§ 39. Bartrum. rule. thereof, as a security for a debt due to him from the debtor (u). And the principle that a secured creditor is bound to deduct the value of his security before he can participate in the dividends arising from the estate, is one well established in law. In a recent case (r), Jessell, M. R., thus clearly gave an exposi- Couldery v. tion of the principles relating to securities, "There came a class of what were called secured creditors. Our commercial The principle people dealt with secured creditors in this way, and commercial guiding the people understood business a great deal better than Judges; they said, 'You, a secured creditor, have got a security: your security is worth half the debt, take it for half the debt, and treat yourself as an unsecured creditor for the rest.' That is perfectly intelligible, and on that principle our bankruptcy law was framed. The security was realized. The creditor set it against the debt, and proved for the balance. Then there came cases in which it was not convenient to realize the security. It might be a doubtful security, or the creditor preferred to keep it. How was the security to be dealt with then? This contrivance was adopted instead of directing the security to be valued as it would be abroad, by an official of the Court the law allowed the creditor to value it himself, but said, 'Now mind, you shall never get any more out of it than the value you have put upon it.' That was the check which the law placed upon wrong valuations. The object was to get the creditor to value his security at as high a figure as possible, so that he might prove for as little as possible; and, therefore, when he was told, 'Whatever you value it at, you shall never get any more than that value for it,' of course, he would not undervalue his security, because if he did he would lose the benefit of it beyond that valuation. That was the theory of the bankruptcy law, and that is kept up at the present day" (y). And in the same case upon appeal, Lush, L. J., said : "A secured creditor may if he please abstain altogether from proving in the bankruptcy; he may rely on his security. If he wishes to take any part of the debtor's other assets he must, unless he has realized his security before he is allowed to prove or vote, put a value on his security and prove for the balance. If he values his security he is bound by that valuation, subject possibly to an alteration if on application for that purpose be made before the bankruptcy or liquidation proceedings have § 39. Rules as to proof by secured creditor. come to an end. However difficult it may be to do so, he must put a valuation on his security, and by that he is bound. If it turns out that the security produces more than the valuation, the creditor must hand over the surplus; if less, he must suffer the loss" (z). As we have seen (a), where the petitioning creditor is a secured creditor, he must either state that he is willing to give up his security for the benefit of the creditors in the event of bankruptcy, or give an estimate of the value of his security, and in the latter case petition for and in respect of the balance after deducting such value. So for the purposes of proof and voting, a creditor, unless he surrenders his security, must state in his proof the particulars of such security, the date when it was given, and the value at which he assesses it, and is entitled to vote only in respect of the balance (if any) due to him after deducting the value of the security; and if he votes in respect of his whole debt he shall be deemed to have surrendered his security, unless the Court on application is satisfied that the omission to value the security has arisen from inadvertence (aa). So far, with slight modification, the law is as it formerly was, but there have been introduced provisions enabling the trustee within twenty-eight days to redeem the security for the benefit of the creditors, with an addition thereto of twenty per centum, and enabling a creditor to correct within that time and before he receives notice an erroneous valuation, and make a new proof; and for the purposes of dividend there are the several Rules of Sched. 2, given elsewhere, as to estimating, surrendering, selling, and redeeming securities, and also for amendment of valuations which have been made. But an entirely new provision has been introduced into this Act by Rule 11 of Sched. I., which is as follows: "A creditor shall not vote in respect of any debt on or secured by a current bill of exchange or promissory note held by him, unless he is willing to treat the liability to him thereon of every person who is liable thereon antecedently to the debtor and against whom a receiving order has not been made as a security in his hands, and to estimate the value thereof, and for the purposes of voting, but not for the purposes of dividend, to (z) At p. 406. But see Société Générale de Paris v. Green, (H. L.), 75 L. T. 183; as to liability of secured creditor to account for excess in case of composition. (a) S. 6, sub-s. 2, and notes. deduct it from his proof." And it appears that the right of the trustee or the official receiver to redeem such security within twenty-eight days also applies under Rule 12 to such security by bill of exchange. Every person so antecedently liable is in fact a surety for the debtor, and although formerly the holder had a right of proof in respect of the entire sum, having been only obliged to deduct and expunge from his proof the amount of such payment, for the purpose of and at the time of receiving a dividend (b), now he must treat such antecedent liability (if such person antecedently liable has not had a receiving order made