. 5d. on open account. In their claim to vote in the sequestration, Ramsay & Company valued and deducted, inter alia, the three customers' bills above mentioned, on the ground that other parties were liable on them as well as the bankrupt.

The trustee admitted Ramsay & Co. to a ranking for the amount of their debt as constituted by the bankrupt's acceptance and by the open account, and called upon them to return to him the three bills. He maintained that the endorsing and delivery of these bills to them was an assignation to a creditor of part of the bankrupt's funds within 60 days of sequestration, and was therefore reducible under the Act 1696, c. 5. He raised this action for reduction of the indorsement and transference of the three bills, and for delivery of the bills themselves. Alternatively, and failing delivery, he claimed payment of £47, 18s. as the amount due under the bills. The defenders averred that the transaction was one within the ordinary course of the bankrupt's trade, and pleaded that they were therefore entitled to absolvitor.

Two of the bills (Balfour's for £15, 4s. 7d. and Aitken's for £8, 10s. 3d.) had been paid by the acceptors, and the bills had therefore been delivered up to them. £3 had been paid to account of the other bill (C. & J. Stewart's), and the bill remained in possession of the defenders.

After a proof, in which these facts appeared, the Lord Ordinary ( Fraser) pronounced this interlocutor—“In respect that the two bills for £15, 4s. 7d. and £8, 10s. 3d. referred to in the summons have been paid, and the bills themselves delivered up to the acceptors, decerns against the defenders for payment of the said two sums, amounting to £23, 14s. 10d.; and in respect that £3 have been paid to account of the bill for £24, 3s. 2d. referred to in the summons, decerns against the defenders for the said sum of £3: reduces, decerns, and declares as regards the endorsement and transference of the said last bill as concluded for: Finds the pursuer, as trustee upon the sequestrated estate of Charles Stewart & Co., entitled to the possession of the said last-mentioned bill, with a view to the recovery of the balance still due thereon, and decerns: Finds the defenders liable in expenses,” &c.

“ Opinion.—The estates of Charles Stewart, wholesale boot manufacturer at Gorgie, near Edinburgh, were sequestrated on 10th September 1883, and the trustee on his sequestrated estate now seeks to set aside, under the Act 1696, cap. 5, certain bill transactions which took place between the defenders and the bankrupt. It is not disputed that the defenders are creditors of the bankrupt.

The bankrupt sold boots manufactured by machinery, to country boot and shoe makers, he obtaining the leather which he needed from leather merchants, chiefly in Edinburgh. His business was very extensive, the turn-over being about £20,000 a-year, and the premises at Gorgie, where he conducted his manufacture, cost him £10,000 or £11,000. In the year 1881 his affairs became embarrassed, and his creditors agreed to accept a composition of 6s. 8d. in the pound. This composition was paid to all the creditors except the Royal Bank, whose claim amounted to £15,000, under deduction of the value of heritable property belonging to the bankrupt which they held in security. The fact that the bankrupt had in the year 1881 to compound with his creditors necessarily affected his credit, and thereafter he found it difficult, and latterly impossible, to obtain from the bank the same facilities in discounting his bills which he previously had. Nevertheless he continued to carry on business at Gorgie from 1881 down to the date of his sequestration. When he got leather from the merchants with whom he dealt, he paid for it in cash when he was in funds, and when he had none, his mode of operation was to endorse over to them the bills which he had got from his country customers. These bills were taken by his creditors, and credited to him in their account with him; but they were always taken upon the condition that if the acceptors failed to meet them, recourse would be had upon him. The defenders, James Ramsay & Co., got eight of these bills in the course of their dealing with the bankrupt. Five of these were anterior to the sixty days before the sequestration, and in regard to them no question is at present raised. The other three were granted within the sixty days, and were payable at dates after the sequestration. Two of them were discounted by the defenders after the sequestration, the third being held by them undiscounted. The trustee maintains that the defenders are not entitled to claim the amounts in these three bills, because Stewart was notour bankrupt at the time that they were given to the defenders, and they do not fall within any of the recognised exceptions to the annulling effect of the Act 1696. The amount of the three bills is only £47, 18s.; but the importance of the question for this bankrupt estate consists in this, that there are a number of other creditors who have obtained bills within the sixty days for very much larger amounts, and if the trustee is successful in the present action he necessarily will be successful also against these other creditors.

The reason why the bankrupt, instead of paying cash to the people who furnished him with leather, handed over endorsed bills to them, is simply this, that the banks would not discount the bills with his name merely. It was the practice of the merchants who got these bills from the bankrupt sometimes to discount them themselves, and sometimes to keep them till they arrived at maturity. The two first bills obtained by the defenders, of which delivery is sought in the summons, have been paid by the acceptors and are now in their possession; but of the third bill for £24, 3s. 2d., only £3 has been paid to account, and the bill has been produced in this process.

The first two bills were handed to the defenders upon the 8th of August 1883, at which time there was a debt for former furnishings, due by the bankrupt to them of £65, 6s. 6d. These two bills were put to the credit of the bankrupt's account. On the same day he got additional goods to the amount of £7, 5s. 8d.; and thereafter, till the sequestration, further goods were furnished to the amount of £26, 6s. 7d. The third bill for £24, 3s. 2d. was given to the defenders on the 6th September—four days before the sequestration—and was entered to the credit of the bankrupt as against preceding furnishings—like the two other bills.

