Scottish Court of Session Decisions

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Cite as: [1884] ScotLR 21_293, [1884] SLR 21_293

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SCOTTISH_SLR_Court_of_Session

Page: 293↓

Court of Session Inner House First Division.

Tuesday, January 15. 1884.

21 SLR 293

Molleson (Liquidator of the Edinburgh and Glasgow Heritable Company, Limited)

v.

Leck and Others.

Subject_1Public Company
Subject_2Voluntary Liquidation
Subject_3Payment of Dividend
Subject_4Secured and Unsecured Creditors — Principles of Ranking — Companies Act 1862 — Supreme Court of Jurisdiction Act 1875 (38 and 39 Vict. cap. 76).
Facts:

Held that in the winding-up of a public company under the Companies Acts, the creditors fell to be ranked according to the rules of the common law, and not the rules of the Bankruptcy Acts, and therefore that secured creditors
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were entitled to rank pari passu with those unsecured without being obliged to value and deduct their securities.

Headnote:

Section 138 of the Companies Act 1862 provides—“Where a company is being wound up voluntarily, the liquidators or any contributory of the company may apply to the Court in England, Ireland, or Scotland, or to the Lord Ordinary on the Bills in Scotland in time of vacation, to determine any question arising in the matter of such winding-up, or to exercise as respects the enforcing of calls, or in respect of any other matter, all or any of the powers which the Court might exercise if the company were being wound up by the Court, and the Court or Lord Ordinary, in the case aforesaid, if satisfied that the determination of such question, or the required exercise of power, will be just and beneficial, may accede, wholly or partially, to such application, on such terms and subject to such conditions as the Court thinks fit, or it may make such other order, interlocutor, or decree, on such application, as the Court thinks just.”

The Edinburgh and Glasgow Heritable Company (Limited) was formed under memorandum and articles of association, dated 2d November 1874, and was incorporated under the Companies Acts of 1862 and 1867. The objects of the company were, inter alia, to purchase or acquire heritable subjects within the United Kingdom, and manage and dispose of the same, and do all incidental thereto, including borrowing money on security of the Company's property, on debenture or otherwise.

The capital of the company was £250,000, divided into 50,000 shares of £5 each. 10,000 shares were taken up, of which £3 a share was called up in various instalments by the directors. The company having become financially embarrassed, an extraordinary general meeting of the shareholders was held in Edinburgh upon 3d May 1880, at which it was resolved that the company should be wound up voluntarily, and that James Alexander Molleson, chartered accountant, Edinburgh, should be appointed liquidator, with all the powers conferred by the Companies Act of 1862, and Acts amending and extending the same.

On 21st July 1880 the liquidator made a call of £2 per share upon the contributories, and from this and other sources funds to the extent of £13,220 were realised, available for division among the creditors of the company.

The debts of the company as estimated by the liquidators amounted to £135,195, 3s. 7d., of which £84,100, 1s. were secured heritably. The liquidator was in the course of distributing the sum in his hands pari passu among the creditors of the company, secured and unsecured, in respect of their debts as at the commencement of the liquidation, without deducting the value of the respective securities of the heritable creditors. This course was objected to by the unsecured creditors, some of whom also maintained that the period for making payment of a dividend did not arise until the secured creditors had realised their securities, and they objected to the liquidator dividing the funds in hands on the principles which he proposed. A question also arose regarding the position of Henry Leck, one of the heritable creditors, who held a postponed bond for £45,750 over St Mary's Buildings, Glasgow, a property which had belonged to the company. The total debt secured on this property was £77,750, and the property was sold by the prior bondholder after the commencement of the liquidation for £70,000, thus causing a loss to Leek of £7750. He claimed to be ranked and draw a dividend for the full sum in his bond, £45,750, while, on the other hand, it was maintained that he was only entitled to be ranked for the deficiency of £7750.

In these circumstances the liquidator presented this petition to the First Division of the Court under sec. 138 of the Companies Act of 1862 (quoted supra), praying the Court to determine the questions just stated.

Answers were lodged for Leck, in which he averred, in addition to what has been stated above, that at the date when the company agreed to wind up voluntarily he was their creditor in a sum (1) of £17,000 contained in and due by bond and disposition in security over certain heritable subjects at Merryflats, Glasgow; (2) the £45,750 already referred to. A claim for the two debts amounting to £62,750 had been intimated to the liquidator in December 1880. The heritable subjects at Merryflats had not been realised, and as regarded the subjects called St Mary's Buildings, and which were sold by the prior bondholder on 26th October 1881, he had been prevented by the company in 1879 from then proceeding to sell and realise his security.

