Scottish Court of Session Decisions

In September 1888 the affairs of John Gorrie, potato merchant, Perth, became embarrassed, and he endeavoured to arrange a private settlement with his creditors. He failed however to effect this, and upon 15th January 1890 he presented a petition for sequestration to the Sheriff of the county at Perth, and sequestration was awarded on the same day.

Upon 17th November 1888 he wrote the following letter to James Dunbar, writer, Glasgow—“Since I saw you on Wednesday, things are going farther against than I expected. I have been in difficulties for this last two months and have been negotiating with my creditors for a settlement private, and fully expected it till a few days ago, and now I am afraid I will be forced into sequestration. My reason for wanting a lease for my son of his shop was that my business could be carried on in his name. Can you make a lease that will be good in those circumstances, say for five years instead of three, and send it on at once. I will get it signed here. Your attention to this will oblige.”

The lease, which was for five years, was accordingly prepared and executed, and thereunder the son, William James Gorrie, entered upon the occupation of a shop, 23 Princes Street, Perth, where he carried on the trade of a cycle agent. The yearly rent was £7, and William James Gorrie was taken bound to repair and keep up the premises.

George Kyd, auctioneer, Perth, was appointed trustee upon Gorrie's sequestrated estate, and he sold the subjects in Princes Street by public roup for £100. The buyers were not aware then of the existence of the lease. W. J. Gorrie refused to leave the premises upon being served with the usual warning by the burgh officer. The magistrates declined to grant a summary warrant of ejection on the ground that the lease was ex facie regular, and the purchaser refused to pay the price until he got possession, and threatened an action of damages against the trustee.

Kyd brought an action of reduction of the lease against William James Gorrie. He averred—“The said pretended lease under reduction was so granted by the said John Gorrie when he was insolvent in favour of the defender, his son, a conjunct and confident person with the said John Gorrie, gratuitously and without any consideration, in fraud and to the prejudice of the said John Gorrie's creditors. The said lease is thus null and void under the Act 1621, cap. 18, and also at common law. The rent stipulated for under the said pretended lease is considerably below the true annual value of the subjects thereby pretended to be let; and if the said pretended lease was granted in security of a prior debt or obligation, it is reducible under the Act 1696, cap. 5, and the ‘Bankruptcy (Scotland) Act, 1856,’ section 110, or one or other of the said Acts.”

The defender averred—“(2) In November 1887, the said John Gorrie let the said shop to the defender for five years from Martinmas 1887 in consideration of the yearly rent of £7, and of the defender's painting and flooring the said shop at his own expense, and the said John Gorrie at the same time agreed to execute a formal lease in the defender's favour. (3) The defender entered into possession of the said shop about 20th November 1887. Because of its unfinished state, he could only use it for lumber and keeping poultry until February 1888. He then had it painted and floored at his own expense, the cost being £12, 11s. or thereby. The said possession was under the said agreement of lease, and the said expenditure was made by the defender only on the faith of that agreement.”

The pursuer pleaded—“(1) The lease libelled is null and reducible under the Act 1621, cap. 18, in respect that it was a gratuitous alienation granted by the said John Gorrie when insolvent to a person conjunct and confident with him, without true, just,

Page: 835↓

and necessary cause, and to the prejudice of prior creditors represented by the pursuer. (2) Separatim, the said pretended lease is also null and reducible at common law, in respect that it was granted by the said John Gorrie when he was insolvent, fraudulently to defeat and disappoint the rights of his just and lawful creditors. (3) If the defender was a creditor of the said John Gorrie for a prior debt, the said pretended lease is null and reducible under the Act 1696, cap. 5, and 1856, section 110, or one or other of them, in respect that it was a preferable security granted within sixty days of the sequestration of the said John Gorrie.”

The defender pleaded—“(3) The lease in question having been entered into for a true, just, and necessary cause, and in pursuance of a prior obligation to grant the same, it is not liable to challenge.

The Act 1621, cap. 18, provides—“For remeed whereof the said Lords will decreete and decerne all alienations, dispositions, assignations, and translations whatsoever, made by the debtor of any of his lands, teindes, reversions, actions, debtes, or goods whatsoever, to any conjunct or confident person, without true, just, and necessarie causes, and without a just price really paid the same being done after the contracting of lawful debts from true creditors: To have beene from the beginning and to be in all times coming null and of none avail, force, or effect, at the instance of the true and just creditor by way of action, exception, or reply, without further declarator.”

The Act 1696, cap. 5—“Declares all and whatsoever voluntary dispositions, assignations, or other deeds, which shall be found to be made and granted directly or indirectly by the foresaid dyvor or bankrupt, either at or after his becoming bankrupt or in the space of sixty days of before in favours of his creditors either for his satisfaction or further security in preference to other creditors, to be void and null.”

After a proof, the result of which is fully stated in the Lord Ordinary's note, he pronounced this judgment upon 28th January 1890—“Finds that it has not been proved that the lease sought to be reduced has been granted without true, just, or necessary cause, or without a just price really paid: Therefore assoilzies the defender from the conclusions of the summons, and decerns: Finds the defender entitled to expenses, &c.

