Freely Available British and Irish Public Legal Information
[Home] [Databases] [World Law] [Multidatabase Search] [Help] [Feedback]
Scottish Court of Session Decisions
You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Halifax Plc v Archibald S Gray CA [2000] ScotCS 44 (18 February 2000)
URL: http://www.bailii.org/scot/cases/ScotCS/2000/44.html
Cite as: [2000] ScotCS 44
[New search] [Help]
|
OUTER HOUSE, COURT OF SESSION |
|
|
CA35/14/99
|
OPINION OF LORD EASSIE in the cause HALIFAX PLC Pursuers; against ARCHIBALD S GRAY, C.A. (TRUSTEE OF MRS J. N. GORMAN) Defender:
________________ |
Pursuers: Sellar; Morton Fraser W.S.
Defender: Mrs Smith Q.C.; Bird Semple
18 February 2000
Introductory
The defender in this action is the trustee on the sequestrated estates of Mrs Jeanne Neil Gorman - "Mrs Gorman". By a transfer agreement dated 20 December 1996 the pursuers acquired the assets and liabilities of the Halifax Building Society - "the Society". In this action the pursuers seek a declarator that a standard security granted by Mrs Gorman in favour of the Society over a house at 42 Russell Street, Johnstone "gives the pursuers, in competition with the defender, a prior right over those subjects (and the proceeds of any sale of them) to the extent of the sum owed by Mrs Gordon to the pursuers".
Both parties have pleas to the relevancy of the opposing pleadings which were argued at a procedure roll debate.
Facts
Subject to one main exception, the facts pertinent to the issues between the parties are a matter of agreement in the pleadings.
On 15 October 1991 a petition seeking the sequestration of the estates of Mrs Gorman was lodged at the Sheriff Court in Paisley and on that date a warrant was granted citing Mrs Gorman to a diet on 6 November 1991 to show cause why sequestration should not be granted. Service of that petition was not however effected in time for that diet. It was not effected until 9 December 1991. Mrs Gorman did not contest the petition and sequestration of her estates was in due course awarded by the sheriff on 8 January 1992, the defender being appointed trustee ad interim. His appointment as permanent trustee on the sequestrated estates was effected by an interlocutor of the sheriff dated 5 February 1992. Since the petition for sequestration was at the instance of a creditor (T.S.B. Bank Scotland plc), the date of Mrs Gorman's sequestration, and hence the relevant date upon which her estate vested in the permanent trustee, was drawn back to the date of the granting of warrant to cite, namely 15 October 1991 - see section 12(4)(b) of the Bankruptcy (Scotland) Act 1985 ("the 1985 Act"). In the interval between that date constituting the date of sequestration and the sheriff's interlocutor of 8 January 1992, Mrs Gorman sought and obtained from the Society a loan of £34,500 which she applied in buying the house at 42 Russell Street at a price of £43,200. As part of the process of obtaining that loan Mrs Gorman signed a questionnaire dated 23 October 1991 which answered negatively a question whether she had ever been bankrupt. It is admitted by the pursuers that at that date Mrs Gorman was unaware of the existence of the petition for her sequestration. It is further averred by the pursuers that on 19 November 1991 Mrs Gorman signed an application form for a loan which contained a declaration in these terms:-
"I/We agree to notify the Society of any change in circumstances relating to my/our purchase or mortgage before completion and I/we authorise my/our solicitor/licenced conveyancer to disclose such information to the Society."
For reasons whose exploration is not necessary counsel for the defender had not previously had sight of that application form (no. 6/4 of process) and by reason of want of instruction was unable to accept whether Mrs Gorman had signed that form and, if so, in what circumstances she had done so. Counsel was therefore not in a position to admit the accuracy of the averment. [This is the exception to the agreement on the facts to which reference was made at the outset of this narrative.]
Following service on her of the petition for sequestration on 9 December 1991 Mrs Gorman did not advise the Society of its existence. On 12 December 1991 she executed a standard security over the house in favour of the Society. On 31 December 1991 the Society advanced to her the sum of £34,500. On the same day - 31 December 1991 - the sellers of the house delivered a feu disposition of the house to Mrs Gorman who, for her part, delivered the standard security to the Society. The disposition was registered in the Land Register of Scotland on 14 February 1992, the area in which the house was situated being subject to the land registration scheme. The Keeper of the Register refused however to register the standard security, or to grant any indemnity under section 12 of the Land Registration (Scotland) Act 1979 - the "1979 Act" - the fact of the award of the sequestration of Mrs Gorman's estate being then known. On 25 June 1996 the defender registered in the Land Register a notice of title in his favour, as trustee of the sequestrated estates, in respect of the house.
