Scottish Court of Session Decisions

The North British Building Society was established in 1868 in accordance with the provisions of the Act 6 and 7 Will. IV. cap. 32, entituled “An Act for the Regulation of Benefit Building Societies.”

The purpose of the society was stated in the rules to be to raise a fund to enable its members “to acquire heritable property, and to make improvements thereon,” and to secure a safe and profitable investment for their savings.” The provisions of rules 3, 12, 13, 27, and 28 are quoted, and those of rules 14 and 15 are narrated in the opinion of Lord Shand infra.

The society carried on business under the rules, and for some years made profits derived from interest, premiums on advances, redemption fees, fines, &c., which were duly declared in terms of the twenty-eighth rule, and out of these profits a guarantee fund was set aside, and the remainder was allocated to the members, borrowing and non-borrowing, in proportion to the amounts respectively standing at their credit on their shares. In the course of the society's existence many new members were added, while many others withdrew, or, their shares having been completed, were paid out.

The greater portion of the society's funds being advanced to members, as authorised by the rules, on postponed securities, the fall in the value of heritable property (which commenced in 1876 or 1877, and was accelerated by the failure of the City of Glasgow Bank), and the bankruptcy of several of the society's borrowing members, involved the society from time to time in losses which ultimately absorbed its guarantee or reserve fund, which, as it stood in 1880, was written off under the instructions of the directors, and a sum of £1046, 6s. 3d. placed to the credit of that fund in 1881 was also absorbed by losses, while in that year no profits were declared or allocated. This state of matters continued till the beginning of 1882, when a large number of the non-borrowing members gave notices of withdrawal, and some of the securities upon which the society had given advances to members had fallen further in value, while in most instances the borrowers had ceased to pay the instalments on their shares and the interest on their advances.

The directors accordingly obtained from a valuator of experience a report upon the securities which they considered doubtful, and found their apprehensions regarding these securities confirmed by the valuator's report.

To ensure that borrowing members would be in safety to continue their payments to the society without increasing the liability which might possibly rest upon them as shareholders to bear a share of the loss believed to have been sustained in proportion to the amounts standing at their credit on their shares, the society at a general meeting, inter alia, passed the following new rule:—“That all payments received from borrowing members due from and after the 11th day of April 1882” (the date when the directors resolved to obtain a valuation of the securities of the society) “be attributed not to their shares but to account of the sums due under their bonds to the society, without prejudice to the present position of borrowing members.”

On 13th May 1882 the directors issued a circular to members of the society in which they intimated that notices of withdrawal had continued to be given for some time to such an extent that the directors felt it necessary “to take into grave consideration the position in which the remaining members would be placed if the withdrawing members were paid out in the usual course;” they then stated that their apprehensions with regard to the fall in value of the securities held by the society had been confirmed, and that it was apparent that if those

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members who had given notice of withdrawal, and others who might take a similar step, were paid out in ordinary course, the risk arising from the depreciation of the society's securities would fall on the remaining members. The circular then intimated that the directors considered that they would be wanting in their duty were they to delay taking such measures as might be necessary to put all the members on an equal footing, and that they were advised that the best and speediest course to adopt in order to effect that object was to ask all the members to give notice withdrawing their shares. The issue of this circular practically brought the business of the society to a close. No new members were admitted to the society, and no new shares were taken out, and the society existed virtually for the purpose of liquidation.

Prior to the year 1881 a sum of £5509, 19s. 3d. of estimated profits had been allocated, and stood at the credit of the shareholders, borrowing and non-borrowing, but the directors in their report for the financial year ending 30th November 1882 stated that losses had been incurred to the amount of £16,044, 9s. 11d., in respect of advances made to borrowing members, which were to that extent irrecoverable owing to depreciation in the value of securities and other circumstances.

This was a Special Case presented to the Court in order to determine how these losses were to be allocated among the different classes of members. The questions raised were entirely inter socios, as there were no outside creditors. It was stated in the Case with regard to the above—mentioned sum of £16,044, 9s. 11d. that although a portion of that sum had since been recovered, and a further portion of it might eventually be recovered, there required to be set against that, losses which were not reckoned upon at that date, and which either had already emerged or were likely to emerge, and that it was therefore certain that the ultimate loss would entirely absorb the £5509, 19s. 3d. of profits allocated to shareholders (assuming these profits to be chargeable with the loss first of all), and would besides absorb a large amount of the capital of the society.

