A M Spicer & Son Pty Ltd (In Liq) v Spicer & Howie [1931] HCA 30; (1931) 47 CLR 151 (1 October 1931)

A. M. Spicer and Son Proprietary Limited (In Liquidation) Plaintiff, Appellant; and Spicer and Howie Defendants, Respondents.

This was an action by A.M.Spicer and Son Pty. Ltd. (in Liquidation) seeking (inter alia) a declaration, against Howie that a debenture for £13,000 issued by it to him was beyond its power, and against both Howie and Spicer that the Company was entitled to the benefit of all securities held by Howie in respect of a debt of £10,000 owing by Spicer to him; and an order against both defendants for payment to it of considerable sums of money collected pursuant to the powers and authorities contained in the debenture and also some other moneys mentioned in the statement of claim. The Spicer Shoe Co. Pty. Ltd. was incorporated in Victoria under the Companies Acts, and its principal shareholders were the defendant Spicer and his family. The Company needed further capital, and the defendant Howie was approached. But he did not care to become a shareholder, though he was prepared to make an advance, secured by way of floating charge over the assets of the Company. On the other hand, the Company did not desire to give a charge or security over its assets because such an instrument would require registration, and that might affect its credit. So another arrangement was adopted, whereby the Company obtained further capital. It is set forth in two agreements, dated 30th June 1922, one between Spicer and Howie, the other between the Company, Spicer, and Howie. Howie paid to the Company at the request of Spicer the sum of £10,000, for the purchase by Spicer from the Company of 10,000 cumulative preference shares of £1 each. Spicer covenanted to repay this sum, and also to pay interest thereon, and he also assigned the preference shares to Howie, and agreed to deposit the title deeds of certain lands as a security for the advance. The Company agreed to issue to Spicer 10,000 shares, preferential to all other shares in the Company, both as to capital and, to a certain extent, as to dividends, and hand the same to Howie. The preference shares were duly issued, and deposited with Howie, who did not, however, become registered as the proprietor thereof. The title deeds were also deposited with Howie, in accordance with the agreements.

Wasley A.J. found that though Spicer appeared to be the borrower of the money, nevertheless the real transaction was that the Company was the borrower, and Spicer, in assuming liability for the loan, was only acting as agent for the Company. This finding cannot be supported. The evidence makes it clear, I think, that the idea of the Company borrowing money from Howie was dropped, and recourse was had to another method. That other method would answer as well and be just as advantageous to the parties. It is set forth in the agreements of 22nd June 1922, to which I have referred. That was the real transaction and the transaction into which all parties intended to enter. There is no reason why their arrangement should not be given effect to in the manner and form agreed upon.

In September of 1925 the Spicer Shoe Co. went into liquidation. The plaintiff Company, Spicer and Son Pty. Ltd., was incorporated in December 1925, and its principal shareholders were the defendant Spicer and his family. The main objects of the Company were to carry on the business of manufacturers, buyers and sellers of boots and shoes, in all its branches, to acquire and undertake the whole or any part of the business, goodwill and assets of any person, firm or company carrying on or proposing to carry on any of the business which the Company was authorized to carry on, and as part of the consideration for such acquisition to undertake all or any of the liabilities of such firm or company, to borrow or raise money, and to secure repayment of any money borrowed, raised or owing, by mortgage or charge on the whole or any part of the Company's property or assets, and to do all such other things as were incidental or conducive to the interests of the Company or to the attainment of any of the objects of the Company. The new company—the plaintiff Company—was really formed to take over the business of the old Company, and a scheme to that end was negotiated between the liquidators of the old Company, the shareholders of the old Company, and the plaintiff Company. The details of the arrangement are set out in two documents bearing date 15th March 1926 and 23rd March 1927. In outline the arrangement was as follows:—(1) The plaintiff Company should take over as on 1st February 1926 all the estate, right, title and interest of the old Company in the plant, machinery, stock and other rights and interests specified in a schedule. (2) The plaintiff Company should pay to the old Company or its liquidators "sufficient to pay all persons who shall lawfully establish claims against the old Company or its liquidators the amounts in full of their claims or debts remaining unpaid." (3) The shareholders in the plaintiff Company should have allotted and issued to them in the capital of the plaintiff Company one share of £1 fully paid up for every two shares in the capital of the old Company registered in their name.

