Scottish Court of Session Decisions

On 6th May 1913 William Brodie Galbraith, C.A., Glasgow, trustee on the sequestrated estates of Hugh MacDougall, builder in Oban, pursuer, brought an action against William Ironside, solicitor and bank agent, Oban, and Peter Moir, bank agent there, defenders, for reduction of an assignation by the said Hugh MacDougall in their favour of a bond and disposition in security for £2000 in favour of the said Hugh MacDougall.

The pursuer averred—“(Cond. 1) The estates of Hugh MacDougall, builder in Oban, were sequestrated on 12th February 1913, and the pursuer was elected and duly confirmed trustee thereon.… (Cond. 2) Prior to the sequestration of his estates the said Hugh MacDougall carried on business in Oban for a period of twelve years or thereby. During that time his law agents were Messrs Hosack & Sutherland, solicitors in Oban, of which firm Mr John D. Sutherland and the defender William Ironside until the end of March 1912, and thereafter the said William Ironside, were the sole partners. Mr Sutherland was also the agent of the Royal Bank of Scotland's branch in Oban, at which bank the said Hugh MacDougall kept his bank account. The said firm of Hosack & Sutherland were thus intimately acquainted with MacDougall's entire business affairs and with his financial position from the time he commenced business onwards. (Cond. 3) About the month of October 1910 the said John D. Sutherland recommended the said Hugh MacDougall to erect a building of shops and dwelling-houses at Kinlochleven. At that time MacDougall's entire capital amounted only to £600, but on the representation of Mr Sutherland that he would procure a loan for him, MacDougall proceeded with the erection of the tenement. Mr Sutherland failed to procure a loan, but MacDougall succeeded in finishing the property with the assistance of an overdraft from his bankers. On its completion the property was sold for £3000, of which £1000 was paid in cash and the bond and disposition in security described in the conclusions of the summons was taken in payment of the balance. The £1000 received in cash

