Scottish Court of Session Decisions

Hugh Morton, who carried on business as an engineer and iron shipbuilder in Leith, died in 1878 leaving a trust-disposition and settlement, by virtue of which Samuel Morton Smart and Hugh Morton Gavin acquired his business at a valuation. Upon 1st January 1879 they entered into partnership with Stewart Robertson, and carried on business under the firm of Samuel & Hugh Morton & Company. From Hugh Morton's trustees, acting under powers conferred by the trust-disposition, they received on tools and machinery a loan of £8500, and upon 15th February 1879 granted a bond in the following terms—“We, the said Samuel & Hugh Morton & Company, as a firm, and we, the said Samuel Morton Smart, Hugh Morton Gavin, and Stewart Robertson, as partners of said company and as individuals, bind and oblige ourselves, and our respective heirs, executors, and successors whomsoever, and the whole partners of said firm, present and future, all conjunctly and severally, and without the necessity of discussion, to repay the said principal sum of £8500,” with interest.

In July 1890 Mr Stewart Robertson died, and in December 1890 Mr George E. Watson, C.A., Edinburgh, was appointed judicial factor on his estate under the 164th section of the Bankruptcy (Scotland) Act 1856.

After Mr Stewart Robertson's death Messrs Samuel Morton Smart and Hugh Morton Gavin continued to carry on business under the same firm name, and to pay Hugh Morton's trustees interest upon the loan until December 1890, when they suspended payment. They then granted a trust-deed for behoof of creditors, and paid a composition of 8s. 6d. per pound. Hugh Morton's trustees acceded to this trust-deed, and received £3300 out of £7775 remaining unpaid of their loan of £8500, and granted receipts. For the remainder they claimed to rank upon the estate of the late Mr Stewart Robertson.

The judicial factor upon 11th March 1892 rejected the claim, on the following grounds—“No steps were taken by the claimants to call up the bond at Mr Robertson's death. On the contrary, the credit was continued to the succeeding firm of S. & H. Morton & Company, of which Messrs Smart & Gavin were the only partners, and they were adopted as the debtors, and were applied to for and paid the interest when it fell due. By so doing without notice to Mr Robertson's representatives, the claimants gave up any claim they might have had against Mr Robertson's estate. … In said trust-deed, to which the trustees of the said Hugh Morton acceded as creditors, it is expressly provided as follows—That the creditors who acceded thereto, and who should draw dividends out of the bankrupt estates of the said firm of S. & H. Morton & Company, and of Samuel Morton Smart and Hugh Morton Gavin, the individual partners of that firm, should be held to have discharged the said firm and the said individual partners of the whole debts due by them to the creditors so acceding…. The said trustees received from th trustee under the said trust-deed dividends upon the amount claimed by them, and granted formal receipts therefor. Had matters remained entire, and had Mr Robertson been called upon to pay the said bond, he would have been entitled to relief from S. & H. Morton & Company. That firm having been released by Morton's trustees, the judicial factor considers that the estate under his charge has also been released.”

Hugh Morton's trustees brought the matter by way of note of objections before the Junior Lord Ordinary (Low), who upon 2nd August 1892 pronounced the following interlocutor:—… “Sustains the objections, recals the said deliverance, and remits to the factor to rank the said trustees as ordinary creditors.…

“ Opinion.—On 1st January 1879 Samuel Morton Smart, Hugh Morton Gavin, and Stewart Robertson entered into partnership as engineers and iron shipbuilders under the firm of Samuel and Hugh Morton & Company.

The business had previously been carried on by the deceased Hugh Morton as sole partner, and on 15th February 1879 the bond and assignation in security upon which the claim now under consideration is founded was granted in favour of Hugh Morton's trustees.

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The bond and assignation is granted by Samuel and Hugh Morton & Company, and by Mr Smart, Mr Gavin, and Mr Robertson as partners of the firm and as individuals. The bond narrates that under his trust-disposition and settlement the deceased Hugh Morton had directed his trustees to offer the business at a valuation to Mr Smart and Mr Gavin; that the trustees had done so; that Messrs Smart and Gavin had accepted the offer; that they had arranged to take over the business as at 1st January 1879, and to carry it on under the firm of Samuel and Hugh Morton & Company, and had taken Mr Robertson into the partnership.

The bond further narrated that by a codicil Hugh Morton had authorised his trustees, in order that Messrs Smart and Gavin might be enabled to accept the business, ‘to grant in loan to us the said Hugh Morton Gavin and Samuel Morton Smart, or the survivor of us, such sum or sums as his said trustees might in their judgment and discretion think reasonable and proper.” It was further narrated that the trustees were directed to take a bond or bill for the amount which they might advance, with interest at 5 per cent., but that they were not to call up the loan so long as they were satisfied that the business was in a satisfactory condition. It was then narrated that it had been arranged between the trustees and Messrs Smart and Gavin that the trustees ‘should advance to us the said Samuel and Hugh Morton & Company, and to us the said Samuel Morton Smart, Hugh Morton Gavin, and Stewart Robertson, the individual partners of the firm, in loan to enable us to carry on the said business, the sum of £8500.’

