Scottish Court of Session Decisions

On 20th October 1879 Webster & Littlejohn, solicitors, Arbroath, on behalf of Mrs Webster, a widow, residing at 1 Kersland Terrace, Hill-head, Glasgow, advanced the sum of £200 to Messrs D. & W. Coutts, traction-engine owners, Arbroath. In security of the advance they took a document from the borrowers bearing that they sold thereby to Mrs Webster a traction-engine, threshing machine, waggon, &c. A relative back-letter was however granted stating that the disposition was truly to be held only till the bill of the same date for £200 with interest should be paid, failing payment of which on demand the machine was to be Mrs Webster's. A bill at one day's date was granted by D. & W. Coutts, William Gordon, Arbroath, signing the bill also as an obligant. Interest on the sum of £200 was regularly paid till Martinmas 1884. In 1880 D. & W. Coutts bought a new engine from John Doe, and paid instalments of the price till they had paid £185 up to December 1884, when Doe, who had raised an action for the balance of the price, obtained decree against them therefor with expenses. In this action Webster & Littlejohn acted for D. & W. Coutts by putting in defences and endeavouring to negotiate a settlement, but they did not appear for him at the proof, and decree went by default. About the beginning of September 1884 D. & W. Coutts had begun to get into difficulties. The fact of their being so was known to Webster & Littlejohn. On 8th November 1884 Messrs Webster & Littlejohn wrote to D. & W. Coutts stating that they would require to get possession of the engine sold to Mrs Webster, and sell it so as to save loss; and they stated in this letter that unless Doe could be arranged with the bankruptcy of D. & W. Coutts would probably supervene. On 1st November D. & W. Coutts sold to a man named Clarke the engine mentioned in the disposition to Mrs Webster, and various other articles, and with the proceeds paid in cash £175 to Webster & Littlejohn, having some weeks before paid them £25, in satisfaction of their client's debt. Webster & Littlejohn had nothing to do with bringing about this transaction with Clarke, but it was admitted in this case that D. & W. Coutts knew themselves to be insolvent and thought Mrs Webster had a preferable claim on them, and considered that they had made Doe a reasonable offer, which had been refused.

On 22d December 1884 decree of cessio was pronounced against D. & W. Coutts by the Sheriff-Substitute of Forfarshire, at the instance of David Souter, a creditor.

David Morgan Graham, auctioneer, Forfar, was appointed trustee on the estate of D. & W. Coutts, and on 30th April 1885 he raised an action in the Sheriff Court of Forfarshire against Mrs Webster, with consent of John Doe, for all right and interest competent to him, for £200.

The ground of action as laid by the pursuer appears from the following articles of his condescendence and from his pleas-in-law:—“(Cond. 6) At the time said articles were so sold the said Webster & Littlejohn acted as the agents of the defender, and also as the agents of the said D. & W. Coutts and William Coutts, and the said Webster & Littlejohn and D. & W. Coutts and William Coutts were all well aware that they, the said D. & W. Coutts and William Coutts, were and had been, from at least 1st September 1884, bankrupt and insolvent. In point of fact they were rendered notour bankrupt in or about the beginning of December 1884, and at all events within 60 days of the date when the said articles were sold as aforesaid, and the proceeds thereof paid to or on behalf of the defender. (Cond 7) The whole of the said articles so sold to the said John Clarke had been, on or about the said 17th November 1884, transferred by the bankrupts to the defender, or taken possession of by or on behalf of the defender, and were sold by her or for her behoof to the said John Clarke; or otherwise, the said articles were, on or about said date, sold to the said John Clarke by the defender, or for her behoof, and for the purpose of paying her said claim of £200, or by the said bankrupts on the instructions or at the instance of the defender or her said agents, and for the purpose of paying her said claim in fraudem and to the prejudice of the bankrupts’ other creditors, the said bankrupts and the defender or her said agents well knowing that said bankrupts were then, as they have been ever since, and still are, bankrupt or insolvent; or otherwise, the said articles were sold to the said John Clarke in the full knowledge by the bankrupts and by the defender or her said agents that the bankrupts were then bankrupt or insolvent, and with the purpose of paying the defender's said claim in fraudem and to the prejudice of the bankrupts’ other creditors; and the said transfer and sale of

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said articles, and the said payment of the proceeds thereof, were carried through fraudulently and in collusion between the said bankrupts and the said Webster & Littlejohn acting for the defender, and with the purpose foresaid.”

