Clarkson v. Dominion Bank

Clarkson v. Dominion Bank
Collection
Supreme Court Judgments
Date
1919-03-03
Report
(1919) 58 SCR 448
Judges
Davies, Louis Henry; Idington, John; Anglin, Francis Alexander; Brodeur, Louis-Philippe; Mignault, Pierre-Basile
On appeal from
Ontario
Subjects
Financial institutions
Decision Content
Supreme Court of Canada
Clarkson v. Dominion Bank, (1919) 58 S.C.R. 448
Date: 1919-03-03
George T. Clarkson and Another (Plaintiffs) Appellants;
and
The Dominion Bank (Defendant) Respondent.
1918: December 18; 1919: February 4; 1919: March 3.
Present: Sir Louis Davies C.J. and Idington, Anglin, Brodeur and Mignault JJ.
ON APPEAL FROM THE APPELLATE DIVISION OF THE SUPREME COURT OF ONTARIO.
Banks and banking—Loan to manufacturer—Security—Written promise—Advance for prior debt—“Bank Act,” ss. 88, 90—Mortgage as security—Insolvency—Knowledge of bank—Mortgage on land outside Province.
By section 88 of the “Bank Act” a bank may lend money to a manufacturer on security of his goods or raw material and by section 90 it shall not acquire any such security unless the liability is contracted “(a) at the time of the acquisition thereof by the bank; or (b) upon the written promise or agreement that such * * * security would be given to the bank.”
Held, Anglin J. dissenting, that subsection (b) does not contemplate a general promise or agreement to give security for future advances but it must have reference to a specific loan negotiated at the time on the security of specific goods.
A manufacturing company, by application in writing, obtained a line of credit from a bank and agreed to give security under the “Bank Act” on its stock and material for each advance made thereunder. Advances were made and security given as agreed. By similar application the credit was renewed from time to time, and after each renewal the bank took security not only for the present advance but for the total indebtedness of the company to that date.
Held, Anglin J. dissenting, that this security taken for the whole debt was only valid for the amount of the loan made at the time it was acquired; but
Held, Idington and Brodeur JJ. dissenting, that the security acquired for each individual advance was never released and did not merge in the general security so taken; the bank, therefore, was entitled to the benefit of all the securities so acquired.
In May, 1912, the company agreed to give to the bank, as further security, a mortgage on its factory site in St. Thomas, Ont., and also a mortgage on land in Montreal. The former was not executed until Nov., 1913, nor the latter until Jan., 1914. In March, 1914, the bank filed a petition for winding-up the company. Held, that in Ontario it is the date of the promise to give the mortgage that governs and as the mortgagor was solvent at that date the mortgage on land in Ontario was valid; but
Held, that in Quebec the date when the mortgage was executed can alone be considered, and as the mortgagor was insolvent to the knowledge of the bank when the Quebec mortgage was given it must be set aside.
Per Anglin J.—Insolvency to the knowledge of the bank at that date was not established; and
Qu.—Can an Ontario Court set aside a mortgage on land in Quebec?
After the petition for winding-up the company had been filed the bank advanced $17,600 on security of the stock in trade and material on hand.
Held, Idington and Brodeur JJ. dissenting, that if this advance was made, under the terms of section 20 “Winding-up Act,” with the sanction of the liquidator and for the beneficial winding-up of the estate the bank was entitled to the benefit of the security.
Judgment of the Appellate Division (40 Ont. L.R. 245) and of the trial Judge (37 Ont. L.R. 591), reversed in part.
APPEAL from a decision of the Appellate Division of the Supreme Court of Ontario[1], affirming the judgment at the trial[2], in favour of the defendant bank.
The material facts and the questions raised for decision on this appeal are stated in the above head-note.
Hellmuth K.C. and J.B. Davidson for the appellant. Under section 90 of the. “Bank Act” a bank can take security for a present loan only. A general security to apply to future advances is invalid. See Bank of Hamilton v. Halstead[3], at p. 241; Bank of Hamilton v. Shepherd[4].
