Scottish Court of Session Decisions

In March 1887 George Cuthill junior,

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Arbroath, William Cuthill, Dundee, Joseph Strachan, and Jonathan Forbes became co-obligants in a cash-credit bond granted to the British Linen Company in favour of George Cuthill junior for £600 sterling. George Cuthill junior operated on the credit under an account-current kept in the books of the bank at Arbroath. On 4th September 1888 the estates of Joseph Strachan were sequestrated. The sequestration was closed under a composition contract of 7s. 6d. in the pound on all debts and obligations contracted by him, or for which he was liable at the date of the sequestration, and that in three equal instalments at three, six, and nine months from the date of his discharge. That composition was duly accepted by the creditors, and Strachan was discharged finally on 2nd November 1888. At 4th September there was a balance due to the bank on the cash-credit account of £599, 7s. 6d. The bank did not lodge any claim in the sequestration, and no payment under the composition arrangement was made to them in respect of the bond.

George Cuthill junior continued to operate upon the account as before until 22nd June 1891, by which time the amount of the credit was exhausted; and Cuthill's affairs being embarrassed, of the same date he granted a trust-deed for behoof of his creditors, in favour of Robert Meldrum Brodie, Dundee, and the cash-credit was closed. In October 1891 the bank compelled William Cuthill, Dundee, to pay the sum of £615, 5s. 8d., the whole amount of the principal and interest then due under the bond.

William Cuthill then brought an action against Jonathan Forbes and Joseph Strachan to recover the share due by them as co-cautioners in the cash-credit bond. The amount claimed from Strachan was £74, 18s. 4d., being the amount of a composition at the rate of 7s. 6d. in the pound on the sum of £199, 15s. 10d., being one-third of the sum of £599, 7s. 6d., the amount due under the cash-credit bond at the date of his sequestration (restricted by minute to £37, 9s. 2d. after Forbes had repaid his share to the pursuer).

The defender averred—“Explained that between the date of the defender's sequestration and the closing of the account, sums were paid into the account by the principal debtor, equal to the amount for which the defender was liable at the date of the sequestration, assuming a claim to have been then made against him by the bank. The claim against the cautioners under the said bond only emerged and became exigible at the closing of the said account, and long before that time the present defender had been relieved of all liability in reference thereto…. Denied that the present defender was liable to his co-cautioners for any sum at the date of his sequestration, or that the pursuer paid the balance then due to the bank. Explained that the bank was the only party who could then make any claim against the defender under the said bond, and that in place of doing so, the account was continued after the sequestration, with the consent of the remaining cautioners, on the footing of their being alone liable therefor, and that on the account being closed the pursuer and the other defender were the only parties liable for the balance then ascertained and exigible by the bank.”

The pursuer pleaded—“(1) The cash-credit bond condescended on having been granted by the parties thereto, conjunctly and severally, they were each liable for the whole debt due under the same in a question with the bank; and the pursuer having paid the said debt, the solvent co-obligants are bound to pay and free and relieve him of their rateable proportion of the loss. (2) The said cash-credit bond having been granted for behoof and for the benefit of the said George Cuthill junior, the other parties to the said bond were merely cautioners for him, and in questions inter se are liable for the loss pro rata. (5) The defender Joseph Strachan, being one of the co-obligants under the said bond, is liable for one-third of the loss sustained in respect of the same, and the pursuer is accordingly entitled to decree against him, with expenses as concluded for.”

The defender pleaded—“(2) The pursuer has no claim against the present defender under or in respect of the said cash-credit bond, in respect (1) that the present defender's obligation under the said bond terminated, and was extinguished by his discharge under the sequestration, and that thereafter he was under no liability in respect thereof; (2) that the account was continued under the said bond after the pursuer's discharge on the footing of the remaining cautioners being alone liable therefor, and sums were thereafter paid to the credit thereof by the principal debtor in excess of the present defender's liability at the date of his discharge; (3) that if any claim had been made against this defender at the date of his sequestration, he would have been able to operate relief against the principal debtor, who was then solvent; and (4) that on the account being closed, and the balance exigible by the bank being ascertained, the pursuer and the other defender were the only cautioners therefor.”

