Scottish Court of Session Decisions

On 7th February 1908 the Ballachulish Slate Quarries Company, Limited, and J. H. Buchanan, C.A., the liquidator thereof, presented a petition under section 138 of the Companies Act 1862, as amended by section 25 of the Companies Act 1900, for the determination of certain questions in the liquidation of the Easdale Slate Quarries Company, Limited.

The Ballachulish Slate Quarries Company was incorporated on 29th December 1893, and the Easdale Slate Quarries Company on 18th January 1895. At the date of the petition both companies were insolvent.

Prior to the formation of the Easdale Company the quarries at Easdale were the principal competitors of the Ballachulish Company in the slate market, and the Easdale Company was promoted by the directors of the Ballachulish Company in order to acquire the Easdale quarries. The directorate of the Easdale Company, after its formation, was practically identical with that of the Ballachulish Company. On 24th December 1894 the directors of the Ballachulish Company passed a resolution that a sum of £3000 belonging to the company should be advanced to the Easdale Company, to be secured by debentures, bearing interest at 5 per cent., and constituting a first charge over the assets, including the uncalled capital of the Easdale Company. The said sum was duly advanced to the Easdale Company, who on 1st May 1895 granted to the Ballachulish Company a debenture bond, containing, inter alia, the following clauses:—“(1) The Easdale Slate Quarries Company, Limited, incorporated under the Companies Acts 1862 to 1890 (hereinafter called the company), will, on the eleventh day of November Eighteen hundred and ninety-five, or on any subsequent date, pay to the Ballachulish Slate Quarries Company, Limited, and the assignees of the said company, the sum of Three thousand pounds. … (3) The company hereby charges with such payment its undertaking and all its property whatsoever and wheresoever, both present and future, including its uncalled capital for the time being. (4) This debenture is issued subject to and with the benefit of the conditions endorsed hereon, which are deemed to be part of it. … The conditions referred to—(1) This debenture will have a preferential ranking on the property hereby charged, and such charge is to be a valid security. … (6) If at any time the unpaid capital of the company, whether called or uncalled, is less than the principal sum then owing on this debenture, such unpaid capital shall be deemed to be specially charged with the payment of this debenture, and if subsequently paid up shall be paid to the trustees to be nominated by the company, to be held in trust accordingly.”

The transaction was reported to the shareholders of the Ballachulish Company at the annual meeting of the company in June 1895; and at the first statutory meeting of the shareholders of the Easdale Company, in May 1895, the directors of that company reported that the debenture for £3000 in favour of the Ballachulish Company, secured over the uncalled capital of the company, had been executed and delivered. A copy of the report containing this intimation was sent to each of the shareholders on 27th May 1895.

At different times during the years 1895 and 1896 the directors of the Ballachulish Company lent to the Easdale Company additional sums amounting to £1350, for which sum the latter company, on 10th June 1896 granted to the Ballachulish Company a debenture bond in substantially the same terms as the bond quoted above. No formal intimation of the bond was given to the shareholders of the Easdale Company.

In June 1902 the directors of the two companies were identical, and the board had a common chairman. The shares of both companies also were practically held by the same persons. The directors of the Easdale Company being then desirous of borrowing a further sum of £3000, arranged with the directors of the Ballachulish Company that the debenture bonds for £3000 and £1350, above mentioned, should be postponed to a new series of debentures to be issued by the Easdale Company for the said sum, and on 13th June 1902 this arrangement was reported to the Ballachulish Company and agreed to. On 23rd July 1902 a prospectus was issued by the directors of the Easdale Company to the shareholders of the two companies inviting applications for an issue of £3000 first mortgage debentures secured upon the company's assets. The prospectus stated, inter alia, that, “at the general meeting of the shareholders of Ballachulish Slate Quarries Company, Limited, it was unanimously agreed that the existing loans granted by that company to the Easdale Company should be postponed to the present issue of debentures.” Thereafter applications for the new issue of debentures were received by the Easdale Company,

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and loans were accepted by them to the amount of £3000. In return debenture, bonds were issued to the lenders, dated 8th September 1903, of which the material clauses were these—“(1) The Easdale Slate Quarries Company, Limited, incorporated under the Companies Acts 1862 to 1890 (hereinafter called the company) will, on the (end of lease) fifteenth day of May Nineteen hundred and sixteen, or on any other subsequent date, pay to, his executors, administrators, and assignees, or other the registered holder for the time being of this debenture, the principal sum of (3) The company hereby charges with such payment its undertaking and all its property whatsoever and wheresoever, both present and future, including its uncalled capital for the time being. (4) The company, as beneficial owner, hereby assigns to and in favour of Robert Menzies, Solicitor before the Supreme Courts, twenty-three York Place, Edinburgh, as trustee for behalf of, his executors, administrators, and assignees, or other the registered holder for the time being of this debenture, all and singular the full benefits and advantages of the foregoing agreement, and all and singular the rights, easements, liberties, and privileges thereby respectively conferred or agreed to be granted, to hold the same subject to the terms and conditions hereinafter set forth. Condition (1) This debenture will have a preferential ranking on the property hereby charged, and such charge is to be a valid security. All already existing debentures over the property and undertaking of the company will be postponed to it and to the other debentures of the series of which it forms part.”

