Scottish Court of Session Decisions

J. Smart & Company, iron, tinplate, and metal merchants, Sunderland, pursuers, brought an action against George Deans Stewart, tea merchant, Edinburgh, carrying on business under the style or name of Stewart & Company, iron and tinplate workers, 6 Gilmore Place, Edinburgh, defender, in which he sought declarator — “(1) That the defender, on or about 17tn October 1908, while a creditor of the firm of Falconer & Company, tinplate workers, 6 Gilmore Place, Edinburgh, and in the full knowledge that the said firm of Falconer & Company was insolvent, illegally and unwarrantably, without intimation to the creditors of said Falconer & Company, and without price or other consideration paid therefor, took possession brevi manu of the said business of Falconer & Company, including the goodwill thereof, and the machinery, plant, stock, fittings, and other assets of the said firm, and simultaneously removed the name of the said firm and substituted therefor the style or name of ‘Stewart & Company,’ and that he has thenceforth carried on and is still carrying on the said business as a going concern under the said new style or name for his own behoof; (2) that by said illegal and unwarrantable actings the defender has prejudiced the interests of the pursuers as creditors at the said date of the said firm of Falconer & Company to the extent of £189, 10s. 3d., which remains unpaid, and has prevented the pursuers recovering the same; and (3) that by his said illegal and unwarrantable actings the defender has rendered himself liable either to restore the said business in integrum as it stood upon the said 17th October 1908, within such period as to our said Lords shall seem proper, or, failing his so doing, to make payment to the pursuers of the said sum of £189, 10s. 3d., with interest thereon at the rate of five per centum per annum from the date of citation to follow hereon till payment.” There were (2 and 3) relative conclusions for payment.

A. Lawrie Kennaway, W.S., Edinburgh, trustee under a trust deed granted by the late Miss Joanna Falconer, who was alleged in the trust deed to be the sole partner of the firm of Falconer & Company, was also called for any interest competent to him as such trustee, but as there were no operative conclusions against him he did not appear.

The pursuers pleaded, inter alia—“(1)

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The defender having acted illegally and unwarrantably in seizing and maintaining possession of the business of Falconer & Company as condescended on, decree should be pronounced in terms of the first conclusion of the summons. (2) The pursuers haying, by the said illegal and unwarrantable actings of the defender, suffered prejudice in the recovery of their claim as condescended on, decree should be pronounced in terms of the first and second conclusions of the summons. (3) Separatim—The pursuers having suffered loss, injury, and damage through the said illegal and unwarrantable actings of the defender as condescended on, decree should be pronounced in terms of the third conclusion of the summons.”

The defender pleaded, inter alia—“(1) The action as laid is incompetent. (2) The pursuers' averments being irrelevant and insufficient to support the conclusions of the summons, the action should be dismissed. … (5) The defender's whole actings having been legal and regular and in good faith, he is entitled to absolvitor.”

On 12th March 1909 the Lord Ordinary ( Skerrington) sustained the defender's first two pleas-in-law and dismissed the action. The pursuers reclaimed, and on 20th October 1909 the First Division recalled the Lord Ordinary's interlocutor and remitted to him to allow a proof before answer ( 1910 S.C. 18, 47 S.L.R. 8).

The facts of the case appear from the opinions of the Lord Ordinary and Lord Mackenzie.

On 30th March 1910, after a proof, the Lord Ordinary pronounced the following interlocutor:—“Finds that on or about the 17th day of October 1908 the defender illegally took possession of the business of the firm of Falconer & Company, mentioned in the summons, and also the plant and stock of said firm, and that said stock and plant were of the value of £135, 19s. 6d., per inventory and valuation, but that there falls to be deducted therefrom £29 for rent of premises, and added thereto £50 for goodwill of business, making in all £156, 19s. 6d.; appoints the defender to consign said sum of £156, 19s. 6d., with interest from said 17th October 1908 at five per cent. in the Bank of Scotland, Edinburgh, in name of the Accountant of Court and his successors in office, on or before 28th April 1910, with certification that if he fails to make consignation as aforesaid, decree will be pronounced against him for £189, 10s. 3d. (being the amount of the pursuers' debt mentioned in the summons), with interest thereon at five per cent, from 18th December 1908 till paid, and with expenses: Grants leave to reclaim.”