From minutes lodged by the bank it appeared that between 4th September 1888 and the closing of the cash-credit, George Cuthill had paid in to his credit sums amounting to £6266, and had in the same period drawn out sums amounting to £6291, 17s. 11d.

Upon 24th November 1893 the Lord Ordinary decerned against the defender Strachan for £37, 9s. 2d., with interest thereon, as the composition of 7s. 6d. in the pound on one-half of one-third of £599, 7s. 6d., the remaining half, in the Lord Ordinary's opinion, being exigible by the co-cautioner Forbes.

“ Opinion.—The sum in dispute here is only £37, 9s. 2d., but it has given rise to an ingenious argument on the liability of a discharged bankrupt under a composition contract, and on the application of Devayne's case to a cash-credit account.…..

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“It only remains for me to notice the defender's argument founded on Devayne's case, 1 Merivale 585, and the cases of Houston v. Spiers, 3 W. & S. 392; and Royal Bank v. Christie, 2 Rob. 118. The principle of Devayne's case is simply this, that in an account-current where no special appropriation has been made by the parties, the law appropriates payments to the various debts in their order, so that the first item on the credit side discharges the first item on the debit side, and so on. In Houstoun's case (which was one of suretyship), there was a change in the mode of dealing which was held to liberate the cautioners after a certain time. The balance against them at that time was afterwards entirely extinguished if the payments which they subsequently made were applied to the debit entries in their order, and it was held that they must be so applied. So in Christie's case (which was one of partnership dissolved by death), the balance against the deceased partner at the date of his death was afterwards entirely extinguished if the subsequent payments by the surviving partners were applied to the debit entries in their order. But what the defender wishes to do here is, not to set one entry against another in order of time, but to pick all the credit entries out of the account and by adding them up and disregarding the debit entries altogether, to show that they exceeded the sum of £599, 7s. 6d. This seems to me quite inadmissible. The actual debit balance on the account from day to day was never reduced below £550 or thereby. Once there was an apparent reduction to £444 by a credit payment of £149, but there were drafts on the same day which restored the balance to £599. Substantially the state of the account remained unaffected from September 1888 to June 1891. It seems to me, therefore, that the principle of these cases would not apply, even if it could be said that the defender had no control over the account after his sequestration. But I think he had, because, as I have said already, he could have called upon the bank to stop it if he had chosen. I shall therefore give decree for the restricted sum, but with interest only from the date of citation.”

The defender reclaimed, and argued—It was admitted that the defender was due the sum of £599, 7s. 6d. to the bank under the cash credit at the time of his sequestration. The bank had not claimed a ranking on his estate at the time, but had gone on allowing the principal debtor to operate upon his account. From the time of his sequestration until the closing of the cash-credit the principal debtor had paid in sums which exceeded the debt for which the defender was liable, and as there was no special appropriation of these sums the defender's debt was therefore extinguished— Devaynes v. Noble, &c., July 26, 1816, 1 Merivale 585; Houston's Executors v. Spiers, May 22, 1829, 3 W. & S. 392; Royal Bank v. Christie and Others, April 6 1841, 2 Rob. Appeals 118; Lang v. Brown, December 2, 1859, 22 D. 113; Scott's Trustees v. Alexander's Trustees, January 10, 1884, 11 R. 407.

The respondent argued—The reclaimer admitted he was liable to pay the bank the whole sum of £599, 7s. 6d. at the date of the sequestration, he was therefore liable to the pursuer in his proportion of that sum as a co-guarantor. It was true that sums had been paid into the bank larger in total amount than the whole amount under the cash-credit, but these were specially appropriated, because the amount which was put in between the date of the sequestration and the closing of the cash-credit, and the amount drawn out by the principal debtor, were almost exactly the same; these two sums must therefore be put against each other, and when that was done the debt due to the bank was even greater than at the date of the defender's sequestration. The sums put in were in fact put in only to be drawn out the next day or shortly afterwards.

At advising—