064-NLR-NLR-V-33-HONG-KONG-AND-SHANGHAI-BANK-et-al.-v.-KRISHNAPILLAI.pdf
Hong Kong and Shanghai Bank v. Krishnapillai.
249
1932Present; Garvin S.P.J. and Drieberg J.HONG KONG AND SHANGHAI BANK et al. v.KBISHNAPILLAI
78—D. G. (Inty.) Ratnapura, 60.
Pledge—Shares in Joint Stock Company pledged with hank—Security for over-draft—Insolvencyof pledgor—Bank'sright to dispose of shares—Order
of Court to sell shares—Preferential right of hank over proceeds of sale—English law.
< A bank with whom scrip relating to shares in a Joint Stock Companyisdeposited by way ofsecurityforan overdraft, with written authority
todisposeof the sharesby saleortransfer, has no right to dispose of
them without the intervention of Court, where the assignee in insolvency -of the pledgor objects to such a course. The bank is, however, entitledtoobtainan order fromCourt that,upon the sale of the shares by the
assignee, it should be given preference in those proceeds for so much ofits claim as is charged upon and secured by such shares.
The right of a pledgee to sell his security .without recourse to a Courtoflaw ispeculiar to theEnglishlawof pledge, and the Boman-Dutch law
in the matter of rights of mortgage and pledge does not give place to theEnglish law, when the mortgagee or pledgee is a bank.
The Court ordered that the bank will be further entitled, in the eventof its purchasing the property hypothecated, to credit to the extent of such claimprovided the purchase is made for a price not less than the current market priceof the shares.
250
DRIBBBB0 J.—Hong Kong and Shanghai Bank v. Krishnapillai.
^^PPEAL from an order of the District Judge of Ratnapura.
This was an application by the assignee in insolvency for an order tosell certain shares alleged to be the property of the insolvent. Theapplication was opposed by the appellant-banks so far as it related tocertain shares, the scrip of which had been deposited with them as securityfor overdrafts with written authority from the insolvent to dispose.of ortransfer them. The learned District Judge ordered that the sharesshould be sold, the proceeds brought into Court, and that the securedcreditors should bring hypothecary actions against the assignee to.establish their preferential claims to the proceeds.
B. F. de Silva, for appellants.—Pledgee of shares is entitled to sell.The English law should govern banking transactions (Ordinance No. 5-of 1852V The pledge or mortgagee can sell (Stubbs v. Slater1; Colonial*Bank v. Whinney 2). Bankers have special lien under the law merchant.(Grant on Banking, p. 288; Rock v. Garrissen*), in realizing lien onsecurities (Grant, p. 296; The Odessa case4). Where share certificatesare deposited as security for a debt the creditor may obtain an order for•foreclosure (Grant on Banking, p. 403). Even under Roman-Dutchlaw, banks are in special position, as, for example, in the case of shares held•by a bank (Wille on Mortgage, p. 183; Morice Roman-Dutch Law, p. 62). ■
Counsel cited Sankayar v. Mohamadu 5; Raman Ghetty v. Sarkuman *;.Brand & Co. v. Assignee of Goerge Wall & Co.1
Keuneman, for assignee, respondent.
•January 22, 1932. Drieberg J.—
This is an appeal from an order directing the sale by the assignee of■certain shares alleged to be the property of the insolvent. The applicationfor sale was made by the assignee and was opposed by the appellants so.far as it related to the shares in their possession.
The history of the case, so far as it relates to the matter before us, andthe respective positions of the several appellants as gathered from therecord and the affidavits filed by them are as follows: —
The. insolvent, when he filed his declaration of insolvency on January.31, 1930, was indebted to the first appellant, the Hong Kong and ShanghaiBank, on his overdrawn current account in a sum of Rs. 13,883.90. Thebank held as security 1,000 shares in Broughams, Ltd., and 650 shares inthe Boscombe Tea Estates, Ltd. On October 5, 1924, the insolventgave the bank a writing authorizing it as his attorney to dispose of theshares by sale or by transfer to a nominee of the bank if it, should befound necessary to do so. The bank still holds these shares and has notdealt with them under this power. These facts appear in the affidavit
4{1916) 1 A. C. 158.
6 8 Times 98.
