Supreme Court of Canada
Hughes v. Northern Electric and Manufacturing Co., (1915) 50 S.C.R. 626
Date: 1915-02-02
William Hughes and Another (Defendants) Appellants;
and
The Northern Electric and Manufacturing Company and Others (Plaintiffs) Respondents.
1914: November 19, 20; 1915: February 2.
Present: Sir Charles Fitzpatrick C.J. and Davies, Idington, Duff, Anglin and Brodeur JJ.
ON APPEAL FROM THE APPELLATE DIVISION OF THE SUPREME COURT OF ONTARIO.
Company law—Powers of company—Sale of shares—Mortgage by company—Subsequent creditor—Status.
Three directors owned all the stock of a mining company to which they had advanced $43,000 for expenses of operating. Two of them were at variance with the third as to the mode of operating and all refused further advances. The company having no other means of procuring money, it was agreed that the two directors should sell their stock to the third for $60,000 secured by mortgage on the company’s property, the debt of $43,000 to be discharged and the purchasing director to advance funds for operating and until the first payment had been made on the mortgage no such advances should be a charge on the company’s property. Payments were made on the mortgage which afterwards fell into arrears and on action by the mortgagees an order was made for sale and delivery “up of possession.” More than a year after the mortgage was made the mining company incurred a debt to the respondent company which brought action for the amount and for a declaration that the mortgage was ultra vires of the company and that the judgment in the mortgage action was void. The action was dismissed at the trial. The Appellate Division held the mortgage void but only as to the excess over the indebtedness of the company at the time it was made.
Held, reversing the judgment appealed from (31 Ont. L.R. 221) and restoring that of the trial judge, Fitzpatrick C.J. and Idington J. dissenting, that the mortgage was valid; that though the expressed consideration was the price of shares sold by one holder
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to another the real consideration was the discharge of the company’s existing indebtedness and securing of financial aid for the future.
Per Davies, Duff and Brodeur JJ.—The judgment in the foreclosure action was a conclusive answer to the attack on the mortgage by the company. The Great North-Western Railway Co. v. Charlebois ((1899) A.C. 114,) distinguished.
Also per Davies, Duff and Brodeur JJ.—The trial judge having in effect decided that he had jurisdiction to pass upon the validity of the mortgage, that decision was binding on all parties until reversed in appeal, and, having regard to what occurred at the trial, the decision on the point of jurisdiction was not appealable.
Per Fitzpatrick C.J. and Idington J., dissenting.—The agreements and records made by the parties concerned in the transaction upon which alone the mortgage in question rests shew it to have been given solely to secure to the mortgagees the price of their sales of shares in the company to another shareholder and that, as such, the mortgage was ultra vires and void as against any creditors of the company.
APPEAL from a decision of the Appellate Division of the Supreme Court of Ontario, reversing the judgment at the trial in favour of the defendants.
W.N. Tilley for the appellants.
McKay K.C. for the respondents.
The appellants, Hughes, and Mackechnie, and the respondent, Kirkegaard, were the owners of a mining property in the Township of Belmont, which they transferred to Cordova Mines Limited (a company they had incorporated for the purpose of acquiring the property), in consideration of the issue to themselves and their nominees of all the authorized capital stock of the company fully paid.
Cordova Mines Limited having issued all its capital stock in payment for the mine, it was necessary that money should be borrowed to carry on operations.
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These operations were extensive and were made possible by loans to the company from Hughes, Mackechnie, and Kirkegaard in equal shares. In April, 1912, Cordova Mines Limited was indebted to Hughes, Mackechnie and Kirkegaard in respect of these loans, including moneys then advanced to the extent of over $43,000. At this time Hughes, Mackechnie and Kirkegaard had drifted apart in their ideas as to the policy to be adopted in carrying on the company’s affairs. Hughes and Mackechnie were on one side, Kirkegaard on the other. None of them was willing to advance more money unless his policy was adopted. A deadlock ensued. This deadlock was finally broken and the continuance of operations secured by an arrangement whereby Hughes and Mackechnie sold their shares to Montgomery, who was Kirkegaard’s solicitor and trustee, for $60,000, payment of this amount to be secured by a mortgage from the company to Hughes and Mackechnie on the mine. Kirkegaard was to provide for the proper operation of the mine and to spend at least $3,000 per month in its development.
The form in which this arrangement was expressed and carried out consists of (1) an agreement between Hughes and Mackechnie of the first part, Joseph Montgomery, trustee, of the second part, and Peter Kirkegaard of the third part, dated 23rd April, 1912; (2) a supplemental agreement between Hughes and Mackechnie of the first part and Joseph Montgomery of the second part, dated 30th April, 1912, and (3) a mortgage from Cordova Mines Limited to Hughes and Mackechnie, dated 30th April, 1912.
The substance of the arrangement, so far as it affected the company, was set out and embodied in a
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minute of its directors held on the 30th April, 1912, as follows:—
“It was explained to the meeting that all moneys required by the company for expenses had heretofore been advanced by the three directors equally, and Messrs. Hughes and Mackechnie did not now desire to continue making advances, but were willing to dispose of their stock to other parties who were willing to guarantee the payment of the purchase price by a mortgage on the company’s property, and it was considered advisable in the interests of the company that this should be done provided all shareholders consented thereto.”
All the shareholders of the company concurred in this arrangement.
It was part of the agreement that the sum of $43,000 owing by the company was to be wiped out. All the debts owing by the company at the time of the arrangement were paid, and it was not contemplated that any further debts should be incurred. On the contrary it was expressly provided that until the first payment had been made on the mortgage all costs and expenses should be paid by Montgomery and his associates so as not to become a lien or charge on the company’s property.
The result of the transaction was to free the company from its overdue debt of $43,000, and to obtain for it the new advances necessary for carrying on its operations and improving its property.