The firm and the individual partners then acknowledge that they have received from the trustees tools and machinery to the value of £8500, and then the bond proceeds—‘Therefore we, the said Samuel and Hugh Morton & Company as a firm, and we the said Samuel Morton Smart, Hugh Morton Gavin, and Stewart Robertson, as partners of said company and as individuals, bind and oblige ourselves, and our respective heirs, executors, and successors whomsoever, and the whole partners of said firm, present and future, all conjunctly and severally, and without the necessity of discussion, ‘to repay the sum of £8500 with interest. Then, in security of the above personal obligation, Mr Smart and Mr Gavin assign to the trustees certain beneficial interests which they had under Hugh Morton's settlement.

The partnership continued until July 1890, when Mr Robertson died. During that period I understand that the interest upon the £8500 had been regularly paid to the trustees. After Mr Robertson's death Mr Smart and Mr Gavin continued to carry on the business under the same firm name until December 1890, when they suspended payment. Between the date of Mr Robertson's. death and their suspension, Messrs Smart & Gavin, or the firm of S. & H. Morton & Company as then constituted, paid to the trustees, and the trustees accepted payment of certain interest which became due on the £8500.

S. & H. Morton & Company, and Messrs Smart & Gavin as the partners thereof, then granted a trust-deed for behoof of creditors, and Hugh Morton's trustees acceded to the trust, and made a claim in respect of the £8500, and received a dividend of 8s. 6d. per pound.

The present claim is made by Hugh Morton's trustees against the estate of Stewart Robertson (which is in the charge of a judicial factor appointed under the 161th section of the Bankruptcy Act) for the balance still due under the bond and assignation in security.

The judicial factor has rejected the claim upon two grounds. In the first place, he holds that the trustees accepted the firm of S. & H. Morton (as constituted after the death of Stewart Robertson) as their debtors, and thereby discharged any claim which they might otherwise have had against Mr Robertson's estate. In the second place, he holds that Mr Robertson was only a cautioner under the bond and assignation, and that no claim can be made against his estate by the trustees after having accepted a dividend from the estate of S. & H. Morton & Company.

I am of opinion that the deliverance of the judicial factor is not well-founded.

The only ground for saying that the trustees accepted the new firm of S. & H. Morton after Mr Robertson's death as the sole debtors is, that they accepted payment of interest when it fell due from that firm. I think that it would have been extraordinary in the circumstances if the trustees had done anything else, and I am of opinion that it is plain that the acceptance by them of the interest when it became due, and was tendered to them cannot be held to import an abandonment by them of any rights which they had under the bond and assignation.

In regard to the respective positions of the parties to the bond, it was contended that as the sum for which the personal obligation was given represented the tools and machinery used in the business, and as the power of the trustees was limited to advancing money for the purpose of carrying on the business, the firm must be held to be the principal debtors, the individual partners being merely cautioners. I am unable to adopt that view. No doubt if it is clear from the transaction set forth in the deed that certain of the parties are truly cautioners although subscribing as co-obligants, they will be entitled to the equities of cautioners. But I do not think that anything of the sort is clear from the transaction disclosed in the deed under consideration. It is true that the money or the money's worth was given for the purpose of enabling the firm to carry on the business, and that the firm is in law a separate person from the individual partners. But each of the partners as an individual had a direct personal interest in the matter, and was in a very different position from a cautioner in a bond of cash-credit to which the present bond was sought to be assimilated.

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The bond seems to me to be carefully framed with the view of taking all the parties to it—the firm and the partners as such, and as individuals—bound, not only in form but in fact, as principal debtors, and I do not think that there is anything in the nature of the transaction disclosed which justifies the rights and obligations of the parties being determined upon any other footing.

I shall therefore recal the deliverance of the factor, and appoint him to give the trustees a ranking.”

The judicial factor reclaimed, and argued—(1) Notwithstanding the form of the bond the real position of parties must be looked at. The partners, including Stewart Robertson, were truly cautioners for the firm, which was a separate persona, and the true debtor. If Stewart Robertson was in fact a cautioner, he was entitled to the equities of a cautioner— Paterson v. Bonar, March 9, 1844, 6.D. 987; Scottish Provincial Assurance Company v. Pringle, January 28, 1858, 20 D. 465. Accordingly he had been discharged by the partnership coming to an end at his death, or by the discharge of the principal debtor, and of the co-cautioners by virtue of the accession to the trust-deed and the receipt granted, for thereby his right of relief had been cut off—Bell's Prin. 62; Bell's Comm., 7th ed. 362. (2) The old obligation under which Stewart Robertson was bound was extinguished by delegation, for Morton's trustees had, after December 1890, taken the new firm as their debtor, and had received interest from it—Bell's Prin., sec. 578; Buchanan v. Somerville (1779), M. 3402; Ker v. M'Kechnie, February 23, 1745, 7 D. 494.

Argued for respondents—(1) Stewart Robertson was a principal debtor not only as one of the firm for whose benefit the advance was made but under the bond, which could not have been more explicitly worded. The creditors had not lost their right of proceeding for the balance of the debt against Stewart Robertson's estate, because they had exercised their undoubted right of getting payment first from the other two co-obligants. But neither had Stewart Robertson's right of relief been in any way prejudiced. (2) There had been no delegation, which was not to be presumed—Bell's Prin., sec. 578. In M'Intosh v. Ainslie, January 10, 1872, 10 Macph. 304—a much stronger case than this—it was held there had been no delegation.

At advising—