§ 59. Security given by one of a firm. Secured creditors proof. If a partner gives, as a security for a debt of the firm, shares standing in his own name, the right of the creditor to prove for his whole debt and retain his security, depends upon whether, as between the partners themselves, the shares are assets of the firm or the separate property of the partners in whose name they stand. If they are assets of the firm, they must be so treated, even although the creditor was not aware of the fact when he took them as security (8). The rule as to what securities a secured creditor of a bankrupt is bound to value and deduct, on proving against the bankrupt estate, was recently fully considered and explained Ex parte East by the Court of Appeal in Ex parte West Riding Union Banking Riding Union Company re Turner (t). Two partners interested in equal shares Banking Com- in the partnership business dissolved partnership. They held and West pany re Turner. On a lease of the mills where they had carried on business. 113; 33 L. T. 37; and see also Re ner. (s) See Lindley, p. 1183; and see Ex parte Bowden, 1 D. & C. 135; and Ex parte Manchester and County Bank, 3 Ch. D. 481. (t) 19 Ch. D. 105; and distinguishing Ex parte Shepherd, 2 M. D. & D. 204; sub nom. Ex parte Plummer, and Ex parte English and American Bank, L. R. 4 Ch. 49. delivering judgment (u), said: "Our bankruptcy law (it is peculiar, but it is well established) treats the partnership estate as an entirely separate thing from the individual partner's estate, so that you have a separate estate of each individual partner, and a joint estate or a partnership estate of the firm. . . The case arose where a man who had a joint debt had a security on the separate estate of a partner, and the question was, whether that was within the rule which enabled a man to prove for the full amount of his debt without giving up his security when the property pledged was that of a stranger. It was held that it was, and for this very simple reason, that his giving up his security would not augment the joint estate. The converse case afterwards came to be argued, and it was decided in the same way. The whole thing was discussed in Ex parte Shepherd (x), and Lord Lyndhurst there stated what the principles are. (His Lordship lays down the same principle given in this judgment.) That was the principle upon which Ex parte Peacock (y) proceeded, and that case was decided first by Sir J. Leach, and afterwards by Lord Eldon, and has since been followed in Ex parte Bowden (z). Now this case is merely the converse of that, and the same principle applies to it. Now that being the principle, has it ever been extended beyond the case of joint and separate estate? So far as I am aware, never." His Lordship, the M. R., then recites the facts, and, after referring to the arguments, proceeds: "What rights the creditors may have had cannot affect the rights as between the bank and these two gentlemen. If the creditors had made them bankrupt, other considerations might have arisen ; but they have not. Only one has become bankrupt, and we are dealing with a proof against his estate, . . the result, therefore, is this, that we have a simple pledge of Turner's undivided moiety in the mill for 15,000l., in the terms of the contract, and Turner has become bankrupt; of course you cannot prove against Turner's estate without either giving up the security, which, if given up, would increase his estate by the value of it, or deducting the value." So where there was security upon both the joint property of the firm and the separate property of one of the partners, and a com § 59. ་ 8 59. Joint secured creditor. Proof by partner. Executors of deceased partner. position was accepted by the joint creditors from the firm, the security having been valued and the composition paid on the balance (but realised more than the valuation), upon seeking to retain the security against the debtors, it was held by the Court of Appeal that because of the receipt of the composition the creditors could not retain the security, although they were not bound to have deducted its value for the purpose of proving, and that no leave could be given to amend the proof (a). A joint creditor, holding security of the separate estate, is entitled to realise the security without proving upon the joint estate, or giving up his security, and in that case the joint estate should recoup the separate estate the amount applied in payment of the joint debt (b). Proof by Partners. It is an established rule that a partner in a bankrupt firm shall not prove in competition with the creditors of the firm, inasmuch as they are his own creditors, and he cannot be permitted to diminish the partnership assets to the prejudice of those who are not only creditors of the firm but also of himself (c). So also as the estate of a deceased partner is liable to the debts of the firm, it follows that so long as any debts contracted in the lifetime of the deceased