For a long time before the winding-up order was made the bank knew that the company was unable to pay its debts and knew that it was insolvent when the two mortgages were given as security. See Molsons Bank v. Halter[5]. D.L. McCarthy K.C. and Shapley for the respondent. The written promise provided for in subsection (b) of section 90 may refer to future as well as present advances. Imperial Paper Mills Co. v. Quebec Bank[6].
The promise to give the mortgages was made when the bank had no reason to believe, and evidently did not believe, that the company was insolvent. As to the Quebec mortgage a court in Ontario could not set it aside.
THE CHIEF JUSTICE.—The principal and main question raised and argued on this appeal was as to the proper construction of sections 88 and 90 of the Dominion Act respecting banks and banking.
So far as is material for this case, section 88 provides as follows:—
3. The bank may lend money to any person engaged in business as a wholesale manufacturer of any goods, wares and merchandise manufactured by him, or procured for such manufacture.
* * *
6. The security may be taken in the form set forth in Schedule C to this Act, or to the like effect.
Section 90 enacts:—
90. The bank shall not acquire or hold any warehouse receipt or bill of lading, or any such security as aforesaid, to secure the payment of any bill, note, debt or liability, unless such bill, note, debt or liability is negotiated or contracted:
(a) At the time of the acquisition thereof by the bank, or
(b) Upon the written promise or agreement that such warehouse receipt or bill of lading or security would be given to the bank.
The bank’s contention which was adopted and followed in the judgment appealed from was that the written promise referred to in subsection (b) was not one required to be given contemporaneously with a proposed loan or advance or having reference to any specific goods or property to be secured, but was a blanket promise sufficient to cover any future loans or advances which the bank might make the promisor up to the time when it was acted upon and security taken. That time might be as counsel boldly put it in argument five or ten years after the promise given, and would enure to cover as well loans subsequently made from time to time to the promisor as property which was not even in existence when the promise was made.
The appellant, on the other hand, submitted that such a written promise as the Act referred to was one having reference to a specific loan then being negotiated for, and to specific goods proposed to be given in security for the loan, stated in the Act as an alternative to the acquisition by the bank of the security itself in those numerous cases in which the loan had necessarily to be advanced to enable the borrower to obtain possession of the goods so that he might give the bank the security.
I have had no hesitation whatever in adopting the appellant’s contention on that point. In construing such a very important section as the one in question, which validates a secret and unregistered security on personal property not in possession of the grantee, bank and in direct opposition to all provincial laws on the subject requiring registration of such a security, one must exercise one’s common sense and common knowledge. I cannot believe it ever was the intention of Parliament to pass a law having the object and purpose contended for by the bank.
The section is a prohibiting one. It declares the bank shall not acquire any warehouse receipt or bill of lading or such security (Form C) as aforesaid to secure payment of any debt or liability unless such debt or liability is contracted at the time of the acquisition of the security, or upon a written promise that such security would be given. To my mind the object, intent and purpose of the section was plain and is sufficiently well expressed, though perhaps not so clearly as to remove all doubt. Primarily the section required that the taking of the security should be contemporaneous with the negotiation or contracting of the debt or loan. If, however, for any reason that could not be done, and scores of reasons arise to one’s mind of conditions in which it could not, then the alternative of a written promise is substituted for the execution of the security. But the written promise to give security had reference, and reference only, not to a future debt or loan to be subsequently made, but to the then debt or loan being negotiated and to the goods and personal property then existing which it was proposed to give security upon, and with reference to which negotiations were taking place. It was only intended in my opinion to cover cases where the actual security could not be given because of the non-possession of the goods or property at the time by the borrower. But it had no reference to future or other loans than the one for a specific amount then being negotiated or to other goods than those specific goods which were to be secured by such loan.
