United Kingdom House of Lords Decisions

Earl of Halsbury.—We are all agreed that the interlocutors appealed from ought to be affirmed and the appeal dismissed with costs, but it will be convenient that the reasons for our judgment should he given at a later date.

Lord Kinnear.—The question in this case is raised by a claim made by the appellants in the liquidation of a limited company, called Hutchison, Main, & Company. The claim is based on an alleged preferable right in a certain security which is said to have been constituted by a debenture created and issued in favour of Hutchison, Main, & Company by another limited company styled Frank A. Johnson, Limited. This debenture is now in the hands of the liquidators, and would seem prima facie to be held by them as an asset of the estate for distribution among the creditors pari passu. But the appellants claim right to a preference which will exclude the other creditors on two different and inconsistent but alternative grounds. They say, first, that at the date of the liquidation they had obtained a valid and effectual security over this debenture for payment of a debt of £14,000 due to them by the Company; and, secondly, that the debenture is not part of the distributable estate, but belongs to them, inasmuch as at the date of the liquidation it was held by the Company as trustees for them, and not as beneficial owners. Both grounds have been rejected as untenable by the Court below, and I think the judgment is right.

It is common ground between the parties that the rights of competing creditors in the liquidation are to be governed by the same rules as regulate the rights of creditors in a sequestrated estate under the Bankruptcy Acts. These are well established and familiar. The general object of the statutes, as Lord President M'Neill states it in Littlejohn v. Black, “was to preserve as far as possible all rights and interests in the position in which they stood the moment before bankruptcy.” From that moment no preference could be acquired by any creditor or created by the bankrupt. But the earlier Act, with which he was at the time concerned, as well as that now in force, “abstained from disturbing any securities or preferences honestly obtained and lawfully completed according to the nature of such securities or preferences.” I do not understand it to be disputed that in this respect the Company in liquidation is exactly in the same position as an individual debtor under the Bankruptcy Acts. Rights in security which have been effectually completed before the liquidation must still receive the effect which the law gives to them. But the Company and its liquidators are just as completely disabled by the winding-up from granting new or completing imperfect rights in security as the individual bankrupt is by his bankruptcy. This, indeed, is the necessary effect of the express provision of the Companies Act that the estate is to be distributed among the creditors pari passu. Every creditor is to have an equal share, unless any one has already a part of the estate in his hands by virtue of an effectual legal right. The question, therefore, is whether, at the date of the liquidation, the appellants had obtained a valid security legally completed over the debenture issued by F. A. Johnson.

In answering this question the Court did not require to consider whether a floating charge over the assets of a trading company would constitute a valid security according to the law of Scotland except in the cases where it may have been specially authorised by statute, because Frank A. Johnson is an English company, and its rights and liabilities must be governed by English law. Nor did they need to inquire, as in other circumstances might have been necessary, how far it was valid and effectual, or by what method it could be effectually transferred in security, according to the law of England, because, in fact, it has not been transferred to the appellants at all.

There can be no question that by the law of Scotland the jus crediti in debts may be made the subject of an effectual security, provided the debt be assigned and the assignation completed according to the method recognised as proper for the completion of such rights. But to make it effectual the assignee must have a right which he can enforce against the debtor in his own name, because it is indispensable for the efficacy of a security that the secured creditor should have jus in re. It is manifest on the face of their own statement, and of the document they produce in support of it, that the appellants have no such right. They say that the Company had financial dealings both with the appellants themselves and with the British Linen Bank, and that, at a time when the appellants were not satisfied with the state of the account, it was arranged that they should transfer to the British Linen Bank certain goods which they held in security, and in lieu thereof should take bills on F. A. Johnson to be held in security, and “as collateral security the company would give the appellants a debenture or floating charge over the assets of F. A. Johnson for the sum of£12,000.” This last part of the statement lacks precision. But the nature of the proposed debenture is more clearly brought out in the contractual obligation.

This is expressed in a letter from the Company's agents to the appellants, dated February 3, 1910, in the following terms: “We are authorised by the directors, and our London correspondents have instructions forthwith to procure from Mr Johnson a debenture or floating charge over the whole of his assets in the name of the company for the amount required to secure the debt due by Mr Johnson to our clients. So soon as that debenture reaches our hands we have instructions to make it available to the Bank of Scotland as further and additional security for the repayment by our clients of their indebtedness to the bank.” This is the only writing by way of security which the appellants ever obtained, and it seems to me quite idle to pretend that it is a valid and effectual security in itself. It is a promise to give the Bank the benefit of a security which the Company is to procure from its debtor in its own favour, and it is nothing more. It does not appear in what manner the Bank was to obtain this benefit, and in particular it is not stated whether the debenture is to be transferred or whether the Company is to account for the proceeds. But this is not material, because nothing was done to make the promise effectual. The appellants' counsel laid great stress on the undertaking to “make the debenture available to the bank” as soon as it reached the hands of the agents. But that only shows that something remained to be done which the appellants could not do for themselves. If they have a complete and real security they require no help from the Company to make it good. If they have not, they have no preference of any kind. They are in no better position than that of unsecured creditors of the Company, and the estate must be divided equally among all such creditors.

