Hanson v. Bondholders' Re-Organization Committee

Hanson v. Bondholders' Re-Organization Committee
Collection
Supreme Court Judgments
Date
1950-11-20
Report
[1951] SCR 366
Judges
Taschereau, Robert; Rand, Ivan Cleveland; Estey, James Wilfred; Locke, Charles Holland; Cartwright, John Robert
On appeal from
Ontario
Subjects
Priorities and hypothecs
Decision Content
Supreme Court of Canada
Hanson v. Bondholders’ Re-Organization Committee, [1951] S.C.R. 366
Date: 1950-11-20
Mathew Hanson and Tekla Hanson, (Defendants) Appellants;
and
The Canada Trust Company and William D. Glendinning, (Plaintiffs) Respondents;
and
Bondholders’ Re-Organization Committee and H.S. Black et al. Respondents;
and
J.M. Hickey Respondent.
1950: June 21, 22; 1950: November 20.
Present: Taschereau, Rand, Estey, Locke and Cartwright JJ.
ON APPEAL FROM THE COURT OF APPEAL FOR ONTARIO.
Mortgage—Proposed Sale of Property subject to Bond Mortgage—for Consideration other than Cash—Condition governing Bond Holders and Court’s approval—What “fair and reasonable” to all parties interested—The Judicature Act, R.S.O. 1937, c. 100, s. 15(i). Default having been made on bonds secured by a mortgage or trust deed, a meeting of the bondholders was held to consider a plan submitted on behalf of the mortgagors which provided for the sale of the equity of redemption to a company to be formed, payment to the bondholders of the full amount of their capital investment but not of the interest in default, and preservation of an equity to the mortgagors. The majority of the bondholders having voted approval an order was obtained from the Court under the provisions of s. 15(i) of The Judicature Act, R.S.O. 1937, c. 100, approving the terms of the proposed sale. The decision of the Court of Appeal reversing the Order was appealed to this Court.
Held: That the appeal should be dismissed.
Held: also by the majority of the Court that:
(1) The proposed arrangement was in substance a sale for a consideration other than cash within the terms of s. 15(i) and the judge of first instance was right in entering upon the merits of the proposal but the section does not enable the Court to sanction a sale on terms which will yield the mortgagor a substantial part of the sale price while yielding the mortgagee only a portion of the mortgage debt and having regard to the value of the property the terms of the sale could not be held to be fair and reasonable within the meaning of the Act.
(2) The majority bondholder in voting in favour of the plan was influenced by motives of benevolence and a regard for the moral claims of the mortgagors rather than by a consideration of the interests of the bondholders as a class and therefore the resolution approving the plan could not stand. British American Nickel Corp. v. O’Brien [1927] A.C. 369; Ex Parte Cowen. In re Cowen L.R. 2 Ch. App. 563, applied.
Locke J. agreed with the majority of the Court that the appeal should be dismissed but on the ground that the sale referred to in s. 15(i) is a sale under the power of sale contained in a mortgage, and as the matter was one of jurisdiction, the Court was without power to make the Order approving the proposed sale.
APPEAL from a judgment of the Ontario Court of Appeal[1], setting aside an order of Urquhart J.[2], approving the sale of the mortgaged property. Affirmed.
R.F. Wilson K.C. and H.F. Gibson for the appellants.
J.J. Robinette K.C. for the respondents, the Bondholders Re-Organization Committee and certain bondholders.
J.D. Arnup for J.M. Hickey, the majority bondholder.
E.G. Arnold for the respondents, The Canada Trust Co. and W.D. Glendinning. The judgment of Taschereau and Cartwright JJ. was delivered by
CARTWRIGHT J.: This is an appeal from the judgment of the Court of Appeal for Ontario[3] setting aside an order of Urquhart J.[4], made under section 15 (i) of The Judicature Act of Ontario, ordering and approving the sale of an apartment house property in the City of Kingston to Hanson Apartments Limited.