Take an everyday occurrence and it can be multiplied by scores and hundreds. A merchant purchases a load of produce and it arrives at its destination. The bill of lading and draft for purchase price attached are sent to a bank. The purchaser, to get possession, must pay the draft and possibly the freight, carriage and other charges before he can get possession. He applies to a bank for an advance or loan to enable him to get possession of the goods. The bank makes the loan on his written promise to give warehouse receipt or Form C of the Act, as the case may be, as security when he gets full possession and not till then can he give the warehouse receipt or the statutory security C. So he gives the bank the alternative written promise in the words of the statute
that such warehouse receipt or bill of lading or security would be given to the bank.
This is only one illustration of the many hundreds of cases in which the “written promise” is made by statute sufficient to take the case out of the express prohibition in the section of the bank acquiring any of the securities including Form C mentioned. But the “written promise,” so made by the section an alternative to the execution of the security itself where the borrower is not in a position to give the security, does not extend nor relate to any other loan than the specific one being negotiated or to any other goods than those to which specifically the negotiations for a loan relate. It is obvious, of course, that some time must elapse before, in the illustration I have given, the borrower is in a position to give the security, and the alternative of the written promise to give it in subsection (b) of the section is given so that the bank may not be without security for its money which it had to advance to enable the borrower to get the goods.
I am quite unable to find anything in the case of the Imperial Paper Mills Co. v. Quebec Bank[7], which touches the construction of section 90 or the true meaning to be given to the words “written promise” in subsection (b).
Assuming that I am right in my construction of section 90, I am not sure that it can make a material difference in the ultimate result in this appeal, for the plain reason that the bank in every case where they made a loan to Thomas Brothers, Limited, and took from that firm security in Form C as provided in section 90, included the contemporaneous advance or loan made by them in the amount for which the security was taken. To that extent, therefore, the security would stand. It is true they also included, along with the contemporaneous loan, other loans which they had made to Thomas Brothers, making the security cover as well the amount they had a right to take it for, viz., the contemporaneous loan, as also a very large number of other loans which they had no right to include. This inclusion not being within the statute in my judgment could not, of course, have the effect of making the security effective quoad these outside loans, nor could it invalidate the security so far as the contemporaneous loan was concerned.
Then as regards the mortgages I am of the opinion that the findings of fact of the trial judge as to the insolvency of the Thomas Brothers, Limited, and as to the absence of knowledge on the part of the bank and its manager of the insolvency, and as to the previous promise made to give such mortgage, confirmed as those findings were by the court of appeal, should not be interfered with so far as the Ontario real estate is concerned. The learned trial judge, in making his finding, evidently did so by accepting the evidence of the bank manager, Anderson, as to the insolvency of the manufacturing company, and as to the promise to give the mortgage. It was to some material extent a question of credibility. I therefore think his finding, with regard to the mortgage of the Ontario real estate, confirmed by the appeal court, should not be interfered with. But with respect to the Quebec real estate different considerations arise. A mortgage of such lands cannot be upheld, as I understand the law, based upon conditions existing when the promise to give the mortgage was made, but upon the conditions existing at the time of the giving of the mortgage. No evidence was given before the trial judge or the court of appeal as to the law of Quebec on the question of the validity of mortgages taken at a time when the mortgagor was insolvent. It is clear that such a mortgage in that province cannot be sustained by virtue of a previous promise. As a federal court it is our right and duty to take judicial notice of Quebec law, and I have reached the conclusion that so far as the mortgage of Quebec real estate is concerned it was invalid and should be so declared because at the time of the giving of the mortgage the Thomas Brothers were insolvent.
