Scottish Court of Session Decisions

The Scottish Property Investment Company Building Society was a society incorporated under the Building Societies Act 1874. By the 2d of its rules its objects were declared to be—“By the subscriptions or payments of its members, to form a fund in shares of £25 each—halfshares of £12, 10s. each, and quarter-shares of £6, 5s. each—out of which fund members who are desirous of erecting or acquiring dwelling-houses, or other heritable property, may receive advances upon heritable security by way of mortgage to enable them to do so, and generally the objects allowed by ‘The Building Societies Act 1874.’ No preferential shares shall be issued.”

In November 1881 an order was pronounced by the Sheriff of the Lothians directing the society to be wound up under supervision; and in August 1882 the liquidators petitioned the Sheriff to approve of the state of assets and liabilities, with relative schedules, which they had prepared and lodged in the Sheriff Court in terms of the Act of Sederunt 17th March 1882.

The state of assets and liabilities showed that the ordinary creditors would be paid in full, and the following schedules showed the proposed ranking of members of the society: —

Schedule G, containing the names and amount at the credit of members whose shares had matured regularly in terms of the rules. The amount due to members in this class, exclusive of interest, was £26, 12s.

Schedule H, containing the names and amount at the credit of borrowers whose properties had been sold by the society, leaving a surplus at their credit. The amount due to members of this class, exclusive of interest, was £358, 4s. 10d.

Schedule I, containing names of members whose shares were paid in advance, i.e., who had

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paid more than the subscriptions due thereon at the date of liquidation. The amount due to members of this class, exclusive of interest, was £15,603, 1s. 10d.

These three classes the liquidators proposed to rank pari passu, and to pay them in full out of the first funds coming into their hands, before any payment was made to the following classes of members.

Schedule K, containing the names and amount at the credit of members who had given notice to withdraw on or before 31st January 1881, and who were thus entitled to receive payment in accordance with the balance sheet of 31st January 1880, from which it appeared that the society was a solvent concern. The amount due to members of this class, exclusive of interest, was £960, 5s. 5d., and the liquidators proposed to pay each member embodied in this class in full, according to the priority of his notice of withdrawal, after those included in Schedules G, H, and I, but in priority to any other class of members.

Schedule L, containing names of members who gave notice to withdraw from the society after 31st January 1881, and who therefore fell (as the liquidators were advised) to receive payment of the amount of their subscriptions in accordance with the balance-sheet as made up and finally approved of for the year ending 31st January 1881, which balance-sheet showed a loss to the members of 40 per cent. on the amount of their subscriptions.

The liquidators proposed to pay each member in this category (who had paid in full the subscriptions due by him at the date of his withdrawal) the amount at his credit, less 40 per cent., as representing the loss shown on the balance-sheet, according to the priority of his notice.

Schedule M, containing the names of ordinary members who had not given notice of withdrawal. The amount at the credit of members in this position was £78,979, 8s. 7d., and the liquidators proposed to divide the remainder of the assets after payment of all the other members on the footing above mentioned pari passu among the members in this category according to the amount at their credit.

Notes of objection were lodged to several items in the state of assets and liabilities, but as two only of these objections were made the subject of decision by the Second Division in the appeal after mentioned, they alone need be detailed here.

I. The first objection was by Mr and Mrs J. C. Stewart, Mr G. W. Stewart, and Mr John Fortie, who were entered in Schedule L. They objected to the deduction of 40 per cent. on the amount of the shares in that schedule as proposed by the liquidators.

Answers were lodged by the liquidators, and also by James Coutts and certain other members who had been placed in Schedule M.

The following were the Rules of the Society bearing on the question:—

“21. The subscriptions on unadvanced shares shall be one shilling per share per fortnight; and shall be due and payable in advance, within the office of the society, on each alternate Tuesday.

71. The books of the society shall be brought to a balance and the profits ascertained, as on the first day of February in each year, in such way as the directors shall think proper, under the advice of a chartered accountant, or a Fellow of the Faculty of Actuaries in Scotland, if they shall deem such advice necessary.

72. The profits shall be placed to the credit of the holders of unadvanced shares, to an extent not exceeding five per cent. per annum on the amount standing at their credit in the books of the society.

75. Any member holding unadvanced shares shall be entitled to withdraw from the society on application to the directors in writing, and shall be entitled to receive the amount standing at his credit in the books of the society in respect of his shares as at the immediately preceding annual balance, together with the amount of subscriptions paid by him thereafter. Interest, at such rate as the directors may from time to time fix, shall be allowed on the amount standing at such member's credit at the immediately preceding annual balance, provided that the date of his notice of withdrawal is at least six months subsequent to the date of said annual balance.

