Scottish Court of Session Decisions

James Marwick, ironmonger and general merchant in Kirkwall, died on the 28th March 1873 leaving a widow and family. His business was a considerable one, but he left no means to enable his widow to carry it on. In these circumstances Mr Heddle, solicitor in Kirkwall, who had acted as Mr Marwick's law agent, came forward and assisted his widow to carry on the business for behoof of herself and her children. This she did until July 1878 by means of managers. During this period Mr Heddle paid the accounts for goods furnished for the business and received all the drawings with small exceptions.

In February 1877 Mr William Hourston entered the employment of Mrs Marwick as manager of the business with a salary of £80. In July 1878 he was assumed by Mrs Marwick as a partner in the business. At this date, there was due to Mr Heddle a large balance upon his transactions with Mrs Marwick.

Mr Heddle died on 23rd September 1884, and thereafter a claim was made by Mrs Heddle, as executrix of her husband, against the firm of Marwick & Hourston for the amount of this balance.

On the 16th of August 1886 the estates of the firm of Marwick & Hourston, and the individual partners thereof, were sequestrated, and Thomas M'Laren, S.S.C., Edinburgh, was appointed trustee in the sequestration. Mrs Heddle, as executrix of her husband, claimed to rank in the sequestration for the following sums—(1) The sum of £4402, 13s. 7d., due to Mr Heddle for advances made to the foresaid business between April 16th 1873 and July 17th 1878, the date at which the firm of Marwick & Hourston was formed; (2) the sum of £2240, 0s. 1d., being the interest thereon to the date of the sequestration; (3) the sum of £207, 5s. 9 1 2., due to Mr Heddle and his executrix on account-current between them and the firm of Marwick & Hourston commencing on December 17th 1878 and closing on May 15th 1886; (4) the sum of £6, 19s. 2d., being interest thereon to the date of the sequestration.

The trustee on 26th January 1887 pronounced the following deliverance—“Finds (1) that, to the extent of £214, 5s. thereof, the claimant is entitled to be ranked as a creditor on the estates of the bankrupt firm of Marwick & Hourston, and to that extent admits the claim accordingly; and (2) that, to the extent of £6642, 13s. 8d. thereof the claimant is entitled to be ranked as a creditor on the individual estate of Mrs Marwick, a partner of that firm, subject, however, as to this second finding, to the condition that the cash accounts are properly vouched, and that the business accounts will be taxed by the auditor, as between agent and client, quam primum. Quoad ultra the trustee rejects the claim.”

Mrs Heddle appealed against this deliverance of the trustee to the Court of Session.

The appellant pleaded, inter alia—“The bankrupts having taken over the assets and liabilities of the business which had been carried on by Mrs Marwick, including the debt due to Mr Heddle, the appellant is entitled to be ranked on their estates for the amount of the said debt, with interest, in terms of her claim.

The respondents pleaded, inter alia— “(3) The firm of Marwick & Hourston having incurred no liability for the debt in question, and it not being a debt incurred by the said firm in the course of its business, the judgment appealed against is well founded, and ought to be sustained, with expenses.”

A proof was allowed, the import of which appears in the opinions of the Judges infra.

The Lord Ordinary ( Trayner) on 5th November 1887 pronounced the following interlocutor:— “Recals the deliverance by the respondent appealed against: Directs the respondent to rank the appellant as a creditor on the sequestrated estates of Marwick & Hourston for the debt claimed, when that debt has been constituted, or otherwise properly vouched: Finds the appellant entitled to one-half of the expenses of process, as the same may taxed down to the date of closing the record: Remits the account of such expenses to the Auditor to tax and report; quoad ultra finds no expenses due, and decerns.

“ Opinion.—The appellant claims to be ranked as a creditor on the sequestrated estates of Marwick & Hourston (on which the respondent is trustee) for the sums of £214, 5s. and £6642, 13s. 8d. respectively. The respondent has admitted the appellant's claim to rank for the first of these sums, but as regards the second he has refused the appellant's claim to rank on the estates of the firm, but has admitted the claim to rank on the estates of Mrs Marwick, an individual partner thereof, subject to the condition ‘that the cash accounts are properly vouched, and that the business accounts will be taxed by the auditor.’

