Scottish Court of Session Decisions

The estates of James M'Dougall & Son, wood merchants, Bellfield Street, Glasgow, and James M'Dougall, the only surviving partner of the said firm, were sequestrated on 23rd April 1887. Robert Dick Fraser, C.A., was appointed trustee.

This was an action of reduction by the trustee against Edward Gibbon, joiner, Glasgow, to reduce a disposition dated 31st March and recorded 1st April 1887, whereby the bankrupt and the defender, as trustees and individuals, disponed to the defender certain subjects at Springburn, Glasgow. The action was raised in the following circumstances:— For some time before the bankruptcy the bankrupt firm had obtained goods from Brownlee & Company, timber merchants, Glasgow. He had become indebted to them in the sum of £701, 11s. 8d., consisting partly of a past due bill and partly of a sum as open account. The defender had been associated with M'Dougall in building speculations. They were engaged in building certain subjects in Avenue Street and Springburn Road. On 31st March 1887, the same date as the disposition brought under reduction, they granted a promissory-note for £701, 14s. 1d., and payable three months after date to Brownlee & Company. Upon 1st April the defender executed a back-letter addressed to M'Dougall. By it on the narrative that he had signed the note along with M'Dougall for the letters-accommodation, and that by the disposition they had, as trustees and as individuals, conveyed tohim the subjects at Springburn, “And whereas, although the said disposition bears ex facie to be an absolute and irredeemable conveyance of the subjects therein contained, yet the same was truly granted, so far as regards the beneficial interest of the said James M'Dougall therein, to secure me in the event of my being called upon to pay the principal sum contained in the said promissory-note, and to secure me against all sums of money advanced or lent or paid, or which may hereafter be advanced or lent or paid by me to the said James M'Dougall, or for which I may become bound on his behalf by bill, promissory-note or otherwise, … I bind myself and my foresaids to reconvey to the said James M'Dougall one-half pro indiviso of the said subjects acquired by me under the foresaid disposition, and for that purpose to grant, subscribe, and deliver to and in favour of the said James M'Dougall, at his expense, a formal reconveyance of one-half pro indiviso of said subjects.” It was in respect of the transaction thus arranged that the action of reduction was brought. The pursuer concluded also in the action as originally brought for reduction of certain other bills and of an alleged cash payment granted to Brownlee & Company, but these conclusions were settled extra-judicially, and need not be further alluded to. He did not conclude against Brownlee & Company for reduction of the promissory-note for £701. It had not been paid at maturity, and Brownlee & Company were claiming it in the sequestration. The grounds of reduction of the disposition stated against the defender were thus stated by the pursuer—“The said disposition was arranged for and granted in pursuance of a fraudulent and collusive scheme between them to defeat the just claims and debts of prior creditors of M'Dougall and his firm by withdrawing the property from them and transferring it to Gibbon. The said disposition is struck at by and is reducible under the Act 1696, cap. 5, and is reducible also at common law…. Further, the said disposition conveyed a very valuable interest, and was granted without true, just, and necessary cause, and without a just price really paid. It was made to the prejudice of prior creditors of M'Dougall and his said firm to Gibbon, who is a conjunct and confident person in relation to M'Dougall, and it is reducible under and in virtue of the Act 1621, cap. 18.”

The pursuer pleaded—“(2) The disposition challenged is reducible, both at common law and under the Act 1696, c. 5, as having been made and granted, in satisfaction or security of prior debts, within sixty days of notour bankruptcy, in preference to other creditors. (3) The disposition challenged is reducible, under the Act 1621, cap. 18, as having been granted to a conjunct and confident person, in prejudice of the rights of prior creditors, without true, just, and necessary cause, and without payment of a just price therefor. (4) The said disposition having been granted by a person in a state of insolvency, fraudulently to defeat the claims of his just creditors, under arrangement therefor with the grantee, is reducible at common law.”

The defender pleaded—“(3) The said disposition dated 31st March 1887, not being reducible in virtue of the Statutes 1621, c. 18, and 1696, c. 5, or at common law, the present defender is entitled to be assoilzied from the conclusions of the summons.”

After a proof the Lord Ordinary ( Lee) pronounced this interlocutor:—“Finds it proved that the disposition called for in the summons was granted by the bankrupt James M'Dougall in favour of the defender Edward Gibbon as part of an arrangement in which the defender was participant to enable the said James M'Dougall and Edward Gibbon to use the bankrupt's share of the subjects conveyed by said disposition as a security for a prior debt due by the said James M'Dougall to Messrs Brownlee & Company, timber merchants, and for which the said Edward Gibbon became liable as a cautioner under the promissory-note for £701, 14s. 1d., then granted and payable at three months' date: Finds that the whole transaction was within sixty days of the sequestration of the said James M'Dongall's estates under the Bankrupt Statutes, and finds that the said disposition was granted,though not directly in their favour, for the further security of the said Brownlee & Company contrary to the Act 1696, c. 5: Therefore repels the defences of

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the said Edward Gibbon: Reduces, declares, and decerns in terms of the reductive conclusions of the summons, and finds the said Edward Gibbon liable to the pursuer in the expenses of process as between him and the pursuer, &c.

