§ (1) All transactions by a bankrupt with any person dealing with him bonâfide and for value and without knowledge of his bankruptcy, in respect of property, whether real or personal, acquired by the bankrupt after the adjudication shall, if completed before any intervention by the trustee, be valid against the trustee, and any estate or interest in such property which by virtue of the enactments relating to bankruptcy is vested in the trustee shall determine, and, where any such transaction is a transaction in the course of any trade or business carried on by the bankrupt, it shall be valid against the trustee, whether or not the person dealing with the bankrupt had knowledge of the bankruptcy.
§ (2) In the event of a second or subsequent receiving order being made against a bankrupt, any property acquired by him since he was last adjudged bankrupt which at the date when the subsequent petition was presented had not been distributed amongst the creditors in such last preceding bankruptcy, shall (subject to any disposition thereof made by the official receiver or trustee in that bankruptcy, without knowledge of the presentation of the subsequent petition) vest in the trustee in the subsequent bankruptcy, but any unsatisfied balance of the debts provable under the last preceding bankruptcy may be proved in the subsequent bankruptcy by the trustee in the last preceding bankruptcy.
§ (3) Where the trustee in any bankruptcy receives notice of a subsequent petition in bankruptcy against the bankrupt, he shall hold any property then in his possession which has been acquired by the bankrupt since he was adjudged bankrupt until the subsequent petition has been disposed of, and if on the subsequent petition an order of adjudication is made he shall transfer 1219 all such property or the proceeds thereof (after deducting his costs and expenses) to the trustee in the subsequent bankruptcy.
§ (4) Where a person has been adjudged bankrupt, nothing in any enactment relating to bankruptcy shall affect the rights of any person making title in good faith and for valuable consideration, and without knowledge of the trustee's title, through or under a person who has acquired from the bankrupt property which the bankrupt himself acquired after he was adjudged bankrupt.
§ Mr. CASSEL
I beg to move in Sub-section (1) to leave out the words, "and without knowledge of his bankruptcy."
This Amendment raises the only point of controversy outstanding between the Government and myself upon this Bill, the other points having been substantially settled. It raises a question of very great importance. I am moving this Amendment at the instance of the Bar Council and the Incorporated Law Society. It relates to the after-acquired property of a bankrupt. The position of the law at present is that while all the property, both real and personal, of a bankrupt at the time of adjudication, passes to the trustee, so far as any property which is acquired after the adjudication, whether by the efforts of the bankrupt himself or otherwise, is concerned, if it is personal property the bankrupt can deal with it until the trustee intervenes. Any person dealing with the bankrupt before that intervention acquires a good title, if he deals with him bonâfide and for value, whether he knows of the bankruptcy or not. As this is an important point I should like to read to the House an extract from a judgment which makes that perfectly clear. It was read in very carefully considered words by the Master of the Rolls in the leading case upon the subject. He said:I am therefore prepared to lay down the proposition which has been agreed upon by us all, and which has been written down by my brother Lopes. It is this — until the trustee intervenes all transactions by a bankrupt after his bankruptcy with any person dealing with him bonâfide and for value in respect of his after acquired property, whether with or without knowledge of the bankruptcy, are valid against the trustee.It is perfectly clear, so far as the law now stands, that whether the person dealing with the bankrupt has knowledge of the bankruptcy or not, he acquires a good title so long as the transaction is bonâfide and for value. It was held in that decision that although it applied to leaseholds, it does not apply to freeholds. The result has been to give rise to great difficulty 1220 in dealing with titles to freeholds. Good titles could not be made and could not be forced upon the purchaser. A Departmental Committee, which the right hon. Gentleman appointed, reported that the law with regard to realty ought to be assimilated to the law with regard to personalty. The right hon. Gentleman has not followed that recommendation at All. It is true he has made the law of realty the same as the law of personalty, but he has altered the law of personalty and it is that alteration providing that it is only to apply in cases where the person has no knowledge of the bankruptcy that is so strongly objected to.
