The Maritime Bank v. Troop, (1889) 16 SCR 456

Supreme Court of Canada

The Maritime Bank v. Troop (1889) 16 SCR 456

Date: 1889-03-19

The Liquidators of the Maritime Bank of the Dominion of Canada under the Winding-up Act

Appellants;

And

Howard D. Troop

Respondent.

1888: Nov. 13, 14; 1889: Mar. 19.

Present—Sir W. J. Ritchie C.J. and Strong, Taschereau, Gwynne and Patterson JJ.

ON APPEAL FROM THE SUPREME COURT OF NEW BRUNSWICK.

Bank—Shareholders in—Winding-up—R. S. C. ch. 129—Contributory Calls on—Double liability—Set off—Bank Act R. S. C. ch. 120.

A contributory of an insolvent company, who is also a creditor, cannot set off the debt due to him by the company against calls made in the course of winding-up proceedings in respect of the double liability imposed by the Banking Act, Revised Statutes of Canada, ch. 120.

Appeal from a decision of the Supreme Court of New Brunswick on a special case.

The respondent Troop was a shareholder and also a creditor of the Maritime Bank doing business at St. John, N.B. The bank became insolvent in 1887 and is being wound up under the Winding-up Act, R. S. C. ch. 129. The respondent was placed on the list of contributories, but claimed to be entitled to set off the indebtedness of the bank to him against the calls on his stock, and that he is only liable for the difference. The facts were all admitted, and the following question was, by the special case, stated for the opinion of the Supreme Court of New Brunswick:—

Has the said Howard D. Troop, under the admitted facts, a right to set off the said $5,330.88 against the amount of $10,300 due by him for the calls made upon him? If not, then the order for the payment of the

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said call is to remain in full force; but, if the said Howard D. Troop has such right, the amount of $5,330.88 is to be deducted from such call as the several instalments fall due, and the order is to remain in force for the difference.

The Supreme Court of New Brunswick decided this question in the affirmative and ordered the amount due from the bank to be deducted from the calls. The liquidators of the bank appealed from that decision.

Barker Q.C. for the appellants.

The Bank Act provides for the double liability of shareholders. R. S. C. ch. 120 s. 70. This is a liability which does not arise until the commencement of the winding-up proceedings, and is not within the section relating to set off. R. S. C. ch. 129 s. 57. See Grissell's Case[1]; Black & Co.'s Case[2]; Re Whitehouse[3]; Gill's Case[4]; Sawyer v. Hoag[5].

The right of set-off is not extended by sec. 57 of ch. 129, but only preserved where it would exist if the bank was not being wound up.

J. A. Vanwart for the respondent.

The right of set-off is expressly provided for by the Winding-up Act, R. S. C. ch. 129 ss. 57 & 73. Secs. 44, 46 and 73 of the Bank Act, R. S. C. ch. 120, show that this applies to the double liability.

The learned counsel cited In re China Steamship Co.[6].

His Lordship the Chief Justice took no part in the decision of this case.

STRONG J.—The sole question in this appeal is as to the right of a shareholder in an insolvent bank, in course of being wound up under the Winding-up Act, to set-off a debt due from the bank to himself against calls made upon him by the liquidators in respect of

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the double liability imposed by the 70th section of the Banking Act, Revised Statutes of Canada, ch. 120. This section is as follows:—

In the event of the property and assets of the bank being insufficient to pay its debts and liabilities, the shareholders of the bank shall be liable for the deficiency so far as that each shareholder shall be so liable to an amount over and above any amount not paid up on his shares equal to the amount of such shares.

