Scottish Court of Session Decisions

On the 29th October 1889 James Middleton Paton, a Scotchman who had for a considerable time previously carried on business as a merchant in Lille, was declared bankrupt by judgment of the Tribunal of Commerce of that town, and shortly afterwards Francis Obers, accountant, Lille, was appointed trustee “syndic definitif” on his estate.

On 25th February 1891 the bankrupt executed in favour of his father John George Paton, merchant, Dundee, a discharge of his claim for legitim in the following terms:—“I, James Middleton Paton, residing at the Wild, Broughty Ferry, second son of John George Paton, merchant, Dundee, whereas various advances of money have from time to time been made to me or for my behoof by my said father for my advancement in business, and otherwise for my benefit, and that it appears to me to be reasonable and proper that I, in respect of such advances, should execute the discharge hereinafter written; therefore I have exonered and discharged, and do hereby exoner, acquit, and simpliciter discharge, the said John George Paton, his heirs, executors, and successors, and all others his representatives or the intromitters with his effects, of any bairns' part of gear, legitim, portion—natural and share of executry, which I could claim through the death of my said father in the event of me surviving him, excepting as hereinafter mentioned, and of all execution competent to me for the same, and all that has followed or is competent to follow thereon; but excepting from the operation of this discharge any moneys or effects which may be bequeathed to me by my said father in any testamentary deed executed or to be executed by him. And I oblige myself and my heirs and successors to warrant this discharge at my hands. And I consent to the registration hereof for preservation.”

The bankrupt's father, John George Paton died on 9th March 1891, leaving a trust-disposition and settlement, whereby he directed his trustees to divide his estate equally among his children, but provided that the trustees should retain in their hands the bankrupt's portion, and pay the whole revenue thereof to him as an alimentary provision only, not assignable by him nor attachable by his creditors.

On 18th January 1892 the syndic in James Middleton Paton's bankruptcy raised an action in the Court of Session against Easton Gibb and another, John George Paton's testamentary trustees, concluding for (1) reduction of the discharge quoted above; (2) an accounting with regard to John George Paton's estate; and (3) payment to the pursuer of such sum as should be found due to him by the defenders.

The pursuer averred—“(Cond. 5) The said discharge was granted fraudulently by the said James Middleton Paton while he was an undischarged bankrupt, and subsequent to the appointment of the pursuer as trustee on his estate. Moreover, it was conceived and executed by the said James Middleton Paton in the full knowledge and in view of the fact that his father was then on his deathbed, with the fraudulent design of rendering effectual and securing for himself the liferent alimentary provisions in his favour contained in his father's trust-disposition and settlement, and of precluding the pursuer and the said James Middleton Paton's creditors from claiming the legitim to which he would have otherwise been entitled from the said John George Paton's estate. It was further granted in favour of a conjunct and confident

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person, and without any true, just, and necessary cause, and without a just price really paid. At the date when the said discharge was executed the said Janies Middleton Paton was due his father a large sum in respect of payments made by him from time to time to the said James Middleton Paton, or on his account, and for which he had granted vouchers acknowledging his indebtedness. The said discharge bears to be in respect of such advances, and it was a condition of its execution that the said John George Paton should discharge his said son of the indebtedness constituted by said payments and vouchers. The said John George Paton did not, however, accede to the said condition or accept of the said discharge, and it was still undelivered to him at the date of his death. At the date of the said discharge and of the raising of the present action the said James Middleton Paton was, and he still continues to be, insolvent. The said discharge was made and granted by the said James Middleton Paton fraudulently, with a view to defeating the rights of and to the hurt and prejudice of his whole lawful creditors both in France and elsewhere abroad and in this country, whose debts were then and still are unpaid, and who are represented by the pursuer as special assignee or trustee in the bankruptcy of the said James Middleton Paton.” “(Cond. 6) The defenders the trustees and executors of the said deceased John George Paton have been requested by the pursuer as trustee foresaid to give an account of their intromissions with the estate of the said John George Paton, and to pay the share of legitim or bairns' part of the said estate due to the said James Middleton Paton, but they have refused to do so, and this action has therefore been rendered necessary. The pursuer believes and avers that said share amounts to not less than £6000.”

The pursuer further set forth his view of the law of France, and in particular relied upon article 443 of the “Code de Commerce Francais” relating to bankruptcies.