At the first hearing of the Case on July 3, 1884, the Court continued the cause with a view to the society being put in liquidation. The society subsequently went into liquidation, and by interlocutor of 13th November 1884 the Court allowed the society and their liquidator to become parties to the case of the first part along with the original parties, the trustees and directors of the society.

The second party was a completed member holding two shares in the society, which were completed in September 1880, the instalments paid by him and the profits allocated thereon (not including or anticipating any profits for the year then current) having then accumulated to £25 per share. No advance was ever made in respect of these shares. It was admitted that there were sufficient funds to pay his claims in respect of the shares, under rule 13. He maintained that he was entitled to be paid the amount at his credit in the society without deduction and with interest in terms of rule 13, in the order of the date of his shares being completed, and in preference to all members whose shares were completed or who gave notice to withdraw subsequent to the date of completion of his shares.

The third party was a withdrawing member holding twenty shares, in respect of which no advance had been made. On 23d August 1879 he gave intimation of withdrawal, and since that date there had been and still were sufficient funds to pay him out in terms of rule 12, after paying out all members still unpaid whose shares were completed or were withdrawn prior to the date of his notice of withdrawal. He maintained that he was entitled to be paid the instalments at his credit (excluding profits) with interest, in terms of rule 12, without deduction and in preference to all members whose shares were completed or who gave notice of withdrawal subsequent to the date of the third party's notice of withdrawal.

The fourth party was a withdrawing member holding twenty shares in the society, in respect of which no advance had been made, who gave notice of withdrawal on 11th January 1882. Since that date there had not been sufficient funds in the hands of the society to pay him out after paying out all members whose shares were completed or were withdrawn prior to his notice of withdrawal. His contention was the same as that of the third party.

The fifth party was a withdrawing member holding four shares in the society, in respect of which no advance had been made, who gave notice of withdrawal on or about 16th May 1882 in compliance with the circular issued by the directors on 13th May 1882. He was the general contradictor of all the other parties to the case as stated infra.

The sixth party was a borrowing member holding forty shares in the society. On 20th November 1871 he obtained an advance of £1000 from the society, being the nominal amount of his shares, and in security of this advance he granted a bond and disposition in security in ordinary form, containing a personal obligation to repay the principal sum at the first term of Whitsunday or Martinmas after the loan was granted. From time to time thirty-two of the shares held by the sixth party were completed by the due and regular payment of instalments and the addition of profits till the amount at the credit of these shares was equal to £25 per share; and the society thereupon discharged the bond and disposition in security to the extent of £800, being the nominal amount of the thirty-two shares. At or before 30th November 1882 there stood at the credit of the remaining eight shares held by the sixth party the sum of £191, 19s. 1d., which included £35, 19s. 1d. of profits allocated on these shares. He paid interest on the £200 remaining undischarged of the said bond up till Martinmas 1882, and on 6th December 1882 he made payment to the society of £8, 0s. 11d., thereby, as he contended, repaying the remaining balance of his bond. Had he continued to pay instalments regularly on the said eight shares, in terms of rule 3, the payments would have continued till June 1883. He maintained that he was entitled to cease being a member of the society and to have his bond and disposition in security discharged, in terms of rule 27, without any further payment, and that he was not liable to bear a share of the loss sustained

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by the society in proportion to the sum standing at his credit on his shares at 11th April 1882.

