Scottish Court of Session Decisions

The defenders, Halifax, entered into a Transfer Agreement with Halifax Building Society, under which the Society's business, as it stood immediately before the defined vesting day, 2 June, 1997, was transferred to Halifax. The agreement came into force and had effect from 1 January, 1997, and was subject to a number of contingencies some of which were derived from the requirements of the Building Societies Act, 1986, as originally enacted, or from regulations made under that Act. The transfer was referred to the Building Societies Commission in terms of the Act, and in due course the consent of the Commission and all of the other regulatory consents required were obtained. The transfer became unconditional. Accordingly, as provided in section 97 (6) of the Act, "all the property, rights and liabilities" of the Society were, by virtue of the Act, and in accordance with the Building Societies (Transfer of Business) Regulations 1988, transferred to and vested in Halifax.

Section 100 (1) of the Act, so far as is material, provided that the terms of transfer of a building society's business to a company might include provision for rights in relation to shares in the successor company to be conferred on members of the society. In terms of paragraph 5 (1) of schedule 2 to the Act, the rules of a building society might allow a person to become a member of the society without holding a share in the society, and accordingly borrowers from the society might be members. The Transfer Agreement between Halifax and the Society made provision for borrowing members to receive shares in Halifax, or in certain cases to receive the proceeds of disposal of shares. The dispute between the parties relates to the rights of borrowing members of the Society who had been sequestrated prior to the vesting day, and whose estates were administered by the Accountant in Bankruptcy as permanent trustee at, and at all material times before, that date. The Accountant undertakes to prove that each of the relevant individuals satisfied the requirements of the Transfer Agreement relating to entitlement to participate in the rights conferred on borrowing members. He contends that the benefits provided vested in him as permanent trustee on the respective estates, and that he is entitled now to damages for the wrongful acts of the Society in setting the relevant shares aside for, or transferring the shares, or in making the relevant payments, to the bankrupts to the detriment of their sequestrated estates. Halifax does not admit all of the material averments, but it is not in dispute that the Society did in fact set aside certain shares, and did make transfers or payments to the bankrupts themselves. It was not disputed that if the Society committed wrongful acts, Halifax is liable for those acts.

The Transfer Agreement obliged the Society, before vesting day, to subscribe in cash at par a number of shares in Halifax sufficient to comply with the Society's obligations to transfer or procure the transfer of ordinary shares, the "free shares", in accordance with certain provisions of the agreement without financial consideration. Clause 6 provided, in the events which happened, that one such obligation was to confer, on and subject to the terms and conditions of the agreement, on "Qualifying Borrowing Members", a right to a "Basic Distribution" of 200 free shares. The definition provisions in the agreement are complex. The expression "Borrowing Member" is defined. It was agreed by counsel that the Accountant would require to prove, if it continues to be disputed, that each of the bankrupts was at all material times a person who had been accepted as a member of the Society under its rules, in respect of a debt which was, to the satisfaction of the Society, fully secured on land when it was granted. "Qualifying Borrowing Member" is defined as:

Completion day was 1 June, 1997. The additional conditions imported by head (iv) of the definition were that the minimum level of borrowing of £100 had to be satisfied at 31 December, 1996, and on the prescribed voting day, and that the member was not a minor on the date of the relevant special general meeting called to consider the transfer scheme.

The action now relates to the affairs of eight bankrupts, and the Accountant undertakes to prove that each met all of the prescribed requirements of being a "Qualifying Borrowing Member" of the Society. In addition he undertakes to prove that each was a "Qualifying Recipient". That expression is defined as including qualifying borrowing members "who appear to the Society to be entitled to receive... Free Shares under the terms of this Agreement."

The mechanics regulating the distribution of the free shares provided for the distribution of "Share Allocation Forms" by the Society to each person who, at the time the forms were sent out, appeared to the Society to be likely to fulfil the criteria to be a qualifying borrowing member. In the provisions Halifax is referred to as "the Successor". Clause 9.2 of the agreement provides, so far as material:

The structure of some of the provisions is perplexing. There is a reference to "Qualifying Recipient" in clause 6.5 which is not relevant for present purposes. That apart the expression appears in clause 9.2 without procedural antecedents in relation to a person who is described as being "entitled" to free shares, but who must go through the procedural hoop of completing and returning a share allocation form in order to receive them. Read together with the interpretation provision, and with clause 9.1.1., it appears that one possible view is that qualifying recipients were viewed as a sub-class of qualifying members identified under clause 9.1.1. by the Society as entitled to participate in the free issue contingently upon their satisfying the qualifying conditions at all material times. As I understand it, the Accountant was content with that approach for the purposes of debate, since he is prepared to prove that each of the relevant bankrupts was identified by the Society, and was sent an appropriate share allocation form, and indeed completed and submitted it to the Society which in due course acted on the instructions received. The alternative view is that entitlement to participate in the distribution of free shares derived from satisfying the requirements of being a qualified borrowing member, and that clause 9.2 is purely mechanical, regulating the administration of the arrangements for effecting the distribution.

