Scottish Court of Session Decisions

This was an action at the instance of James Craig, chartered accountant in Edinburgh, trustee upon the sequestrated estates of John Anderson, spirit merchant, Hawick, against John Somerville & Company, Limited, distillers and wine and spirit merchants, Leith, and Alexander Peggie Blyth, wine and spirit merchant there, managing director of that company, in which the pursuer concluded, inter ( alia (1) for payment of a sum of £203, 4s. 1d., of which the defenders had obtained possession a few days before Anderson's sequestration.

The pursuer averred (Conds. 2 and 3) that the defender Blyth had held an absolute disposition of Anderson's premises qualified by a relative back-bond, the effect of which was to give the defenders a security over these subjects to an extent not exceeding in all £700, for debts due to them by Anderson. (Cond. 6) That the premises were sold, the disposition being granted by Blyth with consent of Anderson, that the price came into the hands of the defenders, who in accounting therefor deducted as due to them and falling under their security a sum of £945, 17s. 4d., being (1) a sum of £712, 13s. 3d., and also a further sum of £203, 4s. 1d. (being the sum sued for). “This sum they deducted from the price, and they handed over to Thomas Purdom & Sons, who professed to Anderson to be acting for him, a sum brought out after said deduction.” (Cond. 7) That the said deduction of £203, 4s. 4d. from the price was entirely illegal and unwarranted: that Anderson had never borrowed it from the defenders or their predecessors John Somerville & Co. or their partner Blyth; that they had never disbursed any such sum, but that, assuming they had done so, it did not fall within the security which was limited to £700; and that the transaction described, which took place a few days before the sequestration, was a fraud upon the creditors, and challengeable at common law and under the Act 1696, cap. 5.

The defender averred—(Ans. 6) “Admitted that the subjects were sold to a Mr Kerr. The subjects were sold by Anderson to him; the disposition being granted by Blyth (who was feudally vested in them) and Anderson. As stated, the price obtained was £2400, including £400 in name of goodwill. The purchase price was paid to Anderson, who paid out of it the said sum of £742, 13s, 3d., and the said sum of £200, with £3, 4s. 1d. of interest to the defenders. The said sums of £200 and £3, 4s. 1d. were paid in cash by Anderson through his agents Messrs Purdom & Sons (who acted as his agents in selling said subjects), to the defenders on 7th January 1898, The said sums were paid to the defenders in the ordinary course of business.”

The pursuer pleaded—“(1) The defenders John Somerville & Company, Limited, having no right or title to retain out of the price of the said property the sum sued for, the same ought to be paid to the pursuer, as trustee for behoof of the creditors. (5) Separatim—The transaction referred to on record is exposed to challenge at the pursuer's instance, under the Act 1696, cap. 5.”

The defenders pleaded—“(3) The said sums, of which repetition is sought, having been paid in cash, and in the ordinary course of business, and, separatim, being covered by the terms of said back-letter, the defenders are entitled to decree of absolvitor, with expenses.”

A proof was allowed.

The following statement of the facts is in substance taken from the opinion of the Lord Ordinary ( Stormonth Darling):—The bankrupt acquired his Hawick premises in 1894, at the price of £1750, of which 1000 was raised on a bond over the property, and the balance was advanced by the defenders. The title to the property was taken in the name of the defender Blyth, but in December 1894 he granted a bark-letter by which he ackowledged that, although the disposition in his favour was ex facie absolute, yet it was truly granted in security of (1) a sum of £300 advanced by the defenders; 12) a sum of £200 advanced by them: and (3) any other advances which might be made to Anderson by the defenders, and all accounts for goods which had been or might be supplied to him by them, to an extent not exceeding the further sum of £200; and bound himself and his successors “on payment to the said John Somerville & Company, and me, the said Alexander Peggie Blyth, of all sums due and to become due by” Anderson “to them and me, whether for goods, cash advances, or otherwise” to reconvey the said subjects to Anderson, Then came a declaration that the registration of the back-letter in the Register of Sasines should not have the effect of limiting the security created by the disposition to the sum that might be due at the date of such registration, “but that the said disposition” should “form an absolute security for advances to be made and accounts to be incurred” . . “after the date of such registration, as well as for advances and accounts due prior to that date, to an extent not exceeding in all the sum of £700, any law or practice to the contrary notwithstanding.”

