OUTER HOUSE, COURT OF SESSION [2008] CSOH 11
A316/06	OPINION OF LORD McEWAN in the cause GILLIAN THOMPSON, Accountant in Bankruptcy Pursuer; against STELLA RAE SNEDDON and THE KEEPER OF THE REGISTERS OF SCOTLAND Defenders: ________________

Pursuer: Duthie; Burness, W.S.,

Defenders: MacKenzie; Blacklocks

18 January 2008

[1] The case before me is at the instance of the Accountant in Bankruptcy who is the permanent trustee on the sequestrated estate of one Matthew Sneddon (the son) of 35 Peploe Drive, Glenrothes. The first defender is his mother to whom, in June 2005, Matthew disponed his half share of the Glenrothes property for no consideration. On 10 June it was registered in the Land Register of Scotland kept by the second defender (for whom there was no appearance in this action).

[2] The Trustee challenges the alienation. The mother pleads one of the statutory defences. The Trustee has responded by saying that the mother has made no relevant averments in her defence. The only contentious issue before me related to the Glenrothes property. Put simply, unless there are relevant averments that on 10 June the son's assets exceeded his liabilities the mother's defence cannot succeed.

[3] I should record here that I was referred to a number of authorities, a few in detail, but others only in passing or as examples in other fields. I list them as follows. Goudy on Bankruptcy (4^th edn); Erskine, Institute iii, 6,8; Bell's Commentaries both volumes; Wilson, Scottish Law of Debt; McBryde on Bankruptcy; Miller v McIntosh (1884) 11 R 729; Hodge v Morrison (1883) 21 SLR 41; Stuart's Trustees v Chung 1991 SLT 472; S.N.E.R. v Napier (1859) 21 D 700; McGruther v Walton 2004 SCLR 319; HMA v Salmon & Moore 1998 SCCR 740; Phillips v Brewin Dolphin Ltd [2001] 1 All ER 673; re Thoars [2003] 1 BCLC 499.

[4] Counsel for the first defender (the mother) said that he had averred that the debtor (the son) was solvent at the date of alienation in June 2005 and that there were no relevant averments to counter that. Any liability in a Court action producing a decree by default in August 2005 was until then an illiquid claim. The sequestration did not follow until November and there was no Trustee until December. Counsel referred me to his averments about the son's assets and to section 34 of the Act.

[5] There required to be a proof before answer into the facts of the Sheriff Court case. The test had to be absolute insolvency. The case of Phillips was after trial. He also referred to Wilson on Debt, Bell's Commentaries and Short's Trustees v Chung. Counsel relied on the carefully reasond decision of Sheriff Principal Dunlop in McGruther v Walton (also decided after proof). He distinguished Miller as a case involving practical insolvency. If it was, there was no warrant for imparting any legal fictions. In any event in the present case it was a fiction too far. (Counsel referred by analogy to the criminal case of Salmon and Moore). The English cases were complicated, depended on different statutory provision and had to be treated with caution. Even the case of Thoars was sent for trial.

[6] Counsel referred me to various passage in McBryde and concluded by arguing that it was a question of mixed fact and law whether the son was absolutely insolvent in June. I should allow a proof before answer with all pleas outstanding.

[7] Counsel for the pursuer argued thus. The issue concerned the claim and counterclaim in the Sheriff Court action. The debtor and his father were partners in a firm which was suing people called Taggart for fees worth £20,000. They, in turn, counterclaimed for £30,000. In August at a proof diet there was no appearance for the firm and decree was granted for the sum counterclaimed. The question was whether that sum ascertained in August could figure in the alleged solvency in June. Clearly if it could the debtor was insolvent at the time of the alienation to his mother. Whether the debt was illiquid or contingent to begin with, once decree passed a liquid sum became known and the authorities say that such a sum was drawn back to the date of the alienation when solvency had to be determined.

