Scottish Court of Session Decisions

This was a note to the Lord Ordinary for James Maxtone Graham, C.A., Edinburgh, official liquidator of the Irvine and Fullarton Property Investment and Building Society, for settlement of the list of contributories.

From the statements made in the note it appeared that on 14th November 1903 the Court, on the petition of certain creditors, ordered the society to be wound up as an unregistered company under the provisions of the Companies Acts 1862 to 1900, and appointed the petitioner to be official liquidator thereon.

The objects of the society were (1) to provide a mode of safely and profitably investing the savings of its members, and (2) to advance to its members money to erect or purchase dwelling-houses or other real or leasehold estate, or pay off burdens affecting such property.

By the 3rd article of the rules of the society it was provided that the capital of the society should be raised in shares of £25 each, payable by monthly instalments of 2s. per share, or by fortnightly instalments of Is. per share, and by interest arising thereon.

Articles 16, 17, and 18 were as follows:— “Article 16. Instalments in Arrears.—Every member failing to pay his monthly instalments shall be fined Id. per share for every month such instalments are in arrears, and such fines may be liquidated from the first moneys paid in by the defaulter, or deducted from the amount already paid in by him, and so soon as the fines shall amount to the sum at his credit, the amount thereof shall then be forfeited to the society, and be carried to the contingent fund, and the member shall thereafter cease to have an interest in the society. Intimation shall be given by the manager to every share-holder who may be in arrears for a period of not less than six months, stating the amount of his arrears then due, by letter addressed to such shareholder to his registered address, and having a postage label thereto attached, put into the post office at Irvine, when, if not paid, the notice shall be repeated every three months thereafter until he shall either pay his arrears or cease to be a shareholder, as before provided. The expense of these notices, which shall be assessed at 3d. each, to be paid by the shareholders to whom they are sent. Article 17. Temporary Suspension of Instalments.—The directors shall have power in special cases, where application is made for that purpose, and under such conditions as they may think fit, to allow members to suspend payment of their instalments for a limited period, not exceeding six months, without exaction of the before-mentioned fine. Article 18. Withdrawal of Shares.—Any member who has not received an advance on the shares held by him may, at any time after twelve months from the date of his joining the society, on giving one month's notice to the manager in form No. 4 of appendix, withdraw his instalments on such shares,

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with interest thereon at the average rate allowed by banks on open accounts since the date of last allocation of profits. Members so withdrawing shall forfeit all right to any share of the profits not yet allocated. Applications for withdrawal shall be considered and granted by the directors, and payment shall be made to such applicants as the state of the funds will permit, in the order of priority of their dates.”

The note further stated that so far as the liquidator had been able to ascertain the claims of outside creditors amounted to upwards of £4100, and that he believed that these claims with the costs of the winding-up would exceed the sum likely to be realised from the sale of the security subjects and that a call upon the members would therefore be necessary. That in virtue of the provisions of sec. 200 of the Companies Act 1862 he had framed a list of contributories, consisting, inter alios, of investing members who did not appear to have withdrawn from the Society; that owing to the defective way in which the register of members had been kept, he had had great difficulty in ascertaining who were now contributories, and that he had accordingly lodged the present note in order that the list might be settled by the Court.

Objections and answers to the note were lodged by James Cuthbertson, contractor, Wellpark Road, Saltcoats, who objected to his name being placed on the list of contributories in respect that he was not a member of the society. He averred that he had never been a member of the society, but that, assuming he had been, he must in terms of article 16 of the rules have ceased to be a member many years before.

The liquidator lodged answers in which he averred that in November 1878 Cuthbertson had applied for shares, that he had paid entry-money and instalments, that he was duly entered on the register of members, that thereafter he was treated as a member of the society, that profit in respect of his shares was allocated to him up to and including the year 1886, and that no notice of withdrawal was ever given by him to the society. He further averred that the society did not enforce the 16th article of the rules in regard to the shares in question.

On 29th June 1905 the Lord Ordinary ( Johnston) pronounced the following interlocutor:—“Finds that the name of the objector, the said James Cuthbertson ‘unior, should not have been put in the ist of contributories appended to the said note, No. 89 of process, and orders the liquidator to remove his name from said list, and decerns: Finds the said objector entitled to expenses in connection with his said objections and answers out of the funds of the liquidation: Allows an account thereof to be given in,” &c.