The Principal Statutory Provisions
It is not disputed that, as property acquired after the date of the sequestration, the house vested in the defender by virtue of section 32(6) of the 1985 Act which provides that without prejudice to subsection (1) [which relates to income received by the bankrupt and is not pertinent to present matters]:-
".. any estate, wherever situated, which -
(a) is acquired by the debtor on a relevant date; and
(b) would have vested in the permanent trustee if it had been part of the debtor's estate on the date of sequestration;
shall vest in the permanent trustee for the benefit of the creditors as at the date of acquisition; and any person who holds any such estate shall, on production to him of a copy of the act and warrant certified by the sheriff clerk confirming the permanent trustee's appointment, convey or deliver the estate to the permanent trustee:
Provided that -
(i) if such a person has in good faith and without knowledge of the sequestration conveyed the estate to the debtor or to anyone on the instructions of the debtor, he shall incur no liability to the permanent trustee except to account for any proceeds of the conveyance which are in his hands; and
(ii) this subsection shall be without prejudice to any right or interest acquired in the estate in good faith and for value."
The Grounds of the Action
The pursuers put forward two grounds on which they seek the declarator already mentioned, which may be summarised as follows.
First, the pursuers contend that in making the advance to Mrs Gorman in exchange for the execution and delivery of the standard security over the house the Society acted in good faith and for value and such right or interest in the house as is given to them by the standard security is protected by proviso (ii) in section 32(6) of the 1985 Act, quoted above.
Secondly, the pursuers contend alternatively that at all events payment of the loan from the Society was obtained in consequence of a fraudulent or negligent representation by the borrower. By the time payment of the loan was made in exchange for the standard security Mrs Gorman was aware of the petition seeking sequestration of her estate. The statement made in answer to the question in the questionnaire referred to above had therefore become an essentially inaccurate account of the facts. The declaration made in the application for the loan required Mrs Gorman to disclose the service of the petition on her, service of the petition being a material change in circumstances relating to the purchase or "mortgage". Her failure to do so constituted a fraudulent or at least negligent misrepresentation, the Society being then unaware of her being sequestrated. Since assets acquired by a bankrupt and passing to the permanent trustee were taken tantum et tale the trustee therefore could not retain a benefit obtained by the bankrupt through any fraudulent or negligent misrepresentation.
The defender contends that neither basis constitutes a relevant ground of action and therefore seeks dismissal of the action.
The Defender's Submissions
In relation to the first basis upon which the action is presented (s. 32(6) of the 1985 Act) Mrs Smith, who appeared for the defender, advanced three principal propositions.
(1) The first proposition put forward by counsel was founded on the fact that whereas the defender had completed his title to ownership of the house by registering the notice of title in his favour the standard security in favour of the Society had not been registered prior to that notice of title. This meant, said counsel, that the defender's title was to be preferred and the standard security had no effect whatever.
In support of this proposition counsel submitted that it had long been recognised that on bankruptcy a trustee who completed his title to heritable property by recording or registration prevented an unrecorded or unregistered heritable security from receiving effect. The importance, for a trustee in a sequestration, of promptly recording his title in the Sasine Register in order to prevent prior, unrecorded grants by the bankrupt of heritable securities or conveyances from receiving effect in competition with the trustee, as representative of the general body of creditors, was evident from, among others, Bell's Commentaries II, 338; Bell's Lectures 812; Craigie on Conveyancing 512-514; Wallace on Bankruptcy 237 and Burns on Conveyancing Practice 409. Counsel further referred to Cormack v Anderson (1829) 7 S. 868; Viscount Melville v Paterson (1842) 4 D. 1311, notably the familiar dictum of the Lord Ordinary (Lord Ivory) at 1315 on the need for a trustee to run a race to the Register; and to Smith v Frier (1857) 19 D. 384, particularly per the Lord Ordinary (Lord Handyside) at 387-388 and Lord Deas at 396.
In the light of these authorities counsel for the defender further submitted that the holder of a delivered but unrecorded heritable security was in a very different position from the holder of a delivered, unrecorded disposition. The latter could get entry, sell the property and give a good title by means of a clause of deduction of title and the grantor could not give a voluntary title to anyone else except by fraud on his part. By contrast, the former's rights were wholly dependent on recording. If the grantor disponed the property to a third party prior to the recording of the heritable security the creditor would simply be too late to do anything to make his security real. Similarly a holder of a subsequently granted heritable security who recorded that security before the first holder would obtain preference. Fraud on the part of the granter could not arise.
As I understood it the short, simple proposition was to the effect that since the essence of a security was that it prevailed in priority to other ordinary creditors, and since recording was essential to achieve that priority or preference, the fact that the Society had not been able to register the standard security granted by Mrs Gorman in the Land Register meant that the defender's title, completed by notice of title, must prevail as an wholly unencumbered title. The present action accordingly foundered at the outset on that point.
(2) As her second proposition on this branch of the case, counsel for the defender submitted that in any event Mrs Gorman's grant of the standard security in favour of the Society was null and void.
Section 32(6) of the 1985 Act provided for immediate vesting of the acquired estate in the trustee in the sequestration. That immediate vesting meant that at the very moment at which the disposition of the house from the seller to Mrs Gorman was delivered ownership of the house instantaneously passed to the trustee. Accordingly, Mrs Gorman could never validly grant a standard security over the house because at the very moment of her acquisition of the house she was deemed to have been simultaneously divested of her interest in it.
