[DIVISIONAL COURT AND COURT OF APPEAL.]

TWYCROSS v. GRANT AND OTHERS.

Joint Stock Company - Fraudulent Prospectus - Concealment of Contracts affecting the Company - Companies Act, 1867 (30 & 31 Vict. c. 131), s. 38 - Words "Knowingly Issuing" - Measure of Damages.

Action brought by the plaintiff under the Companies Act, 1867, s. 38, to recover the amount paid by him on certain shares taken by him in the L. Company on the ground of the fraud of the defendants (promoters of the company), in omitting from the prospectus two contracts entered into by them as promoters - the one a contract between the defendants C. & P. and one S., for the purchase of certain foreign concessions for the construction of tramways which the company was afterwards incorporated to make and work; the other a contract between the defendants, C. & P. and the defendant G., as to certain payments to be made by C. & P. to G. in consideration of his obtaining for them a contract from the company for the construction of the tramways, by means of which fraud the plaintiff had been induced to take the shares, which proved worthless. The jury found that these contracts were material to be made known to the intended shareholders of the company:-

Held, by the Common Pleas Division and in the Court of Appeal by Cockburn, C.J., and Brett, L.J., that the contracts ought to have been specified in the prospectus, and that the defendants were liable; Kelly, C.B., and Bramwell, L.J., dissenting:-

Held, by the Common Pleas Division and in the Court of Appeal, by Cockburn, C.J., Bramwell and Brett, L.JJ., that the words "knowingly issuing" in s. 38 mean intentionally issuing a prospectus without inserting the contracts which are required by that section to be specified, although they are omitted under the bon‰ fide belief that it is unnecessary to specify them.

At the trial the judge directed the jury that if the real damage occasioned to the plaintiff by the defendants' fraud was the price he paid for the shares he was entitled to recover that amount. The jury assessed the damages at the price paid by the plaintiff:-

Held, by Cockburn, C.J., Bramwell and Brett, L.JJ., affirming the judgment of the Common Pleas Division that the direction was right, and that the shares taken by the plaintiff being worthless he was entitled to recover the amount paid by him for them: Kelly, C.B., dissenting.

THIS was an action founded upon s. 38 of the Companies Act, 1867 (30 & 31 Vict. c. 131), which enacts that "every prospectus of a company, and every notice inviting persons to subscribe for shares in any joint-stock company, shall specify the dates and the names of the parties to any contract entered into by the company, or the promoters, directors, or trustees thereof, before the issue of

such prospectus or notice, whether subject to adoption by the directors of the company or otherwise; and any prospectus or notice not specifying the same shall be deemed fraudulent on the part of the promoters, directors, and officers of the company knowingly issuing the same, as regards any person taking shares in the company on the faith of such prospectus, unless he shall have had notice of such contract."

The first count of the declaration (1) stated that the defendants Grant, Clark, & Punchard, were the promoters of a company called The Lisbon Steam Tramways Company, Limited, being a joint-stock company having a capital divided into shares, and duly registered under a memorandum and articles of association under the Companies Acts, 1862 and 1867 (2); and the defendants, being promoters of the company, before the issue of the prospectus and notice hereinafter mentioned, had entered into a contract with each other in the words and figures following, that is to say,

"Memorandum of an agreement made the 6th of July, 1871, between Messrs. Edwin Clark, Punchard, & Co., of &c., contractors, of the one part, and Messrs. Grant & Co., of &c., bankers, of the other part, whereby it is agreed as follows:-

"1. In consideration of the expenses incurred and to be incurred and the services rendered and to be rendered by Messrs. Grant & Co. in and about the obtaining for the said E. Clark, Punchard, & Co. of a contract upon such terms as shall be satisfactory to the said E. Clark, Punchard, & Co., from the Lisbon Steam Tramways Company for constructing and equipping certain lines of tramways, and also in and about the formation of the said company, and in and about the preparation of and advertising and making public the prospectus of the company, and in using their best endeavours to raise and place the capital thereof, E. Clark, Punchard, & Co. shall pay to Messrs. Grant & Co. the sum hereinafter mentioned at the times and in the manner following, that is to say, the sum of 30,000l. in cash out of the first payment which E. Clark, Punchard, & Co. shall receive under or by virtue of the said contract, and the further sum of 10,000l. in cash as follows, viz. 5000l. out of the second payment and 5000l. out of the fourth payment which E. Clark, Punchard, & Co. shall receive under the said contract, as and when received; and the said Clark, Punchard, & Co. shall also pay or hand over to Grant & Co. 5800l. in fully paid up shares of that nominal amount, or, at the option of Clark, Punchard, & Co., a similar amount, that is to say, 5800l. in cash on the second instalment being paid to Clark, Punchard, & Co., such option to be declared by them within thirty days after the first allotment of shares shall be made by the company.

"2. In the event of Clark, Punchard, & Co. being required by the company to

(1) Delivered 5th July, 1875.

(2) 25 & 26 Vict. c. 89, and 30 & 31 Vict. c. 131.

take any part of the payments to be made to them by the company in respect of the works to be executed by them under their said contract in 8 per cent. debentures of the company, Grant & Co. shall take from Clark, Punchard, & Co. one fourth of any debentures they may be called upon to take instead of cash, at the price of 80l. for every 100l. debenture.