But then it is said that the question as to the validity of the security arises only on the assumption that the debenture is part of the distributable estate, and that, although the appellants have stated a claim on that assumption, their substantial case is that it is held by the Company and its liquidators, not as part of the Company's estate, but as trustees for them. In aid of this contention it was argued that the Company procured the debenture as agents for the appellants. But agency is matter of fact, and no facts are proved or stated from which it could possibly be inferred. The case has been decided on the assumption that the appellants' averments on record are true, and in these averments no suggestion is to be found that they employed Hutchison, Main, & Company as their agents to procure the debenture. In the absence of averments relevant to be sent to proof the case must be decided on the documents. These consist of the letter already mentioned, the agreement between Hutchison, Main, & Company and Frank A. Johnson, and the debenture itself, and there is no trace of the supposed agency in any of them. If they are to be taken as expressing the transaction, they make it apparent that Hutchison, Main, & Company procured the debenture in their own name and acting on their own behalf, and not as agents for anybody else. The agreement between them and Frank A. Johnson was that the latter should execute and deliver to the Scotch company a debenture for a total sum of £17,000 to be “held as security for all amounts which may from time to time be owing to the Scotch company”; and the debenture actually issued is, accordingly, for £17,000, and is in favour of Hutchison, Main, & Company. I have no difficulty, therefore, in rejecting the argument founded on a supposed agency. But it is nevertheless true that Hutchison, Main, & Company were under an obligation to make the debenture available to the appellants, not to its full amount, but to the extent of £12,000, and it is said that this affects their right with a trust which excludes any beneficial interest in themselves or their creditors. The argument was founded on the decision of this House in Heritable Reversionary Co. v. Millar, and on the doctrine which was there considered that a trustee in bankruptcy takes the estate tantum et tale as it stood in the bankrupt.

But the decision has only a remote bearing, if any, on the case before your Lordships, and the doctrine of tantum et tale is inapposite, because on the liquidation of a limited company there is no transference of property to which it can be applied. The effect of the Bankruptcy Act is to divest the bankrupt, and to invest the trustee in the entire estate; and it is not surprising that questions should have arisen as to the extent to which this transference of the legal title might or might not involve a corresponding transference of all equitable qualifications which might have affected the estate in the hands of the bankrupt. But the liquidators of a limited company are not vested in the estate to the exclusion of the company. The estate remains vested in the company itself, and the liquidators are mere administrators of it for the purpose prescribed by the statute, and that is for equal distribution among creditors. It appears to me, therefore, that the argument on the doctrine of tantum et tale is beside the mark. But the question remains whether the debenture forms part of the distributable estate; and it is that which is said to be decided by the case of Millar. I cannot agree. The only arguable question in that case belonged to a totally different chapter of law: to wit, What is the legal effect of the registration of an absolute title to land in the Register of Sasines? A bankrupt who had been manager of a trading company had purchased a certain heritable property, for behoof of the company and on the instructions of their directors, and the purchase-money was provided by them. He took the title in his own name, and he executed a declaration of trust which was perfectly explicit and effectual to qualify his right; but unfortunately he recorded the title, ex facie absolute, in the Register of Sasines, and he did not record the declaration of trust. It was, therefore, a latent trust, however effectual as between the agent himself and his employers. It was held in the Court of Session that the Register of Sasines was conclusive, because the bankrupt was infeft on an absolute title, and everyone, whether creditor or purchaser, dealing with a proprietor infeft was entitled to rely on the public records, and was not affected by any qualification or burden on the real right which did not appear there. The main ground of judgment was that the bankrupt could have sold the subject and given an unimpeachable title to a purchaser, and that the trustee in bankruptcy is vested in all heritable estate held by the bankrupt under such an absolute title, to the same effect as if he had obtained a decree of adjudication in implement of a sale to himself.