The assent of the shareholders to this arrangement places it outside the decision in Bisgood v. Henderson's Transvaal Estates Ltd.[1]. It was intended that Howie should be a party to and join in the arrangement, but he refused to do so until his interests were secured. As already set forth, 10,000 cumulative preference shares had been deposited with him as security for the money advanced by him to the defendant Spicer, and he was entitled to call for a transfer of and become registered as the proprietor of the shares. The surplus assets of the old Company were sufficient to repay the capital paid up on these shares, but if those moneys were repaid, the plaintiff Company would have insufficient capital to carry on business. Protracted negotiations took place, and in 1928 the following terms were agreed upon: (1) that Howie should execute the agreement of March 1926; (2) that Howie should advance £3,000 to the plaintiff Company; (3) that the plaintiff Company should give a charge over its assets by way of floating security to secure the sum of £13,000.

Howie accordingly executed the agreement bearing date March 1926, and advanced £3,000 to the plaintiff Company, and it issued a debenture to Howie, creating a floating charge over all its assets to secure the sum of £13,000 and interest thereon. It is recited in the debenture that the sum of £10,000 was due and owing by the plaintiff Company to Howie, and that Howie had advanced to it the further sum of £3,000. The latter recital is undoubtedly true, but how did the sum of £10,000 become due and owing by the Company to Howie? The transaction of 1928 was not the substitution of the liability of the plaintiff Company under the debenture for the liability of the old Company on the cumulative preference shares in respect of its surplus assets. The issue of 5,000 cumulative preference shares to Spicer in the plaintiff Company under the arrangement of 1926 makes this clear. These new shares were never deposited with or handed over to Howie. Moreover, the evidence of Howie and his representative Perry is to the effect that if the plaintiff Company would give him a debenture in respect of the old debt of £10,000 (that is, the amount owing by Spicer to Howie), then Howie would advance an additional sum of £3,000 to the plaintiff Company. The position assumed by the plaintiff Company was therefore that of surety or quasi-surety in respect of the debt due by Spicer to Howie. There was no release or discharge of Spicer's obligation nor of the mortgage security given by him over the lands already mentioned.

The most critical question raised in this case is whether the assumption of this liability by the plaintiff Company through and by means of the debenture issued to Howie was within its powers. In my opinion it was. The plaintiff had power to acquire the business of the old Company, and, as part of the consideration for such acquisition, to undertake all the liabilities of the old Company. Now part of these liabilities was the obligation to repay to the cumulative preference shareholder out of its surplus assets the capital paid up on those shares, namely, £10,000. If the persons entitled to those rights refrained from forcing a realization and distribution of the proceeds of those assets, why should they not stipulate for some other right instead thereof? Spicer was prepared to take 5,000 cumulative preference shares in the plaintiff Company. Howie, however, required a charge upon its assets. On the bulk of those assets he already had a prior call through the cumulative preference shares deposited with him as security for the £10,000 advanced to Spicer. The plaintiff Company could not obtain title to those assets or to the business of the old Company unless it conceded Howie's terms. The substance of the matter was, however, that the plaintiff Company by its action freed the surplus assets from the claims of Spicer and Howie in the hands of the old Company, but took upon itself a liability different in character—though the same in amount—towards the persons (Spicer and Howie) who had claims on the surplus assets. In short, the plaintiff Company assumed responsibility for the moneys advanced by Howie to Spicer, and secured by, inter alia, the deposit of the cumulative preference shares. Such a transaction appears to me within the express powers of the plaintiff Company, or at least incidental or conducive to its interests.

