Michael Upton: Lessons from bank crashes

Michael Upton: Lessons from bank crashes

Michael Upton

Advocate Michael Upton looks at an early bank crash and its reverberations in Scots law.  

Readers accustomed to making their way from Queen Street Station to Glasgow Sheriff Court have probably walked along Glassford Street. With bank crashes back in season, you may care next time to glance at the back of Marks & Spencer’s store, and reflect on the site’s history. The head office of the City of Glasgow Bank (CGB) stood there from 1851. On 2 October 1878, it stopped payments. Investigation led by Alexander McGrigor of McGrigor Donald (now Pinsent Masons, but then a seven-year-old firm, though a merger of Glasgow practices dating back to 1769) revealed an ostensibly healthy balance sheet to be a fraud, concealing a deficit stated in today’s money at up to £900 million.

Unusually to our eyes, the bank’s shareholders’ liability was unlimited. The liquidators pursued them for the shortfall – with considerable success. About 80 per cent of the 1,200 shareholders ended up insolvent, to the salvation of the creditors, including the customers. But the knock-on effects were widespread. Trade in the west was depressed for months if not years. Property prices fell, not only for lack of money to buy, but because of the volumes put for sale to pay debts.

The consequences can be traced through numerous law reports for the rest of the 19th century, affecting not only insolvent Glasgow building societies and builders, but ruining businesses, from farms in Berwickshire to quarries in Dumfries-shire (Husband v Soady’s Tr., (1888) 15 R. 966; Nugent v Nugent’s Trs., (1899) 2 F. (H.L.) 21). At least one solicitor’s consequent insolvency disclosed his own and his clients’ funds to be mixed; in A.B, Petr. you can follow the redemptive tale of conviction for embezzlement and 15 years’ conscientious struggle to restore his name (22 R. 877).

At the same time commercial litigation thrived in consequence of the crash, chiefly with CGB’s liquidators as pursuers or defenders – led by George of the Auldjo Jamieson family (who deserve a few articles of their own). Surely no single event in Scots history has been so productive of litigation. Apart from the successful prosecution of the directors in the High Court, over four hundred actions were raised. The arguments about who was entitled to what led to at least 73 judgments in the Court of Session, and others in the Sheriff Court, plus a clutch of appeals to House of Lords – principally by those called on to pay as contributories, all of which the Lords rejected.

In 1882 the City of Glasgow Bank Liquidation Act created the Assets Co. to take over what was left, and consequently the main rôle in the litigations, which rumbled on for 27 years till 1905.

The single largest body of cases dealt with shareholders’ attempts to avoid liability, most though not all of which failed. May a trustee holding shares avoid liability by resigning? (Shaw, 6 R. 332; Mitchell, 6 R. (H.L.) 60). Is a former trustee or executor holding shares liable if he has resigned before the insolvency, but that has not been intimated to the company? (Sinclair, 6 R. 571; Tochetti, 6 R. 789). Where the registered member is a patent or latent trustee, or an executor, is he personally liable? (Muir, 6 R. (H.L.) 21; Cuninghame, 6 R. (H.L.) 98; Macdonald, 6 R. 621; Brownlie, 6 R. 1233; M’Ewen, 6 R. 1315; Low’s Exrs., 6 R. 830; Gillespie & Paterson, 6 R. 714). What if he holds the shares as a trustee for the company itself? (Hunter, 6 R. (H.L.) 112).

What about the shareholder whose share purchase did not follow the statutory forms? (Mitchell, 6 R. (H.L.) 6). Or who contracted to sell his shares before the insolvency, where no conveyance has been executed? (Mitchell, 6 R. (H.L.) 60; cf. Howe, 6 R. 1194). Conversely, what if he is entitled to shares but they have not yet been transferred? (Bell, (1879) 6 R. (H.L.) 55; Richters’ Trs., 7 R. 102).

What if the shareholder is dead, and so is his executor too? (Oswald’s Trs., 6 R. 461). If the member is a ward, what is his curator’s liability? (Lindsay’s Curator, 6 R. 671). If he has already been sequestrated, what of his trustee? (Myles, 6 R. 718). If two persons hold the shares as liferenter and fiar, what are their liabilities? (Wishart, 6 R. 823).

What if someone else registered a man as a shareholder, but without his authority? (Stott’s Trs., 6 R. 1126); or the member is a company whose acquisition of shares was ultra vires? (Fraser, 6 R. 1259).

Less relevantly to our emancipated times, there were a batch of cases about the liability of husbands whose wives held shares (Biggart, 6 R. 470; Blackwood, 6 R. 607; Wright, 6 R. 1089; Forbes, 6 R. 1122; Lang, 7 R. 68; Kerr, 7 R. 111; Brown, 7 R. 118; Wright’s Exrs., 7 R. 527).

Of more general relevance in the law of obligations, Gillespie ruled on the relevance of unilateral error as a ground for avoidance (6 R. 813); homologation of an obligation absent compliance with necessary formalities was at issue in Roberts (6 R. 805); and Tennent considered rescission of a share-purchase contract for fraud after the company has declared insolvency (6 R. (H.L.) 69).