The seventh party was (1) a completed member as regards sixteen shares, at the credit of which there stood £400, or £25 per share. This sum of £100 included £98, 17s. 4d of profits allocated on these shares. He was also (2) the holder of twenty-four shares, at the credit of which there stood the sum of £351, 5s. 1d., which included £39, 17s. 1d. of profits allocated thereon, and (3) the holder of sixteen shares, at the credit of which there stood the sum of £234, 3s. 4d., which included £26, 11s. 4d. of profits allocated thereon. On 15th May 1876 the seventh party obtained an advance from the society of £600 against these twenty-four shares, and on 20th November 1877 he obtained another advance of £400 against the last-mentioned sixteen shares, and granted bonds and dispositions in security for the amount of these advances. The bonds were in similar terms to the bond granted by the sixth party. The seventh party paid interest on the advances of £600 and £400, at the rate of five per cent. per annum, half yearly up till Martinmas 1881. On 27th April 1882 the seventh party gave intimation of his intention to withdraw from the society “as regards the shares not yet fully matured,” and of his desire to apply the sums at the credit of all his shares towards his bonds, and to pay up any balance that might thereafter be due by him to the society. He maintained that he was entitled to a discharge of his bonds upon payment of the difference, if any, between the amount of his bonds, namely £1000, with interest thereon down to 27th April 1882 on the one hand; and, on the other hand, the amount at the credit of (1) his sixteen earlier completed shares, with bank interest thereon from the date of their completion, and (2) his forty later unmatured shares, with periodical interest on the amount of instalments from time to time paid on the said shares to 27th April 1882. He also maintained that the interest for which he was entitled to credit on the amount of his forty later unmatured shares should be at the rate of five per cent.

The eighth party was a borrowing member, holding twenty-four shares in the society. In 1878 he obtained an advance of £600 from the society, being the nominal value of the shares, and granted a bond and disposition in security therefor in similar terms to the bond granted by the sixth party. On 10th January 1882 he intimated his desire to redeem the property given in security of said advance. The sum standing in the books of the society at the credit of the shares was £158, 16s. 2d., of which £155, 7s. 6d. consisted of instalments, and the balance of £3, 8s. 8d. consisted of dividends allocated thereon. He contended that upon payment of the difference between (1) the said sum of £600, and (2) the said sum of £155, 7s. 6d., with interest on the various instalments making up the same, he was entitled under rule 27 to redeem his property and renounce his shares, and thereafter to cease to be a member of the society. He further contended that he was in no view liable to bear a share of the losses of the society, but maintained that if he should be held to be so he was entitled to have his liability postponed to that of all members who had withdrawn or renounced their shares subsequently to the said 10th January 1882.

The ninth party was a borrowing member holding twenty-four shares. On or about 6th October 1877 he obtained from the society an advance of £600, the nominal value of the shares, for which he granted a bond and disposition in security in the same terms as that granted by the sixth party. The sum at the credit of these twenty-four shares on 11th April 1882, including £6, 6s. 9d. of profits allocated thereon, amounted to £127, 10s. 3d. Since then no further payments were made by the ninth party to the society except the interest on said advance. On or about 16th May 1882, in compliance with the suggestion in the circular of 13th May 1882, he sent a notice withdrawing his shares. But while taking that step for his protection, quantum valeat, he intimated to the directors of the society his desire to continue paying up his advance by instalments as formerly under rule 3. He maintained that he was entitled to complete his shares by paying up the instalments which remained due thereon as formerly, getting credit for all profits which have been allocated upon his shares, and that upon such completion he was entitled to have his bond discharged and to cease to be a member of the society without any liability for its losses. He further contended that while his instalments remained unpaid he was not bound to pay to the society the interest on the full amount of his advance, but was entitled to have the interest rebated to the extent of the reduction effected by previous instalments and allotted profits in the amount of the principal sum due. He further maintained that he was in no view liable to bear a share of the losses of the society, but contended that if he should be held liable for a share of the losses of the society, he was entitled to be postponed in the order of liability, and to be ranked preferably to the members who had not withdrawn, and to be held liable and ranked pari passu with the members who like himself withdrew at the suggestion of the directors.

The tenth, eleventh, and twelfth parties were non-borrowing members holding shares which had become matured according to time, though the final payments had not in fact been made. It was the practice of the society to hold that such shares were matured (as stated in the opinion of Lord Shand infra). These parties therefore maintained that they were entitled to be dealt with on the footing that their shares had become matured in terms of rule 13.

All these statements as to the sums at the credit of any of the parties in the books of the society were made without reference to the loss of £16,044, 9s. 11d., no part of which had been charged against any of them.