But then it was argued that the debenture was issued without any proper or lawful authority on the part of the directors. The defendant Spicer and his son were the directors of the plaintiff Company, and it was on their resolution, dated 22nd March 1928, that the seal of the Company was affixed to the mortgage debenture in favour of Howie. Under the articles (cl. 100) the directors may exercise all the powers of the Company, subject to the Companies Act and the articles. And clause 97 provides: "All acts done by any meeting of directors shall notwithstanding that it shall afterwards be discovered that there was some defect in the appointment of such directors or that they or any of them were disqualified be as valid as if every such person has been fully appointed and was qualified to be a director." Directors of a company have duties to discharge of a fiduciary nature towards their principal, and it is a rule of universal application, in the absence of any stipulation to the contrary, that no one having such duties to perform should be allowed to enter into engagements in which he has or can have a personal interest conflicting or which possibly might conflict with the interests of those whom he is bound to protect (Transvaal Lands Co. v. New Belgium (Transvaal) Land and Development Co.[2]). And it was urged that the quorum at meetings of the board must be a quorum of persons competent to vote at the board meeting in question (In re Greymouth Point Elizabeth Railway and Coal Co.; Yuill v. Greymouth Point Elizabeth Railway and Coal Co.[3]). It is difficult to resist the conclusion that, in giving a charge over the assets of the plaintiff Company in aid of a debt owing by the defendant Spicer to Howie, there were the elements of a conflict between the duty of Spicer as a director and his interest as a debtor to Howie. It is not so clear, however, that the members of the quorum required under the plaintiff Company's articles of association must all be disinterested persons. The articles do not—as in the Greymouth Case and other cases—provide that no director shall vote on any matter relating to any contract or business in which he might be interested, nor is there any provision vacating a director's seat if he be interested in any contract with the Company. But in my opinion the answer to the whole argument is found in article 97, already set out. "Notwithstanding that it shall afterwards be discovered that there was some defect," it has been held, does not mean "notwithstanding that the facts which show the defect were afterwards discovered," but "notwithstanding that the defect itself arising from the facts was afterwards discovered" (Dawson v. African Consolidated Land and Trading Co.[4]; British Asbestos Co. v. Boyd[5]; Channel Collieries Trust Ltd. v. Dover, St. Margaret's and Martin Mill Light Railway[6]). "If there is good faith ... the mere fact that the person claiming the benefit of the" clause "had notice of the existence of the facts which led to the disability is not sufficient to disentitle him to rely upon it if he can honestly say I was not aware of the defect and the consequences of the facts I knew, I was not aware of the disqualification which now exists" (Channel Collieries Trust Case[7]). The present case appears to me to be within this interpretation of the words occurring in article 97. Both Spicer and Howie knew of the original transaction between them and of the security required by Howie from the plaintiff Company if he gave up his rights arising from the deposit of the cumulative preference shares with him. But that either was aware of the possible consequences of the facts, namely, the disqualification of Spicer, is out of the question. The transaction was honest, in good faith, and necessary if the plaintiff Company were to carry on business. It should consequently be supported.

I pass to the claim of the plaintiff Company for a declaration against Howie and Spicer that it is entitled to the benefit of all securities held by Howie and to which he was entitled in respect of the sum of £10,000, and in particular to the security constituted by the deposit of the title deeds already mentioned. In my opinion, the Company is entitled to this declaration. Howie has enforced his debenture security against the Company, and obtained sufficient by a realization of the Company's assets to satisfy the sum of £10,000 secured thereby. But it has already been stated that the plaintiff Company assumed the position of surety or quasi-surety in respect of the debt due by Spicer to Howie. If this is so, the rule of law applicable is thus stated by the present Mr. Justice Rowlatt in his book on Principal and Surety, 1st ed., p. 6:—"There lies, however, just beyond the border-line of suretyship the class of cases in which, without any contract between the debtors, there is a primary and secondary liability of two persons for one and the same debt, the debt being, as between the two, that of one of those persons only, and not equally of both; so that the other, if he should be compelled to pay it, would be entitled to reimbursement by the person by whom, as between the two, it ought to have been paid. Such persons, when both have become liable to the creditor, and it is in his choice upon which to put the burden, do stand in a relation to one another which gives rise to an equity identical with one which exists between principal and surety—namely, that securities given by the primary debtor are attributable in the hands of the creditor to the satisfaction of the debt, and do not go back to that debtor or his general creditors" (Duncan, Fox & Co. v. North and South Wales Bank[8]).

A further claim was made by the plaintiff Company for £1,593 18s. paid or credited by the Company to Spicer without consideration or as bonuses to reimburse Spicer in respect of amounts paid to Howie as and for interest on the advance of £10,000. But the parties do not appear to have devoted much attention to this claim, and the evidence, such as there is, leaves the matter in a doubtful and confused state. In these circumstances the plaintiff Company must fail on this last claim.

This is an appeal from a judgment of Wasley A.J. by which he decided (1) that a debenture of 22nd March 1928 expressed as given by the appellant Company to secure the repayment of £13,000 to the respondent Howie was a valid instrument and a security for the full amount binding upon the appellant Company and (2) that its liability upon the debenture was primary so that the respondent Spicer was not in the position of a surety liable to recoup the appellant Company the amount paid out of its assets under the debenture, or liable to have a security which he had provided for the same sum handed over by the respondent Howie to the appellant Company. It is convenient to state and discuss the course of events upon which these questions depend in the order in which they took place.