The defenders contradicted the pursuer's statement of the law of France, and answered the pursuer's other averments thus—“(Ans. 5) Admitted that it was granted by the said James Middleton Paton while he was an undischarged bankrupt and subsequent to the appointment of the pursuer. Admitted that at the date of the discharge John George Paton was seventy-seven years of age, and explained that at said date he had made advances of money to and for behoof of James Middleton Paton amounting to upwards of £2000…. Admitted that at the date when the discharge was executed by James Middleton Paton he was due his father a large sum in respect of advances made by him from time to time to the said James Middleton Paton, or on his account. Quoad ultra denied, and explained that with the view of delivering the said discharge James Middleton Paton instructed his agents to register the same in the Books of Council and Session, and it was so registered on 25th February 1891. The said discharge was thus effectually and completely delivered. The said James Middleton Paton informed his father on or about said 25th February 1891 that the said discharge had been executed and registered as aforesaid. (Ans. 6) Admitted that the trustees refuse to give the pursuer an account of their intromissions with the estate of the said John George Paton. Explained that they refuse to do so because the said James Middleton Paton's claim to legitim was effectually discharged by the discharge of 25th February 1891 above quoted.”

The pursuer pleaded, inter alia—“(3) Esto that the said James Middleton Paton is a domiciled Scotchman, the discharge sought to be reduced having been granted by James Middleton Paton when an undischarged bankrupt, without consent of the pursuer, as trustee on his estate, is null and void, and decree ought to be pronounced in terms of the reductive conclusion of the summons. (4) Esto, that the said James Middleton Paton is a domiciled Scotchman, the said discharge being fraudulent at common law, and to the prejudice of the said James Middleton Paton's creditors; et separatim, being struck at by the Act 1621, cap. 18, decree of reduction should be pronounced as craved. (5) The provisions in the trust-disposition of the deceased John George Paton being gratuitous, and the claim of the said James Middleton Paton to legitim out of his father's estate not having been excluded or renounced, the pursuer, as trustee foresaid, is entitled to decree in terms of the declaratory conclusion of the summons. (6) The said discharge having been conditional, and the condition on which it was granted not having been acceded to by the said John George Paton, et separatim, the said discharge having been undelivered at the date of his death, all the bankrupt's rights to legitim vested in the pursuer as his trustee, and the discharge is acccordingly null and void.”

The defenders pleaded, inter alia—“(1) No title to sue. (2) The pursuer's averments are irrelevant. (3) The pursuer's averments so far as material being unfounded in fact, the defenders should be assoilzied with expenses…. (5) The pursuers' claims being unfounded, (1st) under any provisions of the law of Scotland, or (2nd) under any provisions of said law upon which the pursuers are entitled to found as against these defenders, decree of absolvitor should be pronounced.”

A proof having been allowed, it appeared that the discharge was prepared on the bankrupt's instructions by Mr George Heron, solicitor, Dundee, who was not Mr J. G. Paton's agent. Mr Heron deponed—“I said to him ( i.e, the bankrupt) that as his father was in such a state of health he could not take delivery himself, and that the only probable course for making the deed effectual was to put it on record. He thereupon gave me written authority to put it upon record.”

The written authority referred to was in

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these terms—“Dundee, 25 th February 1891. Messrs Heron & Co., Solicitors, Dundee. Gentlemen,—I hereby request you, by way of delivering the discharge by me in favour of Mr John George Paton, my father, which I have to-day executed and left in your hands, to get the same registered forthwith in the books of council and session.—Your obedient servant, J. M. Paton.”

Mr Heron subsequently wrote as follows:—“20 Castle Street, Dundee, 9th March 1891. James M. Paton, Esq., The Wild, Broughty Perry. Dear Sir,—We have now got an official extract of the discharge in favour of your father which you executed on 25th ulto., and which in terms of your letter to us of that day was recorded on the following day in the Books of Council and Session. This extract we, in conformity with what you said to us on 5th inst., hold in the meantime for you and subject to your orders.—Yours faithfully, Heron & Co.”

M. Leon Renault, Professor of Law, Paris, in answer to certain interrogatories adjusted by parties and approved of by the Lord Ordinary, expressed the opinion (1) that the pursuer as syndic on the bankrupt's estate was entitled according to French law to raise and prosecute all actions having for their object the setting aside of any deeds executed by the bankrupt fraudulently and to the prejudice of his creditors, affecting any estate that but for his execution of such deeds might have fallen to him during the subsistence of his bankruptcy; (2) that the syndic in prosecuting such actions was the representative of the bankrupt's creditors, and entitled to avail himself of all grounds of law competent to them or any of them in setting aside such deeds; and (3) that the syndic had not only a right, but the exclusive right, to act in the interests of the body of the creditors.

