Supreme Court of Canada
Bank of Montreal v. Kiwi Polish Co. (Canada) Ltd. et al., [1971] S.C.R. 991
Date: 1971-04-27
Bank of Montreal (Plaintiff) Appellant;
and
Kiwi Polish Company (Canada) Ltd. et al. (Defendants) Respondents;
and
Powell Projects Ltd. et al. (Defendants) Appellants.
1971: March 15, 16; 1971: April 27.
Present: Martland, Judson, Ritchie, Hall and Spence JJ.
ON APPEAL FROM THE COURT OF APPEAL FOR BRITISH COLUMBIA
Partnership—Two companies forming partnership and subsequently executing debenture—Joint and several covenant to pay—Charge on partnership assets—Whether necessary to covenant expressly as partners of firm.
Two limited companies formed a trading partnership to carry on business under the name of Geo. M. Fraser & Co. Subsequently, these two companies executed a joint floating charge debenture for $275,000 in favour of the Bank of Montreal. The issue in this appeal was whether this debenture created a valid charge on the partnership assets in priority to the trade creditors, or whether it bound only the net interest of the partners in the firm’s assets. The money lent by the bank on the strength of this security was received and used by the partnership in its business. Both at trial and on appeal it was held that the debenture bound only the net interest of the partners in the firm’s assets.
Held: The appeal should be allowed.
The debenture constituted a charge upon the accounts receivable, inventory and the other assets of the firm of Geo. M. Fraser & Co., or the proceeds thereof in the hands of the receiver appointed herein in priority to any other interests represented in this action.
When all the partners in a partnership jointly and severally covenant to pay a debt and charge the partnership assets for the payment of the debt, it is not necessary for them in covenanting for joint and several payment to say that they covenant as partners of the firm as well as in their individual capacities. One who holds the joint obligation of all the mem-
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bers of the firm can prove a partnership debt. Hoare v. Oriental Bank Corp. (1877), 2 App. Cas. 589, applied.
APPEAL from a judgment of the Court of Appeal for British Columbia, dismissing an appeal from a judgment of Smith J. Appeal allowed.
P.B.C. Pepper, Q.C., and R.J. Harvey, for the plaintiff, appellant.
C.L. Dubin, Q.C., L.M. Candido and R.A. Blair, for the defendants, appellants.
B.D. Macdonald and R. Wilson, for the defendants, respondents.
The judgment of the Court was delivered by
JUDSON J.—On August 1, 1965, two limited companies, Arcus Importing Company Ltd., and Heyrod Enterprises Limited, formed a trading partnership to carry on business under the name of Geo. M. Fraser & Co. On June 3, 1966, these two companies executed a joint floating charge debenture for $275,000 in favour of the Bank of Montreal. The issue in this appeal is whether this debenture created a valid charge on the partnership assets in priority to the trade creditors, or whether it bound only the net interest of the partners in the firm’s assets. The money lent by the bank on the strength of this security was received and used by the partnership in its business. Both at trial and on appeal it has been held that the debenture bound only the net interest of the partners in the firm’s assets. The Bank of Montreal appeals.
I set out the parts of the debenture which are relevant to this appeal:
DEBENTURE
CANADA PROVINCE OF BRITISH COLUMBIA............................................................. $275,000.00
HEYROD ENTERPRISES LTD. and ARCUS IMPORTING COMPANY LTD. (each incorporated under the Companies Act of the Province of British Columbia and each with
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registered office at 3525 Cornett Road, in the City of Vancouver, in the Province of British Columbia)
1. HEYROD ENTERPRISES LTD. and ARCUS IMPORTING COMPANY LTD., each a body corporate, duly incorporated under the laws of the Province of British Columbia, with registered office at 3525 Cornett Road, in the City of Vancouver, in the Province of British Columbia, (hereinafter called the “Companies”) jointly and severally covenant that they will on demand pay to the BANK OF MONTREAL (hereinafter called the “Bank”) the sum of TWO HUNDRED AND SEVENTY-FIVE THOUSAND DOLLARS ($275,000.00) in lawful money of Canada.
* * *
4. As security for payment of the said principal sum and interest and of other monies owing… the Companies jointly as partners in the partnership known as Geo. M. Fraser & Co. do and each of the Companies separately for itself, doth hereby charge… all the joint and several properties, assets, effects and undertakings… of the Companies as partners and of each of the Companies individually…
* * *
IN WITNESS WHEREOF the Companies have executed this Debenture under their Common Seals this 3rd day of June, Nineteen Hundred and Sixty-six.