4 15 N. L. R. 337.
{1910) 1 Ch. 632.
{1886) 11 App. Cases 426.
(1550) 3 Q. L. J. Ch. 39.
7 5 S.C. C. 86.
DRIEBEB0 D.—Hong Kong and Shanghai Bank 9. RHshnapillai.
251
of the agent of the bank dated September 19t 1930, and the applicationto Court of October 18, 1930, was that the Court should make orderallowing the shares to be sold by a firm of brokers, Forbes & Walker,at such price as the bank should approve, that the necessary transfer beexecuted by the assignee, the first respondent to this appeal, that the bankbe allowed credit at the sale and further, to be allowed to prove for thebalance of its claim, if any, as an unsecured creditor. The writing ofOctober 5, 1924, was not before the District Court when the orderappealed from was made. It was produced before us at the argument.
The second appellant, the Eastern Bank, came into the proceedings onFebruary 13, 1931, and on that day moved jointly with the Hong Kongand Rtin.ngVifti Bank that the order made on February 7 allowing the in-solvent to leave the Island be revoked “ Until such time as it has beendecided (1) whether the banks can realize their security, if not (2)whether they must file hypothecary actions and (3) until the question ofMr. Harrison’s interest, if any, in the Uva shares now with the EasternBank has been decided The Eastern Bank had not then made anystatement as to the nature or extent of its claim or what its position wasregarding the enforcement of it. Mr. Harrison's claim regarding theseshares is set out in his affidavit proving his claim. He there said thatthe insolvent purchased 500 shares in the Uva Rubber Co., Ltd., for andon his behalf, that these were made out in .the name of the insolvent whoheld them in trust for him and paid him the dividends.
An affidavit of October 28, 1931, by the agent of the Eastern Bankwas submitted to us at the hearing of this appeal. He there states thatthe insolvent was indebted to the bank on an overdrawn current accountin a sum of Rs. 3,918.96, that as security the insolvent deposited onFebruary 27, 1929, certificates in his name for 500 shares in the Uva.Rubber Co. of Ceylon, Ltd. with a blank form of transfer signed by theinsolvent; on November 8, 1928, the insolvent by a letter of lien author-ized the bank to complete the .transfer of all property of the insolvent inits possession and in the event of non-payment of his overdraft to sell theproperty and pay. itself. On February 3, 1930, the bank completed thetransfer of the 500 shares in the Uva Rubber Co. and received from thecompany amended scrip in the name of the bank’s nominee. The letterof lien is not before us.
/
The affidavit of the agent of the Eastern Bank refers to 100 shares .inthe Stratheden Tea Co. deposited on June 28, 1929, with the bank assecurity. These were in the name of Mrs. Kennedy and there was ablank form of transfer signed by her. On July 6, 1929, Mrs. Kennedywrote to the bank that these shares were not to be sold but were to beretained by the bank until such time as they were redeemed by Mrs.Kennedy or the insolvent. The Eastern Bank has not dealt with theseshares.
The trial Judge refused the joint motion of the IJong Kong and Shanghaiand the Eastern Bank and there was an appeal against the order by theHong Kong and Shanghai Bank. The appeal was heard on February 27,1931. The certificate meeting had previously been fixed for March 7and the insolvent was ordered to appear at it; this Court ordered that-
as2
DRIEBERG .J.—Hong Kong and Shanghai Bank v. Krishnapillai.
at that meeting the District Court should hear and determine all appli-cations in respect of sale of shares in which .notice had been given. Theapplication referred to was one of November 10, 1930, by the assigneefor leave of Court to sell through Messrs. Forbes & Walker the sharesbelonging to the insolvent, among them the Uva Co. shares and theStratheden Co. shares, and that the assignee be authorized to execute thenecessary transfers.
On March 7, after hearing argument only on behalf of the appellants• and certain creditors, the Court ordered that the shares should be sold,the proceeds 'brought into Court, and that the secured creditors shouldbring' hypothecary actions against the assignee to establish their preferen-tial claims to the proceeds. The appeal is from this order.
The three appellants are not in the same position and it is necessary tostate their claims as they were presented in the District Court.
