Scottish Court of Session Decisions

On 20th March 1888, upon the application of Mr H. E. Broad, a holder of mortgages of the Edinburgh Northern Tramway Company to the extent of £6270, Mr David Nicolson Cotton, C.A., Edinburgh, was appointed by the Court to be interim judicial factor upon the undertaking and property of the said company, and to receive the whole or a competent part of the tolls or sums liable in payment of the interest payable on the said mortgages until the same with all costs should be fully paid. Having found caution Mr Cotton entered upon the duties of his office, and on 19th May 1888 the Court continued his appointment as judicial factor on the undertaking of the company. In the exercise of the office so conferred upon him Mr Cotton assumed what was practically the financial management of the company's affairs. The gross amount of the tolls were paid into bank, to an account in the judicial factor's name, amounting during the term of his office to £12,638, and as desired by the directors he disbursed therefrom the working expenses of the line and met various claims against the company of a pressing nature. He also kept the books of the company, and submitted the accounts at the meeting of shareholders.

On 19th July 1889 the judicial factor presented the present petition for examination and discharge.

He averred—“The petitioner has now a balance in hand after providing for the expenses incident to factory, including the expenses of the petition for his appointment, and of the present application, and his own remuneration, and the current working expenses so far as unpaid, sufficient to pay the arrears of interest due upon the said mortgages, held by the said Harrington Evans Broad, as at the date of his appointment. Subject to your Lordships' orders, the petitioner proposes to pay to the said Harrington Evans Broad the sum of £152, 3s. 8d. as the interest due upon the said mortgages up to 10th February 1888, under deduction of income tax. He also proposes to pay to the said Harrington Evans Broad interest at 5 per cent, upon the said arrears of interest up to the date of payment. After paying the expenses of factory as the same shall be taxed, and retaining such amount for his own remuneration as shall be fixed by the Auditor of Court, the petitioner proposes to pay to the company any balance that may remain in his hands.”

He craved the Court—“to remit the process to the Lord Ordinary on the bills, with power to his Lordship to authorise and empower the petitioner, the said David Nicolson Cotton, as judicial factor foresaid, to pay to the said Harrington Evans Broad the sum specified in the petition, with interest as therein mentioned, and to pay over to the said The Edinburgh Northern Tramways Company the balance of the funds remaining in the factor's hands (after deducting the current working expenses so far as unpaid), and the expenses of and incident to the factory, including the expenses of the present application, as the same shall be taxed by the Auditor of Court, and retaining such sum for his own remuneration as shall be fixed by the said Auditor; and to exoner and discharge the petitioner as judicial factor foresaid; to grant warrant to and ordain the Accountant of Court to deliver up to him his bond of caution.” …

Answers were lodged to the petition by William Hamilton Beattie, George Villiers Mann, Peter Couper, James Galloway, and Augustus William Rixon, who were besides Mr Broad the remaining mortgagees of the tramway company, holding mortgages to the amount of £3280, and who were also a minority of the shareholders of the com

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pany. The respondents objected to the granting of the petition, inter alia, in respect (1) of the undertakings and representations made on the occasion of Mr Cotton's appointment, to the effect that he would not pay the interest on one mortgage more than another; and (4) that Mr Cotton had acted ultra vires of his appointment, and that the funds in his hands were not the tolls or other sums of money which alone, by virtue of his appointment, he was authorised to receive, but the net returns of 15 months' working of the undertaking, as if he had been appointed judicial factor or manager under the Railway Companies (Scotland) Act 1867 (30 and 31 Vict. cap. 126).

On 19th November the factor lodged a minute, offering, with consent of the company and Mr Broad, if authorised by the Court, to make payment of the arrears of interest due to all the mortgagees at the date of his appointment.

The accounts of the factor having been lodged, objections were lodged thereto by the respondent.