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Against the latter part of this deliverance the present appeal is brought, the appellant contending that she is entitled to be ranked on the firm's estate (and not merely on Mrs Marwick's) for the full amount of the debt claimed.

“From the proof which has been led before me it appears that prior to 28th March 1873 the late James Marwick (who died of that date) carried on business as an ironmonger and general merchant in Kirkwall; that from that date till July 1878 the business was continued by Mrs Marwick (who was her husband's executrix) for behoof of herself and her family; that in February 1877 Mr Hourston entered the employment of Mrs Marwick as manager of said business at a salary of £80 per annum; and that in July 1878 he became a partner in the business along with Mrs Marwick. No contract of copartnery was ever executed between Mrs Marwick and Mr Hourston, but it is stated that the latter was to get a third of the profits of the business. It is not clear, on the evidence, whether a proper balance-sheet showing the condition of the business was prepared at the time when Mr Hourston joined the business as a partner, but from his acquaintance with the business as manager Mr Hourston had at least some knowledge of how the affairs of the business stood. When the partnership of Marwick and Hourston was formed that firm continued the same business which had formerly been carried on by Mr Marwick and continued by his widow. The whole stock and assets of the old firm were handed over to and traded with and used by the new firm as the stock and assets of the latter. No new set of business books were opened; the old ones were continued. The only change which took place was, that a bank account was opened in the name of the new firm—the bank account for the business carried on by Mrs Marwick for some time prior to July 1878 having been kept in name of the late Mr Heddle, who was in effect the cashier and financial manager for Mrs Marwick. Further, the whole debts due by the old firm (except the debt due to the late Mr Heddle) were paid by the new firm of Marwick & Hourston from the proceeds of their business, and the whole debts due to the old firm were collected and discharged by the new firm.

“The debt claimed by the appellant (so far as a claim of debt may be established by her) was incurred to the late Mr Heddle in connection with and for behoof of the old firm. For several years he acted not only as the law agent of Mrs Marwick, but also as financial manager and cashier of the business she was carrying on. I think there is no doubt that Mr Heddle made advances on behalf of Mrs Marwick's business, without which that business could not have been carried on.

In this state of the facts I do not think the law is doubtful. It appears to me that the present case is not distinguishable in any essential particular from the cases of Miller, 23 D. 359, and M'Keand, 23 D. 846. In the latter case it was laid down by the Lord Justice-Clerk (Inglis) ‘that when parties take up a going business in that way, and take the stock, they must also take the liabilities,’ and that in effect was the judgment pronounced.

The respondent sought to distinguish between this and the cited cases in three respects—(I) That Hourston paid in capital to the new firm; (2) that he did not know at the date when he became a partner that any debt was due by the old firm to Mr Heddle; and (3) that whenever he became aware of the present claim he at once repudiated liability thereof. Each of these points deserves consideration.

1. Capital—In his examination in the sequestration Mr Hourston stated that under his contract of copartnery he was to subscribe one-third of the capital. He certainly never did that. In his evidence in this case he says he paid into the capital of the business three sums, viz., on 22nd February 1877, £46; on 18th February 1878, £20; and on 2nd October 1882, £113. The first and second of these sums, it will be observed, were paid before the partnership commenced. Mr Hourston explains that these sums were due to him by Mrs Marwick, and that he allowed them to lie in the business as part of his capital. Assuming that statement to be true, it would only show that Hourston had paid £66 towards purchase of one-third of the business, its stock and assets, an altogether inadequate price. The third sum (£113) is said to have been paid in on 2nd October 1882. I am not satisfied that that sum was ever paid. There is no voucher for it, except an entry in the firm's books in the handwriting of Mr Hourston. The entry is written on an erasure, of which Mr Hourston can give no explanation; and the entry is not posted in the ledger. In my opinion it is not proved that Mr Hourston paid anything whatever towards the capital of the new firm. I have already stated what I think of the alleged payment of £113, and with regard to the ether two small payments I think they were at the best debts by Mrs Marwick to Mr Hourston, which may or may not have been imputed to capital some time after the partnership was formed. I incline to the view that the idea of imputing them towards payment of capital is quite a recent idea. But even taking them as payments towards capital, they are so trifling as to make no real difference between the present case and the cases I have referred to.

