According to its terms, therefore, the section contemplates two distinct rights of challenge: that of a qualified creditor and that of the permanent trustee or equivalent. Under the previous law, both the trustee in sequestration and a qualified creditor were entitled to challenge a gratuitous alienation, whether at common law or under the Act 1621 c. 18: Goudy, The Law of Bankruptcy in Scotland (4th edition, 1914), 33-34, 52-53; the trustee's title was conferred by section 9 of the Bankruptcy (Scotland) Act 1913. The right of a creditor to challenge gratuitous alienations and fraudulent preferences can be important. This is illustrated by Brown & Co. v McCallum 1890, 18 R 311; the case deals with illegal preferences, but the same principles have been treated as applying to gratuitous alienations: see the passages in Goudy cited above. In that case the trustee in sequestration had not attempted to reduce a security granted by the bankrupt as an illegal preference. The court nevertheless held that individual creditors had title and interest to bring an action for reduction of the security as an illegal preference. Lord Kinnear (at page 316) stated that the pursuers had a special interest of their own because the security granted by the bankrupt, if it were permitted to stand, would exclude their plea of retention over part of the sequestrated estate. He further held that the pursuers had a good title under the Act of 1696 because they were admitted to be prior creditors. It had been argued that the Bankruptcy Act 1856 had transferred the title of individual creditors to the trustee in sequestration, but that argument was rejected. On this point Lord Kinnear stated (at page 317):

"It may very well be that a single creditor, by reason of a security which he holds over part of the bankrupt's estate, may have an interest either adverse to the general body of creditors, or in which they do not participate; and in such a case the trustee may have no interest, and therefore no title to reduce for behoof of the general body. But then the trustee takes the estate for behoof of the general body, subject always to the securities which existed at the date of the sequestration; and it seems to me to follow that the creditors who hold such securities cannot be deprived of their right to make them effectual by setting aside any fraudulent or illegal preference which may stand in the way of their legal operation, merely because the statute has extended to the whole body of creditors the benefit of certain challenges, which were previously available only to a particular class".

[16] The Act 1621 c.18 has been replaced by section 34 of the 1985 Act. The enactment of the latter section followed a recommendation of the Scottish Law Commission, contained in their Report on Bankruptcy and Related Aspects of Insolvency and Liquidation (Scot. Law Com. No. 68), published in 1982. The question of title to challenge alienations and preferences is considered at paragraph 12.21 of the report:

"We have already noted that challenge under the 1621 Act may be made by any creditor whose debt was contracted before the date of the alienation. It might be suggested that a requirement of sequestration or its equivalent before a statutory challenge can be made would remove the need for individual creditors to retain their right of challenge, because the creditors will ex hypothesi be represented by a trustee in sequestration or a person similarly empowered to make the challenge. The reported cases show, however, that there may be circumstances where an individual creditor is the person mainly interested in the reduction of an alienation or has an interest in the reduction adverse to that of the trustee [reference was made to Brown & Co. v McCallum, supra]. Accordingly, it would be unsafe to exclude an individual creditor from the benefits of the statutory challenge. We recommend, therefore, that the statutory challenge should be available to any creditor in respect of a debt incurred by the debtor at any time before the date of the latter's sequestration...".

The draft Bill annexed to the report dealt with gratuitous alienations at clause 33; clause 33(3) is in terms which are almost identical for all material purposes to those of section 34(1) of the 1985 Act. It is accordingly clear that the reference to the creditor's right in the latter subsection was deliberately inserted in order to deal with cases where one creditor is the person who has the principal interest in the reduction of an alienation, or where the interest of a creditor conflicts with the interest of the trustee or the generality of creditors. For this reason we are of opinion that the separate right of the creditor is an important feature of section 34, and that it should be given full effect unless there are compelling reasons to the contrary.

[17] The existence of separate rights in the trustee and individual creditors can no doubt give rise to procedural complexities. It seems to us, however, that these can be dealt with in a commonsense fashion, for example by permitting the trustee to refrain from active participation in proceedings, or by ensuring that a creditor who brings a successful challenge accounts for any benefit to the sequestrated estate so far as that is appropriate. In any event, we are of opinion that procedural considerations should not be an obstacle to the existence of a separate right in a creditor. Rules of procedure are designed to facilitate the proper application of the law, not to obstruct it. The result is that the minuter has clear title and interest to reduce the gratuitous alienation under section 34.

