Scottish Court of Session Decisions

Lord President (Clyde).—The bankrupt's mother is a claimant on the sequestrated estate of her son in respect of two loans of money which she says she made to him, in 1923 and 1925 respectively, to enable him to purchase certain motor vehicles for the purposes of his business. With her claim she lodged no further or other voucher than an account consisting of some four entries representing the capital sums advanced and interest thereon. In order to prove her claim for ranking purposes she produced (1) excerpts from her own and her son's bank accounts, (2) letters from the sellers of the motor vehicles, (3) the parole evidence of herself, the bankrupt, and one of the sellers, and (4) a holograph acknowledgment by the bankrupt dated some time subsequent to the award of sequestration, whereby he acknowledged having received the two loans in 1923 and 1925 respectively. The trustee accepted (1), (2), and (3) as sufficient to prove that the amount of the two loans was derived from certain deposit-receipts belonging to the claimant which she cashed at the dates of the alleged loans; that the price of one of the vehicles was paid forthwith by the claimant herself to the sellers direct, while a sum equivalent to the price of the other two was forthwith lodged in the bankrupt's account and immediately thereafter drawn out by the bankrupt by cheque payable to the sellers. But he found himself unable—and in my opinion rightly so—to hold that these transactions were evidence of loan, unless the holograph acknowledgment was admissible in evidence. The Sheriff-substitute held that it was, and the trustee has appealed.

Loan requires proof by the debtor's writ or oath. On the other hand, it is not (like contracts concerning heritage) incapable of constitution without writing. From which it follows that the writ tendered as evidence of the constitution of the loan need not be contemporaneous with the constitution of it, but may consist in some writing of later date, and is sufficient provided it imports an acknowledgment of the obligation to repay.

It was held in Matthew's Trustee v. Matthew and Williamson v. Allan that, apart from fraud, a written acknowledgment of loan by the bankrupt—even in favour of a near relative—made within the sixty days prior to the bankruptcy, is good evidence to entitle the lender to rank in the subsequent sequestration. It may be (I am expressing no opinion on the subject) that in such a case the evidence of the bankrupt to explain the circumstances in which the acknowledgment was granted—a kind of evidence sometimes necessary in connexion with such documents—is competent. In both the cases quoted, the bankrupt was examined in the proof taken upon the claim.

But the question in the present case is whether a written acknowledgment granted after sequestration is admissible at all. Without some such piece of written evidence the lender cannot prove his debt, and consequently cannot establish his right to rank; and that was the mother's position here when the borrower's estate was sequestrated and placed in the hands of a trustee for division among his creditors according to their legal rights as they stood at the date of the sequestration. It is of no moment that a claimant does not, or cannot, produce the evidence necessary to vouch his claim when he first lodges it—except that it may deprive him of the right to vote. It is not always easy to discover the existence of an essential piece of written evidence; and in cases in which parole evidence is necessary to establish right to a ranking (as it sometimes is) it is only produced at a comparatively late stage in the sequestration proceedings. But the question in this case turns, not on the belated discovery and production of an essential piece of written evidence, but on the creation of it for the first time after the date of sequestration.

It may be that the mother really did lend her son the two sums for which she seeks to rank on his estate; and, if so, it was the plain duty of the son as an honest man to repay her, or, if he could not do so at once, to bring into being some writ of his own which would put her in a position of being able to prove against his executors—or his creditors—that she had truly lent him the money. But he lost the power to do her this act of justice when he was divested of his estate and of all power of disposal over it. The situation is described in the clearest terms by Lord Justice-Clerk Hope in Adam v. Maclachlan . After explaining the effect of sequestration in enabling the creditors—or the trustee—to avail themselves of objections which the debtor could not have raised, and in excluding remedies which the debtor must have at once aided in granting,

he says (at p. 570):—“In particular, no acknowledgment can be granted after sequestration by the debtor, however clear his moral duty, so as to be available against the body of his creditors. The general rule is, that no evidence can be created after sequestration of a debt against the creditors, and there would be infinite hazard in departing from that rule.”

I think therefore that the Sheriff-substitute had no good ground for interfering with the trustee's deliverance, and that that deliverance should stand.

Lord Blackburn.—It is settled law that the evidence of a bankrupt, whether oral or in writing, which is not tendered till after the date of the sequestration is insufficient by itself to vouch the claim of a creditor to rank on the sequestrated estate. No doubt after the sequestration the trustee may invite the bankrupt to give evidence as to the meaning of facts and circumstances which have occurred, or of writings which have passed between the bankrupt and the claimant prior to the date of the sequestration, in order that he may judge whether these constituted the debt habili modo. But evidence tending to show that the debt had been constituted habili modo prior to the sequestration is a very different matter from evidence which constitutes the debt for the first time after the sequestration. The latter is in fact no more than the creation of a new debt.

The claimant in this case avers that she advanced money on loan to the bankrupt prior to the sequestration, but that she failed, when she made the loan, to take any acknowledgment from her debtor in writing. The risk she ran was not confined to the bankruptcy of her debtor. Had he died solvent, she would have had no claim in law against his executor. His sequestration operates in precisely the same manner. Neither his oath nor his writing is available to prove that, prior to the sequestration, she had the necessary evidence to vouch a loan by her to the bankrupt so as to entitle her to rank on the estate in competition with his other creditors. In my opinion the judgment of the Sheriff-substitute is clearly wrong, and I agree that the appeal should be allowed.

