COURT OF APPEAL.

Otago Daily Times, Issue 9117, 16 May 1891, Page 5 (Supplement)

COURT OF APPEAL.

:hportant bankruptcy decision.

Tbe following is tha judgment, delivered on the 13th May, by the Court of Appeal, consisting of the Chief Justice, Mr Justice Denniston' and Mr Justice Conolly, in the case of the Official Assignee (in the estate of H. D. C. Marr) v. Chick, an appeal from the judgment of Mr Justice Williams. Mr Woodhouse appeared for the appellant, and Sir Robert Stout, for the respondent:— "By an agreement in writing, dated 6th March 1889, the respondent Chick agreed with Marr to purchase all the right, title, and interest of the latter in certain buildings constituting the Otara Dairy Factory, and the appliances, fixtures, plant, stock-in-trade, and book debts in and about the same. The stock-in-trade must, we think, be taken to refer to cheese which had immediately before been sold by M&rr to Mr Elder for £664 10s 3d. In any case, this sum was to be paid to Chick as part of the property received by him. This property was valued in all at £1044 0a 31 Tho consideration for the purohaso was the agreement by Chick to assume the liability of, and grant to Marr an indemnity, for certain specified debts. Some of these are in the agreement left blank and some unspecified; but these totals are shown to have been ultimately arrived at as £1052 17s 7d. Of this sum Chick had guaranteed to a bank, jointly with another £300, for which he held an agreement to mortgage the land and fixtures and to give a bill of sale over the chattels. A further amount of £128 was owiog as milk money to two persons who had rented cows from Chick on terms of paying half the proceeds of their milk. Before the date of the agreement Marr had, to the knowledge of Chick, been served with a writ at. suit of one Harty for £740, damages claimed for an alleged breach of an agreement for the sale of the season's cheese. He swears that both Marr and his solicitors assured him there was nothing in tho action, and that ho believed them. The result of the action was ultimately a verdict in favour of Harty for £500. Marr represented that be had money coming from Scotland sufficient to meet any small outstanding debts other than trade debts, and, if necessary, to arrange Harty's claim. There were a number of facts which certainly rai3e suspicions that Marr personally, and Chick, if not personally, at least: through Elder (who seems to have been agent for both parties), were frightened at the possible consequences of Harty's claim, and that the sale was in a large measure to protecb Chick and those creditors who had sold milk to the factory against it. The learned judge iv the court below ha 3, however, declared his belief in Chick's bona fides, and unless a contrary conclusion is forced upon us by the uncontradicted evidence we do not think we should overrule such conclusions. There are valid reasons, apart from any fear of Harty's claims, which might reasonably induce Chick to stipulate that the consideration for the purchase should be retained in his own hands, and be applied to paying the trade liabilities. Marr became insolvent on 19th July 1889. He had at the time^of the agreement no property other than the subject matter of the agreement and the claim on moneys from Scotland. We think with the learned judge in the court below, that 'in' re Snackman, ex parte May and others' (L.R. 24, Q.B. D. 28) is an authority that this transaction 13 not an assignment of property to a trustee or trustees within subdivision B, subsection 1, of section 41 of ' The Bankruptcy Act 1883.' Whether this court should accept this very narrow view oJ the words of this subdivision is a question which we should desire to hold ourselves open to consider should ifc be necessary to decide it. The substantial question in this appeal is whether this transaction is fraudulent as against the policy of the bankruptcy law, and therefore void as an act of bankruptcy. The principle is thus stated in Mr Tate Lee's ' Law of Bankruptcy ' (3rd edition), p. 224, ' Where the effect of a conveyance is to put it entirely out of a man's power to go on with his business and meet his creditors, there he must be taken to have intended the consequence of what he has done, and though not guilty of intentional fraud or what is called moral fraud, yet he ia guilty of fraud against the policy of the bankruptcy law, which is that there shall be an equal distribution in bankruptcy among all the creditors.' In Woodhouse v. Murray (L.R., 2 Q. 8., 631), Lord Cockburn says (p. 637): 'It is well established law that the assignment of the whole of the estate and effects of a trader is void, and constitutes an act af bankruptcy, because it is contrary to the policy of the bankrupt law; and this is based upon the principle that where a man is in insolvent circumstances his property must be divided pro rata among the body of his creditors. Therefore, if a man in insolvent circumstances make over tbe whole of bis effects to another, he prevents himself from carrying on his business, or paying his creditors, or distributing his property among them in the proportion !of their several claims.' He proceeds to deal with the exception to the rulenamely, where the trader, in disposing of his effects, gets something which to him aud hia creditors is an equivalent. Has then the appellant in the first place proved that this was an assignment of all or substantially all the debtor's property. He was a trader whose business was the carrying on a dairy factory. The transfer included the factory and all connected with it, including what was in effect a sum of £640 cash for which he had sold his season's output of cheese. At the time he told the respondent he had not capital to carry on, the only other asset undisposed of was the equity of redemption of his interest in property coming to him under his mother's will. This had been pledged for about £200. He says the legacy was supposed to be £445. He says tbe money was supposed to be coming out from Home— that it had been in fact the subject of litigation, though he did not then know it. He had tried to sell bis equity to the mortgagee, who told i him it was not worth £20. He appears ultimately in fact to have in effect sold it to his brother for £40, the amount actually received does not seem to have more than paid the amount of the pledge. The exception must be i substantial, and not merely colourable; whether i ifc is substantial must depend on the circum- | stances— ex parte King (in re King 2 oh. D i 256). Thus in ex parte Foxley (in re Nurse, ' j L.R. 3, eh. 515) the assigned property was ' i worth £2600, the excepted furniture produced ' j £400, and the excepted book debts were I valued at time of assignment by bankrupt at 1 £800, but he said only £600 were hopeful, and ■ ' were not immediately available. This was held , ' not a substantial reservation. Here the prol■■ perty assigned was worth £1044. Tho so-called i i asset was partly pledged, was indefinite and ■ • contingent, was not immediately available, and i turned out to be practically valueless. We , ■ cannot doubt, therefore, that it was not such a ' substantial exception as to prevent the sale to P Chick being of practically all the debtor's property. Then, were there debts ? It is admitted 3 there were some debts. The claim of Harty 3 must, after the verdict, be taken to have been I valid to the extent of £500. Tomkins v. i Saffery (3, Appeal Cases, 213) has a,very sm--9 portant bearing on this part of the case. There

