Scottish Court of Session Decisions

Charles John Munro, C.A., Edinburgh, as trustee for certain creditors of a debtor under a minute of agreement of May 1918, and James Bruce, S.S.C., as onerous assignee of certain creditors of the debtor who were parties to the minute of agreement, in and to their claims against the debtor and their rights present and future under the minute of agreement, and the debtor, were complainers in a note of suspension against Henry Rothfield, financial agent, 201 Buchanan Street, Glasgow, respondent, in which the complainers sought suspension of a decree obtained in the Sheriff Court at Edinburgh against the debtor at the instance of the respondent dated 18th October 1918 and of the charge thereon.

The minute of agreement of May 1918 provided, inter alia—“( Second) The first party [the debtor] hereby binds and obliges himself, his executors and representatives whomsoever, to pay the said scheduled debts by instalments, and for that purpose to provide and set aside out of his income a sum of not less than Three hundred pounds per annum, and to pay and authorise that amount to be paid over at intervals of not exceeding three months or thereby, to begin as at thirtieth June Nineteen hundred and eighteen, and that to the third party as his attorney, for proportionate equal division amongst the second parties [the money lending creditors] hereto until the whole scheduled debts are paid, as also the whole expenses of executing these presents, including adequate remuneration to the third party [Charles John Munro] for his trouble and outlays and other disbursements he may, in his discretion, have to make in

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connection with the premises in any way whatever. ( Third) To enable the third party to uplift the said sum of Three hundred pounds which he shall be entitled to do without reference to the first party, and to do whatever may be necessary in addition thereto to give effect to the provisions of the immediately preceding article hereof, the first party shall, of even date with his execution of these presents, grant a power of attorney by him in favour of the third party authorising him to uplift from His Majesty's Treasury, or from whoever pays or may have to pay same, the first party's whole salary … and that quarterly or otherwise as the said salary becomes due and payable, and to apply same primarily for the purposes of these presents, and to pay the balance to the first party, or otherwise to apply same on his the first party's instructions. The said power of attorney shall be irrevocable so long as any part of the obligations of the first party hereunder remain unfulfilled and undischarged to any extent. Further, in the event of the death of the third party, or of his ceasing for any cause or reason to act under the said power of attorney, it is agreed that the first party shall grant a power of attorney, in similar terms and to the same effect to the said power of attorney in favour of the third party, in favour of the nominee of a majority in value of the second parties. ( Fourth) As a security pro tanto for implement of these presents by the first party, he hereby dispones and conveys to the third party his whole estates and effects, heritable and moveable, of every description, including his household furniture, plenishings, and effects, with power to the third party to enter into and take possession of the whole of the said estates if and when he in his the third party's own sole discretion may think proper to do so.… ( Seventh) Nothing herein contained shall import a departure by the second parties or any of them, or a discharge by them or any of them, of their or any of their said scheduled debts until the same are fully paid, the whole claims for which, so far as outstanding from time to time remaining—subject to the provisions hereof—enforceable by all legal process and diligence: But declaring that so long as the said sum of Three hundred pounds per annum is paid by the first party in terms hereof, the second parties hereby bind and oblige themselves to refrain from enforcing their respective claims: And in the event of any failure on the part of the first party to implement his part under these presents, or it becoming impossible, through the death of the first party or from any other cause whatever, for him to carry out and implement the provisions otherwise of these presents to be carried out and have full effect given thereto, the second parties and each of them shall have full power to enforce their respective claims by all legal process and diligence against the first party, his representatives and estate. Upon completion of these presents and of the said power of attorney all actions at present pending at the instance of any of the second parties, including the application at the instance of Henry Rothfield, Two hundred and one Buchanan Street, Glasgow, for sequestration of the first party's estates, shall be withdrawn.”

The schedule of debts appended to the minute of agreement contained the following:—“6. Mr Henry Rothfield, registered moneylender, 201 Buchanan Street, Glasgow, £250.”

On 28th March 1918 the debtor wrote the following letter to the respondent—“To Murray Oliver, Esq., Solicitor, Edinburgh. … Edinburgh, 28 th March 1918. H. Rothfield. Dear Sir—I beg to confirm in writing the arrangement regarding this claim. In the event of the proposed arrangement being carried through as to all the claims specified in the schedule to the agreement, I undertake forthwith to arrange that Mr Rothfield's claim be taken over by instalments at three, four, and six months from the last date of signature in said agreement, and I hereby bind and oblige myself to pay the said instalments accordingly.”