He pleaded—“(1) The transaction complained of having been carried through while the said bankrupts were in a state of insolvency, fraudulently on the part of the defender or those for whom she is responsible, and to the prejudice of the said bankrupts’ creditors, is voidable. (2) The said payment of £200 or thereby having been obtained by the defender fraudulently and in collusion with the bankrupts, while the latter were known by her and by themselves to be insolvent, and with intent to defeat and to the prejudice of the just rights of their other creditors, and otherwise, in the circumstances condescended on, the defender is bound to restore the said sum. (3) The said goods having been transferred by the said bankrupts voluntarily while they were in a state of bankruptcy, or at least within sixty days of their notour bankruptcy, in satisfaction of a pre-existing debt, to the prejudice of the bankrupts’ other creditors, the defender is bound to restore the sum sued for, being the price or surrogatum of the said goods.”

The defender pleaded—“(3) The defender through her agents having merely got payment in cash of a debt admittedly due to her, cannot be compelled to repay same to the pursuers or to anyone else. (4) The whole actings and transactions of the defender and her agents in regard to said loan and the repayment thereof having been in bona fide, she is entitled to be assoilzied. (8) The said D. & W. Coutts having paid to the defender's agents in cash a debt which they were justly due to her, the payment cannot be held to be a preference either under the Bankruptcy Acts or at common law, and the pursuers are therefore not entitled to call upon the defender to repay the same.”

The Sheriff-Subsitute allowed a proof before answer. Thereafter he pronounced this interlocutor:—“Finds (1) that on 20th October 1879 D. & W. Coutts borrowed £200 from the defender; (2) that they gave as security an assignation of their rights of property in an ambulatory steam threshing machine and relative implements; (3) that the money so obtained was used in paying a loan, by the help of which they had originally paid for said machine and implements; (4) that on or about 17th November 1884 the surviving partner W. Coutts sold said machine and other articles to John Clarke for the sum of £200, and that on obtaining payment of said £200 in the office of his agents, who were also agents for the defender, he paid to them the sum of £175, being the balance of said £200 then resting owing; (5) that at the date of said payment W. Coutts was insolvent, but finds that the pursuers have failed to prove that said cash payment is null, either in respect of fraud at common law, or of the Act 1696, c. 5; therefore assoilzies the defender from the conclusions of the action: Finds the defender entitled to expenses, &c.

“ Note.—That the transaction sought to be challenged in this action was a cash payment is all but indisputable, but it is equally indisputable that it was a cash payment made by a man who knew himself to be insolvent; that it was made to agents who knew that he was on the verge of bankruptcy, and that it gave the defender (who herself knew nothing about it) a preference over Coutts’ other creditors, and in particular over John Doe, the largest creditor, who appears in process as an auxiliary pursuer.

It is settled law that up to the instant of sequestration a bankrupt can make valid payments in cash (Bell's Coms. ii. 201; Thomas v. Thomson, 3 Macph. 358; Nicol v. M'Intyre, 9 R. 1097. But there is a question left open about the reducibility of fraudulent payments in cash. What sort of payment that may be is left to the imagination. But whatever its features, I am of opinion that they do not appear in the cash payment here challenged. I can detect in it no conscious fraud on the part of anyone, and I cannot conceive of unconscious fraud. I rather incline to believe that W. Coutts did what he did, not with intent to do wrong, but under the conviction that he was doing right. The chief articles that he sold to pay this £200 in cash had really been paid for in part by this very £200. He could not pay the engine in 1878 when he bought it from Doe, the pursuer, so he borrowed £220 from John Hay, a friendly farmer. He repaid Hay in 1879 on the very day when he received this loan from the defender. No doubt John Doe had sold him a second and improved threshing machine at a price of £430, and that only £185 of this price had been paid; that he had no use for two threshing machines, and was unable to pay the second or dispose of the first; that John Doe stood upon his bargain and refused to take back his second machine, even though offered £20 with it, as well as the right to keep the £185 previously paid to him. Coutts certainly had no grateful or friendly feeling to John Doe; but there is no evidence that he sought revenge upon him through fraud, or that he did more for the defender than he believed himself honestly bound to do.