“ Opinion.—I am unable to distinguish this case from that of Miller v. Duncan, December 8, 1825, 4 S. 283, and my opinion is that the conveyance in favour of the defender Gibbon is reducible under the Act 1696, c. 5.

The evidence shows that the defender was jointly interested with the bankrupt, not only in the various building speculations mentioned on record, but also in sundry bill transactions between the bankrupt and Messrs Brownlee & Company, of the City Saw-Mills, with whom the bankrupt had dealings in connection with their building operations. In March 1887 the bankrupt was due to Brownlee & Company a sum of £701, 14s. 1d., partly on open account and partly on a bill which became due on the 25th of that month. He was pressed for payment by Brownlee & Company, and it appears from the correspondence with Messrs Hill that he was being pressed at the same time for payment of a debt of £2000 heritably secured over certain subjects in King Street of Glasgow. It is established by the proof that the disposition under reduction in this action, though ex facie absolute, was granted as part of an arrangement between the defender and the bankrupt and Messrs Brownlee & Company, the object of which was to enable bankrupt to satisfy the claims of Brownlee & Company through the intervention of the defender. This was not done by a cash payment in respect of which the defender at once extinguished the debt due to Brownlee & Company, and became himself immediately the creditor of the bankrupt, taking the disposition in question as his security. The arrangement was that as Brownlee & Company refused to be satisfied with a disposition to the Springburn Road subjects in their favour the defender (who was joint proprietor of these subjects along with the bankrupt) should join the bankrupt in a promissory-note, payable in three months, to Brownlee & Company, and should take from the bankrupt a disposition to his pro indiviso half of the subjects ‘to secure me (Edward Gibbon) in the event of my being called upon to pay the principal sum contained in the said promissory-note.’ (See back-letter, No. 21 of process.)

This transaction was arranged, and the promissory-note and disposition were executed on 31st March, but the arrangement appears not to have been completed until the delivery of the promissory-note on 7th April. The disposition was delivered and recorded on 1st April, but delivery of the promissory-note to Brownlee & Company was withheld for a time owing to the defender's desire to have an express undertaking from them that the promissory-note should be held as contingent on the security over the property being effectual. (See Messrs Brownlee, Watson, & Beckett's account, No. 33, and the letters in No. 110 of process.) But the whole transaction was within sixty days of the bankrupt's sequestration, the date of which was 23rd April 1887.

It is said that Brownlee & Company were not parties to any agreement that the promissory-note should be enforceable against the defender only in the event of the disposition in the defender's favour being effectual. This appears to be the case, although it is worthy of notice that in fact the note never has been put in force against the defender by Brownlee & Company, who have claimed in M'Dougall's sequestration without valuing the obligation of the defender, ‘the bankrupt being the primary debtor in said debt.’ But the material question under the Act 1696 is as to the footing on which the defender entered into the transaction with the bankrupt. This appears clearly enough from the evidence already referred to. He trusted that there would be no sequestration, but he took his chance of it. He accepted the position of becoming answerable for Brownlee & Company's debt on the security of the disposition in question. But he acknowledged that the disposition was only to secure him in the event of his being called upon to pay the promissory-note. In that event he would acquire right to Brownlee & Company's debt, and would of course, become a creditor of the bankrupt in place of Brownlee & Company. In short, the substance of the transaction was that the disposition was given to the defender as a substitute for Brownlee & Company, and in satisfaction of or security for the debt of Brownlee & Company, which he undertook to pay, and for payment of which previously there was no security over the bankrupt's heritable estate.

It was urged that the Act 1696 could not apply, because the defender was not a creditor before he obtained the disposition in question. If that were true, it would be a question whether the disposition was not granted contrary to the Act 1621 in favour of a conjunct and confident person, without true, just, and necessary cause, and without just price really paid. But in the view I take of the case, it is not true that the defender, under the arrangement by which he obtained the conveyance, became creditor in a new debt. What he did was to interpose himself as security for an old debt, upon obtaining a conveyance in relief which could not have been granted to the creditor directly without being struck at by the Act 1696; and I think that the conveyance is not the less struck at by the Act 1696 when granted in favour of one who so interposed. The statute expressly applies to deeds granted ‘directly or indirectly’ in favour of creditors. The observation of Lord Gillies in the case of Miller v. Duncan appears to be applicable to the present case with the alteration of the name. ‘This was just a security for a prior debt, and it is proved that Patrick Duncan was participant in and a party to the arrangement, so that it must be set aside as to all the parties in order to do justice to the other creditors.’