76. A fee of one shilling shall be charged against the member for each share he withdraws, unless he shall at the same time re-enter with the society for a new share instead thereof. Applications for withdrawal shall be considered and granted by the directors in the order of priority of the dates on which these applications shall have been received by the manager, and payment shall be made to such applicants so soon as the directors shall have sufficient funds at their disposal, and not otherwise, but such member shall be entitled to bank interest on the amount due to him from the date of his application being received.”

The admitted facts were these—Mr J. C. Stewart and Mr G. W. Stewart gave notice of withdrawal on 3d March 1881, and Mrs Stewart and Mr John Stewart on 4th March. At these dates no balance-sheet had been made up for the year ending 31st January 1881, but a balance-sheet for that year was made up and embodied in the directors' annual report of date 30th March 1881, and was submitted to a meeting of the society on 2d May, when it was disapproved, and a committee appointed to investigate. An amended balance-sheet was prepared and was appended to a report by the directors of date 20th July. In this report there was a note to the effect that “Shares of which notice of withdrawal has been given since 31st January 1881 will be subject to a rateable proportion of the estimated deficiency as appearing in this balance-sheet.” In the balance-sheet the alleged deficiency was estimated to be equal to 40 per cent., or 8s. per £ of the value of the unadvanced shares. No sum was written off the sums standing at the credit of the objectors. The original balance-sheet showed a profit for the year of £7628, and the amended balance-sheet a loss of £45,021. There was no evidence that any part of this loss had occurred between the dates of the two balance sheets. The amended balance-sheet was approved of by the Society on 28th July. The objectors also stated that they had been excluded from taking part in the business of the Society, and in particular in the meetings of 2d May and 28th July.

The objectors pleaded—“(2) The objectors, as at the dates of their withdrawals, ceased to be members of the Society, and became creditors

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thereof for the sums standing at their credit as condescended on, as in a question with those remaining members of the Society. (3) It was incompetent and ultra vires of the Society, or the remanent members thereof, to prejudice the rights of the objectors to payment of the full sums at their credit by resolutions or actings subsequent to the dates of said withdrawals; and the objectors are accordingly not bound by said resolutions and actings, but entitled to a ranking, according to priority of notice, as claimed. (5) The objectors' notices of withdrawal having been duly given and accepted, they fall to be ranked in the liquidation for the sums claimed, and that either on the principle of reference to the balance-sheet of January 1880 or March 1881, as condescended on. (6) There being no ground or reason for making a distinction in ranking, as before and after 31st January 1881, the true and sole principle of ranking being that effect should be given to notices of withdrawal in order of priority, and that for sums at the credit of the respective withdrawers at dates of notice, the statements and schedules of the liquidators fall to be amended, and therefore Schedule K should be deleted, and the entries therein massed with Schedule L.”

The liquidators pleaded—“(5) In respect that notice of withdrawal was given by the members embodied in Schedule K prior to 31st January 1881, they are entitled to receive payment of the amount at their credit at 31st January 1880, being the date of the immediately preceding annual balance. (7) The sums standing at the credit of the objectors in the balance-sheet of 31st January 1881, by the annual balance immediately preceding their notices, being the sums paid by them on their respective shares, subject to deduction of 40 per cent. as the proportion of the estimated loss which bad been incurred at the date of the balance-sheet, they are only entitled to be ranked in the liquidation for the sums payable to them respectively, in terms of the balance-sheet.”

II. The second of the present objections was stated by John Mitchell, whose name appeared in Schedule M as an ordinary non-withdrawing member, and the question raised by him was whether a notice of withdrawal admittedly sent by him to the directors of the Society on 11th March 1881 had been (as the liquidators maintained) subsequently cancelled unconditionally.

The following were the material facts bearing on this question:—The committee of shareholders appointed (as already mentioned) to investigate the Society's affairs in consequence of the unsatisfactory report by the directors of date 30th March, reported (on 20th June), inter alia, as follows:—“In view of the result brought out in the accountant's report, which shews an estimated deficiency of close upon £50,000, and looking to the fact that at 15th May last unadvanced members holding upwards of £53,000 of share capital had given notice to withdraw their shares (which sum has since been increased to about £60,000), and counsel being of opinion that those members who have so given notice to withdraw are entitled to be paid in full in the order of priority of their applications to withdraw, the committee consider that only one or other of the following courses can be adopted. These are—(1) To apply for liquidation immediately. (2) To ask unadvanced members who have given notice of withdrawal to cancel their notices; and thereafter, by the necessary alteration of and addition to the rules, to alter the constitution of the Society, and especially to restrict the area of its loan operations to Midlothian, where the Society have made little or no losses. But inasmuch as it would obviously be inequitable that some unadvanced members should cancel their notices of withdrawal, while others did not, the committee suggest that, should the second course be adopted, members should be asked to cancel their notices only on the express understanding that these cancellings are not to be used unless shareholders representing at least nine-tenths of the amount under notice of withdrawal should cancel their notices within a limited time. It is for the shareholders to say which of these two courses should be followed, but a majority of the committee strongly recommend the adoption of the second course.”