Opinion. — “The defender, Mr Stewart, who is a wholesale tea merchant in Edinburgh, for many years bought tin boxes from a firm, and afterwards from a limited company managed by a Mr Falconer. The latter had a good reputation in the trade for the quality of his work and was also popular with his customers, but he was not successful as a financial manager. The company lost money, and it went into liquidation in November 1906. No offer was made for the goodwill and nothing was paid to the creditors. The machinery belonged to a money-lender, and it was acquired by a Mr Drummond. He and Mr Falconer carried on a similar business for seven months, when it failed. In October 1907 the defender, out of kindness, agreed to help Mr Falconer to a fresh start by advancing £150. As Mr Falconer was an undischarged bankrupt, it was arranged that the business should belong to his sister Miss Joanna Falconer, and should be carried on under the name of Falconer & Company, and that Mr Falconer should act as her manager at £2 a-week, with power to sign cheques and transact ordinary business. Though the so-called firm of Falconer & Company came into existence entirely for the benefit of Mr Falconer, there was nothing simulate about the arrangement that Miss Falconer should own the business. She had the sole legal title to it, and she was alone responsible for its debts. She had some estate, but she did not in fact put any money into the business. That privilege was reserved exclusively for the defender, who during the eleven months from November 1907 to September 1808 inclusive advanced to or on behalf of the firm £339 in all. The advances in so far as exceeding £150 were not voluntary, but were made in order to obviate disaster, as when one of the firm's cheques was dishonoured or when money was otherwise urgently wanted.

In the beginning of October 1908 the defender came to the conclusion that matters could no longer continue on the existing footing — he doing all the paying and Mr Falconer having the uncontrolled management. The defender had known for some time that the business was insolvent, but he did not suspect that the deficiency was so serious as afterwards appeared. On 6th October 1908 he prepared notes as to a proposed transfer of the business from Miss Falconer to himself. She was to make over the assets to him, including the ‘goodwill of the business’ and the lease of the premises, and was also to sign a will bequeathing to him two small properties in Bonnyrigg. The defender on his part was to pay the whole debts of the firm, as also the interest of the bond on the Bonnyrigg properties and the feu-duty. The defender was further to engage Mr Falconer to act as manager of the Dusiness under his (the defender's) direction. In a few days, however, it became clear to the defender that this scheme was unworkable—first, because the financial position of the firm was such that it was impossible for him to undertake to pay the debts in full; and second, because Mr Falconer objected to being reduced to what would be practically the position of a foreman under the defender, and accordingly used his influence with his sister to induce her to refuse her consent. The brother and sister lived together. She was dying of a painful disease, and it was impossible for a stranger to approach her on business.

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In this state of matters I hold it proved that the defender formed the design of acquiring for himself the firm's business at his own hand and without obtaining the consent of Miss Falconer, and that he carried out this design to a successful conclusion. If I am right in this view of the evidence the defender acted illegally, even though the business which he so acquired was insolvent, and may also have possessed no saleable goodwill or profitearning capacity. It is only fair to say that in my opinion the defender acted in the belief that he was doing the best for all the creditors. His counsel strenuously maintained that he had done nothing which he was not legally entitled to do, and the defender doubtless entertained this belief. Of course the defender does not admit that he formed and carried out the design which I attribute to him. His case is that he started under the name of Stewart & Company a new and independent business similar to but different from that formerly carried on by Falconer & Company.