The appellants are the owners of the equity of redemption in the property in question. In 1929 when the apartment house was in course of construction, the appellants arranged with United Bond Company Limited to underwrite a bond issue of $135,000 6 ½ per cent first mortgage bonds, secured by a mortgage and trust deed dated 20th June 1929 made by the appellants as mortgagors to The London and Western Trusts Company Limited and Howard C. Wade as mortgagees. The plaintiffs are successors to these trustees. The trust deed is not in the material before us but we were informed by counsel that it is made pursuant to the Short Forms of Mortgages Act, contains the mortgagors’ covenant to pay, creates a fixed and specific charge in favour of the trustees and contains an express power of sale, in the usual short form, on one month’s default and one month’s notice. It contains no provision for the holding of meetings of bondholders and no provision enabling a majority of the bondholders to sanction a sale, transfer or exchange of the mortgaged premises for a consideration other than cash. Unfortunately, United Bond Company Limited went into receivership with the result that the appellants although liable to pay bonds totalling $135,000 actually received only $86,700, an amount insufficient to complete the building. They succeeded in completing the building by using their own resources and by obtaining a loan of $60,000 from the Ontario Equitable Life Insurance Company secured by a first mortgage on the property, to which the bond mortgage was postponed by order of the Supreme Court of Ontario dated 27th January 1931. As collateral security to this $60,000 mortgage, life insurance policies totalling $100,000 were taken and assigned to the Ontario Equitable Life Insurance Company. It was stipulated that default in payment of the life insurance premiums would be regarded as default under the mortgage. The first two interest coupons on the bonds were duly paid on 20th December 1929 and 20th June 1930, respectively, but no further interest was paid until 1943. Since June 1943 substantial payments on account of interest have been made to the bondholders. On 12th November 1930 an action was commenced in the Supreme Court of Ontario by the then trustees under the bond mortgage against the defendants to enforce the security. That action is still pending and the order of Urquhart J. is styled in that action and “In the matter of section 15 (i) of The Judicature Act R.S.O. 1937 c. 100”.
Since 18th December 1930 the respondent, The Canada Trust Company, and its predecessor, have been in possession of the mortgaged premises as receiver.
In or about the year 1933 the appellants bought in bonds of the face value of $63,900 and surrendered them to the trustees. In 1939 an unsuccessful effort to re-finance and end the receivership was made.
In 1949 the appellants put forward the plan which was approved by Urquhart J. The plan is signed by the appellants under date of 7th March 1949 and the following statement is appended to it duly sealed by Hanson Apartments Limited and signed by its proper officers:
HANSON APARTMENTS LIMITED hereby authorizes and approves the offer and plan contained in the within letter and undertakes and agrees to effectually complete the same forthwith upon approval being given in accordance with the provisions of The Judicature Act.
WITNESS the seal of the Company under the hands of its proper officers at Kingston, this 12th day of May, A.D. 1949.
On 30th May 1949 Barlow J. made an order upon motion of the appellants and the trustees, and with the consent of The Canada Trust Company in its capacity as receiver, directing The Canada Trust Company to summon a meeting of the bondholders on 20th June 1949
for the purpose of considering, and if thought fit approving and sanctioning with or without modification or amendment, FIRST, a certain plan proposed by the defendants, Mathew Hanson and Tekla Hanson dated the 7th day of March, 1949, being Exhibit “A” to the said affidavit of Mathew Hanson and Tekla Hanson filed, providing for the sale, transfer or exchange of the said property and assets for a consideration wholly or in part other than cash, all as therein set out; SECONDLY, in default of approval of the said plan either as proposed by the defendants Mathew Hanson and Tekla Hanson or as modified or amended, any other plan that may be proposed at the said meeting or at any adjournment thereof for the sale, transfer or exchange of the said property and assets for a consideration wholly or in part other than cash; and for the purpose of transacting such other business as may be incidental, consequential or supplemental thereto;
The order contained directions as to procedure at the meeting, and provided that upon the termination of the. meeting or any adjournment thereof the minutes should be filed with the Court and that the Canada Trust Company might apply for further directions.
At the date of the offer the property in question was encumbered as follows:
Ontario Equitable Life Mortgage..................................................................