“ Opinion.—This is an action of reduction brought by the trustee on the sequestrated estate of John Gorrie, coal merchant, Perth, of a lease in favour of his son William Gorrie, the defender. The action is based on the Act 1621, c. 18, and on fraud at common law. There is a subsidiary or alternative plea founded on the Act 1696, c. 5.

For some time before October 1888 the bankrupt was, and knew that he was, insolvent. He had consulted Mr Macleish, writer in Perth, about his affairs, and on 1st November Mr Macleish had sent him a petition for sequestration for his signature. He declined to sign it at that time, but on 14th January 1889 he instructed Mr Macleish to present a petition for sequestration, which was accordingly awarded on that day.

Between these dates, and on 17th November 1888, the bankrupt instructed Mr Dunbar, a writer in Glasgow, to prepare a lease in favour of his son in a letter, the terms of which are certainly calculated to arouse suspicion. He writes—‘I am afraid I will be forced into sequestration. My reason for wanting a lease for my son of his shop was that my business could be carried on in his name. Can you make a lease that will be good in these circumstances, say for five years instead of three, and send it.’

The lease was prepared by Mr Dunbar on these instructions, and the testing clause bears that it was signed on 20th November 1888. The lease is for five years from Martinmas 1887, and the rent is £7. The lease had therefore nearly four years to run at the date of the sequestration. If it be sustained the defender will possess the shop until Martinmas 1893 for £28, which will be payable primarily to the trustee, or if the property be sold, it will be sold under burden of that lease.

There is some conflict of evidence, or rather difference of opinion, about the fair rent of the shop. But I think that the result is that £7 is below a reasonable rent, and that at the date of the lease it might have been fairly expected to let at £10 or £12. If the rent mentioned in the lease had been £10 there would have been nothing to be said on the score of the rent.

It is not unfair to say that £3 or £4 a-year for four years—that is to say, from £12 to £16—represents the loss to the estate occasioned by this lease. The trustee would not have been benefited to that amount, because it appears that the property was burdened beyond its value. This fact no doubt does not destroy the interest of the trustee, but minimises it. At all events, the pursuer's case cannot be put higher than this, that the defender managed to abstract from the estate about £16, and that no more than that can be recovered by this action.

Now, if that be so, it seems at first sight a very unreasonable thing to incur the expense of an action of reduction in the Court of Session for such an inconsiderable sum. The most complete success could not possibly increase the dividend to the creditors. Besides, it was in the power of the trustee to raise an action of removing in the Sheriff Court, and to state his objections to the lease by way of exception in virtue of the 10th section of the Bankruptcy Act 1856, and the 9th section of the Bankruptcy Act 1857.

I can hardly think that I am wrong in conjecturing that this action would not have been brought but for the circumstance that the property has been sold by the trustee, with consent of the heritable creditors, without mention of this lease, and that the purchaser has on that ground refused to pay the price.

There is some obscurity about that matter, but the trustee's ignorance of the

Page: 836↓

lease seems to have arisen from the failure of the bankrupt to enter this lease in his state of affairs, or to allude to it in his examination, or to mention it to the trustee. On the other hand, it does not appear that the trustee directly questioned either the bankrupt or the defender on the subject, although he saw that the defender's name was on the signboard of the shop.

It appears that at the sale of the property Mr Macleish stated publicly that there was no lease, and he depones that he believes the defender must have heard him. The defender's evidence is quite at variance with that of Mr Macleish, but where they differ I have no difficulty in preferring the evidence of Mr Macleish. At the same time I cannot hold it clearly proved that the defender heard the statement made that there was no lease, and without going into details on the point which really does properly bear on this case, there do not seem to me sufficient grounds for blaming the defender for the belief of the trustee that there was no lease.

I have no means of judging of the validity of the purchaser's objection to complete the contract of sale. But in truth this difficulty as to the sale of the property has no real bearing on this case, and is not alluded to on the record. It came out almost incidentally in the course of the proof; and the case must be considered just as if no attempt to sell the property had been made. The attempted sale may, and no doubt does account for this reduction being brought, but cannot affect the judgment to be pronounced.

The pursuer's case, therefore, is left on the bare facts that this lease was granted by the bankrupt to his son, when he was insolvent and on the eve of bankruptcy, for a rent of £7, when £10, or possibly £12, might have been obtained.

If the rent had been adequate, I think the lease would have been unchallengeable, although granted by an insolvent to his son on the eve of bankruptcy. It could not be said to have been granted without a true, just, and necessary cause. But, on the other hand, a lease granted by an insolvent to his son at a grossly inadequate rent would, I apprehend, undoubtedly be subject to reduction. Counsel for the defender contended that a lease cannot be reduced under the Act 1621, c. 18, because it cannot be comprehended under the deeds specified in the Act. As at present advised, I do not concur in that argument; but it is not in my view necessary to decide the point, because whether the statute applied or not, such a deed would in such circumstances be reducible at common law.

