[COURT OF APPEAL]

In re GUARDIAN PERMANENT BENEFIT BUILDING SOCIETY.

Building Society - Borrowing Powers - Unlimited Power of borrowing - Deposit of Deeds - Paid-up Preference Shares - Winding-up - Priority - 6 & 7 Will. 4, c. 32 [Revised Ed. Statutes, vol. vii. p. 1013] - 37 & 38 Vict. c. 42, ss. 8, 15; 38 & 39 Vict. c. 9 - Interval between Act and Repealing Act - Effect of Certificate of Barrister - Amendment of Rule - Rule acted on notwithstanding Disallowance.

A rule giving an unlimited power of borrowing money to the directors of a building society is void, although it was certified by the certifying barrister. And persons advancing money under it on the security of the deposit of the title deeds of borrowing members, must, in the winding-up of the society, give up their securities, and prove against the residue of the assets after payment of the outside creditors and unadvanced members.

A rule giving the directors power to issue deposit or paid-up shares at a fixed rate of interest with the right to withdraw the money in preference to the ordinary unadvanced members, is valid, and the holders will be entitled in the winding-up of the society to be paid in preference to the unadvanced members.

The effect of sect. 1 of the Building Societies Act, 1875, repealing sect. 8 of the Building Societies Act, 1874, is that all deposits with and loans to a building society certified under 6 & 7 Will. 4, c. 32, made in the interval between the 2nd of November, 1874, and the 22nd of April, 1875, are valid; but deposits and loans made before the 2nd of November, 1874, if otherwise invalid, are not made valid thereby, although they may be continued during that interval.

Securities given by a building society may be enforced against the society although sects. 14 and 15 of the Building Societies Act, 1874, are not indorsed thereon; the enactment in sect. 15 directing this to be done being only directory.

The certifying barrister struck out a rule of a building society, but the directors notwithstanding printed and acted upon it. Some years afterwards, the rule was amended and the barrister certified the amendment:-

Held, that the effect of his certificate was to make valid the whole rule as amended.

THIS was an appeal from a decision of Mr. H. F. Bristowe, the Vice-Chancellor of the Duchy of Lancaster.

The Guardian Permanent Benefit Building Society was enrolled in the year 1870 under the 6 & 7 Will. 4, c. 32, and carried on business at Manchester.

The rules, as in similar societies, provided both for borrowing

and investing, or non-advanced, members, and contained, among others, the following provisions:

Sect. 5 provided for the payment of the subscriptions and fines of members, and contained a clause that members might pay in advance any number of shares or half shares in accordance with Investors' Table No. 2.

Sect. 20 related to advances to members requiring them. It provided that the secretary should from time to time send notice to each such member in rotation, informing him of the time of inspection; and that the amount of advance should be according to the tables, less such deductions as were provided by the rules.

Sect. 31 was as follows: "The board for the time being shall have power as circumstances may require to issue deposit or paid-up shares of the value of £30 each, upon a certificate bearing interest after the rate of £5 per cent. per annum, and such certificate shall entitle the depositor (after one month's notice in writing, to be reckoned from a monthly meeting) to withdraw the whole or part of his deposit in preference to all other shares. The form of certificate shall be the same as set forth in the schedules to these rules."

Sect. 32 provided that "The trustees or directors for the time being of this society may, from time to time, as occasion may require, borrow and take up at interest any sum or sums of money from the society's banker, or from any banker, or from any other person or persons; and any borrowed money shall be a first charge on the funds and property of the society. And in case the trustees or directors shall at any time give their joint or several promissory note, or other security for money borrowed for or on behalf of the society, then and in such case, the persons giving the security shall be indemnified by the society, and the funds and property of the society shall be held subject to the repayment of the borrowed moneys; the borrowed moneys being always deemed a first charge on the society's funds and property."

Sect. 37 provided that if a loss should arise which the contingent fund should be insufficient to make good, or if from any other reason the board should deem an augmentation of the contingent fund necessary or expedient, the board should direct a levy of such a sum on every share or half share advanced and

unadvanced as would cover all deficiency. But it was provided that no levy of any sum should be made on or in respect of any deposit, or paid-up share, referred to in section 31.

Sect. 41 provided that any member might withdraw unadvanced shares on giving one clear month's notice; the amount payable on withdrawals shall be determined by the said tables. All unadvanced shares which according to the said tables should have accumulated to the full value of £120 should be considered due and payable on demand. Withdrawals were to be payable in rotation according to the priority of notice. The board might limit the number of withdrawals to be paid off in any one month.

Sect. 44 provided that whenever there was any balance at the bank not wanted for advances or other claims, the board might at any monthly meeting cause the members of the society who had not received advances either to take an advance as before provided or to withdraw by ballot as many shares as should be sufficient to exhaust the balance.

The rules were followed by two tables, of which Table No. 1 shewed the accumulations of an ordinary share, and No. 2 shewed the accumulations of a paid-up share.

These rules, after being printed, were submitted to the barrister appointed to certify the rules of benefit building societies, who certified them all with the exception of sect. 31, which he struck out. That section was, however, retained uncanceled among the printed rules, and the society obtained considerable sums of money by the issue of preference shares under it.

In the year 1876 the society altered several of their rules, and, among others, amended section 31, as follows: "Section 31. Omit £30 and insert £1 in line 3." This alteration, together with the others, was certified by the barrister, apparently in forgetfulness of his having disallowed section 31.

The effect of the alteration was to convert the £30 preference shares into £1 preference shares; and all the persons who had taken £30 preference shares exchanged them for £1 shares of the same class; and several other persons subscribed and paid for £1 shares.

The society from time to time issued advertisements and circulated reports inviting the public to make advances to it.

The society borrowed large sums of money under the 32nd section of the rules, and also issued preference shares to a large amount under the 31st section; they also were in the habit of overdrawing their account at their bankers to a considerable extent. The moneys so obtained were advanced to the borrowing members on mortgage. Reports were issued every year to the members, which contained a balance sheet shewing the amount of these transactions, and containing the initials of the persons who had taken preference shares and advanced money to the society.

The holders of these preference shares were not entered on the list of members of the society in respect of these shares, nor credited with any bonuses or profits. Nor did they vote at the meetings of the society.

On the 14th of November, 1881, an order was made in the Court of the Vice-Chancellor of the Duchy of Lancaster to wind up the society.

The assets of the society consisted of £81,500, or thereabouts, due from advanced members on mortgage; but the value of the securities was insufficient to cover the sums owing. The liabilities of the society on account of ordinary debts, exclusive of loans from persons not members under sect. 31, was only about £229. The claims of persons who had lent money to the society under sect. 32 amounted to about £58,907, of which about £21,088 was covered by securities given by the society.

The amount claimed by unadvanced members in respect of their shares was about £7413.

The claims of holders of preference, or deposit, shares amounted to £14,282, of which about half were issued after the alteration of rule 31 in 1876.

On the 25th of June, 1874, Mrs. Crace-Calvert advanced to the society £2000, which was applied in the ordinary course in reduction of the balance due to the bankers, which at that time was overdrawn to the amount of £4530. Mrs. Crace-Calvert received two promissory notes for £1000 each from the trustees of the society, and a deposit of certain title deeds of property which had been mortgaged to the society by some of the advanced members. On the 3rd of July, 1875, she advanced a further sum

of £2000 on similar security, which was applied in like manner in reducing the society's overdraft at their bankers. Some portion of the money advanced by Mrs. Crace-Calvert had been repaid to her, but £2600 still remained due.

Mrs. Crace-Calvert applied for a declaration that she had a valid charge on the property comprised in the deeds deposited with her, and an order that the property might be sold and the proceeds applied in payment of her debt, and that if the proceeds were insufficient, she might be admitted to prove against the assets of the society for the balance.