It is clear from the wording of this section, and of section 72 of the same act, that the monies to be obtained from calls made in enforcement of this double liability were to form a fund to pay the debts and liabilities of the bank, and that, therefore, if the double liability was one in course of being enforced, not in a proceeding taken under the Winding-up Act, but under the Banking Act, by the directors, pursuant to sections 71 and 72 of the latter act, there could be no set-off by a shareholder upon whom a call of this kind was made. The obvious reason for such a conclusion being that the fund thus constituted being formed expressly to pay debts and liabilities, it would be in law a fund which the directors would hold in trust for the creditors of the bank, and therefore that mutuality between the cross demands, which is an essential requisite in all cases of set-off, would be wanting. The money which the shareholder would be called on to pay would, in this case, be payable into the hands of the bank or its directors, but it would be so paid to them as trustees for distribution amongst persons who were under no cross liability whatever to the shareholders—namely, the body of creditors of the insolvent bank.

Such being, in my opinion, the solution which this question would receive if there had been no winding-up, the question we have to decide is narrowed to this: Does anything contained in the Winding-up Act remove this objection to a set-off proceeding on the ground of want of mutuality?

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The material section of the Winding-up Act is the 57th, which is in these words:—

The law of set-off, as administered by the courts, whether of law or equity, shall apply to all claims upon the estate of the company, and to all proceedings for the recovery of debts due or accruing due to the company at the commencement of the winding-up, in the same manner and to the same extent as if the business of the company was not being wound up under this act.

I quite agree that the question of set off is regulated by this section, and that all we have to do is to apply the provision contained in it to the state of things as regards the nature of the liability existing under the Banking Act. As I have already shown, the debt due by the shareholders in respect of a call under the double liability clause is, in equity and in substance, a debt due, not to the bank, but to the creditors of the bank—whilst the debt which the shareholder seeks to set-off is a debt due, not from the creditors of the bank—but from the banking corporation itself; consequently they are not in any sense "mutual debts." Then what section 57 requires us to do is to apply "the law of set-off, as administered by courts of law or equity," to this state of things. Now, as regards the statutory right of set-off, which in the province of New Brunswick prevails in courts of law, it is by an express provision[7] of the Consolidated Statutes of that province restricted to "mutual debts," and the doctrine of setoff, as applied by courts of equity according to the general principles of equity, is also invariably restricted to cross debts or demands which are "mutual." Therefore, applying "the law of set-off," which sec. 57 requires us to do, no set-off is admissible in the present case.

To put it in another form: "mutuality" was and always had been an essential of the law of set-off up to the time of the passing of the Winding-up Act—

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and there is nothing in the latter act in any way derogating from this universal principle.

I have not felt called on to write at greater length, as Mr. Justice King has, in the opinion delivered by him in the court below, stated what I consider to be the correct view of the law with great fulness and accuracy, and I refer to what he has said if any amplification is required.

The appeal should be allowed with costs to the liquidators, both here and in the court below.

TASCHEREAU and GWYNNE JJ. concurred.

PATTERSON J.—The question on this appeal is whether a stockholder of the bank who has been placed on the list of contributories under the provisions of the Winding-up Act[8], in respect of his double liability under the Banking Act[9], can set off against calls for that double liability an independent debt due to him by the bank.

The question is important, and, having regard to the form of some of the provisions of the Winding-up Act, it is not a matter of surprise that two arguments in the court below failed to secure a unanimous judgment, or that one of the learned judges receded on the second argument from the view of the statute which he entertained after the first.

The opinion of the majority of the court was in favor of allowing the set-off, and from that decision the liquidators appeal.

It will be convenient in the first place to examine the provisions of the Winding-up Act which bear upon the matter in hand, before referring particularly to those of the Banking Act, although it is under the latter act that the double liability arises.

The sections of chapter 129 more directly operative

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are 44, 46 and 57; others, and especially 73, may have to be also taken into account.

Section 44 is as follows:—

Every shareholder or member of the company, or his representative, shall be liable to contribute the amount unpaid on his shares of the capital, or on his liability to the company, or to its members or creditors as the case may be, under the act, charter or instrument of incorporation of the company, or otherwise; and the amount which he is liable to contribute shall be deemed an asset of the company, and a debt due to the company, payable as directed or appointed under this act.

