Sinclair v Brougham: HL 1914

An insolvent building society had, outside its powers, run a banking business. The House considered the competing claims of the unadvanced shareholders of the building society’s intra vires business, members of the society who had not been granted mortgages, and the depositors of its ultra vires banking business. The claims of all other creditors had, by agreement, been met. It was accepted that contracts entered into for the purposes of that ultra vires business, which by the time of bankruptcy had become the society’s predominant business, were, so far as the society was concerned, void. The issue was the significance of that fact for the priority of claims of the shareholders and the depositors to the funds held by the Liquidators. In the High Court and the Court of Appeal the unadvanced shareholders prevailed: the depositors’ contracts were held void, and therefore would only be honoured to the extent that all prior valid claims had been met.
Held: The competing claims for priority of both the unadvanced shareholders and the depositors were declined. The available funds were to be shared pro rata, an outcome that had not been considered until raised by Viscount Haldane during argument.
Viscount Haldane approached the question by assuming that specific tracing was not possible and, on that basis, concluding that pro rata sharing was the way to apportion the monies: ‘The depositors can, in my opinion, only claim the depreciated assets which represent their money, and nothing more. It follows that the principle to be adopted in the distribution must be apportionment on the footing that depreciation and loss are to be borne pro rata. I am, of course, assuming in saying this that specific tracing is not now possible.
What is there must be apportioned accordingly among those whose money it represents, and the question of how the apportionment should be made is one of fact. In the present case the working out of a proper apportionment based on the principle of tracing not only would involve immense labour but would be unlikely to end in any reliable result. The records necessary for tracing the dealings with the funds do not exist. We have therefore, treating the question as one of presumption of fact, to give such a direction to the liquidator as is calculated to bring about a result consistent with the principles already laid down.
Viscount Haldane
[1914] AC 398, [1914-15] All ER 622
England and Wales
Cited by:

  • Explained – In re Diplock’s estate CA 1948
    re_diplockCA1948
    After considering a situation in which trust money had been applied in making alterations to the property of an innocent third party but had not added to the value of the property,
    Held: The origin of the equitable rules of tracing were . .
    [1948] Ch 465
  • Cited – Foskett v McKeown and Others CA 27-Jun-1997
    Various people had paid money with the promise of acquiring an interest in land in Portugal. The scheme was fraudulent. The funds had been used to purchase a life/investment policy. The policy was held in trust for the fraudster’s mother but he had . .
    Times 27-Jun-97, [1997] EWCA Civ 1747, [1998] Ch 265

These lists may be incomplete.
Updated: 02 December 2020; Ref: scu.187413