The claim of Mrs. Hawkins was considered at the same time. Her case differed from that of Mrs. Crace-Calvert, inasmuch as she had made her advances in December, 1874, and January, 1875, at the time when the Building Societies Act of 1874 was in force, but without any security except the promissory notes of the trustees.

It appeared that the 14th and 15th sections of the Act of 1874 were not printed at the back of the promissory notes, as required by the 15th sub-section of sect. 5 of the Act.

The Vice-Chancellor gave judgment in favour of Mrs. Crace-Calvert,but decided that Mrs. Hawkins was not entitled to the benefit of her security, but could only prove for her loan against the assets of the society(1).

(1) 1882. May 12. Mr. H. F. BRISTOWE, V.C., after stating the facts, so far as they related to Mrs. Crace-Calvert'sapplication, continued as follows:-

It is material to notice the dates when the advances were actually made by Mrs. Crace-Calvert, namely, the 25th of June, 1874, and the 3rd of July, 1875. The former date is prior and the latter subsequent to, the passing of the Building Societies Act, 1874, which Act took effect on the 2nd of November of that year. But this Act was repealed, so far as sect. 8 is concerned, by the Building Societies Act,1875, passed on the 22nd of April, 1875; and therefore the loans made on the 25th of June, 1874, and the 3rd of July, 1875, are not, in my judgment, affected by the Acts in question. It was argued that Mrs. Crace-Calvert had suffered the loans made on the 25th of June, 1874, to remain after the passing of the Act of 1874 from the 2nd of November, 1874, till the 22nd of April, 1875, and that, therefore, her loan to that extent was made valid by the Act of 1874. In my judgment that is not so; and the Acts in question have not any effect upon her loans.

Then it was urged on her behalf that although the society had no authority to borrow, and though the Act did not validate the loans, yet that as the mortgages given to the society were bound to contain powers

CALVERT'S CASE.

The official liquidator appealed from the judgment in this case.

Ambrose, Q.C., Maberly, and Edwin Jones, for the Appellant:-

It is admitted that sect. 32 of the rules is ultrà vires, and that the society had no borrowing powers which justified the advances

of sale, and as the right to transfer the securities given would also be vested in the trustees, the deposits of the deeds made to Mrs. Crace-Calvertmust be treated as transfers of the securities and quasi sales empowering her to hold the properties comprised in the deposits as purchaser thereof in equity. It is, in my judgment, difficult to follow this argument, because if there be no power to borrow at all, the deposit of deeds, which is an integral part of the borrowing, is as bad as the borrowing; and if the case rested on this ground alone I should not see my way to decide in favour of the depositee. But the real and substantial question appears to me to be this: As Mrs. Crace-Calvert's money undoubtedly came into the hands of the society at the solicitation of the trustees thereof, and was used and applied for the purposes of the society, is it equitable that on the final winding-up of the society the members thereof, who had the full advantage of her money, should now be entitled to take away the securities given to her and also to take and to hold for their own benefit the money undoubtedly lent by her and secured as already mentioned?

In my judgment they are not so entitled. In the first place I should observe that I am not aware of any decision exactly governing this and the other cases now before me; but bearing in mind that this is in fact the final adjustment of the assets of the society after payment of all outside debts, and the costs of the liquidation, it appears to me to be inequitable to say that the money paid into the coffers of the society by persons making advances at the solicitation of the society, through its officers, should be retained by the members of the society, and that they should at the same time be entitled to repudiate the securities given when the money was advanced, and to have such securities realized and applied for their own benefit. It may be that the money was taken by the society without proper authority, and therefore in that sense illegal; but the question really is who, upon the final winding-up of the society, is entitled to the money which was actually, though in one sense illegally, advanced? No doubt, in the first place, all the outside debts must be paid; they are but small and can be easily satisfied. Then the costs of the winding-up must be provided for. Assuming that to be done, there will still remain a considerable surplus of assets. In my judgment those persons who, like Mrs. Crace-Calvert, have bonâ fideadvanced money to the society upon the solicitation of the society, through its officers and trustees, though not creditors of the society in such a way as to entitle them to a winding-up order, which was the point really decided by Lord Justice Giffard in Ex parte Williamson (Law Rep. 5 Ch. 309), are yet entitled to hold the securities given to them, and are not bound

by Mrs. Crace-Calvert. Those advances went to pay the society's overdraft on their bankers, which was also illegal. The borrowing

to give them up to the official liquidator for realization on behalf of the society. My judgment upon this point is very much based upon the recent decision of Vice-Chancellor Bacon in Wilson's Case (Law Rep. 12 Eq. 516), and I hold here, as Vice-Chancellor Bacondid there, that the official liquidator is not entitled, without payment of the money advanced, to deprive the lender of her securities. I think, therefore, that she is entitled to have those securities realized for her benefit, and to have payment made to her of her debt.

There remains, however, the further question whether if the securities realized do not pay her in full, she will be entitled to prove against the general assets of the society for the balance. This question may affect other cases besides that of Mrs. Crace-Calvert; but to confine myself for the present to her case, in my judgment the true solution of the question does not rest upon whether Mrs. Crace-Calvert could or could not in respect of that balance be treated as an ordinary creditor of the society, but whether upon the final adjustment of the whole of the affairs of the society she is not entitled to receive back out of the assets of the society, after all the outside claims have been fully discharged and satisfied and all costs paid, such proportion of the assets remaining in the coffers of the society as would represent money lent by her to the society and not repaid. That she could not be an ordinary creditor must, I think, be admitted after the decision of Ex parte Williamson (Law Rep. 5 Ch. 309), already referred to; and that she could not have been entitled to a winding-up order as a creditor must also be admitted. But although the point is, I believe, untouched by authority, I come to the conclusion that it would be inequitable for the members of the society who have received Mrs. Crace-Calvert'smoney, and had the benefit of it, to say, "The society is now wound up; all outstanding debts and claims have been paid; all costs have been paid, and there is a substantial residue. We, the members of the society, will take that and divide it amongst ourselves, because you and others had no right to lend it to us - you did wrong in lending it to us, and we did wrong, through our trustees, in taking it, but as we have got it, we will keep it, and you shall not recover it from us." That appears to me a very inequitable claim, and I therefore hold that Mrs. Crace-Calvertis entitled to prove against the assets of the society in the winding-up for so much of her advances as may not be realized by her securities.

The next case is that of Mrs. Hawkins.She claims priority for her debt over all other persons who are not in her precise position, and she rests her claim mainly on the following ground:

Both of her loans of £1000 were made in the gap between the 2nd of November, 1874, when the Act of 1874 took effect, and the 22nd of April, 1875, when the Act of 1875, repealing sect. 8 of the Act of 1874, took effect. She therefore says that the decisions in Laing v. Reed (Law Rep. 5 Ch. 4), and cases of that class, do not affect her; that she lent her money upon the faith of the Act of 1874, and must be entitled to prove as a creditor in respect of her loan as having been made with a parliamentary sanction in priority to any one not similarly interested. It becomes necessary, therefore, to closely

being ultrà vires, it follows that the securities given to the lender are void, and the deeds must be given up to the liquidator.

