EDWARD NELSON & CO., LIMITED, AND OTHERS v. FABER & CO. Company-Debentures-Floating Security-Set-off-Second Debenture-holders, A debenture issued by a trading company to their bankers and payable on August 1, 1900, provided that the debenture should be a first charge upon all the company's undertaking and property present and future; that such charge was to be a floating security, but so that the company were not to be at liberty to create any mortgage or charge in priority to, or upon an equality with, that debenture; that the company should be at liberty to carry on their business until default should be made in payment of the principal sum secured, or until a receiver should be appointed, and that from and after such default, or the appointment of a receiver, the liberty of the company to carry on their business should forthwith cease and determine, and the charge created by the debenture should be immediately enforceable. The company subsequently issued to the defendants, with whom they had been and were trading, a debenture payable on October 1, 1900, and expressed to be subject to the debenture held by the bankers. The company made default in payment both of the debenture issued to the bankers and of that issued to the defendants. The bankers took no steps to stop the company carrying on their business until October 2, 1901, when they appointed a receiver. In an action brought by the company and the bankers to recover from the defendants the balance of the price of goods sold and delivered by the company to the defendants between July 1, 1900, and October 1, 1901 : Held, that the defendants were entitled to set off the sum which, on October 1, 1900, became due under their debenture against the sum due to the plaintiffs for the goods. ACTION tried before Joyce J. sitting as an additional judge of the King's Bench Division. The plaintiffs, Edward Nelson & Co., Limited, were lace manufacturers at Nottingham, and the defendants were a firm of lace merchants carrying on business in Austria. The claim in the action was for 28877., the balance alleged to be due for the price of lace goods sold and delivered by Edward Nelson & Co., Limited, to the defendants. The defendants admitted the sale and delivery of goods to the amount claimed, but alleged (inter alia) that they were 1903 May 29; June 16, 17, 29. 1903 entitled to set off against the claim sums of a greater amount due to them under debentures issued to them by Edward Nelson & Co., Limited, and counter-claimed for the balance. The facts proved or admitted at the trial, so far as they are FABER & CO. material for the purposes of this report, were as follows: EDWARD NELSON & Co., LIMITED v. : On March 12, 1900, the plaintiffs, Edward Nelson & Co., Limited, duly issued and delivered to the plaintiffs, Moore & Robinson's Bank, three debentures bearing that date. By No. 1 of those debentures Edward Nelson & Co., Limited, covenanted to pay the bank, on August 1, 1900, the sum of 30007., with interest thereon, and the company thereby charged with such payments its undertaking and all its property whatsoever and wheresoever both present and future, and the debenture was expressed to be issued subject to the conditions indorsed thereon. By No. 2 the company covenanted, in the same form and subject to the same conditions, to pay the bank 20007., with interest thereon, on August 1, 1901. The conditions indorsed on each of the debentures numbered 1 and 2 provided as follows: Condition 1. "This debenture is one of a series of debentures of the company for securing principal sums not exceeding in the whole 15,000l. The debentures of the said series are all to rank pari passu as a first charge on the property hereby charged without any preference or priority one over another, and such charge is to be a floating security, but so that the company is not to be at liberty to create any mortgage or charge in priority to or upon an equality with the said debentures." Condition 2. "Notwithstanding the charge created by the said debentures, the company shall be at liberty in the course of its business, and for the purpose of continuing and carrying on the same, to use, employ, sell, lease, exchange, or otherwise deal with all or any part of the said property until" (amongst other events not material to be stated for the purposes of this report) "default shall be made in payment of any principal moneys hereby secured, or for the period of two calendar months after the same shall have become due according to the tenor of this debenture of any interest thereon, or until a receiver of the company's undertaking or any part thereof shall be appointed," &c. or the 1903 EDWARD NELSON & Co., LIMITED v. Condition 3. "From and after such default appointment of such receiver whichever shall first FABER & CO. happen. . . . . the liberty and authority to the company hereinbefore given shall forthwith cease and determine, and the principal moneys hereby secured shall immediately become payable, and the charge by this debenture created shall and may be immediately enforceable." Condition 11 provided that at any time after the principal moneys thereby secured should become payable, or in the event of the company making default for two calendar months in the payment of any interest thereby secured, the registered holder of the debenture might appoint by writing a receiver of the undertaking and property charged by the said debenture, and a receiver so appointed should have power to take possession of the property charged by the