In 1896 Anderson executed certain alterations on the property for the purpose of

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Converting it from a licensed grocer's shop into a public house, and when these were executed he got the one licence exchanged for the other. These alterations cost over 200, which Anderson could not pay, and accordingly he applied to the defenders for a further loan. A corresponded between the defenders and Messes Purdon of Hawick, as Anderson's agents, resulted in an arrangement by which the loan was ostensibly to be made by Messrs Purdon, who were to draw a bill on Anderson, and were to receive a gurantee for its amount from the defenders. Accordingly, on 5 ^th March 1897 a four months' bill was drawn and acceped, and on 8 ^th Jully it was renewed for two months. When the bill fell due again Anderson could not pay it and the amount in the bank who had discounted it. The bank thereupon endorsed the bill to Messrs Purdon, who in turn endorsed it to Messrs Somerville and debited them with the amount. Anderson, by letter of even date with the first bill, agreed that he should lodge his weekly drawings in Purdom's hands, and that if these had not increased by at least one third at the end of four months Messrs Purdom were to business, This authority was renewed by 1897 and the property was sold at the price if £2000 for the heritage and £400 for the goodwill, by missives dated 15 ^th and 16 ^th December 1897 The purchaser, a Mr Kerr, seems to have been found by the defenders, but they did not appesr directly in the transaction, and the missives were signed by Kerr on the one hand and Anderson on the other, This transaction came to be settled at Hawick on 7 ^th January 1898, between the witness Greig (head clerk to Mr Philp, S.S.C. who was the John R. Purdom. Greig attended in a double capacity. Primarily he represented the purchers Kerr, but he had also insrtructons from the defenders both to fulfil their guarantee to Mr Purdom and to obtain payment of their claims against Anderson. Accordingly, the transcation was divided into three parts. First Greig, as representing the defenders, handed to Purdom £203, 4s 1d. in bank nots that being the amount of the bill which the defenders had guaranted, with interest to date and received from him the bill and the letter of guarantee, Then Greig, as representing the purchaser Kerr, paid the price to Purdom, as representing Anderson, £ 900 of the amount being in the form of a cheque by kerr's agent Mr Philp in favour of Mr Purdom's firm, and the balance in bank notes, finally, Purdom, as representing Anderson, settled the account (No. 79 of process) which contained the defanders' £945, 17s. 14d., including the sum of £203, 4s. 1d. now in dispute. He did so by endorsing and handing back to grig, as representing Somerville, Philp's cheque for £900, and paying the balance in cash. Before doing so he had sent a junior clerk to Anderson to ask the latter's authority to pay the account. The clerk deponed that Anderson gave the authority in general terms, but the admitted that he did not explain the account to him any way, and he was not even sure whether he drew his attention to the material figure of £203, 4s, 1d., which at that time stood only in pencil. Anderson, on the other hand, denied that the gave any such authority, and deponed that his expectation was, that after the defenders had received out of the price the £700 for which they held security, the balance would be paid over to himself for equal division among his creditors.

The payment of the sum of £203, 4s, 1d. by Greig to Purdon took place about twelve o'clock noon, and between the time when that took place and the time when the sum brought out as due to Somervilles was paid to Greig by Purdom there was an interval of about three hours. During that interval Anderson's consent to the payment of the sum of £945, 17s. 4d. was said to have been obtained. On the forenoon of the day of settlement Anderson's account to Somervilles was written partly in ink and partly in pencil. In the part which was written in ink a total of £742, 13s. 3d. was shown as due by Anderson, but below this the amount of the £200 bill with interest, and a correspondingly increased total, was written in pencil. This had been done by Purdom some time before 7 ^th January. This was the condition of the account when it was sent to Anderson, as Purdom alleged, for his approval. When it was announced by Purdom that Anderson's consent had been obtained, the part of the account relating to the £200 bill, and the correspondingly increased total were filled in by Greig, this total being £945,17s. 4d., the sum paid by Purdom to Greig.

Mr J. R. Purdom deponed that throughout these transactions he was acting as agent both for Somervilles and for Anderson, and that he had regarded himself as being in that position from 27 ^th October 1897 onwards. On that day Somervilles wrote to Purdom that they regarded Messrs Purdom & Son as “our legal advisers in your district.” He also deponed as follows:—“(Q) Did he (Anderson) give you any authority to pay that bill as distinguished from any of his other debts?—(A) He approved of the accounts with the bill marked on it, and I understood that was the authority. (Q) Why was this bill to be paid in full and nobody else if sequestration was imminent?—(A) Because both Anderson and myself were of opinion that Messrs Somerville & terms of the back-letter were not in my mind certainly at that time. The reason to add that £203 to the account on that date, was becaue I understood I had authority from Anderson to do so; and secondly, and entitled to deduct it.”