The procedure prior to the stage of the case which is the subject of this report was—The respondent brought an action in the Sheriff Court at Edinburgh against the debtor and alleged that he had been induced to sign the minute of agreement by the granting of the letter above referred to; that he had received £12,10s., but that the first instalment under the letter was £83, 6s. 8d. and had not been paid, and he concluded for £70, 16s. 8d., the difference between the instalment due and the sum paid. He obtained decree in absence on 18th October 1918 and charged thereon. The debtor brought a note of suspension, which was refused in the Bill Chamber. The debtor reclaimed, and in the Inner House the other complainers lodged minutes craving to be sisted as parties to the cause. The Court sisted the minuters, and allowed them to incorporate the averments in their minutes in the statement of facts attached to the debtor's note of suspension. Thereafter the Court recalled the interlocutor of the Lord Ordinary on the Bills (Blackburn) refusing the note, and remitted the cause to him to continue the sist and pass the note. The note having been passed a record was made up.

In the record the averments of parties were—“(Stat. 1) On 9th October 1917 the [debtor] granted to the respondent, who is a moneylender, a bill for £250 payable on demand, in consideration of advances made by the respondent to the [debtor]. (Ans. 1) Admitted. (Stat. 2) In February 1918 certain moneylending creditors of [the debtor], including the respondent (who afterwards all became parties to the agreement after mentioned), were pressing the [debtor] for payment of various sums due to them, amounting in cumulo to about £1200. The [debtor] was unable to pay their claims and was insolvent, and was aware of his insolvency. Said creditors were also aware of his insolvency. In point of fact the respondent on 20th February 1918 presented a petition in the Bill Chamber for sequestration of the [debtor's] estates, in which he averred that the [debtor] was notour bankrupt. Protracted

