Scottish Court of Session Decisions

This was an action of count, reckoning, and payment at the instance of Kinmond, Luke, & Company, jute and yarn merchants, Dundee, against James Finlay & Company, merchants, 22 West Nile Street, Glasgow.

The nature of the pursuers' averments is disclosed in the following narrative, which is quoted from the opinion of the Lord Ordinary ( Low):—“In 1883 the pursuers transferred 50 shares of £100 each of the Champdany Jute Company, Limited, to the defenders. Twenty-five of these shares were again transferred to the pursuers, leaving the defenders with 25 shares which were subsequently converted into 250 shares of £10 each. In 1893 the pursuers transferred 200 further shares of £10 each to the defenders. Further, in 1892 the pursuers assigned to the defenders their whole share, right, title, and interest in a business carried on in India under the name of the Calcutta Twist Company. These transfers and the assignation were ex facie absolute, but it is admitted that they were truly granted in security of advances made by the defenders to the pursuers.

“In 1894 the pursuers executed a trust-deed whereby they conveyed to Mr M'Intyre, C.A., Dundee, their whole means and estate for behoof of their creditors. All the pursuers' creditors, including the defenders, acceded to the trust-deed, and lodged claims with the trustee.

The trust-deed contained the following provision ‘ Tenth. That subject to the provisions of these presents in other respects, all matters whatsoever shall be settled as if sequestration of our estates under the Bankruptcy (Scotland) Act 1856, and all amendments thereof, had been awarded, and on the footing of the provisions contained in the said statutes as to rankings and valuations for rankings, and all other particulars.’

The amount for which the pursuers lodged a claim was £8513, and the trustee called upon them to value and deduct the securities held by them. The pursuers valued the Champdany shares at £2250, and their security over the Calcutta business at £4417. Both of these valuations were accepted by the trustee, and the defenders were duly paid a dividend upon the amount of their debt, after deducting the value of the securities.

By the 12th article of the trust-deed it is provided that—‘On a final division of our estates among our creditors under these presents, and whatever be the amount of dividend such estates may yield to the creditors, we shall be entitled to our discharges from such creditors, and shall be ipso facto discharged of the full amount

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of all our debts and obligations in the event of the trustee being of opinion that we are so entitled and certifying accordingly.”

In terms of that provision, the trustee on the 3rd January 1896 granted a certificate to the effect that the estates of the pursuers had been realised and a final division thereof made, that he was of opinion that the pursuers were entitled to their discharge, and that they were therefore ipso facto discharged although their debts were not paid in full.

The trustee did not require the defenders to assign the securities to him, and the defenders did not themselves realise the securities, but they still retain the shares in the Champdany Company and the interest in the Calcutta Twist Company.

The pursuers aver that both of these companies have prospered, and that the dividends which the defenders have received from them have more than extinguished the pursuers' debt.”

The defenders pleaded—“(1) No title to sue. (2) The action should be dismissed in respect ( a) that it is incompetent; and ( b) that the statements of the pursuers are irrelevant. (3) The pursuers having no right, title, or interest in said Twist Company or in said Jute Company's shares, the defenders should be assoilzied from the conclusion for an accounting.”

On 20th November 1903 the Lord Ordinary pronounced the following interlocutor:—“The Lord Ordinary having in the procedure roll heard counsel for the parties on the closed record, and considered the same, repels the first three pleas-in-law stated for the defenders, and appoints them to lodge in process within one month from the date hereof the accounts of their intromissions concluded for in the summons.”

Opinion. —[After narrating the facts ut supra]—“The defenders plead that the action is incompetent and that the pursuers have no title to sue.

In support of the first of these pleas the defenders argued that when the trustee elected not to demand a conveyance of the securities he abandoned them to the defenders for what they were worth. Accordingly, if the securities had turned out to be of less value than that which had been put upon them the loss would have fallen upon the defenders, and it followed that if, upon the other hand, they turned out to be of greater value it would be the defenders who would gain thereby.

Now, that argument appears to me to amount to this, that where a trustee in bankruptcy does not demand a conveyance or assignation of a security, which has been valued and deducted in terms of the 65th section of the Bankruptcy Act, the creditor thereafter holds the subject of the security not as a security but as his own absolute property.

I can find no warrant for that view in the statute. If it had been intended that there should be a transfer of the property of the security-subjects the statute would have said so, but it does not say so, but enacts that the trustee shall either be entitled to a conveyance or assignation of the security on payment of the value specified, ‘or to reserve to such creditor the full benefit of such security.’ It is therefore the security, and nothing more, which is reserved to the creditor.