The defender's first overt act towards acquiring the old business or starting a new one (as the case may be) was (without consulting either Miss Falconer or her brother) to call upon the landlord of the Eremises in which the firm carried on business, and to induce him to take advantage of a clause in Miss Falconer's lease entitling him to terminate it if the rent was in arrear for more than three weeks. He at the same time agreed with the landlord for a new lease in his own favour. It was part of the bargain that the defender should pay the arrears of rent (£29) and should have an assignation of the landlord's rights. This happened on 13th October, and formal intimation terminating her lease was sent to Miss Falconer on the same day. The lease in favour of the defender was signed on 16th October and was for five years from its date. The subjects were described as ‘recently occupied by Messrs Falconer & Company,’ though that firm was actually in possession. About the same time the defender approached two merchants who had sold machines to the firm but had not received payment. In one case the machines had not yet been delivered; in the other case they had been delivered on condition that the property should remain with the sellers until payment of the price. The defender induced these merchants to sell the machines to him, thus impliedly rescinding their contracts with the firm. The landlord and the merchants acted within their rights, but I doubt whether the defender acted legally in procuring the termination or rescission of these contracts, especially in view of the fact that the whole business and books of the firm had been disclosed to him as its leading creditor. It is often in the interest of a debtor to make a full disclosure to his creditor of the whole details of his business, and the debtor cannot complain if his creditor takes advantage of his knowledge for the purpose of securing or recovering his debt in the ordinary way; but I do not think that a creditor is entitled to use this knowledge in order to negotiate behind the back of the debtor for the acquisition of rights prejudicial to the debtor, The next matter which engaged the defender's attention was the stock and plant, which were the property of the firm and were in their premises. He had these articles inventoried and valued on 16th October 1908. The valuation came to £135, 19s. 5d., and appended to the valuation there is a statement by the defender of the firm's liabilities and assets, showing liabilities £591, assets (less preferential claims) £145, the deficiency being £446, and the dividend 4s. 9d. per £1. This statement does not include Miss Falconer's private estate if that was of any value, nor does it disclose that the greater part of the defender's claim of £339 was on bills which had not yet matured. With the exception of the pursuers, who had a claim for £189 for materials supplied to the firm, and of the machinery merchants already referred to, the remaining claims were only five in number and for small sums. The defender offered the creditors a composition of 4s. 6d. in the £1, and this offer would have been accepted if the pursuers had not refused to concur. The defender was very anxious to get this composition arrangement carried through. On Saturday, 17th October, he called upon the pursuers at Sunderland and tried unsuccessfully to obtain their consent. I can explain this anxiety only on the theory that it was essential to the defender's plans to acquire the firm's stock and plant. With the same object, as it appears to me, the defender used pressure on Mr Falconer to persuade his sister to sign a trust deed for behoof of her creditors in favour of her law agent. The trust deed was signed and delivered to the trustee on the forenoon of 17th October, but the trustee took no steps to protect the interests of the creditors either on that date or at any other time. On the same day a cheque for £89, 7s. by Falconer & Company in favour of the defender, dated 7th August 1908, was protested for non—payment at the instance of the defender, and shortly afterwards he arrested the largest debt due to the firm. It is, I think, apparent that the defender never intended to accede to the trust deed. On his return from Sunderland on 17th October, and in the knowledge that the trust deed had been signed and delivered, the defender got the keys from Mr Falconer and took possession of the firm's business premises. Mr Falconer had no authority to deliver the keys or to cede possession, and the defender's entry was, in my opinion, illegal. On Monday, 19th October, the defender took possession of the firm's business as completely as if he had bought and paid for it. He took into his service Mr Falconer and the other employees; he used the firm's machinery and plant; he manufactured the firm's tinplate into boxes; he carried out its current orders; and he visited the firm's customers, informing them that he was to carry on the business, and asking for their patronage. He also made use of

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the firm's books and stationery, deleting the name ‘Falconer & Co.’ from the invokes and substituting ‘Stewart & Co.’ In some of the business cards he described his firm as ‘successors to Falconer & Co.’