In the present case, slight as the advantage may be to the defender, and still smaller the loss to the trust-estate, I should, although not without difficulty, have held the pursuer entitled to succeed in consequence merely of the difference between the rent in the lease and the rent which might have been obtained if the lease could not be supported on any other ground.

But the defender has stated a somewhat special defence, which, although not very satisfactory in itself, nor very satisfactorily proved either, appears to me sufficient in the special circumstances of this case to meet the pursuer's action.

The evidence of the bankrupt and of his son did not impress me favourably, and I place on it a very limited reliance. I do not think it necessary to examine it in detail. But I think that, making all allowances, the following facts may be taken as proved.

The shop occupied by the defender was constructed by the bankrupt in 1887 out of a court or entry which formed part of the bankrupt's property and adjoined his shop. It was made by connecting two side walls already existing, and was therefore erected at a comparatively small cost. It was built for the use of the defender, and with the intention that he should occupy it as tenant. It was let to him verbally, at or about Martinmas 1887, at the rent of £7, which, although a low rent for the shop, was a very fair return for the money expended in making it. All this was done before there is proof of the bankrupt's insolvency. Two sums of £3, 10s. were paid by the defender to his father at Whitsunday and Martinmas 1887 as rent for the shop. It was not fully completed when the defender entered into possession, and he spent somewhere about £10 or £12 in completing it. It does not appear that this was an advance or loan by the defender to the bankrupt, or could have been claimed by the defender as a debt. It has been deponed that the bankrupt agreed verbally to give the defender a lease for five years, but no such lease was executed at that time, and the bankrupt was not under an obligation which could have been enforced to grant the written lease now sought to be reduced. But it may happen that a deed is protected against reduction under the statute, although the bankrupt could not have been compelled to grant it, if it be supported by a fair, onerous, and adequate consideration,—Bell's Comm., 7th ed., ii., 177; and it appears to me that in this case the bankrupt was entitled in granting a lease to his son to take into consideration what had previously occurred, and the expenditure on the property, inconsiderable as it was, to which his son had been put. If the defender had expended £100 on the house, it would surely have been fair to grant a lease to him on easier terms than if there had been no such expenditure. Such a lease could not have been justly called gratuitous. But the propriety of taking into account a previous expenditure cannot depend on its amount.

If, then, the bankrupt was entitled to take the expenditure into account at all, and was entitled to modify the rent in consequence, can it be said that the modification allowed was excessive, or was too great to such an extent as to open the deed to challenge under the Act 1621, c. 18, or as a fraud at common law.

I am unable to hold so. I think that in considering whether a deed is challengeable under the Act or as a fraud the difference between the consideration received by the bankrupt and an adequate consideration must be something considerable, or at

Page: 837↓

all events tangible, and not absolutely insignificant, as in the present case, if the proved expenditure be taken into account—£4, or something like that, would in that case be the amount of the advantage to the defender.

I hold that it is proved that the defender spent £10 or £12 on this house; that the bankrupt was entitled to take that expenditure into account in fixing the rent in the lease; and that when it is taken into account there is no such inadequacy in the rent as makes the lease reducible.

The lease was granted within sixty days of bankruptcy, but that is not in fact of any relevancy in considering the application of the Act 1621, c. 18. But if the expenditure by the defender which is founded on in justification of the lease could be regarded as a prior loan by him to the bankrupt the lease might possibly have been challengeable under the Act 1696, c. 5. But I think that there is no proof that the money spent by the defender was advanced as a loan at all, or raised the relation of debtor and creditor between the defender and the bankrupt, and on that account I think the Act 1696, c. 5, does not apply.

While I feel that the conduct of the bankrupt has been in many respects reprehensible and calculated to arouse grave suspicion, I doubt whether the defender has been equally to blame, and think, on the whole, that he has proved sufficient onerosity to escape the reach of the statute, and that he is therefore entitled to absolvitor.”

The pursuer reclaimed, and argued—There was here a distinct violation of the Act 1621, cap. 18. The bankrupt knew that he was insolvent at the time of granting the lease of his shop. He granted it to his son, who was a conjunct and confident person within the meaning of the Act, and he granted it for an inadequate rent. The evidence showed that the rent was not a fair one as some of the witnesses said that £12 or even £14 would have been a proper sum for such a shop. The letter of 17th November to his agent by the bankrupt showed that he wished to get the better of his creditors. The lease was also reducible under the Act 1696, cap. 5, as it was granted in further security of a prior debt.

The respondent argued—This lease was not reducible under the Act 1621, cap. 18. The lease was granted to the son of the bankrupt in terms of an agreement between the parties that the son was to expend £12 upon the premises so as to put them in proper order. This was not a prior debt, as there was no legal obligation upon the younger Gorrie to spend the money, but that he actually did the Lord Ordinary had found proved. In view of that fact the rent must be held to be quite an adequate one. The fair rent the Lord Ordinary had stated at £10, the actual rent paid was £7, but if the £12 spent on improving the premises was spread over the five years during which the lease was to run that would bring the rent up to the sum which the Lord Ordinary thought just. In the second place, the trustee had no interest in pursuing this action as no advantage could accrue to the estate.

At advising—