The Common Seal of HEYROD ENTERPRISES LTD. was hereunto affixed in the presence of:
“A. HESFORD”
Director
“G.M. FRASER”
Director
The Common Seal of ARCUS IMPORTING COMPANY LTD. Was hereunto affixed in the presence of:
“G.M. FRASER”
Director
“A. HESFORD”
Director
On May 15, 1968, the bank started proceedings to enforce its debenture and obtained the appointment of a receiver. On June 25, 1968, the
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partners were made bankrupt, and pursuant to an order made under s. 16 of the Bankruptcy Act, Kiwi Polish Company (Canada) Ltd., and others have throughout these proceedings opposed the bank’s claim to priority. The other interest represented in these proceedings is that of the holders of debentures who are postponed to the bank’s debenture but claim to be second in priority„ Their debentures are similar in form to that of the bank. These parties are former partners of a predecessor firm of Geo. M. Fraser & Co., and they took these debentures when they sold out to Arcus and Heyrod.
The issue, both at trial and on appeal, was before the Courts on the following question:
1. To what extent, if any, does the debenture that is the subject matter of this action constitute a charge upon the accounts receivable, inventory and the other assets of the firm of Geo. M. Fraser & Co., or the proceeds thereof in the hands of the Receiver appointed herein?
The ratio of the Court of Appeal is contained in the following paragraph from the reasons of Tysoe J.A.:
A consideration of the wording of the debenture leads me to the conclusion that it is not an instrument done or executed in the firm name, or in any other manner showing an intention to bind the firm of Geo. M. Fraser & Co. The language is inappropriate to create a charge upon the partnership assets. The covenant to pay is a joint and several covenant of Heyrod Enterprises Ltd. and Arcus Importing Co. Ltd., with no mention of them as partners or of the firm called “Geo. M. Fraser & Co.” The conditions attached to the debenture impose restrictions upon the companies, i.e., Heyrod Enterprises Ltd. and Arcus Importing Co. Ltd., and, while they make reference to the winding up or bankruptcy of the said companies, the conditions say nothing about the firm of Geo. M. Fraser & Co. Notwithstanding that in cl. 4 of the debenture the phrases “as partners in the partnership known as Geo. M. Fraser & Co.” and “of the Companies as partners” and “all the joint and several properties” appear, I am unable to construe the instrument as charging assets of the partnership called by the firm name of “Geo. M. Fraser & Co.”
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as distinct from the assets of the two partners. In my view, there is significance in the entire absence of any such words as “for and on behalf of the said partnership” or “and assets of the said partnership.”
The problem is entirely one of construction of the wording of the debenture. With respect, my opinion is that the Court of Appeal was in error in its construction. In para. 1 Arcus and Heyrod jointly and severally covenant to pay on demand a certain sum. In para. 4 they gave the charge which, reduced to its essentials, has been quoted above.
To me, para. 4 plainly gives a charge on the whole of the partnership assets as they may exist from time to time and it was given by the only two partners of the partnership. The two partners could have been sued at any time after demand on their joint and several covenant to pay and the judgment could have been enforced against the partnership assets. As partners, they were in a position when giving the debenture to charge the partnership assets as security for their joint and several promise and they did exactly that.
The question becomes a very narrow one, namely, when all the partners in a partnership jointly and severally covenant to pay a debt and charge the partnership assets for the payment of the debt, whether in covenanting for joint and several payment they must say that they covenant as partners of the firm as well as in their individual capacities. In para. 1 of the debenture, as Tysoe J.A. points out, they did not expressly covenant as partners of the firm but the fact is that they were the only partners. They gave a joint and several covenant; they charged the firm’s assets; and they were, in fact, covenanting as partners and as individuals.
We are not concerned in these proceedings with any question of the implied authority of one partner to borrow on behalf of the firm and charge the firm’s assets. One who holds the joint
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obligation of all the members of the firm can prove a partnership debt. In my opinion, Hoare v. Oriental Bank Corporation is directly in point and remains good authority for the proposition that one who holds a joint obligation by all the members of the firm can prove a partnership debt. In the Hoare case, the proceeds of the loan were not used for partnership purposes but the firm’s assets were still liable. In the present case, the funds were used by the partnership and the result must be the same.
The answer to Question 1 is that the debenture, the subject-matter of this action, constitutes a charge upon the accounts receivable, inventory and the other assets of the firm of Geo. M. Fraser & Co., or the proceeds thereof in the hands of the receiver appointed herein in priority to any other interests represented in this action.
It is unnecessary to answer Question 2 that was submitted to the Courts. This had to do with an assignment of book debts by the predecessor partnership.
I would allow the appeal with costs throughout to both appellants, i.e., the bank and the holders of the second charge debentures.
Appeal allowed with costs.
Solicitors for the plaintiff, appellant: Campney & Murphy, Vancouver.
Solicitors for the defendants, appellants: Lawson, Lundell, Lawson & McIntosh, Vancouver.
Solicitors for the defendants, respondents: Buell, Ellis, Sargent & Russell, Vancouver.
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