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Decisions of the Superior Courts of New South Wales, 1788-1899

McLachlan trustees of Welsh and Ors v. Power [1844-45] NSWKR xxx

insolvency, voidable preference, insolvency, statutory history, reception of English law, insolvency, valuable consideration, meaning of

Supreme Court of New South Wales, Port Phillip

Jeffcott J, 14 August 1844

Therry J, 7 March 1845

Sources: Port Phillip Patriot, 19 August 1844; Port Phillip Patriot, 10 March 1845[1] 

Source: Port Phillip Patriot, 19 August 1844

THIS being the last day of term, his Honor the Resident Judge took his seat,

IN BANCO.

M'Lachlan and others Trustees of P. W. Welsh, v. Power.

Judgment.

--- His Honor.---This was an action in trover brought by the assignees of Welsh, an insolvent, to recover possession of certain sheep, which it was alleged Welsh assigned, being at the time insolvent. Defendant pleaded the general issue, and gave notice of special matter, that plaintiffs were not the trustees, and that the sheep were delivered to defendant and others on the 18th March, 1842, as security for their liabilities upon certain bills of exchange drawn upon Gower, Nephews & Co., of London. On the fourth of April last the cause was tried before assessors, who found a verdict for plaintiff, which was subsequently set aside, and I would remark that the verdict was found upon such inadmissible evidence, that I would not have allowed it to stand upon any account. The cause was again tried on the 12th June last, and a verdict found for plaintiff, $4500, to be reduced to $50 upon the sheep and station being delivered up.

The circumstances of the case were, that in February, 1842, Welsh drew certain bills of exchange in favor of certain parties upon Gower, Nephews, & Co., of London, for $6000. At the time he drew, he had an account with Gower, Nephews & Co., and owed them a balance, and being doubtful whether under the circumstances his drafts would be honored, in the month of March he applied to several parties to give their security to Gower, Nephews & Co. for the amount, to which they agreed, and on the 18th March, 1842, a bond was executed by P. W. Welsh for $12000; [R.??] H. Power, E. Curr, J. P. Fawkner, J. Allan, and J. M. Chisholm, in $1000 each, under certain conditions.

Previous to this arrangement being entered into the co-obligors required security, and the sheep, the subject of the present action, were purchased, and Welsh swore that they asked for the sheep as security, and that he gave it; he entered into arrangements and purchased 10,000, for which he gave mortgage securities amounting to $7,500. John Allan negotiated the transaction, and on the 29th May he wrote to Welsh, saying that he held the sheep for him; Welsh wrote back directing them to be delivered according to the agreement, and Allan consequently wrote to Power, saying that he held them upon his account. Allan put Glendenning in charge of the sheep, but he did not say at the time for whom he was to hold them, although as Glendenning swore he understood it was for Welsh. Glendenning remained in charge, but he did not understand for whom, up to 4th August, 1843, about which time it was suggested that it would be better if the sheep were placed in the possession of one of the co-obligors to the bond, and Power wrote to Allan to take a receipt from Glendenning that he held the sheep for Power; the letter passed Allan upon the road, but upon returning to the station, in the latter end of August, the receipt was given. If this transaction was not affected by the Insolvent Act, it was fair, and the sheep were transferred to secure a large amount for which the parties had made themselves liable, and the transfer also, was openly made, but the plaintiffs say that the transfer which would have been otherwise good, was void in consequence of Welsh being Insolvent at the time of making it.

The foundation of the claim of the assignees, is, that the transfer took place nine months before Welsh was declared insolvent, it was therefore void under the 6th or 8th section of the insolvent Act, therefore the property never passed but continued in the Insolvent, and consequently in the plaintiffs as his assignees. Allan took charge of the sheep on the 29th April, 1842, for Power, and the order for the sequestration of Welsh's estate is dated 18th Jan., 1843. It was quite clear from the evidence that Welsh was insolvent at the date of the transfer, but unless expressly prohibited by the Insolvent Act, he could deal with his property as he pleased; if prohibited he could not pass the sheep to Power, and they would still be subject to all the legal liabilities as though they remained in the hands of the insolvent.---9 Vesey, 100.

