Scottish Court of Session Decisions

The Act 1696, c. 5, “declares all and whatsumever voluntar dispositions, assignations, or other deeds, which shall be found to be made or granted directly or indirectly be the foresaid dyvour or bankrupt, either at or after his becoming bankrupt, or in the space of sixty days of befor in favors of any of his creditors, either for their satisfaction or further security in preference to other creditors, to be void and null.”

On 6th May 1887 George Smith & Company, iron founders, Sun Foundry, Kennedy Street, Glasgow, and David Prentice Menzies, and George Whitehall, partners of the firm, granted the following assignation—“In consideration of the sum of £330 advanced by Hugh Farries Smyth, 4 Main Street, Anderston, and a bill dated 31st March 1887 for £57, 15s. granted by us, We do hereby assign, convey, and make over to the said Hugh Farries Smyth, and his heirs, executors, and assignees whomsoever, the following book debts due and owing to us, and to be held and collected by him in security of the said advance and bill, videlicet.”

On 20th and 23rd May 1887 the firm made further assignations of their book debts to Smyth in security of advances by him amounting respectively to £300 and £50, and any deficit that might arise on former assignations.

Upon 25th May 1887 the estates of the firm were sequestrated. At a meeting of creditors held on the 11th day of July 1887 for the election of trustee in the sequestration, the creditors present or represented at said meetingunanimously resolved that the estate ought to be wound up under a deed of arrangement, and that an application should be presented to the Sheriff to sist procedure in the sequestration for the period of three weeks, and a trustee accordingly was not elected.

The Sheriff granted the application, and a deed of arrangement was entered into between George Smith & Company, Gavin Bell Millar, and the creditors of the firm, whereby Millar purchased the whole estate, property, and assets constituting the sequestrated estate, including the goodwill of the business, and a right to use the firm's name, for the payment of £3500 for a discharge of the heritable debts due to the firm, and £3000 for division among the unsecured creditors.

In May 1888 George Smith & Company and Gavin Bell Millar brought an action in the Sheriff Court of Lanarkshire at Glasgow against Hugh Farries Smyth and his assignee David Prentice Menzies, to have the defenders ordained to grant to the pursuers a valid assignation or translation of the book-debts and others contained in these assignations in so far as the debts were still due and unpaid, and also to ordain them to produce an account of their intromissions with the said book debts. The defender Smyth admitted his liability to account for the book debts, and he proposed to credit himself with the sum of £387, 15s. The pursuer denied the defender's right to take credit for the sum of £57, 15s. He averred—“The bill for £57, 15s. represented a prior debt due by the defender Menzies as an individual to the defender Smyth. The granting of said bill by the firm of George Smith & Company was a preference in favour of the defender Smyth, and the granting of an assignation in security of said bill was a further preference in favour of the defender Smyth. The estates of George Smith & Company were sequestrated within sixty days after the date of said bill and assignations, and they were insolvent at the dates of said documents.”

The pursuers pleaded—“(1) The pursuers being in right of the assets of the late firm of George Smith & Company, the defenders are bound to account to them for their intromissions with the debts assigned to them as aforesaid. (2) The pursuers having tendered and being prepared to consign the balance due to the defenders, they are entitled to have the said book debts, so far as still unpaid, assigned to them.”

The defenders pleaded—“(2) The defender Smyth, being assignee for value of the accounts in question, was legally entitled to assign the same to the other defender without challenge on the part of the pursuers. (3) The pursuers having declined to pay the balance of the defender Smyth's claims, the latter was in no way bound to transfer the assigned accounts to the pursuers. (4) The defender having always been ready and willing to account for the sums received under the assignations in question, the prayer of the petition craving for an accounting should not be granted.”

Upon 20th July 1888 the Sheriff-Substitute ( Lees) found that the pursuers had no title to sue.

“ Note.—Only one point is now left in issue. The pursuers have acquiesced in the charges for commission which are made by the defender Smyth, and having regard to the other deliverances in the case, the only question on the merits that requires to be disposed of is the challenge by the pursuers of the bill for £57, 15s. Assuming that that bill constituted or evidenced a debt by the company, I cannot regard the three assignations that were granted as other than in further security of it and of the advances which were made at the time in cash. So far as regards these advances the assignations of the book-debts of the firm are good. But as regards the bill they are, I think, open to challenge. It is plain that they were not a payment of the debt contained in the bill. They bear to be only in security of it, and as the debts included in each assignation largely exceeded the sums for which they were assigned it is plain that these assignations were matters which are struck at by the Act of 1696.