I would therefore allow the appeal as to the mortgage on the Quebec lands with one quarter of the costs of the appeal as the point was a minor one. As to the $17,600 advanced by the bank after the filing or presentation of the petition for liquidation, no point or question was raised by the liquidator on the argument of this appeal. We, however, referred the questions arising out of these advances back to the parties for what they might have to say regarding the rights of the bank respecting them. After reading these supplementary factums or statements we are of the opinion that if the parties cannot agree as to the rights of the bank with respect to these advances, and the proceeds of the goods and chattels which these moneys were advanced to improve so as to enable them to be sold more profitably than in their unfinished state they could be, it should be referred to the proper officer of the court below to determine whether any of these advances were made under section 20 of the “Winding-up Act” in which case the bank should be entitled to the benefit of the securities taken and if not so made to determine whether the advances were made by the bank in the interest of the estate generally and for the completion of the partially manufactured goods and chattels to make them marketable and saleable, in which case the advances so made should be repaid to the bank out of the proceeds of such sales, and any balance left paid over to the liquidator as part of the assets of the insolvent estate.
IDINGTON J.—The most important question raised herein is whether or not the condition upon which a bank is enabled by sections 88 and 90 of the “Bank Act,” ch. 29 R.S.C., 1906, to lend money upon the security of goods as therein specified, was duly observed by respondent in its dealings now in question with Thomas Brothers, Limited.
The parts of said sections relative to that in question herein, being subsections 3 and 5 of sec. 88, are as follows:—
(3) The bank may lend money to any person engaged in business as a wholesale manufacturer of any goods, wares and merchandise, upon the security of the goods, wares and merchandise manufactured by him, or procured for such manufacture.
* * *
(5) The security may be taken in the form set forth in Schedule C to this Act, or to the like effect.
Sec. 90, sub-sec. 1, is as follows:—
(1) The bank shall not acquire or hold any warehouse receipt or bill of lading, or any such security as aforesaid, to secure the payment of any bill, note, debt or liability, unless such bill, note, debt or liability is negotiated or contracted:
(a) At the time of the acquisition thereof by the bank; or
(b) Upon the written promise or agreement that such warehouse receipt or bill of lading or security would be given to the bank;
Provided that such bill, note, debt or liability may be renewed, or at the time for payment thereof extended, without affecting any such security.
As far back as January, 1908, we are informed, the company owed the respondent about $200,000 and so continued up to the time it was put in liquidation early in 1914. The amount of indebtedness to the bank varied and for some time exceeded that sum. But whatever it was it is claimed by respondent securities had been taken upon goods as specified by writings conformable with Form C in the schedule to the “Bank Act.”
I cannot find that any of said writings, in fact, observed the requirements of the Act.
In the latest, dated 12th May, 1914, produced in the printed case as a fair sample of many others in the record, the first, and for our present purpose the most essential, part, reads as follows:—
In consideration of an advance of two hundred and thirteen thousand, four hundred ____________dollars, made by the Dominion Bank to the undersigned for which the said Bank holds the following Bills or Notes[8] the products of agriculture, the forest, quarry and mine, the sea, lakes and rivers, the live and dead stock, and the products thereof and the goods, wares and merchandise mentioned below, are hereby assigned to the said Bank as security for the payment of the said Bills or Notes, or renewals thereof or substitutions therefor and interest thereon.
This security is given under the provisions of section 88 of the Bank Act and is subject to the provisions of the said Act.
Those mentioned on the back thereof consist of one hundred and three items headed:—
Date of Note
Promisor
When payable
Amt.
Underneath the word “promisor” is written the words “Thomas Bros. Ltd.” and underneath “when payable” “demand.”
The dates of these notes run from “Sept. 20” to “May 12.” The year in which given is not stated.
If we try to ascertain that, and turn to the foot of the document we find the following:—
This security is given pursuant to the written promise or agreement of the undersigned and especially of agreement, dated 29th day of January, 1914.
Dated at St. Thomas the 12th day of May, 1914.
On calling the attention of respondent’s counsel to this being founded on a promise dated 29th January, 1914, yet running back to transactions as early as 20th Sept., 1913, if I understand the document aright, he said there were other documents which preceded and covered those items anterior to 29th January, 1914.