Opinion.—“Under this note for settlement of the list of contributories in the liquidation of the Irvine and Fullarton Property Investment and Building Society, the objector, James Cuthbertson junior, seeks to have his name removed from the list in these circumstances.

The shares in the society are of £25 each, payable by monthly instalments of 2s. each, or fortnightly instalments of Is. each per share, and the rules make provision for application, registration, and issue of certificates. The voucher for payment of instalments is (article 14) to be the member's pass-book. But with regard to instalments in arrear it is provided (article 16)—(1) Every member failing to pay his monthly instalment shall be fined one penny per month for every month such instalment is in arrear; (2) such fines may be liquidated from the first moneys paid in or deducted from the moneys already paid in; (3) when the moneys paid in, or at the credit of the member, are exhausted by fines, the said amount ‘shall then be forfeited to the society and carried to the contingent fund, and the member shall thereupon cease to have an interest in the society’; and (4) certain notices are provided to be given to the member in arrear, and to be repeated every three months ‘until he shall either pay his arrears or cease to be a shareholder as before provided.’

Now, James Cuthbertson is alleged to have become a member in respect of three shares in 1878, and to have paid up in all only 10s. on these shares, which, if the rule of article 16 operated automatically, would have been extinguished by fines by 1882, or, at any rate, long before the liquidation of the society commenced in 1903. But the society continued him on its register, regularly credited him with a share of profits so long as profits were divided, i.e., down to 1886, sent him no notices in terms of article 16 of the rules, did not debit his account with fines, and did nothing to declare the forfeiture.

Cuthbertson, the objector, denies his identity with the Cuthbertson registered as a member, and states other objections requiring proof. But he asks judgment on the question, which would avoid proof, whether article 16 of the rules does not work automatically, so that he ceased, ipso facto, on exhaustion of his payments in, to be a member of the society, and therefore cannot be settled on the list of contributories.

The liquidator maintains that the forfeiture is not automatic, and that the society, it being solely for its benefit, may elect to exercise the power of forfeiture or not as it pleases; that the forfeiture is in fact in the discretion of the society, acting through its directors.

The Scottish case of Bidoulac, 17 R. 144, decided that an analogous forfeiture in a lease was in the discretion of the landlord, and the decision in one branch of Dalrymple v. Herdman, 5 R. 847, is based on the same principle.

“Further, the English case of Moore v. Rawlins, 1859, 6 Scott's C.B. Reports (new series) 289, was quoted as having decided the very point under the rules of a building society in favour of the liquidator's contention. It is true that the rubric bears it to have been held that a similar clause operated a forfeiture of the member's

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shares only at the option of the directors: But I cannot find that the judges, except Mr Justice Byles in an interjected remark during the argument, make any reference to the point. But assuming the Court to have dealt with it as disposed of by Mr Justice Byles' remark, I cannot hold that case conclusive of the present. The building society there in question was in its constitution much more akin to a joint-stock company. All shares taken out were to be paid up to completion, and there was no provision for paying out except on a regular winding-up when the objects of the society were attained. There was no provision for retiring or withdrawing while shares were only partly paid up, as here under article 18 of the rules, or for paying out on demand where shares were fully paid up, as here under article 20 of the rules.

Moore v. Rawlins may, I think, be quite well referred to the same principle as applies where there is a power of forfeiture of shares in a registered company for default of payment of calls—Lindley, 6th ed., p. 728. But it seems to me that the circumstances of the present case lead to an opposite conclusion. When the general scope of the rules is considered, it is found that in the Irvine and Fullarton Society it was not the intention to retain the member permanently or for a definite time. He came in and he went out at his own discretion, subject, it might be, to sacrifice or to delay. He might allow his contributions to be forfeited under article 16. He might apply to withdraw when only partly paid up under article 18, and, on notice to withdraw, any obligation under which he lay to pay instalments would appear to me to cease. He might apply to be paid out when fully paid up under article 20. And it is to be noticed that, while completed withdrawal under article 18, or completed payment out under article 20, must depend on the state of the funds of the society for the time being, it is provided that they shall be treated as on the same footing. Fully paid shares under article 20 ‘shall only be payable along with the withdrawals (under article 18) in their order, and as the funds will permit.’