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was paid to the said John D. Sutherland, and to the extent of £100 it was applied in paying his firm's business accounts, and the balance of £900 was placed to the credit of MacDougall's bank account. After placing this amount to the credit of the account it still stood at debit to the amount of £885, 3s. 5d. This was on 11th November 1911. (Cond. 4) In the month of February 1911 Messrs Hosack & Sutherland asked the said Hugh MacDougall to manage the Ardshiel Granite Quarries, which had formerly been worked by the Quarrier Company Limited, of which company Hosack & Sutherland were the law agents. Having implicit confidence in, and relying as they well knew on the advice of, his law agents, and believing the arrangement which they had proposed to him was for his benefit, the said Hugh MacDougall entered into a contract of copartnery with the said Quarrier Company, under which he was to manage the quarries, receiving an annual salary and a certain share of profits. He was also at this time induced by the said Messrs Hosack & Sutherland to contribute £250 to the capital of the Quarrier Company, but no information whatever was furnished to him by the said Hosack & Sutherland as to the financial position of that company, although they were fully conversant therewith. MacDougall was promised by them balance sheets relating to the quarries, but they were never furnished, and he was thus kept entirely in ignorance regarding the financial workings of the concern. He, however, trusted to his law agents, one of whom was also his banker. The said partnership agreement was invalid and void and null in respect that the Quarrier Company had no power under its memorandum and articles to enter into any such partnership, but Messrs Hosack & Sutherland, in breach of their duty to MacDougall as his agents, failed to inform him of this. (Cond. 5) Towards the end of March 1912 Mr Sutherland retired from the said firm of Messrs Hosack & Sutherland and also from the agency of the said bank. Mr Ironside was thus left sole partner of the said firm of Messrs Hosack & Sutherland, and he, along with the other defender Peter Moir, was then appointed joint-agent at Oban of the said Royal Bank of Scotland in succession to Mr Sutherland. (Cond. 6) A few days before Mr Sutherland's retiral from business the said Hugh MacDougall called for him to discuss his private affairs, when he was assured by Mr Sutherland that these would be put all right before he retired from the business. At this time the said Hugh MacDougall's account with the Royal Bank was overdrawn, but he had no information at the time as to the state of the Quarrier Company's account, nor did he consider that he had any responsibility therefor. About the beginning of April he had some communications from the defender William Ironside as to his personal overdraft, and Mr Ironside suggested an assignment to the bank of certain policies of insurance amounting to £400 on MacDougall's life. Later Mr Ironside suggested that MacDougall should assign to himself and the other defender the £2000 bond which MacDougall held over the property at Kinlochleven. Having implicit confidence in his law agents and bankers, MacDougall agreed to do so, and on 16th April 1912 called at the defenders' office and signed an assignation of the bond. Prior thereto he had received a letter from Mr Ironside dated 12th April, marked ‘private,’ in which it was stated—‘You of course will get a back-letter from Mr Moir and myself stating the purpose for which the assignation is granted. The acceptance of this assignation must not prejudice the position taken up by the bank that your overdraft must be considerably reduced.’ MacDougall understood, and was led by the defenders to understand, that the assignation referred to his individual overdraft, and that he would receive a back-letter from the defenders setting forth the purpose for which the deed had been granted. No such letter was, however, granted. At the same time the life policies before referred to were assigned to the Royal Bank, and thereupon MacDougall was stripped of his whole available assets. The amount of his overdraft at the bank on 12th April was £1131, 12s. 6d. Throughout these transactions Mr Ironside was agent for MacDougall, the Quarrier Company, and for the bank. .… [The italicised words were added by way of amendment, q. v. infra.] … (Cond. 7) After this MacDougall went to Copinsay, where he was erecting a lighthouse, and did not return to Oban till the end of September or beginning of October 1912. He had then a meeting with the defender Moir, who informed him that it was the purpose of the bank to hold him liable for the whole of the Quarrier Company's overdraft. This overdraft amounted to £1412, 11s. 4d. or thereby, while MacDougall's own overdraft only amounted to £401, 11s. 9d. MacDougall at once protested against the attempt which was being made to make an improper use of the assignments which he had made, but the defender Ironside persisted in the position which he had taken up. [ Apart from the Quarrier Company overdraft, MacDougall, it is believed and averred, was solvent on 12th Aprill 1912, and also at the date of the trust deed after mentioned, but] liability for the overdraft of the Quarrier Company at both dates rendered his estates hopelessly insolvent. This was well known to the defenders, who were fully acquainted with MacDougall's entire position.… [The italicised words in brackets were deleted by way of amendment, q. v. infra.] … (Cond. 8) Thereafter MacDougall's creditors began to press him, and on the recommendation of the defender Ironside he, on 23rd November 1912, signed a trust deed in favour of the pursuer. This deed was superseded by the sequestration which was awarded on 12th February following. (Cond. 9) At the time when the said assignation was granted in favour of the defenders the said Hugh MacDougall, having regard to his liabilities as a partner of the said Quarrier Company, was hopelessly insolvent, and this was well known to the defenders. No consideration was given for the said assignation, and the granting and procuring of the said deed was a fraudulent attempt to secure the overdrafts of MacDougall and of the said Quarrier Company to the said bank, and to the prejudice of the just rights of MacDougall's other creditors. The pursuer has called upon the defenders to reassign the said bond to him, but they refuse or delay to do so, and the present action has accordingly become necessary.”

The pursuer pleaded—“(1) The assignation libelled falls to be reduced in respect ( a) that it was granted without consideration; ( b) that at the date thereof the granter was insolvent; ( c) that the said deed was procured by the defenders fraudulently in the knowledge of MacDougall's insolvency, and with the intention to defeat and to the prejudice of the just rights of his others creditors; ( d) that the said deed was procured by the defenders while acting as agents for MacDougall and in breach of their duty to him. (2) That, in the circumstances condescended on, the pursuer is entitled to decree as concluded for.”

The defender, inter alia, pleaded—“The pursuer's averments being irrelevant and insufficient to support the conclusions of the summons, the action should be dismissed.”

On 16th July 1913 the Lord Ordinary ( Skerrington) allowed a proof before answer.

Opinion.—“This is an action to reduce a security voluntarily granted by an insolvent to a creditor, the ground of reduction being fraud at common law. The relevancy is objected to for the reason that the pursuer refrains from averring that the granter of the security was conscious of his insolvency, The judgment and opinions in the well-known case of M'Cowan v. Wright, March 10, 1853, 15 D. 494, show that such an averment is of the very essence of an action of reduction based upon the ground that a security was granted fraudulently and in order to disappoint the legal rights of the other creditors. In the present case the pursuer alleges that the defenders were aware of the insolvency, but a creditor cannot be guilty of collusion in a case where his debtor acted honestly in giving the security.