The result of it is to throw doubts on the title in dealing with leasehold. At all events, so far as leaseholds were concerned there was no doubt because whether the person had knowledge of the bankruptcy or not, so long as it was a bonâfide transaction for value a good title was acquired. It is true that at the end of the Clause there are words which protect transactions in the course of the trade or business of a bankrupt, but as a rule dealing with leasehold or freehold would not be in the course of the trade or business at all, and I am not sure-that this Section does not really render the position worse than it was before the Section was passed, in so far as it throws a new doubt upon a transaction relating to leases. It may be said it is desirable to prevent creditors being defrauded in any way but I do not think creditors really can be defrauded by transactions of this kind because they must be bona fide and for value and any transaction which had for its object the defrauding of creditors could not be said to be bonâfide. If there are a few cases where creditors who lose property if my Amendment were accepted would otherwise not have lost it, that does not for a moment weigh in the balance against throwing doubt on all transactions in connection with leasehold, because it may be that years after the transaction a man may be called upon to show he did not know he was dealing with a bankrupt. Even the executors of a deceased person dealing with leasehold may be called upon to show the same thing. It may be extremely difficult to do so, and for that reason, before accepting the title at, all elaborate searches of a most difficult character may have to be made. Searches as to whether a man with whom you are dealing is an undischarged bankrupt or not are extremely difficult searches to, 1221 make, especially where the name is a common one, and I submit that the law with regard to personalty ought to be left where it was before this Bill was introduced and the laws of realty ought to be assimilated to that law. It is not in any sense a party question and it affects all dealings with property in the future.
§ Mr. POLLOCK
I beg to second the Amendment.
I agree that the real importance of this matter is that the law should be definite and clear. For twenty-three years since Cohen and Mitchell was decided, it has been held to be good law. We have now a Clause which alters the law very vitally, and if we are going to alter it let us do it in a manner which will not leave matters more undecided and indefinite than they were before. I associate myself with all that my hon. and learned Friend has said. There are not many cases where this Clause really has application which are of very much moment. It is far better that transactions with a man who is not known to be a bankrupt, where the trustee does not intervene, should be certain and valid rather than that you should safeguard the possible rights of creditors in a bankruptcy which has passed into the past. The only danger is this: Supposing a man has become bankrupt and you want to do your best for his creditors. This Clause has reference not to the rights of the bankrupt at the time of his bankruptcy but solely to any property acquired after his bankruptcy and after the time when the creditors have really an interest in the estate. What does it provide? It provides, first of all, that dealings with him bonâfide for value are to be good. If they are bonâfide or for value, they ought to be given as great validity as possible, but when we come to the later lines of the Clause we get an absolute title given where the transactions are transactions in the course of any trade or business. That becomes a matter of fact, and you have to ascertain whether a particular transaction did fall within the ambit of the bankrupt's trade or business.
Take, for instance, real estate. If you are dealing with real estate, certainty ought to be your object. Assuming that you have a sale by a bankrupt of some real estate, who shall say whether that property is a matter which is dealt with by him in the course of his trade or business? Suppose that you are 1222 dealing with a shop in which he is carrying on business, and of the freehold of which he has become possessed. It may be absolutely essential that the business should be carried on, but at the same time it may be a matter of doubt as to whether that piece of real estate has any real connection with his trade or business. You open the door immediately to controversy, litigation, and dispute, and, of course, expense, in a case where expense should be avoided if possible. What my hon. and learned Friend desires is certainty in this matter. If you leave out the words which he suggests you should leave out, it seems to me that you narrow the possible sphere of controversy, and, instead of leaving the matter uncertain, you bring it back into a condition of certainty, and put realty and personalty in the same position, eliminating the uncertainty which necessarily involves some litigation, and probably prolonged controversy and considerable expense, which might amount to more than the subject matter is really worth. I do press that the Amendment should be accepted.