In 1922 a Company called the Spicer Shoe Company Proprietary Limited desired to raise a sum of £10,000 and applied to the respondent Howie who consented to supply the money at nine per cent. The Company did not wish to grant a debenture or create a floating charge over its assets and proposed that it should issue preference capital for the amount, but Howie was unwilling to become a shareholder. The respondent Spicer, who was the principal member of the Company and its managing director, was ready to provide additional security in the shape of a mortgage over a piece of land to which he was entitled, and eventually the transaction was carried through by documents which constituted the respondent Spicer the borrower of the money and secured it over the land and over 10,000 shares of £1 each in the Company which were issued as preferential both as to a cumulative dividend of nine per cent per annum and as to capital, and were allotted to Spicer by whom they were fully paid up by the application of the money lent to him by Howie. Spicer entered into a personal covenant with Howie to repay the loan with nine per cent interest or such greater interest as would be equal to the dividends on the shares, and to execute a mortgage of the land. He lodged with him the scrip for the shares indorsed with a transfer executed in blank and appointed him his attorney or proxy to vote at meetings of the Company. The Company entered into a covenant with Howie and Spicer that the shares should be preferential as to capital and should bear a preferential dividend of nine per cent cumulative; that after nine per cent had been paid on the ordinary shares, the dividends on the preference shares should be pari passu with the ordinary shares; that the Company would give Howie information as to the affairs and business of the Company, and that it would at any time register a transfer of the shares to Howie. This transaction appears to me to have been effectual to create the relation between the parties which the documents describe. The view that a contract of loan was made between the Company and Howie cannot be supported.

For some time payments of interest to Howie were kept up, but at length, on 21st September 1925, the Company went into voluntary liquidation. Its assets appear to have had a value of £66,317, and the debts owing to its creditors seem to have amounted to £46,125. The liquidation proceeded; the creditors were paid dividends amounting to 10s. in the £ and as at 31st January 1926 the remaining assets were set down by the liquidators at £43,224. If the liquidation had gone on in the ordinary course, and if the assets had realized this sum, then after the creditors had received another £23,093 or thereabouts the preference shares issued to Spicer would be next in priority; £10,000 would have been paid upon them and Spicer's debt to Howie would thus have been discharged. But behind these preference shares stood 35,125 fully paid ordinary shares of £1 each, the greater number of which belonged to Spicer and his family, and a scheme of reconstruction was conceived in the interests of the holders of these shares. The plan was to form a new company to acquire from the liquidators the material assets and the business of the old Company, undertaking in return the discharge of the balance of its liabilities and allotting share capital to the members of the old Company in proportion to their holdings so as to cover the surplus value of its assets over its liabilities. Meetings of creditors were held and Spicer's solicitors explained the scheme which was eventually adopted by the liquidators, the creditors, and the shareholders, except two or three whom Spicer bought out. Howie's solicitor attended one meeting, the minutes of which record him as having concurred in all the proposals of Spicer's solicitors, but it does not appear that any of these proposals related to the priority which Howie's security over the preference shares, in effect, gave him in the application of the surplus if the winding up proceeded. Doubtless it was not a matter which concerned a creditors' meeting. In any case, having regard to the course taken at the hearing of this suit, it could not be suggested that any arrangement was made with Howie providing for the priority he would have if he could enforce his security over the preference shares.