On 22d June an adjourned meeting of the Society “gave (as its minutes bore) a general approval to the committee's report, and the committee were instructed to send out circulars to those unadvanced shareholders who had given notice of withdrawal, inviting them to cancel their notices.”

On 20th July the directors sent out the following circular:—“The directors beg to refer to their report dated 30th March last, and to the reports by the committee appointed by the shareholders which have been read at the recent meetings of the Society…. The shareholders' committee have requested the directors to give an opportunity to those members who have given notice of withdrawal to cancel their notices, in order to facilitate the proposed arrangements. The directors accordingly enclose a form to be tilled up and returned by such members as desire to do so, and they will allow notices to be thus cancelled up till the end of August.”

The cancellation form was in these terms:—“I hereby cancel the notice of withdrawal of my shares in The Scottish Property Investment Company Building Society.” Then followed blanks for signature, occupation, and address.

The objector had not returned his cancellation form on 19th September, having in the meanwhile received two other circulars from the Society, dated respectively 8th August and 9th September, urging him to cancel, but making no reference to the report of the committee, or to the condition therein contained.

It was admitted that shareholders representing nine-tenths of the amount under notice of withdrawal had not cancelled their notices at the date of the liquidation.

The objector pleaded—“(2) In any event the objector is entitled to be treated as a withdrawn shareholder, in respect that, first, his notice of withdrawal could not be, or at least never was, validly cancelled; and second, any cancellation of his notice was under a condition which has never been fulfilled.”

The liquidator pleaded—“(1) The objector having unconditionally cancelled his notice of withdrawal, he thereupon ceased to have any of the rights or privileges of a member of the Society who had given notice of withdrawal.”

J. C. Stewart and others, who also lodged answers to the present note of objections, stated

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a similar plea to that of the liquidators.

On 11th August 1884 the Sheriff-Substitute ( Hamilton) approved of the scheme of ranking set forth in the state of assets and liabilities, subject to certain alterations on matters which were not at the present stage discussed on appeal.

“ Note.—In this liquidation the ordinary debts due by the Society have now been fully paid or provided for, and the time has arrived for determining the rights of the members inter se, with a view to the distribution of the remaining funds.

In connection with the scheme of ranking submitted by the liquidators, questions affecting large classes of members have arisen, with reference to which a record has been made up, and a full discussion has taken place before the Sheriff-Substitute. These are dealt with in the above interlocutor, leaving for after consideration any special questions that may be raised with regard to the rights or claims of individual members.

The following are the points now decided—(1) That the members whose names appear in Schedules K and L are entitled to a preferable ranking, having become creditors of the Society as from the dates of their respective notices of withdrawal, rules 75 and 76 of the Society's old rules, as read in the light of two recent English decisions, Norwich and Norfolk Provident Building Society, July 5, 1876, 45 L. J., Chanc. 785; Blackburn and District Benefit Building Society, July 6, 1883, 24 Law Reports, Chanc. 421. (2) That while the members in Schedule K are entitled to be paid the full amount of their subscriptions, those in Schedule L must suffer a deduction therefrom of 40 per cent. Both classes are withdrawing shareholders, and as such fall to be dealt with in terms of the 75th rule — i.e., they are to be paid the amount standing at their credit as at the immediately preceding annual balance. Now, the balance-sheet of 31st January 1880, which is that applicable to the members included in Schedule K, shewed that the Society was then a solvent concern, whereas the balance-sheet of 31st January 1881, in accordance with which the members included in Schedule L are to be paid, as amended and ultimately adopted by the Society, shewed a deficiency equal to 40 per cent of the share capital. To pay the members in Schedule L in full would therefore be contrary to the express terms of the rule above referred to. It would also be unjust to the other shareholders of the Society. In support of his contention that the L shareholders are entitled to be paid without deduction, counsel for the objectors John Stewart and others founded strongly upon a recent decision of the Second Division of the Court of Session in the case of Galbraith v. The Glasgow Working Men's Provident Investment Building Society [28th May 1884, 21 Scot. Law Rep. 782.] The Sheriff-Substitute cannot, however, regard that decision as in point, seeing that the rule regulating the rights of withdrawing shareholders which was there under consideration differs materially from that upon which the question here turns. In the Glasgow society's rule there is no reference to a balance-sheet. (3) That members in the position of the objector John Mitchell, who, having given notice of withdrawal afterwards cancelled it, are rightly classed in Schedule M, along with the general body of non-withdrawing members. So far as appears such cancellation was absolute and unconditional; at least there is not sufficient evidence of a conditional contract having been made with the society. Upon this point the Sheriff-Substitute may refer to the circulars issued by the directors on 8th August and 9th September 1881.