In support of this branch of her argument counsel for the defender referred to and founded upon the decision of Sheriff Patrick in Alliance & Leicester Building Society v Murray's Trustee 1995 S.L.T. (Sh. Ct.) 77. As in that case, the circumstance that the delivery of the disposition to Mrs Gorman and the delivery of the standard security by her may have taken place on the same date was of no consequence. The receipt of the disposition from the seller of the house and the purported granting of the standard security over it were separate transactions. In view of the full automatic vesting provided for in section 32(6) Mrs Gorman must be treated as never having had any title to grant any valid security over the house.
(3) The third proposition in light of which the first ground of the action was irrelevant was that the pursuers' invocation of proviso (ii) to section 32(6) of the 1985 Act was misconceived since, as mere holders of an unregistered standard security, the Society could, in any event, hold no "right or interest in the estate", i.e. the house.
Counsel for the defender did not dispute that the Society had acted in good faith and had given value. But, she said, all they got in the standard security was a piece of paper, which they might register. They had no possible right or interest in the house simply because the standard security had not been registered. It was essential that a party relying on proviso (ii) had a right or interest in the property. Had a bankrupt, in good faith and for value, disponed heritable property to someone else that other person holding the delivered disposition would be protected. But a standard security was different. Standard securities had been introduced by the Conveyancing and Feudal Reform (Scotland) Act 1970. Section 11(1) provided that "Where a standard security is duly recorded, it shall operate to vest the interest over which it is granted in the grantee as a security for the performance of the contract to which the security relates". Accordingly, said counsel, it is not until the standard security is recorded (or as the case may be, registered), that it can operate to vest the interest as a security. Had the Society been able to register the standard security prior to the award of sequestration then the proviso would apply, but the absence of registration meant that they did not have any interest in the property. In the course of her response to what was subsequently said by counsel for the pursuers, Mrs Smith further submitted that the term "the estate" referred to in the proviso must mean the particular item of estate falling within the leading provision of subsection (6) of section 32 of the 1985 Act. Thus had a bankrupt inherited a car and contracted with a third party that the third party might have use of the car, the contract would give the third party an interest in the car. Or were an artist, after his bankruptcy, to create a painting and give a licence to a third party for its reproduction, the licensee would have an interest in the painting. But those examples were very different from the situation in the current case since, said counsel, a standard security can have no effects whatever if not recorded. A mere claim of debt gave no right or interest in the estate.
Turning to the alternative branch of the pursuers' case (fraudulent or negligent misrepresentation) counsel for the defender pointed out that at the time at which the questionnaire was put to Mrs Gorman for signature the question whether she had ever been bankrupt was correctly answered in the negative. Even if one could infer from the declaration in the later application form the existence of a duty to correct that answer, the simple fact was that even as late as 31 December 1991, when the disposition and standard security were respectively granted and delivered, Mrs Gorman had not actually been rendered bankrupt. Sequestration of her estates was not awarded until 8 January 1992. Mrs Gorman therefore could not be said to be in bad faith. It was essential for the pursuers - in this branch of the action - to aver and prove fraud on the part of Mrs Gorman. The authorities on tantum et tale - particularly Colquhoun's Trustees v Campbell's Trustees (1902) 4 F. 739 - support only fraud as being the ambit of application of the principle of tantum et tale. It was thus not sufficient for the pursuers to aver the weaker alternative of a negligent misrepresentation. The pursuers would have to prove that Mrs Gorman was aware of and understood the significance of the declaration. The declaration was vague and woolly. While a solicitor would appreciate immediately that the Society should be told of the existence of a petition for sequestration, it was not evident that a lay person would have the same appreciation.
This branch of the action, which was really only based on a supposed negligent misrepresentation, was therefore irrelevant and should not proceed to probation.
The Pursuers' Submissions
In resisting the argument advanced by Mrs Smith for the defender, Mr Sellar, who appeared for the pursuers, submitted further that the counterpart of his submissions on the first branch of the case was that no relevant defence had been proponed and decree de plano should accordingly be pronounced. If the pursuers were not successful as respects that argument on the first ground, proof before answer should be allowed on the second branch (misrepresentation) given, in particular, that the averments for the pursuers concerning the application form were not admitted by the defender.
Addressing the submissions made by Mrs Smith on the primary ground of the action (the proviso to s. 32(6)) counsel for the pursuers referred to the first proposition put forward by Mrs Smith, to the effect that the fact of the defender's having registered a notice of title before the standard security had been registered really meant an end to the action. Counsel did not take any issue with the authorities on the race to the registers to which Mrs Smith had referred. However, those authorities were all concerned with the vesting of the estate at the date of sequestration, that is to say, vesting under section 31 of the 1985 Act, in circumstances in which the bankrupt had granted pre-sequestration deeds. The present case was however not concerned with that situation at all, the appropriate provision of the 1985 Act being section 32, which dealt with property acquired by the bankrupt after the date of sequestration.
