Important Decision in Bankruptcy.
The Creditors’ Trustee in Bankruptcy of the Property of John Fraser and Others v. William Brown and John Beaumont.
The Supreme Court gave judgment in this important case last Friday, and we give below the following report from the Christchurch papers:— The declaration in the action, after setting out the formal steps taken in this bankruptcy and also in several other bankruptcy matters connected with the firm of Fraser and Co., up to the appointment of Mr. Hugo Friedlander as creditors’ trustee, proceeded to allege that the property of the debtors in the several bankruptcies comprised the whole of the joint and respective, separate, real, and personal property of the said John Fraser and others, which were conveyed and assigned by the deed next hereinafter mentioned. The deed was then set out, under date June 9, 1880, by which it appeared that John Fraser, Alexander Dunlop, and Daniel Henderson (trading as John Fraser and Co.) conveyed and assigned unto the defendants the whole of their joint and separate property, real and personal, upon certain trusts, for the benefit of the joint creditors of the bankrupts. The declaration then stated the filing of the deed under the Debtors’ and Creditors’ Acts, the notice convening a meeting of the joint creditors for the purpose of assenting to the deed, the notice of application to the Supreme Court for an order declaring the complete execution of the deed under the Acts, and the order made July 30, 1880, declaring the deed completely executed. It was further alleged that the separate creditors of the several debtors did not assent to the deed nor attend the meeting of l creditors called for that purpose, and that no notice of such meeting was given to them; also, that under color of the deed the defendants had taken possession of and proceeded to realise the estate; and had also proceeded to distribute the proceeds amongst the joint creditors; also, that several of the separate creditors had tendered proofs under the deed against the separate estate, and that the defendants rejected such proofs; also, that the deed was executed and filed, and the order of 30th July was obtained, in fraud and prejudice of the separate creditors, and to enable the joint creditors to obtain an undue advantage, and to the intent that the separate creditors should be wholly prevented and hindered from obtaining payment of their debts. The declaration then claimed that the deed might be declared fraudulent and void as against the plaintiff, and might be set aside; and that the defendants might be decreed to deliver and transfer the estate and pay over the proceeds in their hands to the Lplaintiff; arid that the deed might be Removed from the file of the Court; and taat the order of 30th July might be uisoinded; and that the usual accounts be taken; and that the defendants should ho restrained from dealing with the estate, and should be ordered to pay costs. To this declaration the defendants demurred, on the grounds that the declaration showed no equity in the plaintiff entitling him to the relief asked for, and that it did not show that the deed was fraudulent or void as against the plaintiff; and also that the declaration did not allege that at the date of the deed there were any separate creditors of Fraser, Dunlop, and Henderson.
Mr. Garrick, in support of the demurrer, contended that under the Debtors’ and Creditors’ Act it was competent to the creditors of the firm to appropriate the whole of the joint and separate estate to the payment of the joint debts to the exclusion of the separate creditors; and he mainly relied on the 143rd section as showing that the deed must be taken to have complied with all the provisions of the Act, and that the separate creditors were excluded thereby. He also cited the 128th, 147th, 155th, and 15Gth sections. The 143rd section is as follows :—“ Subject to appeal under this Act the declaration of complete execution shall be final and conclusive with respect to the validity and complete execution of the deed, and from and after such declaration the deed shall be binding in all respects on all creditors of the arranging debtor, and shall not be liable to be disturbed or impeached at law or in equity by reason of any prior or subsequent Act of Bankruptcy, or on account of anything being contained therein or omitted therefrom, or on any other account whatever.” Mr. Garrick contended that all the statutory requirements having been complied with, the deed and order of complete execution were binding on all the creditors. In the coarse of the argument, the Court held that Ihe declaration sufficiently alleged that there were separate creditors existing at the time of the execution of the deed.
Mr. Joynt (who appeared for the plaintiff in support of the declaration) was not called on.
His Honor Mr. Justice Johnston, in giving judgment, said that the deed should not be allowed to prevail against the rights of the trustee in bankruptcy; that on the application for the order of complete execution of the deed, it ought to have been made to appear to the Court that the deed provided for the absorption of the joint and separate estates of the partners in favor of the joint creditors. That such a deed is at variance with the principles of the Bankruptcy Acts—that it was not competent for the joint creditors by arrangement among themselves to alter the respective rights of separate and joint creditors. By deed duly executed under the Bankruptcy Acts the parties may arrange by a statutory majority to take something short of the whole property, whereas in Bankruptcy the whole of the debtor’s property is to be distributed. That the Court ought not to uphold the deed if it appears that the order of complete execution was made without the attention of the Court having been drawn to the true facts of the case. His Honor Mr. Justice Williams said: The declaration is good. The deed is not a deed of arrangement contemplated by the Act that partners were justified in
entering into. In construing the Act we must look at the statute itself, and the principles of the Bankruptcy laws which have been established for nearly two centuries. These principles are clear. The separate property is to go to pay the separate debts and the partnership property to pay the partnership debts. If one estate shows a surplus and the other a deficit, the surplus is to go in aid of the deficit. An ■ attempt has been made to set up section 143 of the Act which makes the declaration of the complete execution of the deed binding on all the creditors. To that there is one universal exception, that is, where the Court has been misled. It sufficiently appears from the circumstances stated in the declaration in this action that the Court was misled. It appears that there was separate property and that there was separate creditors. If these factsjhad been brought before the Court it cannot be assumed that the Court would have made the declaration declaring the deed completely executed. The facts were not brought to the notice of the Court: It was clearly the duty of the persons applying for the order to have brought the facts before the Court. Their not having done so amounts to a fraudulent supression of facts which enables the Court to go behind the order. If we can go behind the order, we find that, after the execution of the deed giving the property of the separate creditors to the joint creditors, there was the bankruptcy of the debtors. The deed was, therefore, a fraudulent preference. The dumurrer must be overruled. Leave was granted to Mr. Garrick to appeal.
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Ashburton Guardian, Ashburton Guardian, Volume 2, Issue 261, 5 February 1881
SUPREME COURT. Ashburton Guardian, Volume 2, Issue 261, 5 February 1881
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