Chap. XXXI. Inasmuch as a bill of sale transfers the property in the mortgaged chattels to the holder, it is no fraudulent preference for the grantor to give to the holder notice of impending bank- § 2 (iii). ruptcy, in consequence of which the holder seizes and sells the chattels (o). Notice to secured creditor of bankruptcy. A trust deed by a partner assigning all his property for his impending separate creditors is a fraudulent preference (p), though his Trust deed partnership assets are not specifically mentioned in the deed (q). by partner. The creditor cannot apply the principle of consolidation (r). clause. An attornment clause in a mortgage, so framed as to amount Attornment to a mere device to enable the mortgagee to obtain thereby a preference over the other creditors on bankruptcy, is a fraudulent preference (s). So a licence in a builder's contract to seize materials on Licence to seize. bankruptcy may be void (t). after arrest. No payment or composition made or security given after Payments arrest made under sect. 25 of the Bankruptcy Act, 1883, is exempt from the provisions of the Act relating to fraudulent preferences (u). to be taken. When the only result of recovering property delivered to a When procreditor by way of fraudulent preference would be to benefit a ceedings are secured creditor, and not the creditors generally, the trustee ought not to take proceedings or lend his name for that purpose (x). given pending After composition resolutions have been passed and re- Securities gistered (y), a debtor cannot, before completion of the com- a composition. position, enter into a valid agreement with a creditor who is bound by the resolutions to pay him his debt in full, even though the agreement is made for valuable consideration, such as an agreement by the creditor to give fresh credit to the debtor (z). Securities given by a compounding debtor to a creditor before Secret the passing of the composition resolution without communication (0) Exp. Symmons, Re Jordan, 14 Ch. D. 693, C. A. (p) Exp. McLean, 24 L. T. 144. (q) Exp. Trevor, 1 Ch. D. 297. (r) Exp. Hodgkin, Re Softley, L. R. 20 Eq. 746. (8) Exp. Williams, Re Thompson, 7 Ch. D. 138, C. A.; Exp. Jackson, Re Bowes, 14 Ch. D. 725, C. A. (t) Exp. Jay, Re Harrison, 14 Ch. D. 19, C. A.; but see Re Weibking, (1902) (u) See also the Bankruptcy Act, (x) Willmott v. London Celluloid Co., 34 C. D. 147. (y) Compositions are now regulated by sect. 3 of the Bankruptcy Act, 1890, 53 & 54 Vict. c. 71. (z) Exp. Barrow, Re Andrews, 18 Ch. D. 464, C. A. securities. Chap. XXXI. § 2 (iii). Agreement to the other creditors, by which the creditor obtains preference over them, are void (a). It makes no difference that the fraudulent creditor is surety for the composition (b); and a release contained in the comwith surety. position deed is binding upon the fraudulent creditor (c). Agreement with third party. Recovery of amount secured. Security to particular creditor in So, also, a similar agreement with a third person would be void. So where a banker, after proceedings for liquidation had been commenced against a customer, took from the customer's brother, without the knowledge of the other creditors, a guarantee that the loss to the banker should not exceed 2,000l., so as to induce the latter not to oppose the composition, it was held that the arrangement could not be sustained (d). Where, however, the goods of a debtor were, by the terms of a composition, left at his disposal, a deposit of the goods as security with a person who guaranteed an instalment of the composition, was upheld (e). The trustees of the bankrupt can recover the amount of the fraudulent security; and the debtor also can recover the amount from the creditor if he is compelled to pay the fraudulent security in the hands of a third party (ƒ), and even if he has paid the money under the fraudulent agreement to the creditor himself (g). Where a security is given to some creditors for more than the composition, the executing creditors are not bound by the composition. composition (h); and the secured creditor can neither recover upon the fraudulent security nor share in the composition (i). Indeed, it would seem that a creditor, who has practised a fraud of this sort on the other creditors, will not, if the composition is not paid