And section 46: —

The liability of any person to contribute to the assets of a company under this act, in the event of the business of the same being wound up, shall create a debt accruing due from such person at the time when his liability commenced, but payable at the time or respective times when calls are made as hereinafter mentioned for enforcing such liability; and in the case of the bankruptcy or insolvency of any contributory, the estimated value of his liability to future calls, as well as calls already made, may be proved against his estate.

These sections evidently include the double liability of shareholders in a bank. It is covered by the words of section 44 as a

Liability to the company, or to its members or creditors as the case may be, under the act, charter or instrument of incorporation or otherwise.

And it is therefore, under section 46, a

Liability to contribute to the assets of a company under this act, in the event of the business of the same being wound up.

And it creates

A debt accruing due from such person at the time when his liability commenced, but payable at the time or respective times when calls are made.

Whether for all purposes of this statute it stands on the same footing as an amount unpaid on shares of capital may have to be considered further on.

A shareholder in a joint stock company incorporated under our general acts has an undoubted right to set off any debt due him by the company against a call upon his unpaid stock made in the ordinary conduct

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of the business of the company. In England the same right exists, but there it is well settled that under the clauses 38 and 75 of the Companies' Act, 1862[10], which are essentially like our sections 44 and 46, no set-off against calls can be allowed in a limited company after liquidation has commenced, a different rule obtaining under section 101 when the liability is unlimited. And the same rule is applied whether the calls are made before or after the liquidation proceedings have begun; Grissel's Case[11]; Calisher's Case[12]; Black & Co.'s Case[13]; Barnett's Case[14]; Re Whitehouse[15].

One provision of section 133 of the Companies' Act, 1862, is that the property of the company shall (upon a voluntary winding-up) be applied in satisfaction of its liabilities pari passu, and, subject thereto, shall, unless it be otherwise provided by the regulations of the company, be distributed amongst the members according to their rights and interests in the company. Our section 58 has an equivalent provision, not confined, however, to the case of a voluntary winding-up. It does not contain the words pari passu, the language being:—

The property of the company shall be applied in satisfaction of its liabilities and the charges incurred in winding up its affairs.

But the principle of ratable distribution must be intended, the words pari passu being omitted as unnecessary. "Property" here includes unpaid capital as well as other assets; Webb v. Whiffin[16].

In Grissel's Case (2) Lord Chelmsford more than once referred to section 133. In one passage he said[17]:—

The act creates a scheme for the payment of the debts of a company in lieu of the old course of issuing executions against individual members. It removes the rights and liabilities of parties out of the

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sphere of the ordinary relation of debtor and creditor to which the law of set-off applies. Taking the act as a whole, the call is to come into the assets of the company in payment of debts. To allow a setoff against the call would be contrary to the whole scope of the act. In support of this view it will be sufficient to refer again to the 133rd section as to the satisfaction of the liabilities of the company pari passu. And the argument against the allowance of a set off, addressed to the court on behalf of the official liquidators, is extremely strong—that if a debt due from the company to one of its members should happen to be exactly equal to the call made upon him he would in this way be paid twenty shillings in the pound upon his debt, while the other creditors might, perhaps, receive a small dividend, or even nothing at all.

Section 133 referred in terms only to a voluntary winding up, and the winding up in connection with which Grissel's Case[18] arose was not of that character. That circumstance was referred to as detracting from the force of the remarks of Lord Chelmsford in Brighton Arcade Co. v. Dowling[19], where a different rule as to set-off was held to apply when the winding up was voluntary—a decision which would probably not now be followed; see Re Whitehouse & Co.[20]; but the criticism leaves the argument apposite to our section 58, which applies to compulsory winding-up proceedings.