The manner in which post-sequestration acquisitions were dealt with had been altered by the 1985 Act. The matter had been the subject of recent discussion in Rankine's Trustee v H. C. Sommerville & Russell 1999 S.L.T. 625. While under the preceding legislation (section 98 of the Bankruptcy (Scotland) Act 1913 and, before then, section 103 of the Bankruptcy (Scotland) Act 1856) it had been enacted that acquirenda -
"shall ipso jure fall under the sequestration and the full right and interest accruing thereon to the bankrupt shall be held as transferred to and vested in the trustee as at the date of acquisition thereof or succession for the purposes of this Act",
the legislation went on to provide that it was necessary, before the trustee might obtain the estate in question, for the trustee to petition the court for a decree of declarator that the acquired estate was vested in the trustee. There had been a significant change of wording in the 1985 Act which discontinued that procedure for declarator and the explanation for that change could be found in the Report of the Scottish Law Commission which preceded the enactment of the 1985 Act.
Looking however to the manner in which post-sequestration acquisitions were dealt with prior to the 1985 Act counsel referred firstly to Lord Napier's Trustee v Lord Saumarez (1899) 1 F. 614. The provision prevailing at that time was section 103 of the 1856 Act, which was in similar terms to the succeeding provision in the 1913 Act. It was pointed out by the Lord President that the words tantum et tale were effectively written across the section. Counsel also pointed to the argument advanced by the creditor, which found favour with the Lord Ordinary, to the effect that the section required the trustee to take the personal right of the bankrupt under the burden of a prior personal right of the creditor. On that view one was not concerned with a race of diligence between persons having independent rights but with a restriction on the bankrupt's own interest which the trustee cannot disregard and which indeed on the principle of tantum et tale affects the interest of the trustee. The trustee accordingly took subject to the burden of any personal right which a creditor might have over or in the estate. In the case cited, the bond and disposition in security held by the creditor, although recorded, was recognised as being in effect only a personal right, and not a real right of security, because the grantor's right had not been infeft. In Grant v Green's Trustee (1901) 3 F. 1016 Lord Kinnear, in whose opinion the other judges concurred, observed at 1019-1020, in relation to the same section,
"that it vests in the trustee ipso jure a right to acquirenda but that is only a personal right which to be fully effectual requires to made real by certain statutory procedure. It is the duty of the trustee when he comes to the knowledge of such acquisitions to apply to the Lord Ordinary to 'declare all right and interest in such estate which belongs to the bankrupt vested in the trustee at the date of acquisition thereof, to the same effect as is hereinbefore enacted in regard to the other estates'. The estate dealt with in this section therefore cannot be practically brought under the sequestration without the intervention of the court. It follows that till this done earnings which are not vested by a declarator of the Lord Ordinary to the effect set out in the section remain open to the diligence of creditors whose debts have been incurred after the sequestration, and if any such creditor has made his right effectual by diligence before the trustee has made the right to prior creditors as real by the statutory procedure, the right first made effectual must prevail."
Against that background of the prior law counsel then turned to the Scottish Law Commission's Report which at paragraph 11.18 explained that the procedure of applying to the court for a declarator had the dual purpose of "providing a mechanism for transforming the personal right of the trustee to acquirenda into a real right and of providing through advertisement and the intervention of the court a safeguard for persons who might have a legitimate interest to object to the estate falling under the sequestration". The thinking which led to the enactment of section 32 of the 1985 Act was explained in paragraphs 11.19 and 11.20 of the Report. The proposal that the requirement on the trustee of petitioning the court for a declarator be abolished was to be subject to rules proposed for the protection of persons acquiring in good faith and for value any right or interest in the estate. Hence, at paragraph 11.20 it is stated,
" Again, the trustee should not be entitled to challenge a title to any interest in, or security over, the property where the title to that interest has been acquired in good faith and for value."
Clause 30 of the draft Bill annexed to the Report is in identical terms to those which were enacted in section 32 of the 1985 Act. Accordingly, said counsel, the cases and authorities on the race to the register applicable to the initial vesting of the sequestrated estates simply did not apply in the case of post-sequestration acquisitions and the proposition (1) advanced by counsel for the defender was accordingly misconceived.
Mr Sellar also submitted that the proposition was ill-founded for the further reason that a "race to the registers" did not and could not apply to post-sequestration acquirenda which were subject to the land registration system. The Society had sought to register the standard security but the Keeper had refused to register it because it was then known that Mrs Gorman's estates had been sequestrated. It was not suggested by the defenders that the Keeper was wrong in refusing to register the standard security. In short, one was not dealing with a competition between creditors at the date of sequestration but with post-dated acquisitions where the law had always taken a different approach.