"3. Clark, Punchard, & Co. further agree that, in the event of Grant & Co. declaring within thirty days after the first allotment of shares shall be made by the company that they require Clark, Punchard, & Co. to take up shares in the company to an extent not exceeding 4200 shares in the whole, Clark, Punchard, & Co. will accept a transfer or transfers of such shares as they may be so required to take, and shall pay to Grant & Co. the par value of such shares, that is to say, the sum per share which for the time being shall be called upon the said shares, upon such transfer or transfers being tendered to them duly executed by the transferor or transferors.

"4. It is understood that all the shares hereinbefore referred to and which may be taken by the parties hereto shall be held by them respectively, and shall not be dealt with or disposed of until the completion of the contract hereinbefore mentioned. As witness, &c."

And the said Lisbon Steam Tramways Company mentioned in the said contract is the same company as is hereinbefore mentioned; and the defendants, after the making and entering into of such contract, and after the passing of the Companies Act, 1867, and after the 1st of September, 1867, knowingly and fraudulently, and with intent to induce persons to take shares in the said company, and well knowing the premises, issued and caused to be published a prospectus of the said company, and also issued and caused to be published a notice inviting persons to subscribe for shares in the said company, which said prospectus and notice did not nor did either of them specify the dates, and names of the parties to the contract; and the plaintiff, on the faith of such prospectus and notice, respectively, took shares in the company and paid to the company a large sum of money in respect thereof; and the plaintiff had no notice of such contract, there being a contract within the meaning of s. 38 of the Companies Act, 1867; and the said shares were and are of no value to the plaintiff, and he has lost the moneys he so paid to the company as aforesaid.

Second count, that the defendants were the promoters of a company called the Lisbon Steam Tramways Company' Limited, being a joint-stock company having a capital divided into shares and duly registered under a memorandum and articles of association under the Companies Acts, 1862 and 1867; and the defendants

Clark & Punchard, being promoters of the company, before the issue of the prospectus and notice hereinafter mentioned had entered into a contract with His Excellency Field Marshal the Duke de Saldanha, who was a director of the company, and which contract was in the words and figures following,

Memorandum of an agreement made the 5th of July, 1871, between His Excellency Field Marshal the Duke de Saldanha, of the one part, and Messrs. Edwin Clark, Punchard, & Co., of the other part, whereby it is agreed:-

"1. The Duke de Saldanha shall transfer and make over to Clark, Punchard, & Co. such part and interest of and in the concessions granted to the Duke de Saldanha by royal decrees of the kingdom of Portugal as enables the Duke de Saldanha to establish, maintain, and work for the term of ninety years from the 15th of May, 1871, railways on the system Larmanjat on the roads from Cascaes to Cintra and Pero Pinheiro, and from Lisbon through Lumiar to Torres Vedras, with all the rights, privileges, and advantages to the said part and interest in the said concession belonging or appertaining, or in any way incident thereto. The Duke de Saldanha shall also transfer and make over to Clark, Punchard, & Co. the existing railway on the road from Lisbon to Lumiar, with all the rolling-stock, materials, implements, and appurtenances thereto belonging.

"2. The Duke de Saldanha having made application to the proper authorities in Portugal for the grant of a concession for the like period of ninety years of the right to establish, maintain, and work steam tramways on the road from Lisbon to Cascaes, and having received a formal promise from the minister of public works that the concession so applied for as aforesaid shall be granted to him, hereby agrees to obtain such concession and to transfer and make over the same to Clark, Punchard, & Co. within the space of thirty days from the date hereof.

"3. The Duke de Saldanha shall also transfer and make over to Clark, Punchard, & Co., the right and interest of him the Duke de Saldanha of and in the invention of Jean Larmanjat of a new system of mixed railway with a single rail, to such extent as will enable the invention to be used and applied upon the roads mentioned in clause 1 of this agreement, but not further or otherwise.

"4. The consideration or price to be paid to the Duke de Saldanha for such transfer as aforesaid shall be the sum of 22,000l., of which the sum of 6000l. shall be paid in cash, and the remainder, viz., 16,000l., in fully paid up shares in a company now in course of formation intended to be called the Lisbon Steam Tramways Company, Limited, for the purpose of constructing, maintaining, and working steam tramways or railways upon the roads in Portugal hereinbefore mentioned upon the system Larmanjat.

"5. The sum of 6000l. so intended to be paid in cash shall become due and be payable to the Duke de Saldanha within three calendar months after the first allotment of shares in the company shall have been duly made to the public and the payment made on such allotment; and the 1600 fully paid up shares representing the remaining 16,000l. to be received by the duke shall at the same time be delivered to him or as he may direct.

"6. Messrs. Clark, Punchard, & Co. shall hold harmless and indemnify the Duke de Saldanha against all claims and demands of Larmanjat for royalties, dues,

or charges in respect of the use of his invention upon the railways mentioned in clause 1 of this agreement, or in respect of the construction, maintaining, and working thereof.

"7. In the event of the capital of the intended company not being subscribed to such an extent as in the opinion of the board of directors thereof, and with the concurrence of Clark, Punchard, & Co. is sufficient to warrant them in proceeding to allot the shares to the public, or in the event of Clark, Punchard, & Co. not obtaining from the company the contract for constructing and equipping the said railways, then and in such case this agreement shall be of no effect, and every clause, matter and thing herein contained shall cease and be void.

"8. It is also hereby further agreed that the 1600 fully paid up shares in the Lisbon Steam Tramways Company hereinbefore agreed to be delivered to the Duke de Saldanha shall not be dealt with or disposed of by him, but shall be held until the steam tramways about to be constructed by the company have been completed and opened for traffic. As witness, &c."