The English decisions on the construction of the cognate provisions of the Companies' Act, 1862, are conclusive against the claim to set off a debt against calls on unpaid stock under our statute, unless the right is given by section 57. Let us note the exact terms of the section:—

The law of set-off, as administered by the courts, whether of law or equity, shall apply to all claims upon the estate of the company, and to all proceedings for the recovery of debts due or accruing due to the company at the commencement of the winding up, in the same manner and to the same extent as if the business of the company was not being wound up under this act.

It is impossible to reconcile the construction of this section contended for by the respondent with the other provisions to which I have referred Thus,

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reading sections 44, 46 and 58 together, they declare that unpaid capital is an asset of the company and a debt due to the company, accruing due when the shareholder's liability commenced but payable when calls are made, and shall be applied in satisfaction of the liabilities of the company and the charges incurred in winding up its affairs, and what remains shall be distributed among the members or shareholders.

A shareholder who is a creditor occupies the same position in respect of his debt as a creditor who is not a shareholder, and no better position. That was so held in Grissel's Case[21]. The property of the company is, under section 58, to be applied towards the satisfaction of the company's liability to him, just in the same way as if he were not a shareholder. But, accede to the contention of the respondent, and as pointed out by Lord Chelmsford, he may be paid in full while others get nothing.

Section 57 does not extend the law of set off to any class of debts to which the statute of George II, or the New Brunswick law, would not apply. The debts must still be mutual debts and in the same right. It preserves the right that would have existed if the business of the company was not being wound up under the act, and in that respect it declares the law as it had been held by Lord Hatherley under the Companies' Act, 1862, in re Agra & Masterman's Bank[22]; but it limits that effect to proceedings for the recovery of debts due or accruing due to the company at the commencement of the winding up.

The argument for the respondent makes the two contiguous sections, 57 and 58, inconsistent with each other, because the property of the company, or that part of it which consists of unpaid stock, cannot be applied in payment of the liabilities generally if it goes to satisfy debts due to individual members without regard to the claims of others.

[Page 465]

The construction we are urged to put upon section 57 is so much at variance with the general scheme of the measure that it cannot be taken to interpret fairly the intention of the legislature. I believe the true understanding to be that the section has no reference to calls made upon shareholders after the commencement of the winding-up.

The original statute was 45 Vic. ch. 23 passed in 1882.

The provisions now found in the first part of section 56 of the revised statute and section 57 formed together section 60 of the act of 1882, the subject of the section being the proof of debts and claims against the company. The two sections must be read together as in their original connection. What is interposed between them in the revision, as a second part or sub-section of section 56 is a provision introduced in 1886 in favor of clerks, &c., by 49 Vic. ch. 46. By that act it was made a third sub-section to section 60 of the act of 1882, leaving the present section 57 to retain its position as the second sub-section. If any change was proper in making the revision, it would have been more correct to make a separate section of the new clause, which is not on the same subject as the others, relating as it does to the dividend sheet and not to the proof of debts, and to let section 56 truly represent the original section 60 by embracing the provisions which, as section 57, are occasioning so much perplexity.

Section 60 enacted that:—

When the business of a company is being wound up under this act, all debts payable on a contingency, and all claims against the company, present or future, certain or contingent, ascertained or sounding only in damages, are admissible to proof against the company,—a just estimate being made, as far as is possible, of the value of all such debts or claims as may be subject to any contingency or sound only in damages, or for some other reason do not bear a certain value.

All this computation was obviously to have reference

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to the date of the commencement of the winding up proceedings. Then the section went on to enact "2. The law of set off, &c.," as in the present section 57. The law was to apply to all claims upon the estate of the company. I call attention in passing to this form of expression, as I shall have to refer to it again by-and-by. The provision had immediate reference to the adjustment of claims for proof, and to the date of the commencement of the winding up, as of which data the claims were to be proved, and the express mention of that date in the latter portion of the clause indicates that the debts there spoken of do not include the liability, consequent upon the winding up, to be called on for payment of stock, but only debts ascertained and capable of computation at the commencement of the winding up.