That construction of the vesting clause was corrected in this House and the judgment was reversed on the ground that, as between the bankrupt and his employers, the former was a bare trustee, and the latter were the true and beneficial owners of the property, which, therefore, did not belong to the bankrupt in the sense of the Act, and was not vested in the trustee. It was not disputed that third persons dealing with the bankrupt with specific reference to the property were entitled to rely on the title as it stood on the Register of Sasines, and, thus, that an onerous purchaser from him would have obtained an unimpeachable title. But it was held that this would not be because the property was his, but because the true owners had permitted him to appear on the Register of Sasines as the owner, and thus entitled anyone dealing with him for value to regard him as such. The noble and learned Lords held that the rule of personal bar which thus protects transactions of the trustee from challenge only applies to such as have specific reference to the trust estate, and is not pleadable by personal creditors who do not stipulate for, or obtain, any conveyance to that estate. This appears to me to be the full force of the decision; and I am unable to see that it has any bearing on the matter in hand. Of course it assumes, what, indeed, was never disputed, that property admittedly held under a bare trust, without any beneficial interest in the trustee, would not pass to his creditors on his bankruptcy. But the bankrupt's title of property was qualified only by a latent trust. The question was whether this latent declaration of trust could be looked at; and when that was once settled by the decision of this House the rest followed as a matter of course.

It is further to be observed that the trust so established was declared in express terms, and directly affected the constitution of the real right. It is a very different thing to say that a personal obligation to give the benefit of a specific fund to a particular creditor creates a trust which attaches to the fund and excludes it from the estate for distribution. That the judgment in the case of Millar was not intended to cover such a case as this is obvious, because Lord Herschell states the distinction between the duty imposed by a trust and the liability created by a personal contract in perfectly clear terms. But the appellants rely upon a dictum of Lord Westbury in Fleeming v. Howden, where he is reported to have said that “an obligation to do an act with respect to property creates a trust.” This proposition is expressed in general terms, but in relation to property only, and not to personal obligations; and it must be interpreted with reference to the particular case which the noble and learned Lord was discussing. The effect intended to be given to it in that case does not seem to me to be doubtful. Mr Fleeming, afterwards Lord Elphinstone, held the estate of Duntiblae under a deed of entail which required him to denude on succeeding to a peerage. He was duly infeft in terms of an instrument of sasine which was recorded in the Register of Sasines, but the deed under which he held was not recorded in the Register of Tailzies. It followed that, although the entail was distinctly set forth on the face of the deed in which he was infeft, the fetters of the entail were ineffectual to exclude the diligence of creditors. He succeeded to a peerage in 1860 and died in 1861 without having denuded, and leaving large debts. It was held that the estate did not pass to a trustee in bankruptcy because from the moment the clause of devolution became operative it was not to be regarded as the property of the deceased bankrupt but was held by him in trust for the benefit of the heir to whom it had devolved. But it was so held, as is shortly but very clearly explained in the judgment of Lord Colonsay, because the duty to devolve was a quality of the right on the face of the title under which Mr Fleeming possessed. It was thus a trust which every one becoming his creditor on the faith of his having a feudal investiture was bound to know, for there it stood open and patent. An obligation of this kind, which in express terms qualified the title to land, imposed a duty which might well be held to involve a trust.

But to extend Lord Westbury's phrase so as to make it cover personal obligations which do not affect the real right of the obligor seems to me altogether extravagant. It was maintained in argument that every obligation with reference to any property or fund which involves a liability to account fell within the principle. If that were so, every imperfect security, however invalid as a real right, would be effectual as a trust. But then in the same sense a bankrupt holds his whole estate as trustee for all his creditors. The fallacy consists in using legal terms in a popular or metaphorical sense and yet affixing to them all the legal consequences which would attach to their use in a strictly technical sense. It is impossible to suppose that Lord Westbury employed the word “trust” in any such inaccurate sense, and, indeed, the danger of so using it is nowhere more clearly exposed than it is by that eminent person himself in Knox v. Gye . In discussing the liabilities of a surviving partner to the representatives of a deceased partner, his Lordship says, “Another source of error in this matter is the looseness with which the word ‘trustee’ is frequently used. The surviving partner is often called a ‘trustee,’ but the term is used inaccurately.” He is not a trustee: if he is by an improper use of words to be called so the trust is limited to the discharge of his obligation. He goes on to say, “It is most necessary to mark this again and again, for there is not a more fruitful source of error in law than the inaccurate use of language. The application to a man who is improperly, and by metaphor only, called a trustee, of all the consequences which would follow if he were a trustee by express declaration—in other words, a complete trustee—holding the property exclusively for the benefit of the cestui que trust, well illustrates the remark made by Lord Mansfield, that nothing in law is so apt to mislead as a metaphor.” That Mr Fleeming was a complete trustee in the sense thus explained, holding the property as trustee by express declaration, and holding it exclusively for the benefit of the cestui que trust, is beyond question, because it was so decided by this House. I think it equally clear that Hutchison, Main, & Company, who held a debenture under no express declaration of trust, and who certainly did not hold it exclusively for the benefit of the appellants, cannot be styled trustees of that debenture except by such an inaccurate use of language as Lord Westbury condemns. They were under an obligation to give the benefit of it to the appellants, but only to a limited extent; and that obligation they are disabled from performing in terms, because their hands are tied by the liquidation.