And the Lisbon Tramways Company, Limited, mentioned, in the said contract is the same company as is hereinbefore mentioned, and the defendant Grant as well as the defendants Clark & Punchard were before the issuing of the prospectus and notice hereinafter mentioned well aware of the said contract; and the defendants after the making and entering into of the said contract, and after the passing of the Companies Act, 1867, and after the 1st of September, 1867, knowingly and fraudulently, and with intent to induce persons to take shares in the company, issued and caused to be published a prospectus of the company and a notice inviting persons to subscribe for shares in the company, which prospectus and notice did not nor did either of them specify the dates and names of the parties to the contract; and the plaintiff, on the faith of such prospectus and notice respectively, took shares in the company, and paid to the company a large sum of money in respect thereof; and the plaintiff had no notice of such contract, then being a contract within the meaning of the 38th section of the Companies Act, 1867; and the shares were and are of no value to the plaintiff, and he has lost the moneys he so paid to the company. Claim 1000l.

The defendant Grant and the defendants Clark & Punchard severally pleaded not guilty and a traverse of every material allegation in the declaration. Issue thereon.

There were eighty-seven other actions brought against the same defendants by other persons who like the plaintiff had been

induced to become purchasers of shares in the Lisbon Steam Tramways Company upon the faith of the prospectus issued by the company. The aggregate amount of the claims in these several actions was about 36,000l. In one only of these eighty-seven actions, viz., Miller v. Grant and Others, had a statement of claim been delivered, which charged fraud at common law as well as under the statute. The others had proceeded no further than writ, when (on the 23rd of February, 1876) the following consent was given by the respective solicitors for the defendants in the eighty-seven actions:- "We do hereby consent that the time limited for the respective plaintiffs in all the above actions to deliver statements of claim be extended until one month after final judgment shall be entered in the action of Twycross v. Grant and Others. This consent, however, to be without prejudice to any application the defendants may hereafter make, upon reasonable terms, in any one or more of the said actions, to compel the plaintiff or plaintiffs to deliver his or their statement or statements of claim at an earlier date. No order or orders to be drawn up upon this consent, unless required by one of the parties to one of the above actions."

The action came on for trial before Lord Coleridge, C.J., on the 26th and 29th of May, and the 7th, 11th, 12th, and 13th of July, 1876. Before the jury were sworn, the counsel for the defendants applied for a postponement of the trial, on payment of costs, and upon the terms of bringing the amount of damages claimed (1000l.) into court, in order to give the defendants an opportunity of entering into negotiations with the Portuguese authorities to obtain further concessions to re-establish the company; or, in the alternative, to allow the defendants to withdraw their pleas. (1)

(1) Order XXIII. under the Judicature Act, 1875, provides that "The plaintiff may, at any time before receipt of the defendant's statement of defence, or, after the receipt thereof, before taking any other proceeding in the action (save any interlocutory application), by notice in writing, wholly discontinue his action or withdraw any part or parts of his alleged cause of complaint, and thereupon he shall pay the defendant's costs of the action, or, if the action be not wholly discontinued, the defendant's costs occasioned by the matter so withdrawn. Such costs shall be taxed, and such discontinuance or withdrawal, as the case may be, shall not be a defence to any subsequent action. Save as in this rule otherwise provided, it shall not be competent for the plaintiff to withdraw the record or discontinue the action without leave of the Court or a judge, but the Court or a judge may before or at or after the

The application was opposed by the plaintiff's counsel; and Lord Coleridge, C.J., declined to accede to it, on the ground that, this action having been put forward ss a sort of test action in order to try the question or one of the questions common to all the eighty-eight actions, the trial of this action, in the preparation for which great expense had necessarily been incurred, must materially affect the trial of the others, and therefore it would be inexpedient in this manner and at this stage of the proceedings to interrupt the ordinary course.

The jury having been sworn, the defendants' counsel formally offered to consent to a verdict for the plaintiff for the amount of the claim in the declaration. This offer being rejected, the case proceeded, the counsel for the defendants intimating to the Court that it was not their intention to appear for their respective clients or take any part in the trial.

The view of the facts taken by the judges respectively is given in detail in their judgments, and this renders a separate statement unnecessary.

At the close of the evidence for the plaintiff his counsel summed up the case. The defendant Grant then, in the absence of his counsel, addressed the jury and contended that there was no evidence to shew that he or his co-defendants had been guilty of any fraud; that the contracts referred to in the declaration were not such "contracts entered into by the company, or the promoters, directors, or trustees thereof," as were required by s. 38 of the Companies Act, 1867, to be disclosed in the prospectus; and that, at all events, the defendants were guilty of no want of bon‰ fides in assuming that they were not such contracts as the Act required to be disclosed.

The defendants Clark & Punchard were not represented. No evidence was offered on the part of the defendants.

hearing of the trial, upon such terms as to costs and as to any other action and otherwise as may seem fit, order the action to be discontinued or any part of the alleged cause of complaint to be struck out. The Court or a judge may, in like manner and with the like discretion as to terms, upon the application of a defendant, order the whole or any part of his alleged grounds of defence or counter-claim to be withdrawn or struck out; but it shall not be competent to a defendant to withdraw his defence, or any part thereof, without such leave."