examine those two Acts of Parliament. [His Honour then read the Building Societies Act, 1874, ss. 7, 8, 14, 15, and continued:] Now it is said on behalf of Mrs. Hawkins, that as her two loans of £1000 were made to the society after the 2nd of November, 1874, they were made under the borrowing powers conferred by the Act of 1874. It is said, first, that under sect. 15, rule 1, the society was authorized to receive loans within the limits provided by the next sub-section, viz., not exceeding two-thirds of the amount for the time being secured to the society by mortgages from its members; and it was urged on behalf of Mrs. Hawkins that as her money was lent while this Act was in force, and as the amount did not exceed the prescribed limit, though upon this point the evidence is not very clear, she is entitled to claim the amount of her advances as a loan made expressly in pursuance of this Act. The argument upon this branch of the case was very complicated, but in my judgment the claim as founded upon the Act, in whatever way it is put forward, is wholly untenable, by reason of the fact that the 5th sub-section of the 15th section had not been complied with. That sub-section is as follows: "Every deposit book or acknowledgment or security of any kind given for a deposit or loan by a society, shall have printed or written therein or thereon the whole of the 14th and 15th sections of the present Act." It was admitted that this sub-section had not been complied with; and I hold that it was of the very essence of the securities alleged to have been given under the powers conferred by this Act that the Act itself should be strictly and even literally complied with. But it was not. It was admitted that the 5th sub-section had been wholly disregarded; that no deposit book had been given; that no deposit book or acknowledgment or security given for a deposit or loan to the society had printed thereon the prescribed sections of the Act, and that in fact there had been no compliance with this sub-section, in fact that the loan was made wholly without reference to the Act or its provisions. The whole argument therefore under the Act falls to the ground; and in my judgment the claim of Mrs. Hawkins cannot be supported as a loan contracted under the authority of this Act.

Then comes the Act of 1875, which as from the 22nd of April, 1875, repeals the 8th section of the Act of 1874, and thereby repeals the borrowing powers of any society deemed to be a society under the Act of 1874, but it is provided that the repeal shall not affect anything done or suffered in pursuance of the Act of 1874. It is argued that the loans by Mrs. Hawkinswere things done in pursuance of the section and suffered to remain in pursuance thereof. But inasmuch as I hold that the loans were not effectively done under the Act of 1874, I do not see that the saving clause of the Act of 1875 has any effect upon the question.

On the whole I come to the conclusion that Mrs. Hawkins cannot support the loan in any way under the Act of 1875. Her claim therefore rests upon the broad grounds I have already referred to in Crace-Calvert's Case, in so far as such claim rests upon loans made without any deposit of deeds to secure them.

The result of my decision may be

The case is entirely covered by Blackburn Building Society v. Cunliffe (1).

[They were stopped by the Court.]

shortly stated thus: A building society is not a company in the usual or ordinary sense of the term; it is not and ought not to be a borrowing society except within particular limits and for particular purposes. If such a society, either without any borrowing powers or with an unlimited borrowing power, accepts loans from lenders, those lenders are not, in the ordinary sense of the term, creditors of the society, and would not be entitled to an order for winding up the society or to relief consequent thereon; but where the society is wound up without any reference to such persons, and when all outside creditors have been paid in full, and all costs of the liquidation have been provided for, and the ultimate distribution of the remaining assets has to be made, the persons who (as in these cases), at the solicitation of the society, through its trustees, have lent their money to the trustees of the society for the benefit of the society are entitled in the ultimate adjustment of the affairs of the society to be repaid so much of the loans as can be met out of the assets of the society, and the members of the society are not entitled to say that such assets belong to them, because the loans were illegally made. Then, further, such persons, as between themselves, must divide the assets according to their rights as secured or unsecured claimants upon the assets. Those who have deposits of deeds giving them a special charge upon the property comprised in the deeds deposited with them will have priority of payment to the extent of their securities, and will be entitled to be paid to the full extent of their securities in priority to non-secured claimants, and will be entitled to prove against the assets in respect of the balance (if any) of their claims; and claimants who have no special deposit or security will then be entitled to be paid their respective claims rateably out of the general assets of the society remaining after payment of (1) Outside creditors, (2) Costs, (3) Secured claims.

In the result I hold as to Mrs. Crace-Calvert,that she is entitled to have the securities held by her by way of deposit realized, and to have the proceeds thereof paid to her in discharge pro tanto or in full of her claim, interest, and costs; and to prove in the liquidation for the balance, if any, due to her.

As to Mrs. Hawkins, that she is entitled to prove merely for the loans made by her, and for interest and costs.

I would lastly observe that my judgment in these cases does not, in my view, at all militate against my recent decision in Blackburn Building Society v. Cunliffe (22 Ch. D. 61). The case was one of bankers who, in my judgment, dealt with the trustees of that society with full knowledge of the facts of the case, and with express notice of the rules of the society, and who claimed to enforce - not a definite charge for a given sum advanced, but an indefinite claim for advances from time to time made by them upon a security given to them by the trustees of the society, which, in my judgment, was wholly illegal and void.

(1) 22 Ch. D. 61.

Rigby, Q.C., and Hopkinson, for Mrs. Crace-Calvert:-

Although the borrowing did not create the regular relation of lender and borrower between Mrs. Crace-Calvert and the company, yet as between her and the members of the company who invited the loans and received the benefit of the money and had participated in the illegal act, important equities arise. The outside liabilities are only about £229, and will be easily provided for. The question now arises how the residuum is to be divided. The money advanced by persons in the position of Mrs. Crace-Calvertcannot be altogether traced, but it has been used for carrying on the business, and it is unjust that the shareholders who have had the benefit of the loans should divide the assets in priority to those who advanced the money. This applies to the unadvanced shareholders whose claims amount to more than £7400, and who claim to be paid in priority to us: Wilson's Case (1). The borrowing was ultrà vires, it was not illegal in the strict sense of the word; therefore there can be an equitable liability on those who borrowed it although we have no legal remedy. The doctrine laid down in Barwick v. English Joint Stock Bank (2) is not applicable: Chapleo v. Brunswick Permanent Building Society (3); Coltman v. Coltman (4). It is similar to the case of money paid by mistake; the person who paid it is entitled to recover it. It is a principle of the civil law which has been adopted into our law that no one can enrich himself at the expense of another.

There is a special ground on which Mrs. Crace-Calvert's loan may be supported. The Building Societies Act, 1874 (37 & 38 Vict. c. 42), enacted by sect. 15 that any deposits with or loans to a society under that Act, which by sect. 8 included all building societies certified under 6 & 7 Will. 4, c. 32, made before the commencement of the Act in accordance with its certified rules, were declared to be valid. That Act came into operation on the 2nd of November, 1874. Then the Building Societies Act, 1875 (38 & 39 Vict. c. 9) repealed sect. 8 of the Act of 1874, thereby excluding this building society from the operation of the Act of 1874,

(1) Law Rep. 12 Eq. 516.

(2) Ibid. 2 Ex. 259.

(3) 6 Q. B. D. 696.

(4) 19 Ch. D. 64.

but enacted that such repeal should not affect anything suffered or done in pursuance of such section before the date of the passing of the repealing Act, that is before the 22nd of April, 1875. So that between the 2nd of November, 1874, and the 22nd of April, 1875, Mrs. Crace-Calvert had a debt and securities capable of being enforced against the society. We contend that that right has not been taken away by the repealing Act of 1875.

