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Page:Harvard Law Review Volume 1.djvu/344

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ceptor’s estate that the Scotch rule be followed, for though the amount of proof be thereby increased, yet by resorting to the securities the estate can reimburse itself frequently to the full extent of payments made. No such rule can be laid down with regard to the creditors of the drawer’s estate. In the above illustration it so happened that the English rule was the one most favorable to them; but where the acceptor’s estate pays a very small dividend and the drawer’s estate, on the other hand, pays a large one, the creditors of the latter will usually be benefited by the carrying out of the results reached by the Scotch courts, for in such cases only a small share of the securities is required for the surety’s indemnity, and the portion that is returned to the principal’s estate will frequently more than offset the loss occasioned by reason of the increased proof.

With regard to the bill-holders, we may say that by the application of the English rule they will always be benefited at the expense of the general creditors of the acceptor’s estate,[1] and sometimes, as will follow from what has already been said, at the expense also of the general creditors of the drawer’s estate.

An apparent difficulty in applying the Scotch rule arises from the fact that as soon as the acceptor’s estate has been indemnified for the first dividend paid to the bill-holders, the amount thus withdrawn from the security becomes an asset from which all creditors, the bill-holders included, are entitled to another dividend; if any part of the security still remains, the same process is repeated, i. e., the bankrupt estate may reimburse itself to the amount of the bill-holders’ share of the second and other dividends, until the whole of the security has been appropriated to its indemnity. Now it frequently happens that the dividends decrease much more rapidly than the security, in which event the above process would have to be carried on ad infinitum. As soon as it is discovered that this would be necessary, a simple formula[2] will


  1. We may except the case where the securities together with the dividends obtained from the drawer’s estate are sufficient to pay the bill-holders in full.
  2. Suppose the acceptor’s estate be able to pay 40% dividends, its liabilities being £10,000 and its assets £4,000; assume that the bills aggregate £6,000 and that the securities will yield £5,000. The first dividend of the bill-holders will be £2,400, the second 24% of £6,000 or £1,440, the third £864, the fourth £518 8 s. By this time the securities will be found to have been exhausted, and the acceptor’s estate will suffer to the extent of £400. Now let us assume that the assets are £2,000 instead of £4,000, the liabilities, bills, and securities remaining the same as before. The first dividend will