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negotiations took place between said creditors and the [debtor] with a view to making an arrangement with him under which the claims of said creditor[s] would be satisfied and sequestration of the [debtor's] estates obviated, sequestration being greatly to the disadvantage of all concerned, and in the end the minute of agreement was entered into. Said negotiations took place throughout on the footing that under any arrangement that might be come to all said creditors would receive equal treatment, and that no one of them would obtain a preference over the others. The respondent was at first unwilling to enter into any arrangement, but ultimately agreed to the arrangement set forth in said agreement and was a signatory thereto. The agreement was drafted by his agents Messrs Clark & Macdonald. Although the minute of agreement was not completely signed until 29th May 1918, the terms of the draft were finally adjusted at a meeting of the agents for the various creditors who were parties to it held in the complainer Munro's office on 25th March 1918. By said agreement the [debtor] agreed to set aside in the hands of the complainer C. J. Munro from his income the sum of £300 per annum for payment of the claims of his said creditors, and said creditors, including the respondent, bound and obliged themselves so long as the said portion of the said complainer's income was paid by him in terms of the said minute to refrain from enforcing their respective claims. The debts for the payment of which provision was made in said minute of agreement, which were enumerated in the first schedule there to, included the debt of £250 due by the [debtor] to the respondent, in consideration of which the before-mentioned bill for £250 had been granted by the said complainer. (Ans. 2) The said minute of agreement is referred to for its terms. Reference is expressly made to the admission of the complainers that at the time when the said minute was prepared and executed they were aware of the insolvency of the debtor. Admitted that certain negotiations took place which ultimately led to the signing of said agreement on 29th May 1918. Reference is made to answer 5. Admitted that the respondent at one time presented a petition for sequestration of the estates of the [debtor], which petition was subsequently withdrawn. The process in the said sequestration petition is referred to. Not known and not admitted that any of the moneylending creditors (other than the respondent) were pressing for payment at the date referred to. Quoad ultra denied. (Stat. 3) The said minute of agreement which is referred to contained, inter alia, the following clause, viz.—‘ Seventh.… v. supra …’ ( Ans. 3) Admitted under reference to the said minute of agreement for its terms. Explained that at the time when the said minute of agreement was executed there were numerous creditors of the [debtor] who were not parties to the agreement and whose claims are still outstanding. … (Stat. 5) Recently the complainers Bruce and Munro have ascertained, and it is averred, that while said negotiations were in progress the respondent and his said agents in breach of good faith pressed the [debtor] to grant additional bills to the respondent without consideration so as to give the respondent an unfair advantage over the said other creditors. The [debtor] refused to do this, and the respondent and his said agents then in breach of good faith, and while said negotiations were still in progress, pressed him to enter into a secret arrangement under which the respondent would obtain a fraudulent preference over said other creditors, and ultimately induced him, representing to him that the undertaking therein contained would not be put into force against him, to write a letter to the respondent's agent in the following terms:—‘… [ The letter is given supra]. …’ At the instigation of respondent's said agents the said letter was addressed to Murray Oliver, Esquire, solicitor, Edinburgh. Mr Oliver was then a clerk in the office of respondent's said agents, and is acting as the agent for the respondent in these proceedings. The arrangement set forth in said letter has all along been concealed from the said other creditors of the [debtor], and constitues a fraud on their rights and the rights of the complainer James Bruce as assignee of Messrs Finklestone and is not enforceable. Further, under said agreement the respondent bound himself to withdraw the said petition for sequestration of the [debtor's] estates, but in breach of said agreement he failed to do so. It was only on 8th February 1919, after a minute had been lodged for the complainer James Bruce in the sequestration process, that the petition was dismissed. Further, while the said Clark & Macdonald were through their clerk the said Murray Oliver acting for the respondent in this action, they were at the same time acting as agents for the [debtor] in an action against him at the instance of his sister-in-law, which is at present depending before the Court of Session in the Outer House. The [debtor] on 25th January 1919 wrote a letter to the said Clark & Macdonald recalling his mandate to them to act for him. By the said letter of 28th March 1918 the respondent obtained an undertaking that the debt due to him would be paid at an earlier date than the debts due to the other creditors who were parties to said minute of agreement. The said undertaking constituted an illegal preference in favour of the respondent, and was obtained by him as a consideration for his accession to said minute of agreement. The averments of the respondent in answer in so far as not coinciding with the complainers' averments are denied. ( Ans. 5) The relations between the [debtor] and the firm of Clark & Macdonald are not known to the respondent. The process in the depending action at the instance of the said complainer's sister-in-law is referred to. Quoad ultra denied. Explained that said letter of 28th March, which is produced herewith and referred to, was voluntarily offered by the [debtor] to the respondent as an inducement to him to become a party to the said minute of agreement. This at first he refused to do, as he was in need of the amount due to him by the [debtor] and