said debenture and to carry on, or concur in carrying on, the business of the company, and to sell, or concur in selling, the company's undertaking and property, and that moneys received by the receiver should be applied in or towards satisfaction of the debenture. On May 14, 1900, Edward Nelson & Co., Limited, duly issued and delivered three debentures to the defendants. By No. 1 of those debentures the company covenanted to pay to the defendants the sum of 1500l. on October 1, 1900; by No. 2 the sum of 1500l. on October 1, 1901; and by No. 3 the sum of 3000l. on October 1, 1901; and each of those debentures contained, in the conditions indorsed thereon, the following stipulations: "This debenture is one of a series of debentures of the company for securing principal sums not exceeding in the whole 6000. The debentures of the said series are all to rank pari passu (subject as hereinafter mentioned) as a charge upon the property hereby charged without any preference or priority one over another, and such charge is to be a floating security, but so that the company is not to be at liberty to create any mortgage or charge in priority to or upon an equality with the said debentures, subject, however, to 1903 EDWARD NELSON & Co., LIMITED v. FABER & CO. an existing issue of prior debentures for the total amount of 15,000l." The existing issue of prior debentures there referred to were the debentures issued to Moore & Robinson's Bank as before stated. Edward Nelson & Co., Limited, did not, on August 1, 1900, or at any time, pay to Moore & Robinson's Bank the sum of 30001. payable under the covenant contained in the first of the debentures issued to that bank. The bank, however, did not appoint a receiver, and took no step at that time to prevent the company from carrying on their business, which they continued to do. The company did not, on October 1, 1900, or at any time, pay to the defendants the sum of 1500l. payable under the covenant contained in debenture No. 1 of the debentures issued to them. The company did not, on August 1, 1901, or at any time, pay to the bank the sum of 2000l. payable under the covenant contained in debenture No. 2 of the debentures issued to them; nor did the company, on October 1, 1901, pay to the defendants the sum of 1500l. payable under the covenant contained in debenture No. 2. On October 2, 1901, the bank appointed a receiver under the power contained in their debentures, and on the same date he took possession of the property and undertaking of the company and carried on their business. The manager of the bank gave evidence that on September 28, 1901, he saw the managing director of the company, and told him that unless payment was provided for of certain cheques drawn by the company, in favour of customers and presented to the bank for payment, the bank would at once take steps to appoint a receiver; that payment of those cheques was not provided for; that on September 30, 1901, the bank manager again saw the managing director of the company and asked him if he would consent to act as receiver for the bank as debentureholders; that on the same day the bank manager gave directions to the bank's solicitors to proceed with the preparation of a deed appointing a receiver; and that on October 2 the managing director of the company definitely consented to act as receiver, and was appointed accordingly. 1903 EDWARD & Co., LIMITED v. The goods claimed for in the action were supplied between July 1, 1900, and October 1, 1901. The action was originally brought in the name of the plaintiffs, Edward Nelson & Co., Limited, for and on behalf of Moore & Robinson's Bank; but that bank, and another bank with whom they had amalgamated, FABER & Co. were subsequently added as plaintiffs. The defendants claimed (inter alia) to set off against the plaintiffs' claim the two sums of 1500l. and 1500l. payable under the debentures held by the defendants, and counter-claimed to be paid the balance by Edward Nelson & Co., Limited. Montague Lush, K.C., O. Leigh Clare, and Appleton, for the plaintiffs. The defendants are not entitled to set off any sums due to them under their debentures against the sum claimed by the banks. By the express terms of the conditions indorsed on the first of the debentures issued by E. Nelson & Co., Limited, to Moore & Robinson's Bank, the liberty and authority of the company to carry on its business absolutely ceased and determined on August 1, 1900, when default was made by the company in payment of that debenture. The security ceased to be a floating security on that date; and, in the absence of any conduct by the banks which would raise an estoppel against them, no right of set-off could thereafter be acquired by the defendants, who had notice of the debentures issued to Moore & Robinson's Bank, and took their own debentures subject thereto. In construing a condition indorsed upon the debentures in Government Stock and Other Securities Investment Co., Ld. v. Manila Ry. Co. (1), Lord Halsbury L.C. was of opinion that the company's liberty to carry on business after default continued because, though the condition provided that they might carry on business until default, the words "and no longer" could not be implied from it. The equivalent of those words is clearly expressed in the condition in the present Until August 1, 1900, E. Nelson & Co., Limited, carried on their business as of right; after that date they carried it on by the sufferance of the banks and at their mercy: see Lord case. (1) [1897] A. C. 81. |