Assuming that to be so, how can respondent justify bringing them forward, as it were, to be incorporated with this document? How can it hope to make this document effective for the purpose of comprehending transactions of an earlier date than the promise relied upon? It certainly could not be permitted to so extend retroactively the operation of the later promise, or the still later lien contract as to include earlier advances than the dates of either the promise or the lien contract or as to include under or by virtue of either a claim upon goods over which Thomas Bros. Ltd. had neither actual nor prospective dominion by virtue of any then existent contract, either when the promise made or lien given.
Then where are we to draw the line? If we draw it at the date referred to in the instrument as the date of the promise, can we be quite sure that we cover thereby all that might rightfully have been considered as falling within the statute?
And supposing we do assume we are right in our guess, what of the anterior promises evidently contemplated to have been had in view by the contracting parties.
Again, which of the written promises or agreements are we to adopt?
The draftsman realized as the fact is and, I submit, law also, that the statute contemplates the existence of only a single promise and that in writing which may and must be the basis of the transaction in order to validate it. But then he presents us with the impossibility of selecting some one, out of possibly many written promises or agreements, and that
especially of agreement dated 29th day of January, 1914,
to support this security which I now present as a test of what the judgment of the Appellate Division rests upon.
I am also oppressed with the language of the instrument presenting the foundation of the whole transaction as, let it be observed, an advance of $213,400.
It is not a group or series of transactions that the statute enables the bank to lend in respect of, and then provides for a security to be given therefor, but a single transaction, a single advance, and an existent single article or assortment of goods definitely specified and ascertainable by following the description thereof in the instrument; is respectively what the statute contemplates and provides for, by its express terms.
It is the certainty of identification both of the subject matter, and of the intended specific contractual relation in respect thereof, which the statute requires. No doubt facility of identification, in order thereby to prevent fraudulent practices, was also aimed at. But above all a strict and complete compliance with the conditions upon which an exceptional power was given banks, is imperatively required. To go beyond those is to produce that which is ultra vires and hence void.
And the respondent by its systematic course of conduct clearly indicates a conception of its limitations and duty in accord with such a view of the statute by getting, or perhaps pretending to have got, on each new advance a new lien security to cover it; yet, inconsistently with such view, at each of same steps trying to cover something else. It seems to have hoped by a metaphysical process, as it were, to enable the judiciary to reach the conclusion that a repetition once a year or thereabouts of a general promise could be converted, by a transferable mode of thought, into a divisible or multiple promise self‑adaptable to meet any such situation that possibly could arise in the course of the contractual relations between itself and the borrower.
Why did the inventor of the annual promise plan not proceed a step further and substitute as a counterpart thereof, periodical loans and acceptances of lien securities therefor, modelled after that in Form C professed to be followed? Am I right in surmising that it possibly was felt the judiciary could not be expected to accept or assent to so much at one time?
However that may be, the transaction must be as to an advance to a wholesale manufacturer upon some of such goods, wares and merchandise as manufactured by him, or procured for such manufacture.
I am unable to see how such an instrument as this resting upon a statute which seems in every line of the relevant sections to contemplate actual specific loans to be made upon the security of specific goods or such as specifically pointed to in writing, or can be manufactured out of those so indicated with such definiteness as to enable them to be effectively traced and identified can be upheld.
I was at first disposed to think that as to the item for advances made at the time when it was given it might become a security upon the goods described, and hence as these instruments were numerous the respondent’s claim might be maintained for something substantial.
But the more I have considered the matter the more absurd does such an instrument seem as a means of executing the power conferred by the statute. In substance as a result of the respective dealings embraced in each, the others are like unto this.
Then again the only promise relied upon is that contained in the request addressed to the bank for a line of credit.
That if held effective would reduce the legislation to something quite ridiculous.
It would be equally good as a compliance with the statute if made when a man opened an account, and signed it then, and acted in accord therewith for the life of his business, whether a year or score of years.
I cannot think that was the sort of thing which was had in view by the conditional requirement of subsection (b) of section 90, quoted above.