Mr Sellar then adverted to proposition (2) for the defender, namely that since section 32(6) automatically and instantaneously vested the house in the defender at the very moment of its acquisition by Mrs Gorman it was not competent for Mrs Gorman to grant a valid standard security in favour of the Society. If that proposition were sound, said counsel, the scope of proviso (ii) would be so narrowed as to have no real content. If, by such vesting, the bankrupt could not competently confer any right or interest in the acquired property in favour of any third party at all, there was nothing left for the proviso to protect. Yet it was plain that the intention of the legislation was to protect third party interests. The legislation required to be approached in a common-sense way which embraced there being scope for the bankrupt on acquiring property yet to confer rights or interests on third parties - as , said Mr Sellar, was indeed contemplated by counsel for the defender throughout her argument in support of her proposition (3). Mr Sellar further submitted that the standpoint which he adopted was consistent with what had been said by Lord Kinnear in Grant v Green's Trustee, the concept of tantum et tale and the equitable result at which Sheriff Patrick would have liked to have been able to arrive in Alliance & Leicester v Murray's Trustee. In regard to that decision counsel pointed out that proviso (ii) to section 36(2) had not been argued; it was wrong to divide up the acquisition of the property and the grant of the standard security over it as separate transactions when applying the principles of tantum et tale. The facts of Murray's Trustee and especially those of the instant case were a fortiori of those in Grant v Green's Trustee.
Accordingly, proposition (2) was also unsound, the contention that the statute provided for instantaneous, complete vesting in the trustee which elided the possibility of the conferring by the bankrupt acquirer of rights or interests on third parties being irreconcilable with the very existence of the protection for third parties contained in the provisos.
In relation to what had been said by counsel for the defender regarding her proposition (3) - that, failing registration of the standard security, the Society could have no "right or interest in the estate" - Mr Sellar submitted that the crucial question was what was meant by "interest" in the statutory context of proviso (ii) rather than what were the rights of a holder of a standard security in general.
He submitted in the first place that "interest" was a word of wide meaning and on any view was much wider in its scope than "right". He referred to the passage in the speech of Lord Russell of Killowen in Tennant's Trustees v The Lord Advocate 1939 S.C. (H.L.) 1 at 5 where his Lordship said that the word "interest" is "a word capable of wide meaning". Further, if one looked to the terms of the 1979 Act, the definition in section 28 of an interest in land was very wide and, having regard to terms of section 5(1)(b), plainly included a standard security which had not yet been registered. It would, said counsel, be anomalous were the term "interest" in proviso (ii) to be less wide than its employment in the 1979 Act. The same point could be made respecting the 1970 Act - cf. section 9(8)(a) and (b). Further authority for the view that unrecorded deeds relating to land may constitute an interest in land was to be found in Magrie Holdings v Commissioners of Customs and Excise 1991 S.L.T. 38, 42B-C.
Mr Sellar submitted that it was not correct to say, as did counsel for the defender, that an unrecorded standard security was to be distinguished from an unrecorded disposition of heritable property in the respect that the former allegedly gave no rights whatever until recorded and was, in the words of counsel for the defender, simply a "bit of paper" whereas the latter did. Both deeds had the common feature that they gave a jus ad rem and, without further act of the grantor a real right, a jus in rem, might be obtained by the grantee by recording. In Gloag & Irvine on Rights in Security it is stated at p. 77 that -
"The right over the lands which is conferred on the grantee by the execution, and delivery of a bond and disposition in security, is effectual, without infeftment, in a question with the grantor of the security, or with any person gratuitously deriving right from such grantor. But it does not, until completed by infeftment or registration, amount to a jus in re or real right over the lands, which will entitle the security-holder to attach them in the hands of anyone to whom they may happen to be transferred."
As indicated in a footnote to that passage, an unrecorded bond and disposition in security transmitted against the heir of the grantor - Bell's Trustee v Bell (1884) 12 R. 85 and that remained so after 1964 (see Gloag & Henderson, p. 760). What had been said by the court in Trade Development Bank v Crittall Windows 1983 S.L.T. 510 showed that the holder of an unrecorded heritable security might impugn the validity of a recorded disposition or security granted subsequently to the date of his security on the grounds "Rodger (Builders) Ltd v Fawdry" bad faith. It had been accepted by counsel for the defender that had the standard security been recorded prior to the date of the interlocutor awarding sequestration it would unquestionably come within the scope of the proviso. Counsel for the defender had also recognised that an unrecorded disposition by a bankrupt of acquired heritable property would come within the proviso and be effective against the trustee. It would be anomalous and inequitable to recognise, as coming within the scope of the proviso, an unrecorded absolute conveyance but not an unrecorded burdening in security of a loan to acquire the very property entering the bankrupt's patrimony subsequent to the deemed date of his sequestration.
Guidance as to the approach to be adopted to the interpretation of insolvency legislation might be derived from the speeches delivered in the House of Lords in Sharp v Thompson 1997 SC (HL) 66. In his speech, at 76F-G, Lord Jauncey had said in relation to the word "property" occurring in relation to the crystallisation of a floating charge that there was "everything to be said for giving it a practical, common-sense meaning which is likely to produce fair and equitable results between the parties affected by the crystallisation". The passage in Lord Clyde's speech at 82A-C is to similar effect. If that were the proper approach which a court should adopt to the term "property" which, said counsel, has a certain technical legal meaning it should apply a fortiori to the term "interest", which in this context does not have any technical meaning. The meaning of the term "interest" in the proviso could also be tested by considering the vesting provisions of the subsection. The term "estate" in the 1985 Act included purely personal items such as mere contractual claims. (The statutory predecessors, sections 97 and 98 of the Bankruptcy (Scotland) Act 1913 employed the phrase "all right title and interest"). In the context of section 32 of the 1985 Act it would be anomalous indeed were "interest" in the proviso to have a narrower ambit than in the leading, vesting subsection. The term "interest" as employed in the proviso was at least wide enough to cover what was given to the grantee of an unrecorded standard security.