They averred, inter alia, that the account now produced by the petitioner showed that the petitioner had, as averred by them in their answers, not confined himself to performing the duties of his office, but had acted ultra vires of his appointment. His duties, as defined by the statute under which he was appointed, were purely “to receive the whole or a competent part of the tolls or sums liable to the payment of” the interest due to the mortgagees on whose petition he was appointed, until such interest, “together with all costs, including the charges of receiving the tolls or sums aforesaid, be fully paid.” From said account it appeared that between the date of his appointment on 20th March 1888 and the end of that month the petitioner had received of such tolls or other sums of money the sum of £115, 4s. 7d., and during the following month he had received the further sum of £526, 0s. 5d. The interest due to Mr Broad, the nominal mortgagee at whose instance the petitioner was appointed, amounted at the date of said appointment to the sum of £192, 0s. 8d., and that due to the other mortgagees of the company amounted at same date to £70, 13s. 3d. The petitioner had been thus in a position, within a few weeks after his appointment, and certainly before the end of April 1888, to have paid the interest due to the mortgagees on whose petition he had been appointed, and he had been also in a position to pay pari passu the interest due at the same date to the respondents, if he was entitled and bound to do so in virtue of the statement made at the bar by counsel for the petitioning mortgagee on the occasion of his appointment being confirmed, as well as to pay any costs legitimately incurred in connection with his appointment and his own reasonable remuneration. In these circumstances there had been no necessity for his appointment being continued, and had these circumstances been disclosed his appointment could not competently have been confirmed on 19th May 1888. The respondents submitted that the petitioner's whole intromissions and actings—at any rate from and after the date at which the tolls and other sums received by him had amounted to a sum sufficient to pay the interest due at the date of his appointment upon the mortgages of the company, together with the costs of his appointment—had been ultra vires and illegal, and that the petitioner was not entitled to be discharged thereof in the present process, or to receive any remuneration therefor. 2. The respondents believed and averred that the petitioner had acted not as judicial factor under the statute, but as if he had been manager of the undertaking of the company, and that he had so acted in his own interest and in the interests of certain parties who were represented by Mr Broad, the nominal petitioning mortgagee on whose application he had been appointed, who were a majority of the mortgagees and shareholders of the company, and greatly to the prejudice of the respondents and other mortgagees and shareholders of the company who formed a minority thereof. As he had maintained himself in his position of judicial factor until his collections had amounted to £12,638, as per account now rendered, it might be assumed that his claim for remuneration at 5 per cent. on his collections would amount to £631, which was more than three times larger than the sum he had been appointed to collect. … 15. On a sound construction of 1 he statute in virtue of which the petitioner had been appointed, and under which alone he could act, he was, as above set forth, bound to account direct to the company for the balance of the tolls and other receipts remaining in his hands, after paying the interest due at the date of his appointment, to the mortgagee at whose instance he had been appointed, or, in the special circumstances attending his appointment, to the whole mortgagees of the company, and this he ought to have done within six weeks of his appointment. There was no provision in the said Act for the petitioner obtaining judicial exoneration and discharge, and it was not in contemplation of the statute that he should do so. Accordingly the respondents objected to his being discharged of the intromissions contained in his account now produced, and to his being remunerated in respect thereof.

The petitioner in answer, in the first place, submitted that the respondents had no title to object to the prayer of the petition being granted. He submitted, in the second place, that he had confined himself to performing the duties of his office, and that he had not acted ultra vires. According to the 57th section of the statute above referred to it was the duty of the factor to receive the whole or a competent part of “the tolls or sums liable to the payment of such interest” until such interest, “together with all costs, including the charges of receiving the tolls or sums aforesaid, be fully paid.” The view of the factor was, that the sums available for payment of interest in terms of this section were the nett receipts, after deduction of all costs, working expenses,

