''Sinclair v Brougham''
914AC 398 is an
English trusts law
English trust law concerns the protection of assets, usually when they are held by one party for another's benefit. Trusts were a creation of the English law of property and obligations, and share a subsequent history with countries across ...
case, concerning the right of depositors to recover sums which were deposited (or loaned) to a
building society
A building society is a financial institution owned by its members as a mutual organization. Building societies offer banking and related financial services, especially savings and mortgage lending. Building societies exist in the United Kingdo ...
under contracts of deposit which were beyond the powers of (''
ultra vires
('beyond the powers') is a Latin phrase used in law to describe an act which requires legal authority but is done without it. Its opposite, an act done under proper authority, is ('within the powers'). Acts that are may equivalently be terme ...
'') the building society.
Facts
The Birkbeck Permanent Benefit Society was formed under the
Building Societies Act 1836, but was never registered under the
Building Societies Act 1874
A building, or edifice, is an enclosed structure with a roof and walls standing more or less permanently in one place, such as a house or factory (although there's also portable buildings). Buildings come in a variety of sizes, shapes, and func ...
. Under rule 35 of the Society’s
constitution
A constitution is the aggregate of fundamental principles or established precedents that constitute the legal basis of a polity, organisation or other type of entity and commonly determine how that entity is to be governed.
When these princip ...
it was allowed to borrow money. Rule 97 said that losses should be shared among the two classes of shareholders in different proportions. From the start it developed a banking business, the Birkbeck Bank, but this was
wound up in 1911. The four groups of creditors were (1) A shareholders who would be repaid on maturity, (2) B shareholders who had permanent shares (3) trade creditors and (4) depositors. The trade creditors and the A shareholders had their claims settled by an agreement. The
liquidator brought an action to determine the others' rights, given that technically, if the contracts for deposits were
void, the depositors had no straight forward personal claim.
Neville J held that rule 35 was not a question of
the Society's capacity, but it was a power and the power to borrow had to be for proper purposes. The whole banking business was ''ultra vires'' and so the bank's depositors could recover nothing. In the
Court of Appeal,
Lord Cozens-Hardy MR,
Buckley LJ held the depositors would be paid last, after the shareholders.
Fletcher Moulton LJ dissented.
Judgment

The
House of Lords
The House of Lords, also known as the House of Peers, is the upper house of the Parliament of the United Kingdom. Membership is by appointment, heredity or official function. Like the House of Commons, it meets in the Palace of Westminster ...
held that the bank's actions had been ''ultra vires'' and void, and that there was no possibility for the depositors to recover under quasi-contract. An implied contract, as that was, would necessarily be void as well, and thus circumvent the point of saying that the deposit contracts were ''ultra vires'' and void in the first place. But instead, given that the depositors must plainly be paid back above the shareholders, an equity was created to give them a first claim.
Lord Dunedin, "Is English equity to retire defeated from the task which other systems of equity have conquered? No."
Viscount Haldane LC
A viscount ( , for male) or viscountess (, for female) is a title used in certain European countries for a noble of varying status.
In many countries a viscount, and its historical equivalents, was a non-hereditary, administrative or judic ...
held the power of the building society had to be limited to its proper objects, so the banking business was ''ultra vires''. Depositors were not entitled to recover their money paid by them on an ''ultra vires'' contract of loan on the footing of
money had and received by the society to their use. Applying the principle of ''
Re Hallett's Estate
''Re Hallett’s Estate'' (1880) 13 Ch D 696 is an English trusts law case, concerning asset tracing.
Facts
Mr Hallett, a solicitor, held bonds for Mrs Cotterill worth £2145 until he wrongfully sold them and put the proceeds in his current b ...
'' that the assets remaining after payment of the outside creditors must be taken to represent in part moneys which the depositors could follow, as having been invalidly borrowed, and in part moneys which the society could follow, as having been wrongfully employed by its agents in the banking business, and (subject to any application by any individual depositor or shareholder with a view to tracing his own money into any particular asset, and to the costs of the liquidation) ought to be distributed ''
pari passu
''Pari passu'' is a Latin phrase that literally means "with an equal step" or "on equal footing". It is sometimes translated as "ranking equally", "hand-in-hand", "with equal force", or "moving together", and by extension, "fairly", "without pa ...
'' between the depositors and the unadvanced shareholders according to the amounts respectively credited to them in the books of the society at the commencement of the winding-up.
Lord Dunedin,
Lord Atkinson,
Lord Parker and
Lord Sumner concurred.
Significance
The case was subsequently overruled by a majority of the House of Lords in . The majority held that it was simply wrong, and should be overruled. The minority expressed doubt about the outcome, indicating that the depositors ought to have been able to recover under a
resulting trust
A resulting trust is an implied trust that comes into existence by operation of law, where property is transferred to someone who pays nothing for it; and then is implied to have held the property for benefit of another person. The trust property ...
, but thought that the case should not be overruled. The effect of the decision in ''Westdeutsche'' on ''Sinclair v Brougham'' was considered at some length by the Court of Appeal in .
However the editors of Hayton & Mitchell
[''Cases and Materials on Trusts and Equitable Remedies'' (2010), at 613] say this case might nonetheless have been rightly decided, "depending on whether the ultra vires depositors' claim to recover their money on the ground of
failure of consideration was founded on the assertion that the building society had failed to repay their money, or on the assertion that their contracts with the building society had been void from the beginning."
See also
*
English trusts law
English trust law concerns the protection of assets, usually when they are held by one party for another's benefit. Trusts were a creation of the English law of property and obligations, and share a subsequent history with countries across ...
*''
In re Guardian Permanent Benefit Building Society'' (1882) 23 Ch. D. 40 considered and distinguished.
*''
Blackburn and District Benefit Building Society v Cunliffe Brooks & Co'' (1885) 29 Ch. D. 902 overruled.
Notes
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References
*
English trusts case law
House of Lords cases
1914 in case law
1914 in British law