Accordingly it was submitted that there was no relevant defence to this, the leading, branch of the pursuers' case.
Turning to the second branch of the case (misrepresentation) Mr Sellar disputed that the principle of tantum et tale was restricted to instances in which property falling to the bankrupt had been acquired by fraud. The principle had much wider application, as was illustrated by the terms of paragraph 11.22 of the Scottish Law Commission's Report which expressed also the intention of the Commission not to suggest the imposition of any legislative restriction on its future application. Counsel for the pursuers further referred to Goudy on Bankruptcy, 249; Colquhoun's Trustees; and McBride on Bankruptcy paragraph 9.26.
It was hard, said counsel, to think of any more pertinent change of circumstances relating to the grant of a "mortgage" (sic.) application than that the applicant had been served with a petition for the sequestration of her estates on the ground of her insolvency. If Mrs Gorman had told the pursuers of the petition for the sequestration of her estates it was abundantly plain that the Society would not have granted her the loan to purchase the house. Had she not obtained the Building Society loan the house would not have formed part of her acquired estate. The trustee therefore cannot take advantage of her misrepresentation by silence and therefore in a question with the pursuers the trustee cannot refuse to give effect to the standard security. The misrepresentation case was therefore relevant but, given that the defender had not admitted the signature by Mrs Gorman of the application form, a proof before answer was, for that reason at least, required on this alternative branch of the pursuers' case. However, the primary submission was that, looking to the essential issues involved in the first ground of the action, no relevant ground of defence had been stated, or could be stated, and accordingly decree de plano should be granted.
Discussion
It is of course the case that the house was not the property of the bankrupt at the date of her sequestration but is an item of property which she purchased after that date employing, for that purpose, funds lent to her by the pursuers in exchange for the delivery of the standard security over the house. As Mrs Gorman's trustee, the defender's entitlement to the house therefore flows, not from the vesting provisions of section 31 of the 1985 Act, but from the provisions of section 32(6) of that Act. The primary basis whereon the pursuers seek the declarator for which they conclude is the terms of proviso (ii) to section 32(6) of the 1985 Act. The issues raised in the case therefore appear to me to involve first and foremost the construction and application of section 32(6) of the 1985 Act, including of course the scope and ambit of its provisos.
In her submissions counsel for the defender submitted (proposition 2) that since section 32(6) of the 1985 Act provides that any estate acquired by the bankrupt after the date of the sequestration vests in the trustee as at the date of acquisition, the immediacy of that vesting means that a bankrupt has no power validly to convey away the asset or to grant any security or other right in or over it. If correct, that proposition would provide a very short answer to the action.
There is on very first sight a logical attraction to that proposition. It was a proposition which found favour with Sheriff Patrick in Alliance & Leicester Building Society v Murray's Trustee. Although unhappy about the inequitable result to which she was apparently driven, the Sheriff stated in the course of her opinion (p. 81C)
"Were the [bankrupt] following his sequestration to receive as a gift a disposition of heritable property from a relative (which disposition was granted after the date of sequestration), it is clear that the subjects would vest in the [trustee] (s. 32(6)(a) of the 1985) and that the [bankrupt] would not be in a position to grant either a standard security or a disposition of the subjects to a third party and were he to do so, that writ would be invalid."
In the action before Sheriff Patrick it appears that the proviso (ii) was not relied upon but in relation to the vires or power of the bankrupt to transact with the acquired property I have come to the conclusion that the proposition advanced by Mrs Smith, and accepted by Sheriff Patrick, is not sound.
First, as was pointed out by counsel for the pursuers, if the provisions of section 32(6) mean instantaneous vesting in the trustee in sequestration of a complete, real right to the absolute exclusion of the power of a bankrupt to confer any right or interest on a third party it was difficult - indeed impossible - to see any actual scope within which the provisos to the leading provisions of that subsection might operate. In her endeavours to exemplify and define the concept of a right or interest in the property acquired post-sequestration by the bankrupt, counsel for the defender provided only examples of rights or interests conferred by the bankrupt. Accordingly the very existence of proviso (ii) presupposes, at the least, an ostensible power on the part of the bankrupt acquirer to confer rights or interests respecting the property acquired after the date of the sequestration.