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and other necessary outgoings, not the gross receipts, as contended by the respondents. It was in the interest alike of the mortgagees and shareholders that the property of the company which might have been attached by ordinary diligence should be protected from unsecured creditors. This was effected by the appointment of the factor, and in consequence the undertaking as a going concern was preserved, and had yielded revenue which was now available for the payment of interest on mortgages. If the factor had acted upon the construction contended for by the respondents there would have been no earnings at all, as there would have been no fund out of which working expenses could have been paid. If the view taken by the factor was correct, then there were not at the end of April 1888 funds in his hands sufficient to pay even the interest due upon Mr Broad's mortgages. There was herewith produced a statement of the financial position of the judicial factory as at 30th April 1888. This statement showed that the gross receipts as at that date amounted to £652, 10s., the payments actually made to £427, 18s., and the working expenses incurred but unpaid to £401, 14s. 6d. The point now raised by the respondents was before the Court when the factor's appointment was confirmed on 19th May 1888. The respondents maintained that the factor had already received all that was due to Mr Broad, and the counsel for the factor replied that there had not been enough money received to keep the company going, as the current expenses had to be paid. It was not till at or about the date of presenting the petition for his discharge that the factor was in a position to pay even the interest due to Mr Broad out of the nett receipts. Even assuming that the petitioner was wrong in his construction of the statute, yet he was allowed to continue to act as factor, and down to the date when he applied for his discharge was never requested by the company, or any one interested, to demit office. The factor therefore submitted that in either view he was entitled to remuneration for the period during which he had acted. The factor has had nothing to do with the general management of the company, or the control of the line, which remained with the directors and officials of the company.

Under its special Act the company had power to borrow money on mortgage.

By the 40th section of the Companies Clauses Consolidation (Scotland) Act 1845 (8 and 9 Vict. cap. 17) it is provided as follows — “If the company be authorised by the special Act to borrow money on mortgage or bond, it shall be lawful for them, subject to the restrictions contained in the special Act, to borrow on mortgage or bond such sums of money as shall from time to time, by an order of a general meeting of the company, be authorised to be borrowed, not exceeding in the whole the sum prescribed by the special Act, and for securing the repayment of the money so borrowed, with interest, to mortgage the undertaking, and the future calls on the shareholders, or to give bonds in manner hereinafter mentioned.” Section 43provides—“Everymortgage and bond for securing money borrowed by the company shall be by deed under the common seal of the company, duly stamped, and wherein the consideration shall be truly stated; and every such mortgage, deed, or bond may be according to the form in the Schedule (c) or ( d) to this Act annexed, or to the like effect; and every such mortgage deed shall have the full effect of an assignation in security duly completed.” The form of mortgage in Schedule (c) is as follows — “By virtue [here name the special Act], we, The Company, in consideration of the sum of pounds, paid to us by A B of, do assign unto the said A B, his executors, administrators, and assignees, the said undertaking … and all the tolls and sums of money arising by virtue of the said Act, and all the estate, right, title, and interest of the company in the same” &c.

Section 44 of the Edinburgh Northern Tramways Act 1884 gave priority to the claims of mortgagees over all other claims against the company. Section 57 enacts — “Every application for a judicial factor in the cases aforesaid shall be made to the Court of Session, and on any such application so made, and after hearing the parties, it shall be lawfnl for the said Court, by order in writing, to appoint some person to receive the whole or a competent part of the tolls or sums liable to the payment of such interest, or such principal and interest, as the case may be, until such interest, or until such principal and interest, as the case may be, together with all costs, including the charges of receiving the tolls or sums aforesaid, be fully paid; and upon such appointment being made all such tolls and sums of money as aforesaid shall be paid to and received by the person so to be appointed; and the money so to be received shall be so much money received by or to the use of the party to whom such interest, or such principal and interest, as the case may be, shall be then due, and on whose behalf such judicial factor shall have been appointed; and after such interest and costs, or such principal, interest, and costs, have been so received, the power of such judicial factor shall cease, and he shall be bound to account to the company for his intromissions, or the sums received by him, and to pay over to their treasurer any balance that may be in his hands.”

Argued for the petitioner—(1) The respondents had no title to object to the petition being granted, or to raise the question whether the factor had exceeded his powers. The company had an interest to raise such a question, but did not resolve to do so. (2) The factor had not exceeded the powers enforced on him by the terms of his appointment. He had not ousted the directors or acted as a judicial manager of the undertaking, but had merely disbursed the sums necessary to preserve the undertaking of the company as a fruitbearing concern — Primrose v. Caledonian Railway Company, January 14, 1851, 13 D. 464, June 21, 1851, 13 D. 1214; Haldane v. Rushton, &c., March 8, 1881, 8 R. 669, December 10, 1881, 9 R. 253. The factor's duty was to receive the

