Ch. Div. 691) is referred to as showing that an appointed fund carries the intermediate interest. Now that, I repeat, appears to me to be an intelligible proposition. When we look at this will what we have after all to ascertain is the intention of the testator to be gathered from the words that are used. What has he done? He has taken these leaseholds, severed them from the rest of his estate, given them to trustees for the daughter Emily, and then to her children as she shall appoint, in terms which would clearly authorise a payment of the income of those leaseholds to the children if she chose to exercise the power in that way. In her appointment she has said nothing about the intermediate income of the leaseholds. But it does seem most extraordinary to say of a will constructed like this that it was not the intention of the testator that his daughter's children should have the intermediate income, but that the intermediate income must by some rule of law be treated as undisposed of and go into the residue until the children attain twenty-one. It appears to me that this case falls within the principle of those cases to which I have alluded and which are based on good sense, and which, if they are contrary to Furneaux v. Rucker (ubi sup.), must, I think, be preferred to Furneaux v. Rucker (ubi sup.). I do not think the cases referred to by Mr. Vernon Smith are opposed to this decision. Holmes v. Prescott (12 W. R. 636) and Hodgson v. Earl of Bective (1 H. & M. 376), when you come to examine them, do not fall within the category of cases to which I have been referring. And it strikes me that it would be quite contrary to the intention of the testator, to be fairly gathered from the mode in which he has dealt with these particular leaseholds, to say that the daughter's children are not to have the income, and that the income cannot be applied to their maintenance so long as they are minors. Therefore, I think that the decision of North, J. in this case must be reversed, and the proper alteration must be made. The form of order had better be this: "Declare that the rents and profits of the testator's leasehold estate devised in trust for the testator's daughter Emily and her children from the death of the said Emily until a child shall attain twenty-one, or being a daughter marries, are with the accumulations thereof applicable to the maintenance of the infant defendant Joseph Spencer Glass and the other infant children, if any." And the same with regard to the Marsdens.

LOPES, L.J.-I entirely agree. We are dealing with leaseholds, and I know no ground on which in a case like this leaseholds stand in a different position from other personal property. Then the question is, what principle are we to apply? I entirely agree that the proper principle to apply is the principle which is to be gathered from the three cases to which reference has been made, viz., Kidman v. Kidman (ubi sup.), Re Medlock (ubi sup.), and Re Clements (ubi sup.). Applying that principle I come to the conclusion that the decision of the learned judge in the court below was wrong and ought to be reversed. There is this satisfaction in adopting this principle and applying it to the present case, that I feel quite clear that by so doing we are carrying out the intention of the testator. The case of Furneaux v. Rucker (ubi sup.) was cited, and it is said that the principle involved in that case is different from

[CT. OF APP.

the principle involved in the three cases to which I have referred. All I can say is, that I have great difficulty in understanding the decision in Furneaux v. Rucker (ubi sup.), and if the principle contained in that case is not reconcilable with the principle contained in the cases to which I have referred, I do not agree with the case of Furneaux v. Rucker (ubi sup.).

KAY, L.J.-I have come to the same conclusion upon this particular will. There is no doubt that a contingent specific bequest of chattels real, or of personalty, not being residuary personalty, where the subject-matter of the gift is not directed to be set apart from the rest of the estate will not carry the intermediate income. Those in effect are the words used by Mr. Theobald in the 5th edition of his book (at p. 146), and he cites Holmes v. Prescott (ubi sup.), Guthrie v. Walrond (22 Ch. Div. 573), and the case of Wright v. Warren (4 De G. & Sm. 367). Now, Guthrie v. Walrond (ubi sup.) most certainly supports very distinctly that statement, and if we had got here nothing but a contingent bequest of chattels real which were not directed to be set apart from the rest of the estate the intermediate income would not pass. But it has been held for a very long time past, in cases as collected at p. 153, and Lindley, L.J. has referred to them, that where a fund is directed to be invested and held by trustees upon certain trusts or otherwise directed to be set apart, it does carry income. The real question is, what is the construction of this will? By this will leaseholds were given specifically by the testator to trustees upon trust for one of his daughters, and, after her death, as she should appoint, among her children; and, in default of appointment, to the children vesting at twentyone or in case of daughters marriage. Are they, or are they not, severed from the bulk of the testator's personal estate? If they are, the rule applies. If they are not, then any intermediate income till the contingency arises between the death of the tenant for life and the vesting in the children of that tenant for life would fall into the residue. Now, what better indication could you possibly have of setting apart property so as not to form part of the bulk of the testator's estate than giving it specifically to trustees upon trust for one tenant for life, and then giving to that tenant for life power to deal with everything, principal and income, from the moment of her own death, and then, in default of her doing so, giving the capital to her children who shall attain twentyone? True, it is a contingent gift to these children. But if the whole thing has been separated from the bulk of the testator's personal estate, then there is no ground for saying that the intermediate income between the death of the tenant for life and the vesting in the children of the tenant for life remains part of the residue. The case of Kidman v. Kidman (ubi sup.) is valuable, because there the very same thing occurred, and it was held that a fund which had been severed for the benefit of a tenant for life and remainderman did carry the interest accruing between the death of the tenant for life and the vesting in the remainderman. Then you have got exactly that state of things. You have got the leaseholds severed from the rest of the estate vested in trustees for the benefit of that tenant for life, and, after that tenant for life's death, to go to the appointees being children of the tenant