That relates to the best-known case, about whether a shareholder can have his name removed from the register of shareholders, on the plea that he was induced to take shares by fraudulent misrepresentations by the company’s officers; the distinction between void and voidable obligations; and if rescission is barred, whether the company is nonetheless liable to the shareholder in damages (Houldsworth, 7 R. (H.L.) 53).

The court considered the proper construction of a compromise of claims (Mitchell, 8 R. 135) and grounds for reduction of discharges (Jamieson, 10 R. 676; Assets Co. v. Shirres’ Exrs., 24 R. 418; Assets Co. v. Bain’s Trs. (No.1), 7 F. (H.L.) 104; Assets Co. v. Falla’s Trs., 22 R. 178). There are also useful decisions about whether a compromise may be avoided on the ground of alleged non-disclosure of assets; and personal bar and mora (Anderson, 8 R. 44; Assets Co. v. Bain’s Trs., 6 F. 692). Houldsworth may be the best-known case, but Bain’s Trs. is perhaps the only one still commonly cited – on the effect of lapse of an interval of time shorter than a negative prescriptive period.

On the border of obligations and property, we have the consequences of a contract to convey subjects to which one has no title (Clark, 9 R. 1063). Within property law itself, the liabilities for feu-duties of holders of successively ranking securities were explored (Nicolson’s Trs., 9 R. 689), as well as the more timeless question of an unintimated assignation (Clark, 9 R. 1017).

In the field of trust administration, there were several judgments on trustees’ rights to indemnity for debts caused by authorised or unauthorised investments (Cuningham v. Cuningham’s Trs., 6 R. 1333; Sanders’ Trs., 7 R. 157; Curror, 7 R. 289; Godby’s Tr., 7 R. 749), and the ranking of such claims relative to those of legatees (Fraser, 7 R. 694). Ker considered whether a man has accepted office as a trustee (6 R. (H.L.) 52); Buchan addressed when he is an executor, and the likenesses and differences between executors and trustees (6 R. (H.L.) 44).

CGB also gave us cases on agency, partnership and employment law: whether a principal has ratified his agent’s unauthorised act (Smiths’ Trs., 6 R. 1017; Galletly’s Trs., 6 R. 1341; Gordon’s Trs., 7 R. 55); the scope of an employee’s authority to bind his employer (Howe, 6 R. 1194); the putative need for intimation of the death of a partner (Oswald’s Trs., 6 R. 461); whether partners’ liability may be several rather than joint (Gillespie & Paterson, 6 R. (H.L.) 104); and whether at common law a former employee of an insolvent employer has a right to payment of a gratuitous pension (Fraser, 7 R. 961).

Unsurprisingly there are the professional-negligence claims, for instance about a solicitor’s liability to volunteer advice (Curror v. Walker’s Trs., 16 R. 355; cf. Cleland v. Brownlie, Watson, & Beckett, 20 R. 152), and Assets Co.’s own claim against the liquidators’ solicitors (Assets Co v. Blair, (1896) 4 S.L.T. 13; Blair v. Assets Co., 23 R. (H.L.) 36).

There are revenue cases: on calculation of stamp duty (Inland Revenue Commrs., 8 R. 389); whether the Revenue is obliged to repay duties measured by the ostensible value of shares when in fact they have turned out to be worthless (Galletly’s Trs. v. Lord Advocate, 8 R. 74); and where a doubtful debt is bought for less than the assignee subsequently recovers from the debtor, whether the gain is chargeable to income tax (Assets Co. v. Inland Revenue Commrs., 24 R. 578).

And of course we owe to this great insolvency authorities on the administration of a liquidation, concerning such matters as: criteria for liquidators’ appointment (Brightwen & Co., 6 R. 244); the likenesses and differences between personal and corporate insolvency (Clark, 9 R. 1017); whether a creditor may apply to the Court for directions (Geddes’s Trs., 7 R. 731); whether the Court may order the liquidator to compromise a claim, and whether a contributory’s own claim against the company is an asset the liquidator may claim for the benefit of its other creditors (Tennent, 6 R. 972); the liquidator’s liability to make repetition to a supposed contributory, on his being found not liable to contribute after all (Houston’s Trs., 6 R. 443); whether liquidators, having in-gathered enough to pay the creditors, retain title and interest to sue directors for allegedly wrongful payment of dividends (Mackinnon, 9 R. 535); examination of bankrupts (Wright, 6 R. 289); and the calculation of remuneration for both liquidators and trustees in sequestration, and joint liquidators’ powers to determine how their remuneration shall be shared inter se (Jamieson, 7 R. 1196; Assets Co. v. Guild, 13 R. 281).

That largely omits the many other reported cases, not involving CGB’s liquidators or the Asset Co., but about the estates of the insolvent contributories, and persons otherwise embarrassed by the bank’s failure. They raise a host of other issues: most curious perhaps was the submission to an arbiter, who was hard up following the bank collapse, and so asked both parties for a loan; was that a ground for reduction of his subsequent award? (Morison v Thomson’s Trs., 8 R. 147).

We order these matters differently today. In effect, banks are not allowed to collapse. There is a belief that a poor choice of bank should have no consequences for the individual, but be rather the responsibility of the government – which is to say everyone. That has proved fortunate for some, including the writer. But it comes at costs which will fall on all of us – or our children; unreal belief in free insurance abets real moral hazard. It is calculated neither to foster the development of the law, nor to sharpen wits.

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