$57,500.00
Bonds outstanding—principal.......................................................................
71,100.00
Interest owing on bonds.................................................................................
93,082.52
The life insurance policies held as collateral security by the Ontario Equitable had a cash surrender value of $26,825.
Hanson Apartments Limited was incorporated under the Ontario Companies Act with an authorized capital of fifteen hundred 4 per cent non-cumulative preference shares of the par value of $50 each and twelve hundred common shares without par value. The plan was stated to contemplate:
(1) The purchase by the above company of the equity of Mathew and Tekla Hanson in the New Annandale property together with any and all rights, interest, choses in action, claims and demands they may have against the Trustees under the Trust deed, the Receiver and Manager, The Equitable Life Insurance Company of Canada, any bondholder, bondholders, or other person, persons or corporations arising out of the ownership and financing of the New Annandale Building, to be paid for by the allotment to the said Mathew and Tekla Hanson, or their nominees, of the 1,200 common shares.
(2) A loan by Hanson Apartments Limited in an amount sufficient for the purposes later enumerated secured by
(a) a first mortgage on the New Annandale property, and
(b) an assignment to the mortgagee of the four Equitable Life Insurance Company policies having recently a cash surrender value of $26,825.
(3) Retirement of the $71,100 in bonds and a discharge of the trust mortgage by giving to the bondholders the option of,
(a) preference shares in an amount equal to the face value of bonds held or,
(b) cash for the face value of the bonds held.
(4) The proceeds of the first mortgage loan to be used,
(a) to pay off the present Equitable Life Mortgage now amounting to $57,500; (b) to pay those bondholders who elect to take cash, or part cash, for their second mortgage bonds; to set up a reserve for missing bonds; and to provide for disbursements incidental to carrying out the plan of re-financing.
The meeting was duly held. Of the $71,100 bonds outstanding $66,950 were represented Bonds totalling $35,650 were voted in favour of the plan and $31,300 against it. All of the bonds voted in favour of the plan were owned by the respondent J.M. Hickey. Those voted against it were owned in varying amounts by one corporation and nine individuals. Following the meeting the appellants moved before Urquhart J. for an order approving the sale. The trustees took a neutral position. The minority bondholders opposed the motion.
The material before Urquhart J. disclosed the facts set out above and also the opinion of three valuators as to the value of the mortgaged premises. The valuations varied from a low of $165,000 to a high of “$250,000 if not a forced sale or $225,000 if the property were sold at a forced sale”. Mr. Colin Drever, an architect practising his profession in Kingston, in an affidavit filed on behalf of the appellants, placed the value at $175,000.
Urquhart J. granted the motion. The formal order of the Court ordered and approved “the sale to Hanson Apartments Limited” of the mortgaged premises “for the consideration and upon the terms of the offer of Hanson Apartments Limited set out in the plan submitted by the defendants Mathew Hanson and Tekla Hanson dated the 7th day of March 1949, a copy of which appears as Schedule “A” to this order and is declared to be a part hereof”. Paragraphs 2 and 3 of the order provided:
AND THIS COURT DOTH DECLARE that such sale for the consideration and upon the terms aforesaid is fair and reasonable having regard to the interests of all parties interested in the premises and property so mortgaged or charged by the aforesaid Mortgage and Deed of Trust AND DOTH ORDER THE SAME ACCORDINGLY.
AND THIS COURT DOTH FURTHER ORDER that leave be reserved to the parties hereto to apply for a further and subsequent Order or Orders making provision in such manner on such terms in all respects as to this Court may seem proper for the transfer to and the vesting in the purchaser or its assigns of the whole of the right, title and interest of the Plaintiffs in their capacities aforesaid and of the plaintiff The Canada Trust Company as Receiver and Manager, in the said property, assets and undertaking of the Defendants, and for the transfer to and vesting in the purchaser or its assigns of the whole of the right, title and interest of the Defendants in the said property, and for the distribution or other disposition of the proceeds of such sale, and for the protection of any or all persons whose interests are affected by such Order, and for all such incidental, supplemental and consequential matters as the Court may deem just.