On 16th February 1894 the Lord Ordinary ( Kyllachy) found (1) that the bankrupt was a domiciled Scotchman at the date of the bankruptcy and also of the discharge; (2) that the pursuer had failed to prove that by the law of France the syndic had at the date of the discharge any title to the legitim or expectation of legitim which was the subject of the discharge; and (3) that the question of the bankrupt's inability to execute the discharge fell to be determined according to the law of Scotland and not of France.

On 16th March 1895 the Lord Ordinary granted decree in terms of the reductive and declaratory conclusions of the summons, and appointed the defenders to lodge an account of the bankrupt's share of legitim.

Opinion.—“In this case the question which I have now to decide may, I think, be stated thus: An insolvent debtor having a spes successionis in the shape of a claim to legitim, which is about to open by his father's expected death, makes what is in effect a gratuitous alienation of that spes successionis in favour of relatives. In the course of a few weeks, and while his debts are still unpaid, the claim emerged by his father's death. It then appears that but for the gratuitous alienation a considerable fund would have become open to diligence of the insolvent's creditors. An action is thereupon brought on behalf of the creditors (I shall consider the particular instance presently) to set aside the alienation under the Act of 1621 and at common law. The question is whether it is a good defence to that action that the subject conveyed was at the date of the deed a mere expectancy, and therefore a subject which was not at that date open to the diligence of the insolvent's creditors.

I may say at the outset that it does not appear to me that any of the cases cited at the discussion touch the question which is thus raised. It has been decided— Trappes v. Meredith, 10 Macph. 38, that a spes successionis does not fall under a Scotch sequestration. And I have already in this case held, after inquiry, that in a French sequestration the rule is the same. It has also been decided— Reid v. Morison, 20 R. 510—that a sequestrated bankrupt cannot be compelled to convey a spes successionis to his trustee to the effect of vesting in that trustee all right to the expected succession whether the same may open to the bankrupt before or after his discharge.

But the present question has nothing to do with the effect of sequestration. There has been no sequestration in this country, and I have already held that the French sequestration, except as a conveyance of the bankrupt's estate at its date, has no effect extra territorium. Moreover, the fund here in question is no longer a mere expectancy. The right to it has now vested, and vested while the debtor is still undischarged. It is therefore a fund which, but for the deed challenged, would have been open to the diligence of the insolvent's creditors. In short, but for the deed challenged it would simply have been part of the acquisita of the insolvent during the period of his insolvency. Now, I know of no decision which touches the right of an insolvent debtor to deal ab ante with estate which he may acquire during insolvency and before discharge. The cases which have occurred apply, in my opinion, to different facts, and depend on different considerations.

The question therefore must be determined on the general principles of bankruptcy law, and considered in that light I have not been able to find any answer to the pursuer's demand. The point, it will be observed, is not whether the insolvent may not deal as he pleases with expected successions, in so far as the same may fall in after he is discharged. Nothing done in that way would be to the prejudice of his creditors. Neither is the point this—Whether, being still vested in the administration of his estate, he may not sell an expected succession for a fair price. That also would not (at least presumably) be to the prejudice of his creditors. The question is—Whether he can voluntarily, and without consideration, deprive his creditors of funds which ex hypothesi would but for his interference have become theirs.

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Now, that is a proposition which appears to me to be contrary to one of the first principles of our bankruptcy law, and indeed, to the principles of bankruptcy law in all civilised countries. The Act of 1621 is of course here unnecessary. It merely aids the common law by introducing certain presumptions, and these are not here required. It is our common law of bankruptcy which here applies, and in my opinion it must be held to be the fundamental doctrine of that law that all gratuitous deeds made by an insolvent debtor to the prejudice of his creditors are null and void, or (to express it otherwise, and perhaps better) that ‘all donations are revocable at the suit of creditors if granted by an insolvent debtor and to their prejudice.’ There is no doubt that this was the rule of the civil law (Digest 42., 8, 1, 6, sec. 11), from which, according to Professor Bell, our law has borrowed it. It appears also to be the rule both in Prance and England. (Bell's Com., ii. 171.) And it is a rule which, it will be observed, is quite general. It is not confined to gifts of what is at the time the property of the debtor, or of what his creditors can at the time attach by diligence. On the contrary, it applies to every gratuitous alienation by an insolvent debtor, of which, when it takes effect, it can be predicated that it is to the prejudice of his creditors. The test is not whether the creditors could have attached the subject, or whether the insolvent could have been compelled ab ante to assign it to his creditors. The test is simply, whether there has been an alienation, whether the alienation is gratuitous, and whether it is to the creditors’ prejudice.