Lord Coleridge, C.J., in the course of his summing up observed that it was necessary to determine whether the contracts mentioned in the declaration were contracts entered into by the defendants as promoters, and whether they were intentionally concealed by them when they caused the prospectus to be issued; and he left the following questions to the jury:-

1. Were the contracts so mentioned made by the defendants?

2. Were the defendants promoters of the company at the time of making such contracts and of the issue of the prospectus?

3. Did they issue the prospectus?

4. Did they knowingly omit mention of these contracts from the prospectus?

5. Did the plaintiff take his shares on the faith of the statements in such prospectus?

6. If these contracts had been disclosed in the prospectus, or reference made thereto, would the plaintiff have taken the shares?

7. Had the plaintiff any notice of the existence of such contracts?

8. Were the contracts connected with the affairs of the company, and were they such that they were material to be known to a person about to apply for shares?

9. Did such contracts materially affect the interests of the company?

10. Was it known to the defendants, and was it the fact, that the company, when formed, would bear the burden of the payments to be made under such contracts, and that the sums to be paid under them would come out of the funds of the company?

11. Were such contracts made, and the fact of their existence intentionally suppressed in fraud of the company and of persons invited to take shares in the company?

The jury declined to answer the last question; and they answered the sixth and seventh questions in the negative, and all the others in the affirmative.

At the suggestion of the defendant Grant, Lord Coleridge, C.J., put this further question to the jury, - "Were the statements of the contracts withheld under a bon‰ fide belief that by law those contracts need not have been set forth?" To this question the jury answered "Yes."

As to the measure of damages, Lord Coleridge, C.J., told the jury, - "The plaintiff is entitled, if you think there has been fraud, to recover what that fraud has cost him. He is entitled to recover the real damage occasioned by the fraud. If you think the real damage occasioned by the fraud is the full amount of the shares, give him the full amount of the shares, namely, 700l. If you think there is evidence which goes to shew that the result of the fraud is not damage to the full extent of 700l., then give him so much less as in your judgment the fraud has really occasioned him loss."

The jury assessed the damages at 700l.

A verdict was thereupon entered for the plaintiff for 700l., with leave to move to enter judgment for the defendants on the additional finding of the jury.

July 24, 1876. Benjamin, Q.C., for Grant, moved for a new trial on the ground that the findings on the second and third questions were against evidence. He submitted that the prospectus was issued by the directors of the company, and not by Grant or Clark & Punchard. Assuming that Grant drew it up and caused it to be circulated, still the persons who issue it, within the meaning of s. 38, after the company is formed and organized, are the directors. From that moment, the existence and functions of the promoter are gone. (1) He also moved on the ground that the jury had not been properly instructed, or had misunderstood-their instructions, as to the proper principle on which the damages were to be assessed, and that the finding of 700l. was in excess of any damages allowed by law.

The rule was refused on the first point, but granted on the second, - the time for appealing against the decision of the Court in refusing to grant a rule for a new trial on the question whether the defendant Grant issued the prospectus, and, if so, whether at a time when he was a promoter, within s. 38 of the Companies Act, 1867, being extended, so as to run only from the date of the final judgment of this Court in the cause. (2)

(1) See 7 & 8 Vict. c. 110, s. 3.

(2) A like rule for extending the time for appealing was obtained in the Court of Appeal on the 2nd of August, 1876.

Hawkins, Q.C., obtained a similar rule on behalf of Clark & Punchard.

Morgan Howard, Q.C., also obtained a rule to extend the time for the plaintiff to move for judgment until the argument of the defendants' rules for a new trial; and that the time for the plaintiff to move for a rule nisi for a new trial, or to set aside the finding of the jury on the question suggested by the defendant Grant, be extended until after the argument of the defendants' rules.

Jan. 23, 1877. Sir H. James, Q.C., Morgan Howard, Q.C., and H. Tindal Atkinson, shewed cause against the defendants' rules for a new trial. They contended that the contracts mentioned in the declaration were contracts made by the promoters, which materially affected the interests of the proposed company, and which were required by s. 38 of the Companies Act, 1867, to be disclosed in the prospectus; that these contracts were fraudulently, that is, intentionally concealed; that the evidence shewed that the whole scheme was a fraud, the proposed tramways impracticable, the company a mere sham, the directors the creatures of the promoters, and the means resorted to in order to induce the public to invest their money in the purchase of shares disreputable in the highest degree; that the prospectus was issued without any inquiry by the directors or any one else as to the probability of the scheme being successful: that it was persisted in when the report of the company's own engineer shewed it to be utterly worthless and impracticable; that this was not the case of a contract which could be rescinded on the ground of fraud, the contract to take the shares being with the company, as against whom the plaintiff could not repudiate the shares by reason of such fraud on the part of a promoter, - Gover's Case (1); nor could the plaintiff give back the shares to Grant, for Grant made no contract with him; that, but for the concealment of these contracts, the company never would have been floated, and therefore that concealment, for which the defendants were responsible, was the real cause of the damage sustained by the plaintiff; and that the shares never had any real value, and consequently the proper

(1) 1 Ch. D. 182.

measure of damage which the plaintiff was entitled to recover was the amount of money which the defendants' fraud had caused him to part with.