On the whole matter, therefore, I am of opinion that the appellants are in the position of mere personal creditors who hold no complete security for their debt, and that the debenture which they might have obtained in security had their contract been carried out is not held exclusively in trust for them, but forms a part of the estate for equal distribution among the creditors of the Company.

Lord Atkinson.—This is an appeal against an interlocutor, dated 29th November 1912, of the Lords of the Second Division of the Court of Session in Scotland, whereby they adhered to an interlocutor of the Lord Ordinary dated 20th June 1912.

By this latter interlocutor the deliverance of the liquidators of a certain limited liability company named Hutchison, Main, & Company—on the claim of the Governor and Company of the Bank of Scotland that they were entitled, to the extent of £14,000, to a security constituted by a certain debenture in the total nominal amount of £17,000 on the entire assets of a certain English limited company, styled Frank A. Johnson, Limited, in accordance with the provisions of an agreement dated 4th March 1910, made between Frank Alexander Johnson, of the first part; Frank A. Johnson, Limited, of the second part; and Hutchison, Main, & Company, of the third part—was upheld.

The liquidators by their deliverance rejected this claim. The Bank of Scotland filed objections to this deliverance, and the Lord Ordinary found that the averments made by the Bank in support of this objection were irrelevant. It is admitted that for the purpose of this appeal the averments in the answers of the Bank must be taken to be true.

The facts have been fully and clearly stated in the judgment of the Lord Ordinary. It is unnecessary to restate any but the very few upon which, in my view, the question for decision turns. Hutchison, Main, & Company were a Scotch company, carrying on in Glasgow the business of manufacturers of golf balls and other gutta-percha and indiarubber goods. These goods they were in the habit of selling to Frank Alexander Johnson, and afterwards to Frank A. Johnson, Limited, the company into which Frank Alexander Johnson converted his business. As against these purchases the former company drew bills on Johnson, and subsequently on his firm, which they respectively accepted. Many of these bills were discounted by Hutchison, Main, & Company in the Bank of Scotland, and many others in the British Linen Bank; all or nearly all of each lot being renewed from time to time. Some other bills remained in the hands of the drawers undiscounted. In February 1910 Hutchison, Main, & Company stood indebted to both banks in respect of these bills to considerable amounts. The precise amounts are immaterial. Securities had been lodged with both banks by them to secure their indebtedness. The British Linen Bank, thinking the security inadequate, refused or threatened to refuse to discount any more of these bills, or to renew any of them, unless they were further secured.

Thereupon an arrangement was entered into between the Bank of Scotland through their local manager, Mr Bisset, whereby it was agreed that securities to the value of £2000 held by the Bank as against the overdraft of Hutchison, Main, & Company should be released and transferred to the British Linen Bank, who in consideration therefor would continue to renew Johnson's bills. A further term was added, of which the written evidence is contained in a letter dated 3rd February 1910, written by W. Baird & Company, the solicitors of Hutchison, Main, & Company, to Mr Bisset. The passage of this letter dealing with the matter runs thus: “We further write to say that we are authorised by the directors, and our London correspondents have instructions forthwith to procure from Mr Johnson a debenture or floating charge over the whole of his assets in the name of this company for the amount required to secure the debt due by Mr Johnson to our clients. So soon as that debenture reaches our hands we have instructions to make it available to the Bank of Scotland as further and additional security for the repayment by our clients of their indebtedness to the Bank, and it is understood, in respect of the arrangements made, that the Bank will give to those interested in the Company the benefit of the arrangements referred to in past correspondence.”

