growth and vitality. Lastly, the expenses of management are, in Terminating Societies, extended over a considerable interval of time; and are, consequently, rendered less burdensome. It is very commonly supposed that these expenses are covered by fees of admission and fines; but this does not appear to be the case; indeed, as to fines for non-payment of subscriptions, these, as Mr. Scratchley (p. 46.) observes, should be reckoned as being partially a set-off for the interest which would have been produced if the subscription had been paid and invested. Nor should we forget that the proper way of estimating at least those losses which are occasioned by unnecessary expenses, is to calculate the amount which the money lost would have realised, could it have been invested as income. In this way it will be seen, that the real considerably exceeds the apparent loss.

The state of the Law relating to Benefit Building Societies or, as they might, with greater propriety, be termed, “Investment Societies "is far from satisfactory. That such would be the case might be presumed from the fact that the statutory provisions now in force relating to Building Societies were evidently prepared without care, and are, in great measure, borrowed from the Benefit Societies Acts relating to associations whose constitution and objects are, in many respects, dissimilar to those of Building Societies. The discussion of some of these provisions seriatim, to which we will now proceed, will, we think, sufficiently justify our

assertion.

And first, as to Shares in such Associations:

statutes

The utmost value of a share is limited to 1507.; the utmost value of a monthly subscription is 20s. It has been, however, decided that a member may hold shares together exceeding 150%. in value.1

2ndly. The value of a member's share or shares is to be secured, by way of mortgage "to the Society until the amount or value of his share or shares shall have been fully repaid to such Society, with the interest thereon, and all fines or other payments incurred in respect thereof."

3rdly. No member is to receive, or be entitled to receive,

1 Morrison v. Glover, 19 Law Jour., N.S., Exch. 28.

from the funds of the Society, "any interest or dividend, by way of annual or other periodical profit upon any shares in such Society until the amount or value of his or her share shall have been realised, except on the withdrawal of such member, according to the rules of such Society then in force. (6 & 7 W. 4. c. 32. § 1.) We presume Mr. Scratchley refers to these provisions when speaking of Terminating Societies; he says (p. 47.), "In the first clause of the Building Society Act, it is provided that the duration of a Society, and the consequent continuance of the borrowers' repayments, shall depend, not on any number of years specified in the prospectus, but upon the actual completion of the full amount of the unadvanced shares if there be a deficiency [at the end of the term of a Terminating Society], from whatever cause it may proceed, then must all the members, borrowers as well as non-borrowers, continue their subscriptions for such additional number of months as may be necessary, unless they should all unanimously agree to dissolve the Society, and put up with the loss sustained."

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This result has, we believe, been experienced in not a few instances1, where the prospectuses of Terminating Societies have promised that shares of a given amount shall be accumulated within a space of time so short that unless an enormous rate of monthly compound interest (say from 127. to 207. per cent. per annum) were charged on loans, it would be impossible that their promises should be realised; while, at the very same time they profess to discount loans at rates not exceeding 77. or 87. per cent. We think, however, the preceding observations of Mr. Scratchley are scarcely reconcilable with a statement contained in another part of this work, where, referring to the management of Permanent Societies, he remarks (p. 55.) that, "the members who become borrowers at once cease to be investers in respect of the shares on which they obtain advances, and do not participate in any of the subsequent liabilities or expenses of the Society, nor, conse

1 Mr. Scratchley tells us that a London Society, of which the proposed duration was ten years, has lately decided that from the extent of its losses by advances on insufficient or bad security, its term must be extended to sixteen years. (P. 47.)

quently, in its profits." And after stating that the general liabilities are provided for, by taking, as the basis of the calculations, a higher rate of interest for the repayments than is actually guaranteed to the investers for the realisation of their shares, he adds, that the "difference in the rate of interest is temporally withheld from the investers in order to form a management and contingent fund for the purposes of meeting the expenses and the contingencies of loss on the mortgages." And that while. "the borrowers' repayments are for a fixed term of years, whatever be the subsequent condition of the Society," "any surplus profits which may arise beyond the promised amount of the advanced shares are periodically and proportionately divided among the investers in the shape of a bonus, to be paid to them with the other sums due on the completion of the subscriptions on each share." (P. 56.)