CT. OF APP.]

for life, and in default, as I have mentioned, to the children who have attained twenty-one. I cannot possibly see how this case can be distinguished from the case to which reference has been made, or from the principle which has been laid down for a long time as governing questions of this kind as to the disposition of the intermediate income. Really, the only case which strikes me as being contrary to this view is the case of Furneaux v. Rucker (ubi sup.), which has been brought before us. It is a case reported only very briefly in the Weekly Notes, where we cannot tell from the report what the argument was, and cannot tell what the reasons of the judge were; and we do not even know distinctly what the provisions of the will were. Now, I, speaking for myself, venture to protest against a case of that sort being treated as an authority. All I can say is that, if it decide something which goes directly contrary to the rule laid down in some of the previous cases, it cannot be treated as a good authority for anything certainly not for contradicting so well-established a rule. I therefore hope that Furneaux v. Rucker (ubi sup.) will not be cited again as an authority for anything, because I do not think anybody can, from the investigation which has been made of it, really understand upon what principle that case was decided. Therefore, I think, with deference to the learned judge in the court below, that, in following what he supposed to be the decision in Furneaux v. Rucker (ubi sup.), he has rather gone against the current of authority which has laid down very clearly an intelligible rule, which applies to this case, and which would have led him to a different conclusion. Therefore, I think that the decision of the learned judge in the court below must be reversed, and I agree in saying that is the proper conclusion to come to in this Appeal allowed.

case.

Solicitor for the appellant, Thomas W. Mit. chell.

Solicitors for the respondents, Torr, Gribble, Oddie, and Sinclair; Thomas W. Mitchell.

May 15, 17, and 20.

(Before LINDLEY, LOPES, and KAY, L.JJ.) THE PORTSEA ISLAND BUILDING SOCIETY v. BARCLAY. (a)

APPEAL FROM THE CHANCERY DIVISION.

Building society-Mortgage - Power to lend on first mortgage Part payment of mortgage moneys by third person-Postponement of security in favour of third person-Second mortgage-Borrowing powers-Ultra vires-Subrogation.

A building society, which had exceeded the borrowing powers under its rules, was in need of money. The society had previously lent a sum of 17,0001. upon mortgage to H., one of its members. The directors of the society then arranged that H. should borrow 60001. from a life assurance company upon the security of the property already mortgaged by him to the society, and that the society should join in the security to release its charge in favour of the assurance company, who would thus become (a) Reported by W. C. BISS, Esq., Barrister-at-Law.

[CT. OF APP.

first mortgagees. This arrangement was carried out by a mortgage deed dated the 1st Dec. 1891, by which the directors of the society postponed their security. H. received the 6000l., and immediately handed it over to the society in part payment of his debt, the balance being secured to the society by a second charge upon the property. The directors of the society paid out of its funds all the costs of this transaction. It was sought to support it on the ground that it was in the nature of a realisation of their security by the directors as mortgagees.

Held (affirming the decision of Romer, J., 71 L. T. Rep. 82), first, that the transaction with the assurance company was ultra vires the society; secondly, that the assurance company's security for 6000l. was postponed to the society's security for 11,000l.; and, thirdly, that the assurance company was not entitled to a security as against the society, in respect of any part of the 60007. applied in payment of any debts and liabilities properly payable by the society.