S. Hall, for the unadvanced shareholders.

JESSEL, M.R. :-

This is an appeal from the decision of the Vice-Chancellor of the County Palatine Court of Lancaster. The question is, how the assets of the society are to be disposed of, having regard to the very curious circumstances of the case. This is a building society with a rule which empowered the governing body of the society to borrow unlimited sums of money. This rule has been certified and been acted upon to a very considerable extent. But it is now well settled by the law that in such a society as this an unlimited power to borrow is not authorized, and that consequently such borrowing is beyond the powers of the society. Still, all has been done here perfectly bonâ fide. The persons who made the rule, as well as those who acted upon it by borrowing and lending, all acted under a common mistake in law that that was a lawful rule, and was binding on the society. To a great extent the borrowing has been from the bankers of the society, and the money so borrowed has been advanced to members of the society on mortgage securities in the usual way, who thereby became advanced members. A sum of about £7000 has also been received from unadvanced members. and has been employed in making loans in the same way. The borrowing from the bankers went on for a long time, and the sums borrowed were from time to time paid off with money borrowed from other people, including the Respondent, Mrs. Calvert. In some cases the moneys advanced by these third parties were not applied in repayment to the bankers, but were lent to unadvanced members, and so these funds have got mixed up in a way which renders it

difficult to say how far they have been applied in one way and how far in another. Under these circumstances, the society was wound up, and it appears that of the amount paid up, amounting to upwards of £81,000, £7000 odd has been obtained from the unadvanced members of the society, and the balance of the sum in question had been obtained in some shape or other from people who lent their money either without security or on equitable deposits or mortgages of property to the society, and the present Respondent is one of those persons. Such borrowing from her was unauthorized, and consequently her loan to the society did not create either a legal or equitable debt from the society to her, it being beyond the power of the society to incur any such debt. It follows, therefore, that the deposit or security which she obtained was a deposit or security for nothing; it was a deposit or security not authorized, and the result is, therefore, that she must give it up. Upon that point there can be no doubt whatever. But then what is to be done with the assets of the society? It is obvious that if the society realizes £81,000 worth of its securities, there will be about £70,000 odd of claims made which have arisen from the advances made by the persons who lent the society their money under the illegal rule. The actual figures will of course be considerably smaller, because the £81,000 will not realize so much by a very large sum. Still, after paying the strictly outside creditors and the sum subscribed by the unadvanced members, there will be a very large surplus to be disposed of. It is plain that it cannot be said on behalf of the society that the surplus so obtained ought to be retained by the members of the society. It was obtained by their own innocent mistake, because they had passed the rule authorizing the directors to borrow. They advertised for loans, and so obtained the money. It was a mistake common to both sides. The surplus which arises from the advances so made must obviously on the plainest principles of equity be returned to the people who advanced. Nobody can have a claim upon it except those whose money it is. The actual money cannot be traced, but after the prior claims on the assets of the company have all been paid off the surplus must come to them, but with regard to the intermediate application of the surplus it must go to the outside creditors and the unadvanced

members who have established a claim. The outside creditors had nothing to do with the adoption of the mistaken rule, they were not bound in any way, and they are therefore entitled to come upon the society and say that the assets were liable to satisfy their demands. Of the unadvanced members there are two classes, those who had given notice of withdrawal and those who had not; but for the purpose of the present judgment it is unnecessary to distinguish between them in order to determine their priorities. It cannot be said that the unadvanced members of the society are not to take the assets. They have a right to claim payment out of the assets, and it is impossible to point to any part of those assets as coming from any particular part of the money as distinguished from the rest. Their legal rights must therefore prevail, and they will accordingly be paid in priority to the other persons who would get the surplus. Of course, the costs of the liquidation must be paid in priority to every other claim. The proper decree to make will be to discharge the order of the Vice-Chancellor, to order payment of the liquidator's costs, then those of the Respondents; next, payment of the outside creditors, then of the ordinary unadvanced members, and then distribute the surplus pro ratâ among the persons who had advanced their money by way of loan upon those invalid contracts. The deeds must, of course, be ordered to be delivered up to the official liquidator.

COTTON and BOWEN, L.JJ. , concurred.

HAWKINS' CASE.

Mrs. Hawkins appealed from the Vice-Chancellor's decision.

Chadwyck Healey, for the Appellant:-

Mrs. Hawkins made her advance and received the promissory notes of the trustees in the interval between the 2nd of November, 1874, when the Act of 1874 came into operation, and the 22nd of April, 1875, when the Act of 1875 repealing the 8th section of the former Act was passed. Therefore she advanced the money at the time when the society had full power to borrow the money. The only ground on which the Vice-Chancellor refused her the

benefit of her security was that the 14th and 15th sections of the Act were not printed at the back of the promissory notes as required within the 5th sub-section of the 15th section. But this enactment is merely directory, and cannot affect the validity of the security.

Ambrose, Q.C., and Maberly (Edwin Jones, with them), for the official liquidator.

JESSEL, M.R. :-

We are all of opinion that the sub-section referred to is only directory. The promissory notes held by Mrs. Hawkins are valid, and she will be in the same position as the outside creditors, and will have her costs.

SCOTT'S CASE.

Mr. R. W. A. Scott was the holder of five £30 deposit or preference shares, which he obtained in August, 1874, and of five others which he obtained on the 16th of April, 1875, and of 300 £1 shares, which he obtained in 1878. His £30 shares had been exchanged for 300 other £1 shares. He had received payment of £50, and had given notice to withdraw the remainder.

Josiah Whittle was the holder of 973 preference £1 shares, which he had given notice to withdraw.

John Scott was the holder of 300 £1 preference shares, some of which had been issued as £30 shares in the latter part of 1875, and the remainder as £1 shares after the alteration of the rule. He had not given notice of withdrawal.

These applicants claimed to rank as creditors of the society in respect of the sum paid for their shares, and to be paid in priority to all other shareholders.

The Vice-Chancellor held that the 31st section was invalid, that the applicants were not members, but were entitled to prove against the residuary assets of the society pari passu with those who had advanced money to the society(1).

(1) 1882. June 12. Mr. H. F. BRISTOWE, V.C.:-

The real point here seems to me to turn upon whether in truth these persons, R. W. A. Scott, J. Whittle, and J. Scott, are members of this society,

From this judgment the Applicants appealed.

Cozens-Hardy, Q.C., and H. B. Buckley, for the Appellants:-

We are shareholders under the 31st section of the rules, and stand in the same position as the unadvanced shareholders. The

or whether they must be treated as in the nature of creditors - not strictly creditors, for I cannot treat rule 32 as of any validity - but having to deal with the question upon the final winding-up of the whole society, and having to deal with the residue of the assets in that which is the equitable mode of dealing with them, I treat these persons as claiming to be creditors or claiming to be members, and the question is really which of the two positions do they fill. In the first place I desire to say that, with regard to Mr. Buckley's argument as to what I have called the gap period between the different Acts, I do not think it necessary to add anything to what I have said in the former case of Mrs. Hawkins. I adhere to that decision, and I do not think that the supposed analogy between the Companies Act and this Act makes much difference on this point. I think there was no sufficient loan under the intermediate section to constitute a loan under the first Act at all, and therefore that particular part of the argument I treat as being already disposed of in the former cases.

Then comes the second and very important point, namely, what is the effect of the certifying barrister having excluded and having refused to certify as a valid thing the 31st section? It came before him and appears to have been struck out by him, but singularly enough the parties, disregarding that, continued to print it in their books. Now with reference to the power of the certifying barrister, I think that it must be admitted, after Laing v. Reed (Law Rep. 5 Ch. 4), that his decision as to certifying a clause to be a good clause, if it be contrary to the law of the land, cannot make a bad clause into a good one. But I do not myself see that the converse argument is quite of the same force, namely, that when he has taken into consideration a particular clause, and has in the exercise of his discretion struck out that clause as being improper, you can still say that his certificate is something that does not matter, and that it is inoperative to strike out that which he had intended to strike out. I think that when he has struck out a clause it must be treated, at all events for a great number of purposes, as really binding upon all parties that can be bound by it, that the clause should be excluded. But I prefer to take the case as if that clause had really and properly formed part of the book of rules.