■ I was there an agreement to transfer all the debtor's assets for division amoog his Stock Exchange creditors, mid a payment, in pursuance of such agreement, of a sura of money, part of such assets. Toe question of fraudulent preference existed in that case, and not in the present one. But it; was treated by the Lord Chancellor and Lord O'Hagan ou tho basis of the transaction amounting to a cessio bonornm, that is, a transfer ot all his property. And in dealing with this question as to whether there were other debts, the Lord Chancellor Bays: 'Now, my lords, they are in this position aB to that they knew the amount of the bankrupt's assets. They knew, therefore,that if there was another creditor undoubtedly they must be receiving a preference over that other creditor. And upon the all-important fact whether there waa another creditor or not, they had this further information that there was a person with whom the bankrupt had had pecuniary dealings to a considerable amount, which dealings might trike the form either of debt, or ot bounty not amounting to debt. That they knew, for upon that they had asked question?. And, my lords, upon a!l this they were satisfied to take the word of the bankrupt himself alone, the person who of all others npon a matter of this kind would be their most untrustworthy informant. If they had been disposed in good faith really to ascertain what was the truth upon this matter, all they had to do waa to ask the person who could have given them the information—namely, Mr Mackenzie himself. They asked no question of him, or of any other person representing him; they took the word of the bankrupt, and upan that they trusted ; and in that view how can they be in any higher position than the bankrupt himself. Whatever notice or knowledge he has, they must be held to have. They did not provide themselves as they might have dove with independent information ; they rested their title upon iho truth or the untruth of the assertion made to them by the bankrupt, and upon that truth or untruth they must stand or fall. If the statement had been a true one the transaction might have been maintained, bat not being a true one it cannot, in my opinion, be maintained. Now, my lords, I think it due to the appellants and those whom they represent, to say that I have no reason to doubt that in point of fact they were willing to receive the statement as true: they had no knowledge that it was otherwise than true, but they had the means of knowledge, and legally by that, in my opinion, they must be; affected.' Aud Lord O'Hagan says t 'My lords, lam of the same opinion; and I too feel bound to say that I see nothing in the case which impeaches the integrity in purpose or in action of che Stock Exchange. This appeal appears to me to h&ve been prosecuted very much under tho influence of irritated feeling; but the words that produced that feeling maybe accounted for in the way^suggested by my noble and learned friend, without an imputation of impropriety either as to the rules of the body or the proceedings of its members. I think there is no ground whatever for such an imputation. If they believed the statements made by the defaulter they were fully justified in what they did; they were only wrong because what he had stated as facts were not facts, and so they were misled.' And Lord Blackburn puts it (page 237): 'If he (the debtor) had told them the truth, and there had been in fact no other creditors, this transaction would have stood and been perfectly good; if he had other creditors it would not stand. They knew all that was necessary for them to know, and I think they took their chance, and they must take the consequences.' We think this applies to this case. The respondent knew that a claim for heavy damages for breach of contract had been made, that the plaintiff and his advisers must have thought they had a claim, and that if that claim was to any substantial extent valid it would be defeated by the tranaction he was entering into. In the face of this he accepted the assurance of the defendant and his solicitor as to the claim. We think the respondent must be taken to have known the amount and nature of Harty's claim. If not, his acceptance of the assurance that it was of no importance seems the more reckless. The defendant was, even if honest, the worst adviser on such a point—and there was the reasonable possibility of his dishonesty. His