Scottish Court of Session Decisions

William Stiven, accountant, Dundee, “trustee under a trust-deed granted by John M'Laren, grocer, William Street, Dundee, now residing at 10 William Street there, in his favour for behoof of creditors, dated 19th March 1895,” and George Willsher. wine merchant, Dundee, a prior creditor of M'Laren, raised in the Sheriff Court at Dundee an action against the National Bank of Scotland, Limited, 115 Hilltown, Dundee. The pursuers prayed the Court “to find to be null and void at common law, and also under the Act 1696, cap. 5, a transaction whereby the said John M'Laren transferred to the defenders on or about the 15th day of March 1895 a sum of £70, 10s., and to find that said transaction was an illegal preference and to set aside the same, and to grant decree against the defenders ordaining them to pay to the pursuers, or alternatively, to the said William Stiven as trustee aforesaid and as representing the creditors of the said John M'Laren the sum of £70, 10s. sterling with interest thereon at the rate of £5 per centum per annum from the said 15th day of March 1895.” The £70, 10s. was the sum due on a bill dated 18th October 1894 drawn at six months' date by M'Laren upon and accepted by his father-in-law, Adam Gatherer, Laurencekirk.

The pursuer averred—“(Cond. 3) The prepayment of said bill to the defenders who knew of the insolvency and imminent bankruptcy of the said John M'Laren on the 15th day of March, was on the part of the said John M'Laren with the object of giving a preference to the defenders, and was entirely voluntary within sixty day of his notour bankruptcy, and in satisfaction or further security of the debt of the said John M'Laren to the defenders, which was not due or exigible, and it is accordingly voidable under the Act 1696, cap. 5. It was also collusive and fraudulent, and it was illegal and in prejudice of the rights of the said George Willsher and the other prior creditors who are represented by the said William Stiven.”

The pursuers pleaded—“(1) The pursuers are entitled to decree as craved, because ( a) The prepayment in question having been made by the said John M'Laren voluntarily within sixty days of his notour bankruptcy in satisfaction of a debt not then due or exigible, is voidable at the instance of the pursuers or one of them under the Act 1696, cap. 5. ( b) The prepayment being illegal and fraudulent and not in the course of business but after suspension of payment, and in prejudice of the rights of the said George Willsher and of other prior creditors represented by the said William Stiven, is voidable at common law.”

The defenders pleaded—“(1) No title to sue.… (3) The drawer and acceptor of the bill being conjunctly and severally liable for the sum in the bill, the defenders were entitled to take payment from either of the obligants when tendered. (4) The transaction in question being payment of a debt for value received in the ordinary course of business, and not a voluntary deed granted either for the satisfaction or further security of the defenders, is not reducible under the Statute 1696, cap. 5. (5) There being no fraud or collusion on the part of the defenders, the payment made to them is not reducible at common law.”

A proof was led, which disclosed the following facts:—In October 1894 John M'Laren's account with the defenders at their branch office at Hilltown, Dundee, was overdrawn to the extent of £555, 14s. 4d., and David Scott Peebles, the defenders' agent at the branch bank, called upon him to reduce his indebtedness. M'Laren thereupon discounted with the defenders a bill for £70, 10s. drawn by him upon and accepted by his father-in-law, Adam Gatherer, Laurencekirk, dated 18th October 1894, and payable six months after date.

On the date when the bill was discounted, or at all events before it was retired as after mentioned, M'Laren informed Scott that the bill had been accepted by Gatherer as an accommodation bill and not for value.

On 13th March 1895 M'Laren was insolvent

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and issued a circular calling a meeting of his creditors to be held on 19th March thereafter.

On 15th March M'Laren retired the bill, there being yet twenty-seven days of the currency to run, by paying in cash to the defenders at their said branch office the full amount of the bill, less 1s. 5d., being the rebate to which he was entitled on account of retiring the bill before maturity. The bill was then delivered to him. No notice had been given to the defenders or Scott of the circular calling the meeting of creditors, and neither the defenders nor Scott were aware that M'Laren was bankrupt or had reasonable grounds for thinking that he was insolvent.

On 19th March the meeting of M'Laren's creditors was held, and the pursuer Stiven was appointed trustee. A trust-deed of that date was granted to Stiven by M'Laren for behoof of his creditors. The deed provided that the estate should be realised and declared, “that so far as possible all rankings and every question and difference arising under this Trust or in relation to the Trust Estates shall … be settled as if sequestration of my estates under the existing Bankrupt Statute or Statutes for Scotland for the time being had been awarded as at the date hereof and on the footing of the provisions contained in said Statutes.” Creditors to the extent of about £1000 prior to the payment to the bank on 15th March acceded to the trust.