Upon this part of the case the following authorities were cited:- Hill v. Gray (1), Borradaile v. Brunton (2), Powell v. Salisbury (3), Davis v. Garrett (4), Lee v. Riley (5), Hill v. Balls (6), Mullett v. Mason (7), Davidson v. Tulloch (8), Kennedy v. Panama and New Zealand, &c., Royal Mail Co. (9), Collins v. Middle Level Commissioners (10), Sneesby v. Lancashire and Yorkshire Ry. Co. (11), and Smith v. Green. (12)

Jan. 24. Sir Henry James, Q.C., moved pro form‰ to enter judgment for the plaintiff; against which

Benjamin, Q.C., and Cohen, Q.C., for the defendant Grant, and Thesiger, Q.C., C. Bowen, and R. E. Webster, for the defendants Clark & Punchard, shewed cause. There are hardly two judges who have taken the same view of the section in question; but all who have expressed an opinion upon it agree that some limitation must be put upon the words of the enactment. In Gover's Case (13), which is the leading authority upon the subject, James, L.J., and Bramwell, J.A., were of opinion that the section does not invalidate contracts such as these, but is confined to contracts made "on behalf of the company," or contracts on which the company may be made liable by adoption or otherwise; and Mellish, L.J., and Brett, J.A., seemed to think that the contracts which are to be disclosed are contracts to the benefit of which the company is entitled, or contracts under which the company may be exposed to some liability beyond that which is expressed in the prospectus. The word "knowingly" in the Act does not mean purposely or designedly, but wilfully and with intent to deceive or mislead. It cannot mean "knowing of the existence of the contract:" it clearly means knowing that it contains something that it was

(1) 1 Stark. 434.

(2) 2 Moo. J. B. 582.

(3) 2 Y. & J. 391.

(4) 6 Bing. 716.

(5) 18 C. B. (N.S.) 722; 34 L. J. (C.P.) 212.

(6) 2 H. & N. 299; 27 L. J. (Ex.) 45.

(7) Law Rep. 1 C. P. 559.

(8) 3 Macq. 783.

(9) Law Rep. 2 Q. B. 580, 587.

(10) Law Rep. 4 C. P. 279.

(11) Law Rep. 9 Q. B. 263.

(12) 1 C. P. D. 92.

(13) 1 Ch. D. 182.

material to be disclosed to the public, and wilfully omitting with intent to conceal it. This the jury expressly declined to find against the defendants. It is not to be lost sight of that this 38th section is found in a division of the statute which is headed "Contracts," and follows a section which deals with how "contracts on behalf of the company" may be made. What more would the plaintiff have had to guide his discretion if the prospectus had contained "the dates of the contracts and the names of the parties to them?" The failure of the scheme was rather to be attributed to the mismanagement or misconduct of the directors in not making themselves acquainted with the difficulties in the way of carrying out the scheme, and in going on with it after they had ascertained that it was impracticable, than to concealment of these contracts.

As to the damages, - The undertaking being according to the plaintiff's own contention utterly impracticable and the shares worthless, he could not have sustained any damage by the concealment of which he complains. He intended to buy shares in a company such as that described in the prospectus, and he bought shares worth less than they would have been worth if the concealed contracts had not been entered into. The utmost measure of damage, therefore, which he could be entitled to, if any, would be the loss which was the natural and necessary result of the defendants' concealment; or the difference between the value of the shares supposing the whole 309,810l. were going to be spent on the works, and their value if the capital were reduced by the sums mentioned in the concealed contracts; or the difference in value of the concern when the plaintiff bought his shares, less the sums last mentioned. Where the contract is not rescinded, the person who has been induced by a fraud to enter into it cannot recover as damages more than the difference between the value of the thing he intended to buy and that of the thing which he actually got: Sedgwick on Damages, 7th ed. 591, 592.

[The following cases were also referred to, - Swinfen v. Bacon (1); Udell v. Atherton (2); Chinery v. Viall (3); < T IT>Keates v.

(1) 6 H. & N. 184, 846; 30 L.J. (Ex.) 368.

(2) 7 H. & N. 172; 30 L. J. (Ex.) 337.

(3) 5 H. & N. 288; 29 L. J. (Ex.) 180.

Cadogan (1); Cornell v. Hay (2); Charlton v. Hay 2v(3); Venezuela Ry. Co. v. Kisch (4); Oakes v. Turquand (5); Peek v. Gurney (6); Parker v. M'Kenna (7); Imperial Mercantile Credit Association v. Coleman (8); Gover's Case (9); New Sombrero Phosphate Co. v. Erlanger (10); Craig v. Phillips. (11)]

Jan. 26. Sir H. James, Q.C., (Morgan Howard, Q.C., and H. T. Atkinson, with him), in support of the plaintiff's rule for judgment, commented upon the cases cited for the defendants, and referred to the following additional authorities: Reynell v. Sprye (12); Smith v. Kay (13); and Reg. v. Prince. (14)

Feb. 12. The judgment of the Court (Lord Coleridge, C.J., and Grove and Lindley, JJ.), was delivered by

LORD COLERIDGE, C.J. This case was tried before me at Guildhall on various days between the 26th of May and the 13th of July in the year 1876. A verdict passed for the plaintiff for 700l.; and the jury answered a number of questions, which, as the argument is recent and the facts are fresh in our memory, it is not necessary here to repeat. The plaintiff and defendants alike moved for judgment; and the question on these cross-motions is whether the verdict for 700l. can stand altogether or in part.

The plaintiff was an allottee of shares in the Lisbon Tramways Company, of which, for the purposes of this discussion, it must be taken that the defendants were promoters. The defendant Mr. Grant was what is called the financier of the company; the defendants Messrs. Clark & Punchard were the contractors.