Hughes and Mackechnie, in pursuance of the agreement, transferred their shares to Montgomery, Kirkegaard’s solicitor and trustee, and Kirkegaard proceeded to operate the mine and advanced to the com-
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pany large sums of money for that purpose. He and others associated with him made payments on account of the purchase money on the shares amounting to $19,000 or thereabouts to Hughes and Mackechnie. Thereafter the mortgage having fallen into arrear Hughes and Mackechnie, the appellants, brought proceedings against Cordova Mines Limited on the mortgage and on the 30th of April, 1913, upon consent of the company, judgment was pronounced for the immediate sale of the mortgaged premises and directing possession to be delivered to Hughes and Mackechnie.
More than a year after the mortgage the company incurred a debt to the plaintiff, respondent, the Northern Electric and Manufacturing Company Limited. The present action was brought by the plaintiff (a) to recover from the company the sum of $817.09 in respect of goods sold to it; (b) to have it declared that the mortgage above mentioned was illegal and ultra vires and a fraud as against the creditors of the company including the plaintiff, and that the consent judgment in the mortgage action brought by appellants was also void.
On the 11th of September, 1913, Cordova Mines Limited and Peter Kirkegaard filed a defence to this action. They admitted the debt owing by Cordova Mines Limited to the Northern Electric and Manufacturing Company Limited, but denied insolvency and denied that the mortgage was illegal or fraudulent.
Since the commencement of this action judgment by default was obtained by the respondents, the Northern Electric and Manufacturing Company Limited, on the 22nd of September, 1913, for the sum of
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$817.09 against the mining company, and execution was issued in respect of this debt on the 26th of September, 1913.
At the trial Cordova Mines Limited, having changed its solicitors, asked leave to amend its defence, and, after most of the evidence was in, a new defence on the part of Cordova Mines Limited was filed, denying the making of the mortgage, saying that if made it was ultra vires and void, and claiming that it should be set aside.
The trial judge dismissed the action. The Appellate Division varied his judgment by declaring the mortgage valid for the amount of the indebtedness of the company at the time it was made and void for the excess. The defendants then appealed to the Supreme Court of Canada.
THE CHIEF JUSTICE (dissenting).—I agree with Mr. Justice Idington.
DAVIES J.—I agree with Mr. Justice Duff.
IDINGTON J. (dissenting).—The respondent, the Northern Electric & Manufacturing Company, suing on behalf of itself and all other creditors, brought this action against the respondent Cordova Mines Limited, the appellants and respondent Kirkegaard to recover from Cordova Mines Limited the amount of $817.09 alleged to be due by it for goods sold and delivered and for an injunction to restrain the appellants and others from selling or offering for sale or dealing with the assets of the Cordova Mines Limited and to set aside a mortgage made by it to appellants.
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Judgment was recovered by default for the debt sued for against the Cordova Mines Limited, and execution issued thereon pending the progress of that part of the action relative to the setting aside of the mortgage, but upon the trial of the issues raised in respect thereof the action was dismissed except as against the Cordova Mines Limited.
The Court of Appeal for Ontario reversed this judgment and substituted one of which the nature will appear later. The appellants appeal from that here and seek to have the trial judgment restored.
The respondents each resist the appeal and seek by way of cross-appeal the full measure of relief sought at the trial.
It may be observed that the cross-appeal seems somewhat informal, but no objection has been taken on that account and the parties seem to desire that the question of the validity of the mortgage in question as against the creditors or otherwise, be finally determined.
The respondent Kirkegaard and appellant seem to have acquired what was supposed to be a gold mine, and with two others, who were their nominees we are told, got themselves incorporated under the Ontario “Companies Act.”
The supposed gold mine was transferred to the corporate company in consideration of the issue of five hundred thousand dollars of paid-up stock in said company of which appellants were to get, and got, two-thirds and respondent Kirkegaard the other third, saving and excepting the shares necessary to qualify the other two to whom I have referred as their nominees.
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Practically these three owners of the stock were equal partners in the venture, owed nothing and acted just as if never incorporated, save in having as a company a minute book—now lost—and a bank account in the name of the company.
When money was needed each put up his one-third share thereof and kept on doing so in the development of the mine till the sum of $43,000 was spent.
There were no such rich veins struck as to found visions upon to present to the public as no doubt anticipated when getting incorporated. And very humanlike, each had his own plans and fancied if only his methods for future development were adopted they would certainly, if followed, lead on to fortune.
Failing to agree, proposals were made by each of selling out to the other or other two. These negotiations ended in Kirkegaard agreeing to pay the appellants for their $333,320 of stock, the paltry sum of $60,000, to be secured by a mortgage for that sum on the entire property of the company to be given by the company.
In an agreement dated 23rd April, 1912, between appellants of first part, one Joseph Montgomery of the second part and said Kirkegaard of the third part, they put the proposition down in plain black and white as follows:—
1. The parties of the first part agree to sell to the party of the second part their two-third interest in the stock of the Cordova Mines Limited for the sum of sixty thousand dollars, payable $10,000 on the first day of August, 1912, and $10,000 every two months thereafter until fully paid, payment to be secured by a first mortgage on the property of the said Cordova Mines Limited payable as aforesaid with power of sale in usual form, but no personal covenant by the party of the second part.
2. The said parties further agree to deliver to second party on execution of said mortgage all their stock in said company.
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Montgomery was but the trustee to take delivery of and to hold the stock thus purchased till such time as Kirkegaard had a chance to turn round and so develop the mine according to his plans as might enable him to pay the cash payment.
By other clauses in this agreement he bound himself to assume all the expenses of doing so and to do it in proper miner-like fashion and
that the proceeds of all ore mined during the period of payment as aforesaid, over and above what is used in actual mining expenses, shall be applied on payment of purchase price until fully paid.
Having executed this agreement personally, Kirkegaard went to California.
