Scottish Court of Session Decisions

Archibald Cochran of Ashkirk, on the death of his father in 1812, succeeded to his estates, burdened with the payment, inter alia, of a legacy of £600 in favour of Robert Kerr, one of the partners of William Kerr and Son, merchants in Leith. The legacy was payable at Whitsunday 1813, but it had not been paid by Archibald Cochran when his estates were sequestrated under the Bankrupt Act in June 1821. William Keith, accountant in Edinburgh, was appointed trustee on the estate. On the general transactions between William Kerr and Son, and Archibald Cochrane, a balance of £838 arose in favour of Cochran, as at the date of his bankruptcy. At that date there were bills to the amount of £5479 in the hands of Inglis and Company of London, who were onerous third parties, on which bills William Kerr and Son were drawers and indorsers, and Cochran was the acceptor. These bills were granted for the accommodation of Cochran, who received their proceeds. The estates of William Kerr and Son, as a Company, and of William and Robert Kerr, the partners, as individuals, were sequestrated in October and December 1822. Robert Christie, accountant in Edinburgh, was appointed trustee. The bills held by Inglis and Co. were still unpaid, and they were ranked both on the estate of Cochran, and on that of Kerr and Son. From the latter estate a first dividend, amounting to £342, was drawn by Inglis and Co. in 1824; and a farther dividend was said to be expected. Dividends were also drawn from the estate of Cochran. William Kerr and Son were also co-cautioners with Cochran in a bond for Stead and Paterson to the Leith Bank. The amount due under it was £362, the whole of which was paid by Kerr and Son, before their sequestration.

Christie, as trustee above-mentioned, raised an action against Keith, as Cochran's trustee, concluding inter alia, for payment of Robert Kerr's legacy of £600, and interest since Whitsunday 1813. Keith pleaded in defence, that at Cochran's sequestration a balance of £838 arose in his favour, on the general transactions with Kerr and Son, and that this should be set off against the legacy due to Robert Kerr, just as much as it would have been against any debt due to the Company of Kerr and Son of which Robert Kerr was a partner. Christie (who alleged that, under the settlement of Cochran's father, the amount of the legacy was sufficiently secured), contended that the proposed compensation was excluded (1.) in respect of a right of recompensation for £181, being one-half of the bond to the Bank which Kerr and Son had paid before bankruptcy, and which one-half was a proper debt of Cochran, and must be Bet off against the general balance of £838; and (2.) in respect of a right of retention, not only on account of the sum of £342, being the dividend already drawn from the estate of Kerr and Son, on account of the accommodation-bills they had granted to Cochran, but also on account of the future dividend which was still expected to be drawn in respect of these bills. It was only after deducting these several amounts from the general balance of £838 (and retaining in so far as they were not yet liquid), that the balance, if any, could arise, which was to be a set-off against the claim for the amount of the legacy. Keith answered, as to the bills held by Inglis and Co., that as the whole had already been ranked on Cochran's estate, and had drawn their full dividend out of it, no farther claim, on account of them, could be made available against that estate, directly or indirectly, without subjecting it to a double-ranking for the same debt, which was not maintainable.

So far as regarded the half of the Bank-bond, or £181, it was not seriously disputed by the defender that it might be set-off by the estate of Kerr and Son against the general balance of £838, due to Cochran's estate, as the whole bond for £362 had been paid by Kerr and Son while solvent; and it was said to have been by an oversight in preparing the accounts that, that item of £181 had not been deducted. In regard to the remaining question, it was

Pleaded by the Pursuer—

1. Cochran was the proper debtor in the bills for £5479. In any question with Cochran, Kerr and Son were in the position of cautioners for Cochran's proper debt. But Kerr and Son were liable to Cochran in a separate debt; and the right claimed by them was, to retain that separate debt, in order to secure their indemnity against the consequences of their cautionary obligation. Such right of retention arose independently of any special stipulation at the date when Inglis and Co. signed the bills; it was expressly recognised both by decisions and by institutional writers; ¹ and it was not touched by the Bankrupt Act, § 38, which left entire all preferences by lawful “securities,” of which the right of retention was one.

