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Cite as: [2005] CSOH 117, [2005] ScotCS CSOH_117

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Cowper v. Malcolm & Ors [2005] ScotCS CSOH_117 (23 August 2005)

OUTER HOUSE, COURT OF SESSION

[2005] CSOH 117

A116/01

OPINION OF LORD KINGARTH

in the cause

THE ACCOUNTANT IN BANKRUPTCY

Pursuer;

against

MARGARET COWPER or ORR

Defender

And

MESSRS CONNOR MALCOLM

and OTHERS

Third Parties:

________________

Pursuer: Webster; Brodies

Defender: McNeil; Bonar McKenzie

Third Parties: Kennedy, Solicitor Advocate; Balfour & Manson

23 August 2005

[1] The pursuer sues as permanent trustee on the estates of Alistair Drysdale Orr ("the debtor") conform to Act and Warrant in his favour from the Sheriff of Lothian and Borders at Edinburgh dated 16 April 1998. The defender is the debtor's spouse.

[2] The debtor was sequestrated on 12 March 1998. He was formerly the heritable proprietor of subjects, a house at 117 Dudley Avenue, Leith, Edinburgh ("the subjects"). By Dispositions dated 6 August 1992 the debtor disponed, first, in favour of himself and the defender the whole subjects and thereafter, to the defender, his one half pro indiviso share of the subjects. These Dispositions were not recorded, however, until 13 January 1995, a date within 5 years of the date of sequestration. In this action the pursuer seeks reduction of these Dispositions on the basis that they were gratuitous alienations at common law, and alienations challengeable under Section 34 of the Bankruptcy (Scotland) Act 1985. The matter came before me on procedure roll. The debate related primarily to the pursuer's claim under Section 34 of the 1985 Act.

[3] Section 34 of the 1985 Act provides (so far as relevant):

"34.-(1) Where this subsection applies, an alienation by a debtor shall be challengeable by -

(a) any creditor who is a creditor by virtue of a debt incurred on or before the date of sequestration, or before the granting of the trust deed or the debtor's death, as the case may be; or

(b) the permanent trustee, the trustee acting under the trust deed or the judicial factor, as the case may be.

(2) Subsection (1) above applies where -

(a) by the alienation, whether before or after the coming into force of this section, any of the debtor's property has been transferred or any claim or right of the debtor has been discharged or renounced; and

(b) any of the following has occurred -

(i) his estate has been sequestrated (other than, in the case of a natural person, after his death); or

(ii) he has granted a trust deed which has become a protected trust deed; or

(iii) he has died and within 12 months after his death, his estate has been sequestrated; or

(iv) he has died and within the said 12 months, a judicial factor has been appointed under section 11A of the Judicial Factors (Scotland) Act 1889 to administer his estate and the estate was absolutely insolvent at the date of death; and

(3) For the purposes of paragraph (c) of subsection (2) above, the day on which an alienation took place shall be the day on which the alienation became completely effectual; and in that paragraph "relevant day" means, if the alienation has the effect of favouring -

(a) a person who is an associate of the debtor, a day not earlier than five years before the date of sequestration, the granting of the trust deed or the debtor's death, as the case may be; or

(b) any other person, a day not earlier than two years before the said date.

(4) On a challenge being brought under subsection (1) above, the court shall grant decree of reduction or for such restoration of property to the debtor's estate or other redress as may be appropriate, but the court shall not grant such a decree if the person seeking to uphold the alienation establishes -

(a) that immediately, or at any other time, after the alienation the debtor's assets were greater than his liabilities; or

(b) that the alienation was made for adequate consideration; or

(i) was a birthday, Christmas or other conventional gift; or

(ii) was a gift made, for a charitable purpose, to a person who is not an associate of the debtor,

which having regard to all the circumstances, it was reasonable for the debtor to make:

Provided that this subsection shall be without prejudice to any right or interest acquired in good faith and for value from or through the transferee in the alienation. ...

(6) For the purposes of the foregoing provisions of this section, an alienation in implementation of a prior obligation shall be deemed to be one for which there was no consideration or no adequate consideration to the extent that the prior obligation was undertaken for no consideration or no adequate consideration. ..."

[4] The pursuer claims that by the Dispositions the debtor effected alienations of his property to an associate which became completely effectual on the date they were recorded. The defender resists the pursuer's claim on the basis that the alienations became completely effectual on the date when the Dispositions were delivered by the debtor to the defender's agents, which they offer to prove was on 6 August 1992 - a date outwith the relevant 5 year period. In the event that she is wrong in her contentions, the defender seeks indemnity against the third parties who acted as her agents, on the basis that they failed timeously to register the Dispositions.