He testifies as follows:—
Q. Had you any negotiations with the mortgagees after the signing of the agreement that is mentioned here?
A. No, that closed the negotiations at the time.
Q. Then the mortgage was prepared and executed without your privity in any way?
A. Without my presence, yes.
Q. Now, Mr. Kirkegaard there were three shareholders in this company other than the nominal shareholders?
A. Yes.
Q. Prior to the agreement that we call the Montgomery agreement?
A. Yes.
Q. These three shareholders were yourself and Dr. Mackechnie and Mr. Hughes?
A. Yes.
Q. The two defendants and yourself, and you were the President of the company?
A. I was.
In his absence Montgomery, who seems to have represented him, entered, on the 30th of April, 1912, into an agreement in writing with appellants, in which former was called the purchaser and latter the vendors. Leaving out the formal parts, the following is a copy:—
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Whereas the vendors are the owners of two-thirds of the stock of Cordova Mines Limited, and the parties hereto are desirous of making an agreement in relation to the sale and purchase of the said interests.
Now it is mutually agreed by and between the purchaser and vendors and their and each of their heirs, executors, administrators and assigns as follows:—
(1) The vendors do this day transfer to the purchaser all their stock in the Cordova Mines Limited, to be held by the said purchaser intact until the first day of August, 1912, or until the sum of ten thousand dollars has been paid by the Cordova Mines Limited upon its mortgage to the vendors, bearing even date herewith.
(2) The purchaser shall have the power to transfer shares so sufficiently to form a qualified board of directors, which stock shall be reassigned in case of failure to pay the sum aforesaid.
(3) The purchaser is to provide for the proper working of the mines in a miner-like manner of the Cordova Mines Limited, situate in the Townships of Belmont and Marmora and more particularly described in the said mortgage, the understanding being between the parties hereto that at least three thousand dollars per month shall be expended in the development of the said mines.
(4) This agreement shall not supersede the agreement made on the twenty-third day of April, 1912, but shall be in addition thereto.
(5) The purchaser hereby covenants with the vendors that all costs, expenses, charges and accounts made by the Cordova Mines Limited from the first day of May to the first day of August, 1912, up to such further time as the said ten thousand dollars is paid, will be paid for by him and his associates and shall not be a lien or charge upon any of the property of the said Cordova Mines Limited.
It appears, from minutes put in evidence, that same day a meeting of the directors was held at the office of Peter Kirkegaard, Toronto, with appellant Hughes (in chair), Vice-President and W.C. Mackechnie, Mr. J.F. Wills and Montgomery acting as secretary of the meeting.
A waiver of notice of this meeting was filed by attorney Joseph Montgomery, Mr. Kirkegaard being absent in California. The remainder of the minute is as follows:—
Statement of outstanding liabilities of the company as of May 1st amounting to $ , subject to correction, was put in by the
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Secretary, which pursuant to agreement is to be paid in equal shares by the three parties, Peter Kirkegaard, W. Hughes, and W.G. Mackechnie.
Agreement dated 23rd day of April, A.D. 1912, was produced providing for transfer of stock held by W. Hughes and W.G. Mackechnie to Joseph Montgomery subject to the condition of the company giving a mortgage to secure payment.
It was explained to the meeting that all moneys required by the company for expenses had heretofore been advanced by the three directors equally, and Messrs. Hughes and Mackechnie did not now desire to continue making advances, but were willing to dispose of their stock to other parties who were willing to continue advances provided the company would agree to guarantee the payment of the purchase price by a mortgage on the company’s property and it was considered advisable in the interests of the company that this should be done provided all shareholders consented thereto.
On motion a by-law authorizing the giving of the mortgage was duly considered and passed.
On motion the transfer of the stock of William Graem Mackechnie and William Hughes to Joseph Montgomery of $333,320 is hereby authorized and accepted.
On motion the transfer of one share by C.A. Bleecker to W.R. Williams, and one share from J.F. Wills to H.P. Edge was authorized and accepted.
The mortgage thus provided for between Cordova Mines Limited and appellants dated same day is executed accordingly by Joseph Montgomery, Vice-President, and Wm. R. Williams, secretary, and sealed in presence of Mr. Wills.
The question raised herein is whether or not such a transaction can stand?
I rather think no one pretends that in the bare nakedness of the transaction as thus expressed in these documents and this minute, that its result would be a valid enforceable mortgage.
However that may be, those who, in varying shades of meaning given it, have seen their way to support it either in whole or in part rely upon something out-
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side of the sale of the stock to help so to support it as to defeat the creditors.
The respondent Kirkegaard was asked by counsel for appellant and answered thus:—
Q. Was it part of the arrangement between you and them that all these outstanding accounts should be wiped out?
A. Yes.
This is spoken of the outstanding liabilities possibly $5,000, and the purpose of each of the three parties so contributing thereto was that when closed out each would have paid an equal share of the expenses up to the date of this mortgage estimated at $43,000. In that sense the $43,000 is spoken of as being wiped out. But how far does that carry us or support the mortgage? It is clear as noonday that these three men had been proceeding upon the basis, from the beginning, that the mine belonged to the three, who put in equal shares of all the expenditure in regard to it.
The company as such never borrowed any money from them, never had agreed to return them any money. The contributions thus given could not in law have been recalled and in fact had been poured into a worthless hole, or one that had proved so up to then.
It was no use to have kept up any kind of form of contract for the return of such moneys. That absurdity, whatever else they did, they spared themselves. If the hole in the ground proved unproductive the property was worthless. If it ever became productive and thus valuable, the market value of the stock would respond accordingly and recoup, in whole or in part or even with a profit, the moneys advanced. It was only thus and through such a channel that appellants
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ever expected to be repaid. And if not so repaid it was just so much money gone over which it would be foolish to cry.
Hence, when the mortgage was given and the above agreement entered into we do not find a word about releasing any claims for advances, not even the form of passing a receipt. It never entered the head of any one so concerned that they were creating a mortgage to secure such advances. In June following the entries in the company’s books of contributions by appellants were squared off by an entry of some kind for which no authority was given. How does that avail?