Nor can I see how the case of Imperial Paper Mills v. Quebec Bank[9], touches the question at all.
The object of the legislation evidently was to limit the power of the banks, when taking security of that kind at all, within the narrow limit of doing so at the time of each transaction; or at that time having a specific promise in writing relative to a specific advance.
And the evidence in this case furnishes abundant evidence of the wisdom of so restricting the power of the bank.
It would have been better for respondent and all concerned had the statute been observed in the sense in which I now hold it should be read.
In this view the amendment of subsection 4 of section 88 in the “Bank Act” as it now stands, need not be considered.
Nor, upon the material before us, need any of the other like securities be considered.
If in the long course of dealings between the parties in question there were any isolated cases of securities given, which can possibly fall within the meaning of the statute, there should be a reference, if respondent desires it, to take an account thereof and report, subject to further directions, upon evidence distinctly proving the facts of a present advance, and specific goods being given as security, and not depending merely upon the production of some pieces of paper and evidence of an agent who does not know the facts, but only speaks to a system existent at some time.
In the mortgage securities called in question I, as the result of a perusal of the evidence, and especially the correspondence between the head office and local agent, bearing thereon, am quite convinced that the respondent well knew when the mortgage was taken on the Montreal property that the company was insolvent and that continuing in business was, for its own purposes, a better expedient than winding it up.
It had only been by careful nursing and direction on its part until that and possibly other securities were got, that the insolvency had not been exposed to the world at a much earlier date.
I think there is no difficulty in reaching and setting aside such a contract made in this province between the respondent and its debtor, as this was, and of necessity had to be here—though registration as result thereof had to conform with the Quebec law.
As to the other security I entertain a different view.
The condition of the concern was not so obviously hopeless at the date of the execution of the chief mortgage as of that of the later one.
Again that earlier mortgage was preceded by an agreement which may be upheld so far as restricted to antecedent debts, and within those limits may protect the mortgage without rendering it offensive against the prohibition restricting banks from making loans on real estate.
With some doubt I have in relation to that aspect of the matters involved, but not touched upon in argument, I incline to hold the mortgage may be upheld.
Yet I must say that with the intimate knowledge the respondent had of the company’s actual financial condition and mode of operating, it is difficult to understand how it could have hoped for any other ultimate result than that of its being forced into liquidation.
If called upon to pay, which is the crucial test, it must have been held insolvent by any shrewd business man acquainted with its affairs. It is more in deference to that of others than to my own judgment that I assent to the judgment below in that regard.
I think the appeal should be allowed with costs throughout in regard to the main objects of the appeal as indicated herein.
ANGLIN J.—The appellants, who are the liquidator and a creditor of Thomas Bros., Limited, an insolvent manufacturing company in liquidation, brought this action to set aside two mortgages on real estate and pledges of certain goods, purporting to have been made under subsection 3 of section 88 of the “Bank Act” (R.S.C. 1906, ch. 29, and 3 & 4 Geo. V. ch. 9), held by the respondent bank for an indebtedness of the company which amounted to about $213,400 on the 12th day of May, 1914, twelve days after the winding-up order was made.
The bank apparently received payments and made advances up to that date. The advances between March 25th, the date of presentation of the petition for winding-up, and May 1st, the date of the winding-up order, amounted to $15,400. After May 1st $2,200 more was advanced. The company’s indebtedness to the bank, however, which on March 24th amounted to $228,827, had been reduced on May 12th, when the last advance of $200 was made, to $213,400. The earliest outstanding note on March 25th, 1914, bore date August 16th, 1913. If those outstanding notes represented actual contemporaneous advances, as the bank maintains they did, they would all fall within subsection 4 of section 88 of the “Bank Act” which came into force in July, 1913. The bank had put its representative in possession on the 24th of March, 1914. By subsequently realizing on its securities (except the St. Thomas mortgage) it had reduced the company’s debt to $135,000 at the date of the trial.