against him) as a security in his hands, and deduct the value for the purpose of voting but not for the purpose of dividend. The effect of these two rules would seem to be in every case to extend the creditor's obligation to deduct even collateral securities which hitherto has been contrary to the rule as generally understood (c), and where a secured creditor votes to give the other creditors the option to take over the liability of the sureties as assets, but inasmuch as such liability would after all be a very doubtful advantage, as against the more tangible consideration to be paid for it (viz., the estimated value), it is more than questionable if it will be deemed an advantage at all. At any rate, the chief benefit will be derived from the more equal voice, for the purposes of voting, of a secured creditor holding bills of exchange, and the creditors not so secured (d). The mere carrying in of a claim as a judgment creditor in an action of detinue has been held not to be a waiver of the creditor's right to the property (e). And where a first mortgagee elects to give up his security altogether, and to prove for the mortgage debt, the security given up does not merge in the equity of redemption for the benefit of a second mortgagee, but is available in the hands of the trustee in bankruptcy for the creditors (ƒ). § 39. Where there has been a loan of money, with a rate of interest Bovill's Act. varying with the profits, so as to compel the lender to be post poned within Bovill's Act (g), the Act does not, if he has also a (b) Ex parte Brett, 40 L. J. Bank. 55; Re Barned's Bank, L. R. 10 Ch. App. 198. (c) And see Ex parte Schofield re Firth, 12 Ch. D. 337. (d) Sched. 2, r. 11. (e) Ex parte Drake re Ware, 5 R § 39. Security of partners. mortgage to secure the loan, prejudice the security or deprive him of his ordinary remedies (h). Where there are cross securities, as where one has guaranteed a borrower, and such guarantor holds securities of the borrower, the principal is allowed to prove without deducting the security (¿). A secured creditor is in no way bound by a debtor's estimate of the value of his security (k). Where two partners interested in equal shares dissolved partnership, on such dissolution the assets, other than a lease and fixtures of the place where the business was carried on, were divided equally between them. The business was afterwards carried on by one, and on deposit of the lease by both, as security for the debts of the continuing partner, on his becoming bankrupt it was held that, as to a moiety of the lease and fixtures, the security was on the separate estate of the bankrupt, and that the creditor was bound to deduct the Accommoda- moiety of the value of such lease before proving (1). When a tion of drawer. bill is accepted for the accommodation of the drawer and deposited by him as a security for a debt less than the amount of the bill, the holder is entitled to prove, on the bankruptcy of the acceptor, for the full amount of the bill, though he cannot receive dividends in excess of the debt due to him by the drawer (m). Where the security is not in respect of the property of the estate against which the proof is tendered, as, for instance, where it is the security of a third person, or of the bankrupt and a third person, the creditor may prove for the whole debt, and need not deduct the security (n), provided, however, he does not receive in the whole more than 20s. in the (n); and if he has already, before proof, realized the security, he can only prove for the balance (6). Collateral securities. As to who are secured creditors, see Sect. 9, and notes. (h) Ex parte Sheil re Lonergan, 4 Ch. D. 789; 46 L. J. Bank. 62. (i) Ex parte Braithwaite re Yewdall, 46 L. J. Bank. 87. (k) Ex parte Hodgkinson re Bestwick, 1 Ch. D. 702; 45 L. J. Bank. 78. (1) Ex parte West Riding Union Banking Co. re Turner, 19 Ch. D. 105; 45 L. T. 456. (m) Ex parte Newton; Griffin ex parte re Bunyard, 16 Ch. D. 330; 50 L. J. Ch. 484. (n) Ex parte Adams, 3 M. & A. 157; but see Sched. I. r. 12. (0) Ex parte Todd, 2 Rose, 202; Ex parte Prescott, 4 D. & C. 23; Ex parte Watson re Walker, 42 L. T. 516. debts. Bankruptcy s. 32. 40. (1.) In the distribution of the property of a 8 40. bankrupt there shall be paid in priority to all other Priority of debts,(a.) All parochial or other local debts due from the bank- Act, 1869, rupt at the date of the receiving order, and having become due and payable within twelve months next before such time, and all assessed taxes, land tax, property or income tax, assessed on him up to the fifth day of April next before the date of the receiving order, and not exceeding in the whole one year's assessment; (b.) All wages or salary of any clerk or servant in respect of services rendered to the bankrupt during (c.) All wages of any labourer or workman, not exceed- (2.) The foregoing debts shall rank equally between themselves, and shall be paid in full, unless the property of the bankrupt is insufficient to meet them, in which case they shall abate in equal proportions between themselves. (3.) In the case of partners the joint estate shall be applicable in the first instance in payment of their joint debts, and the separate estate of each partner shall be applicable in the first instance in payment of his separate debts. If there is a surplus of the separate estates it shall be dealt with as part of the joint estate. If there is a surplus of the joint estate it shall be dealt with as part of the respective separate estates in proportion to the right and interest of each partner in the joint estate. (4.) Subject to the provisions of this Act all debts proved in the bankruptcy shall be paid pari passu. |