Sinclair v Brougham

JurisdictionUK Non-devolved
Year1914
CourtHouse of Lords
Date1914
[HOUSE OF LORDS.] SINCLAIR APPELLANT; AND BROUGHAM AND ANOTHER RESPONDENTS. 1914 Feb. 12. VISCOUNT HALDANE L.C., LORD DUNEDIN, LORD ATKINSON, LORD PARKER OF WADDINGTON, and LORD SUMNER.

Building Society - Borrowing - Unlimited Borrowing Powers - Banking Business - Ultra vires - Winding-up - Distribution of Assets - Priorities - Shareholders - Depositors - Trade Creditors - Money had and received - Tracing Order - Building Societies Act, 1836 (6 & 7 Will. 4, c. 32), s. 1.

A building society formed in 1851 under the Building Societies Act, 1836, and empowered by its rules to borrow to an unlimited extent, started and developed a banking business. In 1911 the society was ordered to be wound up and questions of priority arose between the outside creditors, the unadvanced shareholders, and the bank customers on current and deposit account (for convenience called the depositors). The assets were insufficient for payment of all the claimants in full but were more than sufficient for payment of the outside creditors (who were subsequently paid by arrangement) and the shareholders:—

Held, (1.) that the power to borrow must be limited to borrowing for the proper objects of the society, and that the carrying on of the banking business was ultra vires. (2.) Distinguishing In re Phoenix Life Assurance Co. (1862) 2 J. & H. 441, and Flood v. Irish Provident Assurance Co. (1910) 46 Ir. L. T. 214; [1912] 2 Ch. 597, n., that the depositors were not entitled to recover moneys paid by them on an ultra vires contract of loan on the footing of money had and received by the society to their use. (3.) Applying the principle of In re Hallett's Estate

In re Hallett's Estate (1880) 13 Ch. D. 696, that the assets remaining after payment of the outside creditors must be taken to represent in part moneys which the depositors could follow, as having been invalidly borrowed, and in part moneys which the society could follow, as having been wrongfully employed by its agents in the banking business, and (subject to any application by any individual depositor or shareholder with a view to tracing his own money into any particular asset, and to the costs of the liquidation) ought to be distributed pari passu between the depositors and the unadvanced shareholders according to the amounts respectively credited to them in the books of the society at the commencement of the winding-up.

In re Guardian Permanent Benefit Building Society (1882) 23 Ch. D. 40 considered and distinguished.

Blackburn and District Benefit Building Society v. Cunliffe Brooks & Co. (1885) 29 Ch. D. 902 overruled.

Decision of the Court of Appeal [1912] 2 Ch. 183 varied.

APPEAL from an order of the Court of Appeal affirming an order of Neville J. with reference to the distribution of the assets in the winding up of the Birkbeck Permanent Benefit Building Society.F1 The rules of the society are set out and the facts fully stated in the previous report of the case. The following summary of the facts is sufficient for the purposes of this appeal.

The society was formed in 1851 under the Building Societies Act, 1836, with rules which were duly certified and enrolled in pursuance of that Act; it was not registered under the Building Societies Act, 1874. The object of the society, as stated in rule 2, was to enable the members to raise a fund out of which they might be individually enabled, as provided by the rules, to purchase a dwelling-house or houses or other real or leasehold estate in any part of Great Britain; and rule 35 empowered the directors to borrow to an unlimited extent. From its inception the society made it part of its business to receive money on deposit from those who were willing to leave money in its hands, whether members of the society or not; and in the course of time the deposit branch of the society developed into a very extensive banking business, and the society became popularly known as the Birkbeck Bank and itself made use of this title in connection with its banking business. On June 20, 1911, an order was made for the winding up of the society. Questions of priority arose in the winding up between the outside creditors of the society, the unadvanced shareholders (who were divided into two classes, A and B), and the bank customers on current and deposit accounts (hereinafter called the depositors), and a summons for directions was taken out by the liquidator against representatives of the several classes of claimants. The fund in the hands of the liquidator was not sufficient for the payment of all the claimants in full but was more than sufficient for the payment of the outside creditors (who by arrangement had been paid before the date of this appeal) and the shareholders. Neville J. held that the power to borrow should be construed as limited by implication to the objects of the society; that the exercise of this power for the purpose of carrying on a banking business was ultra vires; and that the assets ought to be applied, after paying the costs of the liquidation, first in payment of the outside creditors, and then in payment of the A and B shareholders, the balance to be divided rateably between the depositors. The depositors appealed, but eventually a compromise was come to between the depositors and the A shareholders, to which the B shareholders were not parties. The Court of Appeal (the Master of the Rolls and Buckley L.J., Fletcher Moulton L.J. dissenting) affirmed the decision of Neville J., with the result that the B shareholders took priority over the depositors.

1913. Dec. 8, 9, 10, 12, 15. Cave, K.C., and Tomlin, K.C., for the appellant, who represented the depositors. The depositors claim to be creditors of the society and entitled as such to be paid out of the assets in priority to the shareholders. This appeal, however, relates only to the B shareholders because a compromise has been effected with the A shareholders. The Court of Appeal, on the authority of In re Guardian Permanent Benefit Building SocietyF2, have held that the depositors are entitled only to what is left of the assets after payment in full of the shareholders.

