Scottish Court of Session Decisions

On 23d December 1885 Richard Mackie, Leith, lent to John Millen & Company the sum of £450. Millen & Company gave in exchange their promissory-note for £462, 10s. (the difference representing interest and exchange), payable four months after date, and a letter which was in the following terms—“In consideration of your having this day discounted for our sole benefit our acceptance, at four months from date, for (£462, 10s.) four hundred and sixty-two pounds ten shillings sterling, and handed us proceeds of same, we hereby hand over to you, as security for same, 100 shares for £6 paid in Holmes Oil Company, and bind ourselves to transfer same to you at any time during the currency of the bill if you desire it.” On the same day the scrip or share certificate of the shares in the Holmes Oil Company was delivered to him, but no transfer was then executed. The shares belonged to John Millen, who acted for his firm.

The affairs of Millen & Company having become embarrassed, were on 14th January 1886 placed in the hands of a firm of chartered accountants, and intimation of the fact made by circular to their creditors. On 15th January Mackie obtained a transfer of the said shares. The transfer was dated 23d December 1885, the date of the letter. He intimated it to the company, who issued a new certificate of the shares in his name. On 28th January the estates of John Millen & Company were sequestrated. John Gourlay, C.A., was appointed trustee.

Mr Gourlay raised this action in order to reduce the transfer, and have the defender ordained to make over the certificate of the shares to him, as trustee, the ground of action being that the transfer was

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signed and delivered voluntarily and without consideration, in satisfaction of and as security for a prior debt due to Mackie on the eve of sequestration and within sixty days of bankruptcy, and therefore was contrary to the Act 1696, c. 5.

The defender in answer explained that the contract between him and Millen was simply that of a loan on security. “The advance was made solely on the faith of its being covered or secured by the oil shares standing in the name of John Millen, and it was understood by both parties that the security was made effectual by the delivery of the stock certificate.”

The pursuer pleaded—“(1) The transfer or assignation having been given in security or satisfaction of a prior debt within sixty days of bankruptcy, contrary to the terms of the Statute 1696, chap. 5, the pursuer is entitled to have the same reduced and set aside. (2) The pretended sale of the said shares described in the said transfer or assignation by the bankrupt John Millen to the defender not having been a bona fide sale, and the same having been an illegal and fraudulent transaction between the parties, it is void, or at least reducible at common law, and the pursuer and the creditors of the said bankrupts are entitled to be reponed thereagainst. (3) The transaction complained of having been fraudulent at common law and under the Bankrupt Acts, and to the prejudice of the bankrupt's creditors, the pursuer is entitled to decree as concluded for.”

The defender pleaded—“(1) The said shares having been transferred to the defender in implement of a prior obligation by the said John Millen & Company to do so, the action, so far as based on fraud at common law, is unfounded. (2) The said shares having been transferred in respect of a novum debitum, and in specific implement of a prior specific obligation, the action, as based on the Act 1696, cap. 5, is unfounded.”

The Lord Ordinary ( Kinnear) repelled the pursuer's pleas-in-law, sustained the pleas-in-law stated for the defender, and assoilzied the defender from the conclusions of the summons.

“ Opinion.—The only question in this case is, whether the security which the pursuer seeks to reduce is struck at by the Act 1696, c. 5? for apart from the statute I think it clear that there is no relevant averment of fraud. The general rule of law by which the question must be determined cannot be better stated than in two propositions laid down by Professor Bell in his Commentaries, and cited with approval by the Lord President in Stiven v. Scott, June 30, 1871, 9 Macph. 930. The first is, that ‘wherever money is paid or advanced, or property made over, in consideration of a general promise of security, not over a specific subject, the distinction is sanctioned between the debt and the security subsequently granted, and in its true intent and meaning the rule of the statute is understood to apply to the security, when it comes to be granted, as being truly a security for a previous debt.’ The second proposition is, that ‘wherever there is stipulated a specific security over a particular subject, in consideration and on the faith of which an advance of money or transfer of goods is made, the completion of that security, although after an interval of time, and after the term of constructive bankruptcy has begun, is not within the intent and meaning of the Act.’ The question is, under which of these two categories the disputed security falls, and I am of opinion that it falls under the second.