Clause 9.3 applied where share allocation forms were returned three clear days before completion day. In those cases the Society was obliged to procure that the free shares were dealt with in accordance with the member's instructions. The clause provided for a range of possible ways in which the shares might he held for or made over to the qualifying recipient. Clause 9.6 applied where share application forms were returned within the period of four days ending at midnight on 1 June. In those cases the Society was to use reasonable endeavours to procure that the free shares were dealt with in accordance with the member's instructions. The agreement then proceeded:

Finally it is necessary to note the terms of clause 15:

For Halifax it was contended that the Society's obligation was limited to issuing free shares to those whom it was reasonably satisfied had been identified as qualifying recipients. The Accountant was not entitled to rely on the share allocation forms submitted by the bankrupts. And it was reasonable for the Society and Halifax as successor not to be satisfied that the Accountant as permanent trustee of the several bankrupts' estates was himself a qualifying recipient of free shares. There was therefore no duty owed to the Accountant, and no relevant basis for the case of failure of duty alleged. Mr Stuart expanded on each submission. He noted that each bankrupt had been sequestrated not only before 1 June, 1997, but before the Transfer Agreement had been entered into and become effective, and that, given the chronology, the estate of each debtor had vested in the Accountant before the effective date accordingly. The Accountant claimed the shares as acquirenda in terms of section 32 (6) of the 1985 Act. If that were correct, then the rights which accrued under the transfer agreement vested in the trustee from their inception, and the debtor was not entitled to intromit with those rights for his own benefit. The submission of a share allocation form was a right conferred on a person who met the qualifying conditions. No bankrupt debtor of the Society could do so after sequestration. The bankrupt had been divested of the rights which would otherwise have accrued under the Transfer Agreement. The Accountant could not found on the actings of a bankrupt who had, on his own hypothesis, been divested of the capacity to submit a share allocation form. There was no regularly completed and submitted form, therefore there was no entitlement to free shares arising from the debt to the Society. It followed that there could be no breach of any duty owed to the Accountant. Mr Stuart referred to Goudy on Bankruptcy at page 263 in support of his approach. If the bankrupt had not submitted a form, the Accountant could have done nothing about it. If the Accountant as trustee sought to vindicate rights arising under the Transfer Agreement, he could do so only by submitting a share allocation form himself. The position was analogous to that arising under section 32 (8) of the 1985 Act.

Expanding the second of his submissions, Mr Stuart argued that the combined effect of clauses 9.10 and 15 was that the Society was under an obligation only to transfer shares to qualifying recipients. It might be said that the intention of the agreement was to confine membership of the successor company to those who were truly members of the Society, a closed group. The benefit of the free share provisions was dependent on the relationship which existed up to the completion date. The Accountant did not aver that he was a qualifying recipient, nor that he was a qualifying borrowing member of the Society at any time. He had no right to enforce the agreement. He took tantum et tale, and what had passed to him was a set of rights which had been limited under the agreement, their sole source, and which provided benefit only to those who met the requirements set out. That was so in absolute terms. But in any event, the Society was entitled to proceed on the basis of not being reasonably satisfied that he was a qualifying recipient. At the stage of the Accountant's initial letter of 19 May, 1997, the conversion exercise was in full flow, indeed it was approaching its final stages. It could not be reasonable to expect the Society to change course on the basis of the letter alone. If the position was not clear on the averments and documents, at least the defenders were entitled to proof of their averments that they could not have acted reasonably other than as they did. In any event proof would be required on the quantification of any claim which was relevant for proof or proof before answer.