Fraud, therefore, I put aside as unproved, and I find nothing left in the cause except the allegation that the articles which had belonged to Coutts were actually delivered by him to the defender, and were sold by Coutts, not for himself, but as her agent. This allegation has nothing to rest upon except an ingenious theory propounded in argument to the effect that Coutts was possessed by the idea that the assignation, which he had signed actually without delivery, transferred the property in his threshing machine and other moveables specified in the document to the defender, and that the hold this idea had taken of him transformed him into her agent, and deprived him of the free will of a man dealing with property which he believed to be his own. Coutts’ examination in the cessio at Forfar gives some countenance to this theory. But even if it had been proved that Coutts had been under the influence of a legal delusion, that would not bind the defender to the consequences of an error not due to anything done by her or left undone. Moreover, the argument based on this theory is double-edged. If the possession of Coutts was the possession of the defender, then the assignation was complete, and the threshing machine and other articles were not his to sell when he did sell them. If that be so, the pursuers can have no right to recover the price of

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what did not belong to the bankrupt, but became the defender's property without delivery at the date of the assignation. But if, on the other hand, the property remained with him, it will not vitiate a cash payment made by him out of the price realised from that property, that he was ignorant that the law of Scotland did not recognise as against creditors the validity of a mere paper title to undelivered moveables.”

The pursuer appealed to the Sheriff, who on 5th April adhered to his Substitute's interlocutor.

“ Note.—This case seems to me to be attended with considerable difficulty, but I have come to agree with the result at which the Sheriff-Substitute has arrived.

There was at the time the payment in question was made a subsisting debt, which might have been enforced against the debtor. The payment satisfied that debt, and I think it may be considered a legitimate payment so far as the sanctions of the Act 1696 are concerned. There was no substitution of a new obligation for the existing one, nor was the debt further secured. It was paid in cash.

If that be so, the only remaining ground upon which the pursuer can prevail is fraud—that is, he must prove fraudulent concert on the part both of the debtor and of the creditor.

The bankrupt admits that he thought the defender had a preferable claim upon his implements, otherwise he would not have sold them. I read this as meaning that he was willing to do what he could to save the defender from loss. But I do not find any evidence sufficient to establish that the sale, or the use made of the proceeds of the sale, was the result of any collusive or preconcerted arrangement between the bankrupt and the defender. In the absence of such evidence there does not seem to be any ground for cutting down the cash payment in question.”

The pursuer appealed to the Court of Session and argued—This payment to Mrs Webster although made in cash was not bona fide but fraudulent, as in so paying the bankrupt preferred one of his creditors to the others; it was not made in the ordinary course of business, and so was reducible either at common law or under the Statute 1696—Bell's Comms. ii, 201, 226 (7th ed.) Under the circumstances of this case the payment here was equivalent to conveying real estate. In the case of Thomas v. Thomson there was no averment of fraud, while here there was such an averment.— Thomas v. Thomson, Jan. 13, 1865, 3 Macph. 358. The answer to the case of Broad-foot (quoted infra) was that the ground of judgment there was that the payment was made eighty days before bankruptcy. If the circumstances proved were indications of mala fides on the part of the debtor, that amounted to fraud— Boss v. Hutton, June 15, 1830, 8 S. 916; Mitchell v. Rodger, June 26, 1834, 12 S. 802; M'Cowan v. Wright, March 9, 1853, 15 D. 494. The agent who acted for Mrs Webster in this matter was aware that Messrs Coutts were insolvent when they paid this debt to Mrs Webster, and there was fraud in taking the money. The private knowledge of the agent as to Messrs Coutts’ insolvency must be taken to mean that Mrs Webster also knew of their insolvency—Benjamin on Sale, p. 430, et seq.; Barwick v. English Joint-Stock Bank, May 18, 1867, L.R. 2 Ex. 259; Mack v. The Commercial Bank of New Brunswick, Marc 14, 1874, L.R. 5 Privy C. App. 394; Taylor v. Farrie, March 2, 1855, 17 D. 639.

Argued for the respondent—Payments in cash were not esteemed by our law to be fraudulent even within sixty days of bankruptcy, and the principle on which they were allowed to be made by the persons even if insolvent was that they were made for the convenience of business. This transaction was made in the ordinary course of business— Broadfoot (Philip's Trustee) v. Leith Banking Co., Dec. 9, 1808, F.C.; Thomas v. Thomson ( quoted supra). No collusion was shown here— Gibbs v. The British Linen Co., June 23, 1875, 4 R. 630.