It would appear to me to be perfectly clear on the construction of this letter, if it embodies the agreement of the parties, that Hutchison, Main, & Company, in procuring this debenture, were acting on their own behalf, and not as agents for the Bank of Scotland. I do not think there is any ground whatever for the contention that they were instructed to act as such agents, or did, in fact, so act. And it is, I think, equally clear that the only obligation they put themselves under was, at the most, a contractual obligation to make the debenture available to the Bank of Scotland “as a further and additional security” when they procured it. How that was to be done is not stated, but from the letter of Mr Bisset to W. Baird & Company of the following day it is plain that the mode in which he contemplated that Hutchison, Main, & Company should discharge this obligation, and make the debenture available as a security, was by assignation of it, followed presumably by notice to the debtor, Frank A. Johnson, Limited. He wrote: “With regard to the debenture or floating charge over Mr Johnson's assets, we shall rely on your having this completed as soon as possible, and sent to us for assignation to the bank as a security for the company's indebtedness.”

This was not done. Discussion arose as to the best mode of making the debenture available, but nothing was done to perfect the security. The debenture was delivered on 4th March 1910, by Frank A. Johnson, Limited, to Hutchison, Main, & Company, in pursuance of an agreement of the same date entered into between them. By that agreement Frank A. Johnson, Limited, contracted to execute forthwith and deliver to Hutchison, Main, & Company a debenture or series of debentures in the form to the agreement annexed in the total sum of £17,000, to be held by the latter company as security for such sums as might, from time to time, be due to them by the former company, either on the bills in the schedule mentioned, or “in respect of advances or generally on trade account.” There is no mention whatever in this agreement of the arrangement made between Hutchison, Main, & Company and the Bank of Scotland touching the debenture or debentures to be delivered under it.

Hutchison, Main, & Company went into liquidation on 1st July 1913. At that time they were ex facie the absolute beneficial owners of this debenture, and according to the case of Heritable Reversionary Company v. Millar, any beneficial property they had in it would, under the Bankruptcy (Scotland) Act, 1856, on liquidation pass to, and become vested in, the liquidators.

The interest which would so pass would be the absolute and entire beneficial interest (unless some lesser beneficial interest had been carved out of this whole, and had, before liquidation, become vested in another). It would not, I think, on the authorities, be at all sufficient that Hutchison, Main, & Company should have merely entered into a contract to carve out of their property in the debenture this partial interest. Something in addition should be done which would, in contemplation of equity and good conscience at all events, separate the part from the whole, and prevent that part from being available to satisfy pro tanto the creditors of the insolvent owner. The ingenious arguments of Mr Clyde and the Solicitor-General for Scotland appear to me to amount to a contention that in the circumstances of this case this carving out took place, in contemplation of equity, the moment the debenture was delivered to Hutchison, Main, & Company. They did not contend that any specific charge on the debenture was thereby created, but they did contend that, by reason of the contractual obligation of Hutchison, Main, & Company to make the debenture available as a security to the Bank of Scotland, a trust in favour of that bank attached upon it immediately upon its delivery; that Hutchison, Main, & Company thenceforth held it, as to the £12,000 portion of the sum secured, as trustees for the Bank, and not as beneficial owners, and that the liquidators are now bound, as it is contended this Company would itself have been bound before liquidation, to transfer to the Bank of Scotland the benefit of the debenture up to that sum. That contention is, in my opinion, ingenious but unsound.

I do not think that the averments contained in the appellants' answers carry their case any further than the documents. The contract they rely upon was no doubt a contract for good consideration. Whether after a delay of so many months it was enforceable, and if so, what was the nature of the relief which would be obtained, are matters beside the real question for decision, which is this: Were Hutchison, Main, & Company, at the time of their sequestration owners of the entire beneficial interest in this debenture or not? In my opinion they were such owners. Whether or not they had bound themselves by contract to denude themselves of a portion of their interest does not alter their position as owners while and as long as that contract remained to be carried out. The Lord Justice-Clerk has, I think, put the case in a nutshell in the following passage of his judgment (1913 S. C., at p. 264): “To me it appears to be clear that at the date of the liquidation the debenture in question was still held by the Company, and that the Bank had no right to it, but had only a right to enforce a contract by which the Company was bound to assign the debenture to the Bank.” In my opinion, nothing has been shown, either in the documents given in evidence, or in the averments contained in the appellants' answers, to establish, on any principle of equity, that at the time of the liquidation this insolvent Company had, either in the form of a charge, or of a trust, denuded itself of any portion of the entire beneficial interest in the debenture. If so, the entirety of that interest must go to satisfy pro tanto the debts of all their creditors, not the debt of one alone.

The decision appealed from was therefore, in my opinion, perfectly right, and this appeal should be dismissed with costs.

Lord Halsbury has requested me to say that he concurs in the judgment which has just been delivered by my noble and learned friend Lord Kinnear.