For the Accountant, Mr Howlin agreed that the right of borrowing members of a society to participate in the free issue of shares was derived from the provisions of the Transfer Agreement. There was no provision for bankruptcy in the agreement, in marked distinction to the lengthy provisions regulating succession on death. But there was no need. The position was regulated by statute, in England by the Insolvency Act, 1986, and in Scotland by the Bankruptcy Act, 1985. Sections 31 and 32 of the 1985 Act, though mutually exclusive, were consonant in vesting the bankrupt's estate in the trustee automatically: Rankin's Trustee v Somerville & Russell 1999 S.L.T. 65. The right to free shares conferred on the bankrupts as qualifying borrowers fell to the Accountant, as permanent trustee, as acquirenda in terms of section 32 (6) of the Act as soon as they became unconditional. Mr Howlin discussed the terms of the Transfer Agreement at some length. Nothing in it impinged on the scheme of the 1985 Act. It was a wrongful act for any person to convey or make over to the bankrupt personally estate which had fallen to the permanent trustee, subject only to the provisos to sub-section (6). In this case the Accountant undertook to prove that the Society had notice of the sequestrations in question. The Society had acted in deliberate disregard of the notice, and the proper inference was that they were in bad faith in making the relevant distributions. In any event they could not meet the dual requirements of the first and only material part of the proviso. The proviso took account of the realities of the sequestration timetable. There were necessary periods of notice which resulted in time passing between the presentation of the petition for sequestration, the grant of a warrant to cite the respondent, the award of sequestration, the appointment of an interim trustee, the appointment of the permanent trustee, and the issue of the permanent trustee's act and warrant. Protection of the creditors' rights in the interim was necessary, but it was possible that there could be innocent transactions by third parties who had no notice of the sequestration process, and who acted in good faith in making a disposal which prejudiced the interests of the bankrupt's creditors. The protection afforded by the proviso recognised this risk, but required proof of good faith and absence of notice. It was necessary for the permanent trustee's act and warrant to be exhibited before a transfer of assets to the permanent trustee was fully protected, but prior to that there was no right to transact except in circumstances within the proviso. It was therefore open to the Accountant to seek a remedy against Halifax for the wrongful acts of the Society in putting away the assets in these cases. Mr Howlin rehearsed the terms of the Transfer Agreement to which Mr Stuart had referred, and some additional provisions. I shall refer to the provisions in discussing interpretation. He submitted that the action was relevant, and the defences irrelevant except in relation to the challenge of the Accountant's averments and to quantum.

It is clear from the pleadings, and from the arguments of counsel, that the parties approached the issues in the case from quite different points of view. The defences proceeded on a construction of the Transfer Agreement which limited the obligations of the Society and of Halifax to those who qualified personally as Qualifying Recipients of free shares under the agreement. On that view, the absence of any provision dealing with sequestration was consonant: if the borrower did not qualify personally there was no right at all. The summons treated the rights under the agreement as general incorporeal property, contingent at its inception, but subject to contingencies which were purified at a relevant time, falling within the general scheme of the Bankruptcy Act. The 1986 Act allowed provision to be made for borrowing members, as already mentioned. It did not regulate the provision which might be made for them. Neither party suggested that there was anything in the 1986 Act which bore on the resolution of the issues before me.

Dealing with the bankruptcy code generally, I agree with Lord Macfadyen's analysis in Rankin's Trustee, and in particular with his summary of the effect of section 32 (6) and its provisos at page 71. Counsel accepted the decision. Having regard to its terms, Mr Stuart properly sought leave to delete by amendment the contention in answer 6.1 of the defences that exhibition of a permanent trustee's act and warrant was an essential of vesting, and to delete the second plea in law for Halifax accordingly. I allowed those amendments. Acquirenda vest in the permanent trustee at the date of acquisition provided that the acquisition occurred on a relevant date, which is not controversial in this case, and that the property would have vested in the trustee if it had been part of the debtor's estate at the date of sequestration. In the circumstances there are the following issues:

The main arguments on interpretation of the Transfer Agreement focused on the first issue.

There is nothing in the Transfer Agreement which expressly disqualifies a bankrupt borrower from benefit. As Mr Howlin noted in his submissions, there are provisions disentitling certain persons from benefit. In terms of clause 9.8 shares unclaimed after three years from the vesting day might be sold by the trustee. If that should happen, the right to receive free shares would be extinguished. If, thereafter, nine further years expired without a claim to the free proceeds of sale of unclaimed shares, the unclaimed balance would be forfeit to Halifax, and the rights of those who had not claimed previously would be extinguished. The consequences of death are dealt with at length. But there is nothing to suggest that bankruptcy as such should have any effect. There are provisions which could be relevant in an insolvency. Head (iii) of the definition of Qualifying Borrowing Member excludes from that class any person whose property or all of whose properties secured in respect of the debt due to the Society had been taken into possession and had been retained in possession by the Society as at midnight on the completion day. The expression "taken into possession" is defined in clause 1.10 of the Transfer Agreement in terms which make no reference to the mechanics of the Conveyancing and Feudal Reform (Scotland) Act, 1970. However sequestration constitutes apparent insolvency in terms of section 7 of the 1985 Act, and therefore "notour bankruptcy" and default for the purposes of the standard conditions. It is clear, in my view, that the Society would in general have been in a position to enter into possession of security subjects held in respect of a loan on the sequestration of the borrower if not on an earlier default event. If that had been done, the borrower would have been taken out of the scheme of the Transfer Agreement. Where that step has not been taken, and the borrower has been left in possession, with the Society in usual course entering into an agreement to recover payment from the trustee, there is no apparent reason why the agreement should not apply to the bankrupt as to any other borrowing member unless it can be found in the provisions regulating successors' rights.