The appellant Company was formed in order to take over the undertaking, and was registered on 31st December 1925. The liquidators divided the assets into two parts, consisting of liquid assets amounting to £15,733 readily available for distribution which they proposed to retain, and assets—for the most part material—amounting in value to £27,491 which they proposed to transfer to the appellant Company as from 1st February 1926. Two agreements were drawn up intended to bear the same date. The first agreement, which was prepared by the liquidators' solicitors, appears to have been concerned with the position of the liquidators and the creditors, and to have had in view the transfer of the assets, the securing of the discharge of the old Company's liabilities to its creditors and the indemnification of the liquidators against the claims of the shareholders who would have been entitled to participate in a distribution of the surplus. These claims the agreement appears to me to intend to extinguish, no doubt, upon the assumption that the shareholders would in some way regain their interests in the surplus by obtaining shares in the appellant Company. The second agreement, which was prepared by Spicer's solicitors, was concerned with obtaining for the shareholders shares fully paid up in the appellant Company to represent their right to participate in a distribution of the surplus assets in the liquidating Company. This instrument was expressed to be made between the appellant Company and the persons, ten in number, who were shareholders in the liquidating Company, called in this agreement "the vendor Company." After reciting the first agreement it witnessed that in consideration of the shareholders in the vendor Company having consented to the vendor Company and its liquidators effecting the sale at the price and upon the terms and conditions expressed in the first agreement, and in further consideration of them agreeing to execute that agreement, the appellant Company should allot to each of them one share of £1 for every two shares held in the capital of the vendor Company. This meant, as a schedule to the agreement specifically stated, that in lieu of the 10,000 preference shares held by Spicer in the old Company over which the debt to Howie was secured, 5,000 preference shares in the new Company should be issued. Howie was not made a party to this agreement, although to the extent of £5,000 it involved an abandonment in favour of ordinary shareholders of his right, by means of preference shares, to obtain the amount of his debt out of the assets before they participated. But the draftsman of the first agreement, in order to protect the liquidators, made Howie a party to it. It was expressed to be made between the old Company and its liquidators of the first part, its shareholders of the second part, Howie of the third part and the new Company of the fourth part, and it recited that Howie had an equitable interest in the shares held by Spicer. The agreement which it contained consisted of (1) a sale by the old Company and its liquidators with the consent of its shareholders and of Howie to the appellant Company of the specified assets of the old Company and of its business as a going concern in consideration of £27,491 payable in instalments, the last of which should become due on 1st March 1927; (2) a proviso that if before 1st January 1927 the appellant Company should have paid to the old Company and its liquidators sums which with the instalments to that date would be sufficient to pay in full claims established against the old Company or its liquidators, together with certain interest and the costs, charges and expenses of winding up, then such payments should be accepted in satisfaction and discharge of the purchase price; (3) an undertaking by the appellant to give a debenture over all its assets including uncalled capital to secure payment of the price or the sums to be accepted in satisfaction of the price; (4) a release and discharge of the old Company and the liquidators by its shareholders from all claims by them in the winding up as shareholders; (5) an undertaking by Howie not to claim in the winding up and a release and discharge by him of the old Company and its liquidators from all claims which he might have against them. This agreement was dated 15th March 1926, but it was not executed upon that day. On 18th March 1926 Spicer's solicitors wrote to the liquidators' solicitors that the agreement and debenture had been executed by the appellant Company, and the agreement had also been signed by several shareholders and that their clients (presumably Spicer and the appellant Company) personally undertook that the remaining signatures would be obtained. The liquidators, however, were not prepared to put the appellant Company in possession of the assets unless the agreement was executed by all parties, or a personal undertaking was given by the solicitors for Spicer that it would be so executed. The second alternative was adopted, and on 26th March 1926 Spicer's solicitors personally undertook to hand to the solicitors for the liquidators one part of the first or sale agreement duly executed by the appellant Company and the shareholders and Howie, whereupon the appellant Company was put in possession of the assets to which the agreement related and proceeded to carry on the business. If Howie had executed this agreement, as for some reason it was expected that he would do, his security over the preference shares would have been lost, although apparently that security would have produced enough to satisfy Spicer's debt to him. For repayment of the amount of £10,000 Howie would have nothing better to look to than Spicer's personal liability to him secured only by the mortgage of his land, and by whatever shares the appellant Company might choose to allot to Spicer in virtue of Spicer's holding of the 10,000 preference shares in the liquidating Company. He would have no means of compelling the appellant Company to allot a number of preference shares which would afford the same security or, indeed, any number at all. In point of fact, according to the second agreement, a number of preference shares was to be allotted which conferred upon the ordinary shareholder an advantage to the extent of £5,000 at the expense of Howie's security. It is, therefore, no wonder that Howie refused to execute the agreement and insisted upon some better protection of his interests. So long as this refusal was maintained the document, though perhaps delivered as a deed operative at law (see Federal Commissioner of Taxation v. Taylor[9]), had no efficacy in equity. "It is well settled that if two persons execute a deed on the faith that a third will do so, and that is known to the other parties to the deed, the deed does not bind in equity if the third refuses to execute" (per Jessel M.R., Luke v. South Kensington Hotel Co.[10]). Thus unless and until the agreement was executed by Howie a title was not obtainable by the appellant Company to the assets which it had taken over.