They were creating a mortgage to secure the price of the sale of stock from two shareholders to another and nothing else. And that was a thing that the company as such had no legal capacity or power in any way to enter into or give. In any way you turn it round and try to make it work out, the transaction is tainted with attempting to do that which was an illegality. I use the word illegality with due fear of the well-founded observations of Lord Cairns in Ashbury Railway Carriage and Iron Co. v. Riche, before my eyes. And for this reason that when you try to give vitality to the transaction and make it operative by mixing up the advances and what relates thereto with the consideration which was present to the minds of the parties whose agreement was to he carried out you blend two things (one possibly proper with one obviously improper) in one total consideration in such a way as to render it necessary to inquire whether or not you can sever that which may be good from that which is bad. You cannot, I submit with great respect, make of these two things, the past advance of money to im-
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prove the property and the sale of stock by two shareholders to another, a single united consideration to support this mortgage, for the ultra vires part thereof or element therein, is in such a connection illegal and taints the whole and thus renders the mortgage void.
I recognize to the full the difficulty of drawing the line where that which is merely ultra vires is to be treated merely as an illegality so tainting a transaction as to render it worthless for every purpose and that where other considerations may be extended to those entering into an ultra vires transaction may be the basis of some legal right springing therefrom which would not be permitted as basis therefor to be extended to those who had in entering into a transaction thereby committed a crime.
The field of such an inquiry is a wide one and needless to enter upon here. For as I conceive the facts here to exist the importation of the old advances into the consideration for this mortgage is something the parties never had in mind, and the transaction such that nothing could in law rest thereon.
Indeed, their economic conceptions of what they were about were too clear headed, it seems to me, to permit of such a mixing up of two things that could not form, either in law or in fact, a single consideration. The advances had made the stock possibly worth something. There is that relation of cause and effect between them.
But when we are asked to hold that the advances formed a part of the consideration and at same time that the stock value they in part created is to be taken as the consideration also, I submit this is a doubling up of consideration that cannot be listened to and I
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repeat was not at all in the contemplation of the parties.
For these reasons I, with great respect, cannot assent to the ground taken and the results reached by the learned trial judge.
The same reasons together with what I am about to repeat forbid me supporting the judgment of the court appealed from. A majority of that court agrees that the transaction so far as founded on the sale of stock is void, but seems in some way to reach the conclusion that it can be supported as to the advances.
It is to my mind impossible on such assumption of fact to sever the two considerations and say how far either is to be given effect to. The court first assumes the parties acted or were moved by considerations, which in fact did not move them, and seeks to sever these and give due value to each thereof. Thus it is what the court thinks is to be assigned as such values and not what the parties thought or expressed that the court directs a reference to ascertain.
The parties fixed $60,000 as the value of the appellants’ share of the stock after the advances had been made. How much of that value rests upon the original acquisition of the land? How much upon the advances? How much upon the speculative value? How much of that again upon the assurance of Kirkegaard or Montgomery, or both, that so much would be expended in development?
Or to put it another way, the appellants had put aside their own views to meet those of Kirkegaard and surrendered their chances of success for a price fixed at $60,000. How can any court say what proportionate part thereof is to be attributed to these advances,
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when the parties have neither directly nor indirectly done or said anything whereby the court can sever anything of the manifold considerations moving them, and take an account thereof?
As illustrative of the whole confusion of thought which has prevailed I most respectfully submit, involved in approaching the matter from the point of view taken below, counsel arguing before us, who usually express themselves clearly, seemed throughout to assume either $60,000 or $43,000 to be the basic value secured by this mortgage.
It is easy to understand the $60,000 sum being put forward. But why the $43,000 can be put forward I am at a loss to understand, not only for the numerous considerations already adverted to, but also for the further reason that it was only two-thirds of this sum that appellants advanced, and they got repaid $19,000, on account of the mortgage debt.
Surely if the true and lawful consideration is to be fixed, the proper way is to allow thereon credit for that which has been paid, and not to attribute it to that which on this theory of the mortgage could have no existence. And to crown the whole of what I respectfully submit is an absurd result the two appellants are to be secured their advances and Kirkegaard who had advanced an equal share and ventured on new risks is left unprotected for his advances. Certainly whatever was had in view such a result never was contemplated by any one of those concerned. That result is clearly involved in the departure made by the court from what the parties have so clearly expressed to have been their purpose. Making a bargain for people which they never made or intended is
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always a rather hazardous proceeding; even when trying to do justice.
I need not dwell longer on what seems, I submit with great respect, an attempt to uphold in order to do a supposed justice between certain parties, what will, if upheld, defeat the creditors who have given what is of value to the whole concern and made it worth fighting about and is to benefit only those who have not made it thus valuable.
I submit the better way is to let the mortgage be taken for what those creating it intended and said, in no uncertain language.
So taken it falls within what the doctrine declared and held by the judgment in Trevor v. Whit-worth, could not be done by such a company.
The decisions in the cases of Ashbury Railway Carriage and Iron Co. v. Riche, and Mann and Beattie v. Edinburgh Northern Tramways Co., exemplify in a wider sense what may be ultra vires a corporate company.
There is no power pointed to in the Ontario “Companies Act” which would enable by any reasonable construction thereof such a power as asserted here to be exercised by the company.
When the cardinal purpose of the transaction so offends against the limits of the powers given the company it matters not to refer to the incidentals relative to such a purpose being such as might give some scope to the operation of the powers of the company.
Kirkegaard, with whom the contract was made upon which the mortgage is founded, did not bind
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himself to do anything, but his partners bound themselves not to interfere with his executing his plans and purposes so long as he paid the expenses thereof and did not bring the company under any obligation and accounted for the profits of such proceedings in way of development.