APPEAL by the defendants, Barclay and others, trustees of the Imperial Life Assurance Company, from a decision of Romer, J. (71 L. T. Rep. 82).

Cozens-Hardy, Q.C., and A. W. Rowden for the appellants. Neither in form nor in substance was this an advance by way of loan to the society. Therefore the transaction was not a borrowing by the society at all. It was merely a mode of realising part of its security. There was nothing ultra vires the society in such a transaction. The society could have foreclosed, or could have assigned the whole or any part of the mortgage debt due to it, which was clearly its own property. House owed the society over 17,000l., and was not in a position to repay even a part of that debt at once. It was plainly competent to the society to ask him to pay off the whole or part of it. When the society found that he could not pay anything, there was nothing to prevent it from asking the appellants, the assurance company, to lend House the money to enable him to pay off part of what was due to the society. The society postponed its own security only to the extent of the sum which went into its own coffers. The transaction was not an evasion of the borrowing rule, but the only available mode of getting back part of the money lent by the society. The point is one of first impression. Rule 11 is directory only.

There is a wide distinction between that which involves merely a breach of trust and that which is void altogether. What was done by the society was justified as being incidental to their position as mortgagees:

Sheffield and South Yorkshire Permanent Building
Society v. Aizlewood, 62 L. T. Rep. 678; 44 Ch.
Div. 412.

CT. OF APP.]

If the appellants are not entitled to rank as first mortgagees, their securities rank pari passu with the securities held by the society on the same properties. At least the appellants ought to be in the position of assignees of the debt to the extent of 6000l. At any rate, they are second creditors of the society to the extent to which the moneys advanced were applied in payment of the debts and liabilities of the society properly payable:

Cunliffe, Brooks, and Co. v. Blackburn and District
Benefit Building Society, 52 L. T. Rep. 225; 9
App. Cas. 857.

The only authority that can be suggested against that view is

Small v. Smith, 10 App. Cas. 119.

The point arose in

Re Coltman; Coltman v. Coltman, 19 Ch. Div. 64. [KAY, L.J.-The principal authority on this point is the case of Re The Cork and Youghal Railway Company (21 L. T. Rep. 735; L. Rep. 4 Ch. App. 748).] In The Blackburn and District Benefit Building Society v. Cunliffe, Brooks, and Co. (48 L. T. Rep. 33; 22 Ch. Div. 61, at p. 71), Lord Selborne said: "The test is, has the transaction added to the liabilities of the company? If the amount of the company's liabilities remains in substance unchanged, but there is, merely for the convenience of payment, a change of the creditor, there is no substantial borrowing in the result, so far as relates to the position of the company. Regarded in that light, it is consistent with the general principle of equity that those who pay legitimate demands which they are bound in some way or other to meet, and have had the benefit of other people's money advanced to them for that purpose, shall not retain that benefit so as, in substance, to make those other people pay their debts. I take that to be a principle sufficiently sound in equity; and if the result is that by the transaction which assumes the shape of an advance or loan nothing is really added to the liabilities of the company, there has been no real transgression of the principle on which they are prohibited from borrowing.' We claim those observations as being entirely in our favour in the present case. The money obtained from the appellants has gone to discharge the liabilities of the society, and the appellants are entitled to the right of subrogation.

Haldane, QC., Carson, Q.C., and Edward Ford for the respondents. The money was advanced by the appellants, with full knowledge that the society's borrowing powers were exhausted, and that the transaction was ultra vires the society. Even if the transaction was what it appeared to be, it was ultra vires. It was really an investment on second mortgage of the balance of the amount originally lent by the society, which remained after deducting what the appellants paid to House. Such an investment is forbidden by rule 11, and the effect of that prohibition is not cut down by the subsequent portion of the rule which enables the directors to accept another security or to release part of the mortgaged estate. The appellants obtained no security whatever by the society depositing deeds belonging to its members. They relied on

Small v. Smith (ubi sup.). Cozens-Hardy, Q.C. replied. Vol. LXXII., 1864**.

[CT. OF APP.