§ Mr. HILLS
I would also press the Government to accept the Amendment. I want to put to them the way in which cases of this sort work in practice. We have to protect the purchaser, so far as we can, without hurting the creditors. For the past twenty years the purchaser of leasehold or personal property is allowed to obtain the title, even though he knew of the fact that the man was bankrupt. It must be bonâfide and for full value. No inconvenience is caused to the public thereby, no one is defrauded and the machinery has worked well. A very different story has prevailed about real estate. Then there has existed a most intolerable nuisance for you had to make certain that your vendor was not an undischarged bankrupt. Unless you were certain you got no title. There was no means of ascertaining by a search who was an undischarged bankrupt. No special list is kept of them. When you bought land what you did was you went to the index to "Stubb's Gazette" and looked up the list of bankrupts of the same name as the vendor. In certain circumstances this was very cumbrous, and it was not very safe. Very often bankrupts have changed their names and they may have bought the property in another name. To a certain extent the new Clause will meet this in the case of the honest purchaser, for bonâfide value, without knowledge. But I would ask the 1223 Government to go further. If they introduce this Clause they will upset the present rule with regard to leasehold titles which are a very important class of property. Speaking for myself I would rather have the old law than this because you will have here two different sorts of searches for freeholds and leaseholds and you will unsettle leasehold titles. I have not heard any defence of this new Clause. All transactions are to be valid which are bonâfide for value and without knowledge of the bankruptcy if completed before the intervention of the trustee. Take the ordinary procedure of buying an estate. First of all a contract is signed. On that contract a ten per cent. deposit is paid. Assume that after that is done the trustee intervenes and stops the sale, I suppose that the deposit is forfeited. I do assure the right hon. Gentleman that very great inconvenience and hardship will be caused and this would not be a very big concession. I believe that the Chambers of Commerce all support the Amendment which I am supporting and I hope that the Government will give way.
§ The SOLICITOR-GENERAL (Sir John Simon)
No one will doubt that the question raised by this Amendment is not altogether an easy question, and of course is a question upon which there is nothing in the nature of party feeling. We all want to make the law in this regard fair and easy to work. But as the hon. Member who has just sat down very truly said we have to try to reconcile the interests of the creditors of the estate who have a right to get paid and the interests of business in dealing with the bankrupt. There is one point as to which everybody agrees. I do not think that it will be disputed that it is a great misfortune if the law is different with reference to personalty and realty and that we ought to make the law the same. It cannot be disputed that at present the law is different. It is a little difficult to understand it, and I am not aware of any Statute to make the difference, but it is a difference in fact. The difference is this: So far as realty is concerned, if I buy a freehold estate from an undischarged bankrupt, I may have paid him full value for it, I may be completely ignorant of the fact that he is a bankrupt, I may have dealt with him exactly as I would have dealt with anybody else, and if he then disappears, and I have paid the purchase money, then, though I 1224 think I have a full and complete title, I lose the whole of my property. That is so far as freehold estate is concerned. On the other hand, if it happens to be leasehold instead of freehold, suppose 999 years, then the law is that even although I knew he was a bankrupt all the time, and that he had not paid his creditors, and that his creditors were waiting for him to pay twenty shillings in the pound, it would not prevent my getting a good title, so long as the transaction satisfied other conditions.
The real question arises: How are we to get on common ground? The House will see that the Bill proposes to occupy common ground by taking a middle position. It says, on the one hand, that if you do not know that the man is a bankrupt at all, if you deal with him on the basis that he is not a bankrupt and that there is no reason for knowing it., then, with either personalty or leasehold, you get a title. On the other hand, if you do know he is a bankrupt it is sufficient to deprive you of a good title, whether personalty or freehold. That is not a very unreasonable view to take. I have in my hand a case—I need not mention the names—in which an undischarged bankrupt became entitled to a legacy of £500 under his mother's will, and he proceeded to assign it to his sister, who perfectly well knew that he was a bankrupt, and gave him £300 for it, and the result was that the creditors were deprived of the money. I have a series of cases which justify the urgent desire of many people that we should make this change in the law, and I suggest that the proposal of this Bill to take a middle position between the two, is perhaps, on the whole, not an unreasonable one, namely, unless you are innocent of knowledge that the man is a bankrupt you cannot hope to get a good title; but if you are innocent of the knowledge that he is a bankrupt, then whether it is realty or personalty you would be able to get a title.