Now Mr. Buckley and Mr. Hopkinsonhave both put it that it was a matter of immateriality whether sect. 31 did or did not exist, and that in fact under sects. 5 and 37, either taken separately or taken together, you would have a sufficient membership to shew that these persons who lent their money - for I only call it that - who made a deposit of certain money and got their paid-up shares, would have been in the same position under sects. 5 and 37 as if sect 31 had not existed. That I think is an argument that will not hold good. I think it is perfectly clear that sect. 5 and the section which is co-relative to it, sect. 37, does not

only difference is that we advanced our money all at once, and they made their payments by instalments. Whatever may have

contemplate anything but a member holding shares, which shares are to be of a particular definite sum and value; and that those shares held by those members were to be calculated for the purposes of ultimate repayment according to a fixed scale of interest.

Now when you turn to Table No. 2 it is clear that that is a computation on a 5 per cent. compound interest table, which is the right of the member under sect. 5, and is not only his right, but if he were under Table No. 1 (and he might hold shares under both) he might under Table No. 1 have to pay certain fines for non-payment of his ordinary subscriptions monthly, which go to the benefit of Table No. 2 to make up the compound interest at 5 per cent. But when you come to the 31st section you find that the person making the deposit is entitled to a fixed interest at 5 per cent. per annum, which is never to be more than 5 per cent., and under which he could not properly be entitled to take the compound interest which is given by Table No. 2. In other words, if a person making a deposit had allowed his interest to accumulate, it does not seem to me that he could have possibly made a claim for more than ordinary 5 per cent. interest, whereas a person making a payment of the £60 or £120 would necessarily get the accumulated interest given by Table No. 2. That mode of paying interest is sufficient, to my mind, to shew that it could not have been intended that rule 5 was to apply to such a case, and that rule 31 was intended by the parties themselves as the governing rule.

Then comes a very important section, namely, sect. 41, and it appears to me clear that if the parties had all they wanted under sect. 41 the withdrawal clause under sect. 31 was absolutely nugatory. But more than that, sect. 41 puts a limit to the withdrawal, and therefore shews that those persons who were members in the ordinary proper sense of the term fell under rule 41, and the depositors fall under rule 31. Without going therefore into all the debated differences of the two sets of clauses I think it cannot be held that these applicants can in any sense be properly treated as members.

Then it is not unimportant to refer to the statement in the agreed statement of facts, namely, that the applicants were not entered in the list of members of the society, and that no bonuses or profits were ever credited to them, and that they did not vote at any of the meetings of the society; and further, that interest on the deposits was paid out to them half-yearly and was not accumulated until withdrawal as in the case of the subscribing members. Then we also find the extraordinary proviso about the levy inserted at the end of sect. 37.

Then it is said that these persons did in fact become members because the balance sheets and reports of the society shewing the amounts which they had paid and stating what levies were required were sent to them; but that, in my judgment, is wholly insufficient to enable me to hold them to be members in the same sense as unadvanced shareholders, and the only conclusion I can arrive at is that they were people who lent money to the society and who got by virtue of these loans these documents which

been the effect of the 31st section being struck out by the certifying barrister, it has now been made valid by his certifying the alteration in it made in 1876. All the old £30 shares were exchanged for £1 shares after that date, and cannot now be questioned.

Ambrose, Q.C., and Maberly (Edwin Jones with them), for the official liquidator:-

The Appellants are not shareholders, they are simply creditors who advanced money, like Mrs. Crace-Calvert, on the faith of a rule which is invalid; and they ought to stand in the same position as she does. The fact of the barrister certifying the alteration did not set up the rule which he had refused to certify; it was merely nugatory. But if it had the effect of certifying the original rule, it is not conclusive as to its legality: Laing v. Reed (1). Such a rule is contrary to the scope and objects of building societies, which is stated in the preamble of 6 & 7 Will. 4, c. 32, to be for purchasing and erecting dwelling-houses by means of small periodical subscriptions. This rule is a scheme for

are called deposit certificates or deposit receipts.

But it was argued by Mr. Buckleythat if the certificates are bad they may be thrown over and you may go back to what was really the contract between the parties. But I am afraid I cannot treat it in that way, I cannot hold that these persons can throw over the certificates and treat them as of no force against them and then rely on other general words so as to exhibit a right other than what the certificate gives them. The certificate shews the contract and makes them in fact lenders of money on the certificates.

Then comes the question whether, as regards Mrs. Crace-Calvert and persons in her position, these applicants were entitled to claim against the assets of the society on the same footing as other non-secured persons and persons who are proving for the part of their debt not covered by their security. In my opinion that is so. When we come to deal with the question upon which I have to arrive at a conclusion, namely, how the ultimate fund is to be distributed, I cannot see how the persons who may be called deposit certificate holders differ in any sense from other persons who have obtained as pledges the securities of the society and who have a claim against the society for more than the value of the pledges. Therefore I hold these applicants not to be members; and I hold them to be entitled to prove against the assets of the society part pari passu with persons who either had no security, or who, like Mrs. Crace-Calvert, claim a security and seek to prove for the balance.

(1) Law Rep. 5 Ch. 4.

unlimited borrowing; it transforms the society into a banking company. These deposit holders, though called preference shareholders, are not shareholders in the ordinary sense of the word. They can draw their money at any time; they cannot obtain advances on their shares as other shareholders can; they do not share in the losses of the society, nor are they liable to any levy under sect. 37. Preference shares were never contemplated by the Act of Will. 4.

JESSEL, M.R. :-

This case raises important questions, which I believe have never been raised before. The rules of the society are most peculiar. The question to be decided is as to the right of certain persons, called members of the society, who took what was called paid-up shares. As to part of them, they originally took £30 shares under one of the rules, and afterwards exchanged those shares for £1 shares. Half of the members, it is said, are in that position, the other half being subscribers for £1 shares. The first point to be observed is that, whatever the effect of the Act of Will. 4 may be, it applies to societies already in existence, and it professes to deal with those societies. It is familiar to all who are interested in the subject that at the time of the Act these societies consisted of two classes of members, investing members and borrowing members, sometimes called advanced and unadvanced. The scheme of those societies was this: There were certain persons who had saved or were saving money and were desirous of investing it at a higher rate of interest than the usury laws enabled them to obtain at the time; and other persons who were desirous of either building or buying houses for their own habitation. Those two classes of persons came together; the people who had saved money or were saving money paid it into the society, and it was lent to persons who were desirous of building or buying houses on the security of the houses, and on terms which compelled the borrowers to pay a larger sum by way of interest than 5 per cent. per annum. That this was the substance of those societies must have been known to the Legislature. The societies were divided into two classes, those which were called terminable and which came to an end at the expiration of a fixed period, sometimes of

ten years and sometimes of fifteen, and the other class, called permanent societies, which came to an end when the shares were all paid up. In both cases at the termination of the society the profits were realised and the surplus assets were divided amongst the members who had paid up their shares. They got back their money with an addition in the shape of interest, which, though always expected to be more than 5 per cent., was sometimes a good deal less. Therefore, the investing members got back their money and interest, and the advanced members got their houses on payment off of the mortgages which were given to secure the sums payable on their shares.

Under those circumstances the 6 & 7 Will. 4, c. 32, for the regulation of building societies was passed, and it recited that certain societies, commonly called building societies, had been established in different parts of the kingdom, principally amongst the industrial classes, for the purpose of raising by small periodical subscriptions money to assist some of the members in obtaining small freehold or leasehold properties. That was only one of the objects of the societies. It must have been well known to the Legislature that the other object was that the investing members should get a high rate of interest for their money, and that it was known is obvious from another section. It was the object to assist, therefore, some of the members to obtain freehold or leasehold property, and some a high rate of interest. Then the Act enacted that it might be lawful for those two classes to form themselves into societies for the purpose of raising by monthly or other subscriptions of the members of such societies shares not exceeding the value of £150 each, and such subscriptions were not to exceed 20s. a month for each share. These words obviously refer to such subscriptions as were to be paid monthly, and do not prohibit other contributions. Such subscriptions were to form a stock or fund for the purpose of enabling each member of the society to receive out of the funds of the society the amount or value of their shares therein, and to erect dwelling-houses, or purchase real or leasehold estate to be secured by way of mortgage to the society until the amount of their shares should have been fully repaid to the society together with interest thereon. There is no provision here as to investing members.