Further, looking to the legislative predecessors of section 32 of the 1985 Act, while each of section 103 of the 1856 Act and section 98 of the 1933 Act provided for the ipso jure vesting of acquirenda et acquisita neither was seen as excluding the bankrupt's conferring rights or interests on third parties. As was explained in Grant v Green's Trustee the right given to the trustee in bankruptcy was merely a personal right, the bankrupt being divested of the real right of property only by the subsequent declaratory adjudication. The acquired items of property remained open to diligence by post-sequestration creditors. It follows, in my view, that the acquired property might be burdened by the bankrupt by way of security or that other rights in or over it might be conferred by him. In its Report the Scottish Law Commission recognised that the declaratory procedure laid down in the legislation which it was examining provided protection for third parties acquiring an interest in the property falling to the bankrupt post-sequestration by reason of acts on the part of the bankrupt. I do not find in the Law Commission's Report anything to indicate that by their recommendation of the abolition of the declaratory procedure - described as cumbersome - they intended to make impossible the acquisition by third parties from the bankrupt of any non-gratuitous right or interest where the third party was acting in good faith, ignorant of the existence of the sequestration.
Although not subject to any express mention by either counsel, I would add that subsection (8) of section 32 of the 1985 Act expressly nullifies, in a question with the permanent trustee, dealings after sequestration by a bankrupt with the assets vesting, under section 31, in the trustee at the date of sequestration, but that provision is subject to various exceptions set out in subsection (9). It appears to me that it would be at the least odd were certain dealings by a bankrupt with estate which had vested under section 31 to be protected by those exceptions, but any dealing whatever by the bankrupt with the subsequently acquired assets to be beyond any redemption by reason of the instantaneous, automatic and absolute vesting for which counsel for the defender contended.
I therefore conclude that the vesting provisions of section 32(6) cannot have the effect of nullifying ab initio the grant by Mrs Gorman of the standard security in the Society's favour. The statutory provisions necessarily imply a continuing authority in the bankrupt to give a good title to a party acquiring a right or interest in the property for value and in good faith. It is of course difficult to reconcile the conferring of interests to third parties, in good faith and for value, which call for protection by virtue of the proviso, with a concept of automatic vesting of the real right of property in the acquired estate in the trustee. However, in my opinion the vesting provisions of section 32(6) do not have any wider effect than the vesting provisions of section 31 insofar as they too only give to the trustee a personal right. That restricted right in the trustee enables the bankrupt to give good title to third parties acquiring for value and in good faith. I do not see the Law Commission's recommendations as involving more than relieving a trustee in bankruptcy of the necessity of undertaking the "cumbersome" procedure of an action for declarator and it does not appear to me that the Law Commission's proposals encompassed the absolute vesting of the real right in the trustee ipso facto in terms of the statutory vesting. Such an interpretation of section 32 would give the word "vest" a different meaning to that given to the same word in section 31. Accordingly in my opinion section 32 only vests in the trustee in bankruptcy a personal title, it being for the trustee to adopt the appropriate means whereby his title may be made real in situations in which the creation of a real title is necessary, for example by obtaining delivery of corporeal property or, as here, by registering a notice of title to heritable property.
It was perhaps implicit in some of the argument tendered before me that in his decision in Rankine's Trustee Lord Macfadyen had held that the effect of section 32(6) was to vest in the trustee in bankruptcy an instantaneous and immediate vesting of the real right in the acquired property. I have to say that in the context of the issue before him I do not understand Lord Macfadyen's opinion as meaning more than that in consequence of the alteration effected by the 1985 Act there was no further procedural requirement imposed on a trustee in bankruptcy before he might demand the delivery or property held by others for behoof of the bankrupt. I do not read his opinion as expressing the view that the real right in property, including heritable property, acquired by the bankrupt after sequestration is automatically conferred on the trustee by the mere fact of sequestration taken in conjunction with section 32(6).
The further submission for the defender respecting the construction of section 32(6) was to the effect that the pursuers could not come within proviso (ii) because an unrecorded standard security could never be a right or interest in the property over which it was granted.
I did not understand counsel for the defender to dispute the submission advanced by Mr Sellar that, in this context, the word "interest" has a wide meaning and was a wider concept than a "right". Nevertheless, the examples which she gave of instances in which the third party would be protected by the proviso were all cases in which the third party had a personal right to utilise the item of estate in some way. Be that as it may, the essential submission for the defender was that an unrecorded or unregistered standard security had no effect at all.
I have come to the view that this submission is not well founded. While one recognises of course that section 11(1) of the 1970 Act provides that where a standard security is duly recorded it shall operate to vest the interest over which it is granted in the grantee as a security, I do not consider it correct to say that prior to its being recorded a signed and delivered standard security is simply a piece of paper and cannot constitute at least an "interest" in the property over which it is granted. Section 28 of the 1979 Act defines "interest in land" as including a heritable security and section 5(1)(b) treats as an interest in land a heritable security prior to its registration. I agree with counsel for the pursuers that it would be strange were an unrecorded standard security to be an interest in land for purposes of the 1979 Act but could not come within the phrase "right or interest" in proviso (ii) to section 32(6). Further, while section 11(1) of the 1970 Act provides that where a standard security is duly recorded it shall operate to vest the interest over which it is granted, the need to record the standard security in order to give a real right over the land is a characteristic shared by its predecessors, such as a bond disposition in security. In the passage at page 77 in Gloag & Irvine cited by counsel for the pursuers and which I have set out in the narration of the submissions for the pursuers it is stated that an unrecorded but delivered bond and disposition is effectual without infeftment in a question with the grantor of the security. I can see no reason why the same should not apply in the case of a standard security.