Anderson's estates were sequestrated on 26 ^th January 1898.

On 10 ^th January 1899 the Lord Ordinary (Stormonth Darling) pronounced the

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following interlocutor:—“Sustains the fifth plea-in-law for the pursuer: Decerns against the defender conform to the first petitory conclusion of the summons: Finds it unnecessary to deal with the other conclusions of the summons: Finds the pursuer entitled to expenses,” &c.

Opinion.—“In this action the trustee on the sequestrated estates of John Anderson, a spirit merchant in Hawick, seeks to recover from the defenders £203, 4s. 1d., of which they obtained possession on 7th January 1898, within a few days of sequestration. The transaction is described in the condescendence as a fraud upon the creditors, and challengeable at common law, as well as upon the Statute 1696, chapter 5. But I may say at once that the case presents no element of fraud. A good deal of evidence was led to prove that Anderson was for a long time insolvent, and that the defenders knew it. Certainly he was a man entirely without capital, and for a long time the defenders had been bolstering him up financially in a way which seems not uncommon in the spirit trade. If anything turned upon the defenders' knowledge of his affairs, I should hold that they had cause to view his solvency with extreme suspicion. But ever since the case of Thomson v. Thomson, 3 Macph. 358, followed as it was in Coutts' Trustees v. Webster, 13 R. 1112, and in other cases; it has been settled that where an insolvent debtor makes a cash payment to his creditors, fraud is not to be inferred from the mere fact that both the debtor and the creditor are aware of the insolvency.

All that part of the case may therefore be disregarded. The real question is, whether the transaction of 7th January 1898 is challengeable under the Act 1696, chapter 5. This makes it necessary to attend very closely to what actually occurred, because in cases under that Act, where no fraud is involved, the form of the transaction may be of the utmost moment as determining whether the transaction falls on one side or other of the narrow line which divides what is allowed from what is forbidden.

[ His Lordship then stated the facts narrated supra.]

The substantial defence made on record, and particularly in Answer 6, is that this rather complicated operation constituted payment in cash by Anderson to the defenders, and therefore that it is not struck at by the statute. I shall deal with that in a moment. But first I must notice an argument suggested merely as an alternative in the defenders' third plea-in-law, but keenly urged by Mr William Campbell, to the effect that the defenders were fully secured by their absolute disposition, and that the back-letter did not limit their security to £700 except in the single event of the letter being recorded in the Register of Sasines. As a matter of construction that seems to me quite an inadmissible reading of the back-letter, which limits the security to £700 long before it speaks of the Register of Sasines, and is impressed with the stamp appropriate to that figure. But I admit that there is law for the proposition (though it seems to do some violence to the terms of a written contract) that though a back-bond should specify particular obligations as the limit of the security, still, so far as subsequent advances are concerned, the granter may retain the security until he is relieved of these. (See Lord Fullerton's review of the authorities in Robertson v. Duff, 2 D. 279, at pp. 291–2.) I greatly doubt whether this principle could ever be applied to a case where the back-bond actually fixes the amount of the future advances which are to be covered by the security. But plainly it has no application here, because the defenders allowed the property to be sold, and did not claim to retain any part of the price against their debt of £203, 4s. 1d. Indeed, they could not do so, for the simple reason that the price was never in their hands. It is their own distinct averment, from which they cannot escape—and it is also the result of the evidence—that the price was paid not to them but to Anderson.

Accordingly the defenders' case must depend entirely on their making out that the final stage in the transaction, by which Purdom endorsed and handed back to Greig Philp's cheque for £900, and added thereto £45, 17s. 4d. in cash, constituted a cash payment by Anderson to them. If this was a transaction in the ordinary course of business, by which the defenders' claim was extinguished by payment, even though the result should be, after the period of constructive bankruptcy had begun, to give them a preference to which they were not otherwise entitled, the Act would not apply, and the pursuer would have no case.

