Knightsbridge Estates Trust Ltd v. Byrne and Others

[1940] 2 All ER 401

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(Judgment by: Viscount Maugham)

Between: Knightsbridge Estates Trust Ltd
And: Byrne and Others

Court:

Judges:
Viscount MaughamLord Atkin
Lord Wright
Lord Romer
Lord Porter

Subject References:
land
Mortgage
Mortgage by company
Principal repayable by instalments over period of 40 years
Postponement of redemption
Reasonableness of postponement
Clog on equity
Rule against perpetuities
Whether mortgage a debenture

Legislative References:
Companies Act 1929 (c 23) - s 74; s 380

Case References:
Levy v Abercorris Slate & Slate & Slab Co - (1887) 37 ChD 260; 7 Digest 31, 156; 57 LJCh 202; 58 LT 218
British India Steam Navigation Co v Inland Revenue Comrs - (1881) 7 QBD 165; 6 Digest 500, 3172; 50 LJQB 517; 44 LT 378
Lemon v Austin Friars Investment Trust Ltd - [1926] Ch 1; Digest Supp; 95 LJCh 97; 133 LT 790
Samuel v Jarrah Timber & Wood Paving Corpn Ltd - [1904] AC 323; 10 Digest 782, 4892; 73 LJCh 526; 90 LT 731; affg [1903] 2 Ch 1
Re Southern Brazilian Rio Grande do Sul Ry Co Ltd - [1905] 2 Ch 78; 10 Digest 733, 4582; 74 LJCh 392; 92 LT 598
Floyer v Lavington - (1714) 1 P Wms 268; 35 Digest 355, 984
Kreglinger v New Patagonia Meat & Cold Storage Co Ltd - [1914] AC 25; 35 Digest 241, 20; 83 LJCh 79; 109 LT 802
Lindsay v Cundy - (1876) 1 QBD 348; 42 Digest 679, 910; 45 LJQB 381; 34 LT 314; on appeal (1878) 3 App Cas 459
Ely (Dean) v Bliss - (1852) 2 De G M & G 459; 42 Digest 679, 908; 20 LTOS 35

Hearing date: 2, 3, 4 April 1940
Judgment date: 22 April 1940

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Judgment by:
Viscount Maugham

My Lords, this appeal raises the question whether the appellants, who are mortgagors, are entitled to redeem on the usual notice a mortgage, dated 6 November 1931, made between the appellants of the one part and the respondents (who are trustees of the Royal Liver Friendly Society) of the other part, notwithstanding a provision in the mortgage for repayment of the loan of £310,000 by 80 half-yearly instalments. It was not in dispute before your Lordships that, on the true construction of the mortgage, the appellants were not entitled to pay off the loan otherwise than by the instalments, and at the times, provided in the mortgage, so that the appellants would not be entitled to the free enjoyment of their property for 40 years except by a voluntary concession from the respondents.

Three questions of law emerged on the argument before your Lordships which may be stated as follows:

(i)

whether the provisions in the mortgage which purported to postpone for so long a period the right of redemption were not void in equity, as preventing redemption for an unreason able length of time, having regard to certain circumstances which, it was alleged, made the provisions as to such postponement oppressive on the appellants, and unnecessary for the protection of the respondents,

(ii)

whether any of the provisions of the mortgage were invalidated by the rule against perpetuities, and

(iii)

whether the mortgage was a debenture within the meaning of the Companies Act 1929, s 74, having regard to the definition contained in s 380 of that Act.

The first two questions raised the points on which the appellants relied. The third was a contention on the part of the respondents, who claimed that s 74 of the Act in effect removed any doubt as to the validity of the provisions postponing the right of redemption.