[5] Both the defender and the third parties have averments to the effect that, in any event, the Dispositions were for adequate consideration within the meaning of Section 34(4)(b) (and at common law). In particular, it is said that both Dispositions were granted in implementation of a prior obligation expressed in an Agreement dated 6 August 1992. Under that Agreement, the debtor ("the First Party") and the defender ("the Second Party") agreed that:

"(1) The First Party shall grant a Disposition in favour of the Second Party of a one half share of the property.

(2) The Parties shall grant a Standard Security in favour of the Bradford and Bingley Building Society for the sum of FIFTY THOUSAND POUNDS (£50,000) STERLING.

(3) The First Party shall grant a Disposition in favour of the Second Party of his reversionary interest in the subjects."

[6] The defender and third parties have supporting averments to the effect that, although title to the subjects was originally taken in the name of the debtor alone (in or about 1986), both the defender and the debtor applied the net proceeds of sale of a property which they formerly jointly owned (at 2 Parliament Street, Edinburgh) towards the purchase price. In addition a loan of £25,000 from the Halifax Building Society was obtained, and secured by Standard Security over the subjects. It is further averred (in summary) that the value of the debtor's reversionary interest as at 6 August 1992 was £50,000; that thus by the first Disposition the defender became entitled to property worth £25,000; that the debtor wished to raise a further £25,000 for use in his business; that the defender agreed to allow the property to be used as security to enable funds for that purpose to be raised (by means of a new loan of £50,000 from the Bradford and Bingley Building Society and by repaying the existing loan of £25,000 to the Halifax Building Society); that a Standard Security in favour of the Bradford and Bingley Building Society was duly granted on 6 August 1992 and thereafter by the second Disposition the debtor's whole heritable interest in the subjects was transferred to the defender, leaving her with a reversionary interest which, according to the third parties' averments, remained worth approximately £25,000.

The Pursuer's Submissions
[7] The alienations affected by the Dispositions could not properly be said to be completely effectual until they were recorded. Until a disposition of heritable property was recorded, the disponer retained the real right in property, capable inter alia of being adjudged by his creditors. The disponee's right remained ineffective against third parties able to obtain earlier registration. It was for these reasons that until the recording of any disposition heritable property remained part of "the whole estate of the debtor" which vested at the date of sequestration in the permanent trustee for the benefit of the creditors under Section 31 of the 1985 Act. Reference was made to Burnett's Trustee v Grainger 2004 SC(HL) 19. If the debtor was not divested of the real right in heritable property, there was no need for the permanent trustee to have recourse to Section 34. That section was designed to safeguard the interest of creditors. Although there was no directly relevant recent authority, it was held in Grant's Trustee v Grant 1986 SC 51 that a disposition in security became "completely effectual" as a preference, in terms of the Bankruptcy Act 1696 and Section 4 of the Bankruptcy (Scotland) Act 1913, only on the date of recording. This decision was consistent with views expressed in Goudy (A Treatise on the Law of Bankruptcy in Scotland) at page 99 and Wallace (The Law of Bankruptcy in Scotland) at page 52. The pursuer's approach to construction of Section 34 was supported in McBryde, on Bankruptcy, (2^nd edition) at paragraph 12-70 and, in relation to the equivalent provision for company insolvency - Section 242 of the Insolvency Act 1986 - In Palmer on Company Law, Volume 3, at paragraph 15.706.2. There was no reason why Section 34 of the 1985 Act should be looked at only from the point of view of the relationship between the disponer and the disponee. The decision in Sharp v Thomson 1977 SCHL 66 was reached in relation to the use of the word "property" in a non-technical sense in a different, and novel, statutory context. The decisions in Bowman v Wright 1877 4 R 322 and Thomas v Lord Advocate 1953 SC 151 were also distinguishable. The pursuer did not admit the averments of the defender and third parties as to when delivery of the Dispositions took place, but it was accepted that if he was wrong as to the construction of Section 34, his pleadings would be irrelevant in so far as he did not offer to prove that delivery was within the relevant 5 year period.

[8] Further, there were no relevant averments made by the defender or third parties to support a defence of adequate consideration under Section 34(4)(b) of the 1985 Act (or indeed in respect of the common law challenge). The Dispositions were said to be in implement of the prior obligation under the Agreement but, on the face of it, that was undertaken for no consideration or no adequate consideration within the meaning of Section 34(6). Although averments were made in relation to the original purchase of the subjects, there were no averments of a contractual agreement arising out of that or any other obligation which the defender was entitled to enforce or which the debtor required to fulfil. Reference was made to Macfadyen's Trustee v McFadyen 1994 SC 416. And it could not be said, looking at the Agreement alone, that the Dispositions made by the debtor were for consideration or in any event adequate consideration. All that could be said was that the defender was willing to allow the property to be the subject of a further security, but the debtor could have granted a further security himself. In any event, the additional loan funds obtained required to be paid back. Reference was made to Cay's Trustee v Cay 1998 SC 780.