“2. Ignorance of the debt.—It may be the fact that Mr Hourston did not know the amount of the debt due to Mr Heddle by the old firm, or that there was any debt due to him at all; but if Mr Hourston became a partner of the new firm under such circumstances as imposed a liability on it for the debts of the old firm, I fear his ignorance affords him no exemption from liability. He should have made sure of the extent of his liability before he became a partner. He knew quite enough, however, to put him on his inquiry, for he knew that while he was manager (from February 1877 to July 1878) Mr Heddle was financing the business, receiving all its drawings and paying all its accounts. I am bound to add that I am not satisfied that Mr Hourston was as ignorant of the debt due to Mr Heddle as he now represents himself to have been.

3. Repudiation of the claim.—On this subject there is some conflicting evidence. It is said on the one hand that when the account now claimed for was rendered, Mr Hourston, along with Mrs Marwick and her son, did not dispute liability thereof, but on the contrary agreed that the account should be settled by the new firm continuing to supply goods to the representatives of Mr Heddle to the extent of about £200 per annum until the account was settled.

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This agreement is denied by Mr Hourston, Mrs Marwick and her son, who say they never heard of such proposal. If there was no evidence in the case on this branch of it, except the parole testimony, I should be placed in considerable difficulty, for not one of the witnesses on one side or the other (except the accountants, Garioch, Magnus Marwick, & Hewison) impressed me as being worthy of much confidence. There was, on the part of them all (except those I have specially named) such a want of recollection as to matters which they could not reasonably be supposed to have forgotten, and such pretended ignorance regarding things which they should have known according to all reasonable probability, that I formed the impression above stated. There is, however, a piece of real evidence which I think conclusive on this subject. In May 1886, after the account now in question had been rendered, Mr Hourston, as representing his firm, consulted Mr Thompson, solicitor, Kirkwall, with regard to the condition of his firm's affairs. What it was that immediately led to Mr Hourston consulting Mr Thomson is not of much moment; the result of the consultation is of more importance. It resulted in Marwick & Hourston executing a trust-deed in favour of Mr Thomson for behoof of their creditors. Mr Thomson intimated that this had been done by a circular issued by him to the creditors of Marwick & Hourston, of which No. 69 of process is a copy. The circular, which had an ‘approximate state of affairs’ appended to it, stated that ‘the annexed state of affairs shows the assets and liabilities of the firm, and brings out the former as showing 10s. 4d. in the £;’ that the firm solicited an ‘arrangement on the basis of the state of affairs,’ and added, ‘if this arrangement, or a settlement of say 10s. 6d. in the £, be carried through, the firm will be enabled to continue its extensive business with benefit to all.’ Turning to the state of affairs, I find that the debt now claimed by Mrs Heddle is entered among the liabilities of the firm. It is suggested now that that debt was entered in the state of affairs not as a debt which the firm was bound to pay, but merely as an intimation to the other creditors that such a debt was claimed. I regard that suggestion as quite without foundation; it is distinctly negatived by the state of affairs. For it will be observed that it is by including the debt in question that the estate is shown to yield only 10s. 4d. per £, and it is on the representation that that debt is the debt of the firm that a settlement is ‘solicited’ on a composition of 10s. 6d. per £. So far therefore from the debt in question being inserted in the state of affairs as an intimation merely that it was claimed (as distinguished from its being an admitted debt), the other creditors are solicited to make an arrangement on the footing that that debt has to be provided for by the firm, just as and no less than its other obligations. Indeed, on any other view the circular and state of affairs were absurd. Exclude the debt in question, and the firm was solvent, its liabilities only amounting to £3496, 14s. 10d., and its assets to £4173. In such circumstances a trust-deed was unnecessary, and certainly in such circumstances the other creditors were not likely to yield to the solicitation for a settlement on a composition of 10s. 6d. per £.

