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CHAPTER
XXVII.

Mutual credit need not be intended.

Breach of trust.

Effect of notice.

An acceptance of the bankrupt's may be set off as an ingredient in mutual credit, notwithstanding that it was not due at the time of the bankruptcy, and was in the hands of an indorsee (o).

And where a bill is indorsed, credit may be deemed to be given to the indorser as well as to the acceptor, and there. fore if the indorser become bankrupt, the indorsement may be an ingredient in mutual credit (p). A bill accepted for the accommodation of the bankrupt is within the mutual credit clause (q), and may, under that clause, be set off against a demand by the trustees in bankruptcy for money had and received to their use after the bankruptcy (r).

It is not necessary, to constitute mutual credit, that the parties both intended there should be mutual credit; it is sufficient though one take, by indorsement from a third party, the note or acceptance of another without his knowledge (8).

But where goods or bills are deposited with a direction to turn them into money and apply the proceeds in a particular manner, if the party receiving the property is guilty of a breach of trust he cannot claim the benefit of a set-off under this section (†).

When a man's private account at a bank was overdrawn, but there was a balance on a trust account which he kept there also under a different name, it was held that the

230; Atkinson v. Elliott, 7 T. R.
378. But the mutual credit must
have existed before the bank-
ruptcy; thus a bill drawn by the
debtor and accepted by the cre-
ditor after debtor had executed
a deed of assignment, but before
registry thereof, cannot be set off
against debtor's previous accep-
tance, inasmuch as at the date
of the deed there was no mutual
credit. Ex parte Ryder, L. R.,
6 Chan. Ap. 413; 40 L. J., Bkcy.
63; Selby v. Graves, L. R., 3
C. P. 594.

(0) Collins v. Jones, 10 B. & C.
777; 34 R. R. 572; Bolland v.
Nash, 8 B. & C. 105; 2 Man. & R.
189: 32 R. R. 346; Russell v.
Bell, 8 M. & W. 277; McKinnon
v. Armstrong, 2 App. Ca. 531.

(p) Alsager v. Currie, 12 M. &

W. 751; and see Starey v. Barns, 7 East, 435; see Young v. Bank of Bengal, 1 Moore P. C. 150.

(g) Smith v. Hodson, 4 T. R. 211; Ex parte Bayle, Cooke's Bk. Law, 542; Ex parte Wagstaff, 13 Ves. 65; Bittleston v. Timmis, 14 L, J., C. P. 117; 1 C. B. 389.

(r) Bittleston v. Timmis, and see Hume v. Muggleton, 3 M. & W. 30. The mistake in the marginal note of that case is corrected in Bittleston v. Timmis, ubi supra.

(8) Hankey v. Smith, 3 T. R.

507.

(t) Key v. Flint, 8 Taunt. 21; 1 Moo. 451; Ex parte Flint, 1 Swanst. 30; 18 R. R. 12; Buchanan v. Findlay, 9 B. & C. 738; 4 M. & Ry. 593.

banker, who had notice of the trust, could not set off the CHAPTER balance against the deficit (u).

But mutual credit will not destroy a lien created by express contract. C. held M.'s acceptance for 247., and sent M. an article to be repaired by him. It was agreed that C. should pay M. the amount of the repairs in ready money. Before the repairs were completed M. became bankrupt. Held, that C. could not, by virtue of his cross demand on the acceptance, sue M.'s assignees in trover for the article before paying the amount of the repairs (r).

Set-off in bankruptcy may be either in an action at law, or before the Court of Bankruptcy.

A set-off under the Bankruptcy Act is available in all actions, whether for debt or damages. No plea or notice was formerly necessary, though it was usual to plead or give notice as under the general statutes. But by Rule 8, T. T. 1853, re-enacting R. H. 4 Will. 4, mutual credit must be pleaded. Where the assignees or trustees affirm the bankrupt's dealings, they let in his set-off (y). An assignment under the old Insolvent Debtors Act had no relation back to the commencement of the imprisonment, and therefore the assignees having declared on a sale by the insolvent, after the imprisonment, and before the assignment, not on a sale by themselves, were subject to the defendant's set-off against the insolvent (z).

To an action for a debt due to the assignees in their official character, the defendant cannot plead a set-off due from the bankrupt before his bankruptcy (a). But such a set-off may be the subject of mutual credit (b). A garnishee could not set off a debt due to him from the judgment creditor (c).

But where, there being no bankruptcy, a company in process of winding up held acceptances of S., not yet due, but S., the acceptor, held bills drawn and indorsed by the company, which bills, the drawees having refused acceptance, had therefore become a present debt due from the company to S.; it was held on appeal that the official liquidator of

(u) In re Gross, L. R., 6 Ch. App. 632. Ante, p. 31, note (w).

(c) Clarke v. Fell, 4 B. & Ad. 404; 1 Nev. & Man. 244; Ex parte Bennett, 9 Ch. Ap. 293.