These bonds were not at the time of their issue intimated to the shareholders of the Easdale Company. On 17th February 1904, however, a circular was issued to the shareholders by the secretary of the Easdale Company, intimating, inter alia, that the directors had assigned the uncalled capital of the company (first) to Robert Menzies, S.S.C., 23 York Place, Edinburgh, as trustee for the holders of the debentures for £3000, issued on 8th September 1903; and (second) to the said Robert Menzies, as trustee for the Ballachulish Company, in security for the debentures issued to that company, dated 1st May 1895 and 10th June 1896 respectively. Attached to the circular was a form of acknowledgment of intimation, which was signed and returned by the different shareholders to whom the circular was addressed.

Both companies went into liquidation on 13th June 1907. The liquidator of the Easdale Company having called up the unpaid capital of the company, questions arose, inter alia, as to whether the capital had been validly assigned in security. In these circumstances the petitioners made the present application.

The questions of law submitted to the Court were:—“(1) Whether the said debenture bonds in favour of the said Ballachulish Company, dated 1st May 1895 and 10th June 1896, for £3000 and £1350 respectively, confer a valid security over the capital of the said Easdale Company, so far as uncalled at their respective dates, to the effect of entitling the petitioner to a preferential ranking on the property thereby charged: (2) Whether the said debenture bonds issued on 8th September 1903 for £3000 in all confer a valid security over the capital of the said Easdale Company, so far as uncalled at that date, to the effect of entitling the respective creditors therein to a preferential ranking on the property thereby charged: (3) In the event of questions (1) and (2) being answered in the affirmative, there arises the further question—Whether the said debenture bonds in favour of the said Ballachulish Company rank ( a) preferentially to, or ( b) pari passu with, or ( c) postponed to the said debenture bonds dated 8th September 1903.”

Answers were lodged by (1) Edward Bruce and others (holders of the 1903 debentures), and (2) Robert Menzies (trustee for the 1903 debenture holders) in which they maintained that the debenture bonds issued in 1903 constituted a valid security over the uncalled capital of the company, and that in the circumstances stated, they were entitled to a preferential ranking.

Argued for petitioners—The bonds issued in 1895 and 1896 in favour of the petitioners created a valid security over the uncalled capital. That capital had been validly assigned, vide condition 6 ( quoted supra), and intimation thereof had been given by the circular of 17th February 1904. Words of direct conveyance were not necessary to constitute an assignation provided the intention to assign was clearly indicated— Carter v. M'Intosh, March 20, 1862, 24 D. 925, at p. 933. The 1903 debentures had not “specially” assigned the uncalled capital; they had merely “charged” the undertaking and its whole assets. That was an attempt to introduce into the law of Scotland what was known in England as a “floating security.” As to the meaning of a “floating security” reference was made to Wheatley v. Silkstone and Haigh Moor Coal Company, [1885] L.R., 29 Ch. Div. 715. Assuming, however, that the invalidity of the 1903 bonds, if established, involved the invalidity of the bonds founded on by the petitioners, the petitioners alternatively submitted that all the bonds were invalid, and that they were entitled to a pari passu ranking with the other creditors. A valid security could not be created over moveables which were allowed to remain under the borrower's control. The bonds were in English form and created no effectual security in Scotland. No formal intimation that the uncalled capital had been assigned was ever made, and therefore in any event the assignation was invalid. As to the difference between the laws of England and Scotland, quoad securities over moveables, reference was made to Clark, &c. v. West Calder Oil Company, June 30, 1882, 9 R. 1017, per Lord Shand at p. 1033, 19 S.L.R. 757.

Argued for respondents (the 1903 debenture holders)—The uncalled capital had

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been validly assigned. That was clear from the terms of the bond— vide clause 3 and condition 1. Words of direct conveyance were not necessary provided the intention to assign was clear— Carter, cit. supra; M'Cutcheon v. M'William, March 8, 1876, 3 R. 565, 13 S.L.R. 358; Miller v. Muirhead, March 10, 1894, 21 R. 658, 31 S.L.R. 569. Intimation of the assignation, as well as of the fact of priority, had been effectively given to the shareholders of the company ( a) by the prospectus of 23rd July 1902, which had been issued to the shareholders of both companies, and ( b) by the circular of 17th February 1904. In any event the petitioners had consented to their bonds being postponed to the debentures of 1903, and were barred from claiming a preference.

Counsel for the trustee for the 1903 debenture holders stated that he adopted the argument submitted by the respondents, the 1903 debenture holders.