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(5.) Pecuniary legacies now abate rateably inter se. (See A. 1 (5).)
(6.) The specific legacies, the estate devised to G. and the interest of H. in the residuary real estate bear the debts next in order rateably inter se.
(7.) And, lastly, the real and personal estate appointed to A. bears the debts not satisfied by all the above properties. (Snell's Equity, 5th ed. 271 ; H. A. Smith's Equity, 499, et seq.)
3. Explain clearly the practical difference between marshalling assets as between creditors and as between legatees, and illustrate by examples. A legacy is charged upon real estate, but the legatee dies before it becomes payable. What is the effect of this ?
Putting aside marshalling securities as between the creditors of a living person which is not within the terms of the question, we have marshalling as between creditors and marshalling as between beneficiaries or legatees.
Marshalling as between creditors of the same person is now no longer necessary. It was necessary when, prior to 3 & 4 Will. IV. c. 104, simple contract creditors had no claim upon real assets unless charged with debts, and then the Courts in administering equity compelled specialty creditors, who could resort to these assets, to seek their remedy thereout, so as to leave the personal assets for the creditors by simple contract; or if the specialty creditors exhausted the personalty, the simple contract creditors were suffered to stand in their place against the real assets, but only to the extent to which the personalty had been applied in payment of the specialty debts. They were not entitled to have a larger fund than they had originally. No question can now arise as to marshalling between secured and unsecured creditors of any class, the rules of administration being now regulated by those of bankruptcy (sect. 10 of Judicature Act, 1875). An example may, however, be here given of its former application. A., a creditor of a deceased person holding a bond given to him as a security for his debt, and in which the deceased had bound his heirs, obtained payment from the executor out of some personal estate of the deceased in his hands. Now A., instead of doing this, might have claimed payment from the heir or devisee to the extent of the lands devolving upon him from the deceased, which B., another creditor of the deceased, secured only by a bill of exchange accepted by the deceased and drawn by B. upon him, could not have done. B., however, might, if there had been enough personalty in the executor's hands, have claimed payment of his bill out of that, but we will assume that there was not, and consequently B., as the law then was, would have gone unpaid but for this equitable doctrine of marshalling assets, whereby under such circumstances the Court interposed in favour of B., and declared him entitled to be paid out of the lands so devolving upon the heir or devisee so much of his debt as was equal to A.'s debt, thus placing B. in A.'s shoes.
Marshalling as between beneficiaries and legatees. This doctrine is utilised in the administration of assets of deceased persons in two classes of cases :
(1.) Where the creditors in exercising their rights to obtain payment out of more than one property have interfered with the rights of some or all of the beneficiaries against the one property only available to them. In such cases, to restore the order of administration which the creditor's election has disturbed, the law permits any beneficiary who is disappointed by the creditor's action to stand in the creditor's place as against any fund which is in the order of administration liable before his own. If, for instance, the creditors have exhausted a fund which was available for the payment of pecuniary legacies, and have not resorted to certain lands devised, subject to and charged with all the debts, the pecuniary legatees have a right to have the lands so devised marshalled in their favour, or, in other words, they have a right to have the lands realised by sale, and their legacies paid out of the proceeds to the extent of the value of the debts which have been satisfied out of the legatees' fund.
(2.) This doctrine is also utilised in the administration of assets of a deceased person as between the beneficiaries or legatees themselves; as, for instance, where a testator charges some legacies on real estate but not others, and the personal estate proves insufficient to pay them all, the legacies charged on the real estate will be thrown thereon in order to leave the personalty for the payment of the other legacies. Or if the privileged legatees choose to exhaust the personalty, the others may pro tanto stand in their place as against
the real estate charged. The principle is clearly the same as in the previous case, the legatees whose legacies are charged on the land have two funds at their disposal (like the creditors there), whilst the other legatees (like the beneficiaries there) have but one. This doctrine will not, however, be applied so as to alter the effect of the rules of construction of legacies. (See H. A. Smith's Equity, 509—514.)
The effect of the legatee dying before it becomes payable, when the legacy is charged on real estate, is that the legacy sinks into the estate for the benefit of the inheritance, and accordingly it is lost to the legatee and his estate, in accordance with the decision in Pawlett v. Pawlett. (Tud. L. C. Conv. 720; Haynes's Student's Leading Cases, 225.)
APPROPRIATION OF PAYMENTS.