Lord Shaw of Dunfermline.—I concur. The facts are important, but they are not complex. They are as follows: In the beginning of the year 1910 a limited firm named Hutchison, Main & Company, carrying on business in Scotland, were indebted to two Scottish banks—one, the appellants, the Bank of Scotland, and the other, the British Linen Bank. For some time the English agent of Hutchison, Main, & Company had been a Mr F. A. Johnson. By an arrangement amongst all these parties the Bank of Scotland transferred to the British Linen Bank certain goods and merchandise of the value of about £2000 which they held in security. On the other hand, they received bills by Johnson for £3000.

Johnson, who was, as stated, Hutchison, Main, & Company's agent in England, was also indebted to that company. He was anxious to form his own business into a limited liability concern and to obtain for this concern the agency of Hutchison, Main, & Company which he himself held. It was necessary in these circumstances that some arrangement should be made by which Johnson, Limited, should come under obligation to pay the bills due by Johnson himself. This was accordingly done, and the the terms of that arrangement are contained in an agreement of 4th March 1910.

By the fifth article of that agreement Johnson, Limited, undertook to execute and deliver to Hutchison, Main, & Company debentures for £17,000. The terms under which the debentures were to be held were these: “Such debentures shall be held by the Scotch company (that is, Hutchison, Main, & Company) as security for all amounts which may from time to time be owing to the Scotch company either in respect of such bills set forth in the schedule hereto or of any other sum that may from time to time be due to the Scotch company by the English company either in respect of advances or generally on trade account.” It thus appears that if there was any trust with regard to the debenture or debentures granted by Johnson, Limited, in favour of Hutchison, Main, & Company, the trust was as now stated. And there can be no doubt that if Johnson, Limited, had paid the sums due by them to Hutchison, Main, & Company that firm would have been bound to hand back the debenture which had come into their hands under that simple arrangement. This transaction took place, as mentioned, on 4th March.

The debenture was granted on the same day. It is by Johnson, Limited, and it covenants with Hutchison, Main, & Company “its successors and assigns, to pay to the said Hutchison, Main, & Company, Limited, its successors and assigns, on the 4th day of March 1915, or on such earlier date as the principal moneys hereby secured shall become payable under the conditions of this debenture, at the registered office of the company the sum of £17,000 on presentation of this debenture.”

In these circumstances it would require competent and very cogent and clear evidence to convince the mind that this debenture, once granted, was not the property of Messrs Hutchison, Main, & Company until that firm should have parted with it by voluntary assignation or until its liquidator or its trustee in bankruptcy should have succeeded to it as a consequence of the statutory assignment which vested in him everything which was in bonis of the firm.

The whole question in this case appears, therefore, to be: Has there been any deed produced, formal or informal, or is there indeed any relevant averment that the property in this debenture thus duly vested in Hutchison, Main, & Company was not in reality the property of that firm, but was so only in appearance,—that the debenture was only their apparent title, but that the real title to its contents was in somebody else, namely, the appellants? In short, I will venture to put the proposition which, as it appears to me, is at the bottom of this case in these words: What proof is tendered that the contents of this debenture were not at the date of liquidation in bonis of its holder, Hutchison, Main, & Company, but were in bonis of the Bank of Scotland? For unless the latter proposition be relevantly averred and legally proved, the claim of the Bank to that debenture must fail.

This being the statement of the proposition, it is now important to see how the Bank addresses itself to it on the record. In particular, does the Bank really claim that this property throughout belonged to it and not to Hutchison, Main, & Company?

It founds upon the correspondence. From that it appears that in the preceding month of February Messrs Hutchison, Main, & Company, whose own affairs were manifestly embarrassed, did make an important promise to the Bank. It is in these terms: “We are authorised by the directors, and our London correspondents have instructions forthwith to procure from Mr Johnson a debenture or floating charge over the whole of his assets in the name of this company for the amount required to secure the debt due by Mr Johnson to our clients.” (The letter is written by Messrs Hutchison, Main, & Company's solicitors, and it proceeds as follows:) “So soon as that debenture reaches our hands, we have instructions to make it available to the Bank of Scotland as further and additional security for the repayment by our clients of their indebtedness to the bank, and it is understood, in respect of the arrangements made, that the bank will give to those interested in the company the benefit of the arrangements referred to in past correspondence.” The Bank is, therefore, undoubtedly right in so far as it maintains that a just expectation was held out to it that the debenture was to be made available to it by Hutchison, Main, & Company.

The form, however, of making it available was certainly not that they should take the debenture as trustee or agent for the Bank and hold the debenture for it. On the contrary, the firm took the debenture exactly in terms of the agreement made with Johnson, Limited, namely, as its own; and the arrangement with the Bank was that after this had been done then the next step would be taken, namely, to grant a title to it to the Bank by way of assignation. This is clear from the bank manager's letter of 4th February, which says: “With regard to the debenture or floating charge over Mr Johnson's assets, we shall rely on your having this completed as soon as possible and sent to us for assignation to the Bank as a security for the Company's indebtedness.”