The action was heard by Luxmoore J, who held by his judgment, dated 13 April 1938, that the provision in the mortgage deferring redemption for a period of 40 years, taken in conjunction with clauses in the deed which he regarded as unusual and oppressive, was unreasonable, and constituted an unlawful clog upon the right of the appellants to redeem the mortgage, and that the appellants were entitled to redeem the mortgage on the usual notice. The judge further held, in favour of the respondents, that the rule against perpetuities has no application to mortgages, and, in favour of the appellants, that a common mortgage of freeholds is not a "debenture" within the meaning of the Companies Act 1929, s 74. The respondents' appeal to the Court of Appeal (Sir Wilfrid Greene MR, Scott LJ, and Farwell J) was allowed. Judgment was delivered on behalf of the court by Sir Wilfrid Greene MR. It was thereby held that, while the court would not enforce any provision in a mortgage which was unconscionable, or which operated to prevent the mortgagor from exercising his right of redemption after the specified date for redemption, or which rendered the right of redemption illusory, the court is not further concerned with the question whether the terms of the mortgage are reasonable, and a provision that the date for redemption shall be postponed for a given period, however long, is not on that ground alone unenforceable. It was also held that in the present case, where the mortgage represented a commercial agreement between two important corporations experienced in such matters, the provision for repayment by instalments and the other terms above mentioned were open to no objection which justified the interference of the court. The court also held that the rule against perpetuities has no application to mortgages, but expressed no opinion as to whether the mortgage is a debenture for the purpose of the Companies Act 1929, s 74.

In the course of the able arguments for the appellants, it became manifest that logically the first matter to be determined was the third question above stated-namely, the question whether the Companies Act 1929, s 74, applied. That section is in the following terms:

'A condition contained in any debentures or in any deed for securing any debentures, whether issued or executed before or after the commencement of this Act, shall not be invalid by reason only that the debentures are thereby made irredeemable or redeemable only on the happening of a contingency, however remote, or on the expiration of a period, however long, any rule of equity to the contrary notwithstanding.'

Section 380 of the Act, so far as relevant, provides:

'(1)

In this Act, unless the context otherwise requires, the following expressions have the meanings hereby assigned to them (that is to say) ... "Debenture" includes debenture stock, bonds and any other securities of a company whether constituting a charge on the assets of the company or not ...'

If, then, the mortgage was a debenture within s 74, it was difficult to see how the appellants could succeed on the main point. Your Lordships, therefore, after fully hearing counsel for the appellants, thought it right to call on counsel for the respondents on the question arising under s 74, and eventually did not think it necessary to call on the respondents for an argument on either of the other two points which I have stated. In these circumstances, it would not be right for me to express any opinion on the first question, and I wish to reserve full liberty to consider that question if it should arise in a case where s 74 did not apply. On the other hand, I must make some observations on the second question, as to the application of the rule against perpetuities, a matter as regards which none of your Lordships felt any doubt that the decisions of Luxmoore J and the Court of Appeal were right.

My Lords, the judgment of Luxmoore J contains an elaborate statement of the history of s 74, and of the reasons which led him to the conclusion that the section did not apply to the mortgage in the present case. Unfortunately, his attention does not seem to have been called to the Companies Act 1928, which was not a consolidating but an amending Act, and he accordingly thought that the extended definition of the word "debenture" was first found in the Companies Act 1929, which, as he justly observed, was a consolidating statute. In fact, the extension of the definition is to be found in Sch II of the Act of 1928, where the added words are to be found as an amendment of the Companies Act 1908, s 285: see s 99 of the Act of 1928. The consolidating Act of 1929 reproduced as part of the consolidation the amended definition of the word "debenture," and there is, therefore, no room for any such presumption excluding an amendment of the existing law by a consolidating statute as the judge relied on.

The position, therefore, is as follows. The substance of s 74 of the Act of 1929 was first found in the Companies Act 1907, s 14, where it was prefaced by the words "for removing doubts it is hereby declared that. ..." There was no definition of the word "debenture," and there is strong ground for thinking that, whatever be the ambit of the word, it did not in that section include an ordinary mortgage of land. The consolidating Act of 1908 reproduced the provision of the Companies Act 1907, s 14, omitting the introductory words. It was in the exact terms of the present s 74 of the 1929 Act. The definition clause (s 285) stated that " 'debenture' includes debenture stock," which perhaps made it even clearer that "debenture" did not include a mortgage of land in ordinary form. The amending Act of 1928, however, contained the provision that at the end of the definition of "debenture" in s 285 of the 1908 Act:

'there shall be added the words "bonds and any other securities of a company whether constituting a charge on the assets of the company or not.".'

It is perhaps worth pointing out that the words "unless the context otherwise requires" which we find in the consolidating Act of 1929 are not to be found in the amending Act of 1928. I attribute little weight to this fact, for, in my opinion, some such words are to be implied in all statutes where the expressions which are interpreted by a definition clause are used in a number of sections with meanings sometimes of a wide, and sometimes of an obviously limited, character. On the other hand, I think due weight ought to be attributed to the words "otherwise requires" in the Companies Act 1929, and it is incumbent on those who contend that the definition does not apply to s 74 to show with reasonable clearness that the context does in fact require a more limited interpretation of the word "debenture" than s 380 has assigned to it.