It looks as if everybody was to get an advance, and that the framers of the Act were forgetting that the people who made the advance must be somewhere. Then the Act goes on, "And to and for the several members of each society from time to time to assemble together, and to make, ordain, and constitute such proper and wholesome rules and regulations for the government and guidance of the same as to the major part of the members of such society so assembled together shall seem meet, so as such rules shall not be repugnant to the express provisions of this Act, and to the general laws of the realm." Whether those rules were intended to be merely by-laws to be made after the society was constituted or not does not appear to me to make any difference, because the Legislature must have known that the society could not start without rules, and therefore, if you restrict those words to the subsequent rules or laws, there is no provision as to the original rules, and it appears to me that this is the true meaning of the clause; that the rules spoken of are not the original constitution of the society, but subsequent "as to the major part of the members of such society so assembled together shall seem meet;" but they must be members to make the rules. It seems to me to point to a period subsequent to the starting of the society, and that there is really in this very Act of Parliament no restriction, and no direction as to the original rules which govern the constitution of the society. But, however, whichever view you take, the only limitation as to the rules is this: that they shall not be repugnant to the law of the realm, or to the express provisions of this Act. Then the 2nd section of the Act clearly shews me this, that the Legislature clearly had the investing member in view, for it provided that it might be lawful for any such society to receive from any member thereof any sums of money by way of bonus on any shares, for the privilege of receiving the same in advance prior to the same being realised, and also any interest for the shares so received, without being subject or liable on account thereof to any of the forfeitures or penalties imposed by any of the Usury Acts; or, in other words, the society was entitled to take from the borrowing members a larger rate of interest than the usury laws allowed. Those words can have no possible meaning unless they contemplated a body of lending

members. By lending members, I do not mean lending in the actual sense of a loan proceeding from the members, but that class which I have described as investing members. Then the 7th section extended the benefit of the Act to all societies then existing which got their rules certified. Although it has been held that a general unlimited power of borrowing is contrary to the constitution of such a society, I am not aware of any decision which would prevent the society from having paid-up shares, preference shares, or any other class of shares, and it is undoubtedly the case that in many societies there are various classes of shareholders, though perhaps not varied as in this one.

The first question the Court has to decide depends upon a very peculiar state of circumstances. This society had its rules printed, and when they were sent to the revising barrister he struck out rule 31, but notwithstanding that it was struck out, the society continued to insert the rule in their printed books as if it were still in force, and took thousands of pounds from the public on the representation that it was a rule of the society. I do not intend to impute to the directors any notion of fraud. I think they were simply guilty of gross carelessness; but it is an extraordinary circumstance that the directors and trustees of the society should have continued printing the disallowed rule and have taken the money of the public on the assumption that it was still in force. The rule gave the public the option of taking £30 shares, and many persons were induced to take shares under it. What is the position of persons who have paid their money for such shares, and whose money went into the coffers of the society? It is tolerably plain that, as between them and the society, the society on winding-up must either admit the validity of their shares, or give them back their money. The society cannot say to them: "We represented to you that there was a rule which entitled us to issue such shares, and we got your money by that representation, but as the rule was not certified we are not liable to you in any way." At a subsequent period, having forgotten that this rule had been struck out, they amended it. In June, 1876, they amended a non-existing rule by inserting "£1" instead of "£30." The amended rule went to the revising barrister, and I am afraid

I cannot acquit him of being a little careless also, for he passed the amendment without satisfying himself as to the existence of the rule. The effect of his certificate was to make the rule which had been struck out a valid rule again, so that after the 19th of June, 1876, this rule existed, but altered by substituting £1 for £30. Then those members who had subscribed for £30 shares exchanged them for £1 shares, and others who had not before held paid-up shares took up shares of the new issue. The amount subscribed was about equally divided between the two classes of subscribers. The question is, whether either or both in the winding-up have any claim upon the society. If I am right in the view I take of the position of the subscribers of the £30 shares, they cannot have lost their right by taking £1 shares. And with regard to those who took up shares of the new issue there was no misrepresentation at all, and if the rule is valid they are entitled to the £1 shares, and if it is invalid then the question arises whether the transaction was in fact a contract to take shares, or whether, as the Vice-Chancellor has held, it was a mere device for a loan, and therefore struck at by the decisions which laid down that a society could not have an unlimited power of borrowing money.

Was this a device to borrow? That is always a question of construction. It must depend on two things: First, you look at the articles to see whether it was a disguised borrowing - for that is the meaning of a device to borrow; secondly, one has to consider whether even supposing it was not intended to be a disguised borrowing, it was not so in fact? I have come to the conclusion not only that it was not intended to be a disguised borrowing, but that it was not so in fact. As regards the intention, I never saw a clearer case, for the rules contain an express power to borrow and to an unlimited amount, so that there is no occasion for having recourse to a device. The people who framed the rules no doubt were mistaken in law according to the decisions, as they thought they might borrow to any extent they liked, and put it in the plainest terms; therefore it is impossible, as it seems to me, to suppose for a moment that they thought rule 31 to be otherwise than a bonâ fide rule. Rule 32 enables the society to borrow and take any sum of money from the

bankers of the society, or from any bankers, or from any other person, and the borrowed money must be a first charge on the funds of the society. This puts an end to any notion of an intention to disguise the power of borrowing, but still it does not put an end to the question whether it is in fact a mere borrowing under the disguise of issuing shares, although not so intended; but the fact of the intention being plain of course is not to be lost sight of in ascertaining what the meaning of rule 31 is. When you shew that it is not intended to be a borrowing, but it is intended to be an issue of shares, it does help you to determine whether what is issued is a share or not. Is it a share? First of all it is called a share. "The board for the time being shall have power, as circumstances may require, to issue deposit or paid-up shares of the value of £30, upon a certificate bearing interest, after the rate of 5 per cent. per annum, and such certificate shall entitle the depositor" - it does not entitle him to interest; that is the important point, it shall entitle him - "(after one month's notice in writing, to be reckoned from a monthly meeting) to withdraw the whole or part of his deposit in preference to all other shares." Now it is to be observed upon those words: first, there is no agreement to pay him anything. The certificate only entitles him to withdrawal; it is not an absolute right, but only in preference to other shares. It is behind the lenders; that is the important point. It shews it is not a mere borrowing of money, because if it were they would be on the same footing as the other lenders; but the other lenders are to have a first charge on the property of the society, whereas these people only take a preference as between themselves and the other shareholders. Now I must call attention to the 5th section of the same rules. There the society is to consist of holders of shares and half shares, and it will be found that "members may pay up in advance any number of shares or half shares in accordance with Table No. 2," so that even the ordinary members may pay up in advance. How do they differ from the paid-up shares? They differ in this way: they are behind them. The withdrawing member who has got a paid-up share under sect. 31 is entitled in preference to all other shares; but still the man who pays up his share under sect. 5 is a paid-up shareholder, and on