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“tolls or sums liable in payment of interest”— Companies Clauses Consolidation (Scotland) Act 1845, sec. 57. It would very much depend on the meaning of these terms what his duty was. A distinction seemed to be made between “tolls” and sums liable in payment of interest. “Tolls” in that section might be taken then to mean “tolls proper” arising where a company leased out the use of its plant, and sums liable in payment of interest as equivalent to nett earnings, where a company worked its own business, as in the present case. “Tolls was a word of flexible meaning sometimes used as meaning “tolls proper,” where such existed, sometimes as equivalent to nett earnings where there were no tolls proper. In the following cases under secs. 88 and 90 of the Railway Clauses Consolidation (Scotland) Act 1845, it was held to mean “tolls proper”— Highland Railway Company v. Jackson, June 16, 1876, 3 R. 850; Scottish North-Eastern Railway Company v. Anderson, July 8, 1863, 1 Macph. 1056; In the case of Gardner v. London, Chatham, & Dover Railway Company, L. R., 2 Ch. App., per Lord Cairns, p. 216, 217, “tolls and sums of money” were treated as the equivalent of earnings. In the following cases there were no “tolls proper.” and the word “tolls” was held to mean nett profits — Ames v. The Trustees of the Birkenhead Dock, 1855, 20 Beavan 332; in re Manchester & Milford Railway Company, April 14, 1880, L.R., 14 Ch. Div. 645. The intention of the Legislature was to keep the undertaking as a fruitbearing subject. It was therefore necessary for the factor to meet the current expenses in order to secure the receipts. What the mortgagees were intended to have was the produce of the permanent undertaking, and it was only the nett receipts which were inpignorated. The factor here had paid no unsecured creditors, save these whose claims it was necessary to meet in order to preserve the undertaking as a fruitbearing concern.

Argued for the respondent—(1) The title of the respondents to appear and object to the granting of the petition arose from the fact that the factor had used his position to favour the interests of the majority of the company at the expense of the minority, and that it was impossible to obtain redress from the company. A dissentient minority in such a position was entitled to appear andbeheard— Rixon v. Edinburgh Northern Tramways Company, March 20, 1889, 16 R. 653; Orr v. Glasgow,&c., Railway Company, April 23, 24, 1860, 3 Macq. 799. (2) The factor had exceeded his powers, which were merely those of a receiver. The interest due should have been paid out of the gross receipts. The “costs” which the factor was entitled to deduct under sec. 57 were the “charges of receiving,” and included the expenses of his appointment and remuneration, and the expenses of collection. There was no provision in sec. 57 for deduction of working expenses as in 30 and 31 Vict. c. 126, sec. 4. The absence of such a provision showed that under the 1845 Act no such deduction was anticipated. Under the mortgage were assigned all the tolls and sums of money arising in virtue of the company's special Act—Edinburgh Northern Tramways Act 1884. These were, under the Tramways Act 1870, sec. 45, and the special Act, secs. 58 and 60, clearly the same as fares. The cases referred to under the Railway Clauses Act 1845 were not relevant. By sec. 44 of the Special Act priority was given to mortgagees over all other creditors of the company. Down to 1867 the creditors had the power of paralysing the work of a concern by seizing the rolling stock. The Railway Companies Act of 1867 was passed to obviate that. The English and Scotch Companies Acts of 1845 were in identical terms as nearly as the differences in legal language allowed. A judicial factor was just the same as a receiver. The argument was not affected by Lord Cairns' opinion in the case of Gardner. There was nothing in that opinion, in the Acts and in the forms of mortgage provided for, to show that in taking the fruit of a concern a factor was bound to provide for the growth of fruit in the future. The case of Ames was not under the Act of 1845, the appointment then under consideration having been made on the authority of the Court of Chancery without reference to any statute. The case of the Manchester Railway Company arose under the Railway Act of 1867, the terms of which were, as had been shown, quite different from those of the Act at present under consideration. In that case also the Master of the Rolls clearly distinguished between the functions of a receiver and a manager, and laid down that a receiver was not a receiver of nett profits—pp.648–9.

At advising—