It was proved that the contractors had at first agreed to make a line, speaking in round numbers, of 130 miles in length for a sum of 304,000l.; but the scheme in this shape and for this number of

(1) 10 C. B. 591.

(2) Law Rep. 8 C. P. 328.

(3) 31 L. T. (N.S.) 437; 23 W. R. 129.

(4) Law Rep. 2 H. L. 99, at p. 120.

(5) Law Rep. 2 H. L. 325.

(6) Law Rep. 6 H. L. 377.

(7) Law Rep. 10 Ch. 96.

(8) Law Rep. 6 H. L. 189.

(9) 1 Ch. D. 182.

(10) 5 Ch. D. 73.

(11) 3 Ch. D. 722.

(12) 21 L. J. (Ch.) 633.

(13) 7 H. L. C. 750; 30 L. J. (Ch.) 45.

(14) Law Rep. 2 C. C. R. 154.

miles never reached the public. The scheme of which the prospectus was issued, and on the faith of which prospectus the plaintiff bought his shares, was for making a line 68 miles only in length for the sum of 309,000l. Substantially, the difference between the smaller contract for the larger number of miles and the larger contract for the smaller number of miles was made up by two sums which the contractors agreed to pay to Mr. Grant and to the Duke of Saldanha, the chairman of the company, respectively, by two contracts the existence of which was not disclosed in the prospectus, and was unknown to the public, and to the plaintiff, as one of the public, when he bought his shares. The plaintiff contends that the withholding of these contracts in the prospectus renders it fraudulent on the part of the defendants as promoters, and entitles him, as a shareholder, to recover from them the money he has lost, viz. the price of the shares, as damages caused to him by the fraudulent prospectus.

Two main questions arise and were discussed in the argument before us, - 1. The action being brought distinctly and only upon the 38th section of the Companies Act, 1867 (30 & 31 Vict. c. 131), does it lie at all? or, in other words, are the contracts set out in the declaration within the words of the statute just mentioned? - 2. Were the damages awarded by the jury founded on a wrong principle, and therefore excessive?

The section, the language of which it is necessary carefully to consider, is as follows:- "Every prospectus of a company, and every notice inviting persons to subscribe for shares in any joint-stock company, shall specify the dates and the names of the parties to any contract entered into by the company, or the promoters, directors, or trustees thereof, before the issue of such prospectus or notice, whether subject to adoption by the directors, or the company, or otherwise; and any prospectus or notice not specifying the same shall be deemed fraudulent on the part of the promoters, directors, and officers of the company knowingly issuing the same, as regards any person taking shares in the company on the faith of such prospectus, unless he shall have had notice of such contract."

Some limitation, it is plain, must be put upon the very general words "any contract," which in their full grammatical sense would

include a contract made by a promoter on his own personal behalf, and without any reference whatever to the affairs of the company. This cannot be the true construction of the statute. What, then, was the object of the statute? because according to that object, if it can be according to legal principles discovered, the language must be interpreted. Now, the general nature of the frauds to which applicants for shares in companies are a prey, and the necessity for special legislation to protect them, will be best understood by examining the respects in which applicants for shares differ from purchasers of other kinds of property, and the dangers to which such applicants are more particularly exposed. All purchasers equally run the risk of buying a comparatively worthless article, and of being misled by untrue representations as to its nature and value; and from risks of this kind no special legislation was necessary to protect shareholders. The value of a share in a company, however, depends not only on those circumstances which regulate the value of all saleable commodities, but also on the persons by whom and the mode in which the capital of the company is to be dealt with. It is utterly immaterial to an ordinary purchaser to know what the vendor will do with the purchase-money when he gets it: the purchaser has no further interest in it. But an applicant for shares in a company is in a totally different position. His money becomes part of the capital of the company; and to him it is all important to know what sort of persons are to have the control of his money when he has paid it, and how that money is to be applied, whether upon the enterprise itself or in remunerating, perhaps with lavish extravagance, those who have brought the company into existence. Again, it is all important for him to know whether shares applied for by other people are applied for honestly, as by himself, or by persons whose only object is to create a factitious demand for the shares, and to get rid of them as soon as they have succeeded in deluding others to take them on the faith of their apparent value. Now, these are all matters which promoters may arrange for their own benefit, and keep entirely out of sight: and it is notorious that by taking advantage of their opportunities in this respect promoters have committed gigantic frauds.

The investigations which have brought these frauds to light

have shewn that there are certain methods commonly in use by promoters to induce persons to take shares in worthless schemes, and to supply the means by which promoters can enrich themselves. Some of these methods are the following:- To put forth a prospectus giving a glowing description of the enterprise, omitting everything which if known would shew it to be worthless, - to enter into agreements by which the company should become bound to pay large sums of money to the promoters, - to make arrangements for obtaining the command of a large number of shares in the company, so as to control the disposition and market-price of such shares, - to arrange that the promoters or persons friendly to them should become directors of the company. Of these methods the first was seldom resorted to alone; and, if it were, the law relating to fraudulent prospectuses was sufficient for all practical purposes.

But the frauds perpetrated by means of concealed agreements, which were the most common, were also the most difficult to deal with. Their non-disclosure by no means necessarily made a prospectus fraudulent; and, unless the prospectus was fraudulent, the deluded shareholders were generally without redress. To defeat frauds of this kind some law was required to compel the promoters of companies to disclose all agreements entered into by them, and affecting their own remuneration by the company directly or indirectly, the price to be paid by the company directly or indirectly for the property the company was formed to take, the qualifications or independence of the directors, the issue or control of the shares of the company. Experience shewed that it was by means of secret agreements relating to matters such as these that unscrupulous promoters succeeded in enriching themselves at the expense of their dupes.