The fifth party was the general contradictor of all the other parties to the case. He objected to the contentions of the second, third, fourth, sixth, seventh, eighth, ninth, tenth, eleventh, and twelfth parties, on the ground that if these contentions were admitted, and if members of the society in similar positions were dealt with similarly to these parties, he and the other non-borrowing members of the society who had not withdrawn or completed their shares prior to 13th May 1882 would be burdened with all the losses incurred by the society, though the amount of these losses might not have been ascertained by the realisation of the society's investments. He

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contended that these losses ought to be borne by all the members of the society; and that the same should be allocated to all the shareholders, borrowing and non-borrowing in the same manner as the estimated profits had been allocated, and that the proportion allocated to each shareholder should be deducted from the sum standing at the credit of his shares. He further contended with regard to the claims of the second, third, and fourth parties, that in the circumstances set forth in the case these parties were only entitled to a pari passu ranking on the funds of the society along with himself and all other non-borrowing members, and at all events were only entitled to be paid out preferably and in the order in which they contended for, after deduction from the sums at the credit of their shares of a proportional part of the said estimated loss of £16,044, 19s. 11d. He further contended with regard to the claim of the sixth party that even supposing the sixth party was not liable to bear a share of the losses of the society he was not entitled to anticipate payment of his instalments except in terms of rule 2 (which provided that it should be in the power of the directors to receive payment of any number of instalments in advance and allow interest thereon at 4 percent), and that he was bound to pay interest up till June 1883 on the full amount of the £200 remaining due on his advance, receiving credit, however, for interest at four per cent. on the £8, 0s. 11d. paid by him, from the date of payment till June 1883. He also contended with regard to the claim of the seventh party that even supposing the seventh party was not liable to bear a share of the loss, he was not entitled to have the amount at the credit of the shares against which no advance was made applied towards his bonds, but that, with respect to the sums at the credit of the said unadvanced shares, the seventh party was on the same footing as the second party, and fell to be paid out on the same principle. He also contended that the interest to be credited to the seventh and eighth parties on their instalments was interest at the rates specified under rule 12 to be allowed to a withdrawing member. He also contended with regard to the claim of the ninth party, that the ninth party was bound to continue paying his instalments as formerly, and was not entitled to have the sums at the credit of his shares, or any instalments paid and to be paid since 11th April 1882, deducted from the principal sum due under his bond, and was bound to continue payment of interest on the full principal sum contained in the said bond until the sums standing at the credit of his shares were equal in amount to the sum due under his bond, and was only entitled to credit for his share of whatever profits might thereafter be declared by the society. He contended with regard to the claims of the tenth, eleventh, and twelfth parties, that they were not entitled to rank as completed shareholders in the manner contended for by them, and that if it were held that non-borrowing shareholders were to be paid out in the order of completion or withdrawal of their shares, he was entitled to be paid preferably to the tenth, eleventh, and twelfth parties.