But I cannot so view it. The first difficulty in the defenders' way is created by the case of Carter v. Johnstone, 13 R. 698. A bankrupt may according to that decision make a good payment in cash by drawing a cheque on his own bank account, but he cannot do so by endorsing a cheque in which he is payee. That is truly an assignation to which the Act in terms applies, and it is not a transaction in the ordinary course of business. But there are other considerations which seem to me to deprive this transaction of that indispensable character. The defenders never had any direct claim against Anderson for the sum of £203, 4s. 1d. His creditor was Purdom, and though he knew by the end of December that the loan had been guaranteed by the defenders, it does not appear that he was told on the day of settlement that they had paid the amount to Purdom that very morning. It is said that Purdom, if he had not taken payment from the defenders, might have deducted the amount before paying over the price to Anderson. Perhaps he might, but that was not what he did. I rather think he forgot the terms of the back-letter, and supposed that it was good for all advances subsequent to its date. When asked ‘Why was this bill to be paid in full, and nobody else, if sequestration was imminent?’ his answer was ‘Because both Anderson and myself were of opinion that Somerville & Company had security

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for the amount. The terms of the back-letter were not in my mind certainly at that time. The reason why I allowed Mr Philp's clerk Mr Greig to add that £203 to the account on that date was because I understood I had authority from Anderson to do so, and secondly, because I considered they were secured and entitled to deduct it.’ Now, if both Anderson and his agent were under that mistaken impression, it is very difficult, I think, to support the transaction as a cash payment in the ordinary course of business. That would be to make the debtor's understanding of a security and not the security itself the determinant of its effect. I greatly doubt whether Anderson had any opinion in the matter. I do not think that his authority for the payment, which was certainly considered necessary and was asked, was given intelligently, if given at all. Whether the same result might have been attained by other means I am not concerned to inquire. But I reach the conclusion that in the shape which it actually took the transaction was a voluntary assignation within sixty days of bankruptcy, for the satisfaction of a prior creditor in preference to other creditors, and therefore that it falls under the veto of the Act.”

The defenders reclaimed, and argued—(1) It was somewhat difficult to see the principle upon which the case of Carter v. Johnstone, March 5, 1886, 13 R. 698, was decided. There seemed to be no sufficient reason why a payment made by endorsing another person's cheque should be bad, when a payment made by giving a cheque on the bankrupt's own account was good. But accepting that decision as binding, it did not apply here. The cheque which was endorsed in this case was not a cheque in favour of the bankrupt, but a cheque in favour of his law-agents, Purdoms, and it was Purdoms and not the bankrupt who endorsed it. Moreover, Anderson did not direct the account to be paid by endorsing the cheque. What he directed was payment or settlement in general terms, and Somervilles could not be prejudiced by the fact that Purdoms chose for their own convenience to endorse a cheque in their (Purdoms') favour, instead of giving them (Somervilles) a new cheque upon their (Purdoms') own bank account. As far as Anderson himself was concerned this was a cash payment, for that was what he had directed. Further, where the cheque endorsed was not a cheque in favour of the bankrupt, but a cheque in favour of his unquestionably solvent law-agent, there was no room for any of the objections to payments by way of indorsation on the eve of bankruptcy, which the Court had in view in the case of Carter, cit., and upon which the judgment in that case to a great extent proceeded. In this case it was not possible to conceive of any illegitimate purpose which would have been served by Purdoms paying Somervilles by means of endorsing a cheque in their favour, instead of retaining that cheque, and giving Somervilles a new cheque upon their (Purdoms') own bank account, or any advantage which could have accrued to Somervilles from adopting the one method of payment rather than the other. In the case of Ramsay v. Scales, June 11, 1829, 7 S. 749, the debt for which the bill was given was not presently due. (2) If the real nature of the transaction here was looked at rather than the form which it took, it would appear that the case of Carter v. Johnstone bad no bearing upon the present. The cheque here, as had been pointed out, was not in favour of Anderson but of Purdoms. The sum of £200 now in question was never the property of Anderson. It was part of the price of subjects which Anderson had authorised Purdoms to sell. Purdoms had advanced money to Anderson, and when the price of the property came lawfully into their hands they were as in a question with Anderson entitled, and as in a question with Somervilles bound, to retain the amount of their advance. If they had not done so they would have had no right to come upon Somervilles under the guarantee. What happened here was in substance and effect the same as if Purdoms had put the £200 in their pockets and had torn up the bill and the guarantee. No doubt the form which the transaction took was different. An operose and unnecessary method of settling the accounts between parties was adopted. The Lord Ordinary had held that the transaction was illegal under the Act, because, and only because, of the form which it had taken. It was only because of the form adopted that Somervilles became prior creditors of Anderson for the sum in the bill, because Purdoms might have paid themselves out of the price, and then Somervilles never would have been creditors for the sum in the bill at all. The usual case was that a transaction unexceptionable in point of form was said to be illegal because of its nature in substance and reality. A transaction which was in substance and reality unexceptionable could not be rendered illegal under the Act simply in respect of the form which it took. In this case the true nature of the transaction was a settlement which could have been arrived at simply by squaring accounts. In Carter, cit., the indorsee of the cheques acquired right and title to the money solely in virtue of the indorsation. Here the right to the money was acquired aliunle. What took place upon the occasion in question was in truth and effect simply a settlement or balancing of accounts, although a circuitous way was taken to arrive at that result.