[18] The pursuer relied on section 65(1) of the 1985 Act to argue that she was entitled to compromise the present action and that any such compromise would bind the minuter as an individual creditor. In our opinion this argument cannot be sustained. Section 65(1) is in the following terms:

"The permanent trustee may (but if there are commissioners only with the consent of the commissioners, the creditors for the court) -

(a) refer to arbitration any claim or question of whatever nature which may arise in the course of the sequestration; or

(b) make a compromise with regard to any claim of whatever nature made against or on the half of the sequestrated estate;

and the decree arbitral or compromise shall be binding on the creditors and the debtor".

Under section 172 of the 1913 Act the trustee was entitled, with consent of the commissioners, to "compound and transact... any questions which may arise in the course of the sequestration regarding the estate, or any demand or claim made thereon". Any such compromise or transaction was declared to be binding on the creditors and the bankrupt. Under the 1913 Act the election of commissioners was mandatory, but under the 1985 Act this is no longer so. The Scottish Law Commission recommended that provision should be made for the continued participation of creditors in the supervision of the trustee's administration through commissioners (op. cit., paragraphs 4.30 and 10.9) and that in the absence of commissioners the Accountant in Bankruptcy should exercise general supervision of the actings of the trustee. Despite this recommendation, the election of commissioners is in practice relatively unusual; there were no commissioners in the present sequestration. Section 65(1) is perhaps somewhat curiously framed, in that if there are commissioners the creditors or the court may supply consent in place of those commissioners, but if there are no commissioners the trustee has an apparently unfettered power to reach a compromise. We do not think, however, that that affects the present case; because there are no commissioners it seems that, on the wording of the subsection, the permanent trustee can act without obtaining any consent.

[19] Nevertheless, we are of opinion that on its proper construction the pursuer's power under section 65(1) to make a compromise cannot be used to defeat the independent right of a creditor to reduce a gratuitous alienation under section 34, or indeed at common law. A number of reasons exist for this conclusion. In the first place, section 65(1) permits the permanent trustee to compromise "any claim... made against or on behalf of the sequestrated estate". The right of an individual creditor under section 34(1) to bring proceedings for reduction of a gratuitous alienation is an independent right conferred on the creditor; it is not in any sense a right derived from the permanent trustee; nor does the creditor act on behalf of the sequestrated estate. Consequently it cannot in our view be regarded as a claim "made on behalf of the sequestrated estate". In some cases, no doubt, the creditor will have to account in whole or in part for any benefit obtained through the reduction, but that is merely the consequence of a successful reduction; it does not affect the creditor's independent title to challenge the alienation. The independent nature of the right appears to us to be clear from the wording of section 34(1). It is also noticeable that under the law prior to 1985 the right of a creditor to challenge an alienation was regarded as independent of the trustee, and the clear intention of the Scottish Law Commission (op. cit., paragraph 12.21) was to maintain an independent right. In the second place, the independent nature of the creditor's right becomes important where his interests conflict with those of the permanent trustee or the general creditors. That is mentioned by Lord Kinnear in Brown & Co. v McCallum, supra, and also by the Scottish Law Commission (op. cit., paragraph 12.21). Where such a conflict of interest exists it would clearly be most unsatisfactory if the permanent trustee had power to defeat the creditor's independent right. If the intention of the statute were to achieve such a result clear language would be required, and in our opinion section 65(1) comes nowhere near the requisite clarity. This seems to us to be a point of considerable importance. In the third place, section 34 is part of the substantive provisions of the 1985 Act; indeed the power to challenge gratuitous alienations can be regarded as one of the most important features of the legal regime that applies to sequestration and its corporate equivalents. Section 65, by contrast, is found in the part of the statute headed "Miscellaneous and supplementary", and is essentially concerned with matters of procedure. It is unlikely that a provision falling within the latter part of the Act would be capable of defeating a right that is expressly conferred upon a creditor by the substantive provisions in the earlier parts of the Act.

