Scottish Court of Session Decisions

In 1893 a limited liability company was incorporated called the United Gutta Percha and Rubber Company. The shares allotted to the public were 25,000 A shares of the nominal value of £1 each, and upon these 10s. per £ was called up. The company not being successful, and money being required, Andrew Buchanan, William Stevenson Brown, John Main, Robert Hutcheson, and Alexander M'Dowall, who were all directors of the company, by letter of guarantee, dated 18th, 26th, and 28th May, and 1st and 22nd June 1894, jointly and severally guaranteed to the Bank of Scotland due payment of all sums for which the company were or might become liable to the bank, the amount for which the guarantors became liable being declared not to exceed £12,500, with interest from the dates or date of advance.

On 28th January 1896 John Main, who had resigned his position as director of the company on 30th October 1895, and Robert Hutcheson, intimated to the bank that they withdrew from the guarantee. The bank thereupon closed the guaranteed account, in which there was a debit balance of £12,283, 5s. 3d. Immediately thereafter a call, payable at the bank, was made upon the shareholders for the amount still remaining due upon the A shares, and between 3rd February and 19th May 1896 this produced

Page: 105↓

£6387, 10s. These calls were entered as received by the bank into a separate account, headed, “United Gutta Percha and Rubber Company, Limited, No. II. Call Account,” which was a credit account entirely.

On 30th March 1896 the bank opened a new current account with the company. This account contained no entry of the debit balance in the guaranteed account, and no reference to that account. On 20th May the debit balance due to the bank on this account was £2349, 9s. 6d.

On 20th May 1896 the company having exhausted its resources, went into liquidation, and its affairs were gradually woundup.

In October 1898 the position of the bank in connection with the company was as follows:—The debit on the guarantee account amounted with interest to £13,021, 13s. 5d., and the debit on the account-current opened on 30th March 1896 amounted with interest to £2647, 13s. 7d., together amounting to £15,669, 7s. From this fell to be deducted the amount standing at the credit of the call account, amounting with interest to £6433, 15s. 6d., leaving £9235, 11s. 6d. After deducting from this sum dividends received by the bank from the company's estate and securities held by them, there remained due to the bank the sum of £4306, 17s. 11d.

The bank made a demand on Andrew Buchanan and W. S. Brown, two of the cautioners under the guarantee for the debit balance brought out above, and each of these cautioners paid to the bank the sum of £800 on 31st March 1898, and the sum of £1353, 9s. on 24th October 1898.

Thereafter Buchanan and Brown made a claim upon John Main for a third of the sum paid by them to the bank, on the ground that he being a co-guarantor with them was bound to relieve them for sums paid under the guarantee to such an extent as would make them and him contribute equally. He refused to pay, whereupon they raised an action against him in the Sheriff Court at Glasgow for £1435, 12s. 8d. with interest on £533, 6s. 8d. from 31st March 1898, and on the balance of £902, 6s. from 24th October 1898.

In their condescendence the pursuers averred that Alexander M'Dowall died in March 1898, and that his estates were insolvent, and that Robert Hutcheson disputed liability under the guarantee and maintained that he was unable to pay if liable.

The defender maintained, inter alia, (1) that the £6387, 10s. paid into the bank as the result of the call made upon the shareholders should have been applied to reduce the balance due on the guaranteed account, and (2) that even if he were liable at all, the pursuers were not entitled to recover from him more than one-fifth of the sum due under the letter of guarantee.

After proof had been led, the Sheriff—Substitute ( Fyfe), on 21st May 1900, pronounced the following interlocutor:—“Finds (1) that pursuers and defender form three of five guarantors who undertook, on behalf of the United Gutta Percha and Rubber Company, Limited, the guarantee obligation expressed in the letter of guarantee; (2) that the ultimate debit balance arising under said guarantee towards payment of which defender is liable as a contributor is £2833, 19s., which was payable to the bank at 24th October 1898, (3) that defender's proportion thereof is one-fifth, or £566, 15s. 9d.; (4) that pursuers have paid the bank's claim under said guarantee: Finds in law that pursuers, having been called upon to pay, and having paid the bank's claim arising under said guarantee, are entitled to relief by defender to the extent of one—fifth thereof: Therefore decerns against the defender for payment to pursuers of said sum of £566, 15s. 9d. sterling, with interest thereon from 24th October 1898.”

The grounds on which the Sheriff-Substitute based his judgment included, inter alia, the following—(1) that the £6387, 10s. received as the amount of the calls should have been applied to the reduction of the debit balance in the guaranteed account; (2) that the pursuers had not proved that Alexander M'Dowall's estates were insolvent, or that Robert Hutcheson was unable to pay; and (3) that although the five co-obligants as in a question with the bank were liable singuli in solidum, their liability inter se was pro rata only, and that in the absence of proof to the contrary all the five must be assumed to be able to pay.

The pursuers appealed, and argued—(1) There was here no contract, express or implied, which compelled the bank to appropriate to the guaranteed account the amount of the calls on the unpaid capital. The guaranteed account had been closed before the unpaid capital was called up, and the accounts were kept quite separate. The purpose of calling up the unpaid capital was not to reduce the debit on the guaranteed account, but to furnish funds for the carrying on of the company. In re Sherry, 1884, 25 Ch D 692. (2) The proof showed that the estates

of Mr M'Dowall and Mr Hutcheson were insolvent, but whether they were or not the defender was not entitled because the bank had chosen to demand the debt from the pursuers to escape sharing equally with them in the burden. He was bound to pay them a third, and thereafter he like the pursuers would be entitled to seek relief for the difference between the one-third and the one-fifth of the debt from the cocautioners who had paid nothing.

Argued for the defender—The Sheriff—Substitute's judgment was right. (1) The amount received from the calls should have been used to write off the debit balance on the guaranteed account. The mere fact that the bank chose in following out their mode of accounting to enter the calls in a separate account should not be held to prejudice the defender. The bank was bound to apply all moneys paid in primarily to extinguish the debit under the guaranteed account— Cuthill v. Strachan, February 16, 1894, 21 R. 549; Clayton's case, 1816, 1 Merivale 572; Kinnaird v. Webster, 1878, 10 Ch. D. 189. (2) In any event the defender was only bound to pay one-fifth of the total

Page: 106↓

amount paid to the bank by the pursuers. Where one out of several cautioners had paid a debt, he was only entitled to decree against each of his co-cautioners for that cautioner's own individual share— Anderson v. Dayton, June 26, 1884, 21 S.L.R. 787. In the present case the pursuers had not proved that they were unable to recover from Robert Hutcheson and the estates of Alexander M'Dowall the one-fifth parts due under the guarantee.

At advising—