LINDLEY, L.J.-The case is an important one, and in some respects the decision at which we have arrived will be a hard one for the appellants. The appellants are the Imperial Life Assurance Company, and they appeal against an order made by Romer, J., which is to this effect: The court declares that certain mort. gages, which I will refer to presently, are not binding on the plaintiff society, that is, the Portsea Island Building Society, and that a counter-claim, to have a first charge upon some property which is comprised in those mortgages, must be dismissed with costs. The case arises in this way: The Portsea Island Building Society was a building society formed under the Building Societies Acts, and governed by rules. That society, like many other building societies, has borrowed money far in excess of its powers. That is beyond controversy and nobody disputes that. The society had exceeded its borrowing powers at the time of the transaction to which I am about to refer. Mr. House had borrowed money of the society in the ordinary way upon mortgage. He had borrowed a very considerable sum, about 17,000l., by the 1st Dec. 1891. He first of all borrowed 6000l. and then he borrowed some more, and he gave the Portsea Island Building Society mortgages and securities for the money. I have already said that in Dec. 1891 the Portsea Island Building Society had borrowed money far exceeding its powers; and that that fact was known to the Imperial Life Assurance Company. There is no question at all about that. Well, then the Portsea Island Building Society wanted cash-whether it wanted to borrow more money or not is another matter-but it wanted cash, and one method of obtaining cash of course was to get House, and others like him, to pay off their mortgages which would produce the cash. So an arrangement was come to between the Imperial Life Assurance Company and the Portsea Island Building Society and House. The arrangement was to the effect that the Imperial Life Assurance Company should lend House 60007.; that they should do that at the request of the Portsea Island Building Society; and that, in consideration of that advance by the Imperial Life Assurance Company to House at the request of the Portsea Island Building Society, the Imperial Life Assurance Company should have a first charge on the property which had been mortgaged by House to the Portsea Island Building Society. In other words, the Portsea Island Building Society was to postpone its charge or the rest of its charge-its charge in form and in substanceto the claim of the Imperial Life Assurance Company. A deed of the 1st Dec. 1891 was accordingly executed between House of the first part, the Portsea Island Building Society of the second part, some trustees of the same society of the third part, and the trustees of the Imperial Life Assurance Company of the fourth part. Now it is obvious from the recitals, from the framing of that deed, and from the circumstances which were known to both parties when that deed was executed, that the very last thing contemplated was that the Imperial Life Assurance Company should lend money to the Portsea Island Building Society. They could not do that, and they knew that they could not do that, because they knew that the Portsea Island Building Society had long ago exhausted all its borrowing

CT. OF APP.]

powers. They knew, therefore, that this transaction must take the form of a loan to House; and that nothing short of a loan to House would have a reasonable chance of being a valid transaction. Accordingly, the recitals are: that the Imperial Life Assurance Company have agreed to lend to House 60007., and the 60007. is advanced to House at the request of the Portsea Island Building Society, and House covenants to repay the money. Then House as beneficial owner grants and conveys all the mortgaged premises, and the Portsea Island Society releases all the mortgaged property to the Imperial Life Assurance Company discharged from the 17,7901. Then there is this proviso: Subject to the proviso for redemption hereinafter contained, provided always, and it is hereby agreed that, if House or the Portsea Society shall pay to the mortgagees -that is the Imperial Life Assurance Company -"the sum of 60001." which is what the Imperial advanced to House "with interest"-I understand that the interest on this amount was 6 per cent. -"then the mortgagees"-that is the Imperial-— "shall at any time thereafter upon the request and at the cost of House reconvey the premises hereby mortgaged to the use of the society "that is the Portsea Society-" or as they shall direct, subject to such right or equity of redemption as the same premises would if these presents had not been executed have been for the time being subject to by virtue of the society's mortgages on payment of the moneys thereby secured, and with the same power of sale and other powers and authorities in all respects as would have been subsisting or might have been exercised if these presents had not been executed." Now, what was the legal effect of that transaction? It seems to me that the legal effect of that was very simple and very plain. The legal effect was exactly that which the parties intended. It was a loan by the Imperial Life Assurance Company to House upon the terms that the Imperial Life Assurance Company were to have a first mortgage upon the property, which up to that time had been mortgaged to the Portsea Island Building Society, and the Portsea mortgage was to be postponed to the extent of 6000l. until the security had been repaid. That is the real effect of the transaction. Now, unfortunately it is said, and I think rightly said, that that transaction was beyond the powers of the directors of the Portsea Island Building Society. That turns upon the rules, and it is impossible to read rule 11, which is a very long one, without seeing that it was impliedly forbidden to the directors of this Portsea Island Building Society-indeed, expressly forbidden I will start with saying-to lend money on second mortgage. This was not in form a loan on second mortgage, but the transaction, although not in form a loan on second mortgage, had all the incidents, all the consequences, and all the inconveniences of a second mortgage. Now the 11th rule is: The member to receive an advance shall give notice of the nature and situation of the premises intended to be offered." I need not read the whole of it. Then he is to submit to the society an abstract of the title of the property on which he proposes to borrow the money. Then the society is to look into that, to see that it is right, that the title is good, and that the property is of sufficient value. Then comes this provision: "In no case shall any pro