The Hong Kong and Shanghai Bank claimed a mortgage of these shares-effected by delivery, a blank .transfer signed by the insolvent and awriting authorizing it to dispose of the shares. This writing howeverwas not before the Court.
The third appellants, Bartleet & Co., had disclosed their position in theiraffidavit proving an unsecured debt and in their motion of January 15,1931. They claimed to hold as security for a debt of Bs. 72,000 6,110shares in the Etambawala Bubber Co. and 4,500 shares in .the BoscombeTea Estates Co., for which they held blank transfer forms signed by the ■insolvent. They do not say that they hold such an authority as the HongKong and Shanghai Bank has to complete the transfer if necessary inthe name of the insolvent.
The claims of the Hong Kong & Shanghai Bank and Bartleet & Co..are alike. They ask for an order of Court allowing the sale of the sharesby Messrs. Forbes &. Walker and that they be allowed credit for theirclaims at the sale. The Hong Kong and Shanghai Bank asks that thesale be at a price approved by it and Bar.tleet & Co. ask that they beallowed to buy at a price not less than the current market rate and in thealternative that a date be fixed for inquiry and ascertaining the marketvalue of the shares to enable them to take over the shares at that price.
The Eastern Bank had not stated its position in the District Courtexcept what can be gathered from its motion of February 13, 1931,which is that it held as security certain Uva Co. shares to which Harrisonmade a claim. The amount of its claim was not stated.
From the agent’s affidavit of October 28, 1931, we now know that thebank under the authority it claims had disposed of the shares and thatthey are now held by a nominee of the bank; I infer from the statementthat the bank has received amended scrip from the company that thistransfer was registered. The agent says in paragraph 9 of his affidavitthat though he believes he had the right to sell these shares withoutreference to court doubts have arisen as to the validity of the transferof February 3, 1930. I understand this to refer to registration beingeffected after adjudication and without the assent of the assignee. Hesays that for this reason " the Bank joined in the appeal of the Hong
DRIEBERG J.—Hong Kong and Shanghai Bank o. Krishnapillai.
253
Kong and Shanghai Banking Corporation and Messrs. Bartleet & Co. inorder to establish its rights in the matter What is meant by this is notclear. If the Eastern Bank desired an adjudication on the question—for 1 presume this is the question that concerns it and I can only gatherthis from the affidavit—whether the registration of the transfer after theadjudication and without the assent of the assignee is valid, it shouldhave been done in a proper proceeding. It may be inferred from itsjoining in this appeal and from what was urged on its behalf in theDistrict Court that the Eastern Bank is prepared to assume the sameposition as the appellants, that is to say, that it still holds these Uva sharesas security; but it is not clear that this is its position.
It was urged especially on behalf of the appellant-banks that they hadthe right to sell any shares pledged with them without reference to .theCourt. It was contended that as Ordinance No. 22 of 1866 introducedinto the Colony the law of England in all questions relating to banks andbanking they have the same rights in the matter of realizing these secu-rities as they would under the law of England. But the right of a pledgeeto sell his security without recourse to a Court of law is peculiar to theEnglish law of pledge and the common law of the land in the matter ofrights of mortgage and pledge does not give place jbo the English lawwhen the mortgagee or pledgee is a bank.
It was contended by Mr. de Silva that the banks have the right ofselling the shares independently of the Court as the writing authorizingthem to dispose of the shares was an express agreement for partite executionwhich is recognized by the Courts of South Africa as valid in the case ofa mortgage or pledge to a bank. He referred us to page 176 and thefollowing pages of Wills on Mortgage and Pledge in South Africa andMorice’s English and Roman-Dutch Law, p. 62. This question does notarise for decision for if the banks thought that they had .this right theyshould have disposed of the shares without the intervention of the Court.It is suggested that they could not do so as the authority of the assigneewould be needed for registration of the transfers. If they have the powerto sell, they presumably also have the power to compel the assignee to dowhat is necessary to give effect to the sale. But what counsel urged onbehalf of the appellants at the argument in the District Court, was thatthe assignee should be authorized to sell the shares, pay the appellants,and bring .the balance into Court, and that the appellants be allowedcredit for the amount of their claims. It is sufficient to say that accordingto the Roman-Dutch law such an agreement is one which the law will notrecognize, except in the case of movables of small value and in the caseof {shares held by a bank, in which case, the right to do so depends oncustom, by which the law has been abrogated. It has not been provedthat such a custom exists here and that it has been recognized *in ourCourts.