If we begin by asking what the word "debenture" means, apart from any definition, the reply must be that it has no precise meaning. Chitty J observed in Levy v Abercorris Slate & Slab Co, at p 264, that the word:

'... means a document which either creates a debt or acknowledges it, and any document which fulfils either of these conditions is a "debenture.".'

An interesting extract from Skeat's Etymological Dictionary, 1882, will be found in a footnote to the case, at p 264. Lindley J had previously stated simply in British India Steam Navigation Co v Inland Revenue Comrs, at p 172

'Now what the correct meaning of "debenture" is I do not know.'

In Lemon v Austin Friars Investment Trust Ltd, the same ignorance was professed in the Court of Appeal. Warrington LJ, in particular, after observing at p 17 that it had been said "by a wiser man than myself" that it was impossible to give an exhaustive definition of the word "debenture," went on to remark that he did not propose to incur the reproach of venturing where wise men fear to tread. The textbooks are agreed at least in this-that no accurate definition of the word can be found. I think it sufficient to cite Buckley, Law and Practice under the Companies Acts (11th Edn), p 174, on the point. It is clear, therefore, that it was desirable to insert a definition of the word in any consolidation of the Companies Acts.

We must next ask ourselves whether there was any reason for limiting s 74 of the Act of 1929 to debentures of a series issued to a number of subscribers in one of the forms now in common use, or in some such way. The reason for the section is explained in the note to the section in Buckley, Law and Practice under the Companies Acts (11th Edn), pp 154, 155. Enormous sums had been borrowed by companies formed under the general Companies Acts on debentures and debenture stock the principal of which was (in terms) either not repayable at all or only in certain specified events. Doubts had been expressed whether these restrictions on the right of redemption were valid (Samuel v Jarrah Timber & Wood Paving Corpn Ltd, at p 15, and Re Southern Brazilian Rio Grande do Sul Ry Co Ltd), and it seemed desirable to remove these doubts by the Companies Act 1907. The equitable rule was based on the hypothesis that, in a contract for a loan, the borrower is not usually contracting on equal terms with the lender. I find the reason quaintly stated in Floyer v Lavington by Sir Joseph Jekyll as counsel in a case heard by Cowper LC. He explained the ground for holding that a mortgage cannot be rendered irredeemable thus, at p 269:

'... as the borrower is commonly necessitous, this would put it in the power of the scrivener to make advantage of such necessities, and would let in oppression, and foreclose the power and jurisdiction of this court.'

In saying that this was the real foundation of the interference of the court of equity with the legal right of the mortgagee, I am not forgetting the technical account of the matter given by Viscount Haldane LC and Lord Parker in Kreglinger v New Patagonia Meat & Cold Storage Co Ltd. Viscount Haldane LC himself truly observed, at p 36, that the lending of money, on mortgage or otherwise, was looked on with suspicion, and the court was on the alert to discover want of conscience in the terms imposed by lenders.

My Lords, loans made to limited companies on the security of their assets are in general very different from loans made to individuals. Companies may be wound up, in which event their debts have, if possible, to be paid, but they do not die. To the knowledge of both the company and the lender the loan is intended in most cases to be in the nature of a permanent investment. The former can only in the rarest of circumstances be at the mercy of the latter. There is no likelihood of oppression being exerted against the company. Considerations such as these make it manifest that clauses in debentures issued by companies making them irredeemable, or redeemable only after long periods of time, or on contingencies ought to be given validity. It may be conceded that the ground for excluding the rule in equity is stronger in the case of a series of debentures issued in one of the usual forms than in the case of mortgages of land to an individual, but some of the reasons still remain. It is difficult to see any real unfairness in a normal commercial agreement between a company and, for example, an insurance society for a loan to the former on the security of its real estate for a very prolonged term of years. Both parties may be equally desirous that the mortgage may have the quality of permanence. There is a great deal to be said in such a case for freedom of contract.