In this state of things the 38th section of 30 & 31 Vict. c. 131 was passed. This at least appears from it:- The persons to be protected are persons applying to a company for shares and contributing to its capital on the faith of its prospectus. The means of protection is the compelling those who issue a prospectus to disclose in it the dates and names of parties to all contracts described in the section. The consequence of knowingly omitting to comply with the statute is to render the prospectus fraudulent on the

part of those who issue it, but not on the part of the company itself.

What are the contracts which must be disclosed? Contracts entered into, (a) by the company, or the promoters, directors, or trustees of the company, and (b) before the issue of the prospectus. The words "whether subject to adoption by the directors or the company, or otherwise," do not explain the kind, of contract. This is to be ascertained from a consideration of the previous language of the section, and its real object. Some limitation, as has already been said, must be imposed; and it seems clear that the contracts which must be disclosed are contracts calculated to influence persons reading a company's prospectus in making up their minds whether or not they will apply for shares in it. Are there, then, any further limitations to be imposed upon the words describing the contracts to be disclosed?

It is suggested, - first, that only contracts imposing obligations on the company need be disclosed: but so to hold would leave applicants for shares still exposed to most of the frauds already pointed out; and, although all contracts imposing burdens on the company are clearly within the Act, they are not in our opinion by any means all which were contemplated and struck at by it.

The argument derived from s. 37 and the heading "contracts" prefixed to ss. 37 and 38, and to the effect that the contracts in s. 38 must be contracts binding upon the company, is by no means satisfactory or conclusive. Sect. 37 was inserted to cure an oversight in the Companies Act, 1862, and to shew by what contracts companies registered under that Act are to be bound, and is complete in itself. Sect. 38 relates, it is true, to contracts; but its primary object is the prospectus; and it is not confined, at least in terms, to companies formed or registered under the Companies Act, 1862, but extends, at least in words, to all joint-stock companies of whatever description.

It is suggested, secondly, that only contracts entered into by the company or by its promoters, directors, or trustees, as such,are within the enactment: and this is the view adopted by Bramwell, B., in Gover's Case. (1) But this again would be, in our opinion, too narrow a construction. In fact, nothing would be

(1) 1 Ch. D. 182.

easier than to evade the Act altogether, if the words "as such" are imported into it. As pointed out by Lord Justice Mellish in Gover's Case (1), all that would be necessary to evade the Act would be, to enter into a contract first, and to become a promoter afterwards.

Conceding, therefore, that the contracts to be disclosed must in some way affect the internal or external affairs of the company, including in that expression its property and prospects, the management of its affairs, and dealings with its shares, we think the kind of contract to be disclosed ought not to be limited in the way suggested.

A statute passed to prevent fraud, and couched in general language, ought to be construed so as to defeat all the frauds which are within the mischief sought to be remedied; and the general language of the statute ought not to be cut down so as to leave perhaps the larger portion of such frauds entirely undefeated. It may be inferred that the words of the Act were purposely left as general as possible, in order to throw as wide a protection as possible over those for whose benefit the Act was passed. Nor is it necessary for us to do what the legislature has declined to do, viz. define positively and negatively the exact kind of contract which must be disclosed, and the exact kind of contract which need not. Suffice it to say that any construction of the Act which would exclude from its operation a contract entered into by a promoter before its prospectus was published, and affecting his own payment out of the funds of the company, or the property of the company, or the manipulation of its shares, or the independence of its directors, would be too narrow a construction, and ought not to be adopted.

We have said already that the words "whether subject to adoption by the directors or the company or otherwise" do not appear to us to be so important as the defendants' counsel contended that they were. But we cannot assent to the construction attempted to be put upon them, and to construe "or otherwise" as meaning "or otherwise adopted." Such a construction would make the words themselves almost if not entirely superfluous. It is not easy to suggest how a contract by a promoter on behalf of a

(1) 1 Ch. D. at p. 191.

company before a company existed could be made otherwise than subject to adoption by the company itself, - yet contracts by promoters not subject to such adoption, and concealed from the company, are the commonest and most mischievous form of the frauds which, as we think, the statute was intended to defeat. If we have rightly construed the Act of Parliament, the mere reading of the first contract is sufficient to shew that, if the defendants were promoters, it is clearly one which the Act compels to be disclosed. And, as to the second, it is enough to point to the provision that the Duke de Saldanha is not to receive his money unless the defendants Clark & Punchard obtain the contract for the works. Both parties to this contract had a direct interest in getting up the company altogether irrespective of the probabilities of its ultimate success. We are of opinion that these two contracts are within the words of the section, and that as against the defendants their suppression gave a right of action to the plaintiff on this prospectus, unless we are precluded from so holding by authority, which we proceed to inquire.

Cornell v. Hay (1), in the Common Pleas, and Charlton v. Hay (2), in the Queen's Bench, are clearly in accordance with the view above expressed. Lord Chief Justice Cockburn, in Charlton v. Hay, at nisi prius, is said to have taken a different view of the Act: but there is no authentic report of his observations; and, if he did take the view ascribed to him, and use the expressions which have been quoted to us, he must we think have for the moment overlooked the essential difference between a buyer of ordinary property and a person applying to a company for a share in its capital. Be this, however, as it may, what fell from the Lord Chief Justice at nisi prius cannot in this Court be taken to overrule the decision of the Court in banc.