During the next two years various proposals were made to Howie, all of which he refused. Nevertheless, the appellant Company continued to carry on the business which the liquidators had put into its control. By 16th March 1927 the creditors had been paid off in full by the liquidators, who had received £9,963 from the appellant Company, which together with £15,733 retained by them sufficed to pay the remaining 10s. in the £1, amounting to £23,093 or thereabouts, and also, as it seems, the costs, charges and expenses of the liquidation. The result was that from this date the assets in the control of the appellant Company represented surplus assets in the liquidation which, but for the reconstruction to which Howie was asked to agree, must have been applied first in or towards a return of the share capital of £10,000 represented by the preference shares over which his advance of £10,000 was secured. For some reason, not clearly explained, the completion of the second or shareholders' agreement was delayed, but at length it was executed by all the shareholders probably on 23rd March 1927, the date which it actually bears in spite of being expressed to be of even date with the first or sale agreement. In the meantime, according to the records of the appellant Company and its returns to the Registrar-General, shares were allotted in conformity with the provisions of the incomplete agreement, "the consideration being the value of their respective holdings in the Spicer Shoe Company Pty. Ltd. in liquidation." The date given for the allotment, which is recorded as accomplished by resolution of the members, is 12th March 1926, but there is some reason to doubt the record. It may be noticed that the scheme which resulted in the allotment of these fully paid up shares did not follow sec. 193 of the Companies Act, and that arguments which might be relied on to establish that the appellant Company did receive money's-worth for its paid-up shares within Wragg's Case[11], tend to support an application to the sale by the liquidating Company of Bisgood v. Henderson's Transvaal Estates Ltd.[12]. But all the shareholders agreed and in any case the validity of Howie's debenture would not be involved. At length, after two years, the appellant Company reached an arrangement with Howie. The arrangement was that he should lend to the Company a sum of £3,000 and that the Company should grant a debenture acknowledging a debt of £13,000 with interest at nine per cent per annum repayable as to part by sixteen quarterly instalments of £200 each and as to the residue on 1st July 1932, secured by a floating charge upon all the assets of the Company. On 22nd March 1928 this debenture was sealed on behalf of the Company pursuant to a resolution of a meeting of directors, and upon its registration Howie paid over the additional £3,000 and executed the first or sale agreement of 15th March 1926. There is no evidence that when Howie obtained this debenture he agreed to, or intended to, take it in discharge of Spicer's personal liability to him for the sum of £10,000. It is likely that little importance would be attached to that liability by Howie and Spicer, who probably took a lay view of the matter. But it seems improbable that Howie would give up his security over Spicer's land, and this would be the necessary result of a discharge without more of the liability it secured. It is enough to say that there is no material upon which it could be found that the debenture was taken in discharge of Spicer's indebtedness or in relief of the security over his land or over the shares allotted to him in virtue of his holding 10,000 preference shares in the old Company. Apart from a question whether so much of this debenture is valid as imposed upon the appellant Company an obligation secured over its assets to pay the sum of £10,000, the result was that both Spicer and the appellant Company were liable to Howie in respect of the same sum of £10,000. If Spicer repaid it, the Company's debenture would be discharged. If the Company discharged its debenture, Spicer's debt to Howie would be paid. So far as Howie is concerned the liability to him of Spicer upon his covenant of 1922 and the liability of the appellant Company upon its covenant of 1928 were equal. He could resort to either of them indifferently. But, "where a creditor has a right to come upon more than one person or fund for the payment of a debt, there is an equity between the persons interested in the different funds that each shall bear no more than its due proportion" (per Lord Blackburn, Duncan, Fox & Co. v. North and South Wales Bank[13]). As between the appellant Company and the respondent Spicer, were their liabilities upon an equality, or is one secondary and the other primary? Before the Company gave the debenture its position was that it had allotted fully paid-up shares to the members of the old Company in respect of their right to participate in a distribution of its surplus assets in the liquidation, and it had found the consideration required by the creditors of that Company, whose claims ranked before the shareholders in the winding up. Among the share interests in the old Company in respect of which shares in the new were allotted, was the prior right given by 10,000 preference shares. The necessity of giving the debenture arose from the fact that these very shares were encumbered with Spicer's debt to Howie, who thus was in a position to make claims which the Company and the liquidators had recognized and because of which the liquidators would not allow the transaction to go through without Howie's concurrence. The 5,000 shares had been allotted to Spicer in virtue of his holding the 10,000 preference shares, and payment of Spicer's debt to Howie would discharge the liability so secured over them. In these circumstances Spicer's liability could not but be primary and the Company's secondary. The relation is analogous to that of principal and surety. It falls within the third of the cases given by Lord Selborne L.C. in Duncan, Fox & Co. v. North and South Wales Bank[14], and is one of "those in which, without any such contract of suretyship, there is a primary and a secondary liability of two persons for one and the same debt, the debt being, as between the two, that of one of those persons only, and not equally of both, so that the other, if he should be compelled to pay it, would be entitled to reimbursement from the person by whom (as between the two) it ought to have been paid." Accordingly, upon the debt being paid by the Company or out of its assets, the Company would become entitled to be recouped by Spicer and to resort to the securities in Howie's hands which he had provided.