advisers would, it must be Jpresumed, take their account of the transaction from the defendant. We think in choosing to act on such statements the respondent must be taken in tho words of Lord Blackburn to have taken his chance, and must take the consequences. These consequences (outside any question of fraudulent preference) are summed up by Lord O'Hagan (page 230) — ' there was clearly in this case a ceesio bonorum for the benefit of a limited class of creditors when insolvency had been declared and bankruptcy was imminent; and this being so, no further agreement is needed to defeat the appellant's claim to exclusive advantages unshared by the general creditors of the bankrupt.' We cannot accept the argument that this transaction was not a pledge, but an actual sale, and that it was not to a creditor. If an assignment by way of security is, under the circumstances, fraudulent, an absolute sale, where there is no right to redeem, is not tho IeBS so. Nor is the vice in the sale to a creditor, even if it is conceded that the respondent was not a creditor. It ib true thai the case most commonly occurring is that of an assignment in consideration of a debt, but tha vice is in the nature of the consideration—that is, does the consideration exclude any equivalent for the unpaid creditors. It can make no difference if the property is pledged or sold for one or more past debts, or in consideration that the assignee pays one or more past debts. The effect of tho transaction on those creditors who are left out of the benefit of the consideration is the same. There is the further consideration: Does this case come within the exception which, as stated by Lord Blackburn in Woodhouse v. Murray (page 638), has been engrafted on this rnle, thab the trader in disposing of his effects gets something which to his creditors—i.e., all his creditors—is an equivalent? It is obvious in this case that he does not. The whole consideration is not anything paid to Marr, but the payment by cheque of certain pre-arranged creditors. Such payment almost exactly corresponding to the agreed value of the property assigned. It is unnecessary therefore te discuss the question, What amounts to an equivalent ? Here thero waa clearly none. It does not matter that there were good and, to the purchaser, legitimate reasons for so disposing of the consideration. It is the effect, not the reason, of such dispositisn which vitiates the transaction. As put by Mellor, 1., in Woodhoase v. Murray (p. 641) and by other judges in many cases—'the test whether the deed is an act of bankruptcy is, does it necessarily delay the creditors of the trader?' In that case the jury found that the transaction was in good faith — that is not concocted or actually fraudulent — yet it was held a fraud within the bankruptcy laws. 'Exparte Stubbinsre Wilkinson ' (17 Gh D.,58), ■vt re Ward' (14, V.L.R., 733), and similar cases were cited for respondent as showing that absolute sales of a debtor's property were not invalid through the purchaser intending to apply the proceeds in such a way as to defeat and delay the creditors, and even though such intention was known to the purchaser, but in all these cases the debtor received an actual equivalent which it was in his power to apply for the benefit of his creditors. They do not meet such cases as the present, where the transaction itself necessarily involved (on the assumption before made) the defeating and delaying of the creditors not iucluded in the arrangement. We are of opinion, therefore, the appeal should be allowed, and the transaction declared void as an act of bankruptcy. The respondent will be allowed to set off the moneys as against which he held an undertaking to mortgage the lands and fixtures, to the extent of the value of such lands and fixtures. It was said that the court cannot make any terms, that the debts paid by the respondent are to rank as claims on the estate with the debts at the time of the bankruptcy. If this is so, it is an instance of the inconvenience caused by the existence of a separate court of bankruptcy. We are satisfied, however, that the Bankruptcy Court has the means to work out au equitable adjustment between the respondent aud the claims of tho estate. See the order made by Williams J. •in re Brown' (2 N.Z.L.R, 189). Appeal allowed, with co3ts." Sir Robert Stout applied for, and obtained leave, to appeal to the Privy Council.