[CT. OF APP.

perty be deemed a sufficient security for moneys to be advanced by this society which shall be subject to previous mortgage otherwise than to this society, or which shall be held for a term of years subject to the payment of an annual rack rent." Then, later on, comes this passage: "The directors may from time to time accept any other security by mortgage, in manner herein before mentioned, in place of any existing security, or may direct the release of any portion of any mortgaged estate, if they shall be satisfied that the remainder will be sufficient security, or may grant or concur in granting, a lease of any property in mortgage to the estate." I do not think I need read further than that. Then there is rule 13, empowering mortgagors to redeem their property: "If any member shall be desirous of having his property discharged from the mortgage under which it may be liable, he shall be allowed to do so on payment of all advance repayments, interest," and so on. Now, I think that it is quite impossible to read that rule 11, and to see what the effect of this transaction is, and not come to the conclusion that it was beyond the powers of the directors. I say, speaking for myself, I do not think it is exactly and directly within rule 11, because the directors were not advancing money to House, but they were doing this, which put them in precisely the same position: they were putting themselves in the position which the rules say they are not to be in, namely, in the position of second mortgagees, and there is all the difference possible between taking a first mortgage and taking a second mortgage, even if the second mortgage is a good security. The second mortgagee is always liable to be excessively embarrassed by the action taken by the first mortgagee, quite apart from the value of the security, even if the security is a good one. There is redemption and there is sale, and there are the costs and all sorts of things which embarrass a second mortgagee. One knows perfectly well that prudent people are very loth to lend money on second mortgage. There is good sense in saying to a building society, "You shall have nothing to do with second mortgages." And it appears to me that it is impossible to read those rules and not say that second mortgages are directly prohibited in the shape of advancing on second mortgage, and impliedly so if it is in any other shape. Now, what the directors were doing here was that which was in the teeth of the rules as I read them. Therefore, I cannot differ from Romer, J. when he says that this is an ultra vires transaction as regards the Portsea Island Building Society, that the directors had no power whatever to enter into a bargain that the Imperial Life Assurance Company should have a charge upon this property in priority to the Portsea Island Building Society. That is the main point, and, of course, that is nine-tenths of the whole battle. Then it is said, "But although that is so, we have an equity of some kind. We either have an equity to stand in the position of the Portsea Island Building Society as regards 60007. part of the large sum of 17,000l., or, at all events. we have an equity to stand in the position of certain persons as creditors of others who have been paid off by means of our money." As regards the first point let us consider how that is. It is to my mind the most difficult point, because it stands in this way: The Portsea Island Build

CT. OF APP.]

ing Society say, "Although you, at our request, advanced House money-60007.-upon the terms that you were to have a security on our property, we cannot comply with those terms, and therefore our mortgage will come in in priority to yourselves." Well, that does not seem just, and if there were any way out of it I certainly would assist the appellants, and I think I may say Romer, J. would have done so. But there is a great difficulty in doing so. In the first place, I doubt very much whether this is asking for equitable relief as distinguished from legal relief. But, apart from that, I do not see how it is possible to put the appellants in the position which they are now suggesting unless we could come to the conclusion that an arrangement to that effect would have been within the powers of the directors. If we could come to the conclusion that the Imperial Life Assurance Company might have been in the position of a contributory mortgagee it might possibly be done. But there again, when you come to look at the rules 11 and 13, I do not think that such an arrangement would have been a proper arrangement for the trustees of the Portsea Island Building Society or the directors of that society to make. I think it would be involving or sanctioning a breach of trust if we were to take that view.