The Montgomery agreement did no more than supplement and was not to supersede the purpose of that which appellants and Kirkegaard had entered into.
Montgomery was not called and how he came to bind himself, as in last part of his agreement, is not explained. Certainly Kirkegaard in California or on his way there could not have so stipulated or been party to the arrangement it expresses, I do not, therefore, see how it can affect the matter.
The matters involved in the transactions in question herein present what was done in the least offensive sense possible as there were no other shareholders and creditors, for then existing liabilities were to be taken care of.
But the doctrine that the majority of the shareholders in any company can if they choose sell, to any one, their shares and obtain by virtue of their voting power a first mortgage on the whole undertaking for the price of such sale of shares, is rather novel and startling. Yet it seems such is the possible logical outcome of maintaining the proposition appellants contend for. I think such a contention should fail.
Then it is contended, that even so, the respondent the company suing on behalf of itself and all other creditors cannot impeach the transaction.
In the first place it is said that the company had no
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judgment or execution when instituting these proceedings.
The case of Neate v. The Duke of Marlborough, and such like cases were taken as upholding that position and they stand for what they decided. But the cases of Reese River Silver Mining Co. v. Atwell, following Goldsmith v. Russell, pointed out that such objection could not prevail where the creditor sued on behalf of himself and all other creditors.
Then the case of Longeway v. Mitchell, decided by the late Vice-Chancellor Strong, afterwards Chief Justice of this Court, no mean authority on such a subject, followed that line of cases and in doing so made some observations on page 194, to which I would refer as justifying the position I am about to take relative to the jurisdiction of the court to set aside as against creditors even if not a transaction expressly within the Statutes of Elizabeth.
Assuming the mortgage in question is to be treated under the Statute of Elizabeth merely as a voluntary conveyance and void as against creditors, it is alleged there are no creditors antecedent to the creation of the mortgage, and where absolute good faith exists, as found here by the learned trial judge, in such a case later creditors, it may be said, cannot impeach the transaction.
Counsel for respondent seemed to allege that there are antecedent creditors yet unpaid, and the counsel for the appellants suggested that there are no such creditors. I cannot find it clearly proven either way. The intention to have such creditors paid was proven.
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But is the conveyance to be treated as a voluntary conveyance has been? I think not.
It is a deed which is absolutely void and is not merely like the voluntary or fraudulent conveyance which stands good till set aside.
In some way I am quite unable to appreciate the jurisdiction to deal with such a void deed is doubted. If we have regard to the jurisdiction of the courts of equity, for example, over that wide and varied field which for want of a better term has been called constructive fraud, and over injunctions and all other auxiliary grounds of the jurisdiction which such courts have long taken and asserted relative to proceedings in a court of common law in order that justice may be done, the rights of suitors preserved and property held for the benefit of creditors, so that it may not be by fraud or evil practice of any kind removed beyond the reach of creditors, I see no difficulty in the way of the creditor suing here.
It is quite clear that the facts here demand the exercise of some such jurisdiction. The appellants as mortgagees took proceedings on the mortgage and got judgment and intended to proceed to sell the property under this void mortgage.
The creditor suing herein got an interim injunction and is entitled, if successful, to have that made permanent. Strangely enough it asks for it in the writ, but omitted specifically to pray for it in the statement of claim, but is entitled thereto, I assume, under the general prayer for other relief, though in days gone by a specific prayer might have been exacted.
In any event for my present purpose that is only
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illustrative of what remedies are needed and what has been got in part. For no point is made of it in argument.
But why, as has been suggested, should the creditor be restricted to the cases of fraudulent conveyances for the exercise of such a jurisdiction? Is it because that is the most familiar in practice? In light of such possible suggestion it is rather curious to find as we do in Story on Equity when adverting to such assignments the following:—
377. These cases of interposition in favour of creditors being founded upon the provisions of positive statutes, a question was made at an early day whether they were exclusively cognizable at law, or could they be carried into effect also in equity. The jurisdiction of courts of equity is now firmly established, for it extends to cases of fraud, whether provided against by statute or not. And, indeed, the remedial justice of a court of equity in many cases arising under these statutes, is the only effectual one which can be administered; as that of courts of law must often fail from the want of adequate powers to reach or redress the mischief.
Of course it is a long time since the power of the Court of Equity was questioned in that regard, but it is very curious now to find in the existence of that jurisdiction, which exists only as a branch of and by virtue of the application of principles of equity jurisprudence asserting a much wider and more comprehensive jurisdiction, a reason for the non-application of the latter.
I have no doubt of the jurisdiction and no doubt of the right of the creditor seeking herein to invoke it and claim that the mortgage being void must be so declared and appellants restrained from using said mortgage as an impediment to the creditors asserting their rights. Whatever equities may arise as between the original partners, arising either out of the implications in the agreement between them or the covenant
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of Montgomery, not a party hereto, cannot affect the other creditors of the company, and must abide by future independent litigation or in course of liquidation should the company be wound up.
The judgment got upon the mortgage can stand on no higher ground than the mortgage itself. The judgment in the case of the Great North-West Central Railway Co. v. Charlebois, is authority for such a proposition if authority be necessary.
It does not in the view I have taken seem necessary to dwell upon many other things argued, and especially as to the attitude of the Cordova Mines Co.
I may refer to the case of Re Pooley Hall Colliery Co., where a single creditor got a summons to have it declared that certain holders of debentures in excess of what the company had power to issue, should not have the priority which the debentures, if good, would have given and that was made absolute, yet the holders entitled to rank as creditors but only in pari passu with others.
Indeed, the case of Trevor v. Whitworth, cited above for another purpose is on same line.
The Southampton Boat Co. v. Pinnock, may be looked at as another mode of treating the right to impeach an ultra vires mortgage.
In conclusion I think the appeal should be dismissed—the cross-appeal allowed with costs throughout and the declaration made as prayed for and injunction granted with such references as needed to work out the result.