The respondent further claimed to be ranked on the funds in the hands of the liquidator for both his debts, amounting to £62,750, but to the effect of his not drawing more than full payment of his debts. He moved the Court also that a division of the funds should at once be made.

Argued for petitioner—Under sec. 138 of the Companies Act 1867 an application such as this might competently be made in a voluntary liquidation— Monkland Iron Co. v. Henderson, January 25, 1883, 10 R. 494. The heritable creditors here were not bound to value and deduct their securities before claiming, as would be done in the case of a bankruptcy — see sec. 133 of the Act of 1862, sub-sec. 1, also 2 Bell's Com., 5th edition, 526, where the common law principles of division were laid down, and Kirkcaldy v. Mid dleton, December 8, 1841, 4 D. 202, and Melrose v. Black, February 29, 1840, 2 D. 706.

Two of the unsecured creditors compeared by minute.

Argued for them—The proper principle to apply to a case such as this was to value and deduct any security held by the creditor, and admit him to a dividend on the balance. _ As the Companies Acts applied to England and Scotland alike, the English Judicature Act 1875(38 and 39 Vict. c. 77), sec. 10, by the generality of the language used in it, might also be made applicable to Scotland, as it was desirable to have uniformity of decisions in both countries on these Acts. The result of doing so would be that the creditors would be bound to value and deduct their securities, which was the English rule in liquidations like the present.

Argued for Leck—Payment of any sum of money after sequestration could not affect the question of the amount due as at the date of the sequestration—2 Bell's Com. 531. Here there was no
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sequestration, only insolvency and a claim, and therefore there could be no transference of any portion of the debt to each creditor.

At advising—

Judgment:

Lord President—This is a question which it may be right to bring under the notice of the Court as not yet decided in a case where under a voluntary liquidation creditors seek to rank upon the bankrupt estate. The question is not a difficult one. It must be decided upon the common law, without having regard to the rules of the sequestration statutes. All the creditors, secured and unsecured, are entitled to rank upon the insolvent estate for their debts as they stand at the time when the competition arises. A payment to account prior to that date will go to diminish the amount of the debt, and the creditor will only rank for the amount remaining after such deduction. Payments after that date stand in a different position. These payments may be recovered to the fullest extent which the creditor can contrive to obtain from his debtor, or payment may be made by a co-obligant of the debtor, but it will not go to diminish the amount owed to him at the time when the claim arose.

If we apply that rule to the present case, it decides the only question which arises, unless there is any force in the argument founded upon the construction of the English Judicature Act of 1875. It is unnecessary to enter into detail in regard to that argument, because nothing can be clearer than that that Act and the preceding one of 1873 are entirely confined to the administration of justice in the High Court of Justice as defined by the earlier statute, the Act of 1873.

Lord Deas—Upon the general law I have never had any doubt since the decision in the case of Melrose. I have just as little doubt that the general law is applicable to the case of a liquidation under the Companies Acts.

Lord Shand—It may be very desirable that the equalising rules of the bankruptcy law as enacted in England should apply also to cases of judicial and voluntary liquidation. But this can only be done by rules such as those which are applicable in England. The rule of the common law must obtain in Scotland, and there is no doubt as to what it is on both the points which have been argued.

Lord Mure was absent on Circuit.

The Court pronounced the following interlocutor:—

“Find (First) that the petitioner is bound to rank pari passu on the assets of the company the creditors secured and unsecured in respect of their debts, with interest thereon as at the commencement of the liquidation; (Second) that the creditors holding securities over the company's estate are not bound in the said ranking to deduct the value of such securities held by them respectively, and that in particular the said Henry Leek is not bound in the ranking to deduct the value of the security held by him for the sum of £17,000 contained in the bond over the subjects at Merryflats, referred to in the petition; (Third) that the said Henry Leek is entitled to be ranked for the sum of £45,750 contained in the bond referred to in the petition, with interest thereon as aforesaid, without deducting the proceeds recovered by him on the sale of the security subjects; and (Fourth) that the petitioner is bound now to proceed to divide the funds in his hands in accordance with the principles above set forth, reserving to the petitioners right to call the creditors holding securities to account if it should appear that such creditors or any of them, from the dividends in the ranking, and from the proceeds of the securities,‘draw more than full payment of their debt: Find the whole parties entitled to expenses out of the funds in the hands of the liquidator, and decern,” &c.

Counsel:

Counsel for Petitioner— Lorimer. Agents— Morton, Neilson, & Smart, W. S.

Counsel for Leek— R. V. Campbell. Agents— Murray, Beith, & Murray, W.S.

Counsel for Unsecured Creditors— Murray. Agents— Davidson & Syme, W. S.
1884