Except as to such of the pledged goods as were dealt in but not manufactured by the company, which are not now in question, the action was dismissed by Sutherland J[10], and on appeal by the plaintiffs the Appellate Division sustained his judgment[11].
The attack on the real estate mortgages as fraudulent and void against the liquidator and as calculated to hinder and delay the creditors of the company, which was but faintly pressed at bar, in my opinion fails on the facts stated in the judgment delivered by the learned trial judge and affirmed in the Appellate Division. Anderson’s evidence, having been believed by the judge who saw and heard him give it and by the Appellate Division, should not be rejected here unless under very exceptional circumstances.
The Ontario mortgage is supported by the promise of May, 1912. On the facts found by the trial judge and accepted by the Appellate Division, notorious insolvency within art. 2023 C.C. sufficient to invalidate the Quebec security was not established, and the insolvency of the company was not known to the bank when it was taken. Art. 1035 C.C. The plaintiffs’ attack on this mortgage, however, was based entirely on the Ontario statute, R.S.O. ch. 134, sec. 5. They did not invoke the Quebec law. But see Morrow v. Hankin[12], and Logan v. Lee[13]. Before setting aside this hypothec I should have to consider very carefully the jurisdiction of the Ontario courts to do so.
The case presented as to the securities under the “Bank Act” demands fuller consideration. Some facts in addition to those which I state and extracts from the relevant documents that may serve to make more comprehensible the situation out of which the questions discussed arise appear in the judgments below.
Prior to 1908 the company’s line of credit with the bank did not exceed $150,000. In that or the next year it was increased to $175,000, and later, in 1909, to $200,000, continuing at about that figure until the date of the insolvency. During the same period the company’s indebtedness to the bank varied slightly. Seldom below $200,000, it would appear to have reached a maximum of $233,000 about the 16th of April, 1914.
To quote from the judgment of Maclaren J.A.:—
The records of the transaction in question were kept in two separate accounts by the bank, called respectively the purchase account and the sales account. The former contained on the credit side the record of all the demand notes which the company gave from time to time, generally for round amounts ranging from $1,000 to $10,000. On the debit side were entered all cheques given for payment of goods, wages, expenses, interest, etc. On the credit side of the sales account were entered the cash deposited, cheques of customers, drafts for collection, etc. On the debit side the demand notes of the company paid off from time to time, customers’ notes or drafts returned unpaid, etc. As the learned trial judge said, however:—
The two accounts had to be looked to to ascertain the exact standing of the customer with the bank, from time to time, and advances were made to the company in the advance account (called by Maclaren J.A. the purchase account), as they had credits in the other account. The two accounts had, of course, relation to each other and seemed in reality to be treated as one account.
The evidence of the bank manager establishes with reasonable certainty that each of the demand notes given from time to time for the sums placed to the credit of the “Purchase Account” was not a renewal note in any sense, but represented an actual advance made at the time the note was taken—an actual increase by the amount of the note (through withdrawals of its proceeds made by the company then or within a day or two afterwards) of the company’s indebtedness to the bank as shewn by its net debit balance taking the two accounts together. It should perhaps be noted that discount was not deducted from the notes. Their face amounts were credited to the purchase account and bore interest at six per cent. The learned trial judge says:—
It seems to me from the evidence in this case that the bank was from time to time making advances and taking security under section 88 of the “Bank Act.”
As Maclaren J.A. says, distinguishing this case from Bank of Hamilton v. Halstead[14]:—
So far as the evidence goes the company had always the privilege of drawing the full amount that had been put to its credit through the negotiation of the demand notes.
The moneys represented by each of the demand notes were actually
placed freely at the disposal of the customer,
as in Ontario Bank v. O’Reilly[15], at p. 432,
were placed under the control of the company,
Toronto Cream & Butter Co. v. Crown Bank[16]. In the Halstead Case[17], as pointed out by Meredith C.J., whose judgment was approved in this court,
Not a farthing of the amounts which the notes represented could be touched by (the customer) or made available by him for any purpose.