The debenture was thereafter granted on 4th March, but no assignation was made. Correspondence is produced which shows that in April a solicitor in London had been consulted on the point of assignment and that counsel had been instructed to prepare a mortgage. On 6th April the bank manager stated that he would “be glad to receive the mortgage referred to when it is ready for delivery.” Nothing further was done; the months slipped away; and neither assignment nor mortgage had been received by the Bank when, on 1st July 1910, Hutchison, Main, & Company went into liquidation.

The learned Judges in the Courts below, not unnaturally, treat the case as one of an “uncompleted security.” And so treated their judgment upon it would humbly appear to me to be correct. But, in truth, this puts the facts too favourably for the appellants, unless indeed the words “uncompleted security” are meant to include the case of a security not merely inchoate but never to any extent having any existence. A promise had been made to bring it into existence, by way first of assignation and then of mortgage, but beyond the giving of that promise nothing had been done. The learned Lord Justice-Clerk expresses most clearly and concisely, if I may say so, the essential facts of this case in one sentence when he says (1913 S. C., at p. 264): “To me it appears to be clear that at the date of the liquidation the debenture in question was still held by the Company and that the Bank had no right to it, but had only a right to enforce a contract by which the Company was bound to assign the debenture to the Bank.”

It is from this point of view that the citation of much of the authority quoted seemed to me to be inapplicable. For the right of the Bank in the circumstances which I have mentioned was a right resting upon nothing more than this, namely, an unfulfilled promise. And, when one analyses the idea, that is the simple category under which we may presume that 99 per cent of every bankrupt's obligations could be ranged. All his creditors, down to the humblest tradesmen, relied on his promise, expressed or implied, that he would pay for accommodation given, services rendered, or goods received. Upon what principle is one of these creditors to be preferred to another? The whole law of equitable distribution would be destroyed, and the whole security for mercantile dealings would be much impaired, if it were open to an individual creditor to say: “I got no assignment of my debtor's goods either by delivery or by deed, but he promised to me that he would not part with certain of them except in my favour.” After bankruptcy or liquidation, things still standing on that footing, all these nuda pacta disappear, and the one question which remains is: Was the property—whatever promises were made with regard to it before—was the property at the time of bankruptcy or liquidation in bonis of the debtor or not?

It is only fair to the appellants to say that the shape of their pleadings in this case is in accord with the correspondence, their eleventh answer containing the gist of their claim at law in these terms: “As part of the arrangements aforesaid concluded between the Company and the respondents (the Bank), the Company were under obligation to transfer the benefit of such debenture to the extent aforesaid, and that such obligation is therefore binding on the liquidators.” This is a plain admission that at the date of liquidation the debenture was not the property of the Bank, but still remained the property of the Company. At the conclusion of a strenuous argument for the appellants, I ventured to put the Bank's contention in the following propositions, to the accuracy of which their learned counsel assented: “When the debtor acquires and holds property in his own name, but under a personal obligation to account to a particular creditor therefor, then, in the event of bankruptcy the existence of the personal obligation prevents the property being treated as in bonis of the debtor. On the contrary, the debtor must denude in favour of the particular creditor for whom he is truly a trustee.” I am of opinion for the reasons stated that these propositions are not in accordance with the law of Scotland. A preference created in this manner is repugnant to the sound and familiar principles of equitable distribution; and the doctrine of converting a promise to assign or transfer into something which effects a transmutation of real ownership by the debtor into merely apparent ownership by him is legally indefensible.

The only support to be obtained for this operation is by misapplying the well-known doctrine of apparent and real ownership. When an agent obtains money for the specific purpose of purchasing a property for his client and takes the title in his own name, and becomes bankrupt, it is clear that in such a case the law will get behind the apparent title to the beneficial and the real title, and that—always granted that the interests of third parties who have bought upon the faith of the records have not arisen—the property will, in the event of bankruptcy, be correctly treated as never having been in bonis of the debtor, but always of the client. Lord M'Laren explains this with clearness in Forbes's Trustees v. Macleod . Or when a property is acquired by a company with the company's money and put for convenience sake in the name of the company's manager, then upon the occasion of the manager's bankruptcy the same result happens. The apparent title and the beneficial and real title are in conflict, not on account of the existence of any promise on the part of the manager to transfer it to the company, but on account of the fact that the property all along never was the manager's but was the company's. It would be, therefore, contrary to the truth of the case to permit that property to enter the assets of the manager, to whom it never in truth belonged. The company stands accordingly preferred to the property in the distribution of his assets.