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intended to press for payment. It was only on the repeated and urgent requests of the [debtor], and on the express understanding that the undertakings contained in said letter would be implemented, that the respondent ultimately did agree to sign said agreement. The said agreement, to which only a selected class of the [debtor's] creditors were parties, was an unlawful agreement in so far as it purported to confer rights upon creditors who became parties thereto in the knowledge of the insolvency of the debtor. The respondent is not and was not at the date when he signed the said agreement aware that the [debtor] is or had at any time been insolvent. Had the [debtor] been insolvent at the date of the execution of said agreement that fact ought to have been narrated therein and made known to the respondent in this or some other manner. It is expressly denied that it was ever represented to the [debtor] that the undertaking contained in said letter of 28th March 1918 would not be put in force, and he is called upon to aver specifically when and by whom such representation was made. Explained further that from the outset Messrs Clark & Macdonald have consistently declined to have anything to do with the arrangement come to between the [debtor] and respondent or to take any part in the proceedings on behalf of the respondent, and the respondent believes that they were not at the time aware that any additional bills had been asked for. In point of fact the actual terms of said letter of 28th March 1918 were unknown to the said Clark & Macdonald until quite recently. It is believed that the said Clark & Macdonald, on being informed by the [debtor] of the exact terms of the said letter, advised him to place the position of matters before Mr Munro, and it is believed that he did so. The said Murray Oliver, who has all along conducted these proceedings on behalf of the respondent, carried on business as a solicitor for himself for several years at his office, No. 53 Frederick Street, Edinburgh, until Whitsunday 1918, when he transferred his said business to the office of Clark & Macdonald, and conducted it, still on his own behalf, from there. Since March 1916 he rendered certain professional assistance to the said Clark & Macdonald in terms of an arrangement come to for the duration of the war only, whereby he was also entitled to carry on and did carry on his own business. Although the said Clark & Macdonald were naturally aware that he was conducting said case on behalf of respondent as he was entitled to do, they have never, either directly or indirectly, acted for the respondent in the matter, nor were they entitled to interfere with Mr Oliver for so doing. [Stat. 6 set forth the proceedings in the Sheriff Court above referred to.] (Stat. 7) The complainer C. J. Munro has, in virtue of the said minute of agreement and power of attorney therein referred to, regularly uplifted at the end of each quarter, commencing 30th June 1918, the sum of £75, and to each of the second parties to the agreement, including the respondent in these proceedings, he has paid four separate dividends of 1s. per £1 on the amount of their respective debts. The respondent has thus received £50 to account of his debt, the first instalment of £12,10s. being the sum referred to in the initial writ in the Sheriff Court action as having been received by the pursuer to account of the first instalment of £83, 6s. 8d. said to be due in terms of the letter of 28th March. The respondent has received payment of three further instalments of £12, 10s. each since the date of raising the Sheriff Court proceedings. ( Ans. 7) Admitted. (Stat. 8) The agents for the complainer James Bruce have communicated with Messrs J. King, Joseph Jackson, Herbert Manford Limited, and Hyman Kerman, all parties to the said minute of agreement of the second part, and they have intimated that they approve of the action taken by him in appearing in these proceedings. Their claims and his amount together to £759, 7s. 3d., while the whole claims referred to in the said minute of agreement amount to £1285, 6s. The complainer C. J. Munro is concerned to protect and enforce the terms of the said minute of agreement under which he acts and holds office, and which the proceedings complained of, if not suspended, will defeat. ( Ans. 8) The respondent has no knowledge of the alleged communications between the agents for the complainer James Bruce and the other said parties to the minute of agreement, nor of their approval of the complainer Bruce's action. The amount of the claims and the total in the said minute of agreement is admitted. Quoad ultra denied. (Stat. 9) The complainers James Bruce and C. J. Munro were not called as defenders in said Sheriff Court action at the instance of the respondent against the [debtor]. They had no knowledge of it until after the present proceedings were raised. They were not originally complainers in the present note of suspension, but were sisted as complainers in terms of the interlocutor of their Lordships of the First Division dated 22nd February 1919. ( Ans. 9) Admitted that the complainers Bruce and Munro were not called as defenders in the Sheriff Court action, and that they became sisted as complainers in the present proceedings in terms of said interlocutor of the First Division. Quoad ultra not known and not admitted.”

The complainers pleaded, inter alia—“1. The respondent having bound himself by said minute of agreement to refrain from enforcing his claim in respect of the debt for which he obtained decree, the said decree and the charge proceeding thereon should be suspended simpliciter. 3. The answers for the respondent being irrelevant should be repelled.”

The respondent pleaded, inter alia—“1. The said minute of agreement in respect of the complainers' averment of their knowledge of the insolvency of the debtor, being an agreement which these parties are not entitled to enforce as having been affected with illegality—( a) the complainers have no title or interest to present the note; ( b) decree of suspension should be refused. 2. The averments of the complainers are irre levant

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and insufficient to support the prayer of the note. 3. The proceedings complained of not being in breach of the contract embodied in said minute of agreement, suspension should be refused. 4. Separatim, the complainer [the debtor] having, by said letter of obligation dated 28th March 1918, induced respondent to become a party to said minute of agreement, and having failed to implement said letter, the respondent is not bound to implement his part of said agreement to the complainer, and suspension should be refused. 5. The complainer [the debtor] having been solvent at the date of granting said letter of 28th March 1918 and at the date of execution of said agreement, and being still solvent, the obligations undertaken by him in said letter are binding and do not constitute an illegal preference in favour of respondent, and the proceedings following thereon are therefore effectual, and the suspension should be refused,”

On 16th July 1919 the Lord Ordinary ( Blackburn) repelled the reasons of suspension and refused the prayer of the note.