There are some provisions which might be construed as referring to singular successors generally, including a permanent trustee. Mr Howlin did not rely on these provisions. It would have been inconsistent with his general approach to have done so. Nor did Mr Stuart. His arguments depended on the hypothesis that any rights of the Accountant must have arisen as a matter of bankruptcy law. It would have been inconsistent with that position to have relied on provisions of the Transfer Agreement which conferred rights on the trustee directly. But it is as well to mention them. In clause 9.8 the Agreement makes reference to the qualified recipient "or his successor". The clause applies for at least three years after the vesting day. It must have been in the contemplation of the parties that within that three year period a range of possibilities could have become realities. A person might die. In that event some possible situations are provided for in clause 8. In particular, clause 8.2. makes provision for a range of possible situations in the event of death before the completion date. It appears that death after the completion date is not dealt with specifically, and there could be scope for a general reference to successors in that context. The borrower next might assign his rights under the Agreement, and have a singular successor in terms of the assignation. Or, he might be sequestrated. It might have been argued that the expression "or his successor" was apt in that event to include a permanent trustee. Clause 9.10 limits the obligations on the Society and on the Successor to transfer Free Shares "to, or in respect of, those persons who have been identified .... as being Qualified Recipients". That provision must be capable of applying during the same three year period. It might have been argued that the expression "in respect of" had to be capable of applying to a transfer to a successor. Mr Howlin urged me to read the two provisions restrictively. He declined to argue that the expression in clause 9.10 "in respect of" encompassed a transfer to a trustee in bankruptcy. He submitted that the provision referred more naturally to the situations covered expressly by clause 9.3, given the drafting conventions likely to have been followed. The obvious risk for the Accountant was that if Mr Howlin was wrong it might be argued that it must follow that in a provision in which representative interests could have been recognised, other than those already reflected by definition in the expression "Qualifying Recipients", but were not, there was an intentional limitation to the individual and the arrangements made for the realisation of that individual's interests. Similar considerations apply to clause 9.8. Since Mr Stuart did not develop an argument on the basis of these provisions, I consider that it would be inappropriate to express any view on their effect.

Turning more particularly to Mr Stuart's two main arguments, it seems to me to be necessary to have regard to the practical realities of the situation. In each of the cases in question the bankrupt appropriated to himself the shares or their proceeds. But that did not arise directly from the completion and return of the share allocation form. The appropriation was made subsequently, when the Society had implemented the instructions contained in the forms and put the bankrupt in a position to appropriate the benefit to himself. The passage in Goudy on which Mr Stuart relied, far from assisting the defenders, in my view assists the Accountant. The bankrupt was entitled to complete the procedural formalities provided that he did so for the benefit of the estate. Section 64 of the 1985 Act provides for compulsion to that end if the trustee were for any reason prevented from carrying out the formal procedures himself. What the passage indicates, in my view, is that the bankrupt could not by completing the forms do anything which affected the trustee's title. However, I doubt whether the passage is directed towards the situation which arises here. In completing the forms the bankrupts were not voluntarily affecting the title to their property. They were enforcing rights which they had been given as borrowers, but which were not available to them personally for their own benefit following sequestration unless they took them as income. The Accountant is entitled to prove that it was the Society which, by its actions, put the assets beyond the reach of the trustee. For the rest there is nothing in the argument. What the trustee could enforce with the help of the sheriff, if need be, he can certainly take the benefit of where the bankrupt acts voluntarily and without compulsion. The matter can be tested by considering what the position would have been if a bankrupt had honestly reported to the trustee that he had been sent the forms, and that, the interests being acquirenda, he would realise the benefit for the estate, or assist the trustee to realise the benefit himself. The Society could have had no answer to the claim for the relevant benefit whether it was communicated by the bankrupt on behalf of his sequestrated estate or by the trustee on that estate.

