Munro v Rothfield
| Jurisdiction | Scotland |
| Judgment Date | 03 December 1919 |
| Date | 03 December 1919 |
| Docket Number | No. 20. |
| Court | Court of Session |
Lord Blackburn, Lord President, Lord Mackenzie, Lord Skerrington, Lord Cullen.
BankruptcyIllegal preference at common lawAgreement between debtor and certain of his creditors for their preferential treatmentRight of creditor party to agreement to challenge itContractPactum illicitum.
An insolvent debtor entered into an agreement with certain of his creditors, whereby he bound himself to set aside out of his income a sum of 300 per annum to be applied in payment of the debts due to these creditors. The creditors bound themselves not to enforce their claims so long as the sum of 300 per annum was duly paid. The debtor and the creditors who were parties to the agreement were all aware of the debtor's insolvency. The debtor implemented his obligation to set aside the sum of 300 per annum.
Held (rev. judgment of Lord Blackburn) that the agreement, although challengeable by creditors who were not parties to it as an illegal preference at common law, was not void as being a pactum illicitum, and was binding on the creditors who were parties to it inter se.
On 26th December 1918 a debtor brought a suspension against Henry Rothfield, 201 Buchanan Street, Glasgow, of a decree for 70, 16s. 8d. obtained by the respondent in the Sheriff Court at Edinburgh, and of a charge upon the decree. The circumstances in which the suspension was brought, and the subsequent history of the proceedings, were as follows.
A minute of agreement, dated on various dates between 5th and 29th May 1918, was entered into between the debtor, first party, ten of his creditors (one of whom was the respondent, Henry Rothfield), second parties, and Charles John Munro, C.A., Edinburgh, third party. The second parties did not include all the creditors of the debtor.
The narrative clause of the agreement set forth that the first party owed to the second parties the sums set opposite their names in a schedule annexed to the agreement, which sums were referred to in the agreement as the scheduled debts. The sum set against the name of the respondent, Henry Rothfield, was 250. By the operative clauses of the agreement the first party bound himself to pay the scheduled debts by instalments, and for that purpose to set aside a sum of 300 per annum out of his income by quarterly instalments. He further bound himself to grant a power of attorney in favour of the third party, authorising him to uplift from the Treasury an official salary payable to the debtor. The second parties bound themselves not to enforce their claims so long as the 300 was duly paid.*
On 28th March 1918, while the negotiations regarding the agreement were in progress, the debtor had addressed to the law-agent of Henry Rothfield a letter in the following terms:
Dear Sir,I beg to confirm in writing the arrangement regarding this claim. In the event of the proposed arrangement being carried through as to all the claims specified in the schedule to the agreement, I undertake forthwith to arrange that Mr Rothfield's claim be taken over by instalments at three, four, and six months from the last date of signature in said agreement, and I hereby bind and oblige myself to pay the said instalments accordingly.
On 14th September 1918 Rothfield brought an action against the debtor in the Sheriff Court at Edinburgh for payment of 70,16s. 8d. In his condescendence he set forth the scheduled debt of 250, and he further averred that the sum sued for was due to him under the letter of 28th March 1918. He obtained decree in absence for the sum sued for, and on 19th December he charged the debtor to make payment.
On 26th December 1918 the debtor brought a suspension of the
decree and charge. Answers were lodged for Rothfield, and, on 15th January 1919, the Lord Ordinary on the Bills (Blackburn) refused the prayer of the note. The debtor reclaimed to the First Division. While the reclaiming note was pending, Munro, the third party to the agreement of May 1918, and James Bruce, S.S.C., 34 Bernard Street, Leith, the assignee of certain of the second parties, were sisted as complainers. On 8th March 1919 the Court recalled the interlocutor of the Lord Ordinary and remitted to him to pass the note.
A record was thereafter made up. The complainers averred (Stat. 2) that in February 1918 the debtor was insolvent, and that the debtor and the creditors who were the Second parties to the agreement of May 1918 were all aware of the insolvency. They also averred that on 20th February 1918 the respondent, Rothfield, presented a petition for sequestration of the debtor's estates. The respondent (Ans. 2) admitted that he had presented a petition for sequestration of the debtor's estates, which was subsequently withdrawn. He also averred (Ans. 5) that he is not and was not at the date when he signed the said agreement of May 1918 aware that the debtor was, or had at any time been, insolvent.
It was admitted that the complainer Munro had regularly uplifted the sum of 75 at the end of each quarter in terms of the agreement of May 1918.
The complainers pleaded, inter alia;(1) The respondent having bound himself by said minute of agreement to refrain from enforcing his claim in respect of the debt for which he obtained decree, the said decree and the charge proceeding thereon should be suspended simpliciter.
The respondent pleaded, inter alia;(1) The said minute of agreement in respect of the complainers' averment of their knowledge of the insolvency of the debtor, being an agreement which these parties are not entitled to enforce as having been affected with illegality (a) the complainers have no title or interest to present the note; (b) decree of suspension should be refused. (2) The averments of the complainers are irrelevant and insufficient to support the prayer of the note. (3) The proceedings complained of not being in breach of the contract embodied in said minute of agreement, suspension should be refused.
On 16th July 1919 the Lord Ordinary (Blackburn) refused the prayer of the note.
Lord Blackburn'sopinion.I refused the note of suspension in the Bill Chamber on the ground that the debtor, who was then the only complainer, had not averred facts relevant to infer that the letter granted by him to the respondent was in defraud of his creditors within his own knowledge. Thereafter, the assignee of one of the creditors, who was a party to the minute of agreement which it is said justifies the suspension, and the trustee under the agreement, were sisted as complainers and the note was passed. A record has now been made up in which no distinction is taken between the right of the debtor and that of the other complainers to have the decree and charge suspended, and as it was admitted at the bar that, in the event of bankruptcy proceedings, there was no hope of any reversion for the debtor, it follows that his interest in the matter is the same as that of the other complainers, namely, to have the terms of the minute of agreement enforced against the respondent.
It is now averred by the complainers that, at the date of the minute of agreement, the debtor was insolvent, and that both he and the creditors who were parties to the agreement were aware of this state of matters. The respondent does not deny this averment, but states that, so far as he is concerned, he is not and was not at the date when he signed the agreement aware that the debtor is or was at any time insolvent. It is difficult to believe the truth or sincerity of this statement, for, prior to the agreement, the respondent had himself, on 20th February 1918, presented a petition for the sequestration of the debtor. This petition narrates that the debtor has been rendered notour bankrupt within the last four months and still remains in a state of notour bankruptcy, and this petition was the immediate cause of the agreement being entered into.
The respondent, however, founds on the complainers' averment that they entered into the agreement in the knowledge of the debtor's insolvency as an admission that it was a transaction on their part to defraud the other creditors and is thus affected with illegality. He accordingly pleads that the complainers are not entitled to found upon the agreement in any sort of action, and that the present action should be dismissed.
The complainers deny that the agreement which they are endeavouring in this action to enforce against the respondent is in defraud of the rights of other creditors and therefore tainted with illegality. They do not now maintain, as was done in the Bill Chamber, that the agreement is of the nature of a composition contract. They found on it as giving them a security for full payment of their debts and as binding the respondent to refrain from enforcing his claim against the debtor. The subject of this security is a salary payable to the debtor by Exchequer, and therefore, they say, unattachable by his creditors. Accordingly, they maintain that in obtaining this security they have not defrauded the other creditors of any right available to them. Although under article 4 of the agreement the debtor dispones and conveys his whole means and estates to the trustee with power to him to take possession at his sole discretion, the complainers maintain that this is only in security of the fulfilment of the obligation...
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