The Defender's Submissions
[9] The pursuer's statutory claim was irrelevant because, in relation to the transfer of heritable property, the date when it became completely effectual as an alienation within the meaning of Section 34 of the 1985 Act was the date when the disposition was delivered. On a proper construction it was appropriate to look at the transferor to see whether any alienation by him was completely effectual. On delivery, the transferor could be said to lose rights of ownership. Reference was made to Halliday, Conveyancing Law and Practice, 2^nd edition, at paragraph 1-13. As between the parties the transfer of property could be said to be complete upon delivery. Reference was made to Bowman v Wright and Thomas v Lord Advocate. Following delivery of a disposition, the disponer could be said to have no beneficial interest in the property. He could be regarded as having effectively disposed of it. Reference was made to Sharp v Thomson. The decision in Burnett's Trustee v Grainger related to the proper interpretation of "the whole estate" of the debtor under Section 31 of the 1985 Act. That section plainly dealt with the relationship between the debtor and the trustee in bankruptcy. By contrast, Section 34 could be said to be concerned with the relationship between the debtor and any transferee of property. Grant's Trustee v Grant was wrongly decided, and in any event related to different wording under the 1696 and 1913 Acts. There was nothing in the Scottish Law Commission Report on Bankruptcy (dated August 1981) to assist in the interpretation of the 1985 Act, and in particular of the words "completely effectual" in Section 34.

[10] In relation to the question of whether the Dispositions were granted for adequate consideration (which it was accepted was the only other possible defence to the Section 34 challenge), the defender's position was that he did not wish to undermine anything which might be said by the third parties. He was therefore content that any argument on this matter should be advanced by them, and thus that the relevance of any defence on this basis should be judged by the third parties' averments which were more complete in this respect.

The Third Parties' Submissions
[11] On the construction of "completely effectual", the submissions of the defender were adopted. It was recognised that there was a tension with Section 31 of the 1985 Act, but it was reasonable for the Court to accept the view that, in context, "completely effectual" meant that the debtor as disponer had done all that he could do to make the transfer.

[12] On the question of adequate consideration, it was accepted that, notwithstanding the averments about the original purchase of the subjects, it could not be said that any legal obligation incumbent upon the debtor or enforceable by the defender arose therefrom. Nevertheless, looking at the Agreement alone, it could be said, broadly, that the overall result of it was that the debtor obtained £25,000 for use in his business, whereas the defender obtained property worth £25,000. Although he remained liable to repay the loan to the building society, the reality was that the lenders, on default, would have recourse to the property for recovery. In these circumstances the value of what the debtor obtained could be measured, after proof, in such a way as to show that the Dispositions were granted for adequate consideration.

Discussion
[13] It was accepted for the purposes of the debate that, prior to his sequestration, there were, as a result (putting it neutrally) of the two Dispositions, alienations by the debtor by which his whole property at 117 Dudley Avenue, Leith was transferred to an associate (the defender) - all within the meaning of Section 34 of the 1985 Act. The primary question was whether the pursuer had relevantly averred that these alienations (or this alienation) took place on a day not earlier than 5 years before the date of the sequestration. This, it was agreed, depended on whether, as the pursuer averred, the alienations (or the alienation) became completely effectual within the meaning of sub-section (3) when the Dispositions were recorded (which was agreed to be on 13 January 1995) or (as the defender and third parties argued) on the date when the Dispositions were delivered to the defender's agents, which the defender and third parties claimed was on 6 August 1992.

[14] I have come to the view that the arguments of the pursuer on this matter are to be preferred.

[15] In light of the decision in Burnett's Trustee v Grainger, there can be no doubt (and it was not disputed) that by virtue of Section 31 of the Bankruptcy (Scotland) Act 1985, the whole estate which vests in the trustee for the benefit of creditors includes the debtor's real right to heritable property in circumstances where, although the debtor has granted and delivered a disposition of the property in favour of a third party, that disposition has not been recorded at the date of sequestration. The decision was reached after analysis of, and having regard to, "a considerable body of authority which underlies and surrounds the bankruptcy legislation" (Lord Rodger at paragraph 84) - in particular, authority to the effect that whatever language of ownership might be used to describe the rights of an uninfeft disponee, his right of "personal fee" was of no effect against third parties who might attach the estate by legal execution for the debts of the disponer, or who might in bona fide purchase it from him, and be first infeft (see e.g. Lord Rodger at paragraph 104).