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The equities I have referred to as possibly existing between appellants and Kirkegaard should not be interfered with or taken as determined by this suit.
DUFF. J.—The appellants, Hughes and Mackechnie, and the respondent, Kirkegaard, were the owners of a mining property in the Township of Belmont, which they transferred to Cordova Mines Limited (a company they had incorporated for the purpose of acquiring the property) in consideration of the issue to themselves and their nominees of all the authorized capital stock of the company fully paid.
Cordova Mines Limited having issued all its capital stock in payment for the mine, it was necessary that money should be borrowed to carry on operations. These operations were extensive and were made possible by loans to the company from Hughes, Mackechnie and Kirkegaard in equal shares. In April, 1912, Cordova Mines Limited was indebted to Hughes, Mackechnie and Kirkegaard in respect of these loans, including moneys then advanced to the extent of over $43,000.
At this time Hughes, Mackechnie and Kirkegaard had drifted apart in their ideas as to the policy to be adopted in carrying on the company’s affairs. Hughes and Mackechnie were on one side, Kirkegaard on the other. None of them was willing to advance more money unless his policy was adopted. A deadlock ensued. This deadlock was finally broken and the continuance of operations secured by an arrangement whereby Hughes and Mackechnie sold their shares to Montgomery, who was Kirkegaard’s solicitor and trustee, for $60,000, payment of this amount to be
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secured by a mortgage from the company to Hughes and Mackechnie on the mine. Kirkegaard was to provide for the proper operation of the mine and to spend at least $3,000 per month in its development.
The form in which this arrangement was expressed and carried out consists of (1) an agreement between Hughes and Mackechnie of the first part, Joseph Montgomery, trustee, of the second part, and Peter Kirkegaard of the third part, dated 23rd April, 1912; (2) a supplemental agreement between Hughes and Mackechnie of the first part and Joseph Montgomery of the second part, dated 30th April, 1912; and (3) a mortgage from Cordova Mines Limited to Hughes and Mackechnie, dated 30th April, 1912.
The substance of the arrangement, so far as it affected the company, was set out and embodied in a minute of its directors held on the 30th April, 1912, as follows:—
It was explained to the meeting that all moneys required by the company for expenses had heretofore been advanced by the three directors equally, and Messrs. Hughes and Mackechnie did not now desire to continue making advances, but were willing to dispose of their stock to other parties who were willing to guarantee the payment of the purchase price by a mortgage on the company’s property, and it was considered advisable in the interests of the company that this should be done provided all shareholders consented thereto.
All the shareholders of the company concurred in this arrangement.
It was part of the agreement that the sum of $43,000 owing by the company was to be wiped out. All the debts owing by the company at the time of the arrangement were paid, and it was not contemplated that any further debts should be incurred. On the contrary, it was expressly provided that until the first payment had been made on the mortgage all costs and
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expenses should be paid by Montgomery and his associates so as not to become a lien or charge on the company’s property.
The result of the transaction was to free the company from its overdue debt of $43,000, and to obtain for it the new advances necessary for carrying on its operations and improving its property.
Hughes and Mackechnie, in pursuance of the agreement, transferred their shares to Montgomery, Kirkegaard’s solicitor and trustee, and Kirkegaard proceeded to operate the mine and advanced to the company large sums of money for that purpose. He and others associated with him made payments on account of the purchase money on the shares amounting to $19,000 or thereabouts to Hughes and Mackechnie. Thereafter the mortgage having fallen into arrear Hughes and Mackechnie, the appellants, brought proceedings against Cordova Mines Limited on the mortgage and on the 30th of April, 1913, upon consent of the company, judgment was pronounced for the immediate sale of the mortgaged premises and directing possession to be delivered to Hughes and Mackechnie.
More than a year after the mortgage, the company incurred a debt to the plaintiff, respondent, the Northern Electric & Manufacturing Company Limited. The present action was brought by the plaintiff, respondent (a) to recover from the company the sum of $817.09 in respect of goods sold to it; (b) to have it declared that the mortgage above mentioned was illegal and ultra vires and a fraud as against the creditors of the company including the plaintiff, respondent, and that the consent judgment in the mortgage action brought by appelants was also void.
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On the 11th of September, 1913, Cordova Mines Limited and Peter Kirkegaard filed a defence to this action. They admitted the debt owing by Cordova Mines Limited to the Northern Electric & Manufacturing Company Limited, but denied insolvency and denied that the mortgage was illegal or fraudulent.
Since the commencement of this action judgment by default was obtained by the respondents, the Northern Electric & Manufacturing Company Limited, on the 22nd of September, 1913, for the sum of $817.09 against the mining company and execution was issued in respect of this debt on the 26th of September, 1913.
At the trial Cordova Mines Limited, having changed its solicitors, asked leave to amend its defence, and, after most of the evidence was in, a new defence on the part of Cordova Mines Limited was filed, denying the making of the mortgage, saying that if made it was ultra vires and void, and claiming that it should be set aside.
Mr. Justice Middleton delivered judgment dismissing the action as against all the defendants (other than the defendant, Cordova Mines Limited, against whom judgment had already been entered as stated above for $817.09) and declaring that the mortgage in question was a good and valid mortgage, and ordering the plaintiffs to pay to the defendants (other than the defendant, Cordova Mines Limited), their costs.
The plaintiffs, the Northern Electric & Manufacturing Company, Limited, appealed to the Appellate Division; Cordova Mines Limited did not serve any notice of appeal, but counsel for it appeared on the argument.
The Appellate Division on the 6th of April, 1914,
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allowed the appeal in part, declaring that the mortgage was ultra vires to the extent that it exceeded the liabilities of the Cordova Mines Limited cancelled by the arrangement made at the time the mortgage was given, but valid to the extent of such liabilities.
It is no longer seriously argued that the mortgage is impeachable as in fraud of creditors.
