NOTE II. TO §§ 235, 237, ante, pp. 507, 598.

Mortgages and Debentures. Receivers and Managers.

§ 261. In the case of the debentures of the London, Chatham, and Dover Railway Company, the Lords Justices in the Court of Chancery Appeal have just made a decision in the case of Gardner v. that company, defining the precise effect of English railway debentures, which have always hitherto been regarded as mortgages of the property of the company. The debentures in terms pledge "the undertaking" for the repayment of the money borrowed. And that, in effect, is all that is done by any railway mortgage. It mortgages or pledges the undertaking for the repayment of the money. Now upon such a mortgage the question always fairly arises, what is to be regarded as the undertaking thus pledged or mortgaged? It has always been held in this country that this mortgage, when made with legislative authority, and it cannot otherwise be made to any effectual purpose, carries the right of absolutely foreclosing the title to the corporate property and the corporate franchises. In this view, there has always been a serious difficulty, unless in cases where the legislature provides, either by general or special law, for the creation of a new and distinct corporation to carry forward the duties of such railway company.

But it is now held by the highest of the English courts of chancery, that by a mortgage of the undertaking nothing more passes than a priority of right to the net earnings of the company; that the undertaking is the combined result of the corporate franchise and all the property rights, and the net avails of such combined property, which is but another name for the net earnings of the company. This decision places railway debentures and mortgages of the undertaking upon much, if not precisely the same basis as that of preference stocks, which are very commonly issued in England, and not unfrequently in this country.

We insert, for the information of the profession, at length, the very able and to us entirely unanswerable and satisfactory opinion of the learned Lord Justice Cairns, found in 15 Weekly Rep., 325, for Feb. 2, 1867, The head notes are as follows:"A mortgage deed given by a railway company in the form

given in schedule C of the Companies' Clauses Consolidation Act, 1845, 8 & 9 Victoria, ch. 16, does not give to the mortgagee any specific charge upon the surplus lands of the company, so as to entitle him to have a receiver appointed of the sale moneys and interim rents of those lands.

"The undertaking' pledged by such a mortgage is the going concern of the railway, the profits of which are the fund dedicated by the contract to the payment of the mortgage debt.

"Surplus land is merely the representative of capital temporarily diverted from the execution of the works of the company, and invested in land, which land is to be resold, and the proceeds of such sale applied to the purposes of the company.

"The court will not appoint a manager of a railway.

"A railway company may give to their contractor a valid charge upon the proceeds of sale of surplus lands, in respect of works executed by him."

It will be seen by these notes that the decision covers another important point, that of courts of equity appointing a manager to conduct the business of a railway company, which has sometimes been done in this country. But we had always supposed the practice to be a very questionable one. For it amounts to noth

ing less than the court undertaking to execute the business of operating the road. To this there are very serious, not to say insuperable objections. In the first place, the legislature has provided that this duty shall be performed by the company, and therefore the public as well as individuals have a right to insist that the company alone shall undertake such duty, and be held responsible in the ordinary mode for any failure in the performance of that duty. And notwithstanding the large confidence universally reposed in the courts of justice, and nowhere more than in the United States, nevertheless unless this confidence amounts to a belief in the absolute infallibility of the courts, and of all courts whether supreme or inferior, one would not desire to have his rights of redress limited to the decision of the particular tribunal into whose hands the management of the railway might happen to fall. For most of the American courts of equity, or those possessing equity powers, are not the highest judicial tribunals of the state. And there would be no right of appeal from the order

of the Court of Chancery directing the management of the railway, or the particular redress which might be awarded to one who might happen to suffer by its mismanagement, such orders being in their nature mere matters of discretion, and therefore not revisable in any other tribunal; whereas in cases of actions against railway companies for misconduct or mismanagement, the party injured is entitled to take the opinion of the court of last resort.

We know that in cases where a joint-stock company becomes insolvent, it is every day's practice for courts of equity to assume the control of the enterprise, and through the agency of a receiver to conduct for a time the business. This will also happen sometimes where two or more parties claim the net earnings of the company, either in succession or in conflict. But what is here decided is, that a court of equity cannot assume to take upon itself, through the instrumentality of its officers, to operate a railway permanently, or at least that it cannot do this without the authority of a legislative act.