partner are unpaid his executors cannot prove against the joint estate of the surviving partners for the amount due from them to his estate (d). As to cases of breach of trust (e). But an exception to the rule laid down in respect of proof by a partner arises, (1) Where the separate property of one partner has been fraudulently dealt with as the property of the firm; (2) Where there are two distinct trades carried on by the firm, and by one or more of the members of it with (a) Couldery v. Bartrum, 19 Ch. D. 394; 51 L. J. Ch. 265. (b) Ex parte Hooper, 25 Sol. Jour. 697; and Ex parte Dunlop, 28 L. T. O. S. 147. (c) Lindley on Partnership, p. 1187; and see Ex parte Sillitoe, 1 Gl. & J. 382; Ex parte Hargreaves, 1 Cox, 440. (d) Nanson v. Gordon, 1 App. Ca. 195; affirming Ex parte Gordon, 10 L. R. Ch. 160; see also Ex parte Butterfield, De Gex, 570; Ex parte Corbridge, 4 Ch. D. 246. And as to assets improperly employed, see Ex parte Garland, 10 Ves. 110. (e) Ex parte Garland, supra; Ex parte Westcott, 9 L. R. Ch. 626. distinct capitals; (3) Where a partner has obtained his discharge and has afterwards become a creditor of the firm (ƒ). This principle as to a partner not competing with his own creditors has no application as between one partner and the separate creditors of his co-partners. Administration. § 59. The joint debts being paid, and the liens of the individual partners on the partnership assets being satisfied, the surplus of the joint estate becomes divisible amongst the respective separate estates of the partners, in proportion to their respective shares in the partnership's property. This surplus having Surplus joint been distributed, loses its character as joint estate and becomes estate. to all intents and purposes, separate estate of the partners to whose credit it is carried. If any joint estate is carried to a separate estate before the joint debts are paid, and the partner's liens are satisfied, such joint estate will be ordered to be restored (g). The principles that govern the administration of separate Separate estate in an adjudication of a partner alone, are the same as estate. those which govern the administration of the separate estates of the members of a bankrupt firm, i.e., to prefer separate to joint creditors, as in the joint estate joint creditors are preferred; but there is this distinction, that the separate creditors of one partner are not creditors of the firm, whilst the joint creditors of the firm are creditors of each of the partners composing it, therefore, formerly the rule was to distribute the separate estate of each partner, pari passu, amongst his creditors, whether joint or separate (h). This rule was departed from by the provision in Sect. 103 of the 1869 Act, which is re-enacted by the present section. So after payment of separate creditors of each partner the Surplus surplus of his separate estate is carried to the credit of the separate joint estate, and if the partner is a member of several bankrupt firms, the surplus of his separate estate must be divided amongst (f) Lindley on Partnership, pp. 1190, et seq.; and see Ex parte Atkins, Buck, 479. (g) See Lindley on Partnership, p. 1194. (h) Ib., p. 1195. See as to post ponement of interest accrued subse- estate. 8 59. Exceptions to rule. Election and the right of. their respective joint estates, in proportion to the amount of the debts proved against them respectively (i). The rule that joint creditors of partners are not entitled to payment out of the separate estates in competition with the separate creditors, is subject to the following exceptions: (1) Where there is no joint estate (k). (2) Where the property of the firm has been fraudulently converted (?). (3) Where there has been a distinct separate trade in respect of which a separate debt has been contracted (m). Another rule is that a person to whom the members of a firm are bound jointly and severally is not allowed to rank as Double proof. creditor as against both the joint and separate estates, or any of them, he is, therefore, compelled to elect whether he will rank as a joint creditor, or as a separate creditor (n). So this rule is applicable though the creditor be a joint creditor by one instrument and a separate creditor by a distinct instrument (o). Proof in respect of distinct contracts. The joint and separate creditor ought, it seems, to prove against both estates, but elect which he will be paid out of before he takes a dividend (p). This rule, however, is modified by Rule 18, in Sched. 11 (taken from Sect. 37 of the Act of 1869), which regulates and permits proof in respect of distinct contracts as against the properties respectively liable upon such contracts, where the debtor is a member of two or more distinct firms, or is a sole contractor; therefore, where the members of a firm give a joint and several promissory note, the holder will be entitled to prove as well against the joint estate as against the separate estates of the partners (9). |