The Court of Appeal, in allowing the appeal, dealt with only one ground which is stated in the reasons as follows:
Nor do I think it necessary to consider the merits of the scheme of re-financing proposed to be completed if the order of approval of Urquhart J. stands. Suffice it to say that the sale in question is one arranged solely by the defendants (the mortgagors) and is to a Company organized by the defendants and in which they would hold all or the greater part of the stock.
In my opinion, it is beyond question that the proposed sale is not a sale under the power of sale in the mortgage or trust deed.
The sole question, therefore, for determination on this appeal is: Is the jurisdiction conferred on the Court by sec. 15 (i) of The Judicature Act, confined to the sanctioning of sales for other than cash only in proceedings to realize under a power of sale contained in a trust deed or mortgage securing bonds or debentures?
In my opinion a reading of the terms of sec. 15 (i) requires an affirmative answer to such question. To paraphrase the provisions of that section, it will be noted that “the Court may in such action order and approve such sale”. Now what is “such sale”? Is it “the” sale which has been sanctioned and approved by the holders of such bonds and debentures and is “the” sale which is “for a consideration wholly or in part other than cash”? Referring further to the words of the section, what is “the” sale which bondholders may sanction and approve? Is it “the” sale which may arise where “any action shall have been brought or shall be brought for the purpose of enforcing or realizing upon any such mortgage or charge”, i.e. upon a mortgage or charge securing bonds or debentures? This can only be a sale by the mortgagee in realizing upon the security and in my opinion cannot refer to a sale by a mortgagor attempting to salvage his equity of redemption. There is no pretence that the sale in question in this matter is one under the power of sale provision of the trust deed.
In the section prior to the 1935 amendment which was then repealed and had substituted therefor the present section 15 (i), it is more abundantly evident that the power of the Court to approve was only in an action brought by the mortgagee or trustee to realize upon the mortgage security by a sale for a consideration other than cash.
* * *
The present scheme which the Court has been asked to approve is in effect a compromise or adjustment put forward by the debtors to arrange and re-adjust their liabilities with their various creditors. Failing the unanimous consent of all creditors it is not a matter for the Court’s approval.
On the foregoing ground alone, which goes to the very root of the order appealed from, the appeal must succeed.
With the greatest respect to the learned Justices of Appeal, if I had reached the conclusion that the order of Urquhart J. should be upheld upon the merits I would hesitate to give effect to the objection to the Court’s jurisdiction upon which the judgment of the Court of Appeal is based.
The conditions necessary to give jurisdiction to the Court to approve a sale under section 15 (i) of The Judicature Act, so far as they are relevant to the case at bar, appear to me to be as follows:
(a) the existence of bonds secured by a mortgage;
(b) an action shall have been brought for the purpose of enforcing such mortgage;
(c) both of the above conditions being fulfilled the Court shall have ordered a meeting of the bondholders to be summoned;
(d) the holders of the bonds by a vote at such meeting of not less than fifty per cent in principal amount of the total bonds outstanding shall have sanctioned the sale, transfer or exchange of the property mortgaged for a consideration wholly or in part other than cash.
If all the above conditions are fulfilled the Court has, I think, jurisdiction to approve of the sale so sanctioned. Nothing is contained in the section to guide the Court as to how that jurisdiction shall be exercised except the provision that if the sale is approved it must be “on such terms in all respects as the Court shall think fair and reasonable having regard to the interests of all parties interested in the premises and property so mortgaged”.
It is clear that, in this case, conditions (a), (b) and (c) mentioned above have been fulfilled. Whether or not condition (d) has been fulfilled depends upon whether the arrangement which is contained in the order of Urquhart J. can properly be described as a sale of the mortgaged premises for a consideration wholly or in part other than cash.
Such arrangement is clearly not a sale under the power of sale contained in the mortgage. It could not be, because the mortgage contains no power to sell for a consideration other than cash. But one of the purposes of the section appears to be to enable such sales to be made under mortgages containing no such power.