withdrawal will get his money paid if there is money to pay him, but he is in an inferior position, for these are, if I may call them so, preference shares. Now when we come to the power to withdraw there is no other power to be found except sect. 41. It is headed "Power to withdraw," and though the first part of the section relates to unadvanced shares, which in a sense these deposit shares are, it relates really to advanced shares, which the deposit shares are not, because the amount payable is to be determined by the tables, which do not apply to them. Therefore the first part relates to advanced shares under sect. 5, whether they are paid up or not. Then there is to be one clear month's notice, the same notice in both cases as regards time, the only difference is this: one is a month's notice after a monthly meeting, and the other is a clear month's notice. Then "withdrawals shall be payable in rotation according to the priority of notice;" that seems to be general and must be applicable to all withdrawals. "The board may limit the number of withdrawals to be paid off in any one month." That is really the criterion of the whole thing (if they are shares and you can only get paid on withdrawal), and of course it was never intended that you should break up the society by selling up its property. What was meant was this (which is very often provided for - indeed, I have seen it provided for in a great many rules) - that you shall only be allowed to withdraw the money when there is money to withdraw; and that is the meaning of these words, that "The board may limit the number of withdrawals to be paid off in any one month." Now, if this is the true meaning of it, these preference shareholders, as I have called them, can only withdraw if there is money to pay them. That is a totally different position from a lender. The lender of money, when the time for repayment has arrived, whether that time of repayment was originally fixed or whether it is fixed by his own volition, has a right to immediate payment (he has a right to judgment and execution); but these people have no such right. As I read the rules they have only a right to be paid when the board shall so determine. Of course the board will only so determine having regard to the funds they have at their disposal available for the purpose of repayment. It appears to me the holders of deposit shares are not lenders at all, that they are

shareholders, and like the other shareholders entitled to withdraw if they wish to do so. The other shareholders who are unadvanced may withdraw at any time whether paid up or not; therefore, in this respect, the position of preferred shareholders does not differ from the position of non-preferred or ordinary shareholders who are unadvanced; that is the point, that they are not in the position of lenders. On the other hand, what is the position of the society? A borrower may always pay off a loan; indeed, it has been carried so far that he may pay off a loan before it is due. He may be liable to pay damages; that is, to pay interest over and above, to compensate the lender for paying off before it is due, but he can always pay it; whereas this society cannot pay of the preference shares, there is no power until the end of the society to pay them off at all. The effect of this is that the withdrawing member will only get his money, and a member who does not withdraw will get nothing till the end of the society. If that is so, the society is no more in the position of borrower than the deposit shareholder is in the position of lender. It is, in fact, a true preference share; that is, it gives them rights subject to the payment of the society's debts - of course I mean those debts of the society which are valid.

That being so, if they are true preference shares, is there anything in the Act of Parliament which prevents their being valid as such? Of course you must find something either in the common law or in the express words of the statute to prevent that. I cannot find anything in the common law - it is out of the question; and there is nothing in the statute which says that you may not contract to give some shares an advantage over others for value received. But then there is this further consideration which must be discussed. Is it contrary to the nature of these societies so that it is impossible to make a society with this kind of share consistent with the law and conduct of the society? On that point I do not think it is the province of the judicature to find out things to be inconsistent with the ordinary requirements of mankind, which the people themselves have not found out. It is all very easy for people to say it is against policy, or against the meaning of these societies; but when you see that people who

have established the society do not think so, and have acted on a contrary view, it is very improbable that it is contrary to the nature of the society, and contrary to the objects the members have in view. But besides that I cannot see any reason why it should be so. The lending members are unadvanced members. The investing members become so for the purpose of getting more interest than they can get in the usual way. Why may they not stipulate for some security? Why may they not say as between themselves and the other members, If this society comes to grief, recollect we shall be paid first. It is only in that case? "If this society is prosperous everybody is paid, and paid handsomely." Why shall they not say, "We will put our money down; we will start your society, and get you money which shall be advanced to your building members or buying members who want house property on these terms, viz., if we put our money down in hard cash, if the society does not turn out prosperously we shall be repaid?" There does not appear to me to be anything against the constitution of the society in such an arrangement; on the contrary, it may enable societies to be established which otherwise could not be set agoing at all. Again, is it contrary to the constitution of such a society that members shall pay up instalments in advance? I say clearly not. The more money you get from the investing members the more money you have ready to advance to the borrowing members, and the more rapidly you would bring your society to an end, if the society is established without a fixed period. It seems to me there is no reason why the judicature should say that these arrangements, which as far as I am concerned appear to be perfectly reasonable, and not only framed not to obstruct, but to further the object of these societies, are illegal because they are contrary to the policy on which these societies are founded. It does appear to me that there is no valid legal objection to what has been done, and I hold that the second class (those who came in and took the £1 shares) are entitled to the benefit of their shares, and therefore, subject to the payment of the debts, are entitled to be paid out of the assets of the company. Of course this covers the claims of the first class, which I should have been ready to hold, in the event of our not being willing to

extend the benefit to the second class, entitled to come in subject to the payment of the outside creditors.

COTTON, L.J. :-

The question we have to decide on this appeal is, whether the holders of certain shares, whose money has been taken by the society without any authority, are entitled only (as decided by the Vice-Chancellor) to come in and receive back what they can get after all the creditors and shareholders have been paid, in which case they will not receive the full benefit of their moneys, which have been taken illegally; or whether they are entitled to stand as holders of shares, and as such to be paid in accordance with the rules of the society. Now the rule, under which these shares must be considered as taken, authorized paid-up shares to be issued, and the terms on which those shares are to be issued are stated in the printed section (31), subject only to the substitution of £1 for £30. Some question has been raised as to whether it can be said there is any such rule. I do not say for a moment that those holders would stand in a worse position if there were no such rule; but I think the effect of what has been done is this, that a print being submitted to the barrister, and sect. 31 being struck out by him, it ought not to have been in the print of the rules of the society; but the effect of what the barrister did afterwards was to replace sect. 31 in the print, with the substitution of £1 for £30 as a new rule of the society, and the question we have to consider is, whether the holders of shares under that rule are entitled in the winding-up to be treated on the footing of being shareholders. It was argued that this rule was illegal, and therefore that they could not be so entitled, and it was so decided by the Judge in the Court below. The Vice-Chancellor said: "By illegal of course is meant not that which is prohibited under penalty, but something which is not allowed in societies of this nature." I do not say for a moment that the rule as it originally stood would have been a rule which could properly be introduced into a society of this sort, because it provided for payment at once of £30 down, whereas the Act says that the subscriptions are to be periodical, and of small amounts, that is, not to exceed £1 monthly. The barrister might very well

have said: "This is not a rule which is in accordance with the constitution of this society, which primarily is a society which raises funds by subscriptions small in amount, not to exceed £1 in a month." But we must consider whether, with the alteration referred to, it is contrary to law that a society of this sort should have shares of this description. Now, I do not at all express an opinion that if a society was formed with nothing but shares such as these, it would come within and be such a society as is entitled to the benefit of the Act of 6 & 7 Will. 4, and of the Friendly Societies Act, which was introduced by that Act into building societies; because under those Acts the society must be one which does, to a considerable extent at least, consist of members who, by small subscriptions from time to time, are to provide a fund to be dealt with by the society; but here we have this fact, that this is a society which was formed, to a very great extent at least, for the purpose of receiving subscriptions in the ordinary way from its subscribing members, whether they chose to take an advance or not. Then we have to consider whether in a society entitled, as regards its general constitution, to the benefit of this Act, this rule is ultrà vires, or that which the law will not allow as a binding rule and regulation of such a society. Now there is nothing whatever in this Act of Parliament which expressly prohibits such shares as these. The subscription to be paid at once, under the rule as amended, is not beyond the amount which is authorized, and, unless there is something else which can make this class of shares not admissible in such a society, we ought to hold that those persons who have been accepted in this way as shareholders are to be treated not otherwise than as entitled to be holders of valid shares. It is said that the fund is to be raised by periodical subscriptions; but it is not suggested that where a society has, by its constitution, the power to raise funds in that way, it is illegal to receive the total amount of the shares in advance. I do not think it necessary to go into the question whether under these rules the holders of these shares could have obtained an advance. I do not at all say that they could. I think under these rules the advance pointed at is an advance to be within the amount of the shares, and all the payments are calculated on that footing; but that