Opinion—“I refused the note of suspension in the Bill Chamber on the ground that the debtor, who was then the only complainer, had not averred facts relevant to infer that the letter granted by him to the respondent was in defraud of his creditors within his own knowledge. Thereafter the assignee of one of the creditors, who was a party to the minute of agreement which it is said justifies the suspension, and the trustee under the agreement, were sisted as complainers and the note was passed. A record has now been made up in which no distinction is taken between the right of the debtor and that of the other complainers to have the decree and charge suspended, and as it was admitted at the Bar that in the event of bankruptcy proceedings there was no hope of any reversion for the debtor, it follows that his interest in the matter is the same as that of the other complainers, namely, to have the terms of the minute of agreement enforced against the respondent.

“It is now averred by the complainers that at the date of the minute of agreement the debtor was insolvent, and that both he and the creditors, who were parties to the agreement, were aware of this state of matters. The respondent does not deny this averment, but states that so far as he is concerned he is not and was not at the date when he signed the agreement aware that the debtor is or was at any time insolvent. It is difficult to believe the truth or sincerity of this statement, for prior to the agreement the respondent had himself on 20th February 1918 presented a petition for the sequestration of the debtor. This petition narrates ‘that the debtor has been rendered notour bankrupt within the last four months and still remains in a state of notour bankruptcy,’ and this petition was the immediate cause of the agreement being entered into.

The respondent, however, founds on the complainers' averment that they entered into the agreement in the knowledge of the debtor's insolvency as an admission that it was a transaction on their part to defraud the other creditors and is thus affected with illegality. He accordingly pleads that the complainers are not entitled to found upon the agreement in any sort of action and that the present action should be dismissed.

The complainers deny that the agreement which they are endeavouring in this action to enforce against the respondent is in defraud of the rights of other creditors and therefore tainted with illegality. They do not now maintain, as was done in the Bill Chamber, that the agreement is of the nature of a composition contract. They found on it as giving them a security for full payment of their debts and as binding the respondent to refrain from enforcing his claim against the debtor. The subject of this security is a salary payable to the debtor by Exchequer, and therefore they say unattachable by his creditors. Accordingly they maintain that in obtaining this security they have not defrauded the other creditors of any right available to them. Although under article 4 of the agreement the debtor dispones and conveys his whole means and estates to the trustee with power to him to take possession at his sole discretion, the complainers maintain that this is only in security of the fulfilment of the obligation undertaken by the debtor in articles 2 and 3 of the agreement which constitute the creditors' security for the payment of their debts. The power conferred on the trustee under article 4 has not been exercised, and the complainers state that it will not be exercised, and consequently that the other creditors are not affected thereby.

I think the complainers are right in their contention that an official salary payable by Exchequer is not attachable—Bell's Comm., i, p. 124; Latta v. Bremner, 1857, 19 D. 1107; but I think it is quite clear that as and when the salary is received by the debtor it becomes available to his creditors. The right of challenge of a voluntary transference of property by a debtor is not necessarily excluded by the fact that at the time of the transaction challenged the subject of it was not attachable by diligence— Obers v. Paton's Trustees, 1897, 24 R. 719, 34 S.L.R. 538. I do not think there can be any doubt that the transaction embodied in the minute of agreement by which certain favoured creditors are enabled to intercept the debtor's salary before it reaches him from Exchequer is a gratuitous alienation of property which at the moment of interception ought to be available to his creditors, and since this agreement was admittedly entered into by the complainers in the full knowledge of the debtor's insolvency it is one which in my opinion the other creditors could set aside as constituting an illegal preference. No attempt has been made by the other creditors to set aside the agreement, and it may well be, for reasons into which I need not enter, that they would gain little if they did so. But that does not appear to me to alter the character of an agreement entered into without the consent of all the creditors, and in my opinion it remains an agreement in de fraud

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of the other creditors' rights and to this extent illegal.