Voet XX., 5, 6 (Berwick’s translation) says: “ Whatever mode of sal©of pledges has been introduced by municipal law or inveterate usage isto be observed, and this cannot be receded from, or the order changed,by private agreements between debtors and creditors. Whence, if it-‘.hasbeen agreed by pact that it should be permissible to a creditor to sell the
254
DRIEBERG 3.—Hong Kong and Shanghai «. Krishnapillai.
pledge by private authority, nevertheless it cannot be rightly sold exceptby public auction under decree of the Judge, when either the debtor-refuses to allow the sale to be made privately under the pact, or it con-cerns other hypothecary creditors that it should not be sold in this-(manner: for they will not lose their rights by a private sale, and thepurchase will either be null, or the purchaser will take the thing subjectto its encumbrances.”
The law on this point in South Africa is well summarized by Wille on-page 183: “ It is submitted here that the weight of authority is against-upholding an agreement for parate execution, except in the case of securities*of small value. That the true rule is that such an agreement, if made atany time prior to the mortgagor’s default, is valueless and of no effect initself. On the default of the mortgagor, if either he or any third partieshaving a jus in re in the property, for example, a later mortgagee, raisesany objection the earlier mortgagee cannot enforce the agreement exceptwith the assistance of the Court. The only exceptions to this rule are ba-the case of movables of small value and, probably, in the case of sharesheld by a bank, for such an institution will doubtless be able to provethat by custom it is entitled to exercise the power of sale agreed upon.Apart from these exceptions, if the mortgagee wishes to avail himself ofthe power contained in the agreement he should apply to the Court, whichwill, as a rule, grant him a rule nisi calling on the mortgagor and thirdparties to show cause why the mortgagee should not be allowed to sellthe property, and, in the absence of cause being shown, the rule will be-made absolute (Case of Good Hope Building Society’s Liquidator v. Rodel'iEx parte Indwe Mutual Building Society2).
We were .told that in the District Court of Colombo where such claims-often arise, the shares so held by banks are sold with the consent of andby arrangement with the assignee; to such a course there can be noobjection and it would be in compliance with the law, the assignee,representing the debtor and holders of subsequent mortgages, if any, andother creditors. In this case the assignee denies, or at any rate wishes toput the appellants to proof that they have a right of preference, for hodoes not consent to their getting credit for the amount of their claims.
The position of the banks therefore is that they are creditors claimingto have a mortgage of movable property. They do not seek to sell theproperty without the intervention of .the Court and they cannot do sowhere the assignee, who represents their debtors, objects. It followstherefore that they must- prove their claims and their right .to preference.The position of Bartleet & Co. must be regarded as the same as that of(he banks.
The only further question for consideration is whether such rights canbe enforced in these proceedings or whether this should be done in separatahypothecary actions.
The Insolvency Ordinance, which is based on the early English Act doesnot allow for the fundamental difference between the English and theRoman-Dutch law of mortgage. But the practice regarding. the rights ofpreference of creditors who hold a mortgage of immovable
» (1899) 9 C. P. R. 19$.
(190$) 16 C. T. R. 1131.
DBIEBEBG- J.—Hong Kong and Shanghai v. Krisknapillai.25a
property is well settled. In Mathiah v. Marker Tamby,l it was'held thata mortgage creditor had three courses open to him when the mortgagoris adjudicated insolvent; he should make a formal demand of the assigneein order to allow him the opportunity of redeeming the mortgage undersection 76 of the Ordinance and disposing of the property for the benefitof the creditors; if the assignee does not elect to redeem the property themortgage creditor' can prove his claim under the mortgage bond andwhen the property is sold he can draw the vfbole proceeds or so much asis sufficient to satisfy his claim, or#he might bring an action on the bondagainst the mortgagor as debtor and against the assignee as the party inwhom the property has vested under section 71 pf the Ordinance, obtain•a hypothecary decree and have the property sold. It does not appearfrom the report whether the mortgage was of movable or immovableproperty, but Burnside C.J. deals with this course as applicable both to a* mortgage and a pledge, and Lawrie J. deals with cases where the mort-gaged property has vested in the assignee under sections 70 and 71 ofthe Ordinance; section 70 deals with personal effects and section 71with lands and interests in lands#- The grounds on which .this judgmentis based are common to mortgages of movable and immovableproperty.