There does not appear to me, therefore, to be the same bond of obligation between the members of the society here as there is in the case of a registered company, or as there was in the particular society involved in Moore v. Rawlins. There is here a voluntary element which makes the relation of the member to' the society severable at will, and prevents the society, in my opinion, enforcing the payment of instalments by any other compulsitor than the exaction of fines, while the incurring of future instalments can be ended on his own motive by the member giving notice of withdrawal under article 18.

Accordingly, I cannot hold that the provisions of article 16, for determining the members' connection with the society, is for the benefit of the society merely, and requires to be declared by the society through its directors, and maybe so declared or not, according to discretion. I think that the article gives an alternative in regard to the liquidation of arrears, but that, while the ‘may’ infers the option, it becomes ‘must’ as regards the choice of one or other of the alternatives, and that the working of the rest of the provision is automatic. The amount at credit, so soon as exhausted by fines, ‘ shall then be forfeited,’ and the member ‘ shall thereafter cease to have an interest in the society.’ And this is quite explicable if it is kept in mind that the society had no right of action—no means of enforcing payment of the full nominal amount of the shares—except indirectly by means of fines.

Of course, if liquidation finds a member in arrear, but with his share still alive so to speak, the order for liquidation will fix his obligation there and then as a contributory, the provisions of article 16 will cease to be effective, and exhaustion of the sums at his credit will not liberate him from his liability as a contributory. But what the measure of that liability will be it is not for me at this stage to consider. But where the liquidation finds a member in the position of his interest having been already automatically determined, and particularly where, as here, the society has for a long series of years made no demand on the member qua member, and has so departed from its own regulations in dealing with the entries in its books relating to the member's shares, as they have done here, outwith his knowledge, I cannot hold that there is any ground for deciding that, contrary to the express terms of the articles, the former member has still an interest in the society, and that therefore he must be settled on the list of contributories.

Accordingly, I shall order the name of the objector to be removed from the list of contributories, and shall find him entitled to the expenses of his objection.”

The liquidator reclaimed.

A joint minute of admissions was thereafter lodged by the parties, in which, inter alia, the following facts were admitted:—“(2) That no intimation or notice was given by the society to the said James Cuthbertson junior, in terms of the 16th article of said rules or otherwise; (3) that the instalments paid by the said James Cuthbertson junior in respect of shares were 10s. in all; and (4) that if rule 16 operated, the amount of 10s. standing at the credit of the said James Cuthbertson junior would have been extinguished by fines about the month of April in the year 1882.”

Argued for reclaimer—The Lord Ordinary was in error in thinking that the society had no right to proceed against Cuthbertson. Article 16 did not work automatically. None of the other articles did, and neither did 16. All members of the society were liable to the full extent of their means to outside creditors. No withdrawal had ever been intimated to the society. In terms of article 18 notice of withdrawal or intimation of some kind was essential— Moore v. Rawlins, May 5, 1859, 6 C.B., N.S. 289; Lindley on Companies

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(6th edition) 728; Buckley on Companies (8th edition) 584; Bigg's case, December 19, 1865, L.R. 1 Eq. 309; North British Building Society v. M'Lellan, June 23, 1887, 14 R. 827, 24 S.L.R. 600; Bidoulac v. Sinclair's Trustee, November 29, 1889, 17 R. 144, 27 S.L.R. 93.

Argued for respondent—Article 16 operated automatically and no active step was necessary on the part of either party. The case of Moore v. Rawlins was different. In that case the rule relied on (viz., rule 45) was qualified by the two immediately following rules (rules 46 and 47), which gave the directors a discretionary power. In the present case there was an entire absence of any such discretionary power. The effect of article 16 was that membership was forfeited ipso facto on default of payment— Liquidators of The Scottish Savings and Investment Building Society v. Russell, March 9, 1883, 10 R. (H.L.) 19, 20 S.L.R. 481; Smith's Trustees v. Irvine and Fullarton Property Investment and Building Society, November 14, 1903, 6 F. 99, 41 S.L.R. 66.

At advising—