[20] In the present case we are satisfied that there is at least a potential conflict of interest between the pursuer and the minuter. The compromise embodied in the joint minute between the pursuer and the defender was no doubt more than adequate to pay the pursuer's own fees and outlays, and might confer some dividend on creditors. The minuter, however, claims that it represented an undervaluation of the claim against the defender and that he, as the principal creditor in the sequestration, will suffer from that undervaluation. There may well be substance in this contention. After taking advice from counsel the pursuer had initially valued the defender's half share of the property at £85,000. After negotiation, the pursuer had accepted £70,000. In addition, the settlement had been reached on a basis that no expenses would be payable by or to either party; those expenses were said by the minuter to amount to in excess of £33,000, although the judicial expenses would be a lesser amount. The concessions made by the pursuer seem substantial. In these circumstances we are of opinion that it would be a startling result if the pursuer were able to use the power in section 65(1) to prevent the minuter from exercising his independent right under section 34(1).

[21] The pursuer and the defender further founded on section 3(7) of the 1985 Act. This subsection provides as follows:

"Where the debtor, a creditor or any other person having an interest is dissatisfied with any act, omission or decision of the permanent trustee, he may apply to the sheriff and, on such an application being made, the sheriff may confirm, annul or modify any act or decision of the permanent trustee or may give him directions or make such order as he thinks fit".

This subsection did not form part of the original version of the 1985 Act; it was added by paragraph 1 of Schedule 1 to the Bankruptcy (Scotland) Act 1993. The argument for the pursuer and the defender was that section 3(7) provided the minuter with a remedy if he wished to challenge any decision made by the pursuer as permanent trustee. The availability of that remedy meant that the minuter should not be entitled to intervene in any action brought by the pursuer for reduction of a gratuitous alienation.

[22] Section 3(7) is part of the section dealing with the functions and duties of the permanent trustee. It is a provision of general application, but it is essentially procedural in nature; it is designed to enable any person with an interest in the sequestrated estate, including a creditor, to challenge any act, omission or decision of the permanent trustee without embarking on proceedings for judicial review, a remedy which is of course only possible in the Court of Session. We are of opinion that this subsection does not remove or detract in any way from the right of a creditor to raise proceedings under section 34(1). As explained above, section 34(1) confers a substantive right on a creditor, and the availability of a remedy in lieu of judicial review does not appear to us to affect that substantive right. Moreover, the independent right of a creditor under section 34(1) assumes particular importance where there is a conflict of interest between that creditor and the permanent trustee. In that situation the remedy provided by section 3(7) appears a much less satisfactory remedy. Indeed, counsel for the pursuer accepted that if in the present case the minuter were successful in an application under the latter subsection, the remedy would probably take the form of financial redress provided to the sequestrated estate by the pursuer. That suggests that the minuter would require to demonstrate that the pursuer had not acted properly, rather than merely requiring to demonstrate that there had been an alienation by the debtor at an undervalue. Establishing improper conduct on the part of the pursuer seems to us to place a significantly higher burden on the minuter than merely permitting him to enter an action for reduction of a gratuitous alienation.

[23] For the foregoing reasons we are of opinion that the minuter has an independent right of action under section 34(1) and that that right is not affected by the existence of either section 65(1) or section 3(7). On that basis we consider that the Lord Ordinary was fully entitled to permit the minuter to be sisted as an additional pursuer in the action. As he pointed out, to follow that course would allow the parties' rights and obligations to be settled in one process, which is likely to be less expensive than raising a separate action and is likely to lead to a more rapid resolution of the dispute.

The joint minute
[24] The pursuer presented a further argument that the execution of the joint minute had settled the action, at least as between the pursuer and the defender, and that the Lord Ordinary ought for that reason to have interponed authority to the joint minute and to have assoilzied the defender from the conclusions of the summons, at least so far as directed against her by the pursuer. The chronology of the joint minute was as follows. We were informed that on 20 April 2007 agreement was reached between a member of the pursuer's staff and a representative of the defender's agents. The defender's agents were told to put to the agreement into a joint minute, which was duly done. The second signature on the joint minute was appended on 23 April, between 4.30 and 4.45p.m. The joint minute was lodged the following day, 24 April. The minuter's motion was enrolled on 22 April, and the hearing was fixed for 25 April. The status of the joint minute was of course raised at that hearing.

