LORD DENNING M. R., - In February, 1966, the plaintiffs, a company called Corinthian Securities Ltd. (which had only been incorporated a month or two) lent money, pounds 2,800, to the defendant Mr. Cato, to help him finance a shipment of plant and machinery to the West Indias. As security he gave them a mortgage on his house, 38, Garrick Avenue, Golders Green, London, N. W. 11. They stipulated for interest at 1 per cent per month (that is, 12 per cent. a year), together with a commitment fee of 2 per cent., that is pounds 56 payable in advance. The terms of repayment were that :
'This facility will be repayable on demand but provided the account is conducted satisfactorily no demand will be made and it is understood that full payment will be effected by two equal instalments of pounds 1,400 each. The first instalment to be made six months from the date of the first advance and continuation of the facility to be subject to the first reduction being made on the due date'.
As part of the arrangement, Mr. Cato gave a bankers order for the interest of pounds 28 a month. He gave it on his own bank, the Westminister Bank, payable to Corinthian Securities Ltd. at their bank - the National Provincial Bank. Mr. Cato did not get the full pounds 2,800. He only got pounds 2,650. The remaining pounds 150 was deducted for costs and so forth.
Corinthian Securities Ltd. claimed to be bankers. They kept what they called a 'current account' which Mr. Cato. They debited him with the interest as it became due; and afterwards, interest upon interest. Mr. Cato was not able to keep up the terms of repayment. He did not pay, at the end of the first six months, the stipulated pounds 1,400. So in July, 1967, Corinthian Securities Ltd. took proceedings in the county court for possession. They claimed as mortgagees to be entitled to possession. Mr. Cato submitted that Corinthian Securities Ltd. were moneylenders. Judge Leon was referred to United Dominions Trust Ltd. v. Kirkwood, and held that Corinthian Securities Ltd. were bankers. On July 27, 1967, he made an order for possession of the house to give up to the mortgagees, but that order was suspended for six months on terms which were agreed by counsel, namely : Mr. Cato was to pay pounds 2,000 straightaway, and to pay the balance in six months and future interest when it fell due, and so forth. Mr. Cato duly paid the pounds 2,000, but did not manage to pay the rest. So on September 4, 1968, Corinthian Securities Ltd. sought to remove the stay. Counsel then agreed on terms that the stay was to be continued, providing that Mr. Cato paid pounds 1,200 by September 11, 1968; pounds 305, and interest, from July 1 to October 31, 1968, to paid by November 1, 1968; the interest being at 12 per cent. per annum calculated on a day-to-day basis. The costs were also provided for :
After that agreement of September 4, 1968, the solicitors got out the accounts. On November 20, 1968, an account was submitted by Mr. Catos solicitors on his behalf. This showed a balance due from him of pound 11 0s. 11d., which they paid. They say that settled the accounts up to November 21, 1968. But Corinthian Securities Ltd. said that that was not the right balance. They went to the court again and sought to remove the stay. On May 19, 1969, Judge Beresford held that Mr. Cato had not paid what he ought to have done and made the order for possession. Mr. Cato had not paid what he ought to appeal. Terms were imposed by which he had to pay money into court. He did so. And now he appeals in person to this court. His argument raises a point of considerable interest.
Mr. Cato says that in Calculating the amount of the interest outstanding from time to time on this loan, he was entitled to and bound to deduct the tax, and that Corinthian Securities Ltd. were bound to allow it. Section 169 of the Income Tax Act, 1952, makes it plain that where 'yearly interest of money' is payable out of profits and charges brought into charge for tax, then the payer is entitled to deduct the tax and the payee is bound to allow it. Mr. Cato says the payments of interest were 'yearly interest of money' on which tax must be deducted. Mr. Leckie, on behalf of Corinthian Securities Ltd., submits that they were 'short loans,' on which tax is not deductible. Mr. Leckie urged us to say that any loan repayable on demand is a 'short loan' and that tax is not deductible from it. In support, he cited some words from Lord Anderson in Inland Revenue Commissioners v. Hay. I cannot agree with this contention. The words 'short loan' are not used in the statute : it is a mistake to place too much emphasis on them. The real question is whether the interest payable is 'yearly interest of money.' Interest is 'yearly interest of money' whenever it is paid on a loan which is in the nature of an investment no matter whether it is repayable on demand or not. An ordinary loan on mortgage is usually in point of law repayable at six months. But it is still 'yearly interest of money.' On the other hand, when a banker lends money for a short fixed period, such as three months, and it is not intended to be continued, such a loan is not in the nature of an investment. It is not 'yearly interest of money,' but a short loan. That is shown by Goslings and Sharpe v. Blake, where Lindley L. J. said, at page 330, referring to the ordinary mortgage : 'In point of business, therefore, a mortgage is not a short loan; but a bankers loan at three months is a totally different thing. '
Looking at the agreement in this case, it is plain to me that this loan was made as an investment. Although payable on demand, it was unlikely that any demand would be made so long as the interest payments were kept up. It was a loan on the security of property indistinguishable in principle from an ordinary loan or mortgage. The interest was 'yearly interest of money.' Mr. Cato and his advisers were perfectly entitled, when the account was made up, to deduct tax from it. Mr. Cato put before us a letter from the Inspector of Taxes to him, in which he was told he was not allowed to get his personal allowances because he was entitled 'to retain and recover tax from his mortgage interest payments.' I think the revenue were quite right in taking that view.