Heritable Reversionary Company v. Millar is the outstanding instance of this. In the language of Lord Watson, “An apparent title to land or personal estate, carrying no real right of property with it, does not, in the ordinary or in any true legal sense, make such land or personal estate the property of the person who holds the title. That which, in legal as well as in conventional language, is described as a man's property is estate, whether heritable or moveable, in which he has a beneficial interest which the law allows him to dispose of. It does not include estate in which he has no beneficial interest, and which he cannot dispose of without committing a fraud.” And the distinction between a case of real and beneficial interest as against apparent title on the one hand, and a case of real and beneficial interest or dominium with a contractual obligation to convey or transfer, is well brought out in the judgment of Lord Herschell, where he distinguishes the case of Wylie v. Duncan in this way: “It appears to me that there has been some confusion between the case of heritable property held upon a latent trust of which the owner appearing on the register is a bare trustee, and that of heritable property as to which the owner has come under some contractual obligation. The latter was the case in Wylie v. Duncan . Archibald was there the owner of the property, not a mere trustee; he had bound himself on certain conditions to re-dispone to Wylie, from whom he took the subjects. But this was a mere personal contract. If he had sold the property and disposed of the proceeds, he might have rendered himself liable to legal proceedings, on the ground that he had put it out of his power to fulfil his obligation; but he would not have been guilty of a breach of trust, or brought himself within the reach of the criminal law.”

The familiar case—sanctioned in all the law books and acknowledged in many decisions—for the application of this law is that which was commented on in this House in Union Bank of Scotland v. National Bank of Scotland . It is the case of a disposition of heritable property entering the record, but granted concurrently with a back bond which acknowledges that the transaction, although giving the title to the disponee, was truly a security transaction. Nor do I question that the same result could be achieved in a less formal manner. But what is necessary in all such cases is that the question of property itself in what I have ventured to call a real and beneficial sense is settled adversely to the debtor—settled, that is to say, in this way, that the property does not belong to him, but belongs to someone else.

The decisions and dicta in many cases were cited at the discussion, and it would be possible to deal with these in detail. But there are two further considerations which I bear in mind. In the first place, I think that nothing can shake the authority of the case of Heritable Reversionary Company v. Millar, in which substantially the entire case law relevant to this subject was analysed and focussed in the judgments of Lord Herschell and Lord Watson.

And, in the second place, I feel constrained to add that the only judicial dictum of weight which seems to me to give any favour to the argument presented for the Bank is that of Lord Westbury in Fleeming v. Howden . “An obligation,” said the distinguished Judge, “to do an act with respect to property creates a trust; and if a fiar, bound to fulfil an obligation acquires or retains, by means of his neglect of that duty, a greater estate than he would otherwise have had, he is a trustee of such excess of interest for the benefit of the persons who would have been entitled to it if the obligation had been duly fulfilled.” It seems somewhat late in the day to cite the dictum of this eminent Judge as creating an invasion into the well-settled principle that a contractual obligation with regard to property, which has not effectually and actually brought about either a security upon it or a conveyance of it, is not per se the foundation of a trust or of a declarator of trust. As Lord Watson said in Millar's case, “I agree with the late Lord President in thinking that the opinions expressed by Lord Westbury in Fleeming v. Howden with reference to the nature of the interest which a trustee in sequestration takes in the heritable estate of the bankrupt require considerable modification.” Perhaps one ought now to venture distinctly further and to say that it is difficult to reconcile the dictum of Lord Westbury with the decision in Millar's case, or to see how the former can now be stated to represent with accuracy the principle of the law of Scotland.

These circumstances make it clear to me that nothing urged by the Bank in the present case comes up to what the law requires. For, as I have said, it requires nothing less than this, that the property in the debenture referred to was in the Bank of Scotland. The averments, squaring with the correspondence, are, however, that there was a personal contract with Hutchison, Main, & Company to transfer it to the Bank, and that matters stood upon that contract at the time of liquidation. At that time, accordingly, the debenture was part of the property of the bankrupt. It required, in the view of parties, an assignment to divest him of it, and this assignment was not obtained. The case accordingly is the familiar one of an unfulfilled promise to give property or security for goods or benefit which have been received. It is no part of Scotch law to admit a claim of that character to preference in the distribution of bankrupt or liquidation assets.

I am humbly of opinion that the judgment of the Court below is upon that ground correct and should be affirmed.