2. If Kerr and Son had remained solvent, and had paid the whole bills to Inglis and Co. the holders, Kerr and Son, could have retained the debt due to Cochran's estate, for their own relief, and farther could have ranked on Cochran's estate for any balance not covered by the retained debt. But, equally, if Inglis and Co. had first ranked the bills on Cochran's estate, and drawn a dividend, and then had received the full balance of the bills from Kerr and Son, that would have left entire the right of Kerr and Son to retain their debt as against Cochran's estate, and could only have prevented them from ranking for any balance,—for which, however, they might also have ranked but for the previous ranking of the same debt by Inglis and Co.

3. The fact that Kerr and Son became bankrupt after Cochran, did not affect any principle on which the question turned. The estate of Kerr and Son still owed the separate debt to Cochran's estate; their estate had also been subjected in payment of a dividend to the holders of the bills, for which Cochran's estate was properly liable; and, to the extent of that dividend, their estate was entitled to keep itself indemnis, by retaining, pro tanto, the separate debt due to Cochran's estate.

4. No double-ranking was involved in this. Cochran's estate was liable to the holders of the bills for payment, and to their own cautioners, Kerr and Son, for relief. The cautioners held a security in virtue of their right of retention; and the privilege claimed by Kerr and Son,

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¹ 3 Ersk. 4, 20; and note by Ivory—Sturgeon, January 20, 1813 (F.C.)—Balleny, June 7, 1808 (F.C,)—Murray's Creditors, January 19, 1744 (Rem. Dec. No. 154)—Brough's Creditors, November 26, 1793 (2585)—Menzies, July 10, 1718 (2686).

which would have the effect of relieving them, in full, of what they had advanced under their cautionary obligation, was not a privilege of double-ranking; but of operating on a security held by them. So far as that security covered thorn, they were not in pari passu with the common creditors claiming on a bankrupt estate, but, without ranking at all, were entitled to pay and relieve themselves.

5. In so far as the estate of Kerr and Co. possessed an available plea of retention, affecting the balance of £838, it was entitled, at its option, to impute that balance in relief of the sums paid or to be paid to Inglis and Co., in preference to imputing it in extinction of the legacy, on the same principle on which one who is a creditor in a plurality of debts, by the same debtor, may impute an indefinite payment to that debt which is best secured. And in so far as the said balance was subject to be so imputed, it could not be pleaded by Cochran's estate by way of compensation against the legacy due to Robert Kerr. ¹

6. The report of the case of Curtis v. Chippendale, ² neither as to the facts of the ease, nor as to the opinions of the Judges, afforded any precedent to the plea of the defender, but rather seemed to have a contrary tendency. And, in particular, the grounds of reversal in the House of Lords were not stated. It, therefore, could not be relied on by either party.

Pleaded by the Defender—

1. Laying aside the bills for £5479, the general balance of account between Kerr and Son and Cochran, at their bankruptcy, showed a sum of £838 due to Cochran, while Cochran was indebted to Robert Kerr, one of the partners of Kerr and Son, for £600 and interest, being his legacy. To the extent of this last sum, the balance due by Kerr and Son was undoubtedly extinguished by compensation, ³ unless there existed some specialty to take off the effect of that plea.

2. There was no such specialty. Inglis and Company, when they signed the bills for £5479, did not stipulate for, or receive any security or pledge. Neither did they do so at any period prior to the bankruptcy of Cochran. And although it then appeared, that, on a general accounting between Kerr and Son and Cochran, Kerr and Son owed a balance of £838 to Cochran, their estate was not entitled, in a question with Cochran's estate, to impute that balance in full payment of the sums recovered out of the estate of Kerr and Son, by the ranking thereon of the bills of £5479; because no part of the balance was held as such

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¹ Dobson, February 28, 1835 (ante, XIII., 582)—Bogle's Creditors, July 8, 1793 (2581)—Scott, June 13, 1809 (F.C.)—Maxwell, November 13, 1738 (2550 and 2551).

² Bell's Cases, No. 44, p. 119—2 Bell, 530—Brown's Parl. Cases, Vol. VI. p. 264, note.

³ Bogle's Crs., July 8, 1793 (2581)—Russell, May 26, 1824 (ante, II. 88; or 79, new ed.)—Salmon, Dec. 17, 1824 (ante, III. 406; or 285, new ed.)

security. And this was only in conformity with the express terms of the Bankrupt Act, § 38, declaring the whole effects of the debtor to be a common fund of division, “regard being had to preferences obtained by securities, or by diligence before the said deliverance, and not expressly set aside by this act, but to no other claims of preference.”