Lord Morison.—The question in this case is whether the respondent is entitled to rank and draw a dividend from the estates of her son which were sequestrated under the Bankruptcy (Scotland) Act, 1913.

From the respondent's affidavit and claim it appears that she deponed that the bankrupt was “at the date of the sequestration of his estates and still is justly indebted and resting owing to the deponent in the sum of £820, 18s. 10d., conform to account” appended to the affidavit. The account annexed shows that the claim consists of sums of money, with arrears of interest, alleged to have been lent to the bankrupt on specified dates, viz., (first), a sum of £400 on 16th May 1923, and (second), a sum of £320 on 2nd September 1925.

It is apparent that, if these loans were in fact made, the transactions were not carried out in the ordinary course of business. No receipt was granted by the bankrupt for either loan, and no acknowledgment of them by the bankrupt existed prior to the date of the sequestration. The appellant rejected the respondent's claim, on the ground that there was no competent proof of the alleged debts.

The learned Sheriff-substitute recalled this deliverance, and directed the appellant to hold “an inquiry as to the validity of the claim”; and on the evidence led at this inquiry, and in particular on an admission of his indebtedness made by the bankrupt in a letter written by him to the respondent after the date of the sequestration, he held that the claim was proved, and directed that it should receive an ordinary ranking.

In my opinion the interlocutors of the Sheriff-substitute cannot be sustained. It is, I think, clearly incompetent to order a general parole proof of loans of these sums of money. The learned Sheriff-substitute has treated the question on the evidence as if it raised a competition between the respondent and the bankrupt. He appears to have considered that, as between the bankrupt and his mother, the latter's claim was good, and that it must therefore rank in his sequestration. I do not agree with this reasoning.

As the trustee points out in his deliverance, his duty is to divide the bankrupt's assets among his creditors as at the date of the sequestration in accordance with the rules laid down in the statute. In discharging this duty the statute enacts that in no case shall the creditor's oath supersede the production of legal evidence. Claims to rank in a sequestration are in their nature a congeries of separate actions, in which the creditors are the pursuers, and the defenders are the estate and the general body of creditors. The bankrupt's whole estate is vested in the trustee “absolutely and irredeemably” for division among his creditors. In order to make this right unchallengeable, section 107 expressly declares that, subject to certain exceptions (which are not material to this case), all acts done by the bankrupt after sequestration in relation to the estate are null and void.

In the case of Adam v. Maclachlan the Lord Justice-Clerk, speaking of the process of ranking, said (at p. 567):—“The bankrupt is not a party to the cause. His conscience is not to be appealed to as a litigant at all. The action does not depend on his opinion or his sense of justice, or on his convictions as to the truth or justice of the question…. I take the case of a creditor whose evidence is defective, and who wishes to prove his claim against the others by the oath of one who is not a litigant with him; and in such a case, after sequestration, I apprehend it is a mere question as to the sufficiency of the evidence which the creditor possesses, not whether the bankrupt might be obliged in conscience to admit the debt.”

There are cases—though this is not one of them—in which, in the investigation of creditors' claims, it may be the duty of the trustee to examine the bankrupt on oath. The statute directs the trustee to “examine the oaths and grounds of debt, and in writing reject or admit them, or require further evidence in support thereof,” “for which purpose he may examine the bankrupt, any creditor, or any other party on oath relative thereto.”

Letters written by the bankrupt after his sequestration may be used for the purpose of the bankrupt's examination or cross-examination on oath, but they cannot in themselves be regarded as the bankrupt's evidence, even in cases where the trustee requires his testimony. Nor is it, in my opinion, possible for the bankrupt, by any agreement made or by any acknowledgment granted after sequestration, to affect the distribution of his sequestrated estates.

In this appeal no question arises, or indeed can arise, as to the bankrupt's evidence. His evidence on oath after sequestration is incompetent—Adam v. Maclachlan . A fortiori a letter written by the bankrupt to his creditor after sequestration is, in my view, not evidence of the facts it purports to relate as against the general body of creditors. It has frequently been held that such a letter does not even prove its own date.

In this case the question relates to loans of money alleged to have been made by the respondent to the bankrupt on specified dates. I think the clear effect of the statutory provisions is that, in order to entitle the respondent to draw a dividend, she is bound to produce an oath as to the verity of the debt with the vouchers necessary to prove the debt referred to in such oath—that is a debt due at the date of the sequestration. Wherever there is a special voucher applicable to the character of the debt which ought in ordinary course to be in existence, then, in my view, it must be produced. “In the case of a loan of money for instance,” as Lord Fullerton said in Laidlaw v. Wilson, “the creditor is bound to produce the voucher. In that case the production of a mere statement that the money was lent is against him, rather than a prima facie case in his favour.”

In the present case it appears to me that the respondent's admission that no vouchers for the alleged loans existed at the date of sequestration is fatal to her claim. Without the necessary vouchers the loans were, in my opinion, incapable of proof in the sequestration. I think it was impossible for the trustee to admit this claim as vouched by the documents produced. It was futile for the trustee to call for vouchers or for further writings, because none existed at the date of the sequestration. I think the trustee had no alternative but to reject the respondent's claim. In my humble opinion the Sheriff-substitute's interlocutors from 29th March 1928 until 3rd December 1928 inclusive should be recalled, and the trustee's deliverance of 2nd March 1928 restored.