Argued for the pursuer and respondent—‘A payment made on the eve of bankruptcy by means of an indorsed cheque was not a cash payment, but an assignation of the bankrupt's estate, and consequently was null and void under the Act 1696, c. 5. The rule was (1) that a cash payment was good, (2) that a payment by means of the payer's own cheque on his own bank account, which was a payment in cash belonging to the payer in the custody of a banker, was to be treated as a payment in cash, but that (3) the indorsation of another person's cheque was not— Carter v. Johnstone, March 5,

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1886, 13 R. 698. The reason was that such a method of payment was not the method of payment usually adopted in the ordinary course of business, whereas payment by means of a cheque drawn by the payer of a debt upon his own bank account was; and again the reason why payments in cash were recognised as exceptions to the rule was that such payments were payments in the ordinary course of business, and also because cash payments were treated as exceptional in all branches of the law. See Nicol v. M'Intyre, July 13, 1882, 9 R. 1097, per Lord Young at p. 1100. A cheque when it was indorsed and put into circulation was diverted from its primary purpose and converted into a bill of exchange, and it had always been held that the indorsation of a bill of exchange was struck at by the Act 1696 c. 5— Nicol v. M'Intyre, cit.; Ramsay v. Scales, June 11, 1829, 7 S. 749. There were therefore sound reasons for the distinction made between the drawing of a cheque on the bankrupt's own bank account and the indorsation of another cheque by the bankrupt. But whether this was so or not the matter was settled by decision. The reasons against the distinction were all stated in Lord M'Laren's first opinion in Carter v. Johnstone, cit., at p. 700, and however cogent, they had been overruled by the ultimate decision in that case. It made no difference that the cheque was in favour of the bankrupt's agent, and had been indorsed by him— Ramsay v. Scales, cit. That case was not decided upon the ground that the debt for which the bill was given was not yet due. Nor did it matter that the same result as was attained here might have been reached in a way which would not have been struck at by the Act. See Nicol v. M'Intyre, cit.; Ramsay v. Scales, cit. Barbour v. Johnstone, May 30, 1823, 20 S. 351, and 7 S. 752, note; and Miller v. Philip & Son, February 24, 1883, 20 S.L.R. 862, were cases in which transactions somewhat similar to the present had been held illegal. In these cases the payments were made by persons other than the bankrupt. The pursuer, however, was quite willing that the substance and true nature of this transaction should be looked at and not the form. The result and the intended result of what was done here was that the defenders got payment of a prior unsecured debt. This was really a debt due to Somervilles. If in reality Purdoms had been the lenders, and Somervilles had been merely cautioners, it might have been different, but in reality this was not so. Purdoms in fact only advanced the money on behalf of Somervilles, for whom they were acting as agents in this matter, and after the bill was taken up by the Purdoms, they endorsed it to Somervilles, and debited them with the amount. This sum was paid to Purdoms by Somervilles, and the endorsed bill handed over to them some hours before Purdoms gave them the cheque endorsed, and these two transactions were quite separate. Indeed, the whole proceedings here were in pursuance of a fraudulent scheme which was illegal at common law apart from the Act 1696, c. 5.

[ Lord Trayner—There is no plea at common law]. As to the view that Somervilles were owners and sellers of the property and entitled to retain the amount of the debt due to them out of the price, that had never been suggested by the defenders in argument, and there was no plea to that effect.