Moreover, while the two deeds obviously have different functions, there are similarities or parallels between a delivered, unrecorded disposition and a delivered, unrecorded standard security. In both instances the grantor has done all that is necessary for him to do in order to convey or burden the property as the case may be and the grantee has acquired a jus ad rem, either absolutely or in security as the case may be, which he may make real by recording or registration. As I understood her, counsel for the defender accepted, in my view rightly, that were a bankrupt to grant and deliver for value a disposition of the property acquired by him (after the date of sequestration) to a third party who was in good faith, the divestiture to the third party would be protected by the proviso even though the disposition were not recorded or registered. It would not be open to the trustee to defeat the unrecorded disposition by recording a notice of title. Since such a deed of conveyance is a right or interest in the estate which is protected by the proviso it should follow, in my view, that a deed which burdens the property should likewise constitute a right or interest in the estate which is protected by the proviso.
The fact that the Society had been unable to register the standard security was founded on by counsel for the defender not only in connection with her submission that an unregistered or unrecorded standard security could not constitute a "right or interest in the estate" for the purposes of the proviso, but also in respect of her first proposition that since the defender had completed his title to the house by registration of a notice of title the defender's absolute and unburdened title was to be preferred. The principle of the race to the register as respects the estate held at the date of sequestration is of course well known and vouched by the various authorities to which I was referred by Mrs Smith. However, as counsel for the pursuers pointed out, the present case is not concerned with assets held at the date of sequestration or the rights of the creditors participating in those inter se and the cases on the race to the register are not directly pertinent. The vesting of the estate at the date of sequestration under section 31 of the 1985 Act is not subject to an equivalent provision to that contained in the proviso (ii) in section 32(6) and the treatment of acquirenda and acquisita is thus different. The rights of the trustee to property falling to the bankrupt after the date of sequestration are subject to his need to honour and give effect to any rights or interests in the estate which may have been conferred by the bankrupt. Hence, as I understood it, for that reason counsel for the defender accepted that an unrecorded conveyance by the bankrupt of the acquired property would be effective as against the trustee. The personal right ad rem would require to be respected and could not be defeated by the trustee's rush to the register. In my view it similarly follows that in a question as between a trustee and the grantee of an unrecorded standard security the trustee is required by virtue of the proviso to respect the interest granted by the standard security which is similarly not to be defeated by his rushing to the register.
It is also to be noted that whereas counsel for the defender placed reliance on the fact that the trustee had completed his title to ownership of the house by notice of title in June 1996 the Society had endeavoured to registered its standard security at a much earlier date. The Society's request for registration had been refused by the Keeper. Neither counsel offered any detailed explanation of the basis for the Keeper's refusal to register the standard security, the only reference given to me being to section 4(1) of the 1979, Act which, I think, hardly appears particularly apposite. Neither counsel submitted that the Keeper was wrong to refuse registration. I therefore express no view on the correctness of the refusal but in these circumstances it appears to me that if it is correct that the mere fact of an award of sequestration prevents a person, such as the Society, with an unregistered interest in the estate from registering that interest, that is a consideration which further reinforces me in the conclusion which I have reached as regards the effect of the proviso and the lack of registration of the standard security.
I accordingly consider that the pursuers succeed on the first ground of their claim. That is sufficient to dispose of the action subject to the point that there was some discussion at the debate which I heard concerning the wording of the declarator sought. As I understood it parties were agreed that discussion of the precise wording should be deferred to a By Order hearing following the issue of my opinion. I shall therefore put the case out By Order on that particular basis.
Having reached the foregoing conclusion I propose to give only brief expression to the view which I take of the challenge to the relevancy of the alternative approach advanced by the pursuers. The main ground of challenge was to the effect that reliance in this context on the principle of tantum et tale could only be placed where the bankrupt had been guilty of fraud. While it is no doubt true that the acquisition of an item of estate by fraud on the part of the bankrupt is a clear example of the principle whereby the victim of the fraud may vindicate that item, I am not persuaded that the doctrine is limited to such cases. Having regard to the materials placed before me, which included Goudy on Bankruptcy at 249, and the application of the rules regarding catholic and secondary creditors (Littlejohn v Black (1855) 18D 207) I do not see the principal as being so narrowly confined. The Scottish Law Commission's Report (paragraph 11.22) points to the undesirability of giving statutory expression to the principle , lest that endanger its adaptability and flexibility. It appears to me that any misrepresentation or other acting by the debtor which would otherwise vitiate his holding of the item of the estate in question had his estate not been sequestrated may come within the scope of the doctrine of tantum et tale. It was not submitted to me by counsel for the defender that, leaving apart sequestration, a negligent misrepresentation of the kind alleged would not constitute a vitiating factor. The other points which were taken by counsel for the defender appeared to me to be, in essence, corollaries to her leading submission and in the whole circumstances I would have allowed proof before answer on the alternative branch of the case.