The following questions of law were submitted for the opinion of the Court:—“(1) Is the second party entitled to be paid out the amount at his credit in the society without deduction and with interest in terms of rule 13, in the order of the date of his shares being completed, and in preference to all members whose shares were completed, or who gave notice to withdraw subsequent to the date of completion of his shares? (2) Is the third party entitled to be immediately paid out the instalments at his credit (excluding profits) with interest, in terms of rule 12, without deduction and in preference to all members whose shares were completed, or who gave notice of withdrawal subsequent to the date of the third party's notice of withdrawal? (3) Is the fourth party entitled to be paid out the instalments at his credit, with interest, in terms of rule 12, without deduction, as soon as the funds of the society permit, and in preference to all members whose shares were completed, or who gave notice of withdrawal subsequent to the date of the fourth party's notice of withdrawal? (4) Is the fifth party entitled to be paid out the sum at his credit pari passu with the second, third, and fourth parties, or any of them? (5) Is the sixth party entitled to cease being a member of the society, and to have his bond and disposition in security discharged in terms of rule 27, without any further payment, or is he liable to bear a share of the loss sustained by the society in proportion to the sum standing at his credit on his shares at 11th April 1882, and in any event is he liable for interest on his bond up till June 1883? (6) Is the seventh party entitled to a discharge of his bonds, and to cease to be a member of the society upon payment of the difference, if any, between the amount of his bonds, with interest thereon down to 27th April 1882, on the one hand, and, on the other hand, the amounts at the credit of (1st) his sixteen earlier completed shares, with bank interest thereon from the date of their completion, and (2d) his forty later unmatured shares, with periodical interest on the amount of instalments from time to time paid on said shares at five per cent. to 27th April 1882; or does he fall to bear a share of the losses of the society in proportion to the sum standing at his credit on his shares, or any of them, or in what other way is he to be settled with? (7) Is the eighth party entitled to redeem his property in terms of rule 27 on payment of the difference between the amount of his bond and the amount at the credit of his shares, excluding profits, but with interest added in terms of that rule, the rate of interest being five per cent., and thereupon to cease to be a member of the society; or does he fall to bear a share of the losses of the society in proportion to the sum standing at the credit of his shares? and if so, is he entitled to be postponed in the order of liability, and to rank preferably to all members who have withdrawn or renounced their shares subsequently to himself? (8) Is the ninth party, upon payment of instalments amounting in cumulo to the difference between the sum at his credit on his shares, including profits allocated thereon, and the amount of his said advance, entitled to have his bond discharged, and is he liable, so long as any of said instalments remain unpaid, to pay to the society interest at five per cent. on the full amount of said advance, or is he entitled to have the said interest abated to the extent of the reduction effected on the principal sum due by previous instalments and allotted

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profits? Or does he fall to bear a share of the losses of the society in proportion to the sum standing at the credit of his shares at 11th April 1882? and if so, is he entitled to be postponed in the order of liability, and to be ranked preferably to the members who have not withdrawn, and to be held liable and ranked pari passu with the members who, like himself, withdrew on the suggestion of the directors? (9) Is the tenth party entitled to be paid out on terms similar to those on which the second party is entitled to be paid out, but on the footing that the tenth party's shares fall to be held as completed in September 1881; or if not on what terms? (10) Is the eleventh party entitled to be paid out on terms similar to those on which the second party is entitled to be paid out, but on the footing that the eleventh party's share falls to be held as completed in April 1882; or if not, on what terms? (11) Is the twelfth party entitled to be paid out on terms similar to those on which the second party is entitled to be paid out, and on the footing that the twelfth party's shares fall to be held as completed in September 1880; or if not, on what terms?”

It will be seen from the above statement that the members of the society represented in the case were divisible generally into four classes, viz.—Non-borrowing members—Two classes.— A. Those who had withdrawn their shares (rule 12); B. Those whose shares had become completed (rule 13). Borrowing members—Two classes.—C. Those who offered to redeem by paying the difference between the amount of their instalments, with periodical interest, and the amount of their bond (rule 27, 1st alternative); D. Those whose payments along with the profits from time to time allotted to them equalled the amount in their bond (rule 27, 3d alternative).

In argument, classes A and B, non-borrowing members, founded on the cases of The Norwich and Norfolk Provident Building Society ex parte Rackham, 45 L. J. (N.S.), Ch. Div. 785; The Glasgow Working-Men's Provident Investment Building Society v. Galbraith, May 28, 1884, 21 Scot. Law Rep. 782; The Blackburn and District Benefit Building Society, L.R., 24 Ch. Div. 421, aff. L. R., 10 App. Cases 33; Doncaster Building Society ex parte Clark, 14 L.J. (N.S.) 13; and on the opinions in the House of Lords in Brownlie's case infra.

Classes C and D, borrowing members, founded on the case of Brownlie and Others (Liquidators of The Scottish Savings and Investment Building Society) v. Bussell, July 7, 1881, 8 R. 917, aff. (with variations) March 9, 1833, 10 R. (H. of L.) 19, and also on the dicta in Galbraith's case supra.

The ninth party, in support of his contention that he was entitled to go on paying up his bond by instalments as formerly notwithstanding the liquidation, founded on the case of The Scottish Property Investment Company Building Society v. Boyd, Nov. 14, 1884, 12 R. 127.

On this point the contradictor founded on the case of Blair (Liquidator of Greenock Property Investment Co.) v. Agnew, &c., June 25, 1884, 11 R. 976.

At advising—