[25] It is clear that a joint minute is binding on the parties to an action as soon as it is signed on behalf of all of them; it is not necessary for its validity that it be lodged in court or that it should have authority interponed through an interlocutor of the court: Jongejan v Jongejan 1993 SLT 596, at 597; McAthey v The Patriotic Investment Society Ltd 1910 SC 584, at 586; Lothian v Lothian 1965 SLT 368. In the present case, however, the joint minute could not bind the minuter because he was not a party. This appears to have been accepted by the representatives of the pursuer and the defender because they executed a second version of the joint minute. The original joint minute was made available to us. This simply narrated that the action had been settled extrajudicially and moved the court to assoilzie the defender from the conclusions of the summons and to find no expenses due to or by either party. In the Lord Ordinary's second opinion, however, it is stated that at the hearing held on 29 September 2007 counsel for the defender accepted that, in view of the Lord Ordinary's interlocutor of 27 July 2007, which allowed the minuter to be sisted as an additional pursuer, it would be necessary to amend the joint minute to the effect that the court was being moved to assoilzie the defender from the conclusions of the summons in so far as they were directed against her by the pursuer. That difference appears to us to be material. By the time any amended joint minute was executed, the minuter had been sisted as a party, and any joint minute could not affect his position; hence the tendering of the amended joint minute. That is the version of the joint minute that the Lord Ordinary ultimately had to consider, and on any view that version post-dated the Lord Ordinary's decision to allow the minuter to be sisted as an additional pursuer.

[26] In the circumstances we consider that the Lord Ordinary was fully entitled to refuse to give effect to the joint minute. He did so on the basis that another party, the minuter, had been permitted to intervene in the action; consequently to grant decree in terms of the joint minute would possibly pre-empt and would in any event complicate the issues that the minuter wished to raise. The Lord Ordinary further remarked that it was unclear when any agreement between the pursuer and the defender was entered into and when the joint minute was signed. We were given a full explanation of these matters; it appeared that the joint minute had been entered into after the petitioner's motion was enrolled, and in any event the joint minute that was finally put forward was different in a material respect from the original version. Either of these factors might have been a good reason for refusing to interpone authority to the joint minute. Perhaps more importantly, as we have mentioned above at paragraph [20], there were substantial doubts about the terms of the settlement that was embodied in the joint minute; that was why the Lord Ordinary permitted the minuter to be sisted as an additional pursuer, and that in turn was why he refused to give effect to the joint minute. The matter was ultimately one that fell within the Lord Ordinary's discretion. It cannot be argued that he erred in law; nor can it be argued that his decision was one that no reasonable judge could properly reach. We accordingly decline to interfere with the Lord Ordinary's decision.

[27] We should add that, even if effect were given to the joint minute, a further problem would arise. The result of the joint minute would be that the defender was assoilzied from the conclusions of the action brought against her by the pursuer. The question would then arise as to whether that would give rise to a plea of compromise against the minuter if he were to raise a separate action as a creditor. It is not necessary for us to express an opinion on this matter, although it can be said that, if the grounds in the second action were not precisely the same as those in the present action (for example, actual fraud in one action but a mere alienation at an undervalue in the other), the plea of compromise might not be available.

Decision
[28] For the foregoing reasons we are of opinion that the Lord Ordinary's opinion cannot be challenged. We will accordingly refuse the reclaiming motion and remit to the Lord Ordinary to proceed as accords.

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	Scottish Court of Session Decisions
You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Brown & Anor v. Brown [2009] ScotCS CSIH_2 (15 January 2009) URL: http://www.bailii.org/scot/cases/ScotCS/2009/2009CSIH2.html Cite as: [2009] CSIH 2, [2009] BPIR 215, 2009 GWD 3-49, [2009] ScotCS CSIH_2, 2009 SC 236

Scottish Court of Session Decisions

Lord Nimmo Smith

Lord Drummond Young

Lord Penrose

[2009] CSIH 2