and the debtor becomes bankrupt, be allowed to prove under the bankruptcy for either his original debt or the composition (k). (a) Mallalieu v. Hodgson, 16 Q. B. 711; Dauglish v. Tennant, L. R. 2 Q. B. 49; Exp. Phillips, Re Harvey, 36 W. R. 567; Exp. Milner, 15 Q. B. D. 605. (b) Wood v. Barker, L. R. 1 Eq. 139; Bissell v. Jones, L. R. 4 Q. B. 49. (c) Exp. Oliver, De G. & J. 354; Mallalieu v. Hodgson, 15 Jur. 817, Q. B. (d) McKewan v. Sanderson, L. R. 20 Eq. 65. (e) Exp. Burrell, Re Robinson, 1 Ch. D. 537, C. A.; but see Exp. Allard, (f) Horton v. Riley, 11 M. & W. 492. (g) Horton v. Riley, sup. ; Atkinson v. Denby, 7 H. & N. 934; Lensberg's Policy, 7 Ch. D. 650. (h) Dauglish v. Tennant, L. R. 2 Q. B. 49; Cullingworth v. Lloyd, 2 Beav. 385; Wood v. Barker, L. R. 1 Eq. 139. See Robs. Bky. 249, ed. 4. (i) Howden v. Haigh, 3 P. & D. 661. (k) Re Cross, 4 De G. & S. 364, note. And where a debtor obtained the consent of one of his creditors to a composition by a secret promise to pay his debt in full, which promise he performed and afterwards became bankrupt, the creditor was not allowed to prove a new debt, without first deducting the sum so paid to him beyond the former composition (1). Chap. XXXI. § 2 (iii). sect. 49. The protection afforded by sect. 49 extends to a payment in Extent of good faith and for valuable consideration, although the transac- protection of tion would otherwise be a fraudulent preference and an act of bankruptcy (m). Mortgages, whether of the whole of a debtor's property or Mortgage to secure present only of a part thereof, given to secure an actual present advance advance. only, are clearly protected by sect. 49 of the Act, provided they are given previously to the date of a receiving order made against the mortgagor, and that the mortgagee has not notice of any available act of bankruptcy (n). And this is so where the advance is made on the same day as the receiving order, though an hour or two earlier (o). But though a contract to make advances is protected, a payment thereunder does not necessarily share in such protection (p). The notice intended by the Act is actual notice of a complete Notice. act of bankruptcy (9). whole A bonâ fide sale by a trader of all his stock has long been held Bonâ fide to be valid as against his trustee in bankruptcy, if the purchaser mortgage of was ignorant of any fraudulent intention on the part of the property. trader (r), although the purchaser had knowledge that an execution is intended (s); and this principle was extended so as to render valid a bonâ fide assignment by way of mortgage of all a person's property to secure a present advance of which the mortgagor obtains, at the time, the full benefit (t). There must be an equivalent (u), but if the security is for a (1) Exp. Minton, 1 M. & A. 440. (m) Exp. Blackburn, W. N. (1884) 131, C. A.; Shears v. Goddard, (1896) 1 Q. B. 406. (n)"Available act of bankruptcy" means any act of bankruptcy available for a bankruptcy petition at the date of the presentation of the petition on which the receiving order is made. See sect. 168 of the Act of 1883. (0) The Thames, 63 L. T. 353. (p) Powell v. Marshall, (1899) 1 Q. B. 710, C. A. (q) Conway v. Nall, 1 C. B. 643; Bird v. Bass, Man. & Gr. 143. (r) Shears v. Goddard, (1896) 1 Q. B. 406. (8) Wood v. Dixie, 7 Q. B. 892; (t) Whitwell v. Thompson, 1 Esp. 68. (u) Hutton v. Cruttwell, 1 E. & B. 15; Chap. XXXI. § 2 (iii). Mortgage to secure existing debt and present advance. Test of bona fides in such cases. present substantial advance, it is not necessary that the full value of the property be advanced (x). It has been held that a bonâ fide sale for a present consideration will not be invalid as a fraudulent conveyance simply because the vendor intends to misapply the purchase-money or to abscond with the money, and so defraud his creditors, provided there is no fraudulent collusion on the part of the purchaser (y); and the same principle applies in the case of a mortgage (z). A security given bonâ fide for a present advance will not be invalidated merely because it extends to secure an antecedent debt (a). But where a mortgage is given to secure an existing debt and also a further present advance, questions of complication and difficulty sometimes arise as to the bona fides of the transaction. In the