(y) Smith v. Hodson, 4 T. R. 211.

(z) Sims v. Simpson, 1 Bing.

N. C. 306.

(a) Groom v. Mealey, 2 Bing. N. C. 138; 2 Scott, 171; Wood v. Smith, 4 M. & W. 523.

(b) See Bittleston v. Timmis, 14 L. J., C. P. 117; 1 C. B. 389. (c) Sampson v. L. & S. W. Railway, L. R., 10 Q. B. 28.

XXVII.

Mutual credit does not extinguish a lien.

Set-off, &c. in bankruptcy, how available.

Mutual credit
under the
Companies
Acts.

CHAPTER
XXVII.

WHAT PRO-
PERTY IS
DIVISIBLE
AMONG

CREDITORS.

TRUST PRO-
PERTY EX-
CEPTED.

DEPOSITED
SECURITIES.

Holder's right to the benefit

of security in the event of bankruptcy.

the company had a right to negotiate the acceptances of S., because there was no mutual credit, the case not then being within the provisions of the Bankruptcy Act (d).

We may now consider what property is divisible in satisfaction of the claims proved upon the estate, so far as material to this work. And for this purpose it will be sufficient to note that from the general rule (e) rendering divisible all the property belonging to or vested in the bankrupt at the commencement of or during the bankruptcy, is excepted property held by him on trust for any other person (f). And further, that to such property as so belongs to or is vested in the bankrupt, are to be added all goods falling within the reputed ownership clause (g).

And first as to property held on trust, where goods are specifically appropriated prior to the bankruptcy, for the purpose of meeting bills of exchange, the holder of the bill has been held entitled as against the creditors to the benefit of the above exception, since as to such goods the bankrupt is in effect a trustee merely for the person entitled to receive the contents of the bill (h).

When and to what extent securities or remittances in the hands of an acceptor, who afterwards becomes bankrupt, are available in favour of the holder of the bill, is a question involving many difficulties, and it has accordingly given occasion to much discussion.

These questions can seldom arise, except when both drawer and acceptor are insolvent, for it is a matter of indifference to the bill holder from what parties or funds he receives payment (i).

(d) In re Commercial Bank of India, L. R. 1 Ch. App. 538; see In re Agra and Masterman's Bank, L. R., 3 Eq. 337; Er parte Price, Re Lankester, L. R., 10 Ch. 648. Though the Jud. Act, 1875, s. 10, introduced into winding up the same rights as to set-off and mutual credits and dealings as in bankruptcy, still a debt cannot be set off against calls, In re Auriferous Prop. Co., [1898] 1 Ch. 691; nor a judgment debt, Gills' case, 12 Ch. D. 755; and see Washington Diamond Co., In re, [1893] 3 Ch. 95. Mutual dealings must result in specific money claims, Eberle Hotels Case, 18 Q. B. D. 459.

(e) Bankruptcy Act, 1883, 8. 44 (i).

(ƒ) Id. (1), and see ante, p. 455, note (d).

(g) Id. (iii).

(h) Ex parte Imbert, 26 L. J., Bkcy. 65; Er parte Flower, 4 Dea. & C. 449; see also Lutscher v. Comptoir d' Escompte de Paris, 1 Q. B. D. 709; Ranken v. Alfaro, 46 L. J., Ch. 832; 5 Ch. D. 786; Kinnaird v. Webster, 48 L. J., Ch. 348; 10 Ch. D. 139; In re Broad, 13 Q. B. D. 740; Ex parte Derer, Id. 766; Phelps v. Comber, 29 Ch. D. 813; Brown Shipley v. Kough, Id. 848, as to what is a sufficient appropriation.

() The original and leading

CHAPTER

XXVII.

The general rule of law, seems to be, that when both the drawer and the acceptor of a bill become bankrupt, and bills, securities or funds have been remitted by the drawer Holder's right to the acceptor, and specifically appropriated to cover the to securities acceptor's liability on his acceptance, the holder of the bill deposited may avail himself of them; they do not belong to the acceptor's general creditors, and do not pass to his trustee in bankruptcy.

Although this principle applies most frequently in the case of actual bankruptcy, yet it is not essential to his application that the insolvency should have been judicially ascertained by an adjudication in bankruptcy. It is enough if the parties are practically insolvent (k). The securities need not be deposited by a party to the bill; it will suffice if the depositor be liable in respect of the transaction for which the bill was drawn (1). To fall within this rule the holder must be entitled to prove against both the insolvent estates; where therefore the bill had been dishonoured for non-acceptance it was held not to come within it (m).