On 7th July 1929, in the exercise of the powers expressed to be given by the debenture, Howie appointed a receiver who realized assets of the Company out of the proceeds of which Howie received £12,279 10s. 4d. It does not appear what amount was owing upon the debenture for interest and for principal when these moneys were received. On 1st August 1929 a winding-up petition was presented against the appellant Company upon which a winding-up order was made. The liquidators of the appellant Company then brought this suit against Howie and Spicer, claiming against the former that the debenture was invalid, and against the latter, inter alia, that, if the debenture was not invalid, he was bound to pay to the Company the amount obtained by the receiver under the debenture out of the Company's assets, and the Company was entitled to the benefit of the security held by Howie. The suit came before Wasley A.J. who decided against both these alternative claims. In support of the appeal from this decision it was contended that the debenture was invalid, or not binding upon the appellant Company, because it was given pursuant to a resolution passed at a meeting of directors at which no quorum or proper quorum was present, and thus it was not authorized on behalf of the appellant Company by a duly constituted board of directors. The directors of the Company were the respondent Spicer and his son. The articles of association provided that there should be not less than two directors nor more than four; that two directors should be a quorum; that a meeting of directors for the time being at which a quorum is present should be competent to exercise the powers of the directors generally; and that the business of the Company should be managed by the board, which might exercise all the powers of the Company. The contention is that when the article prescribes two directors as a quorum, it means two directors who have no interest conflicting or possibly conflicting with their duty towards the Company, and that the respondent Spicer had such an interest in the transaction because of his personal liability to Howie. In my opinion this argument fails. In the first place, I do not think the article is open to the construction which excludes from a quorum directors who have an interest in business before the board. In re Greymouth Point &c. Co.[15], Neal v. Quinn[16], In re North Eastern Insurance Co.[17] and Victors Ltd. v. Lingard[18] are cases in which an article of association provided that no director should vote upon any matter in which he should be interested, and the article requiring a quorum was interpreted to mean a quorum of directors none of whom was disqualified by this provision from voting. But these cases afford no ground for the view that where an interested director is not forbidden by the articles to vote, he may not be reckoned in the quorum. Some expressions used in Cox v. Dublin City Distillery [No. 2][19] may perhaps appear wide enough to cover such a position, but I do not think they were intended to do so. In the next place, having regard to the fact that Spicer was and remained primarily liable to Howie and the issue of the debenture did not relieve him of responsibility for the amount of the debt, I am not prepared to say that he occupied a position of conflicting duty and interest. I doubt whether in equity the transaction would have been at its inception voidable because of Spicer's interest, assuming Howie had notice of the facts. But the principal contention by which the validity of the debenture is impeached is that it was beyond the powers of the Company to incur a liability for the £10,000 and secure it over its assets. The objects of the Company, contained in its memorandum of association, included the acquisition by any means of any property; the acquisition of any business, goodwill and assets of any company carrying on the business of manufacturers, buyers and sellers of boots and shoes; the giving by way of consideration for any of the property acquired any debentures or securities; and the doing of all things incidental or conducive to the interests of the Company or to the attainment of the above objects or any of them.

The debenture was given to secure payment of a sum of money which, in a due course of administration in the liquidation of the old Company, should have been answered out of the very assets which the appellant Company had taken over under an arrangement which in equity gave it no title to them; the acquisition of the assets was plainly within the power of the Company; and the liability undertaken was not primary. In my opinion it was incidental or conducive to the attainment of the objects of the Company, which empowered it to acquire the boot and shoe manufacturing business of the old Company, to give a debenture by which the liability for the £10,000 was incurred by the Company and secured by a floating charge upon its assets.

On the other hand, I am unable to agree with the decision appealed from, in so far as it holds that the respondent Spicer was not liable to the Company in respect of the sums obtained by Howie under the debenture in satisfaction of the debt of £10,000. For the reasons I have stated, I think he occupied a position of primary obligation. It is not clear that Howie has recovered the entire sum of £13,000 and interest secured by the debenture, and, if he has not done so, presumably he could appropriate the amount which he has recovered so as first to extinguish the £5,000, with the consequence that the security provided by Spicer would be available for the deficiency. It appears, however, that Howie considered on 10th May 1930 that he had no further claim upon the security. If so, the appellant Company is entitled to its benefit.