So I come to the remaining point, which my hon. and learned Friend mentioned, that is the exception at the end of the Clause, which deals with transactions in the ordinary course of trade. It is not against the law for a bankrupt, once he has got rid of the disqualifications, to engage in these transactions. He is at liberty to start trading again. Otherwise you will practically penalise a man. That is the main reason for the exception. So 1225 long as he carries on ordinary trade he gives a good title. For these reasons I suggest, although the subject is full of difficulty, it is a proposal which would assimilate the law as between realty and personalty. I hope hon. Gentlemen opposite will let it go forward on that basis, and will give it every possible consideration. It has been very carefully thought out, and this appears to us to be the best way to do it.
§ Mr. H. TERRELL
I do venture to suggest that there has been no reason shown why this law relating to personal estate should be altered. It is a very small alteration; you are going to alter the law in regard to certain transactions, but not in regard to others. These are transactions which will be entered into in a bonâfide way for full value. If a man has been a bankrupt at one time and subsequently acquires property bond fide and for full value you are going to say that that transaction shall not operate and shall not be valid. I ask the Solicitor-General to consider a case which was before the Courts two years ago, where a man who had been a bankrupt some twenty years before had acquired some property after his bankruptcy. He got married. His wife knew that he had been a bankrupt many years before, but she settled some of her property on him at the time of the marriage. It was held by the Courts, following the accepted principle, that it was a good settlement. Undoubtedly the lady knew he had been a bankrupt, but she had honestly entered into this contract for the settlement of her own property.
If this Bill pass, without the Amendment proposed by my hon. and learned Friend, that transaction would be set aside by the Courts and would be void. The lady would have settled her own property, but the trustee in the bankruptcy, although the bankruptcy took place twenty years ago, would be entitled to come into occupation of that property. You, are going to alter the law in that respect, and however honestly these transactions may have been entered into, simply because the man was a bankrupt many years ago, they will be set aside and the trustee will be allowed to come in. These cases are founded upon a judgment by Lord Mansfield, and many of them have been reported. It is a very old rule which has been established and acted upon for over a century and now we are going to alter it for no reason, so far as I can see. It is not needed to do justice to anybody and 1226 it will not do the bankrupt justice. I see no reason why this rule should be altered or why all these transactions, which are not in the ordinary course of business, however bonâfide in character they may be, should set aside, or why you should overturn the whole bankruptcy laws in this respect. I think the House will realise that it will be an injustice to change the law in this way. The only people who will be benefited are trustees who have been lax in their duties. It may be a case in which the bankruptcy occurred twenty, thirty or forty years ago, and yet the transaction can be overturned and the person deprived of the property in the interest of a trustee who has been negligent in the discharge of his duties.
§ Sir FREDERICK LOW
I understand my hon. and learned Friend to say that the word "value" means "full value." That phrase is not in the Section and it is not in the law as it is at present. Subject to that, this is a very satisfactory change in the law. At present the distinction between real and personal property for this purpose is well defined, but the distinction is one which it is very desirable to put an end to. But in putting an end to that distinction, I would suggest to the Government that it is very undesirable that we should introduce a new restriction, affecting both realty and personalty. The use of these words "without knowledge of his bankruptcy" will put upon every person concerned the responsibility of finding out whether or not he has been a bankrupt. Speaking for myself, I do not think that is advantageous. Of course, if these words remain, then the observations of the learned Solicitor-General with regard to the latter part of the Clause are very much in point, but if these words do not remain then the latter part of the Clause will, of course, become unnecessary. I agree with the learned Solicitor-General that it is very important you. should not do anything which might have the effect of preventing an undischarged bankrupt from trading altogether, but if we agree to dispense with these words, "without knowledge of his bankruptcy," then the undischarged bankrupt will not be exposed, so far as this part of his transactions are concerned, to that danger.