3. It was true that Cochran was the proper debtor in the bills for £5479. But Inglis and Company had ranked for the full amount of these whole bills on Cochran's estate, and had drawn a corresponding dividend. Inglis and Company, therefore, could not, of themselves, directly or indirectly, have drawn any thing farther from Cochran's estate, in respect of these bills; and the estate of Cochran could not be subjected to any farther liability for these bills than the payment of the dividend. This could not be done without its suffering either a double ranking, or at least a double drawing for the same debt; which was contrary to a cardinal rule in bankrupt law. ¹

4. Although Inglis and Company could and did also rank for the bills in question on the estate of Kerr and Son, they could not, in respect of any payment thereby recovered, confer on Kerr and Son a higher right, under these bills, against the estate of Cochran, than that which they, Inglis and Company, the proper creditors in the bills, themselves possessed. In any question, therefore, between the bankrupt estate of Kerr and Son and of Cochran, the payment recovered by Inglis and Company from Kerr and Son could not have any effect whatever; because the payment of the dividend on the bills to Inglis and Company exonered the bankrupt estate of Cochran, as to these bills, in any question with the proper creditors, the holders of the bills, and, a fortiori, in any question with a party who only held a right subordinate to that of the holders of the bills.

5. The grounds of the plea of recompensation by Kerr and Son could not have supported any direct claim, or action of debt against Cochran's estate; and thus there were no termini habiles for the plea of recompensation. And as the right of retention had never been recognised, unless there was a claim or obligation, prestable and capable of being enforced, if liquid, by compensation, against the party in right of the funds sought to be retained, there were no termini habiles for the plea of retention. ²

6. The case of Curtis v. Chippendale ³ involved the same question as that raised in this process, and the decision of the House of Lords afforded an express precedent in favour of the defender.

The Lord Ordinary pronounced this interlocutor:—“Finds that this

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¹ 2 Bell, 527—Cowlie, VII. Term. Rep. 365—Henley on Bankey.

² 1 St. 18, 6, and 7—3 Ersk. 4, 12—Maxwell, Nov. 15, 1738 (2550, Kilk.'s report)—3 Ersk. 4, 11, 19, and 20—Glendinning, June 8, 1745 (2574).

³ Dec. 9, 1794 (2589), reversed, Feb. 23, 1797 (2593)—2 Bell, 530—Thomson on Bills, 769–773—Glen on Bilk, 369.

is an action brought by the pursuer, the trustee on the estate of William Kerr and Son, and William and Robert Kerr, the individual partners of that company, against Archibald Cochran of Ashkirk, and the trustee on his sequestrated estate: Finds that the summons concludes, first, for payment of certain legacies due by the defender Cochran, as representing his late father Archibald Cochran, senior, to Robert Kerr, amounting to £600 sterling, with interest from the years 1813 and 1814; and secondly, &c.—to all which legacies the pursuer, the trustee on the sequestrated estate of Kerr and Son, has now right: Finds that, among other defences, it is maintained by the defenders that they have a counter-claim on a balance due on the general accounting between the two bankrupt estates, of £838, 11s. 2d. sterling: Finds that the pursuers, while they admit the amount of the foresaid balance due to Mr Cochran on the general accounting, deny its effect as a ground of compensation against the sums pursued for, in respect of their claims, independent of the legacies, to be relieved, 1st, Of the sum of £181 sterling, being half of the payments made by Kerr and Son to the Leith Bank, on a cash-account of Stead and Paterson, for which Cochran was their co-cautioner; and, 2d, Of the dividends which they have paid, or may pay, on account of bills to a large amount, granted to Inglis and Company for the accommodation of Mr Cochran: Finds that the first of these claims of relief is well founded, and that the amount of compensation, founded upon the general balance of £838, 11s. 2d. mentioned, must be to that extent diminished; But finds that the claim of relief on the second ground cannot be received, in respect that those bills are already ranked on Cochran's estate, and that the claim of relief or recompensation would operate as a double ranking of all those bills on the said estate: Finds that the defender's plea of compensation, under the foresaid deduction, is good against the conclusions of the summons for payment of the legacies due to Robert Kerr, the individual partner of the house of Kerr and Son; and appoints the parties to lodge a statement of accounts in regard to Robert's legacy, in terms of the preceding findings, in order that it may be ascertained whether the result does not supersede the necessity of considering the other matters in dispute between the parties.” ^*

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^* “ Note.—This is a case of very old standing, and the record is certainly not so prepared as to bring very clearly into view the matters truly in dispute. But with the assistance of the minute lately given in by the parties, the Lord Ordinary thinks that there are means of arriving at a conclusion sufficient to exhaust the cause.