[16] Section 34 is the first of a series of sections expressly said to relate to the "safeguarding of interests of creditors of insolvent persons". It is a section designed to enable the trustee and others to take steps in certain circumstances in effect to return to the estate available for creditors that which has been alienated by the debtor prior to his sequestration, and which but for the alienation would otherwise have been available by virtue of Section 31. Recourse to the section would not be necessary at all in relation to property which remained part of the debtor's estate for the purposes of Section 31 (and in respect of which the trustee first completed title). In these circumstances the natural and reasonable interpretation, in my view, is that, in relation to heritable property, mere delivery by the debtor of a disposition would not, unless and until it was recorded, be a relevant alienation, in particular an alienation by which the property was transferred within the meaning of sub-section (2)(a), or at any rate not one which could be said to be "completely effectual". The structure of the section appears to presuppose that there could be no relevant alienation unless it was completely effectual, and the purpose and context of the section would suggest prima facie that the words "completely effectual" mean what they say, that is effectual not only in a question with the debtor but also in a question with the debtor's creditors and others. Such an interpretation would be consistent with the way in which the same words in Section 4 of the 1913 Act, in relation to the creation of fraudulent preferences, were interpreted (Grant's Trustee v Grant, Goudy on The Law of Bankruptcy in Scotland, page 99 and Wallace on the Law of Bankruptcy in Scotland at page 52). Further it is supported in McBryde on Bankruptcy, 2^nd edition, at paragraph 12-70 and (in the context of company insolvency) in Palmer on Company Law (Volume 3) at paragraph 15.706.2.

[17] The contrary argument depends, it seems, on reading the reference to the transfer of "property" in Section 34(2)(a), in a non-technical sense - as was done in Sharp v Thomson, albeit in a very different context (see in particular Lord Rodger in Burnett's Trustee v Grainger, at paragraph 83) - and on supposing that Parliament had in mind, in considering what would amount to a completely effectual transfer, only the relationship between debtor and disponee. It seemed to me, however, that counsel for the defender was unable to point to any convincing reason as to why, in this context, this should be so. If his argument was right, it would have the apparently odd result, as a matter of language, that heritable property understood to have been alienated by the debtor completely effectually (by delivery of a disposition) would, nevertheless, (unless and until the disposition was recorded) still remain part of his whole estate capable of vesting in a trustee on sequestration. It goes further than mere language because, on this construction, if sequestration was to follow before registration, there would (as was accepted) be no need for the trustee to have recourse to the section at all (at least if he first completed title).

[18] For these reasons, in my view, the attack on the relevance of the pursuer's claim under Section 34, fails.

[19] On the question of whether there are, in response, nevertheless relevant averments that the alienations were made for adequate consideration, I have come to the clear view that there are not.

[20] It became clear in the debate that the matter essentially falls to be judged by the third parties' averments, and by consideration of the terms of the Agreement (in fulfilment of which the Dispositions are said to have been granted). Notwithstanding the particular argument advanced by the third parties in the debate, there can, I think, be little doubt that both the averments and the Agreement clearly suggest that what was done by the debtor was done having regard (putting it broadly) to the fact that the subjects were originally purchased by funds provided by both parties; and in particular that what the debtor wished to do was - in recognition of the defender's apparent rights arising therefrom - to grant her her due heritable right at its current value (by the first Disposition) and, in circumstances where he wished to raise further funds on the security of the property, to do that in a way which did not result in her right in the property becoming less valuable (the Standard Security granted by the parties being followed by the second Disposition).

[21] Looking first to the Agreement, it is important to notice that the preamble or narrative is in the following terms:

"WHEREAS the First Party holds the title to the subjects known as 117 Dudley Avenue, Edinburgh (the subjects) CONSIDERING that the Second Party has resided with the First Party for a considerable number of years.

FURTHER CONSIDERING that the First and Second Parties agree that the Second Party is entitled to a One half share of the subjects FURTHER CONSIDERING that the reversionary interest in the subjects is approximately £50,000 and the First and Second Parties have agreed that should the subjects be sold each party would receive the sum of TWENTY FIVE THOUSAND POUNDS (£25,000) STERLING, FURTHER CONSIDERING that the First Party wishes to raise funds on his share of the reversionary interest in the subjects to the extent of TWENTY FIVE THOUSAND POUNDS (£25,000) STERLING. THEREFORE IT IS AGREED as follows ..."