On 27th April M'Laren was charged at the instance of the pursuer Willsher upon an extract registered protest dated 27th April of a bill for £35 dated 28th January 1895, drawn by Willsher upon and accepted by M'Laren and payable two months after date.

The charge expired on 4th May, on which date M'Laren became notour bankrupt.

Thereafter the pursuers raised the present action.

On 4th July 1896 the Sheriff-Substitute ( Campbell Smith) pronounced the following interlocutor:—“Finds, in respect of the evidence led, (1) that at 18th October 1894, the date of the bill in question, and for some time previously, the account of John M'Laren, drawer of said bill, with the defenders' branch bank in Hilltown, Dundee, was overdrawn to the extent of £555, 14s. 4d., and that he had been called upon to reduce his said indebtedness; (2) that he gave effect to said call, as matter of form, by obtaining his father-in-law's acceptance to said bill, by discounting it with the defenders, and allowing them to retain the proceeds minus interest (at five per cent., as the bill was non-commercial); (3) that at the time the bill was discounted he informed the bank agent that he had given no value for said bill, that his father-in-law was not to be bothered about it, and that he himself would pay and uplift it before it fell due; (4) that the payment before maturity was in accordance with his agreement with the defenders at the time when, as matter of form, they discounted said bill, and, as matter of fact, applied the proceeds to reduction of an overdraft beyond the limit permitted by the defenders central authority in Edinburgh; (5) finds it not proved that the payment in cash now sought to be set aside was contrary to the Act 1696, cap. 5, or that it was fraudulent at common law; (6) finds, separatim, that the leading pursuer took the estate of the truster tantum et tale as he possessed it, that he is possessed of no rights in it, that did not belong; to John M'Laren, and that John M'Laren could have had no title to sue the present action: Therefore assoilzies the defenders from the conclusions of the action.”

The pursuers appealed to the Sheriff ( Comrie Thomson), who on 17th December 1896 dismissed the appeal and adhered to the interlocutor appealed against. There was appended to his interlocutor the following note:—

Note.—“I have arrived, not without difficulty, at the same result as the Sheriff-Substitute. The elements involved in such questions as the present are brought out in a well-known passage in Bell's Com. ii. 205—‘Wherever the transaction is in the ordinary course of dealing, and requisite or suitable to the fair purpose of the debtor proceeding with his trade, and unaccompanied by indications of collusion or notice of insolvency, it is not challengeable, although the effect may be to give a preference to one creditor over the rest.’ In a recent case ( Coutts' Trustee v. Webster (1886), 13 R. 1112) Lord Young observed ‘that a man, though he knows that he is insolvent, and cannot pay all his creditors, may, nevertheless, prefer any of them whom he pleases and pay their debts in full, provided their debts are due, and due in actual money. He is at liberty to do this, though he is not at liberty to give them any pledge in security of their debts.’ It seems plain that M'Laren might have paid the £70, 10s. into his current bank account direct, and so reduced his adverse balance. To this the pursuer could not object, but had he done so there was nothing to prevent the bank from holding the money so paid in against the running bill. The bill was discounted in the ordinary course of business for the accommodation of M'Laren. If he found himself in a position before the expiry of the full currency of the bill to acquire it from the bank (he being, as was admitted in argument, the true creditor as in a question with the acceptor), I see no reason why he should not replace the accommodation, and so take up the bill in his own right. By doing so M'Laren's creditors were not prejudiced because on the assumption (which I understood was also admitted) that the bill formed a good claim by M'Laren against the acceptor (Gatherer) but for a plea of compensation which the latter might set up, the pursuer would have recovered it from Gatherer, but with such questions the bank had no concern. When the defenders discounted the bill they practically bought it. When the contents of the bill are paid before expiry, it is bought back again, the bank making a rebate or

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allowance off their original discount in proportion to the unexpired currency of the bill. Such a transaction is in the ordinary way of banking business, and I do not think that it can be said that the defenders took payment by way of deposit as security.”