does not decide the question. If these are really shares not expressly prohibited by the Act of Parliament, why are we to say that these shares do not form part of the share capital of the society? The object of the society is this, that by means of the monthly or other subscriptions of the members a stock or fund may be raised for the purpose of enabling the members. thereof to receive out of the funds of the society a certain amount - the amount or value of their share or shares. Of course it is clear that every member cannot become an advanced member. Some members must be members who either by choice or by want of luck do not get an advance. All members cannot be advanced. Those who have the luck to draw one will get it, and those who do not want it are not bound to take one, but the suggestion is that they must both be in the same position. It is clear there is nothing in the Act of Parliament that prevents shares of this sort. Powers of unlimited borrowing given to the directors have been rightly held to be ultrà vires and not within the purview of the Act. But there is no prohibition in the Act against the existence of a class of members who by choice, when they go in, may say once for all: "We do not require an advance." In my opinion, unless it can be said that this is really a borrowing, and is not taking in of members' capital, it cannot be said that the shares are ultrà vires. Of course if it appears in any particular society that this class of shares was introduced for the purpose of covertly borrowing - that is, giving under the mask of membership a power of borrowing - then it would come within the decisions and principle which lay down that such societies are not entitled to raise money in that way, because that would be doing something contrary to the Act of Parliament. Here did they so intend? I think the Master of the Rolls disposed of that by shewing that there was in the rules themselves an unlimited power of borrowing; and it may well be that that rule was introduced under the belief that it was perfectly legal. We can hardly come to the conclusion that this was introduced to do covertly, under the mask of something else, that which was openly authorized so far as rules could authorize it. The Master of the Rolls has shewn that these people stand, not in the position of lenders, but in the position of members who are entitled to withdraw their

money subject to the claims of creditors whose demands are payable in priority to theirs. A difficulty has been raised which must be taken into account, that in this society all unadvanced shares are to get interest on payments made. That appears by one of the tables; but it is unnecessary to decide that question now. It comes to this, that the directors have acted in accordance with the provisions of the Act, and therefore have ought not here to hold that this is borrowing under the guise of issuing shares. In my opinion, it cannot be said that the shareholders are to be put in any other position than that of shareholders. Then there is a difference as regards class. It seems that some took shares on the representation that there was a clause authorizing the issue of those £30 shares which the directors purported to issue. I think the Master of the Rolls intimated - and certainly I should hold to that view - that these persons have not lost any such right as they had by taking the £1 shares in exchange for the £30 shares, if the £30 shares were shares which could not be properly issued. Then could it be said that the society is entitled to retain the money received from those who took £30 shares which were taken by them on the representation of the agents of the society, from whom they took the shares, that there was a certified rule authorizing the issue of these shares, when in fact that was entirely inaccurate, and there was no rule authorizing the issue of any such shares? In my opinion, under those circumstances, the takers of those shares would be entitled to recover from the society that money which was obtained by the misrepresentation or by the carelessness or otherwise of those who were the agents, and who got that money from the persons taking the £30 shares. In my opinion, therefore, in the winding-up the holders of these £1 shares must be entitled to rank at least as high as the shareholders in this society.

BOWEN, L.J. :-

I am of the same opinion. After the judgments which have been delivered, in which I entirely agree, I do not propose to add very many words. It seems to me different considerations might very well apply to the two classes of persons with whom we are dealing. These are, in the first place, those who originally took

£30 shares upon the representation virtually made to them by the company that sect. 31 had been certified by the barrister (whereas those who directed the society ought to have known, and must be taken to have known, that sect. 31 had been struck out), who therefore really were induced to pay their money upon a misrepresentation. How does their position differ from the position of persons who make loans to a society which has got no borrowing power? It seems to me the difference is tolerably clear. Those who deal with a society which professes to have power to borrow have equal means of knowledge with the society itself of the statutory powers of the company; they are put, so to speak, upon inquiry whether the company really can borrow validly or not, and if they choose to lend their money to a company which cannot properly borrow it cannot be said there is a failure of consideration. The company has got their money, it is true, but they must be taken to have known what they bought, and to have been willing to pay their money on the chance. But when you come to people who were induced, as these people were, to lend or to subscribe their money by misrepresentation put before them by the company - although the company has had the money I agree that the directors and not the company would be the persons to be sued for fraud, because the misrepresentation was I suppose the misrepresentation of the directors - the company cannot keep the money which they obtained by the misrepresentation of the directors without doing all that lies in their power to make good the representation. They cannot take the benefit of the misrepresentation and repudiate the act of the directors altogether. Therefore, in the first place, these people who subscribed money upon the faith of this sect. 31 being certified by the barrister would be entitled, as it seems to me, against the company, to be placed at all events in the position in which they would have been if sect. 31 had been approved by the barrister. It may be said that would not do them much good, because, if sect. 31 is invalid, they would only be placed in the position of people who had taken invalid shares. I think there would be a fallacy in that answer if it were made, because it does not follow that if the subscribers had known all the facts, if they had known from the beginning

that sect. 31 had not been certified by the barrister, they would have advanced this money. I take it they would be entitled to be placed in the position of creditors of the company but for their own subsequent acts. But they have been willing from the first, although creditors, to be treated as members; they subscribed upon the belief that they would be members, and when they took the £1 shares in 1876 they assented to stand on that footing. They cannot demand more of the liquidator than that they should be treated as members upon the terms of the rule, valid or invalid, and they cannot be denied as much as that. So that, if the case solely concerned the members who had taken shares on the faith that sect. 31 had been certified by the barrister, I should have no doubt that their claim was a good one, and I do not think they prejudiced it in the least by taking the £1 shares; that is to say, they are still entitled to assert their right to be treated upon the footing that those £1 shares are valid. But that does not dispose of the whole of the class which we have been discussing, because there is a large portion, half probably, who have taken £1 shares after 1876, and who have not therefore been induced by any misrepresentation of the company to subscribe, and therefore we are driven to consider the question whether the rule, as altered in 1876, is a valid rule, or ultrà vires. Now it certainly would be ultrà vires if the transaction were a disguised or real loan, but it seems to me, when you look at the rules under which the subscription is obtained, that it is not a loan. I will not go through what was said by the Master of the Rolls and Lord Justice Cotton, but simply state my opinion that it was not a loan. It really is intended to be a preferential share, which should place those people, to a certain extent at all events, in the position of investing members. It has been argued that the company had no right to create these preferential shares to the extent of £1. If the company had no right to create preferential shares of this kind to the extent of £1 it seems to me difficult to maintain that there could be such things as paid-up shares to the extent of £1. Whether shares created under sect. 31 to the extent of more than £1 are within the Act or not, it seems to me at all events

that paid-up shares to the value of £1 and preferential shares of the value of £1 are. If you look at the words of the Act, however you read them, the limit is only this: there shall not be in any one month more paid upon a share than 20s. I say, however you read it, giving it the narrowest construction - the one most in favour of the contention of the liquidator - these are within it. For the other reasons given by the Master of the Rolls and Lord Justice Cotton, in which I concur, but especially for that reason, it seems to me that all the class are entitled to succeed who have the £1 shares, while those who originally subscribed for £30 have, it seems to me, an additional ground on which their claim rests.

Solicitors for Official Liquidator: Pritchard, Englefield, & Co.,agents for Boote & Edgar, Manchester.

Solicitors for other Parties: Rooke & Sons, agents for Earle & Sons, Manchester; Chester & Co., agents for Crofton, Manchester;and for Woodall & Marriott, Manchester; Marsland, agent for Addleshaw & Warburton, Manchester.

M. W.