I am therefore of opinion that the deed here in question is reducible at the instance—perhaps of any creditor, certainly of any prior creditor—of the insolvent. And it only remains to consider whether the trustee under this French bankruptcy has a title to sue on behalf of the body of creditors. On this point I must say I have had some difficulty. There is no doubt that the trustee on the French bankruptcy is a trustee for the whole body of the bankrupt's creditors. He is vested with the whole estate of the bankrupt, including all acquisitions during the bankruptcy as the same fall in. And his duty is to distribute the estate among the whole creditors, wherever resident, who choose to rank. It is certain also that among the creditors who have ranked are various creditors whose debts were prior to the deed now under challenge. On the other hand, it may perhaps be doubted whether the trustee is in strictness the assignee of the creditors, and vested as such in rights of action competent to the creditors with respect to the bankrupt's estate.

It does not appear that the French bankruptcy statutes contain any provision corresponding to the provision of section 11 of our Bankruptcy Act of 1856. The question must therefore be determined as if it had arisen with respect to the title of a Scotch trustee prior to the Act of 1856, and if that question were open, it might perhaps be doubted how far the position of such a trustee was in this matter distinguishable from the position of a trustee under a voluntary trust for creditors who, as lately decided— Fleming's Trustees v. M'Hardy, 19 R. 542—has not a sufficient title to sue such an action as the present. It appears, however, to have been settled, at least in practice, that a trustee under our earlier bankruptcy statutes did have a title to sue such actions—Bell's Com. ii. 172, 174; Edmond, 15 D. 703. And that being so, I see no reason why the present pursuer should be in a worse position than such trustee.

I have come, therefore, to the conclusion that I may sustain the pursuer's title and grant decree of reduction, and an order for accounts, as concluded for in the summons.”

An account having been lodged, after sundry procedure the Lord Ordinary on 3rd December 1896 pronounced an interlocutor disposing of the defender's account and the pursuer's objection thereto dealing with expenses and granting leave to reclaim. The questions involved in the accounting, however, need not be entered upon at this stage of the case.

The defenders reclaimed, and, upon the interlocutor of 16th March 1895, argued—The Lord Ordinary was wrong. I. The syndic had no title to sue. J. M. Paton being a domiciled Scotchman, the French bankruptcy only affected his property in France, and the syndic's title would not be recognised here. In the absence of any decision on the point in Scotland, the case of Artola Hermanos, 1890, 24 Q.B.D. 640, was an authority, and it was a decision expressly negativing the contention that a foreign bankruptcy passed the moveables of the bankrupt extra territorium. In Stein's case (Royal Bank of Scotland v. Cuthbert, January 20, 1813, F.C.) it was quite true that two out of the five partners sequestrated were domiciled in Scotland, but it was the firm that was the leading debtor. In any event a distinction must be drawn between the relative position and effect of English and Scotch bankruptcies and that of English or Scotch and Continental bankruptcies, and the distinction was very pointedly taken by Lord Justice-Clerk Inglis in Young v. Buckel, May 17, 1864, 2 Macph. 1077, at p. 1080. Story's Conflict of Laws, sec. 403, and Guthrie's Savigny, p. 228, also referred to. II. But even assuming that the Scotch Courts would recognise the title of the syndic in the French bankruptcy to the whole of the bankrupt's estate—assuming in other words that the syndic here had been a Scotch trustee in bankruptcy—he would not have been entitled to reduce the deed in question, for it dealt merely with a spes successionis, and that was not property which sequestration could affect. This was conclusively established by a series of decisions. Trappes v. Meredith, November 3, 1871, 10 Macph. 38, decided that a bankrupt's spes successionis is not carried to the trustee in the sequestration. Kirkland v. Kirkland's Trustee, March 18, 1886, 13 R. 798, confirmed