I have already referred to the trust deed, and have suggested that its sole purpose was to enable the defender to get a title to the moveables. The trustee declined to take the responsibility of selling the plant, but on 21st October, the day before a meeting of the creditors was to be held, he did what served the defender's purpose equally well. He hired out to the defender the plant, machinery, tools, &c., belonging to Falconer & Company at a rent of 10s. per week for three months. This agreement and the collection of eight weekly payments of 10s. were the sole acts of management by the trustee. The defender's counsel argued that this agreement legalised the defender's possession of the plant, and he further argued that it implied that the trustee approved of the defender carrying on business in the firm's former premises. I do not agree. The hiring agreement for three months was ultra vires. Further, the trustee's duty was to ingather the estate and not to condone illegalities. The defender omitted to obtain even an apparent title to the firm's stock-in-trade, but he afterwards substituted other stock of a similar kind, which he laid aside and then poinded as the property of the firm.

To complete this strange story, the defender on 21st October caused Falconer & Company to be charged for payment of the amount of the protested cheque. The execution bears that the messenger-at-arms affixed a copy of the charge upon the gate of the firm's business premises, because after giving six audible knocks he could not gain access. The defender had locked out his own messenger. Miss Falconer died on 9th November, leaving, as I understand, no estate over and above that of the ‘firm.’ On 12th November the pursuers' agent intimated to the defender that he held him liable for the pursuers' debt in respect of his having illegally taken possession of Falconer & Company's business and assets. The pursuers' decree against Falconer & Company is dated 14th November. On 20th November the defender presented in name of the landlord a petition for sequestration for rent against Miss Falconer's representatives. He himself bought in the whole of the sequestrated effects, which were valued at £62. The remaining moveables of the firm to the value of £23 were poinded by the defender in December in virtue of the charge already referred to, and were bought in by the defender. These two sales under Sheriff's warrants disposed of the whole articles in the inventory and valuation No. 110 of process. The defender's counsel placed great reliance upon these purchases as giving his client an unchallengeable title to the articles. The defender's liability (whatever it was) camein to existence on 17th October, when he illegally took possession, and he did not in my opinion improve his position by sequestrating and poinding what he already unlawfully possessed.

I am accordingly of opinion that the pursuers have proved what they promised on record to prove, and that they are entitled to some remedy on the authority of Crawford v. Black, &c., 1829, 8 S. 158. I have done my best to understand this judgment and will try to apply it. The Lord Ordinary (Corehouse) gave no opinion. In the Inner house Lord Craigie dissented, but Lord Balgray and Lord Gillies gave opinions in favour of the Lord Ordinary's interlocutor. The opinions of Lords Balgray and Gillies indicate that there is a heavy burden of proof on an illegal intro-mitter, but the interlocutor assumes that the wrongdoer is entitled to replace either the subjects wrongfully taken possession of or their value. As regards the stock and plant, I see no reason to doubt that No. 110 of process was a full and complete inventory and valuation of the articles of which the defender took possession. These articles cannot be restored completely and in their original condition, so the defender must consign the value, £135, 19s. 6d., under deduction of the rent, £29, or £106, 19s. 6d., with interest at 5 per cent. from 17th October 1908. The pursuers do not claim that the business as it now stands should be treated as belonging to Falconer & Company, and should be sold or wound up for the benefit of that firm's creditors. The only alternative is that the defender should consign the value of the goodwill as in October 1908. There are difficulties in the way of holding that the business had any pecuniary value—(1) It was insolvent and had made no profits, but on the contrary a considerable loss, during the eleven months of its existence, and former and similar businesses had failed; (2) the trade connection was to a large extent personal to Mr Falconer; and (3) the customers were few in number, and the bulk of the orders came from one customer. Still the burden of proof and the presumptions are against a wrongdoer, and it is not impossible that either the defender or a stranger might have been willing to pay (say) £50 in order to secure the continuity of the business. I shall, accordingly, find that on or about 17th October 1908 the defender illegally took possession of Falconer & Company's business, and also its plant and stock, which were of the value of £156, 19s. 6d., and allow him to consign this sum, with interest from said date at 5 per cent., on or before the second box-day; with certification that, failing such consignation, decree will be pronounced against him for the amount of the pursuers' debt, viz., £189, 10s. 3d., with interest thereon at 5 per cent. from the date of citation. The defender may possibly have a preferential claim to part of the consigned fund, but I cannot decide that question now.”