“The Lord Ordinary has confined his interlocutor to the claim for the legacies due to Robert Kerr. As to them, there can be no doubt that compensation is pleadable on the balance due by the company to Cochran, the debtor in the legacies. The only question, then, is the amount to which it is to be sustained.

“The balance due by Kerr and Son on the general accounting on the bill transactions is £838, But the Lord Ordinary thinks this must suffer a deduction to the amount of the sums paid to the Leith Bank by Kerr and Son, in consequence of their cautionary obligation for Stead and Paterson, and in which Cochran was their co-cautioner. The Lord Ordinary understands that these sums were paid before their bankruptcy, and as there is here no question of double ranking, there seems no reason to reject their claim of relief or recompensation against Cochran and his trustee.

“The other claim of relief, however, made for Kerr and Son, viz. that founded on the bills granted to Inglis and Company for the accommodation of Cochran, stands in a very different situation. It is admitted that these bills have ranked on Cochran's estate as well as that of Kerr and Son, and the claim of relief, therefore, forming the ground of the pursuer's plea of recompensation or retention of the balance due by him on the general accounting, necessarily involves the proposition that the bankrupt estate of Kerr and Son holds a claim against the bankrupt estate of Cochran for the dividends which the former has paid on the bills which have also ranked on the latter—a result which would practically operate as a double ranking for those bills on Cochran's estate. It was maintained with great ability on the part of the pursuers, that the general balance due by them to Cochran was to be held as a pledge or security in their hands, of which they might avail themselves, and the effect was, not to enable them to rank, but merely to retain and render available that security. But, in the first place, the Lord Ordinary doubts whether the question involved in this illustration is raised by the admitted circumstances of this case. If on occasion of joining in the bills to Inglis and Company, Kerr and Son had stipulated for and obtained a security, whether heritable or by pledge, or by the deposition of bills of third parties, it might have been difficult to prevent them, even after bankruptcy, from realizing those securities to the effect of relieving themselves to the extent at least of the dividends actually paid on those bills. But here the granting security formed no part of the original transaction—a balance indeed, but altogether unconnected with those bills, having arisen in favour of Cochran. Kerr and Son, in seeking to retain, are truly pleading compensation on the supposed claim which they have, to recover from Cochran the amount of the dividend on the bills paid from their bankrupt estate; and if such a claim, made directly, would not have been good, it is difficult to see how it could support the plea of compensation. At any rate, and however plausible the argument in support of the plea may be, it rather appears to the Lord Ordinary that the very point raised on the part of Messrs Kerr and Son was determined in the case of Curtis v. Chippendale, 9th December, 1794, as reversed by the House of Lords on 23d February, 1797. There, M'Alpine and Company had indorsed and discounted bills to the amount of £25,000, accepted by Gibson and Johnston, and onerously held, as it appears from the pleadings, by M'Alpine and Company at the time of discounting. On the other hand, acceptances of M'Alpine and Company were in the hands of Gibson and Johnston to the amount of £22,000. On the bankruptcy of both parties the discounted acceptances of Gibson and Johnston had ranked on both estates, and when the assignees of Gibson and Johnston claimed to rank on M'Alpine and Company's estate for the acceptances of the latter company, they were met by the plea, which seems to be identical with that maintained here, that the latter, M'Alpine and Company's estate, was entitled to retain the debt constituted by their acceptances to Gibson and Johnston until relieved of the liabilities incurred by them for the acceptances due by Gibson and Johnston. It appears from the report that this plea was sustained by the Court, but the judgment was afterwards reversed by the House of Lords; and although there may have been some specialties in that case, it does not appear that those specialties affected the judgment of the Court of Appeal, which is a simple reversal of the interlocutor of the Court containing a special finding on the plea of retention.

“On these grounds, the Lord Ordinary thinks that the claim of recompensation or retention urged by the pursuers must be confined to the sum paid by Kerr and Son before their bankruptcy to the Leith Bank.”

The pursuer reclaimed.

The Court intimated that they considered the point involved to be attended with great difficulty, and ordered Cases, after considering which the following opinions were delivered.