I agree with Mr. Wilson’s submission that the validity of the sale is not to be tested by the origin of the proposal, but to enable it to derive validity from section 15 (i) it must be a sale of the mortgaged premises. Had the order of Urquhart J. been carried out the result would have been that Hanson Apartments Limited would have become the owner of the mortgaged premises, subject only to the first mortgage to the Ontario Equitable Life. All title previously held by the trustees or by the appellants would have been vested in Hanson Apartment Limited. The consideration passing from it would have been 1,200 fully paid shares of its common stock and $71,100 paid in cash or by the allotment and issue of fully paid preference shares or partly in cash and partly by the issue of such shares. This seems to me to be in substance a sale of the mortgaged premises for a consideration wholly or in part other than cash. There is one marked dissimilarity between the proposed arrangement and an ordinary sale by a mortgagee. In the latter case the whole consideration would be paid to the mortgagee and the owners of the equity would receive only the surplus, if any, remaining after the mortgage debt was fully satisfied, while under the proposed arrangement a definite portion of the consideration is to pass to the owners of the equity. I do not think that this goes to jurisdiction. The section is not designed to cover ordinary sales by mortgagees but rather special cases where the circumstances are such as to move the Court to approve a sale for a consideration other than cash even though no power to make such a sale is contained in the mortgage. The fact that the consideration is other than cash renders it necessary for the Court to consider how such consideration should be apportioned between the mortgagee and the mortgagor. The fact that the parties tentatively make this apportionment in the proposal does not, I think, take the case out of section 15 (i) so as to deprive the Court of jurisdiction; although unreasonableness in the proposed apportionment would move the Court to refuse its approval.
In my view the proposed arrangement may properly be regarded as being, in substance, a sale of the mortgaged premises to Hanson Apartments Limited for a consideration wholly or in part other than cash within the terms of section 15 (i) of The Judicature Act and Urquhart J. was right in entering upon a consideration of the merits of the proposal; but, with the greatest respect, I differ from the conclusion which he reached. Before dealing with the details of the proposed arrangement I think it desirable to consider the interpretation of section 15 (i). That section reads as follows:
(i) (i) In case bonds or debentures are secured by a mortgage or charge by virtue of a trust deed or other instrument and whether or not provision is contained in the trust deed or other instrument creating such mortgage or charge giving to the holders of such bonds or debentures or a majority, or a specified majority of them, power to sanction the sale, transfer or exchange of the mortgaged or charged premises for a consideration other than cash, and in case any action shall have been brought or shall be brought for the purpose of enforcing or realizing upon any such mortgage or charge, or for the execution of the trusts in any such trust deed or other instrument with or without other relief, the court may order a meeting or meetings of the holders of such bonds or debentures to be summoned and held in such manner as the court may direct, and if the holders of such bonds or debentures shall sanction or approve the sale, transfer or exchange of the property so mortgaged or charged for a consideration wholly or in part other than cash, the court may in such action order and approve such sale on such terms in all respects as the court shall think fair and reasonable having regard to the interests of all parties interested in the premises and property so mortgaged or charged, and in such order or by any subsequent order may make provision in such manner, on such terms in all respects as to the court may seem proper, for the transfer to and vesting in the purchaser or his or its assigns of the whole or any part of the premises and property so mortgaged or charged and so sold, and for the payment of the proper costs, charges and expenses and remuneration of any trustee or trustees under such trust deed or other instrument and of any receiver or receiver and manager appointed by the court, and of any committee or other persons representing holders of such bonds or debentures, and for the distribution or other disposition of the proceeds of such sale, and for the protection of any or all persons whose interests are affected by such order, and for all such incidental, consequential and supplemental matters as the court may deem just.
(ii) The approval of the holders of any such bonds or debentures may be given by resolution passed at a meeting, by the votes of the holders of a majority in principal amount of such bonds or debentures represented and voting in person or by proxy, and holding not less than fifty per centum in principal amount, or such lesser amount as the court under all the circumstances may approve, of the issued and outstanding bonds or debentures in question. 1935, c. 32, s. 22.