[8] With no definition of liabilities in the 1985 Act, the proper test under section 34 was a "balance sheet" test. The claim and counterclaim would have to feature in that. Miller v McIntosh was clear authority for that even though the value of the claim had to be quantified later. Section 34 was to protect creditors and had to include pending claims. By the same reasoning the £20,000 would become a nil value after August. Counsel referred me to Erskine at 835 and Goudy at page 181. He also drew a distinction between claims which were illiquid and those which were contingent. He referred me to the English cases of Phillips and in re Thoars which he said showed a reasoning consistent with his argument that the purpose of section 34 was to protect net assets. If the Court debt was not a section 34 liability then he could defeat his creditors. The claim was in existence at the date of alienation and the decree simply made it liquid. There was no need for a debt to be liquid for it to be considered on a "balance sheet" test.

[9] The case of McGruther was not in point as it dealt with contingent assets not illiquid ones. There was no need to relitigate any of the Sheriff Court matters which were satellite litigation. The decree was final and was admitted.

[10] Counsel said that decree should be given in terms of the first and second conclusions and certain averments in Answer 6 should be excluded from probation.

[11] It is important to note what are the issues on Record. In the first place it is averred and admitted that the disposition by the son to the mother of the Glenrothes property was made for no consideration (Cond 3 and Answer 3). In Answer 5 the mother makes averments about the Falkirk property and states a figure of equity of £15,810 to which the son and his wife were entitled to one half. The pursuer does not admit these averments. Then in Article 6 the pursuer avers that the son granted a security over the Falkirk property for a sum of money in favour of his mother. The pursuer avers it was granted for no consideration and was a fraudulent preference. The mother denies this and alleges that proper consideration was given in the shape of an undertaking to fund the refurbishment of the Falkirk house. Clearly on that one point there is an issue to try and a proof will be required. Examples were either cited to me or produced to me where the Court has undertaken the exercise of seeing whether value has been given. Stuart's Trustees v Chung is a good example as is Hodge where different findings were made within a family as to what consideration had been given.

[12] What then is said about the Sheriff Court action involving the firm and the Taggarts. The pursuer (Cond 5) says that after sundry procedure, the counterclaim plus interest and expenses was awarded against the firm. For present purposes that equates to a decree against the son. In Answer 5 the granting of the decree is admitted. An explanation is later given but is only a kind of plea in mitigation for the firm's failure to appear at the proof whereby decree by default was granted. It is nowhere suggested that the firm had any defence then or now to the counterclaim. Nor is it said that any attempt was made to appeal the decree, thus reponing the firm. Accordingly on the pleadings there are no matters which could form the subject of any inquiry into the Sheriff Court action. The facts, the sums and the dates are admitted.

[13] What the mother does say is that the Sheriff Court decree in August cannot be taken account of in June, and because of the statement of assets narrated on pages 10 and 11 the son was not insolvent and the section 34 defence is made out.

[14] Section 34 of the Bankruptcy (Scotland) Act 1985 provides inter alia that a trustee in bankruptcy may challenge any alienation of property by the debtor in certain circumstances up to five years before the date of sequestration (subsections (1) to (3)). In the present case it is not disputed that the pursuer has title to challenge the alienation surrounding the Glenrothes property.

[15] However, in the present case the defender seeks to uphold the alienation in respect of Glenrothes by relying on what I call the section 34(4) defence. It provides inter alia as follows: "...(4)..., but the Court shall not grant such a decree if the person seeking to uphold the alienation establishes ...(a) that immediately, or at any other time, after the alienation the debtor's assets were greater than his liabilities; or (b) that the alienation was made for adequate consideration;.....". In this case the defender (the mother) founds on section 34(3)(a) in relation to Glenrothes and section 34(4)(b) in relation to Falkirk.

[16] Before me as I have said the only issue was whether the son was insolvent on the due date 10 June when the half share in Glenrothes was disponed to his mother for no consideration.

[17] I now turn to consider the cases.

[18] Miller v McIntosh was the authority mainly founded on by the pursuer. In that case the pursuer was the Trustee on the estates of a man Chalmers who was a Commission agent. Chalmers was the defender in an action of damages at the instance of McIntosh. Though the action was intimated to him the Trustee declined to sist himself. McIntosh lodged a claim in the bankruptcy for the whole sum sued for (£3,000). Chalmers carried on the defence of the action without finding caution. Decree was granted for a modest sum (£20) together with significant expenses and dues of extract. The Trustee refused to admit most of the claims except the £20.

