The Institute of Bankers.

JANUARY, 1910.

BANKERS' ADVANCES ON STOCK EXCHANGE
SECURITIES.

By A. R. BUTTERWORTH, Esq., Barrister-at-Law.

Delivered before the Institute in London, on Wednesday, November 3rd, 1909.
ALFRED HOARE, Esq., in the Chair.

And at Liverpool on Thursday, November 11th,
JAMES H. SIMPSON, Esq., in the Chair.
And at Birmingham on Friday, November 12th,
F. W. NASH, Esq., in the Chair.

LECTURE I.

Introductory.

In the present Lectures I propose to call your attention to advances made by bankers on the deposit of Stock Exchange securities a very important class of documents, on the security of which principally bankers make those enormous loans-sometimes exceeding in a single case one million sterling-whereby stockbrokers and money dealers are enabled to carry out their transactions. This class of documents includes scrip, share and stock certificates, debentures and bonds-British, Colonial, and Foreign.

Now with respect to all these documents one of the most important things to determine in each case is whether the document is in the strict sense a negotiable instrument. If it is, did the banker or other person advancing the money take it in good faith? If both these questions are answered in the affirmative, he will have an absolutely good title as being the holder of a negoti

able instrument which he took in good faith and for value.1 If it is not negotiable, other matters have to be considered.

Negotiability.

In any case, then, it is important first to inquire whether the particular instrument deposited as security has those two essential qualities, without which it cannot be strictly a negotiable instru

ment.

Those are:

1. It must be transferable by mere delivery, or by indorsement and delivery (according to whether it is made payable to bearer, or to order) so that the property in it shall pass to the transferee free from any defect of title of the transferor or of any prior holder.

2. The holder must be able to sue on it in his own name.

We will shortly consider which of the documents under discussion possess those essential qualities.

Companies registered under the Companies Act,

1908.

As it will be necessary during these Lectures to make frequent reference to the Companies Acts, I may remind you that the principal Act passed in 1862, which introduced the principle of limited liability, was amended by a large number of Acts called collectively the Companies Acts, 1862 to 1908, and in the latter year the Companies Consolidation Act, 1908,2 was passed, which repeals the whole of those earlier Acts, eighteen in number, as well as parts of ten other Acts, and re-enacts their provisions.

The wide bearing which those Acts have on Companies will be apparent when it is seen that over 110,000 Companies have been registered in the United Kingdom under these Acts, of which number on the 30th April, 1909, 46,474 were existing Companies, with a paid-up capital of over 2,163 millions; and if we add to these, debentures and debenture stock, amounting probably to some 400 or 500 millions, we arrive at a total of about 2,600 millions.

The Companies Consolidation Act, 1908,1 which came into operation on 1st April, 1909,2 speaking generally, applies to existing Companies registered under the Companies Acts, 18621879, or under the Joint Stock Companies Acts; and therefore the numerous existing Companies, registered under those earlier Acts and carrying on business in all parts of the world, are now governed by the Act of 1908. Limited Companies under this Act (as under the Act of 18624) are of two classes: those limited by shares, and those limited by guarantee.5

The repealed enactments are specified in the 6th Schedule of the Act, and with regard to the effect of repeals, besides the provisions of ss. 286-294, the general provisions of s. 38 of the Interpretation Act, 1889,6 are applicable. By virtue of that section, unless the contrary intention appears, the repeal will not "affect any right, privilege, obligation, or liability acquired, accrued, or incurred under any enactment so repealed."

Companies incorporated by Charter, or by

Special Act.