I suggest to the Government that we should pause and consider very carefully indeed before we introduce this quite novel suggestion that, even with regard to transactions in personalty, persons dealing with an undischarged bankrupt should be bound 1227 to show a want of knowledge of his bankruptcy. The Clause, it seems to me, could be very much simplified in the direction proposed in the Amendments of the hon. and learned Member for St. Pancras (Mr. Cassel) by leaving out the words, "and without knowledge of his bankruptcy," and as a consequence, "and, where any such transaction is a, transaction in the course of any trade or business carried on by the bankrupt, it shall be valid against the trustee, whether or not the person dealing with the bankrupt had knowledge of the bankruptcy."
There was a point referred to by the hon. Member for Durham (Mr. Hills) on which I should like to say a word, and that is with regard to the completion of the transaction. It does seem to me that a difficulty might arise in the event of the trustee intervening between contract and completion. The position of a purchaser, or rather would-be purchaser, who had entered into a contract and paid a deposit might, under these circumstances, be very unenviable, and it does appear to be expedient to make some amendment in this Section with regard to that; but for the moment I understand we are not upon that point. I do suggest to the Government that the Amendment now under discussion is an Amendment which is right in the interests of persons who have been adjudicated bankrupts, and those who have dealings with them.
This is a question on which many attempts have been made to arrive at a satisfactory conclusion as regards the creditor and as regards the purchaser. I think the hon. Members who have spoken have taken too much the view of the purchaser, and have perhaps neglected somewhat the interests of the creditor. The matter is one to which the Department have given a great deal of attention, and there are cases which have been brought to their notice showing that unless the Clause as it stands is accepted a flaw might. occur, but I should like, if the hon. and learned Member would allow me, to have a further opportunity of considering this matter between now and the consideration of the Bill in the other House. I should like to point out to the hon. and learned Member that we have a good deal of evidence with regard to this particular proposal, but I should be very glad to consider the matter further with a real 1228 desire to meet the hon. and learned Member if we possible can.
§ Mr. CASSEL
In view of what the right hon. Gentleman has said, I ask leave to withdraw this Amendment.
§ Amendment, by leave, withdrawn.
§ Amendments made: In Sub-section (1), after the word "determine" ["the trustee shall determine"], insert the words "and pass in such manner and to such extent as may be required for giving effect to any such transaction."—[Mr. Cassel.]
§ At the end of Sub-section (1) add the words, "For the purposes of this Subsection the receipt of any money, security, or negotiable instrument from, or by the order or direction of, a bankrupt by his banker, and any payment made to, or by the order or direction of, a bankrupt, by his banker, shall be deemed to be a transaction by the bankrupt with such banker dealing with him for value."
§ At the end of Sub-section (1), after the words last inserted, add the words, "This Sub-section shall apply to transactions with respect to real property completed before the commencement of this Act in any case where there has not been any intervention by the trustee before that date."—[Sir Harold Elrerston.]
§ After Sub-section (1) insert, as a new Sub-section, "(2) Where a banker has ascertained that a person having an account with him is an undischarged bankrupt then, unless the banker is satisfied that the account is on behalf of some other person, it shall be his duty forthwith to inform the trustee in bankruptcy or the Board of Trade of the existence of the account, and thereafter he shall not make any payments out of the account except under an order of the court or in accordance with instructions from the trustee in bankruptcy, unless by the expiration of one month from the date of giving the information no instructions have been received from the trustee."—[Mr. Buxton.]
§ In Sub-section (2), after the word "petition" ["presentation of the subsequent 'petition"] insert the words "and subject to the provisions of Sub-section (1) of this Section."—[Mr. Cassel.]