[19] The Sheriff substitute found the Trustee liable to rank the defender in terms of his claim and his decision was upheld by the First Division. Referring with approval to a passage in Erskine the Court held that although the amount of the claim was disputed, once it was calculated it was drawn back in time to when the claim was made.

[20] There was thus a claim at the date of sequestration. It depended on an action. That action was liable to two defences, one that nothing was due or that the amount claimed was too large. The debt was not contingent. It was not future as it was presently due. Because it was presently due though not fixed till later the defender was entitled to rank as at the date of sequestration.

[21] The case is referred to without criticism in Goudy and, so far as I am aware, has never been the subject of any disapproval.

[22] Salmon and Moore is not in my opinion in point here. In the first place it is a criminal case and is concerned with a set of presumptions necessary to enforce the idea of "possession" in the context of the Misuse of Drugs legislation. I thought then and now that the case produced some correct but very hard law especially for one of the appellants over whose trial I presided. It is no help in the present argument.

[23] Hodge and Short's Trustees are, as I note, examples only. It is of some interest to read the vigorous dissent on appeal in Hodge. They are only relevant to a section 34(4)(b) type of case.

[24] S.N.E.R. v Napier is in my view not in point. It did not involve insolvency. It concerned an admitted claim for carriage of fish by rail against which was set off an illiquid claim for damages for an alleged failure to forward the fish by sea to London. The facts are wholly different.

[25] Different too is McGruther v Walton. Although section 34(4)(a) was in issue, the question was how to value pension policies. Two different values were possible with differing results in the solvency question. There was a possibility of election to take part, which the bankrupt had declined. There had been a proof but the evidence did not show in what form the fund would be available to the bankrupt either as part capital or annuity or what value either would have. It was clear that none of the money was available to the diligence of creditors. In these circumstances it would not be included in any calculation of solvency.

[26] That is sufficient analysis of the Scottish cases. It has to be remembered that not all of them raise the same point and the proper answer may differ depending on the relationship of the parties to the action (eg. S.N.E.R. did not concern insolvency). I am quite clear that absolute insolvency is the proper test and that a "balance sheet" approach has to be adopted. It is for the bankrupt relevantly to aver and prove solvency upon a balance of his assets when a challenge is made by the trustee representing creditors. For reasons I have given that has not been the subject of relevant averments here.

[27] The two English cases can be looked at briefly. Phillips was decided after proof. It concerned the current valuation of certain Company transactions and the valuation of a particular covenant concerning a sublease of computer equipment. It is clear the facts were wholly different to the present issues. It was only referred to for how to value against a contingency occurring after the valuation date. The House gave reality precedence over speculation. The case was used by the pursuer as an example of reasoning by analogy. Here valuation or its methods is not really in issue since the Court decree on the counterclaim is ipso facto the valuation of the debt. Thoars concerned transaction at undervalue. The matter was a preliminary issue and was, in the event, sent for trial. It concerned whether proper consideration had been given for an assignment of an insurance policy made less than two months before the assignor died of a cause not expected or anticipated. Again the facts are wholly different and do not assist my decision here.

[28] In my opinion the pursuer is correct in her argument. On the authority of Miller I am of the view that where a balance sheet test is posed at 10 June the claim and counterclaim were assets and debts which had to be included. Though depending upon an action yet to be resolved, they were in law assets held or debts due at that date. All that had then to happen was for them to be quantified. In the event in August the asset became nil and the debt a sum more than any other assets held by the son at the relevant time.

[29] It does not matter that initially the debt was due by a firm in which the son was a partner. No issue was raised over this, nor was I addressed about it.

[30] In the result, the defender has made no relevant averments of a section 34(4)(a) defence. I have already remarked on the detail of the pleading and how no attempt is made to challenge the Sheriff Court proceedings. I shall sustain the pursuer's first and third pleas-in-law granting decree consequent thereon in terms of the first and second conclusions. I shall sustain pro tanto the second plea-in-law in relation to Glenrothes, deleting from probation the words in Answer 6(C) "...Explained and averred that the debtor's assets exceeded his liabilities on 22 August 2005. Reference is made to answer 5 hereof .....". Thereafter, before answer I will allow a proof relating to the Falkirk property.