“The transaction between the defender and the bankrupts was a very simple one, and there was no dispute as to its terms. On the 23d December 1885 the defender made a loan to the bankrupts of £450 by discounting their acceptance, and on the same day they delivered to him the scrip or share certificate of certain shares in the Holmes Oil Company, and a letter addressed to him, in which they say—‘In consideration of you having this day discounted, for our sole benefit, our acceptance at four mo's from date for (£462, 10s.) four hundred and sixty-two pounds ten shillings stg., and handed us proceeds of same, we hereby hand over to you, as security for same, 100 shares for £6 paid in Holmes Oil Coy., and bind ourselves to transfer same to you at any time during the currency of the bill if you desire it.’ It is true that the delivery of the certificate did not of itself operate as a transfer of the shares, but the letter shows that the transaction was in intention and substance a loan on the specific security of the shares, and the obligation to execute a formal transfer was instantly prestable. The advance and the security were parts of the same transaction, and it is a transaction which appears to me to satisfy the requirements of the law as these are explained by the Lord President in the case of Stiven, where his Lordship says—‘If the party come under an obligation to do something immediately and unconditionally, it shall have the effect of creating a good security, and when I say ‘come under an obligation’ I mean nothing short of this, that he subjects himself to an obligation instantly and absolutely enforcible. When he comes under such an obligation as that, then the fulfilment of that obligation, although within sixty days, will not make a case under the statute, because then the security is substantially granted before the sixty days, and at the same time that the debt is contracted. It is a security contemporaneous in that point of view with the contraction of the debt.’ It is true that the security was not in this case granted before the sixty days, but that is because the debt was contracted within that period. It was a new debt contracted within sixty days of bankruptcy, and if I am right in thinking that it was contracted on the security of the shares, the completion of the transaction cannot be considered as the voluntary granting of a further security for a prior debt.

“I do not think this view inconsistent with Moncreiff v. The Union Bank. There is no doubt a certain resemblance between the facts of that case and those of the present, but I think the two cases distinguishable in a very material point. The Union Bank made an advance to the bankrupts more than sixty days before their bankruptcy on the security of a promissory-note, and took from them at the same time a missive addressed to the manager, binding themselves at any time required to assign a heritable bond and certain policies of insurance, which were immediately deposited with the bank. The assignation was not required till the promissory-note fell due, six months after the date of the loan, and within six days of the bankruptcy of the borrowers.

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It appears to me that the only question of difficulty in that case was a question as to the construction of the contract upon which the advance was made, and the ground of judgment, as explained by Lord Fullerton, was ‘that the missive taken by the defenders showed that the instant granting of the security was not the consideration of the advance. There was no absolute stipulation for the security at the time of the advance.’ And accordingly the Court distinguished the case from those in which, although the security was not actually given prior to or simultaneously with the advance of the money, the granting of the security really formed by the terms of the original contract the consideration for such advance. In the present case, on the other hand, I think the missive shows that the security upon which the defender made the advance was not the personal obligation contained in the bankrupt's promissory-note, but the specific security of the shares in question. It is said that the obligation to transfer the shares is qualified by the words ‘if you desire it,’ and that this must mean just what was meant by the words ‘if required’ in the case of Moncreiff v. The Union Bank, so that on the authority of that decision it must be held that the obligation to transfer was not absolute and unconditional, but dependent upon after requirement. But the whole letter must be read to ascertain the terms of the contract, and if it be clear, as I think it is, from the previous words that the advance was made on the specific security of the shares in the Holmes Oil Company, it is impossible to infer from the words in question that the security was not an absolute term of the bargain, but that it was left open for after consideration whether any such security should be required or not. It appears to me that the words ‘if you desire it’ take nothing from the force of the absolute and unconditional obligation to transfer provided it be clear that the contract between the parties was an advance on the specific security of the shares. The case of Moncreiff v. The Union Bank is an authority for the rule of law which may be extracted from it, but it is no authority for the construction of a different contract from that which was then in question.