Urquhart J. has construed the section as enabling the Court to sanction a sale on terms which will yield the mortgagors a substantial part of the sale price while yielding the mortgagees only a portion of their debt. It is well settled that statutes which limit or extend common law rights and which detract from rights of ownership must be expressed in clear and unambiguous language (vide Halsbury’s Laws of England, 2nd Ed., Vol. 31, p. 502, s. 645, and cases there cited). I can find no words in the section which are apt to bring about so revolutionary a change in the respective rights of mortgagees and mortgagors on a sale of the mortgaged premises.
The effect of the section is, I think, to create a new procedure in an action on a bond mortgage. It enables a majority of the bondholders to bind all the bondholders by the terms of a sale of the mortgaged premises for a consideration wholly or partly other than cash, but the power so given is made subject to the safeguard that it may be exercised only upon the Court being satisfied that the terms are fair and reasonable having regard to the interest of all parties interested in the premises. I find nothing in the section, certainly nothing in express words, to suggest that the consideration received shall be dealt with, as between the mortgagee and the mortgagor, in any manner other than that long established in equity; that is to say the mortgagee is entitled to receive the full amount of his debt and must account to the mortgagor only for the surplus, if any, remaining thereafter.
In the case of a sale for cash this is a mere matter of accounting; but when the sale is for other than cash it is necessary to determine what portion of the consideration is a fair equivalent of the mortgage debt and should therefore become the property of the mortgagee and what, if anything, remains for the mortgagor. No doubt cases may arise where there is room for difference of opinion as to whether the portion of the consideration proposed to be treated as payment of the mortgage debt is a fair equivalent of that debt, and in such cases the bona fide opinion of the majority bondholders may well be allowed to govern the minority. The owners of the equity also have a vital interest in the matter if it can be suggested that the total consideration is of greater value than the amount of the mortgage debt. Considerations such as these, and the list is not intended to be exhaustive, would seem to give meaning to the words of the section stressed by Urquhart J. “having regard to the interests of all parties interested in the premises and property so mortgaged”. I do not think that these words should be interpreted as enabling the Court to sanction the appropriation of part of the consideration for the sale to the owners of the equity in a case where it is clear that part only of the mortgage debt is being satisfied.
In the case at bar, if the lowest figure mentioned in any valuation is taken, the mortgaged premises would appear to be worth $165,000. If from this is deducted the difference between the amount of the first mortgage and the cash surrender value of the life insurance policies held as collateral thereto, there remains a net value of $134,325. Under the proposal put forward the mortgage debt, which with interest amounts to $164,182.52, is to be extinguished by the payment of $71,100 in cash or paid up preference shares and the balance of the consideration is to go to the owners of the equity. It was not suggested that the four per cent non-cumulative preference shares could be reasonably regarded as worth more than their par value.
On its face the proposal does not seem attractive from the bondholders’ point of view nor such as should be forced upon an unwilling minority. It is said, however, that the majority of the bonds have been voted in favour of the proposal and that the Court should not, in the words of McTague J. “substitute its judgment for the business judgment of reasonable men voting in their own interest” (Montreal Trust Co. v. Abitibi Power & Paper Co.[5] On the material in this case, I do not think that the proposal could be held to be reasonable having regard to the interests of the minority bondholders.
It will be remembered that all the bonds voted in favour of the proposal were owned by Mr. J.M. Hickey. It is conceded by all counsel that Mr. Hickey has acted throughout in good faith; but I can find no support in the material for the finding of Urquhart J. that Mr. Hickey “thought what he did was the best in his own interest” or that the rejection of the proposal would “put his holdings in jeopardy”.