4. What is the general rule of law with reference to the appropriation by a creditor of payments made to him on account by his debtor ? First, where the debtor pays the money expressly in discharge of or on account of a particular item ; and, secondly, where he pays it generally on account of the whole debt, without any direction as to its appropriation. Can the creditor apply the money to the payment of an item barred by the Statute of Limitations ?
The leading authority on this point is Clayton's case (1 Mer. 585), from which we learn that the following rules are applicable :
(1.) A debtor making a payment has a right to appropriate it to the discharge debt due to his creditor. The debtor may appropriate the payment by so stipulating in express terms, or his intention so to do may be inferred from the circumstances of the transaction; thus where one of the debts owing was secured and another unsecured, an intention first to discharge the secured debt was presumed. This right of appropriation by the debtor is, however, lost unless exercised at the time of payment. If he does not then declare on what account the money is paid, he cannot afterwards do so.
(2.) If at the time of payment there is no express or implied appropriation thereof by the debtor, then the creditor has a right to make the appropriation. The creditor's right to make such appropriation is, however, subject to some limitations. He may not indirectly secure payment of an illegal debt by appropriating a general payment to its discharge ; but a debt barred by the Statute of Limitations is not illegal, the statute (as to personal property) being merely a bar to the remedy, not to the right; and if, therefore, a general payment is made, without appropriation by the debtor, it may be appropriated by the creditor to the discharge of a statute-barred debt. It must, nevertheless, be observed that it will not have the effect of reviving the debt; or, in other words, though by the appropriation the creditor may secure payment of a portion of a statute-barred debt, he does not by that means acquire a right of action for the remainder of it. But if a debt is not barred, a general payment on account appropriated towards its liquidation will take it out of the operation of the statute; that is to say, the statutory period will again commence to run from the time of such payment and appropriation.
(3.) In the absence of any appropriation by either debtor or creditor, an appropriation is made by presumption of law, according to the order of the items of account, the first item on the debit side being the item discharged or reduced by the first item on the credit side. This is the express point decided in Clayton's case, and is abundantly confirmed by subsequent authority. This presumption may, however, be rebutted by evidence of a different intention ; and where a debt bearing interest stands against a debtor, general payments made by him are first to be applied in payment of interest, any balance beyond what is necessary for that being then credited in reduction of the principal. (H. A. Smith's Principles of Equity, 4746.)
5. State the rule as to appropriation of payments laid down in Clayton's case, and distinguish it from novation. Can the rule be applied in respect of claims founded on fraud ?
The rules laid down in Clayton's case are set out in Answer 4.
Novation is the substitution of a new debt or obligation for an old one. This may be effected by the substitution of one creditor
for another, or by the substitution of one debtor for another, or by the substitution of one kind of liability or obligation for another between the same parties. But in Chancery practice the question of novation has most frequently arisen in reference to the transfer of the business of life assurance companies, where a policy-holder is alleged to have accepted the liability of a new company in lieu of the one in which the policy was originally effected. In order to effect a novation, the abandonment of the claim against the original company must, by stat. 35 & 36 Vict. c. 41, s. 7, be in writing and signed by the policy-holder, or by his agent lawfully authorised. (Mozley and Whiteley's Law Dictionary, pp. 25, 281, 282; Law Examination Journal, No. 51, p. 207.)
The rule laid down in Clayton's case is a mere presumption of law which, like all other presumptions of law, only applies so long as there is no evidence either of agreement to the contrary or of circumstances from which a contrary intention must be presumed, and then it gives way to those other considerations. In Re Hallett's Estate (49 L. J. Ch. (App.) 415, 428) the rule in Clayton's case was held not to apply as between trustee and cestui que trust, and it seems on the same grounds' not to apply to claims founded on fraud, which has not been waived or acquiesced in.
6. Can two or more creditors whose debts together amount to more than £50, though each debt is less, combine together and issue a debtor's summons on which the debtor can be adjudicated bankrupt? If so, will a tender by the debtor to one of such creditors of the amount of his debt prevent the adjudication ? Refer to any stutute or decided case on the subject.
Yes, they are able to do so; but they must in that event stand or fall together, and if a petition founded on non-compliance with that summons be presented they must both or all join in it, as there can be but one act of bankruptcy upon the summons. (E.C parte Kibble, Re Onslow, 44 L. J. Bcy. 63; L. R. 10 Ch. 377.)