case of a trader, the validity of the transaction in bankruptcy will depend on whether the present advance is an equivalent by enabling the debtor to carry on his business. "The greatness or smallness of the advance made by the lender to the grantor, though to be taken into consideration, is not the real test. The real test is (whatever the amount of the advance compared with the antecedent debt was), did the lender intend that the advance should enable the debtor to carry on his business, and had he a reasonable ground for believing that it would enable him to do so?" (b). In such a case, the Court will not go into the intention of the debtor, nor consider that the result of the transaction was in fact that the business could not be carried on (c). So, conversely, the security will be bad if it appears on the evidence that the lender advanced his money with the purpose not of enabling the debtor to meet his engagements, and, if a trader, to continue his business, but of giving the lender a security in preference to other creditors (d). If the creditor makes a present advance with the bona fide (x) Bittlestone v. Cooke, sup. ; Allen Y. Bonnett, L. R. 5 Ch. 577. (y) Exp. Stubbins, Re Wilkinson, 17 Ch. D. 58, C. A. (z) Re Colemere, L. R. 1 Ch. 128. (a) Pennell v. Reynolds, 11 C. B. N. S. 709, 722; Shrubsole v. Sussams, 16 C. B. N. S. 452; Lomax v. Buxton, L. R. 6 C. P. 107. (b) Exp. Johnson, Re Chapman, 26 Ch. D. 338, C. A., per Cotton, L. J., at p. 346. See also Exp. King, Re King, 2 Ch. D. 256, C. A.; Exp. Ellis, 2 Ch. D. 797, C. A. These three cases were approved in Admor.-Gen. of Jamaica v. Lascelles, (1894) A. C. 135. (c)_Exp. Johnson, Re Chapman, 26 Ch. D. at p. 347. (d) Re Juleff, Exp. Hole, W. N. (1883) 32; Re Jukes, (1902) 2 K. B. 58. intention of enabling the debtor to carry on his business, the security will not be avoided, though the creditor is aware that the debtor intends to apply the money advanced to pay off an existing debt so as to relieve the estate from distress or other proceedings (e). So it was held that an actual sale of goods for money, the vendor intending to make a fraudulent preference with the purchase-money, was not a fraudulent transfer, although the purchaser knew of the transaction (ƒ). It may be, in some cases, that the relief of a debtor's estate from distress or other pressure affords the only prospect of his being able to carry on his business. Chap. XXXI. § 2 (iii). advance. A present advance, if made bonâ fide by a creditor to enable Smallness the debtor to carry on his business, need not be of large amount of present in proportion to the subsisting debt or to the property mortgaged (g). The smallness of the amount of the advance, however, affords strong evidence that the principal object of the parties in the whole transaction was not to enable the debtor to continue his trade but to secure to the creditor the repayment of his past advance (h). material agreed. Conversely, it would seem that the fact that the further Effect where advance is of a substantial amount will be regarded as affording advance is a presumption that the object was to enable the debtor to continue his trade, so as to support the mortgage (i). And if this is the case, the transaction will be supported, though no advance is actually made at the time, and though the security merely recites an agreement, but contains no covenant by the creditor, to make the further advances which are made afterwards (k). The fact that future advances were contemplated will not Mere consuffice, if there is no agreement to that effect (1), but it is templation of sufficient if such agreement is contained in the assignment, sufficient. although the mortgagee does not sign it (m). (e) Whitmore v. Claridge, 31 L. J. Q. B. 141; Hutton v. Cruttwell, 1 E. & B. 15; Re Colemere, L. R. 1 Ch. 128; Exp. Reed, Re Tweddell, L. R. 14 Eq. 586. (f) Exp. Stubbins, Re Wilkinson, 17 Ch. D. 58, C. A. (g) Exp. Threllfall, Re Williamson, 35 L. T. 675; Exp. Evans, Re Edwards, 39 L. T. 364. (h) Exp. Fisher, Re Ash, L. R. 7 Ch. 636, 644; Exp. Ellis, 2 Ch. D. 797, C. A. See Exp. Winder, 1_Ch. (i) Exp. Sheen, Re Winstanley, 1 Ch. (k) Exp. Winder, Re Winstanley, 1 Ch. D. 290. (1) Exp. Dann, Re Parker, 17 Ch. D. 26, C. A. (m) Exp. Wilkinson, Re Berry, 22 Ch. D. 788, C. A. advance not |