The pursuers appealed, and argued—1. On merits—( a) Under Act 1696, c. 5, all preferences granted to a creditor within sixty days of notour bankruptcy were null and void, and the bank in getting payment of this sum from M'Laren got an undue preference quoad M'Laren's creditors. There were only three exceptions to this rule—(1) Cash payments; (2) transactions in ordinary course of business; and (3) nova debita. The onus lay upon the bank to show that the present transaction fell under one of these exceptions, and that onus they had not discharged. The present transaction did not fall under any of these exceptions. It was not a cash payment or in ordinary course of business. The contract was one to pay a specific sum at a specific date. The debt was not due till the bill matured. In ordinary course of business the bill would have been paid when it fell due. The true test of the question whether this was done in the ordinary course of business was to ask—Could the creditor have demanded payment at the time the money was paid? If he could not, as in the present case he could not, the payment was not in the ordinary course of business—Bell's Com. (7th ed.), 201, 204; Thomson on Bills, 246; Speir v. Dunlop. May 30, 1827, 5 S. 729; Blincow's Trustee v. A. Allan & Company, December 3, 1828, 7 S. 124; Mitchell v. Rodger, June 26, 1834, 12 S. 802; Guild v. Orr Ewing & Company, January 16, 1858, 20 D. 392, opinion of Lord President M'Neil, 397; Rose v. Falconer, June 26, 1868, 6 Macph. 960; Tamplin v. Diggins, 1809, 2 Campbell 311; Morley v. Culverwell, 1840, 7 M. &. W. 174, opinion of Baron Park, 182. Even if it were held to be a transaction in ordinary course of business, that did not make this transaction a good one if collusion on the debtor's part to give an undue preference was proved—Bell's Com. (7th ed.), 205. ( b) At common law—This was a voluntary act done by one conscious of insolvency with a view to grant a preference to one of his creditors. Fraud was proved on the part of the debtor, and complicity on the part of the creditor did not require to be proved in order to cut down the preference—Goudy on Bankruptcy (2nd ed.), 39, &c.; M'Owan v. Wright, March 10, 1853, 15 D. 494; Guild v. Orr Ewing, supra. 2. On Title to sue—The pursuer had a title to sue. The creditors had committed their interests to him to manage for them, and he was entitled to sue in any matter in which they were interested. Whether the trustee had a good title or not, the title of Willsher was good, for a prior creditor was entitled to reduce a transaction of this sort— Cook v. Sinclair & Company, July 2, 1896, 23 R. 925.

Argued for defenders—1. On merits ( a) Under the Statute 1696, c. 5—This case fell within the exceptions to the rule laid down in the Act. This transaction was a cash payment in ordinary course of business. The bill was an accommodation bill, and it was natural that it should be paid off as soon as possible. The fixed date for payment was adjected to the bill solely for the benefit of the debtor, and when the time to pay was adjected in favour of the debtor, the promise to pay might be performed at any date previous to that stated in the bill—Forbes on Bills of Exchange, p. 142, sec. 8. The cases quoted on the other side were not in point. They were all cases in which money had been deposited in the bank in order to meet the bill when it fell due. In this case M'Laren did not say to the bank, “Hold the money in your safe till the bill falls due and then pay it off.” He paid the money and took the bill away. The transaction was a bona fide one in ordinary course of business— Loudon Brothers & Reid v. Lauder's Trustee, December 7, 1877, 5 R. 293. The transaction might also be considered, as the Sheriff held, a novum debitum. It was a buying of the bill by M'Laren from the bank. The bill was a negotiable instrument. M'Laren had bought it. The trustee Stiven was therefore now the creditor in the bill, and could sue Gatherer for the sum contained therein. There had been a purchase of a valuable asset, the asset being delivered in exchange for the money paid. ( b) At common law—No fraud had been proved on the part of M'Laren, or any intention of giving an undue preference to the bank. 2. On title to sue—The sixth finding of the Sheriff-Substitute was right, and the plea against title was good. The trustee in a voluntary trust for creditors had no title to sue, inasmuch as he took the estate tantum et tale with the trustee, who had himself made the payment— Fleming's Trs. v. M'Hardy, March 2, 1892, 19 R. 542. The other pursuer, Willsher, had no title to recover payment— Cook v. Sinclair & Company, supra.

After the case was taken to avizandum it was restored to the roll for further hearing on account of a difficulty suggested by Lord Trayner as to whether the action was competent.

On this point the pursuers argued—The action was competent. This was not such an action of reduction as was incompetent in the Sheriff Court. It was an action with petitory conclusions for restoration to the status quo ante; it was not an action to reduce a deed with its penal consequences for non-appearance. The action was competent under section 10 of the Bankruptcy Act 1856 (19 and 20 Vict. c. 79), and section 9 of the Bankruptcy Act 1857 (20 and 21 Vict. c. 19). As far as the action was one of declarator, it was also competent in terms of the Sheriff Court Act 1877, sec. 8, sub-sec. 2.

The defender, while arguing that so far as reduction and declaratory conclusions of the action were concerned, the action was incompetent, admitted that in view of the decision in Moroney & Company v. Muir & Sons, November 5, 1867, 6 Macph. 7, they could not maintain that the action was incompetent quoad the petitory conclusions if the title to sue was upheld.