Scottish Court of Session Decisions

William Taylor, tenant of the farm of Black-butts, Muchalls, Kincardineshire, executed a disposition omnium bonorum, under the Debtors

(Scotland) Act 1880, in favour of George Scott Caird, solicitor, Stonehaven. At the date of the cessio there were still several years of his lease to run.

Caird, as trustee, entered into two agreements with William Paul, advocate in Aberdeen, as factor and commissioner for the landlords, Dr Milne's trustees. The first of these agreements provided—“And whereas the said first party, as trustee foresaid, has intimated that he is not to continue the possession and occupation of said farm of Blackbutts, or to adopt said lease, and it is consequently expedient that an arrangement should be made for the laying down of the grain crops for the present year;” therefore, under certain reservations as to the landlord's right of hypothec, and subject to certain estate regulations, it was agreed—“( First, that the said first party hereto shall, as trustee foresaid, continue in the occupation of said farm of Black- butts until the term of Whitsunday next, when he shall remove therefrom as outgoing tenant in manner provided in the said general regulations and conditions, and shall have all the privileges of an outgoing tenant as if the lease had then come to its natural termination; second, That in the preparation of the ground for the crops of 1887, the first party hereto shall observe the regulations above mentioned, and perform the necessary work in an efficient manner, and lay down the crops at the sight and to the satisfaction of the ground officer on the estate; and third, That the said first party shall grant at his expense, if required by the said second party, a formal and valid renunciation of said lease in favour of the said proprietors as at and from the term of Whitsunday 1887.”

The second agreement provided that the value of certain enumerated articles on the farm, which under the lease were to be taken over and paid for by the landlord, should be ascertained by arbiters. The valuation of these articles amounted to £108, 7s. 6d.

Paul then lodged a claim, as factor for the landlords, for arrears of rent amounting to £328, 14s. 2d., from which he claimed right to deduct the sum of £108, 7s. 6d., the amount of the valuation.

The deliverance of the trustee upon this i claim was that the factor was not entitled to take credit or plead compensation in respect of his claim against the bankrupt for this sum of £108, 7s. 6d., but that they were entitled to a dividend on the sum of £328, 14s. 2d.

Paul also lodged, as factor, a preferable claim for the rents due at Martinmas 1886, and Whitsunday 1887, with the expenses incurred in connection with sequestration for the rents, amounting to £104, 19s. 7d.

The deliverance of the trustee upon this claim was that Paul was entitled to retain the amount of this claim of £104, 19s. 7d. from the sum of £108, 7s. 6d. above mentioned, due by him to the trustee, and he therefore rejected the claim in toto.

On appeal, the Sheriff-Substitute ( Brown), on 26th November 1887, pronounced this interlocutor—“Finds (1) that the claimant William Paul is entitled to be ranked preferably on the bankrupt's estate for the sum of £104, 19s. 7d., in terms of his claim; (2) that the said William Paul is entitled to compensate the amount of the

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valuations under the minute of agreement, submission, and award referred to by the trustee in his deliverance, by his claim for arrears of rent, amounting to £328, 14s. 2d., and to be ranked as an ordinary creditor for the balance of £220, 6s. 8d., in terms of his claim: Remits to the trustee to rank the claimant accordingly, and to make up a new list of ranking: Finds the trustee liable to the claimant in the sum of 30s. of expenses.”

“ Note.—The circumstances under which this bankrupt estate is in the processof being extricated are somewhat peculiar, and to that I am disposed, in a large measure, to impute the error which I think the trustee has made in dealing with the landlord's claim. The position which the trustee takes up is that the valuations due under the lease and the relative regulations of the estate, which have been liquidated by arrangement between the parties, are both by law and covenant payable to him, and that no concourse between landlord and tenant having existed prior to bankruptcy, his duty requires him to retain these sums for division among the general body of creditors.

“Apart from covenant with the trustee, there seems to be no doubt of the extent of the landlord's right. He is entitled to set off arrears of rent against any liquid claim of his tenant, and as the right to set off passes against assignees, legal, or voluntary; and as a trustee in bankruptcy takes the estate tantum et tale as it was vested in the bankrupt, the landlord was in a position to enforce his claims, whether he were settling with the trustee or as incoming tenant. The landlord's right rests on the general principle that claims arising hinc inde on a consensual contract may be compensated, and it has been quite decisively established that the effect of bankruptcy is to strengthen the plea of compensation in the mouth of the landlord. In balancing accounts in bankruptcy, Mr Bell (Comm. vol. ii. (7th ed.) p. 122) says that if one party have failed, and a demand be made upon the other, he will not be obliged to pay the liquid debt, and come in as a creditor only for a dividend, and that is precisely the case here. It appears to me therefore, that the equitable obligation to permit the landlord to set off claims arising under the lease, is a burden on the bankrupt's estate, which the creditors are not entitled to get rid of without the landlord's express consent.