There can be little doubt that the de quo was thus an apparent belief that the defender was already "entitled" to a one half share of the subjects, and that it was in consideration of that that everything else flowed.

[22] The third parties' averments are entirely consistent with that apparent view. They set out in considerable detail the history of matters with a view, apparently, to emphasise that the subjects were bought by funds provided by both parties etc. (pages 24E-25 of Record). They then explain that the:

"... effect of the Disposition referred to in the first Conclusion was to leave the defender and the debtor as proprietors in common at 117 Dudley Avenue subject to the Standard Security in favour of the Halifax Building Society, the situation which would have prevailed had the original Disposition recorded on 28 April 1998 been in favour of the defender and the debtor rather than only in favour of the debtor. Said Disposition referred to in the first Conclusion implemented paragraph 1 of the said agreement between the debtor and the defender dated 6 August 1992. It was thus granted, as it bore to be granted, for certain good and onerous causes and considerations. The result of the grant of a Disposition to the defender was to leave a situation as at August 1992 whereby the defender and the debtor would each receive approximately £25,000 on the sale of the subjects at 117 Dudley Avenue in accordance with the agreement between the defender and the debtor narrated in said agreement dated 6 August 1992."

The third parties' averments further explain that as a result of the Standard Security granted by the debtor and the defender, and the second Disposition ,she was left with a reversionary interest in heritable property which remained at a value of £25,000. In particular it is averred:

"The effect of the granting of the Standard Security in favour of the Bradford & Bingley Building Society by the defender and the debtor recorded 20 August 1992, the release to the debtor for the benefit of his business of the additional finance thus raised of £25,000 and the grant by the debtor in favour of the defender of the Disposition referred to in the second Conclusion hereof was to implement the remaining paragraphs of the agreement between the parties dated 6 August 1992. The defender was left in a position where her reversionary interest remained approximately £25,000 in that the reversionary interest had been reduced from approximately £50,000 to £25,000 but the grant of the Disposition in her favour mentioned in the second Conclusion was to entitle her to the whole of that reversion. Accordingly the Disposition referred to in the second Conclusion was granted for full consideration, ...".

[23] In the debate before me, however, it was accepted immediately (despite the averments in relation to who provided the funds for the purchase of the subjects) that it could not be said that, as at 6 August 1992, the defender had any enforceable right against the debtor in relation to the transfer of a share in the heritable property or its proceeds, nor that he had any corresponding legal obligation to her. It was thus expressly accepted that, in the light of Macfadyen's Trustee v Mcfadyen, it could not be said that the commitments of the debtor in the Agreement were entered into in fulfilment of any prior obligation, and thus for consideration. That concession, it seemed to me, fatally undermined any attempt to defend the relevance of the pleadings.

[24] Instead, the argument which was in the event presented was (so far as I understood it) that looking at the overall effect of the transaction (or transactions) carried out, it could not be said without proof, that the alienation was without adequate consideration. Against a background, it was said, in which the debtor could not have obtained loan funds otherwise than by proceeding in the way that he did, and where the loan involved a joint and several liability undertaken by the debtor and the defender, the net result of the transaction or transactions was that she obtained property worth £25,000, whereas he obtained funds of £25,000; and although he was obliged to repay that sum, the reality was that the building society would seek to recover any outstanding sums from the secured property. It seems to me, however, that quite apart from the fact that there are no averments that the debtor could not have obtained loan funds otherwise or to the effect that the loan taken out involved joint and several liability (indeed the defender clearly avers that the debtor obtained the loan), not only does the analysis appear to confuse the prospect of recovery with the obligation to repay, which circumscribed the provision of the loan funds, but more fundamentally, the argument ignores the fact that as a result of the overall transaction(s), although it could be said that the defender gained property worth £25,000, to achieve that the debtor gave up his right to heritable property worth, taking account of the existing loan, £50,000. No doubt the reason that he was prepared to do that was because of an apparent belief in her "entitlement" to one half of the property - a belief which the third parties now accept (despite their pleadings) had no legal foundation. In these circumstances I can see no proper basis for suggesting that the obligations undertaken were for adequate consideration. (see e.g. Cay's Trustees v Cay).

[25] In these circumstances I shall sustain the pursuer's first plea-in-law, in so far as relating to Section 34 of the Bankruptcy (Scotland) Act 1985, and his sixth and seventh pleas-in-law, and pronounce decree de plano in terms of the first and second Conclusions. As to further procedure in relation to the issues which remain between the defender and third parties, I shall, as requested, put the matter out By Order.