John Crawford Stewart and others appealed to the Second Division, and argued—The present objectors were entitled to a preferential ranking according to priority of notice, and to the full value of their shares in so far as paid up, and not 60 per cent. thereof as proposed by the liquidators. From the time they gave notice of withdrawal the objectors ceased to be members of the Society ( quoad non-withdrawing members) and became its creditors— The Norwich and Norfolk Provident Building Society, July 5, 1876. 45 L.J. Chanc. 785. The right of an unadvanced shareholder who withdrew consisted of a right to so much of £25 as he had already put in, with interest, and also to so much of the profits as should have de facto been put into the books under his name. No deduction such as was here proposed was permissible— Glasgow Working Men's Provident Investment Building Society, May 28, 1884, 21 S. L. R. 782. No doubt it followed that he was also not entitled to profits accrued but not inserted in the books; but then he had voluntarily chosen a date for withdrawing before the new balance-sheet had been drawn up. Rule 75 spoke of the amount in the “books” of the Society, not in the “balance-sheet.” The rule merely fixed a date, and had nothing further to do with the balance-sheet. It was not suggested that a withdrawal meant a winding-up. Yet a deduction of 40 per cent. was really a break-up valuation. A withdrawing shareholder as a creditor inter socios had a right to a sum of money from a living concern. If the Society had no realisable assets, then liquidation must follow. But to go on and yet to deduct was unjust to the withdrawing shareholders. The date of withdrawal was the date of the notice to withdraw; after that the shareholder had no vote. So this question of value, which was so eminently a matter of opinion, was decided behind the shareholder's back. Further, the deficiency was not the result of the year's trading merely; it was the accumulation of several years during which members had been withdrawing without objection. At all events, the objector's rights were to be settled by the original and not the amended balance-sheet.

Argued for John Mitchell—A member once withdrawn ceased to be a member, and became a creditor of the company, and it was an incompetent way of re-entering merely to cancel the notice of withdrawal. It did not bind the directors, and if it did not do so it could not bind the other party to it. Then (2) the cancellation was conditional. The form of cancellation was enclosed along with a circular which made reference to the report of the committee of shareholders setting forth the condition that the cancellation was contingent on nine-tenths of the withdrawing members also cancelling their notices of withdrawal, and nine-tenths did not do so. It followed that the withdrawing members, even though they did return notices

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of cancellation, remained free— Mason v. Benhar Coal Company, June 2, 1882, 9 R. 883; in re Richmond Hill Hotel Company— Pellatt's Case, April 13, 1867, L.R. 2 Chanc. App. 527; in re Anglo-Danish and Baltic Steam Navigation Company—Sahlgreen and Carroll's Case, Jan. 14, 1868, L.R, 3 Chanc. App. 323; Scottish Petroleum Company, Feb 3, 1881, L.R. 17 Chanc. Div. 373. The Society were bound to give notice of their change of intention, if their intention as to the condition of nine-tenths had changed— Trail v. Baring, March 15, 1864, 4 De Gex, Jon., and Sm. 319.

The argument against both the foregoing parties was maintained by James Coutts, an unadvanced member, not by the liquidators. He argued (1) as against Stewart and others. —The meaning of rule 75 was that you were to take the position of withdrawing not according to what actually appeared from the books of the Society, but according to the balance-sheet which was, or was to be in ordinary course, made up, as for the year ending immediately previous to the date of withdrawal. Rule 71 showed that, if necessary, there was in a balance-sheet to be a re-valuation of assets, and a writing of losses from the shares. The re-valuation was to be taken to be of the property as at 1st February 1881, in the absence of contrary evidence, and there was no proof of a change of circumstances between that date and the date of the amended balance-sheet. Then (2) as against Mitchell, the cancellation was unconditional. In form it was so, and the condition was not imported by reference. It was not clear that the Society had ever made it a condition, and there was no proof that the objector had ever read the committee's report. Even if it was to be held as imported by reason of the circular accompanying the form sent, the objector did not reply to that circular but to others of a later date, in which no mention was made of any condition. There was no special form for re-entering as a shareholder, and the form of cancelling a notice of withdrawal was a perfectly competent form of becoming a shareholder again.

At advising—