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that decision, while Reid v. Morison, March 10, 1893, 20 R. 510, went a step further and settled not only that a spes successionis did not fall under a sequestration but that the bankrupt could not be called upon under section 81 of the Bankruptcy Act 1856 to assign it to his trustee. The grounds of this decision were very fully explained by Lord Rutherfurd Clark, particularly at page 515, and their substance was that individual creditors having no recourse except against the property of their debtor, the whole body of the creditors, for whose common benefit sequestration was designed, could have no higher right. The right to legitim was a purely personal right, and the creditors of a bankrupt could not compel him to exercise his option between his legal provision and a testamentary or marriage-contract provision— Stevenson v. Hamilton, December 7, 1838, 1 D. 181; Lowson v. Young, July 15, 1854, 16 D. 1098; Aikman (Smith's Trustee), 1890, 30 S.L.R. 804. When the legitim vested no doubt it went ipso facto to the assignee of the person entitled to it, but only if that person had not discharged his right, which he was perfectly entitled to do— Macdougal v. Wilson, February 20, 1858, 20 D. 658. III. (1) The discharge of legitim granted by the bankrupt was not gratuitous, and was therefore not struck at by the Act 1621, cap. 18. The cause of granting it was the existence of a debt due by the son to the father, and such a cause was sufficient—Bell's Comm. ii. 177. But, even if there were no sufficient cause, it was not the father who benefited by it, but his other children, for the legitim fund remained the same. (2) The deed was a complete and effectual discharge, not merely an offer to discharge, and therefore acceptance was unnecessary. As regards delivery, there had been registration which was equivalent to delivery— Tennent v. Tennent's Trustees, July 2, 1869, 7 Macph. 936.

Argued for the pursuer—The Lord Ordinary was right. (I) The case of Artola Hermanos, ut sup., if applicable at all, was in direct conflict with the law of Scotland as laid down in a long series of cases— Strother v. Read, 1803, M. App. voce “Forum competens,” No. 4; Maitland v. Hoffman, 1807, M. App. “Bankrupt,” No. 26; Stein's case, ut sup.; Selkrig v. Davies, 1814, 2 Dow, 230; Young v. Bucket, ut sup.; Goetze v. Aders, Nov. 27, 1874, 2 R. 150; and Phosphate Sewage Company v. Lawson & Sons’ Trustee, July 20, 1878, 5 R. 1125, all concurred in establishing that the law of Scotland accepted the proposition of international law that a good foreign vesting order in bankruptcy carried Scotch moveables. This rule was not limited by the domicile of the bankrupt debtor, and indeed the whole question was one not of domicile so much as of the application of foreign judgments. The English Courts had given effect to the same principle in Geddes v. Mowat, 1 Glyn and J. 414, and M'Culloch, 14 Ch D 716. Blithman, L.R., 2 Eq. 23, also referred to. (II) It was not sought to dispute the authority of Trappes, ut sup., or Reid v. Morison, ut sup. These cases only decided that a spes successionis did not vest in a trustee in bankruptcy. They did not in any way affect the principle that if the succession actually opened during the continuance of the bankruptcy the bankrupt's share of legitim instantly vested in the trustee. That rule was perfectly consistent with the trustee having no power to exercise the bankrupt's right of election—See Millar v. Birrell, November 8, 1876, 4 R. 87. It was true that there were no express provisions in the French bankruptcy statutes conferring on a syndic the power conferred by sec. 11 of the Bankruptcy Act 1856 on the trustee. That such a power was recognised by the French Courts as existing in the syndic was plain from the proof, but even if it was not, and White v. Briggs, June 8, 1843, 5 D. 1148, per Lord Fullerton at p. 1158, and Corbet v. Waddell, November 13, 1879, 7 R. 200, seemed to show that the law of Scotland must setttle the question—he was in no worse position than a Scotch trustee before 1856, and it was settled by authority that he had a title to sue such actions as the present— Edmond v. Grant, June 1, 1853, 15 D. 703, Bell's Comm. ii. 172–174. Brown & Company v. M'Callum, December 19, 1890, 18 R. 311, per Lord Kinnear at p. 317, and Bolden v. Ferguson, March 6, 1863, 1 Macph. 522, also referred to. The position of a trustee under a voluntary trust-deed for behoof of creditors was different— Fleming's Trustees v. M'Hardy, March 2, 1892, 19 R. 542. (3) This was the sort of deed struck at by the Acts of 1621 and 1696, as well as by the general principles of bankruptcy law. It was essentially a fraudulent transaction to the prejudice of creditors. But apart from that it was invalid. It was of the nature of an uncompleted contract—an offer to discharge a claim for legitim in return for a discharge of debt due to the father. As such it required acceptance, and it had never been accepted—see Webster v. Rettie, June 4, 1859, 21 D. 915. At all events, and even assuming that it was an effectual discharge, delivery was necessary, and recording was not necessarily tantamount to delivery— Burnet v. Morrow, March 26, 1864, 2 Macph. 929; Tennent v. Tennent's Trustees, ut sup., referred to.

At advising—