We here insert a copy of one of these English debentures, drawn according to the English railway acts, by which it will appear that the contract in terms extends to all the "estate, right, title, and interest of the company in the undertaking," and that the mortgagee may hold the same until repaid his principal and interest, which is substantially all that can be implied from the American railway mortgages. We do not desire to be understood as having reached the confident conclusion that this view should be adopted in America. For it might be regarded as too great a change to bring about at once. It would drive numerous parties into the legislature, where very crude and unsatisfactory, if not impracticable remedies would be likely to be provided. All we desire is that the public should wake up to the importance of having the entire subject of railway management brought under some uniform plan of legislative and judicial supervision, and, as is well known, we think it should be made matter of national concern. The following is a copy of the debentures:

"London, Chatham, and Dover Railway Company (Under Various Powers Act of 1861).

"No. 225.

"Mortgage Deed,

£600.

Three years.

"By virtue of the London, Chatham, and Dover Railway (Various Powers) Act, 1861.

"We, the London, Chatham, and Dover Railway Company, in consideration of £600 paid to us by Joseph Gardner, of Blaina, near Tredegar, Monmouthshire, Esquire, do assign unto the said Joseph Gardner, his executors, administrators, and assigns, the General Undertaking of the Company, as defined by that act. And all the tolls and sums of money arising upon or out of the said general undertaking by virtue of the several acts relating thereto, and all the estate, right, title, and interest of the Company in the same, to hold unto the said Joseph Gardner, his executors, administrators, and assigns, until the said sum of £600, together with interest upon the same, at the rate of £5 upon every £100 by the year (subject to deduction in respect of property or income tax) be satisfied, the principal sum to be repaid at the end of three years from the 1st of July, 1863, and the interest to be payable half yearly, on the thirtieth of June and the thirty-first of December, at the bankers of the Company.

"Given under our common seal, this third day of December, in the year of our Lord, 1863.

"Registered,

W. E. JOHNSON, Secretary." "The orders now under appeal,

Cairns, Lord Justice, said: so far as they appointed managers of the various undertakings of the London, Chatham, and Dover Railway Company, were discharged by us at the conclusion of the arguments in this case, because we were clearly of opinion that the orders were in this respect beyond the authority, and at variance with the practice of this court. When the court appoints a manager of a business or undertaking, it in effect assumes the management into its own hands; for the manager is the officer or servant of the court, and upon any question arising as to the character and details of the management, it is the court that must direct and decide. The circumstance that in this case the persons appointed were the managers previously employed by the company, is immaterial. When appointed by the court, they are responsible to the court, and no orders of the company, or of the directors, can interfere with that responsibility. Now I apprehend that nothing is better settled than that this court does not assume the management of a business or undertaking, except with a view

to the winding up and sale of the business or undertaking. The management is an interim management; its necessity and its justification spring out of the jurisdiction to liquidate and to sell; the business or undertaking is managed that it may be sold as a going concern, and with the sale the management ends. To the management of the undertakings of the London, Chatham, and Dover Railway Company, assumed by the Vice-Chancellor's orders of the 12th and 17th of July, 1866, no limit, short of the repayment of the whole debenture debt, could be assigned; for it has not been and could not be contended that there would at the hearing of the cause be any power of selling the undertakings. But in addition to the general principle that the Court of Chancery will not in any case assume the permanent management of any business or undertaking, there is that peculiarity in the management of a railway which would, in my opinion, make it improper for the Court of Chancery to assume the management of it at all. When Parliament, acting for the public interest, authorizes the construction and maintenance of a railway, both as a highway for the public, and as a road on which the company may themselves become carriers of passengers and goods, it confers powers, and imposes duties and responsibilities of the largest and most important kind, and it confers and imposes them upon the company which Parliament has before it, and on no other body or person. These powers must be executed, and these duties discharged by the company. They cannot be delegated or transferred. The company will of course act by its servants, for a corporation cannot act otherwise, but the responsibility will be that of the company. The company could not by agreement hand over the management of the railway to the debenture hold

ers.

"It is impossible to suppose that the Court of Chancery can make itself or its officers, without any parliamentary authority, the hand to execute these powers; and all the more impossible when it is obvious that there can be no real and correlative responsibility for the consequences of any imperfect management. It is said that the railway company did not object to the order for a manager. This may well be so. But in the view I take of the case, the order would be improper, even if made on the ex press agreement and request of the company. I may add that