Now the minute of agreement is the foundation of the complainers' whole case. They do not ask suspension of the respondent's decree and charge on any other ground than that he is bound to them by the terms of the agreement. It is accordingly necessary to consider whether the illegality which affects the agreement is such as to require the application of the maxim ex turpi causa non oritur actio. There are not many reported cases in Scotland in which this maxim has been applied, and none of them are very apposite to the present case. The most recent is, I think, The Bile Bean Manufacturing Company, 1906, 8 F. 1181, 53 S.L.R. 827. But in England the cases have been numerous, and whether the maxim is pleaded by the defender or not the moment the Court reaches the conclusion that the pursuer's case proceeds on a transaction in any way affected by illegality the action is dismissed without any consideration of the merits between the two parties. Another maxim In pari delicto potior est conditio defendentis is at once applied. The only case to which I was referred during the discussion was Scott v. Brown Dering & Company, [1892], 2 Q.B. 724, where the Court of Appeal refused to entertain an action founded on a contract for buying shares on the stock exchange, in itself an apparently innocent and ordinary transaction. But it transpired from correspondence produced in the case that the joint purpose of the parties in entering into the contract had been to create a fictitious market for the shares of a new company which had no intrinsic value, and thereby to induce the public to come in and purchase the shares at a premium. The Court at once refused to entertain the action. In his judgment A. L. Smith, L.J., held that the parties had been guilty of a conspiracy to defraud which was indictable, and this appeared to me to distinguish the case to some extent from the present one. I do not think that the fraud with which I hold this agreement to be permeated could be made the foundation of an indictment. But the case of Taylor v. Bowers, [1876], 1 Q.B.D. 291, shows that a fraud need not be indictable to warrant the application of the maxim. In that case an embarrassed debtor made over all his stock-in-trade to A in exchange for fictitious bills for the purpose of defrauding his creditors. One of the creditors being cognisant of the transaction got a bill of sale of the goods from A to secure his own debt, and did this without the knowledge of the debtor. Thereafter the debtor raised an action against A and this creditor to recover the goods. It was held that the fraudulent purpose not having been carried out, the debtor was not relying on the illegal transaction, and accordingly the maxim did not apply, and he was held entitled to recover the goods. But the opinions of the very learned judges who took part in the case make it quite clear that had the debtor been founding on the agreement entered into in defraud of his creditors, instead of endeavouring to set it aside, or had the result of the agreement been that the creditors had been defrauded, which was not the case, the debtor's action would not have been entertained. The quality of the fraud in that case was exactly the same as that of the fraud which affects the agreement in the present case. But the position of the complainers here is very different to that of the debtor and pursuer in the case referred to. Not only are the complainers founding on the agreement and endeavouring to enforce it, but the agreement has already resulted in the creditors who are parties to it having obtained payment of sums of money which otherwise would have been available to the whole body of creditors. Under these circumstances I do not think they are entitled to have their action entertained by the Court. For similar reasons I think that the respondent's action in the Sheriff Court might have been dismissed had it been defended, as the averments in this case show that the letter on which the Sheriff Court action proceeded is affected with illegality to as great an extent as is the agreement. Had the suspension been at the instance of any of the creditors who were not parties to the agreement, and who would have been entitled to have their action entertained, I do not doubt that the application would have been successful. It is the respondent's good fortune that as events have shaped themselves the objection has been taken in the action in which he is defender instead of in that in which he was pursuer. I see no alternative to allowing his decree and charge to stand. Whether if he proceeds to further extremes he will better the position which he has meantime secured for himself under the agreement is not a question which I can take into consideration.

The action will be dismissed.”

The complainers reclaimed, and argued—The agreement between the debtor and his moneylending creditors might create an illegal, undue, or fraudulent preference in the sense that it was voidable at the instance of certain creditors, but it was not a pactum illicitum. Pacta illicita were null and void ab initio. A voidable agreement was binding, and until reduced could be founded upon— Smyth v. Muir, 1892, 19 R. 81, per Lord Kinnear at p. 89, 29 S.L.R. 94. But illegal or fraudulent preferences were not null and void; they were binding till reduced— Drummond v. Watson, 1850, 12 D. 604, per Lord Moncreiff at p. 611, interpreting the Act 1696, cap. 5; Bankruptcy (Scotland) Act 1913 (3 and 4 Geo. V, cap. 20), section 8. The right to repudiate a pactum illicitum was universal, whereas the right to cut down an illegal preference was limited to certain creditors only—Ersk. Inst. iv, 1, 44; Bell's Prin. sec. 2327; Goudy, Bankruptcy (4th ed.), p. 33 and p. 42. Thus a trustee in a cessio could not reduce an illegal preference— Forbes' Trustee v. Forbes, 1903, 5 F. 465, per Lord Kinnear at p. 470, 40 S L.R. 369. Such preferences were, no doubt, called fraudulent, but fraud was a word of ambiguous meaning— Nocton v. Ashburton, [1914] AC 932, per Viscount Haldane at p.953. In its common law sense fraud always