“For the foregoing reasons I should have dismissed the action as irrelevant but for certain specialties which make it necessary, in my opinion, to have an inquiry into the facts. The pursuer alleges that the defenders, in whose favour the security was granted, were the law agent and the banker of the insolvent; that they knew of his insolvency, but for their own purposes industriously concealed the fact from him; and that they thus obtained from him a security which he could not honestly have granted if he had known his true position. I am not prepared to decide as an abstract proposition in law that a creditor owes no duty whatsoever to his fellow creditors in the matter of obtaining securities from an insolvent, and that accordingly it is impossible to aver or prove a case of the breach of such duty. I shall allow a proof before answer.”

The defenders reclaimed, and after a hearing on 15th November 1913, in the Summar Roll, the Court allowed the reclaimers to amend the condescendence ut supra. The case again appeared in the Summar Roll on 13th December 1913.

Argued for the reclaimers—The pursuer's averments were irrelevant, because (1) they set forth that, apart from the liability for the Quarrier Company's overdraft, for which the pursuer denied MacDougall's responsibility, MacDougall was solvent at the time he granted the assignation; and (2) they did not state that MacDougall was conscious of his own insolvency. The assignation of the £2000 bond did not amount to a disposition omnium bonorum. An averment to the effect that MacDougall was conscious of his own insolvency was a sine qua non—Bell's Comm., vol. ii (7th ed.), pp. 170 and 226 Goudy's Bankruptcy (3rd ed.), p. 40; M'Cowan v. Wright, March 10, 1853, 15 D. 494, per Lord Justice-Clerk (Hope) at 498–9, and Lord Cockburn at 510; Thomas v. Thomson, December 19, 1866, 5 Macph. 198,

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per Lord Neaves at 201, 3 S.L.R. 121, at 122; Price & Pierce, Limited v. Bank of Scotland, 1910 S.C. 1095, 47 S.L.R. 794, per Lord Kinnear, 1910 S.C. at 1110, 47 S.L.R. at 804. It was true that in the case of a gratuitous alienation the insolvent's consciousness of his own insolvency was assumed—Goudy's Bankruptcy (3rd ed.), at p. 24—but the present case was not that of a gratuitous alienation, but of an alleged fraudulent preference. The word “transaction” occurring in Bell's Comm. (7th ed.), vol. ii, pp. 226 and 229, note 1, meant “fraudulent transaction.” Crawford v. Black, December 2, 1829, 8 S. 158, and Jones' Trustees v. Jones, January 25, 1888, 15 R. 328, 25 S.L.R. 245, were different. They were not cases of a fraudulent preference given by a debtor, but cases of creditors themselves taking a preference. Dick v. Alston, 1913 S.C. (H.L.) 57, 50 S.L.R. 726, was also referred to with regard to the knowledge of the insolvent's law agent of his insolvency.

Argued for the respondent—The pursuer's averments were relevant, because (1) they definitely stated that MacDougall was insolvent at the time he granted the assignation, and (2) it was unnecessary to aver that MacDougall was conscious of his own insolvency, for the injury done to the creditors was the same whether he knew of it or not—Bell's Comm., vol. ii (7th ed.), at pp. 226 and 229, note 1; Goudy's Bankruptcy (3rd ed.), p. 40; Kinloch v. Blair, January 18, 1678, M. 889; Cramond v. Bruce & Henry, February 25, 1737, M. 893; Marshall's Trustees v. James Provan & Company and Others, January 21, 1794, M. 1144; Crawford v. Black ( cit.); Jones' Trustees v. Jones ( cit.), per Lord Justice-Clerk (Moncreiff), 15 R. at 332, 25 S.L.R. at 248. Moreover, even if it were necessary to aver that MacDougall was conscious of his own insolvency, the pursuers had averred this, inasmuch as they averred an assignation by him which amounted to a disposition omnium bonorum, and which therefore in itself made MacDougall insolvent to his own knowledge.