The first question for consideration is whether the transfer is void under the 6th or 8th section of the Insolvent Act, and whether the legal estate was in the assignees; if so it was subject to such legal claims as they might have upon it. The 6th section is borrowed from the 6th George, IV. chap. 16, section 73, by which an assignment made by any bankrupt at the time of his insolvency, without valuable consideration, was void; every such sale shall be valid against the insolvent, but if he shall have conveyed without valuable consideration those things, the Commissioner shall have power to sell and dispose of the same. The 6th section is borrowed from the Bankrupt Act, and that is copied from the old statute of 1 st James I. chap. 15th, section 5---in order to bring the insolvent within the 6th section, it must be proved that he was actually insolvent, and that the transfer was made while he was so, without valuable consideration---I am of opinion there was sufficient to show that Welsh was insolvent at the time of the transfer: 1 Maule and Selwyn, 338, and 3 Barnwell and Adolphus, 363; it was held that a party was not solvent because he would have a surplus upon winding up his affairs; but that a trader was insolvent who was not in a condition to pay his debts in the ordinary course of business.

The evidence to Welsh's insolvency was clerks from the bank with a number of overdue and dishonored bills upon which Welsh was liable either as drawer or acceptor, some of them were dishonored, others were paid by parties whose names were upon them although Welsh was primarily liable. This commenced in 1841, and continued up to August, 1842, and then he was clearly insolvent as he called a meeting of creditors, when all that he could offer to pay was 8s. in the pound.

To rebut this and the only evidence which could be fairly given was that of Welsh who did not think he was insolvent at the time---but what did that prove but ignorance on the part of Welsh of his own affairs; if he had been in the habit of comparing his assets with his liabilities, there would not have been such an exhibition of dishonored bills, and have prevented him mixing himself up with the affairs of others beyond his means, which was most probably the cause of his insolvency.

The assessors upon the first trial and the special jurors upon the second found that Welsh was insolvent at the time of the transfer, and if that was the only point I should refuse the present motion. But then comes the question, were the sheep transferred without valuable consideration? the jury found the consideration not valuable, leaving it, however, for the court to say whether there was evidence of valuable consideration. It was true that no money passed at the time of the transfer, but there is nothing in that proving valuable consideration not to have been given, nor was it necessary in a party so circumstanced: 2 Bosanquet and Fuller, 584. It had been also argued whether the bond not being due at the time of the delivery, the transfer was not, therefore, void, which, if it had been due, would not have been the case: 1 st term reports, 153, Thomas and others, Assignees of Wiseman v. Freeman. From this arises the question, whether a fraudulent preference was given, the bond not being due at the time? Under the 6th section it must be a voluntary preference; but any party, before being declared insolvent, could do what he pleased with his property, provided it was for a valuable consideration; he could dispose of it to any person in the world, if for a valuable consideration.

What is the valuable consideration here? The co-obligors to the bond, became bound for the insolvent. 13 Vesey, 160; Crosbie v. M'Dowall, in which Lord Eldon says, that the engagement to deliver a party from the payment of money by covenant, is a payment in law, and a sufficient consideration: 2 nd Term Reports, 100, whether a party paid money or gave an indemnity he had a legal claim. The consideration was good in law under the 13th Elizabeth, an Act to protect creditors, by which it was enacted, that entering into a covenant to secure the payment of money was a valuable consideration. In 2 nd Brown's Chancery Cases, 90, Stephen v. Olive, in which the trustees entered into a covenant to indemnify him of the debts of his wife; that was held to be within the statute. That point was disputed on the statute in a bankruptcy case, reported in 3 rd Merriville, 256, when the Master of the Rolls held that a covenant of indemnity, even against the debts of a wife, was a valuable consideration. Then comes the question, the transfer being for a valuable consideration, can the defendant retain the property so transferred? In 4th Boswell and Creswell, 448, 9th Adolphus and Ellis, and 5th Term Reports, 233, that doctrine is maintained. Here it was proved that the agreement was entered into previous to signing the bond, and the sheep were delivered in pursuance of that agreement for the use of those persons, and being personal property, may be transferred without any writing, and it was proved to have been delivered to Allan for their use.

The only question which remains is, whether it was a valuable consideration? I am of opinion from the case in 3rd Merriville, under the bankruptcy statute, which was decided by the Master of the Rolls, that it was a valuable consideration according to the statute. As to the 8th section of the Insolvency Act, it cannot be said that the defendant was a creditor. Under all the circumstances of the case, which I have given my most anxious consideration in consequence of its importance, and the large amount of property involved, I am of opinion that the verdict should be set aside, and a nonsuit entered.