No question of the accuracy of this construction would be suggested if it does not conflict as it was considered to do in the court below, and as the respondent now contends that it does, with sections 44 and 46. But if we read those sections, having in mind the scope and policy of the act, which look to the distribution of the assets amongst the creditors without preferring one to another further than, as in the case of clerks and servants, special preferences are given, we shall find no insuperable difficulty created by them.

Section 44 declares the amount for which a shareholder is liable to be placed on the list of contributories after the commencement of the winding up to be an asset of the company, and section 58 requires the assets to be applied towards the satisfaction of the creditors generally. Section 46 does not describe the debt which it declares the liability to create, in the terms of section 57, as a debt due or accruing due at the commencement of the winding up, but as accruing

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due when the liability commenced. The whole reliance of the respondent is, and must be, on maintaining that the liability commenced before the winding up, and thus supplying by inference or implication what is not directly stated in the section, so as to give literal application to the language of section 57. I do not think that he can maintain that proposition; but he would also have to maintain that the debt is a mutual debt, and in the same right as that against which it is sought to set it off. The whole argument on which the English decisions against the right of set off proceed, going the length, as in Black & Co.'s Case,[23] of denying the power of the company to give a right of set off by contract with the shareholder, applies against the contention.

But we have in the very statutes before us direct proof that the reading contended for would misinterpret the intention of the legislature.

The Bank Act[24] under section 70 of which the double liability arises in the event of the property and assets of the bank being insufficient to pay its debts and liabilities, provides in section 72 for the making of calls for the double liability, and by section 74 enacts that:—

Any failure on the part of any shareholder liable to any such call to pay the same when due shall operate as a forfeiture by such shareholder of all claim in or to any part of the assets of the bank—such call and any further call thereafter being nevertheless recoverable from him as if no such forfeiture had been incurred.

The "claims upon the estate of the company" which, under section 57 of the Winding-up Act, are brought under the law of set off are, in other words, debts owed by the company; and the "claim in or to any part of the assets of the bank" under section 74 of the Bank Act—the statutes being in pari materia—denotes,

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or includes, a debt owed by the bank to the shareholder who has failed to pay his call. Is the debt to be set off against the call? Section 74 says no. It declares the debt forfeited, and the logical consequence is that, in a proceeding like this for the recovery of the debt for the call, the shareholder has no debt to set off against it. At all events, and this is as far as it is necessary at present to go, the intention is perfectly clear that the call is to be paid without respect to the shareholder's claim in or to the assets of the bank—or, to vary the expression, the one debt cannot be set off against the other.

The direct operation of section 74 does not touch calls for unpaid stock, but only for the double liability, which is what in the present case is in question; but the influence of the section is, as I apprehend, more extensive. There is no distinction made in sections 44 and 46 of the Winding-up Act between the double liability of shareholders in banks and the unpaid capital in banks or other companies. The sections apply to unpaid liabilities, however they arise.

When, therefore, section 46 is relied on as leading to the conclusion that the liability for calls attaches as a debt as soon as one becomes a shareholder, and that that is a debt to which the law of set-off is, by section 57, to apply, the effect of section 74 is to add another consideration to those already adverted to in favor of construing section 46 so as to harmonize and not to conflict with the general purpose of the act.

The object of section 74 is to impose the penalty of forfeiture if calls for the double liability are not punctually paid. So far, they are treated differently from calls for unpaid capital. But, in recognising the obligation to pay them without regard to counter claims, it does not profess to regard them as an exception from the general range of such liabilities. On

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the contrary, the calls are, by section 73, to be made as prescribed in the Winding-up Act, where there is no distinction indicated.

It matters but little, if it matters at all, in which way these debts are kept away from the operation of the law of set-off—whether by not being due or accruing due at the commencement of the winding up, or by not being mutual debts and in the same right as an ordinary debt due by the company to one of its members.