Where the customer of a banker had lodged a sum of money with a bank to meet an acceptance, and the acceptor failed before its maturity, it was held that at law the drawer could not maintain an action against the banker, there having been no privity of contract between him and the banker (n). And in a similar case (o) the Vice-Chancellor

case on the subject is Er parte Waring, 19 Ves. 345; 13 R. R.217: the complicated facts of that case, so far as they are material to the question now under consideration, are clearly stated by Lord Romilly, M.R., in Re New Zealand Banking Company, L. R., Eq. 226; it seems that the balance must be in favour of the drawer. See also In re Suse, No. 2; 14 Q. B. D. 611; 54 L. J., Q. B. 390.

(k) Powles v. Hargreaves, 3 De G., M. & G. 430; Bank of Ireland v. Perry, L. R., 7 Ex. 14; 41 L. J., Ex. 9; City Bank v. Luckie, L. R., 5 Ch. Ap. 773; In re Barned's Bank, L. R., 10 Ch. Ap. 198. But the estate of the remitter must still be within the jurisdiction of the Court. In re Yglesias, L. R., 10 Ch. Ap. 635; 45 L. J., Bkey. 54. And as to the doctrine laid down in Powles v. Hargreaves, ubi sup., see now Royal Bank of Scotland

v. Commercial Bank of Scotland,
7 App. Ca. 366.

(1) Ex parte Smart, L. R., 8
Ch. Ap. 220.

(m) Vaughan v. Halliday, L. R., 9 Ch. Ap. 561. The funds or monies claimed for the benefit of the bill holders must not be absolutely and entirely the property of, and in the possession of, one of the parties only. Er parte Lambton, L. R., 10 Ch. Ap. 405; Er parte Banner, L. R., 2 Ch. D.

278.

(n) Moore v. Bushell, L. J. 27 Exch. 3. See Farley v. Turner, 26 L. J., Chan, 710.

(0) Hill v. Royds, L. R., 8 Eq. 290. The funds must be specifically appropriated to that purpose, and no mere statement of the drawer can create any lien on funds in the drawee's hands. Thompson v. Simpson, L. R., 5 Ch. Ap. 659; 39 L. J., Ch. 857; Louisiana Bank v. Bank of New

with acceptor.

Holder's right

to funds de

posited with a third person.

CHAPTER
XXVII.

Holder's right to acceptor's guarantee.

REPUTED

OWNERSHIP.

Dormant partner's share not within.

followed the law, and held there was no equity in favour of the drawer. An acceptor who has deposited money with a bank to meet a bill, on the bank's failure has only the rights of an ordinary creditor (p); and where funds were remitted to a bank to meet an acceptance, the banker was held to be entitled to retain them for a debt due to him from the sender (q).

The acceptor's right to the benefit of a guarantee given to him is not transferred to a holder of the bill (r), unless the guarantee be given for the purpose of being exhibited to other parties (s).

Next as to the reputed ownership clause (1).

The share of a dormant partner did not pass to the trustee in bankruptcy under this clause (u). But the claim of a lender, who is to have a share of the profits, and who

Orleans, L. R., 6 H. of L. 352.
In Ranken v. Alfaro, 5 Ch. D.
786, the statement was made
both to holder and drawee.

(p) Massey's case, 39 L. J.,
Ch. 635.

(4) Johnson v. Robarts, L. R., 10 Ch. Ap. 505.

(r) Ex parte Stephens, L. R., 3 Ch. Ap. 753.

(s) In re Agra and Masterman's Bank, L. R., 2 Ch. Ap. 391. In Hallett's case, [1894] 2 Q. B. 256, the guarantee of the maker's solvency ran in favour of payee or holder.

(t) The Bankruptcy Act of 1883, s. 44 (iii), provides that the property divisible shall comprise "all goods being at the commencement of the bankruptcy in the possession, order or disposition of the bankrupt in his trade or business by the consent and permission of the true owner, under such circumstances that he is the reputed owner thereof provided that things in action, other than debts due or growing due to the bankrupt in the course of his trade or business, shall not be deemed goods " within that section. The Bankrupt Act (12 & 13 Vict. c. 106),

s. 125, following the series of Acts from the time of James I., enacted that, if at the time of the bankruptcy the bankrupt had, by the consent of the true owner, in his possession, order or disposition, any goods whereof he was the reputed owner, the Court should have power to order them to be sold for his creditors. The necessity for an order, introduced by this section, was discontinued in the Act of 1869 (32 & 33 Vict. c. 71), s. 15, which repealed all the former provisions on the subject; but it confined the doctrine of reputed ownership to bankrupts being traders. And whereas sect. 125 of the Act of 1849 (12 & 13 Vict. c. 106), applied not only to things in possession, but to things in action, as bonds, policies and other debts (Ryall v. Rolle, 1 Ves. sen. 348 ; 1 Atk. 164), the Act of 1869 took out of the operation of the reputed ownership clause all things in action, except debts due to the bankrupt in the course of his trade, in which respect it is followed by the above quoted clause of the Act of 1883.

(u) Reynolds v. Rowley, L. R., 2 Q. B. 474; 36 L. J., Q. B. 247.

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