The case of Miller v. Duncan does not stand alone as an authority for setting aside a conveyance granted, not to the original creditor, but to one who interposes as cautioner. I think, notwithstanding the observation of Professor Bell (vol. ii. p. 227, 5th ed.), that the point was tried and decided in the case of Swinton's Creditors, M. 1181. It appears from the report that the Lord Ordinary's judgment, so far as setting aside the vendition obtained by the cautioner, was acquiesced in by the cautioner, and that it was only as regards the validity of the promissory-note in the hands of the creditor that his interlocutor

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was altered. But it is unnecessary in this case to decide the abstract point referred to by Professor Bell, as there is evidence that the arrangement to which the defender was a party was a device for the purpose of granting a security which could not have been granted to the original creditor, by granting it in favour of a cautioner who paid no money, but obtained the conveyance as a security against the contingency of his being called on to meet the obligation which he undertook by signing the joint promissory-note, payable at three months' date.

The case of Speir v. Dunlop ( 5 Sh. 729) went even further, and sustained the application of the statute to a cash payment made to an endorser of a bill not then due, as a provision for payment of the bill when it become due. I think it unnecessary, however, to proceed upon that case in deciding the present.

I have not thought it necessary in explaining the grounds of my judgment to go over the evidence in detail. But the evidence of the bankrupt shows that he knew his difficulties, and explained them to the defender. This is not contradicted by the defender. These difficulties were such that Mr Young, on behalf of Brownlee & Company, asked to see his books, and that the defender refused to interpose his security without getting a conveyance of the Springburn Road subjects in relief. They arose not only from the pressure of Brownlee & Company, who were the principal trade creditors, but also from the pressure of an heritable creditor; and it must have been obvious to the defender, as well as to the bankrupt, that the effect of the arrangement by which he obtained a conveyance to the Springburn Road subjects was to satisfy the largest of the trade creditors in a manner which must prejudice the other creditors who held no securities, and also those heritable creditors whose securities were insufficient.”

The defender reclaimed, and argued—It was proved that the defender had not entered into this transaction knowing and having in view that M'Dougall was insolvent, and taking his chance that he did not become bankrupt within the sixty days. If then the parties did not negotiate with bankruptcy in view the case did not come within the Act 1696, cap. 5, and could not be cut down by the Act. But even if the proceedings had been taken with a view to M'Dougall's insolvency the granting of the disposition was not struck at by the Act. The granting of the disposition made Gibbon a new creditor. It gave him no preference over any other creditors. Although he became security to Brownlee & Company for their debt, if that was a preference to them, although that was not admitted, it was no preference given to Gibbon. This case was ruled by that of Monteith's Trustees v. Douglas, December 10, 1794, Bell's Folio Cases, 127. In both the cases of Duncan and Swinton, cited against the defender, the final decisions which had been quoted as upholding the principle that a cautionary obligation might be sustained while the cautionary security was cut down, the decision had been given in the upper Courts, where only a part and not the whole of the case was before the Court— Low v. Bell, June 12, 1827, 2 W. and S. 579; Miller v. Low, December 11, 1822, 2 S. 77; Campbell v. Macgibbon, August 10, 1780, M. 1139; Blaikie v. Robertson, March 9, 1781, M. 887.

The pursuer argued—It was plain from the proof that the arrangement was a scheme or device to enable Brownlee & Company to get their debt paid in full at the expense of the other creditors. The defender knew that M'Dougall was insolvent; he was a partner in the joint-adventure with him, and at least must be taken as having known. He therefore could not object if he is left to bear the burden of the debt although his security should be cut down. The Act of 1696 struck at any arrangement between the debtor and one of his creditors that tended to disturb the equality of distribution among the creditors. The arrangement between M'Dougall, Gibbon, and Brownlee had done that, and was therefore cut at by the Act although Brownlee was not present as a defender. It could not be pleaded that the conveyance to Gibbon constituted a novum, debitum, because the estate got no value for the obligation that was incurred; all that was done was that Gibbon intervened to pay off an old debt due by the debtor to Brownlee & Company, therefore that was giving a security for an old debt in the meaning of the Act. The case of Miller v. Duncan was a direct authority in favour of the pursuer. As regards the case of Monteith, there was nothing shown in that case of a collusive design and desire to evade the statute— Carter v. Johnstone, March 5, 1887, 13 R. 698; Barbour v. Johnstone, May 30, 1823, 2 S. 351; Miller v. Duncan & Low, December 8, 1825, 4 S. 283; Swinton's Trustees v. Forbes, February 19, 1790, M. 1181.

At advising—