“It is further said by Mr Thomson, the local law agent of the firm (who is the author of the suggestion I have been dealing with), that neither Mr Hourston nor Mrs Marwick ever saw or authorised the circular and state of affairs, and Mr Hourston and Mrs Marwick say the same thing. I cannot accept these statements as correct; they are contradicted by the contemporaneous entry in Mr Thomson's account, and Mr Thomson rather departs from his statement when pressed on examination.

“ I come to the conclusion on this part of the case that the firm of Marwick & Hourston distinctly adopted the debt in question, and recognised their liability for payment thereof.

“ The appellant has thus in my opinion failed in each and all of these three particulars to distinguish this case from the others above cited.

“I was referred to the case of Nelmes, 10 R. 974, in which no doubt an opinion was expressed opposed to some of the views expressed in M'Keand's case. But that case was decided upon grounds which leave the authority of M'Keand's case unaffected. I am of opinion that the firm of Marwick & Hourston are liable for the debt in question, not only because being a debt of the old firm they took it over as an obligation when they took over the old firm's business and assets, but also because they distinctly adopted it as their debt, and represented to their other creditors that it was so.

“Although I have arrived at the conclusion that the debt due to the late Mr Heddle is a debt against the firm of Marwick & Hourston, yet I am not in a position to order the respondent (as prayed for in the appeal) to rank the appellant on the firm's estate as a creditor to the extent claimed. The respondent has, I think, very prudently only admitted the ranking on the estate, even of Mrs Marwick, subject to the claim being properly vouched. That has still to be done.

“It appears from the deliverance appealed against that the respondent had called on the appellant to produce evidence of the claim now made being a debt due by the firm, and that in answer to that call certain documents were produced. I cannot say that these productions were such that the respondent should at once in respect of them have admitted the claim; and therefore, although he has been unsuccessful on the question principally argued before me, I cannot hold him entirely accountable for the present litigation. I therefore find him liable to the appellant in one-half of the expenses of this appeal down to the date of proof being allowed, and I mark my dissatisfaction with the evidence adduced on both sides by finding no expenses due to either party since that date.”

The respondent reclaimed, and the Court remitted to Mr Molleson, C.A., to examine the accounts in dispute and the vouchers, and to report, and superseded consideration of the reclaiming-note. In obedience to this remit Mr Molleson reported that a settlement of the amount due to Mr Heddle had been arrived at, and that the balance of principal and interest as mutually agreed on was £3820, 3s. 9d.

The reclaimer argued—This claim was not good against the firm. It was not an ordinary trade debt. It was not disclosed, though there

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was a special obligation on Heddle to disclose it if he meant to claim payment from the new firm. The incoming partner was not aware of its existence. These facts distinguished this from the cases on which the Lord Ordinary had based his judgment— M'Keand v. Laird, March 30, 1861, 23 D. 846; Miller v. Thorburn, January 22, 1861, 23 D. 359. A partner was not liable for debts incurred by a firm before he entered into partnership unless he agreed to be so, though such liability could be inferred from facts and circumstances;— Nelms v. Montgomery, June 15, 1883, 10 R. 974; Bell's Prin., sec. 371; Lindley, i. 389-392; Rothes v. Bank of Australia, 1 Priv. Council App. 27. There were no such facts and circumstances here. The way in which Heddle treated this debt showed that he looked upon it as a claim against Mrs Marwick alone.

The appellant argued—The present case was very similar to Miller v. Thorburn, supra cit. It was not material that the incoming party did not know of a particular debt, for where a new firm took over the whole assets of a business, it followed that they took over its liabilities also, otherwise the creditors of the old firm would be deprived of all the stock, on the faith of which they allowed their debts to be incurred. There was a material distinction between the English and Scotch law on this matter. In English law the question was whether the new partner had become responsible for the debts of the old firm. In Scotch law whether a person, by creating a new persona in the shape of a new copartnery, could prevent his creditors having any claim against the assets of the old firm until all the creditors of the new persona were paid. The case of Rothes raised the question very sharply as to the circumstances from which the liability of the new firm would be inferred. It was a pregnant fact if the new firm had paid a sum to account of a debt due by the old firm. If the new firm paid some of the old firm's debts, there would be a presumption that it had undertaken liability for the debts of the old firm as a whole.

At advising—