The defender reclaimed, and argued — The defender's actings had been perfectly legal. The defender had obtained a valid lease of the premises from the landlord, and his title was unchallengeable— Dobie, &c. v. Marquis of Lothian, March 2, 1864,

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2 Macph. 788. By doing so he had really benefited the estate. Further, it was perfectly settled law that a landlord had a right, and in certain circumstances was bound, to assign his right of hypothec to a third party if he paid, e.g., a cautioner — Stewart v. Bell, May 31, 1814, 17 F.C. 638; Guthrie & M'Connachy v. Smith, November 19, 1880, 8 R. 107 ( per L. P. Inglis at p. 111), 18 S.L.R. 75. Defender had equally obtained an unchallengeable title to the machinery, having bought it from the proprietors— Orr's Trustees v. Tullis, July 2, 1870, 8 Macph. 936 (per L.J.-C. Moncreiff at p. 946), 7 S.L.R. 625. As to the moveables, he had originally taken them over under a contract of hire from the trustee under the trust deed. This was a proper act of administration on the part of the trustee, as he could not have sold before sixty days— Nicolson & Johnston v. Wright, December 6, 1872, 11 Macph. 179, 10 S.L.R. 104; Ogilvie & Son v. Taylor, January 27, 1887, 14 R. 399, 24 S.L.R. 284. By this hiring agreement the trustee held civil possession— Mitchell's Trustees v. Gladstone, February 27, 1894, 21 R. 586, 31 S.L.R. 480. As at 19th October defender had all the legal requisites to carry on the business except the stock. Defender had endeavoured to purchase that stock at a valuation, which pursuers conceded was a fair one. When he found the offer was not to be accepted he at once replaced the value of what he had used, and in doing so he complied fully with the principle of Crawford v. Black, &c., December 2, 1829, 8 S. 158, more fully reported in 5 F.C. 143, founded on by the Lord Ordinary. Long before the sixty days were up, when he found that the creditors were not to accede to a composition, he took diligence, and that diligence was effective to complete the title to the property. If the diligence was irregular it might have been set aside by a reduction, but this had not been done. Goodwill, further, was always a question of circumstances and depended largely on the nature of the business. It was clear from the evidence that there was no goodwill here. The case of Crawford v. Black, &c., cit. sup., was a very flagrant one and was authority only for the proposition that the value of property illegally taken should be restored. In the present case the defender had accounted for everything that had come into his hands.

Argued for the respondents — Defender had unlawfully taken possession of or converted to his own use the trust estate. The law was clear on the matter—Bell's Com. (7th ed.) vi, i, cap. 2, vol. ii, 170. From the moment of insolvency the insolvent was negotiorum gestor for his creditors. Ordinary creditors were entitled to an equal ranking on the estate, and every transaction which gave an undue preference to anyone, whether directly or indirectly, was struck at. The Act of 1621, c. 18, illustrated this. Bell's principle was applicable in all its force to a case where one creditor brevi manu took possession of what did not belong to him. Defender might have got a valid transfer of the lease, but all that this gave him was a right to the vacated premises. Instead of that, however, he had taken possession of the whole business. The trust deed did not entitle the trustee to let the plant out on hire, and no contract of hire could make the plant defender's property. This trust deed was not binding on anyone, and neither trustee nor creditors had acted on it. The rule as to sixty days only applied to equalising diligences cut down by sequestration. The rights of hypothec were only available so far as the landlord's right still existed, and this had come to an end. The poinding and sequestration could not possibly give defender a right to goods which he unlawfully possessed, and he could not poind his own goods even if it were competent for him to do summary diligence on a cheque. With regard to goodwill, the onus was on the defender of showing that there was none, and he had not discharged it. It was impossible to say that there was not some advantage which amounted to goodwill, or that a purchaser could not have been found who would have given value for it. The present case came well within the rule of Crawford v. Black, &c., cit. sup.

At advising—