1. The transactions out of which the claims of the depositors arise were authorized by the rules and were not ultra vires the society. It will be said that the money obtained from the deposits was in excess of the legitimate requirements of the society; but, having regard to the rules, which conferred an unlimited borrowing power on the society and contemplated borrowing by way of deposit, the depositors were not bound to inquire into the purposes for which the money was intended to be applied: In re David Payne & Co.F3 The banking business of the society was carried on openly and for a long period and on an extensive scale and the members knew all about it. Therefore, unless it can be said that this business was ultra vires the society and not merely ultra vires the directors, the members must be taken to have sanctioned that course of business: Houldsworth v. Evans.F4

[VISCOUNT HALDANE L.C. referred to Laing v. Reed.F5]

2. Assuming that these transactions were ultra vires in the fullest sense of the term, the depositors are entitled to recover on the footing of money had and received; or, 3., alternatively on the principle stated by Fletcher Moulton L.J., that the Court in distributing the assets in the winding-up will not allow any payment to the members to be made out of the assets until they have been purged of the moneys which the society through its agents improperly obtained. Where money is paid to a society upon a contract of deposit which is ultra vires, eo instanti a debt arises from the society or its agents to the depositor for money had and received by the society to his use. If a corporation gets into its hands the money of somebody else for no consideration and on no valid contract, it cannot keep the money but must pay it back; it is liable to an action for money had and received just as much as an individual is. If the decision of the Court of Appeal is right, every repayment made to a depositor was an improper payment and the society could get back every penny repaid during the last half-century. It would thus make an enormous profit out of its own wrong-doing. Some difficulty has arisen from confusing illegality and incompetence. This distinction has been clearly pointed out by Lord Cairns in Ashbury Railway Carriage and Iron Co. v. Riche.F6 Where a contract is immoral or forbidden money paid under it cannot, as a general rule, be recovered by either party; but where there is nothing but incompetence, i.e., where it is a mere case of a contract having no binding effect on the corporation or individual, there is no rule of law which prevents the repayment of money paid under that contract. The doctrine of money had and received was propounded by Lord Mansfield in Moses v. MacferlanF7 where he says the action “lies for money which ex æquo et bono the defendant ought to refund,” and is restated by him to the same effect in Sadler v. EvansF8, where he describes the action as “a liberal action, founded on large principles of equity, where the defendant cannot conscientiously hold the money.”

[The LORD CHANCELLOR referred to Royal Bank of Canada v. RexF9 and Wilson v. ChurchF10, affirmed sub nom. National Bolivian Navigation Co. v. WilsonF11, where Lord Esher said that this was not a mere equitable doctrine, but was a common law right.]

In many common law cases it is treated as an action of assumpsit.

The doctrine has been applied in many cases — e.g., in cases of gaming contracts — in which money paid upon a contract which is void but not immoral has been recovered as having been paid for a consideration which has wholly failed: Jaques v. GolightlyF12; Jaques v. Withy and ReidF13; Tappenden v. RandallF14; Hastelow v. JacksonF15; Diggle v. HiggsF16; Shoolbred v. Roberts.F17 This doctrine applies to a corporation – Hall v. Mayor of SwanseaF18 – and to an ultra vires transaction: In...

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27 books & journal articles
  • CONTRACTUAL ILLEGALITY AND CONFLICT OF LAWS
    • Singapore
    • Singapore Academy of Law Journal No. 1995, December 1995
    • 1 December 1995
    ...of money paid in respect of the impugned transaction, the sum paid is irrecoverable as money had and received, see Sinclair v. Brougham[1914] A.C. 398. 67 [1992] 2 S.L.R. 407. 68 [1990] 3 M.L.J. 226. 69 On the impact that the lex fori may have on a contract which is legal by its proper law,......
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    • 11 November 2022
    ...B. & C. 73; 9 Dow. & Ry. K.B. 889; 5 L J. (O.S.) K.B. 294 112 Shoti v. Paul and Ors. 11 N.L.R. 120. 354 Sinclair v. Brougham and others, (1914) A.C. 398; 83 L.J. Ch. 465; 111 L.T. 1; 30 T.L.R. 315; 58 Sol.Jo. 302; (1914-15) All E.R. Rep. 622. . . . . 100 Smith v. Dobbin, 37 L.T. 777; 3 Ex. ......
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    • Irwin Books The Canadian Class Action Review No. 6-1, April 2010
    • 1 April 2010
    ...likely be applicable to other indistinguishable mixtures. See discussion in Smith, above note 121 at 162–65. 140 Sinclair v. Brougham, [1914] A.C. 398 at 419 (H.L.). 141 Re Hallett’s Estate (1880), 13 Ch. D. 696 at 709–10 (C.A.) [Hallett’s Estate]; Smith, above note 121 at 123. 142 Smith, i......
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    • Irwin Books The Canadian Class Action Review No. 6-1, April 2010
    • 1 April 2010
    ...likely be applicable to other indistinguishable mixtures. See discussion in Smith, above note 121 at 162–65. 140 Sinclair v. Brougham, [1914] A.C. 398 at 419 (H.L.). 141 Re Hallett’s Estate (1880), 13 Ch. D. 696 at 709–10 (C.A.) [Hallett’s Estate]; Smith, above note 121 at 123. 142 Smith, i......
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