I have not been able to discover any solid ground upon which the plaintiff obtains a locus standi to attack a transaction as ultra vires which was entered into a year before he became a creditor of the company. Another question ought to be disposed of in limine which is suggested by the dissenting judgment of Mr. Justice Riddell. It is the question whether the judgment of the second Appellate Division ought not to be reversed and the action dismissed on the ground that it was not competent for Mr. Justice Middleton to amend the pleadings in such a way as to permit the company being a party defendant only to attack the mortgage as ultra vires. I do not think it is necessary to pass upon the question whether or not on a proper construction of the Ontario “Judicature Act” and the Consolidated Rules the learned trial judge had power to make the order he did make. I do not think that question arises. The learned trial judge exercising such of the powers of the Supreme Court of Judicature for Ontario as were vested in him as trial judge had, unquestionably, power and authority to hear and pass upon an application by one of the parties for leave to make such an amendment and as necessarily involved therein to adjudicate upon the question whether or not the authority conferred upon him by the Consolidated Rules was broad enough to enable him to make such an order. It seems to be quite clear
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that he did pass upon that question, that he held authority to be vested in him to grant the amendment and to adjudicate upon the issue raised by the amendment as trial judge. It seems obvious enough that neither the learned trial judge nor any of the counsel present supposed that he was trying the issue as arbitrator or in a proceeding ex viâ or ultra vires or in any manner contrary to the course of the court. It may be added that the learned trial judge having tried the issue and pronounced judgment upon it, it seems self-evident that this judgment necessarily involved an adjudication to the effect that he had jurisdiction to pronounce it, an adjudication which as that of a judge exercising the authority of a Superior Court of general jurisdiction to decide upon the scope of its own jurisdiction is binding upon the parties until reversed on appeal. The judgment of Mr. Justice Middleton was not challenged, as I understand it, in the court of appeal by either of the parties on the ground that he had not jurisdiction to pronounce it, and having regard to what took place at the trial I do not think it would have been open to either of them to raise that question. For the same reason I think the point is not open here; and it may be added indeed that the question was not raised by either of the parties in this court.
As to the merits. It is, of course, not contended that the mortgaging of its property for the purpose of securing the payment of the purchase price of shares bought by one of its shareholders for his own benefit would in itself, special circumstances apart, be within the powers of this company; but the broad common sense of the matter seems to be that the company being overwhelmed with debts, the shareholders being involved in disagreements, making effective adminis-
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tration impossible, and the plan which was proposed and carried out promising an escape from these difficulties and prosperity for the company’s undertaking as against ruin otherwise certain, the transaction ought not to be regarded as outside a reasonable application of the doctrine of ultra vires merely because it involved as one of its incidents as part of the consideration moving to one of the shareholders for services in procuring payment of the company’s debts and further advances to enable it to carry on its business a guarantee or payment of a limited part of the purchase price of shares in the company, the purchase of which was of the very essence of the plan decided upon. The two points to be considered in every such question are, first, is the power to enter into the challenged transaction, if not expressly given, primâ facie vested in the company by implication as being reasonably necessary to enable the company to carry on its authorized undertaking? And secondly, if notwithstanding it is primâ facie given by implication from necessity is it the proper inference from all the instruments defining the company’s objects and powers and prescribing the regulations for the conduct of its business that such a power has been denied? On the first question, Lord Blackburn’s observation in Mackay v. Dick, to the effect that in business “impossible” and “impracticable” are convertible terms should be borne in mind. “Necessary” here means necessary in the business sense. I think the observation of Lord Macnaghten in Parkdale Corporation v. West, quoted in Mr. Shepley’s factum, are pertinent; and I think a case of necessity in this sense has been abundantly established. As to the second point, our
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attention has not been called to any provision of the Ontario “Companies Act” expressly forbidding such a transaction and I do not think any argument has been advanced which goes very far to establish ground for implying such a prohibition. It seems to have been assumed in the court below that the transaction is by analogy to be treated as governed by the rule (judicially established) which incapacitates a company from purchasing its own shares in the absence of authority expressly given. With great respect, I am unable to discover the analogy.
There is another ground, however, upon which, in my judgment, the attack fails. As mentioned above the company was at the time of the transaction indebted to the three persons interested in the sum of $43,000. It was admittedly a part of the arrangement that this debt was to be wiped out or merged in the mortgage debt and I think it is clear that such was the effect of the transaction. It would, of course, have been within the power of the company in the circumstances existing to have procured the discharge of its liabilities by a lender at the price of $60,000 and to have given a mortgage to secure this sum. If the transaction had taken that form with the consent of all the shareholders and parties interested it would have been unimpeachable. Again, the transaction might have taken the form of a mortgage securing the payment of $43,000 to the mortgagees the amount of the company’s liabilities discharged and of a further sum of $17,000 for the benefit of the purchaser as in part payment of the purchase price of shares. If it had taken this latter form nobody would have thought of disputing the validity of the mortgage as a security for
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the sum of $43,000; and I understand the majority of the court of appeal to have held that to the extent to which liabilities of the company were in fact discharged by the parties to the arrangement, the mortgage ought to be treated as a valid security. Now it appears to me to be indisputable that as the transaction could have been expressed in such a form as to make it unimpeachable as a security for $43,000, that is to say, as the transaction in its substance was to that extent intra vires and inexpugnable, any objection based upon the form of it must have been curable by a subsequent agreement between the parties declaring that the mortgage should stand as security for this sum of $43,000. In fact as mentioned above, the sum of $19,000 has been paid by Kirkegaard and had been paid by him at the date when judgment was recovered against the company in the foreclosure action. It appears to me to follow that the judgment in the foreclosure action must be held to have precisely the effect of an agreement such as I have suggested. The decision of the Judicial Committee in Great North-Western Central Railway Co. v. Charlebois appears to be beside the point. In the transactions which came into question in that case the persons having control of the company sought by a consent judgment to impart legal authority to arrangements which in their essence were of such a character that the company had no power to enter into them. The impeached transactions had been made to assume a form in which on the surface they appeared to be within the powers of the company. The consent judgment was only the final step in the scheme which from its commencement was never anything else but a fraud
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upon the company’s powers. Their Lordships held that the judgment being a consent judgment could take no higher validity than the ultra vires agreement upon which it was based.