I do not think it could be done. Certainly there is no case which goes anything like the length to which we should be going if we were to make a declaration to that effect. Now, as to the other pointinvoking in aid the doctrine established in the case of The Cork and Youghal Railway Company (21 L. T. Rep. 735; L. Rep. 4 Ch. App. 748) and that class of case-that appears to be wholly out of the question. The legal answer to that is this: "You, the Imperial Life Assurance Company, never lent money to the Portsea Island Building Society at all. You not only did not do it, but you intended not to do it, and you have lent your money to House, and it has nothing to do with us what House has done with his money. If the money you lent to House has gone to pay creditors or anybody else, that may be House's affair, but it is not your affair." It appears to me, that the principle on which the doctrine in Re The Cork and Youghal Railway Company rests is stated extremely well by Lord Selborne in The Blackburn and District Benefit Building Society v. Cunliffe, Brooks, and Co. (48 L. T. Rep. 33; 22 Ch. Div. 61, at p. 71) in that passage referred to by Mr. Rowden. It is impossible to read that passage without seeing that the doctrine presupposes a loan to the society-a loan which is ultra vires-but a loan direct from the Imperial Life Assurance Company to the Portsea Island Building Society, and which has been applied in paying off obligations of the Portsea Island Building Society. It was nothing of the sort, and a direct loan to the society was purposely avoided. To hold that the doctrine applied to this case would be to extend that doctrine to a case to which the reasoning does not apply at all. It is because I have lent money to a person who has applied that money in some way or other that I am entitled to stand and take the benefit of the mode in which he has applied it. I think that it is mere confusion of thought to invoke that line of cases in the present case. For the reasons I have given I do not think the appellants are entitled to the relief asked, and I come there-.

[CT. OF APP.

fore to the conclusion, though reluctantly, that the decision of the learned judge in the court below is right, and that the appeal must be dismissed with costs.

LOPES, L.J.-I am of the same opinion. It seems to me clear that this transaction was ultra vires. In point of fact the transaction appears to me to be an indirect mode by which the society seeks to enlarge its borrowing powers. The true nature of the transaction is this: It is a transaction by which the directors have accepted for the balance of the debt due from House an insufficient and improper security-insufficient and improper under the rules, viz., a second charge. I cannot help thinking that it was very well put when Romer, J. said that the transaction was really much as if House had obtained from the Imperial Life Assurance Company the whole of the 17,000l.; had then paid off to the building society the mortgage debt, and then the building society had relent the money-60001. of it-on the first mortgage, and the other 11,000l. on a second contributory mortgage. Clearly that is a transaction which could not have been maintained under the rules, and speaking for myself-on all these subjects I speak with diffidence it appears to me that the transaction is practically the same as that. Then there was another point which was taken. The Imperial Life Assurance Company say that they have an equity to stand in the shoes of the building society as regards the 6000l. I entirely agree with that which has been said by Lindley, L.J. on that point, and I would only add that that was not the contract. The contract was that it was to be a first charge. It was not this, that if it was not a first charge they were to come in pari passu. That was not the contract at all between these parties. The contract was an express one that the Imperial Life Assurance Company were to have a first charge. regard to the last point I think the answer to that is, that it was in truth and in fact a loan to House. The only person whom the Imperial Life Assurance Company could have sued would have been House, because the loan was to him. I entirely agree with Romer, J., and I think that the result he has arrived at is the correct one.

With

KAY, L.J.-In all the cases relating to building societies it is extremely important to see that the acts which they have done are entirely within their powers. And if in this case we were minded to be brought to the conclusion that this transaction could be supported in the form which it has taken, of course it would be a precedent, on very many future occasions, and to my mind it would be a most dangerous precedent indeed. The main circumstances of the case are these: When this transaction was entered into, the Portsea Island Building Society had exhausted all its borrowing powers. It could not borrow money from anyone. It seems to have wanted cash, and the contrivance by which, in the absence of any borrowing powers -the powers being exhausted-it sought to obtain cash was this, which I understand has been followed in other cases beside the case of House. House was a person to whom the society had properly made an advance, and from whom it had taken a mortgage of property to secure that advance, all being regular and within its rules. The present transaction is one by which, by agreement with the society and House, the