Now as it appears to us, the language of the Building Society Act ought to be of the same force whether applied to Terminating or Permanent Societies; and that the borrower's mortgage ought to be continued "until," and ONLY until," the amount or value of his share shall have been fully repaid." The system above alluded to, seems to imply that, in Permanent Societies it may, for the advantage of the investers only, continue for a longer period; but the meaning of the word "repaid" cannot surely be confined to the payments actually made by the mortgagor; it must also include their resulting accumulations, which will, of course, vary in amount according to the losses or rates of interest at which various investments have been made. We contend, therefore, that such a system unduly favours mere investers, while, for any thing that appears in the Act itself, the value of a share, whether it is to be repaid by the borrower or to be realised by the invester, should be calculated on precisely the same principles. Indeed, the object of the Legislature appears to have been to give assistance to borrowers rather than to investers. For the Act recites that Building Societies were established for the purpose of raising a fund to assist the members in "obtaining a small freehold or leasehold pro

perty." It is, undoubtedly, most desirable both to borrower and invester that the period of subscription should be in effect limited by calculating the loan at a higher rate of interest than the repayments; but if this system is adopted merely for security, why should it enhance the profits of the latter at the expense of the former? Take the extreme case of a succession of losses which might more than swallow up the difference of 27. per cent. which is to form the reserve fund. Would not a rule which should throw any additional loss upon the invester only, contravene the spirit of the Act; and is not the result the same if the investers alone participate in the profits? We would, therefore, suggest that the period of subscriptions should primarily be left indeterminate1, and be ultimately ascertained by the time at which the standard value of a share may on the average be realised. The argument for this system is the more forcible in every Society which professes to make advances with varying rates of discount; for the discount paid by every individual mortgagor should be to the invester a sufficient premium2 on the individual risk; and the mortgagor being still in some sense an invester should, while he remains liable to contingent losses, participate in any contingent profits which may result from the high rates of discount paid by other borrowers.

According to Mr. Stone's rules, the subscription of every member is to last for the definite term of ten years from the time of his joining the Society. Surplus profits, are, however, to be shared by borrowers as well as investers. (Rules 6. 8.) His system seems so far equitable enough; but we contend that as the borrower joins the Society for the purpose of obtaining a loan, when his loan is repaid his object ought to be considered as attained. Yet, whenever there are surplus profits, although his loan is actually repaid, he will, according to Mr. Stone's plan, continue his subscriptions only to receive them again in the shape of a bonus.

2 Mr. Scratchley, in his second edition, observes, p. 56., that "several welldisposed (!) persons have exclaimed against an apparent disadvantage offered to borrowers by the new (Mr. S.'s) system." We confess it is an offer which we should hesitate to accept, spite of Mr. S.'s argument that "the borrower has the enjoyment of an immediate profit which is only prospective to the invester." An argument which, by the way, seems as applicable to Terminating as it can be to Permanent Societies. Is there not sufficient compensation to the invester in the high rate of interest which he ultimately receives, the burden of which falls on the borrowers? And supposing a very large majority of members are borrowers, is it fair that the remaining investers should divide all the profits?

1

In addition to discount, some Societies require interest on the advances. This is only another mode of charging a larger discount; for, besides the premium or amount of discount thus actually given by the borrower, he thus virtually gives a further premium equivalent to the present value of the annuity which he has to pay by way of interest on his demand.

The order in which loans to the members are to be made is in practice variously determined. In some associations the member who offers the largest premium, i. e. discounts at the highest rate, is entitled to the preference; in others, one uniform rate of discount is charged, and the order in which loans are made, is determined by ballot or the priority of application for them; but while either system has its advantages, those of the latter may seem to preponderate. We have, however, heard it alleged that where loans are discounted at one uniform rate, the member who obtains the chance of a loan by ballot, or any other contingency, sometimes disposes of it at a still higher premium; and if there be any foundation for this statement, it would appear that in such a case individual members reap an advantage which should have belonged to the Society itself. We think, too, that there may be a better reason for varying the rate of discount in particular cases; viz.-the sufficiency or insufficiency of the property proposed as a security; for while the rate of discount should be always so large as to leave a sufficient margin over the rate of interest promised to the invester, still, on principle, it should, in some measure, be determined by the individual risk, and should be larger in proportion, as any individual security may be deficient.

4thly. It has been before observed that minors are capable of holding shares in Building Societies; and as the law at present stands it seems that they may even hold office2 in such Societies. Mr. Stone proposes to give to married.

The charge, if regarded merely as simple interest on the loan, should diminish with the borrower's debt; see Scratchley, p. 40. But the principles of simple interest are inapplicable to Building Societies, and the plan itself seems complicated, and likely to work with unfairness.

See and compare 10 Geo. 4. c. 56. s. 32. with 13 & 14 Vict. c. 115. s. 33. VOL. XIV.

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