In 1901 Richard Melton and another guaranteed to a Bank his son Arthur’s debts up to andpound;500. Richard died survived by his widow, Arthur and three daughters, giving his real estate to his widow for her life, with remainder to his four children in equal shares. Arthur mortgaged his share of the estate to the bank to secure his account, but was later adjudicated bankrupt, owing andpound;1,057. The bank valued its security at andpound;158 and proved in Arthur’s bankruptcy for the rest, receiving andpound;494. The bank made demand under the guarantee. Richard’s executors raised funds by mortgaging the testator’s real estate and paid andpound;313 to the bank (andpound;250 + andpound;63 by way of interest). The bank, as mortgagee of Arthur’s share of the estate, assigned that share to Arthur’s wife, Frances. The testator’s widow died in 1916. The real estate was sold and the executors had some andpound;1,598 available for distribution amongst the three daughters and Frances (as assignee of Arthur’s share). The question arose whether the andpound;313, paid by the estate under the guarantee, had to be brought into account as against Arthur’s share. The effect, on the figures, would be that Frances would receive andpound;164.75 (1/4 of {andpound;1,598 + andpound;313} – andpound;313) rather than andpound;399.50 (1/4 of andpound;1,598). At first instance, Justice Astbury held that the andpound;313 paid under the guarantee must be brought into account and retained as against Arthur’s share, rejecting the submission that the executors were (in effect) seeking to prove in Arthur’s bankruptcy – which, he accepted, they would be precluded from doing by the rule against double proof. The question whether the executors could have proved in respect of their right of indemnity as sureties was not the determining factor. The true principle was that the testator’s estate having satisfied its debt (under the guarantee) neither the principal creditors (the bank) nor the trustee in bankruptcy could demand payment of more than the unpaid amount of the bankrupt-trustee-beneficiary’s share.
Held: The appeal failed. The issue was: ‘The appellant [Mrs Frances Melton] claims that she is entitled to receive one fourth of this sum [andpound;1597 18s 10d], say about andpound;400, without any deduction in respect of the andpound;313. Against her it is said that the estate consists not only of the sum of andpound;1600, but also of the andpound;313 which the estate has paid on behalf of the son, and in respect of which the son Arthur was indebted to his father under the agreement that the debtor must indemnify the surety for the obligations of the surety. Therefore, treating the andpound;1600 and andpound;313 as making roughly andpound;1900, the trustees say to Mrs [Melton], ‘You are entitled only to one fourth of about andpound;1900, of which you have in hand andpound;313′.’ He answered: ‘The fund treated as being available for division must first be increased by the amount which Arthur owes, and then his assign is entitled to one fourth of that entire amount subject to this, that she must give credit for the andpound;313 that he has already notionally received.’ He examined the rule against double proof: ‘It is not disputed that under an ordinary creditors’ deed – and it would be the same in bankruptcy for this purpose – the creditor could, having regard to the form of the guarantee, prove for the whole amount of the debt; and the bank have in this case carried in a proof against the bankrupt’s estate for the balance of their debt after valuing their security. They could do that notwithstanding that the surety on account of his liability might have made a payment to the bank. In carrying in their proof the bank were not bound to give credit for that, but might prove for the whole amount just as if no payment had been made by the surety. I think, further, it cannot now be disputed that the position would be the same although the payment made by the surety to the creditor had not been made out of his own money but out of the proceeds of a counter-security given to him by the debtor to indemnify him against his liability as surety. That is the effect of the decision in Midland Banking Co v Chambers . . . Upon the construction of a guarantee similar to the one in the present case In re Sass [[1896] 2 QB 12] was to the same effect. It is quite true, as Mr Potts urged [on behalf of the appellant], that there can be no double proof against the estate; and the rule against double proof has regard to the substance of the transaction and not to the form. It may well be that technically there are two claims against the debtor in respect of the transaction and two separate liabilities of the debtor arising out of the transaction. One of these is the debtor’s liability to the bank for the money he owed. The other, which is a separate liability arising out of the contract of guarantee, is the debtor’s liability to indemnify the sureties in respect of their liability to the principal creditor. Technically they are two separate liabilities, but in substance they are the same; and in respect of that liability there could not be double proof against the estate. The creditor could not prove for the amount of the debt and the surety bring in a proof for part of the same amount as regards his liability for that part of that amount. I think that it is clear from what Mellish LJ said in In re Oriental Commercial Bank . . . That applies to a case of principal and surety. There could not be a double proof in respect of that obligation.’ and ‘Apart from the debtor having become bankrupt, I think it cannot be questioned that the debt arising under an obligation to indemnify a surety can be deducted from a legacy or share of residue given to the debtor’
Judges:
Lord Justice Swinfen Eady, Warrington, Scrutton LJJ
Citations:
[1918] 1 Ch 37
Jurisdiction:
England and Wales
Citing:
Cited – Cherry v Boultbee HL 22-Nov-1839
B died having made a will leaving a fund to pay income to A who owed her money but had been made bankrupt before the death. The debt to B remained unpaid.
Held: The liability to pay the debt and the right to receive the legacy had never tested . .
Cited – Midland Banking Co v Chambers 1869
. .
Cited – In re Oriental Commercial Bank 1871
The court considered the rule against double proof. Mellish LJ said: ‘This rule against double proof applies in the Court of Chancery as well as in the Court of Bankruptcy, and therefore would apply equally where companies are being wound up.’
Applied – Cherry v Boultbee CA 6-Apr-1838
TB was indebted to CB, his sister, in the sum of andpound;1878. He became bankrupt, and shortly after his bankruptcy C B made her will, giving legacies of andpound;500 and andpound;2,000 to her executors, in trust to pay the interest thereof (as to . .
Cited by:
Applied – In re SSSL Realisations (2002) Ltd and Another; Squires and others v AIG Europe (UK) Ltd and Another CA 18-Jan-2006
A creditor claiming an equity in a debt but who himself owed money to the debtor, could not pursue his claim without first contributing the sum due. A person could not take an aliquot share out of a fund without first contributing what he owed to . .
Cited – In re Kaupthing Singer and Friedlander Ltd SC 19-Oct-2011
The bank had been put into administrative receivership, and the court was now asked as to how distributions were to be made, and in particular as to the application of the equitable rule in Cherry v Boultbee in the rule against double proof as it . .
Cited – In re Kaupthing Singer and Friedlander Ltd SC 19-Oct-2011
The bank had been put into administrative receivership, and the court was now asked as to how distributions were to be made, and in particular as to the application of the equitable rule in Cherry v Boultbee in the rule against double proof as it . .
Lists of cited by and citing cases may be incomplete.
Insolvency
Updated: 14 May 2022; Ref: scu.238733