None of the bills was given as payment for goods received at the delivery of the bills—they were simply entered in the account to meet past

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due furnishings. Further, this is not the case of a cheque drawn upon a bank, endorsed by an insolvent, which can immediately be turned into money, and which may therefore be held equivalent to cash. Nor is it the case of a bill the term of payment of which has come, and which (because payment may be immediately demanded) might also be considered as cash. We have here only bills, the term of payment of which has not come, in regard to which this is the definition given by the Lord Justice-Clerk (Hope) in White v. Briggs, 8th June 1843, 5 D. 1174,—‘A bill payable six months afterwards is a security for, and a right to get, money at a distant period. It is not a remittance of cash in any sense of the term. Hence it is a transference or assignation granted in favour of a creditor, in satisfaction or further security, in preference to other creditors. That point appears to me quite clear.’ That an indorsation of a bill within the sixty days is reducible as under the Act of Parliament has been decided in many cases (see 2 Bell Com. 211; Campbell v. Graham, M. 1120; Campbell v. Macgibbon, M. 1139; Robertson v. Ogilvie, M. App. v. Bill, No. 6; White v. Briggs, 5 D. 1148; Manson v. Angus, M. App. v. Bankrupt, No. 7; affd. 2 Pat. 336; Nicol v. M'Intyre, July 13, 1882, 9 Ret. 197). This law cannot be disputed; but it is said that the present case comes within one of the recognised exceptions, viz., that the bills were delivered and taken in the ordinary course of trade; and if the Lord Ordinary could see his way to sustain this plea, he would very willingly do so, because the whole affair was fairly and honestly gone about. The bankrupt went on after his composition arrangement in 1881, struggling with scanty means and impaired credit, hoping to ‘carry through,’ as he expressed it in evidence, and not wishing to give a preference to any one creditor over another. As the bank would not discount his paper, he did the next best thing that his necessities impelled him to, by giving the bills to his creditors, allowing them to discount them if they pleased. It is unnecessary to determine whether Stewart was all along insolvent from 1881 onwards, seeing that the deeds here challenged were granted within the sixty days prior to the sequestration. Actions were very frequently brought during that period against him for small sums, and decrees were pronounced against him, but he contrived to keep off any ultimate diligence till September 1883. The defenders must have known of his labouring circumstances, although it may be quite true that they had no anticipation that sequestration of his estates was imminent. Granting all this, the Lord Ordinary does not see how to bring this within the exception of a dealing in the usual course of trade, of which the last and perhaps the most striking illustration is found in the case of London Brothers v. Read & Lauder's Trustee, 7th December 1877, 5 Ret. 293. It is not in accordance with the usual course of trade for a debtor to hand over bills payable to him to his creditor, leaving the latter to recover payment from the acceptor directly or through a bank; and not being so, it is simply an assignation struck at by the Act 1696. The bills were not given and taken as cash in return for goods then bought. It was simply a security (of which something might be made) for a past due-debt.”

The defenders reclaimed, and argued—The indorsations of these bills ought not to be reduced, because they fell within the recognised exceptions to reduction under the Act 1696, cap. 5. The endorsing and delivering of these bills by the bankrupt, and their acceptance by the defenders, was an ordinary act of trade or business; no undue preference was intended to be given thereby, and the case was free from fraud. The mode in which the bankrupts had long carried on their business was by endorsing their customers' bills and using them as a substitute for cash.

Authorities—In addition to these cited by the Lord Ordinary— Watson v. Young, March 1, 1826, 4 Sh. 507; Stewart (Stein's Trustee) v. Forbes, March 1, 1791, M. 1142; Pattison (Blincow's Trustee) v. Allan, December 3, 1828, 7 Sh. 124, and in H. of L. 7 Wil. and Sh. p. 26; Mackintosh v. Brierly, February 19, 1846, 5 D. 1100, and 5 Bell's App. 1; Anderson's Trustees v. Fleming, March 17, 1871, 9 Macph. 718, Bell's Com. (5th ed.), ii., 218.

Replied for the trustee—The bankrupts had long been in difficulties, as shewn by their mode of carrying on business—in fact, from 1881 they had been practically insolvent. The position of the defenders was practically that they were holders of bills; in order to reduce the indorsation of these bills it was not necessary for the trustee to allege fraud, all that he was required to shew was that such a mode of carrying on business was not a custom of trade. It was not sufficient for the holders of these bills, in order to get the benefit of the exceptions to the Act, to shew that the bankrupts had been in the habit of so carrying on their business; they must shew that such a way of doing business was an ordinary custom of trade.

Authorities—Cases in Lord Ordinary's note and Robertson v. Ogilvie, M. voce Bill, App. No. 6; Ramsay v. Kirkwood, June 11, 1829, 7 Sh. 749; Nicol v. M'Intyre, July 13, 1882, 9 R. 1097; Mitchell v. Rodger & Others, June 26, 1834, 12 Sh. 802.

At advising—