Having regard to the language used, and the arguments developed on the basis of the terms of the Transfer Agreement, therefore, I consider that bankrupt borrowers were not disqualified from benefit except where the Society had taken possession of the security subjects. The borrowing members' rights to free shares arose on vesting day. And bankrupt borrowing members acquired rights on vesting day accordingly. In a question with the Society, the bankrupts in question were qualifying recipients.

The next question which arises is whether the rights arose as income of the bankrupt. Mr Stuart initially conceded that the borrowing members' interests in the free shares fell within section 32 (6) of the 1985 Act. He was allowed to make a number of amendments to the defences, and in particular to delete from answer 5 averments intended to focus the argument that the right to receive free shares was income of the bankrupts, and was excluded from acquirenda on that basis. On the second day of the debate he was allowed to reinstate those averments, having reviewed his position. It was plain that that argument could not be deployed fully in the time available, and the debate was adjourned to a later date for further argument on the point. On 13 May, 1999, the Halifax's solicitors intimated that they did not wish to present any further argument on the issue. In the result, having obtained leave to reinstate the averments, Halifax advanced no substantial argument in support of the proposition.

The scope of section 32 (1) of the 1985 Act is, in some known circumstances, problematical: McBryde on Bankruptcy 2nd edition para 9.173. Where benefits are derived from assets, the familiar distinction between the tree and the fruit may generally provide a satisfactory test where there is a dispute over classification. Where there is no source asset, as in the case of gambling gains, one may be concerned with the essential characteristics of "income" in a more abstract sense. In the present situation what is involved is a benefit derived from a relationship of borrower and lender where it has been recognised that the wishes of the lender and its constituents to effect a reorganisation cannot be carried into effect without the consent of a qualifying majority of the class of which the bankrupt borrowers were members. In effect a benefit has been provided to procure the necessary consents to the scheme. There might have been extensive argument founded on authorities in other fields of law. But it would be inappropriate to speculate on the scope of these in the circumstances. In my opinion, whatever the scope of section 32 (1) generally, the expression "income" is not apt to include a price paid, in whatever form, to a debtor effectively to accept the substitution of a different creditor on a subsisting loan. The benefit falls more naturally into the language of section 32 (6). In my opinion it is clear that the property would have been acquirenda in all possible relevant situations. Before the Society, or Halifax as the case might be, could have been vulnerable to a claim by a permanent trustee for implement in his favour of the provisions of the Transfer Agreement, there would necessarily have had to be an unimplemented obligation to the borrowing member in question. If the vesting day under the Transfer Agreement was earlier than the date of sequestration, that would require that the distribution had yet to take place generally, but that the member had done all that was necessary to qualify to participate in the distribution, or that the member had not become a qualifying recipient because of some failure properly to comply with the procedural requirements specified in the agreement or share allocation forms. In the first of these cases the member's right to the free shares would have become unconditional. The right to the shares would be part of his estate at sequestration. If there remained some unfulfilled requirement of an unconditional right to participate, the right would properly be described as contingent, and section 31(5) would apply. If any requirement had to be performed by the bankrupt personally, section 64 would oblige him to do that act, and there would be power in the sheriff to order performance if need be. In cases such as those involved in the present dispute, the coming into effect of the Transfer Agreement created a contingent right to the free shares. The conditions qualifying the individual borrowing member's rights included the completion and return of a share allocation form. The Accountant undertakes to prove that those requirements were duly implemented. He is entitled to proof of those averments.

The defenders have no relevant averments to support the application of the proviso to section 32 (6), in my opinion. The averments in answer 6.1 are directed towards a different defence, namely that the Society was entitled to take the view that it was not reasonably practicable for them to treat the Accountant as a qualifying recipient. Having admittedly received the Accountant's letter of 19 May, the Society and the defenders as their successors have no defence under the proviso.

I shall sustain the pursuer's second and fifth pleas in law to the extent of repelling the defenders' fourth plea in law. The defenders' second and fifth pleas in law were repelled by amendment or of consent. I shall exclude from probation the defenders' averments in answer 5 that the benefits were income within the meaning of section 32 (1) of the 1985 Act; the averments in answer 6.1 that the transfer of the free shares to the bankrupt borrowers personally was in implement of clause 6.1 of the Transfer Agreement; the averments in that answer that the Accountant failed to identify himself an a qualifying recipient, and was for that reason excluded from benefit; and the averments in the same answer that the Society could not reasonably practically have identified the Accountant's interests. I shall allow the Accountant a proof before answer of his averments, leaving the defenders' first plea in law standing for that purpose, in order to allow for proof of the averments that the individual bankrupts were in right of the benefits in question. I shall allow proof before answer otherwise on parties' pleadings, since quantum of damages is disputed generally.