The practice in the case at bar was from time to time to retire the demand notes longest outstanding by cheques of the customer drawn on its “Sales Account” or by charging up the amounts of such notes against its credit balance in that account. The advances were made quite independently of such retirements.
Concurrently with the taking of each demand note and the placing of the moneys represented by it to the credit of the “Purchase Account,” from which they were subject to withdrawal by the company at its will, the bank took a pledge under section 88 of the “Bank Act” on all the raw material, manufactured goods and goods in process of manufacture in the customer’s premises. Down to the 7th of March, 1914, two separate documents were obtained on each occasion, one a pledge or security for the advance then being made (demand note contract), the other an “omnibus security” (as I shall term it for lack of a better name), for that advance and such prior advances as were represented by demand notes then outstanding (i.e., not yet retired as above explained), a list of which was indorsed on the back. After the 29th of January, 1914, new forms of the omnibus security were used in which the goods are somewhat more fully described but no special allusion is made to the amount of the concurrent advance. Some ten advances, amounting in all to $17,000, appear to have been made between the 7th of March and the date of presentation of the petition for winding-up, the 25th of March, 1914. No document similar to the early “Demand Note Contracts” was taken as security for any of the advances subsequent to the 6th of March. On the back of the omnibus security obtained when each of them was made was indorsed a list of the then outstanding notes, and the security was stated on its face to be given in consideration of their total amount, the last item in the indorsed list being uniformly the amount of the note for the actual concurrent advance. On the last of these securities taken before the winding-up—that of the 24th of March, 1914—77 of the 103 notes in the indorsed list bear dates between the 16th of August, 1913, and the 29th of January, 1914, and only 26 bear subsequent dates. Yet the document purports, as do all the securities taken after that date, to be given pursuant to a written promise or agreement of the 29th of January, 1914. I shall have occasion again to advert to this fact.
The securities taken before the 29th of January, 1914, contain no explicit reference to an antecedent written promise, although such a promise that security would be given under section 88 of the “Bank Act” had been obtained by the bank annually or oftener when the line of credit for the ensuing period of a year, or less, as the case might be, was arranged for. Whatever may be its value as security for previous advances, I know of no good reason why each of these documents taken on and after the 7th of March, 1914, should not be a perfectly good and valid security under section 88 (3) and clause (a) of subsection 1 of section 90 of the “Bank Act” for the actual concurrent advance.
I am satisfied that all prior securities were not discharged by substitution or merger as the result of the taking of the new general security given when each fresh advance was made. This in my view is really the crucial question in this case, and it is perhaps regrettable that more attention was not given to it in argument. If there was no merger of earlier in later securities—if the securities taken concurrently with each advance are still alive and enforceable—the bank’s position seems to me to be free from difficulty, since the requirements of clause (a) of subsection 1 of section 90 are met. On the other hand, if there was a merger or substitution—if the last security taken absorbed and extinguished all prior securities held for the advances for which the outstanding notes indorsed upon it had been given—the stated consideration included them—it is obvious that it would be necessary to establish that as to such prior advances—past indebtedness—the absorbing or substituted security was given pursuant to a promise or agreement that would satisfy clause (b) of subsection 1 of section 90. The question of merger or substitution is only of importance if the omnibus securities taken on the occasion of each advance cannot be supported in respect of the prior indebtedness included in the stated consideration; and it is on that assumption that it is now discussed.
Strong as the legal presumption of merger of an earlier security, which arises upon the taking of a new security of a higher nature for the same debt, undoubtedly is (Price v. Moulton[18]),it yields to satisfactory proof of a contrary intention (Commissioner of Stamps v. Hope[19]); and there is no such presumption where the new and the old securities are of equal degree. 7 Hals. Laws of England 457; Preston v. Perton (1601)[20].
A good prior security will not be held to merge in a later inoperative one.
Chetwynd v. Allen[21], at page 358, per Romer J. Substitu