Two affidavits made by Mr. Hickey appear in the material but neither of them touches on his motives for supporting the plan, although they negative any sugges- tion that he was acting as agent of the appellants. It seems to me that Mr. Hickey’s motive is to be inferred from the wording of the plan. The plan points out that most of the outstanding bonds were acquired by their present holders for a fraction of their face value so that if the bonds are now surrendered on payment of the principal only the investment will have been a profitable one for the bondholders; that the bondholders’ position has been greatly improved by the action of the appellants in purchasing and surrendering $63,900 of the bonds; that the appellants have made a total investment in the property of a very large amount all of which they are in danger of losing if the bondholders insist on their full legal rights; that the appellants have had no income from their investment during a period of twenty years while the total interest payments to the bondholders have been very substantial and that the present comparatively satisfactory condition of the investment is the result of the strenuous, prolonged and unrewarded efforts of the appellants. Following the recital of these facts the plan contains the following:
We appeal to your sense of justice and fair play. We ask you to conscientiously review the facts that we have given you. If you do that we are confident you will give this plan your support.
The plan is, I think, a frankly worded appeal to the generosity and fair-mindedness of the bondholders. It does not attempt to disguise the fact, which would appear from the figures as to the value of the premises quoted above to be self-evident, that, if minded to do so, the bondholders can obtain payment of a substantially greater proportion of the mortgage debt than is offered by the plan.
This is not a case in which we are considering findings of fact made by the judge of first instance after hearing viva voce evidence. The application was argued and decided on affidavits and an appellate court is in as good a position as was the learned judge who heard the motion to draw inferences from the facts deposed to. I think the proper inference is that Mr. Hickey was moved to vote as he did by generosity and by an appreciation of the strong moral claims put forward by the appellants. Having reached this conclusion I think that we are bound by authority to hold that a resolution passed by votes cast with such a motive cannot stand. I think that the principle to be applied is set out in the following passages from the judgment of the Judicial Committee in British America Nickel Corporation v. O’Brien[6]. At page 371 Viscount Haldane says:
Before their Lordships proceed to consider the somewhat involved circumstances in which the question arises, it will be convenient that (they should refer to the principle to be applied in weighing the outcome of these circumstances.
To give a power to modify the terms on which debentures in a company are secured is not uncommon in practice. The business interests of the company may render such a power expedient, even in the interests of the class of debenture holders as a whole. The provision is usually made in the form of a power, conferred by the instrument constituting the debenture security, upon the majority of the class of holders. It often enables them to modify, by resolution properly passed, the security itself. The provision of such a power to a majority bears some analogy to such a power as that conferred by s. 13 of the English Companies Act of 1908, which enables a majority of the shareholders by special resolution to alter the articles of association. There is, however, a restriction of such powers, when conferred on a majority of a special class in order to enable that majority to bind a minority. They must be exercised subject to a general principle, which is applicable to all authorities conferred on majorities of classes enabling them to bind minorities; namely, that the power given must be exercised for the purpose of benefiting the class as a whole, and not merely individual members only. Subject to this, the power may be unrestricted. It may be free from the general principle in question when the power arises not in connection with a class, but only under a general title which confers the vote as a right of property attaching to a share. The distinction does not arise in this case, and it is not necessary to express an opinion as to its ground. What does arise is the question whether there is such a restriction on the right to vote of a creditor or member of an analogous class on whom is conferred a power to vote for the alteration of the title of a minority of the class to which he himself belongs.
Viscount Haldane then proceeds to discuss the cases of Northwest Transportaton Company v. Beatty[7] and Burland v. Earle[8] and continues:
It has been suggested that the decision in these two cases on the last point is difficult to reconcile with the restriction already referred to, where the power is conferred, not on shareholders generally, but on a special class, say, of debenture holders, where a majority, in exercising a power to modify the rights of a minority, must exercise that power in the interests of the class as a whole. This is a principle which goes beyond that applied in Menier v. Hooper’s Telegraph Works[9], inasmuch as it does not depend on misappropriation or fraud being proved. But their Lordships do not think that there is any real difficulty in combining the principle that while usually a holder of shares or debentures may vote as his interest directs, he is subject to the further principle that where his vote is conferred on him as a member of a class he must conform to the interest of the class itself when seeking to exercise the power conferred on him in his capacity of being a member. The second principle is a negative one, one which puts a restriction on the completeness of freedom under the first, without excluding such freedom wholly.