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connoted moral fraud, but it was used in other senses which did not involve any idea of moral fraud, e.g., in fraud of legitim. In a question of preferences in bankruptcy moral fraud was not necessarily involved in a fraudulent preference. Actual fraud need not be proved—Bell's Comm. (7th ed.), vol. ii, p. 184; Goudy, Bankruptcy (4th ed.), p. 23; Main v. Fleming's Trustees, 1881, 8 R. 880, per Lord President Inglis at p. 886, 18 S.L.R. 632. A bargain was pactum illicitum either because it was contrary to public policy or involved actual moral fraud. Thus there was moral fraud in Bile Bean Manufacturing Company, Limited v. Davidson, 1906, 8 F. 1181, 43 S.L.R. 827, and in Scott v. Brown, Doering, M'Nab, & Company, [1892] 2 QB 724. Fraud was also present in Taylor v. Bowers, (1876) L.R. 1 Q.B.D. 291. If the object of the promise or consideration was to promote the committal of an illegal act the result was pactum illicitum— Herman v. Jeuchner, (1885) L. R. 15 Q.B.D. 561, per Brett, M. R., at p. 563. Here the agreement was not only legal but binding till reduced. Herman's case ( cit.) was approved in Wild v. Simpson, 1919, 35 T.L.R. 576. Ex parte Milner, (1885) LR 15 QBD 605, was an example of a case in bankruptcy where there was actual fraud. None of the examples of pacta illicita given in the text writers approximated to the present case, e.g., Bell's Prin., sec. 35, et seq. If so, the respondent was in breach of contract in raising the proceedings in the Sheriff Court, and accordingly the decree should be suspended.

Argued for the respondent—On the assumption that the agreement with the moneylending creditors was not pactum illicitum, the respondent was not in breach of his contract in suing in the Sheriff Court, for his action was not upon the bill scheduled to the agreement, but upon a new agreement constituted by the letter. An express stipulation was required to exclude action if that was the intention of parties— Thin & Sinclair v. Arrol & Sons, 1896, 24 R. 198, 34 S.L.R. 187. But the agreement with the moneylending creditors was pactum illicitum. The agreement was made by a person consciously insolvent to confer a preference on certain creditors which they would not have had otherwise, to the prejudice of other creditors from whom the agreement was concealed. Such a transaction was fraudulent in the full sense of the common law—Goudy, Bankruptcy (4th ed.), p. 492; Bell's Comm. (M'Laren's ed.) ii, pp. 226–229, 399; Arrol & Cook v. Montgomery, 1826, 4 S. 499, (N.E.) 504, per Lord Justice-Clerk Boyle at p. 501, and Lord Alloway at p. 502; Crawford v. Black, 1829, 8 S. 158; Cockshott v. Bennett, 1788, 2 Term Rep. 763, per Lord Kenyon, C.J., at p. 765; Obers v. Paton's Trustees, 1897, 24 R. 719, per Lord President Robertson at pp. 731–732, and Lord M'Laren at p. 733, 34 S.L.R. 538; Thomas v. Thomson, 1866, 5 Macph. 198, 3 S.L.R. 121. It was not necessary to go so far, for if a transference of property were made by the debtor voluntarily, during insolvency, and while conscious of insolvency, to a third party, fraud was presumed, and it was unnecessary that actual intent to deceive should be present—Goudy, Bankruptcy (4th ed.), p. 37. But whatever the exact nature of the taint in such a contract as the present, it was certain that such a contract was not one upon which either of the parties to it could found—Bell's Comm. (7th ed.) i, p. 317, and note 8 referring to Holman v. Johnston, 1775, Cowp. 341, per Lord Mansfield at p. 343, and Blachford v. Preston, 1799, 8 Term Rep. 89, per Lord Kenyon, C.J., at p. 92, and Ashurst, J., at p. 93; Scott's case ( cit.) per A. L. Smith, L.J., at p. 734; Ex parte Cowen, [1867] 2 Ch. App. 563; The Bile Bean case ( cit.), per Lord Stormonth Darling at p. 1200. And it was always competent for either party to repudiate such a bargain for the benefit of the general body of creditors— Taylor's case ( cit.), per Cockburn, L.J., at p. 295; Arrol's case ( cit.). The present case could not be distinguished from M'Ewen v. Doig, 1828, 6 S. 889.

At advising—