I do not think that there is any strong argument for suggesting that s 74 of the Act of 1929, or any of its predecessors, ought, by reason of its nature, to be confined to what may be called ordinary debentures. As we have seen, some definition was certainly desirable, and the very wide terms used by the legislature in the Act of 1928 and reproduced in the consolidating Act of the following year seem to me to show that it was intended to give freedom of contract as regards the particular matter involved in s 74 in relation to any securities granted on loan by a company registered under the Companies Acts. It is contended that the context otherwise requires. I am unable to find any such context. It is, of course, true that some of the ss 73-78, which are to be found under the heading "Special provisions as to debentures," are not dealing with mortgages of land by a company to an individual. S 73, for example, is apparently dealing with debentures issued in a series and registered. S 75 is, perhaps, also limited in the same way. It does not seem to me, as at present advised, that s 76 and s 78 require any such qualification. We are dealing with an Act in which the word "debenture" is used in numerous sections, and, it must be admitted, in more than one sense. The practice of inserting a definition in such a case has often been criticised. It was described by Blackburn J in Lindsay v Cundy, at p 358, as a modern innovation which frequently does a great deal of harm, and by Lord St Leonards LC in Ely (Dean) v Bliss as an attempt to put a general construction on words which, in the different senses in which they are introduced in the various clauses of an Act, do not admit of such.

It is probably too late to add to these and other complaints. All we can do is to see whether the interpretation clause in this case can reasonably be applied to s 74 without leading to any startling result, and whether there is any context which requires us to reject some of the words of the definition. The fact that a particular section contains a provision relating to a particular kind of debenture does not assist us. We do not, for example, use the word "man" in a restricted sense if we make a statement about white men. "Men" has its ordinary meaning. It is the word "white" which qualifies the statement and makes it applicable to some men only. So here s 74 itself applies only to debentures creating a charge. That is because the section applies only to debentures creating a charge capable of being redeemed. It is not a reason for holding that a security of a company creating a mortgage of land is not a debenture within s 74. Finally, it should be noted that the mortgage with which we are concerned on the present appeal could without difficulty have been drafted in the form of an ordinary company debenture with a charge on its face, followed by the provisions as to the instalments by which it is to be paid off, and, if desired, with the various conditions and provisos printed on the back. For these reasons, I am of opinion that the word "debentures" in s 74 must be given the meaning attached to it by s 380.

The contention that the rule against perpetuities applies to the mortgage has not been very strongly urged by counsel for the appellant, who candidly admitted that he raised the point because the reason often given for exempting mortgages from the rule against perpetuities was that a condition in a mortgage precluding redemption for over 21 years would be void in equity. Both Luxmoore J and the Court of Appeal pointed out that the rule has never been applied to mortgages, and they declined to depart from the established view that mortgages were not within the rule. In my opinion, they were justified in taking that course. I will only add that, since the Law of Property Act 1925, came into force, it seems to be more difficult than ever to invoke the rule in the case of mortgages. Where, as in the present case, there is a mortgage term for 3,000 years, with a statutory provision for cesser of the mortgage term on discharge of the money secured by the mortgage, it would seem difficult to consider the case as being within the rule. In saying this, I do not wish to throw any doubt upon the view that mortgages before 1926 were an exception to the rule.

My Lords, the question remains whether, accepting the view that the Companies Act 1929, s 74, applies, the appellants can obtain a declaration that they are entitled, on the usual notice, to redeem the mortgage upon payment of principal, interest and costs. In my judgment, the section establishes that the fact that the mortgage is made irredeemable for 40 years is not itself a ground for the application of the rule of equity, assuming that, but for the section, it would apply. I am not forgetting the words "by reason only that the debentures ..." but the word "only" does not, I think, detract from the fact that the main ground for attack on the present mortgage is the length of time which must elapse before the right of redemption will exist, according to its terms. Apart from the provision postponing the right of redemption, there would be no objection to the mortgage. The word "only" in the section leaves open for consideration by the court cases where there has been hardship or oppression by the mortgagee, but I am unable to take the view in this case that the terms of the mortgage are so stringent, and the restrictions which it imposes on dealings by the appellants with the mortgage properties are so oppressive, that these matters, read in the light of the provisions of s 74, would justify the interference of the court. In this connection, it is right on the question of hardship to take into account the circumstances in which the mortgage was entered into, the great experience of the solicitors on both sides, and the care with which the negotiations were conducted. The appellants executed the mortgage with their eyes wide open. In such a case, the court in these days must be slow to interfere with a contract deliberately entered into, and, having regard to the view above expressed as to s 74 and its consequences, I must come to the conclusion that the appellants' claim to redeem contrary to the terms of the mortgage must fail. For these reasons, I am of opinion that the appeal should be dismissed with costs.