“If I am right in the construction I put upon the present contract, the case falls within the rule, which must now be taken as firmly established, that ‘wherever on an advance of cash a simultaneous engagement is made to give a specific security for the specific advance, such security may be validly completed within sixty days of bankruptcy, and is not struck at by the Act of 1696.’ The rule is settled by a series of decisions, but Taylor v. Farrie [ infra cit.] is probably the most important, since it was a judgment of the whole Court.

“I do not think the rule displaced by the consideration (if that can be gathered from the contract) that the parties may have been uncertain as to the form which might be necessary for making the security effectual. The important matter is that the advance was made substantially on the security of the shares, and that the obligation to transfer the shares on demand for the purpose of making the security effectual was absolute and unconditional. There was no new transaction between the parties, and no voluntary transference by the bankrupts.”

The pursuer reclaimed, and argued—The transaction in question was truly, as was said in Moncreiffs case, a mere device of the most dangerous description, looking to the interests of the general creditors, to evade the operation of the statute. No present security for the debt was either constituted or intended. There was certainly no transfer on the face of it. What was obviously intended was a future security for the debt, which the creditor was to have it in his power to call for should the necessities of the case, or (it might be) the altered circumstances of his debtor eventually prompt such a demand. So long as no demand was made there was no actual obligation incumbent upon the debtor even to give this security. Such obligation was only to arise on the creditor's requisition. The case must be ruled by Moncreiff v. The Union Bank, December 16, 1851, 14 D. 200, the species facti in both being almost identical. In it Lords Ivory, Lord President Boyle, and Lord Fullerton referred to the previous case of Inglis v. Mansfield as conclusive, saying that the obligation to assign went for nothing, and that the time of granting the security was the point of time alone to be looked to. Then followed Taylor v. Farrie, March 8, 1855, 17 D. 639; Lindsay v. Shield, March 19, 1862, 24 D. 821; and Rose v. Falconer, June 26, 1868, 6 Macph. 960. In all of them the principle laid down in 2 Bell's Com., 7th (M'Laren's) ed., pp. 206 and 211, was given effect to, the rationale of the decisions being whether the transference had been taken in specific implement of an obligation ad factum prœstandum. Lastly came the case of Stiven v. Scott & Simson, June 30, 1871, 9 Macph. 923, the facts in which case were almost identical with those in the present case. There in fact the transaction takes the form of an obligation ad factum prcestandum instantly enforceable and unconditional; then and then only can it be considered a voluntary deed in the sense of the statute.

The defender replied—The present transaction was not of the nature of that in Moncreiff's and Stiven's cases. It was quite clear that the advance was made on the specific security of the shares. The parties considered the security sufficient, but they agreed that if found to be necessary the subsequent transfer was to be granted. There was an absolute obligation imposed to grant such transfer. He had then a right in specifica obligations, just as he would have had if the shares had been sold to him, and the second proposition laid down by Bell, supra, and which was expressly approved of by the Lord President in Stiven's case, p. 932 of the report, fell to be given effect to. The case of Moncreiff v. The Union Bank was distinguishable on two grounds—1st, In it the only security was the promissory-note of the debtor, the obligation undertaken being something additional, while in the present case on the face of the contract the advance was made on the face of a specific security. 2d, There was no limit in time for the enforcing of the obligation, the words being “at any time required,” while here there was one. The cases of Taylor v. Farrie and Lindsay v. Shield were expressly in point, and must govern here. Stiven's case was decided distinctly on the absence of all intention of really transferring the goods from one party to the other.

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The true test of all such cases was (1) whether the obligation could be instantly enforced? (2) whether, if the borrower had conveyed to anyone else, he would have been committing a fraud— Cranston v. Buntine (H. L.), July 6, 1826, 6 W. & S. 79.

At advising—