Therry J, 7 March 1845

Source: Port Phillip Patriot, 10 March 1845

In re P. W. Welsh, upon Appeal.---In this case, which was an appeal against the decision of the Chief Commissioner, for refusing the insolvent his certificate, his Honor read the following judgment:---

In this case the decision of the Commissioner (from which an appeal is now made) is founded, first, on that part of the 18th section of the Amended Insolvent Act of 1843, which directs the Chief Commissioner to refuse absolutely the certificate "when the insolvent, being at the time indebted, unlawfully expended for his own benefit, or appropriated to his own use, any trust funds, or other property, of which he at the time had the charge of disposition as trustee, or as an agent only;" and secondly, on that part of the same section which directs him either to refuse or suspend the certificate, "when the insolvent being a person engaged in trust of any kind shall have omitted to keep reasonable accounts or entries of his receipts and payments."

The infringement of the Act in both instances is represented to have been made by the insolvent, P. W. Welsh, in the estate of the late Mr. H. F. Gisborne, towards which the insolvent stood in the double fiduciary relation of agent and executor. In the lifetime of Mr. Gisborne, Mr. Welsh was his agent, and since his decease he was, as he describes himself, the acting executor of the estate of Gisborne; and it further appears from his own statement, he acted as co-trustee conjointly with Mr. M'Crae. Advances had been made by him to Mr. Gisborne, and the account continued an open one until the 15th of August, 1842, which is the date of the last entry in the account current. Much stress was laid on the circumstances of the account being an open one, even to the period of insolvency, from which it may be inferred that a person engaged in the extensive mercantile and other dealings in which the insolvent unquestionably was engaged, might be unconscious of being indebted to the estate at the time the sale of the Bridge Shares belonging to the estate of Gisborne took place, which is the transaction most prominently adverted to and [censured??] in the decision of the Commissioner. Such an argument, however ingenious, is one that must be entertained with a due consideration of the position in which the insolvent stood towards the estate.

It must then be borne in mind that it was in the insolvent's power at any time previous top his sequestration to have balanced the account. Indeed, I think it was his duty to have done so at the time, and it should not be permitted him to take advantage of his own neglect in omitting to perform his duty. Such an argument would go to the length of excusing misappropriation to any extent where there was an open and unsettled account, especially in cases like the present, in which it was in the insolvent's power to keep it open. Besides, this insolvent stood towards this estate, not merely in the relation of an agent, but he was the acting executor, and neglect in him was the less excusable, as peculiar trust and confidence were reposed in him. Without determining at what stated times he should have ascertained how the balance stood between him and Gisborne's estate, there was one period when at least it was his duty to have ascertained it, and that period was, when after the private meeting of his creditors on the 29th of August, 1842, the real state of his affairs was known to him; on that day a valuation of his property took place; and he states in his examination of the 30th March, 1842---"I was virtually insolvent when the valuators gave in the value of my property, which happened in the afternoon of that day."

On the 30th August he resigned his directorship in the Port Phillip Bank and at the close of that month he felt himself unable to meet his engagements as they fell due; in short, the state of his affairs was then such as must have satisfied any reasonable mind that he was then on the eve of insolvency; at such a time he should have enquired into and ascertained the position in which he stood towards Gisborne's estate, of which he was the guardian, and if he had done so he would have found that he stood then indebted to it in the amount of $132 6s., the ten bridge shares being then unsold and in his possession. Bring thus indebted to it then in that amount, which he might at any time have ascertained, we find that early in December following in the same year, he sold those ten bridge shares belonging to this estate, which were not however, transferred to Mr. Were until the 30th of December, within one month of his sequestration.

It has been urged that his creditors permitted him to work out the estate for their benefit up to this period; it may be so---but the creditors had no authority to empower him to sell either for their benefit or his own, trust property which it was his especial and bounden duty to protect. The sale of 25 shares to Mr. Were for $43 at such a time which he describes "as part of Mr. Gisborne's and part belonging to others." For which he gave Gisborne's estate no credit, and for which no entry is made, except in credit for [hole in paper] $??? to Mr. Were, is conduct that certainly calls [for reprehension??] and established both the complaint [???? tained] in the decision of the Commissioner, [being??] that of appropriating (he being then indebted) to his own use trust funds, and 2ndly., that of omitting to keep reasonable accounts of his entries and payments. The latter complaint is further established by the omission to attach Gisborne's name to dividends paid on those shares in April, 1842; and indeed by the total omission to state in any of his books that these shares formed part of the estate of Gisborne. This is something more than a mere slovenly keeping of accounts which in England is not held to be any bar to the bankrupt's certificate; but it is unnecessary even to determine that point. It is sufficient that it amounts, as it certainly does, to an omission to keep reasonable accounts or entries of his receipts and payments, for which omission the 18th section of the amended insolvent act directs that the certificate be either refused or suspended by the Commissioner.