I think that the words of Lord Cairns in Ex parte Cowen. In re Cowen[10] are applicable to the case at bar. The effect of the judgment is accurately summarized in the head-note as follows:
The power given by the 192nd section of the Bankruptcy Act, 1862, enabling the majority of creditors assenting to a deed of arrangement to bind the non-assenting minority, is a statutory power, and must be exercised bona fide for the benefit of all the creditors.
At page 570 Lord Cairns says:
But even without any ingredient of fraud, if the creditors, from motives of charity and benevolence, which might be highly honourable to them, were willing to give the debtor a discharge on payment of a composition wholly disproportioned to his assets, that would not be such a bargain as the Act requires, and would not bind the non-assenting minority.
I cannot find on the material that Mr. Hickey exercised his voting power for the purpose of benefiting the class of bondholders as a whole although, if I may borrow the words of Lord Cairns, I think that his motives were highly honourable to him.
For the above reasons I think that the resolution approving the plan cannot stand and that this appeal should be dismissed.
I should mention that while it appears to have been argued in the Courts below that section 15 (i) of the Ontario Judicature Act is ultra vires of the Provincial Legislature, no such argument was addressed to us and for the purposes of this appeal I have assumed, without deciding, that the section is valid. I do not mean by this form of expression to suggest that I entertain any doubt of its validity in a case where no question of insolvency is raised.
Ordinarily, when we are dismissing an appeal we should not, I think, vary the order as to costs made by the Court of Appeal; but I understood all counsel to assent to the view expressed by Mr. Wilson at the conclusion of his able opening argument that, regardless of the outcome of the appeal, all costs should be ordered to be paid out of the assets in the possession of the Canada Trust Company as receiver and I think that under the peculiar circumstances of the case this is a proper course to follow. I would therefore dismiss the appeal and direct that the costs of all parties of the motion before Urquhart J., of the appeal to the Court of Appeal and of the appeal to this Court be paid forthwith after taxation thereof by the Canada Trust Company out of the property and assets in its possession as receiver and manager, the costs of the plaintiffs as between solicitor and client.
RAND J.:—As I apprehend it, the judgment of the Court of Appeal centres on the view that, as the effect of section 15 (i) of The Judicature Act is to enlarge a power of sale under a trust deed or similar instrument by annexing to it authority to sell for a consideration in whole or part other than cash, the sale proposed here, being that of the equity of redemption and not under the power, is unauthorized.
The provision, in the statute, for terms which the Court “shall think fair and reasonable having regard to the interests of all parties interested in the premises”, and “for the protection of any or all persons whose interests are affected by such order”, including those of the mortgagor, particularly as contrasted with the language of the subsection as enacted in 1917 and repealed by the amendment now in force, makes it clear, whether the power is viewed as purely statutory or as an addition to that provided by the deed, that in such a transaction, the senior security holders and the Court may approve of benefits to junior interests: and I see no reason why it should not extend to the case where the mortgagor is an individual.
The language of the proposal is not as apt and precise to the form contemplated as it might be; but that it is intended to propose a disposal appropriate to and made under the relief claimed in the proceedings is, I think, unquestionable. There is nothing technical necessary to its language and why any interested party should not be at liberty to make it has not been made apparent. What must be looked at is the arrangement as a whole and the object in view. In the preliminary stages of meetings and approval, there was no doubt in the minds of any of those now objecting of what was being put before them, and there is equally no doubt of that in my mind: it was and is a sale in the proceedings on the terms presented, and the proceedings are within the very words of the section.
That being the case, can the terms be said to be fair and reasonable? The conditions in which this legislation was enacted are a matter of common knowledge. We were in the depths of a worldwide depression, which, in this country, reached unexampled proportions. The terms are to be “fair and reasonable”. What is “fair” to the mortgagee? to the mortgagor? This is not an oft-used word in the ordinary statutory vocabulary relating to mortgages; and the question which meets us at the outset is, can the existing balance sheet between the two parties be deliberately altered in favour of the mortgagor?
That question is