But the landlord, instead of having lost or compromised the rights which the law gives him by negotiations with the trustee, appears to me to have most carefully safeguarded these.

On entering upon his office the trustee found a lease with several years to run, and at once intimated his intention not to continue the tenancy, and on that view there is no doubt he did not adopt the lease. But he proceeded, no doubt with the intention and result of doing the best for the creditors, to invite the landlord to concur in his taking another crop, and having certain claims arising under the lease and the regulations of the estate liquidated, stipulating at the same time that he was to have the privilege of an outgoing tenant, as if the lease had come to a natural termination as at Whitsunday 1887; and in that sense it appears to me that the claimant is perfectly right in his contention that the trustee did adopt the lease. The effect of that adoption was very beneficial to the creditors, for it gave the trustee the benefit of a large deduction of rent; but apart altogether from the question as to who took most advantage from the agreement into which the parties entered, it appears to me that that had the effect of operating not a surrender, but a ratification of the landlord's right. The error into which conceive the trustee has fallen, is in forgetting that the lease is the measure of the rights of parties in regard to all claims arising under it, and he has accordingly misinterpreted the negotations with the landlord, the effect of which, in my opinion, is very wide of ousting his rights.

There is no dispute as to the landlord's preferable claim, the only question being whether the landlord is entitled to impute the valuations pro tanto to extinguish his unsecured debt arising from arrears of rent, and the mistake which the trustee makes, is in assuming, in taking up the estate or transacting about it, that the concourse which lies at the root of the plea of compensation, lies between him and the landlord, instead of being, as it is, between the latter and the tenant.

The trustee appealed to the Court of Session.

Paul objected to the competency of the appeal, and argued—In a process of cessio before 1880 the decree of the Sheriff awarding cessio was the only appealable interlocutor. After that, the bankrupt's estate was in the hands of a trustee, whose actings could only be challenged on the ground of mal-administration. The new process of cessio was introduced by the Act of 1880, by which cessio could be awarded at the instance of a creditor, but the procedure for carrying out this new process was only prescribed by the Act up to the point when the Sheriff decerned the bankrupt to execute a disposition comnium bonorum in favour of a trustee for behoof of his creditors. That decree could be appealed against as before, but after that the trustee's actings were still unchallengeable. The Act of Sederunt of 1882, which provided the machinery for working out the Act, gave the Sheriff the right of reviewing the trustee's deliverances at the second meeting of creditors, but gave no further right of appeal. The policy of the statute of 1880, taken along with the Act of Sederunt of 1882, was plainly to provide a simple and economical system for winding-up small estates, and to discountenance a multiplication of appeals. This argument was supported by the 11th sec. of the Act of Sederunt of 1882, which provided that the Sheriff was to dispose of the objections summarily and by the 11th section of the Bankruptcy and Cessio Act of 1881 (44 and 45 Vict. cap. 22), which provided for the superseding of cessio by sequestration, where the Sheriff thought it advisable, if the debtor's liabilities exceeded £200. This was clearly to substitute a process in which appeals were competent for one in which they were not. The interlocutors contemplated by sec. 26, sub-sec. 4 of the Sheriff Courts Act 1876, to which sec. 9, sub-sec. 4, of the Act of 1880 referred back, were interlocutors decerning the debtor to execute a disposition omnium bonorum. These were the only final interlocutors— Galbraith v. Ritchie, December 6, 1856, 19 D. 136; Adam v. Kinnes, February 27, 1883, 10 R.670.

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Argued for the appellant—The appeal was competent. The old process of cessio was at the instance of the debtor, and was purely to protect him from personal diligence; the new process of cessio was a process for the distribution of small estates. In that one process the claims formed a congeries of actions, in each of which the trustee was defender, and the different claimants the respective pursuers. The Sheriff's judgment dealing with the trustee's deliverance on each claim was a final judgment in the cause in which it was pronounced. As a final judgment it was appealable under the 26th section of the Sheriff Courts Act of 1876, unless the right of appeal was in some manner taken away. The only Act which was referred to as taking away the right was the Act of Sederunt of 1882. But an Act of Sederunt could neither confer nor take away such a right. This Act of Sederunt merely prescribed the method for carrying out the provisions of the 1880 Act. Therefore the right of appeal remained.

At advising—