The defenders, in the next place, founded upon the fact that the transfers and assignation, although truly in security, were in form absolute. The argument was to the following effect: the result of the security being given in that form was that the defenders acquired an absolute title to the shares of the Champdany Company and to the pursuers' interest in the Calcutta Company, subject only to a right on the part of the latter to demand a retransfer and reassignation upon payment of the debt. When, however, the debt was discharged, the defenders could no longer demand payment of it, and therefore the correlative right of the pursuers to demand a reconveyance of the security-subjects was also extinguished.

The argument is ingenious, but I do not think that it is sound. In a question between the pursuers and the defenders, the former had, notwithstanding the ex facie absolute title which they gave to the latter, the proprietary interest in the security-subjects, and although the defenders had a power of sale, yet if they had sold they would have been bound to account to the pursuers for any balance of the price after paying all the debts due to them by the pursuers. As I have indicated, I do not think that that position of matters was altered by the trustee electing not to demand a conveyance of the securities; neither do I think that it was altered by the discharge of the pursuers. It is true that after the discharge the defenders could not have demanded any further payment from the pursuers, but it does not follow that the defenders were entitled to anything more than the full payment of the debt. I cannot see how the discharge could entitle the defenders not only to pay themselves twenty shillings in the pound out of subjects which they held in security only, but also to retain these subjects, however valuable they might be, for their own use. Further, it is plain that the argument with which I am dealing would not have been open to the defenders if the transfers and assignation had been expressed to be in security only, and I do not think that the right of the creditor in a question with the debtor in such a position of matters as we have here can depend upon the accident of the security title being taken in this form or in that, so long as it is a security only.

The defenders also contended that the pursuers had no title and no interest to sue, on the ground (1) that their whole estate had been conveyed to the trustees, who had never been divested thereof except in so far as it had been distributed among the creditors; and (2) that the right to the security-subjects, so far as they were not required to pay the defenders' debt, was not in the pursuers but in their other creditors.

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In regard to the first point, I think that it is sufficient to say that a general conveyance in trust does not divest the truster to any greater extent than is necessary to enable the purposes of the trust to be carried out, and when these have been carried out the truster's estate is relieved of the burden of the trust, and no reconveyance is necessary. A trust for creditors is no exception to that rule. It only creates an encumbrance upon the means and estate conveyed in general terms to the trustee.

The answer to the second point is that the other creditors have all discharged their debts and cannot claim any further payment from the pursuers. There is no fraud suggested here, but only that what is probably a very unusual case has arisen, namely, that although the pursuers' whole means and estate have been divided among their creditors in strict accordance with the bankruptcy laws, it so happens (at least so they aver) that owing to certain subjects held by a creditor in security having become of more value than anyone anticipated, there is still part of their estate to which no creditor has any claim.

I therefore propose to repel the first three pleas-in-law for the defenders, and to order accounts to be lodged.”

The defenders reclaimed, and argued—A secured creditor being allowed by his debtor's trustee to retain his security, was entitled to any advantage accruing from a rise in the value of the security, just as he had to bear the loss if it fell in value. The defenders not having been asked to assign their security debito tempore, their right to the security subjects could not be challenged— Henderson's Trustee v. Auld & Guild, July 6, 1872, 10 Macph. 946, 9 S.L.R. 598. The pursuers in any case could not be entitled to any balance remaining after satisfaction of their debt to the defenders, they could not give the defenders a good discharge—Bankruptcy (Scotland) Act 1856 (19 and 20 Vict, c. 79), sec. 155; Whyte v. Northern Heritable Securities Company, June 16, 1891, 18 R. (H.L.) 37, 28 S.L.R. 950.

Argued for the respondents—The reclaimers did not become absolute proprietors of the security subjects by reason of their being allowed to retain the security and receiving a dividend on the unsecured balance of the debt due to them; if the security held by them had depreciated in value before payment of the final dividend they might have revalued it in order to readjust their claim— Commercial Bank of Scotland v. Speedie's Trustees, November 27, 1885, 13 R. 257, 23 S.L.R. 167, 2 B.C. 7th ed. 361. The trustee was discharged when the trust purposes were satisfied, which they were when the respondents were discharged in terms of the trust deed by their creditors who acceded to that deed; accordingly the respondents had in virtue of their radical right a good title to sue the present action— Whyte v. Murray, November 16, 1888, 16 R. 95, 26 S.L.R. 67; Geddes v. Quistorp, December 21, 1899, 17 R. 278, 27 S.L.R. 224.

At advising—