The judge seems to have thought that the agreement, which was made by way of settlement on September 4, 1968, took away Mr. Catos right to deduct the tax from the interest. I do not agree. I am quite sure that counsel had not got the question of tax in mind. It must necessarily be imported into their arrangements that on taking the accounts all proper deductions of tax should be made. Mr. Cato and his advisers were entitled, as they did, to deduct tax from the interest payments.
It is to be noticed that, although Corinthian Securities Ltd. Claim to be bankers, they had not got, at the material time, any authority to issue R. 62 certificates to get back tax on overdraft. The revenue authorities did not give it to them until December 23, 1968 - which is too late. The account was settled on November 20, 1968.
There is a second point in the taking of the account. Corinthian Securities Ltd. under date September 29, 1967, debited to Mr. Cato a sum of pounds 48 6s. 6d. for counsels fee. But the costs had not then been taxed. That sum was not due to Corinthian Securities Ltd. Mr. Cato ought not to have been debited with it.
It follows that the points taken by Mr. Cato on the account were quite right. His payment on November 20, 1968, of pounds 11 0s. 11 d. cleared the account at that time. He had satisfied the terms of the stay. He ought not to have been ordered to give up possession.
Two other sums were mentioned to us. One was the costs of the September, 1968, hearing, and also a sum called 'damages' for another pounds 60. These are sums which fell due after the relevant date, November 21, 1968. They do not affect the present issue. I express no view upon them. They may need further investigation. Corinthian Securities Ltd. can, if so advised, take further proceedings in respect of them. Meanwhile, the stay should be continued. I would allow the appeal accordingly.
WINN L. J. - I agree. My Lord has expressed the reasoning which has led me to that conclusion. I desire to add only one additional point : that is about a further claim made prematurely, as it seemed to me, by the plaintiffs in the action for a sum of pounds 50 in respect of 'damages,' as they are said to be, by way of reimbursement under an indemnity provision contained in the order of July 27, 1967. That sum was demanded, whether or not it be in law due, some time in June of this year, 1969. It was debited or purported to be debited in the banking account of March 20. Quite clearly until demand it was not due. This is another instance of the inability of these bankers, as they purport and claim to be, Corinthian Securities Ltd., to understand how they should operate a so called current account with a customer. In particular, for their own sake they should learn - no doubt they will be advised after this appeal - that bankers cannot make any debit against a customer in his current account with them unless they have an express or implied mandate to enter such debit, particularly if they are seeking to charge interest upon the amount so debited. There are several other instances -one need not take time to specify them - in which there have been premature or unauthorised debit entries in this so called current account. The parties mutual rights and liabilities in regard to payment of the costs to which this item of pounds 43 6s. 6d. is said relate are as yet, it seems to me, not ascertained. It may well be that Mr. Cato is overstating his position when he says he has already paid the whole of his liability with regard to costs. Any liability he may have for costs would arise, it seems to me, by force of clause 13 of the legal charge of May 2, 1967, always assuming that he did execute that. It would certainly not arise, as it argued that it would under clause 1 of that deed I completely reject; it seems to me to be utterly nonsensical. Nor do I pay any serious attention to the submission made on behalf of Corinthian Securities Ltd. on the principal issue in this case, namely, that the loan in question was a short loan by a banker. It was not, quite plainly, I agree that the appeal should be allowed.
CROSS L. J. - I agree. If you look at the realities of this transaction, the plaintiffs were not bankers giving a client overdraft facilities. They were lenders making a loan on a mortgage of property. Even assuming that Mr. Leckie is right in saying that they could have called in the second instalment of the loan immediately after the six months had elapsed, although the first instalment had been repaid, it would have been clearly contrary the spirit of the transaction to have done so, just as it would have been in the case of a mortgage. The distinction between a loan on mortgage and a short bankers loan is clearly drawn by Lindley L. J. in his judgment in Gosling and Sharpe v. Blake. Mr. Leckie submitted that even if this were not originally a short loan, it became converted into a short loan either by the consent order of July 16, 1967, or by the arrangement made on September 4, 1968, which, he suggested operated as a waiver by Mr. Cato through his counsel of his right to deduct tax. In my view there is nothing in either of those points, and so I think that he was entitled to deduct tax in the ordinary way as a mortgagor. It may be that something is now due by Mr. Cato to the plaintiffs under the security in respect of costs and damages; but the plaintiffs have totally failed to show to my satisfaction that they were entitled to claim anything in respect of those items at the time when they received Mr. Catos cheque for pounds 11 0s. 11d. If they apply again to enforce the possession order in respect of those items, the county court judge or the registrar will no doubt scrutinise their whole account with great care-treating it as an ordinary mortgagors account.
I agree that this appeal should be allowed.
Appeal allowed with costs in Court of
Appeal and below.
Judges in order varied; stay to continue.
50 in court to be paid out to defendant.
Leave to appeal refused.