But, then, have the pursuers a title which authorises them to found a challenge on that Act? The statute did not restrict the remedy it granted to prior creditors, but an unfortunate course of decisions so consistently interpreted it as having that implication that the matter must be accepted as beyond question. Now, there is no proof that the pursuers, or either of them, are creditors prior to Mr Smyth. They may be, but it is not shown that they are. The 11th section of the Bankruptcy Act of 1856 gives a trustee in bankruptcy such right of challenge. No trustee, however, was appointed here, because the bankrupts' estates were wound up under deed of arrangement. The section which authorises such settlement provides ‘that the sequestration shall

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receive full effect in so far as may be necessary for the purpose of preventing challenge or setting aside preferences over the estate’ (section 38). The pursuers contend that the effect of this proviso is to authorise challenges to be made of preferences, although not by the trustee. Accepting that as a fair interpretation of the proviso in question, does that clause confer on the pursuers, or either of them, the right of challenge? As regards the bankrupts themselves, it is required as a condition of such title to challenge that they shall have been re-invested in their estates, that they shall have obtained a special assignation of such right to challenge from the creditors, and that notice shall have been given to the creditor whose preference is to be challenged so that he may have the opportunity of stating his views in regard to the propriety of the resolution of the creditors to authorise such challenge. It seems to me that the deed of arrangement founded on by the pursuers confers no such right upon the bankrupts. Mr Goudy remarks (p. 385) that the bankrupt must stipulate for an express assignation of the right of challenge, and not make a mere vague reservation of it. Now, I fail to find in the deed of arrangement anything approaching to an express assignation of the right of challenge. And it is not alleged that any notice was given to Mr Smyth. Indeed, on the assumption that the deed does contain an assignation of authority to challenge, it leaves it quite uncertain whether that right is with the bankrupt firm or Mr Millar. It seems to me, however, that the deed contains no such assignation, but simply transfers the estate as it then stood.

But it is urged that Mr Millar by his purchase of the estate took the position and received the rights which the trustee would have got. But if the trustee had been appointed and thereafter relieved of his office, and the bankrupts been reinvested, as has been the case here, he would have lost his title to challenge without having transferred it to the bankrupts. Therefore even on this line of argument Mr Millar seems to me to have no title to sue. And if the bankruptcy estate had been bought by various parties in portions, difficulty might and probably would have arisen as to where such right to sue lay. I am disposed therefore to hold that the mere purchase of the estate, with the goodwill of the bankrupt's business and the right to use their name, does not in itself suffice to constitute a right to challenge preferences in favour of such purchaser, and that without special assignation of such right he has no title to challenge preferences, and that such assignation or its equivalent is awanting here. As the point, however, is one of some delicacy as well as novelty, I am willing that the pursuers should bring this judgment under review, if so advised.”

The pursuers appealed, and argued—The real question here was, whether when in a sequestration a deed of arrangement had been entered into, and the purchaser of the bankrupt estate wished to reduce an illegal preference, it was necessary that the power of challenge should be specially conveyed to him in the deed? It was admitted that under a composition contract it was necessary that a special assignation should be granted, and notice given to the creditor that such a challenge was to be brought, but that was not necessary under a deed of arrangement. The clause of retrocession in the deed was purely for conveyancing purposes; to enable the bankrupt firm to give Millar a feudal title to the heritable subjects, so that that did not affect its real charucter. The Bankruptcy Statute 1856, section 38, which provides for a deed of arrangement, enacts further—“Provided always, that the sequestration shall receive full effect in so far as may be necessary for the purpose of preventing, challenging, or setting aside preferences over the estate.” It must therefore be taken that the right of the creditors to reduce illegal preferences had been assigned to the pursuer Millar, although there was no special assignation. The three assignations in May had been granted within sixty days of bankruptcy, and therefore constituted an illegal preference so far as related to the bill of £57, 15s., because that was a prior debt due by Menzies as an individual. If Millar had been a trustee in bankruptcy he would have been able to reduce this preference without any assignation, and although the sequestration had not been carried through to the extent of appointing a trustee, Millar had taken his place as representing the creditors— Douglas, Mitchell, & Company v. Hunter, Newall, & Company, July 14, 1859, 21 D. 1302; Bell's Comm. ii. 458.

The defenders argued—The transaction was not struck at by the Act 1696. Upon the 6th May 1887 the defender Smyth granted a loan to the firm of George Smith & Company of £330. He then handed back the bill for £57, 15s. which was current, and received an assignation to the book-debts for the whole sum of £387, 15s.; there was no distinction between the two sums, they were made one debt under this new arrangement. The creditors had not by implication assigned their right to challenge preferences to the pursuer Millar as the purchaser of the bankrupt estate of George Smith & Son. All that was assigned to the pursuer were the creditors' rights in the bankrupt estate, but the power to challenge preferences was no part of the bankrupt's estate; it was a special and peculiar right in the creditors and the trustee in bankruptcy as acting for the creditors. If it were intended that this right was to be transferred to a person other than a trustee for the creditors, who endeavoured to get as much out of the estate as possible for himself, that intention must be shown by a special assignation. The 38th section had no bearing here, as it was intended to meet the case where the creditors desired to keep up the sequestration for the purpose of challenging preferences.