I see no reason why the considerations which governed the English decisions against the right claimed are not equally applicable under our law and equally conclusive against the debts being of the character to which the law of set-off applies, or why we should not assume that to have been the opinion of the Legislature, as evinced by section 74 of the Bank Act, and otherwise. Great stress has been laid on section 73 of the Winding-up Act as opposed to this view, and as, in fact, opposed to denying the right of set-off for any reason.

That section reads as follows: —

When a debt due or owing by the company has been transferred within the time and under the circumstances in the next preceding section mentioned, or at any time afterwards, to a contributory who knows or has probable cause for believing the company to be unable to meet its engagements, or in contemplation of its insolvency under this Act, for the purpose of enabling such contributory to set up by way of compensation or set-off the debt so transferred, such debt shall not be set up by way of compensation or set-off against the claim upon such contributory.

There is no doubt that it is here assumed that a contributory may set off an independent debt against a claim upon him as contributory; all that the clause enacts, however, is that in the specified circumstances the debt transferred to the contributory shall not be set off, and whatever may have been in the mind of

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the draftsman when he introduced the word "conributory," it will be found that no inference is necessarily to be drawn, or, one might say, none can properly be drawn, from it to affect the conclusions so far arrived at.

We need not enter on an exhaustive inquiry as to the force of the word "contributory." It would probably be found only to apply, in strictness, to persons liable to contribute in respect of unpaid capital, or, in the case of a bank, for double liability. But no such limitation of its meaning appears in section 44 where it is made in terms to relate to any liability to the company or to its members or creditors. The same vagueness may attach to the use of the word in this section 73. It is only in connection with section 57 that any force is sought to be given to the section. If section 57 were not in the statute no one would venture to argue that the policy and purpose apparent from the general provisions could be controlled by any inference to be drawn from section 73. But section 57 says nothing of contributories. It is only by argument from the alleged effect of section 46 that it is attempted to bring contributories within the terms of section 57, and I have shown why, in my understanding of the legislation, that section was never meant to apply to contributories, as such, but only to such adjustments of account as would be proper or possible at the commencement of the winding up. I am satisfied that no inference can legitimately be drawn from section 73 opposed to the conclusion that only mutual debts and debts in the same right can be set off under section 57, and that the debts now in question are not of that character.

Whether the debt created under section 46 by the liability to contribute is to be referred back to the original taking of shares in the company, or should be

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deemed to have accrued only after the winding up began, is a point of more difficulty. There are some cases which were noticed in the judgment of the learned Chief Justice in the court below that assume the earlier date. Ex parte Canwell[25]; Ex parte Hatcher[26]. The questions that turned on the date of the accruing of the debt in those cases were not allied to those in debate on the present appeal. On the other hand, there is an opinion of Lord Romilly in Ex parte Mackenzie[27], cited by Mr. Justice King, to the effect that the call refers back to the commencement of the winding up, and the same view forms the basis of part of the argument of Lord Chelmsford in Grissel's Case[28], and of Sir George Jessel in Re Whitehouse & Co.[29].

The weight of authority, so far as the particular point has been discussed, does not strike me as being so much in favor of dating the commencement of the liability further back than the winding-up proceedings, as to make the conjecture unreasonable that our legislature did not regard the statutable debt created by section 46 as due or accruing due at the commencement of the winding up, within the meaning of section 57.

But whatever may have been the views held by the legislature on these points, I am satisfied that the intention to be gathered from the statutes is that a contributory cannot set off against calls made in the course of the winding up, either for capital or double liability, an independent debt owed to him by the company.

I say nothing of calls for capital which may have been made but not paid before the winding up. It

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may be open to question whether they are not covered by section 57, and so taken out of the English rule which classes them with calls made under the direction of the court.

I agree with the conclusions of Mr. Justice King, who dissented in the court below, and think the appeal should be allowed.

Appeal allowed with costs.

Solicitor for appellants: F. E. Barker.

Solicitor for respondent: J. A. Vanwart.