Besides the 46,474 Companies registered under the Companies Act, it must of course be remembered that there are many Companies not so registered. These include not only Companies incorporated by Royal charter-such as the New River Company, incorporated in 1619 in the reign of James I, and the Peninsular and Oriental Steam Navigation Co., incorporated in 1840-but also a great number of Companies incorporated by Special Act of Parliament, as is the case with our large Railway Companies. To ascertain the rights of parties dealing with one of these latter Companies, the Special Act has to be referred to, and if the Company has been incorporated since the 8th May, 1845, it is, as a rule, also governed by the Companies Clauses Consolidation Acts, 1845 to 1889;7 and if the taking of lands is authorized for any undertaking, by the Lands Clauses Consolidation Act, 1845,8 and the Acts amending it; and if the construction of a railway is authorized, by the Railways Clauses Consolidation Act, 1845.10

These three original Clauses Consolidation Acts of 1845-one relating to the constitution and management of Joint Stock Companies; the second to the acquisition of land; and the third to the construction of railways were passed to consolidate into one general Act sundry provisions usually introduced into special Acts authorizing the execution of undertakings of a public nature, the object of these Acts being to avoid the repetition of the usual clauses in each special Act, as well as to insure greater uniformity.1

Equitable Title or Interest.

I wish next to say a few words regarding an equitable as distinguished from a legal title or interest. The rules of equity are now as much part of the law of England as the rules of common law. They are mainly distinguished from the common law by reason of having been originally administered in different Courts and by a different procedure. Thus, while a person who had the legal title to property could alone sue in a Court of law, if he were merely a trustee for another, a Court of equity would treat the person beneficially entitled the "cestui que trust" as he is called in the old Norman French of our law-as the true owner; and where necessary a Court of equity would restrain the trustee from dealing with the property to the detriment of the beneficial owner.

Again, there were certain things called in our law "choses in action"-such as a possibility, or expectancy of property in the future, and the right to sue for damages or for a debtwhich were not assignable at law; but in equity they were regarded as assignable, and if assigned for a valuable consideration, the assignee obtained an equitable interest in them. Future property, possibilities, and expectancies e.g., the interest which a person may take as legatee of a man still living2 are all assignable in equity for value; and an assignment by way of mortgage of "all the book debts due and owing or which may during the continuance of this security become due and owing to the mortgagor is a valid equitable assignment, and passes to the mortgagee the equitable interest in book debts as soon as they come into existence.4

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We see therefore:-1. That one man may possess a bare legal title to property the equitable title to which belongs to another, who is the beneficial owner. 2. That expectancies and debts, future as well as existing, are assignable in equity, and the assignee for value may obtain an equitable interest in such things, although he may have no right, title, or interest which would be recognised at common law.

When we come later on to consider in detail the question of the assignment of choses in action,1 we shall find that they are usually said to be assigned "subject to equities." The term equities" in this connection means rights cognizable by a Court of equity. Thus, when an ordinary debt is assigned, the general rule is that it is assigned "subject to equities"-i.e. the assignee has no greater rights in equity than the assignor (viz. the original creditor), and the debtor has the same equitable rights against the assignee as he had against the assignor. If, therefore, part of the debt has been paid to the assignor before the debtor has notice of the assignment, the debtor will have a right to set this off in a claim by the assignee, who is entitled to recover only the balance.

To what extent this principle applies to the assignment of shares, stock, and debentures will be considered in detail here

after.2

Classification of Stock Exchange Securities.

Let us now come to the different classes of Stock Exchange securities.

For business purposes these are divided into three classes, according to the nature of the document showing evidence of title, viz.:

1. Inscribed stocks.
2. Registered securities.

3. Securities to bearer.3

1. INSCRIBED STOCKS.

To this class belong the premier securities Consols, the other British Funds, Corporation Stocks, and Colonial Government securities.

The holder may have a bank receipt, but he has no certificate of his holding. His name is inscribed as the legal owner in a register kept for the purpose at the Bank of England, or some other bank or office. In the case, therefore, of the transfer of such stock, there can be no delivery of documents, for there are none for the holder to deliver. The mode in which the transferee gets his name inscribed on the register will be considered hereafter.5

2. REGISTERED SECURITIES.

In this class are included nearly the whole of the securities issued by Joint Stock Companies (except debentures payable to