Jn the case of a mortgage of land there are many reasons why a creditormight prefer a sale under a hypotheoary decree, for example, there maybe encumbrancessubsequent- to themortgagewhich wouldnot affect
the purchaser if the property was sold under a hypothecary decree on thefirst mortgage and this may lead to a better price, being realized. This iswhat the mortgage creditor can do if he so desires, but there is nothing toprevent him from following the less formal but more expeditious course■of proving his claim and asking that the property be sold in the insolvencyproceedings. Themortgage creditorwho adopts this coursedoes not
lose his right ofpreference (In reIngleby2and Perera v.Joseph*).
The latter was acase in which themortgagewas over bothland and
movable property. It appears from the report that the property wassold by the assignee with the consent of the primary mortgagee and the.■secondary mortgagee. The rulings in Mathiah v Markar Tamby (supra)and In re Ingleby (supra) were followed, and it was held that thesecondary mortgagee by coming into the insolvency proceedings did-not lose his right to preference*.
The order appealed from is wrong so far as it directs the assignee tosell the shares and the appellants to bring hypothecary actions to establishtheir preferential right to the proceeds. If the appellants have hypothe-cary rights over these shares they are entitled to have them sold in thesame way as under a hypothecary decree, and they are entitled to pre-ference over the proceeds of the sale and to credit for the amount of theirclaims if they find it necessary to purchase it themselves. If they aresecured creditors this cannot be denied them, but they must prove theirclaims and that they have a valid hypothecation,
1 (2884) 6 S. C. C. 83.* {188$) 7 S. C. C. 39.
* (1912) 15 N. L. R.-327.
20/33
256DRIEBERG J.—Hong Kong and Shanghai o, Krishnapillm.
Mr. Keuneman said that the assignee personally was prepared to admitthe claims of the appellants but as there was opposition by some of thecreditors he desired that there should be an order of the Court directingthe sale and recognizing the preferential claim of the appellants. Thecreditors represented by Mr. Pinto and Mr. Wijetilleke apparentlydo not concede that the appellants have a right of preference, butfor what reason they say so does not appear and the Court did notinquire.
Mr. Pinto appeared among others for T. G. Harrison who claimed theUva Rubber Co. shares over which the Eastern Bank claims a mortgage.On March 7 the matter was discussed in a general way and the Judgerefused the request made by counsel for the appellants that the assigneeshould.be authorized to sell the shares and pay the appellants their claimson the ground that he had no power to order in these proceedings thatthe proceeds of sale should be paid to any particular creditor. As I haveshown there is ample authority for such a course if the appellants satisfythe Court that their claims are secured by a valid mortgage. This theyhave not done. The Eastern Bank in particular did not put its casebefore the Court at all.
The order appealed from must be set aside. Any appellant who is ableto satisfy the Court that shares in his possession belonging to the insolventare validly, held by him as security for the amount of his claim or anyportion of it will be entitled to proceed as has been indicated and obtainan order that upon the sale of the shares by the assignee he should begiven preference in the proceeds for so much of his claim as is chargedupon and secured by such shares; further, he will be entitled in the eventof his purchasing the property hypothecated to credit for the extent ofsuch claim provided he purchases the same for a price not less than thecurrent market price of such shares. The sale should be by publicauction by a sharebroker approved by the Court. The appellants willbe entitled to prove for the balance of their claims, if any, as unsecuredcreditors.
We express no opinion on the merits of the particular claims and inparticular in regard, to that of the Eastern Bank which as has beenpointed out was not formulated in the District Court. We would merelyadd for the guidance of the Court that before a sale is ordered it shouldsatisfy itself first, that the shares are the property of the insolvent orheld for him and next, that they are validly pledged and hypothecatedfor the amount of the respective claims or any part thereof.
There will be no order as to the costs of this appeal or of the proceedings-of March 7 in the Court below.
Gabvin S.P.J.—I agree*
Appeal allowed..