The principle of that decision can, I conceive, have no application to this case where the transaction to which the judgment gives effect is in so far as effect is given to it by the judgment unimpeachable in substance; and for the short reason that it was not beyond the powers of the company but within the powers of the company by a valid agreement to disembarrass the transaction of the objectionable features which concerned the form of it alone and to giving legal and binding effect to the substance of it.
For these reasons I think the appeal should be allowed and the judgment of Mr. Justice Middleton restored.
ANGLIN J.—The facts of this case are stated in the judgments delivered by the learned trial judge and the learned judges of the Appellate Division, reported in 31 Ont. L.R. p. 221.
Apart from the serious difficulties in the way of the plaintiff as to parties and procedure, discussed in the opinion of Mr. Justice Riddell, but upon which I understand counsel for the appellants do not desire that the action should be disposed of, I am of the opinion that, when the substance of the impugned transaction is considered rather than the form which it took, the attack made upon it should not succeed. There is no suggestion that it was in any sense fraudulent. The intention of all the parties to it was to do what appeared to be in the best interest of the company—in fact the only thing which would save it from immediate ruin and dissolution. Its stock had
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been fully issued. It had not a dollar with which to carry on its undertaking and it owed the three directors and shareholders, Hughes, Mackechnie and Kirkegaard, $43,000 for advances made by them. By the arrangement in question its existing creditors were provided for and the scheme contemplated that the company should not become liable for any new debts and that further advances should be made to it for development purposes and to enable it to continue its operations.
But it is said that the giving by the company of a mortgage upon its assets to secure the payment of the purchase price ($60,000) of the shares of its stock acquired from the mortgagees, Hughes and Mackechnie, by Kirkegaard, who thus became in reality the sole shareholder—certain qualifying shares being held by his nominees—was ultra vires. If this were the substance of the transaction it could not be supported. But, in substance, though not in form, the company, in consideration of giving the mortgage, secured a release of the debt of $43,000, which it owed in equal shares to the two mortgagees and Kirkegaard. It also obtained in fact, though not in a form which would entitle it to sue upon it, the benefit of an agreement by which Kirkegaard undertook with the mortgagees to make advances to the extent of $3,000 a month for the development of the company’s property and the carrying on of its operations. Under this agreement, Kirkegaard, who is now hostile to the mortgagees and the instigator of this litigation, swears that he actually advanced to the company upwards of $60,000; and, on this point, there is no reason to doubt his word.
In the trial court the mortgage was held valid and
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the action dismissed. In the Appellate Division it was held good to the extent to which it represented the company’s indebtedness, but void as to the balance; and an account was directed as to any payments made to the mortgagees out of the company’s funds, by which it was directed that the $43,000 representing such indebtedness should be reduced, the mortgage to stand as security for the balance only.
Payments have already been made on account of the mortgage, the learned trial judge finds “not by the company but by Kirkegaard and his associates,” to the extent of $19,000. Kirkegaard himself swears to this fact and tells of $18,000 borrowed by him from one Nelson and $2,000 from one Johnson. Here again there is no reason to discredit his testimony. It would certainly have been better had there been a formal assignment by Kirkegaard to Hughes and Mackechnie of his interest in the $43,000 claim against the company and a formal release to the company of that entire claim. There can be no doubt, however, on Kirkegaard’s evidence, that Mackechnie and Hughes in fact acquired his interest and that the company’s debt of $43,000 was extinguished by the arrangement made; and that is assumed by the judgment in appeal. While the agreement by Kirkegaard for future advances should have been with the company and not with Hughes and Mackechnie, they had the same interest as the company in having those advances made and they were in fact made to the company to the extent of $60,000. Had the mortgage ex facie been given in consideration of the release of the company’s debt of $43,000 and of a covenant by Kirkegaard with the company to advance to it $3,000 per month up to the
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amount of $17,000, it would clearly be intra vires and the advisability of giving it would have been a question for the directors or, at the highest, for the whole body of the shareholders. Subsequent creditors not then in contemplation would certainly have no status to attack it. That in substance, though not in form, was the real transaction. The shareholders authorized it and the company has had the full benefit of it. With the transfer of shares from Hughes and Mackechnie to Kirkegaard and the securing of the purchase price the company is not concerned.
While in form the case at bar may bear some resemblance to Trevor v. Whitworth, and Great North Western Central Railway Co. v. Charlebois, cited by Mr. Justice Clute, in substance the facts dealt with in those authorities differ toto cœlo from those now before us. In Trevor v. Whitworth17 the claim against the company was by a shareholder for the balance of the purchase price of shares sold by him to it. This dealing in its own shares was held to be ultra vires of the company. In the Charlebois Case18, the company had been made to give a mortgage of £200,000 for a consideration of only $50,000. Here the defendant company has had the full $60,000 for which it gave the mortgage and nearly $50,000 more as the direct outcome of the impeached transaction.
I think the judgment of the learned trial judge was right. It should not have been disturbed and should now be restored; and the appellants should have their costs in this court and the Appellate Division.
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BRODEUR J.—I concur in the opinion of my brother Duff.
Appeal allowed with costs.
Solicitors for the appellants: Wills & Wright.
Solicitors for the respondents, Northern Electric & Mfg. Co.: Johnston, McKay, Dods & Grant.
Solicitors for other respondents: Price, Garvey & Co.
31 Ont. L.R. 221, sub nom. Northern Electric and Mfg. Co. v. Cordova Mines.
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