These are the circumstances in the conduct of the insolvent that most merit reprehension. It has been urged that it was the duty of his co-executors to have called upon him to render the accounts of the estate. It appears from his own acknowledgment that about the time of his sequestration his co-trustees did so call upon him, which he satisfactorily accounts for his inability to comply with from not having access to his books subsequent to his sequestration. Whether they did so or not is a matter on which it is no part of the court's province now to pronounce. Their omission to do so cannot excuse in him an appropriation of a trust fund which he at least equally with them was bound to protect, and of which he moreover had the immediate charge and controul. The entry of the sale of the shares to Campbell and Woolley's name, and the omission to cancel it does not amount to more than a slovenly keeping of the accounts, and does not carry with it any serious imputation of blame.

Several topics have been urged on the attention of the court in favor of the insolvent, that certainly merit much consideration. It was urged on his behalf, that not only have the requisite number of creditors under the act of the 5th Victoria, No. 17 [(1841)], signed in his favor, but that now no creditor comes forward to oppose it. Though more than one caveat has been lodged it has not been persevered in, and the insolvent is fairly entitled to the presumption raised by this circumstance, that the great body of the creditors (and they certainly form a very numerous class) are not unfavorable to the application for granting his certificate. The recent Act, however, does not make the granting of the certificate merely dependent on the assent of the creditors, but on "the whole conduct of the insolvent before and after his insolvency."

We must be careful that too much weight be not attached to the suggestion, that the amount respecting which the appropriation and omissions have taken place are inconsiderable. The amount is a very subordinate consideration in comparison with the importance of the principle affected in mercantile and other dealings, by omitting to keep reasonable accounts and entries of payments, and on whose accounts these entries were made. The encouragement and sanction of such omissions would have the inevitable effect of rendering merchants' books no legal evidence of their mercantile transactions, and the sanction would operate still more injuriously with respect to Trust Estates, concealment and fraud may be more effectually practised, and, in many instances, its detection rendered impossible.

It has been further urged, that were it not for an accidental misprint of the insolvent's name in then Gazette, he would probably have obtained his certificate from Mr. Justice Willis; but much weight cannot be given to this argument; as it does not appear that the circumstance on which the Commissioner's decision is now founded were made known to Mr. Justice Willis, and, indeed, they would probably never have been known if the Insolvent's books had been the only source from which information was derivable.

It is due to the Insolvent however to bear in mind, that his insolvency was in no small degree caused, or at least accelerated by that sudden and general storm of calamity in which we have seen the first houses in the colony blown down and prostrated to the ground; and it is moreover due to him to observe, that were it not for the rapid depression in the value of property of every kind, and especially property in land, of which he was largely possessed, he had considerable means to meet his liabilities.

I am also not unmindful of the fact that a long periods of time, now upwards of two years, has intervened since the date of the insolvent's sequestration, and that during that period large expences have been incurred. Attaching on the one hand to these considerations the weight to which they are duly entitled, yet finding on the other, that the conduct of the Insolvent contravenes in the instances already adverted to, the legal enactment that enjoins it as a duty that trust funds should not be unlawfully expended or appropriated to the trustee's or agent's own use, and that reasonable accounts of receipts and payments should be kept by persons engaged in trade, the court cannot at once accede to the application made by the present appeal of now granting the insolvent his certificate; but deeming in this case of long protracted insolvency that the law will be sufficiently vindicated by suspension, it is therefore ordered and directed by the court, that the refusal of the certificate of Patricius William Welsh be altered into a suspension of the same, and that the granting of it be accordingly suspended for six months from the twenty-eighth day of February last.

His Honor said he had fixed the 28th February, as on that day the case was for the last time re-argued.

Notes

[1] This case is valuable for its legislative history of the then New South Wales Insolvency Act, (1841) 5 Vic. No. 17 (N.S.W.).

At this time, English law still distinguished between bankruptcy and insolvency. Bankruptcy in England was restricted to traders, and allowed relief from debts. Insolvency was available to everyone, but it allowed relief solely from debtors' prison, the debtor remaining liable to pay the debts. The 1841 New South Wales statute allowed bankruptcy relief to all classes of debtors, preceding English legislation by 20 years. See B. Kercher, Unruly Child: a History of Law in Australia (Allen and Unwin, Sydney, 1995), pp 112-118; John Gava, "The Revolution in Bankruptcy in Colonial New South Wales" in M.P. Ellinghaus, A.J. Bradbrook and A.J. Duggan, The Emergence of Australian Law (Butterworths, Sydney, 1989).

Published by the Division of Law, Macquarie University