A further claim was made by the appellant Company against Spicer in respect of £1,443 1s. 8d. and £150 by which he is said to have been reimbursed in respect of interest paid to Howie for periods prior to the date of the debenture and debited to Spicer's account. But I am not satisfied that these sums do not represent bonuses declared by way of a distribution out of the supposed profits to Spicer as a preference shareholder. If so, the validity of the distribution has not effectively been put in issue in this suit.

The appeal should be dismissed as against the respondent Howie with costs, and allowed as against the respondent Spicer with costs.

The judgment appealed from should be varied as follows:—Discharge so much of the judgment appealed from as orders that, save in respect of the claim referred to in such judgment, the action be dismissed as against the respondent Spicer, and as orders that the plaintiff pay the respondent Spicer's costs. In lieu thereof: (i.) Declare that the respondent Spicer became liable to repay to the appellant Company the amount paid by it or by the receiver out of its assets in or towards the satisfaction of the sum of £10,000 parcel of the sum of £13,000 secured to the respondent Howie by the debenture in the pleadings mentioned which said sum of £10,000 is specifically referred to in such debenture and that upon payment to the respondent Howie of the said sum of £10,000 and all other sums for interest or otherwise payable to the respondent Howie by the respondent Spicer under the indenture made 30th June 1922 between them the appellant Company is entitled to the securities held by the respondent Howie in respect of such sums. (ii.) Reserve liberty to apply to the Supreme Court for further relief consistent with this judgment in respect of the matters to which the last declaration relates. After the words "and this Court doth further order that" and before the words "this action be dismissed as against the defendant John Donald Howie" insert the words "save as aforesaid."

As against respondent Howie appeal dismissed with costs. As against respondent Spicer appeal allowed with costs.

Judgment of the Supreme Court varied as follows:—Discharge so much of the judgment appealed from as orders that, save in respect of the claim referred to in such judgment, the action be dismissed as against the respondent Spicer, and as orders that the plaintiff pay the respondent Spicer's costs.

In lieu thereof:—(i.) Declare that the respondent Spicer became liable to repay to the appellant Company the amount paid by it or by the receiver out of its assets in or towards the satisfaction of the sum of £10,000 parcel of the sum of £13,000 secured to the respondent Howie by the debenture in the pleadings mentioned which said sum of £10,000 is specifically referred to in such debenture and that upon payment to the respondent Howie of the said sum of £10,000 and all other sums for interest or otherwise payable to the respondent Howie by the respondent Spicer under the indenture made 30th June 1922 between them the appellant Company is entitled to the securities held by the respondent Howie in respect of such sums. (ii.) Reserve liberty to apply to the Supreme Court for further relief consistent with this judgment in respect of the matters to which the last declaration relates.

After the words "and this Court doth further order that" and before the words "this action be dismissed as against the defendant John Donald Howie" insert the words "save as aforesaid." Strike out the words "and also so much of the plaintiff's costs of the said action as are incidental to such claim such costs to be taxed." After the words "costs thereof to be taxed" and before the words "and this Court doth certify" insert "and that the defendant Spicer do pay to the plaintiff its costs of this action other than costs incurred by reason of the joinder of the defendant Howie and the claims against him."

Solicitors for the respondents, Bullen & Burt and Abbott, Beckett, Stillman & Gray.

[1] (1908) 1 Ch. 743.

[2] (1914) 2 Ch., at p. 502.

[3] (1904) 1 Ch. 32.

[4] (1898) 1 Ch. 6.

[5] (1903) 2 Ch. 439, at p. 445.

[6] (1914) 2 Ch. 506.

[7] (1914) 2 Ch., at p. 512.

[8] (1880) 6 App. Cas. 1.

[9] [1929] HCA 13; (1929) 42 C.L.R. 80.

[10] (1879) 11 Ch. D. 121, at p. 125.

[11] (1897) 1 Ch. 797.

[12] (1908) 1 Ch. 743.

[13] (1880) 6 App. Cas., at p. 19.

[14] (1880) 6 App. Cas., at p. 11.

[15] (1904) 1 Ch. 32.

[16] (1916) W.N. 223.

[17] (1919) 1 Ch. 198.

[18] (1927) 1 Ch. 323.

[19] (1915) 1 I.R. 345.

High Court of Australia

A M Spicer & Son Pty Ltd (In Liq) v Spicer & Howie [1931] HCA 30; (1931) 47 CLR 151 (1 October 1931)

HIGH COURT OF AUSTRALIA