Gover's Case (3), curiously enough, is claimed both by the plaintiff and by the defendant to be conclusive in his favour. The points actually decided in that case were that, even in cases within the enactment, the shareholder could not repudiate his shares. It was also decided by the Lord Justice James and Bramwell, B., that the contract there in question was not within

(1) Law Rep. 8 C. P. 328.

(2) 31 L. T. 437.

(3) 1 Ch. D. 182.

the Act: but the reason for this part of their decision was, that the alleged promoter, Mappin, who made the contract, was not a promoter of the company, or at all events that he was not a promoter, director, or trustee of the company at the time the contract was entered into. This reason, however, was not concurred in by the other members of the Court of Appeal. So far, therefore, as the actual decision in Gover's Case (1) is concerned, it does not touch this case; for, we have to consider it upon the assumption that the defendants were promoters when the contracts which we have alluded to were entered into.

The New Sombrero Phosphate Co. v. Erlanger (2) turned entirely on general principles of equity, not on the section of the statute with which we have to deal: and Craig v. Phillips (3) only decided that it is not incumbent on a mere vendor of property to a company to disclose what he gave for it. Neither of these decisions in any manner conflicts with the conclusions at which we have arrived. At the same time, it is impossible not to see that the Lord Justice James and Bramwell, B., put upon the Act a construction much narrower than that put upon it by the Court of Queen's Bench in Charlton v. Hay (4), and by the Court of Common Pleas in Cornell v. Hay (5), and narrower than that which we have endeavoured to shew is its true construction. But Lord Justice James, and Bramwell, B., do not appear to have decided that the Act does not apply to such contracts as those with which we have here to deal, if entered into by persons who were promoters at the dates of the contracts: and the balance of authority is against such a conclusion. The balance of authority appears to us to be at present in favour of the view that the object of the legislature was, to prevent the concealment of contracts with promoters, &c., which it might be material for applicants for shares to know. The contracts in this case, as we have already said, and the verdict of the jury shew conclusively that if this test is to be applied the contracts ought to have been disclosed in the prospectus.

But then it is urged that this action will not lie against the

(1) 1 Ch. D. 182.

(2) 5 Ch. D. 73.

(3) 3 Ch. D. 722.

(4) 31 L. T. 437.

(5) Law Rep. 8 C. P. 328.

defendant Grant, as he bon‰ fide believed that the contracts in question need not by law have been set forth. This bon‰ fide belief, however, is perfectly consistent with a full knowledge of all the facts and an erroneous opinion respecting the law applicable to them. As he knew of the prospectus and of the contracts, and as he issued the prospectus knowing that it did not allude to those contracts, the statute applies to him, whether he did or did not take a correct view of the law.

With respect to the damages, we think the verdict ought not to be disturbed. The principle we apprehend to be that the plaintiff is entitled to recover whatever damages he has sustained by reason of the fraud of the defendants. By the fraud of the defendants he was induced to pay 700l. for seventy shares in this company, and the whole of that money has been lost. That loss was the natural consequence of the acquisition and retention of shares in such a company as this.

It was indeed contended that 700l. could not be right, as the defendants were at all events entitled to be credited with the market-price of the shares when the plaintiff bought them; and reference was made, in support of the defendants' contention on this point, to Sedgwick on Damages, p. 556, and to Lord Campbell's observations in Davidson v. Tulloch. (1) No doubt, if the shares were really worth anything when bought, the defendants ought to have credit for what they were really worth. But the fact that they were quoted at a premium on the Stock Exchange is only evidence of value, not proof of it; and, if the jury thought (as they well might, and probably did,) that the quotation on the Stock Exchange did not shew a real, but only a delusive value caused by the fraudulent nature of the prospectus and the mode in which the shares were manipulated by the defendants and others in concert with them, the jury were not only justified in disregarding, but were bound to disregard, such delusive and factitious value; although, of course, if the plaintiff had sold his shares, he must have credited the defendants with whatever he might have realized by the sale.

There is no evidence whatever that the shares ever had any value except that which resulted from the wrongful acts of the

(1) 3 Macq. 783, 790.

defendants; and it would be contrary to all principle to allow them to take advantage of their own wrong, and claim credit for the market-price of the shares, when but for their own concealment of the contracts in question there is no reason to suppose that the shares would have had any market value at all. The defendants are not entitled to say to the plaintiff, "You might have sold your shares to some one as ignorant as yourself, or to some speculator in shares." The plaintiff was not bound to sell; and, after he discovered the fraud, he could not sell.

It was also contended that the property of the company had a value, and that the plaintiff's loss was really attributable to the conduct of the directors in not making the best of that property. But the question is not what was the value of the concessions and plant of the company, but what was the value of the shares got by the plaintiff; and it is evident that the jury treated them as worthless.

It was further contended that, as Grant urged the directors to return the capital to the shareholders when it was intact, he cannot be responsible for its ultimate loss. But he cannot absolve himself from the consequences of his own liability under the statute by shewing that those consequences might have been averted by persons over whom the plaintiff had no control. It was by his fraud that the directors had obtained the command of the capital of the company; and, in acting as they did, they were acting within their powers as conferred by the memorandum and articles of association of the company. Whatever they did acting within their powers was, so far as it affected the plaintiff, a consequence of his having become a shareholder, and a consequence for which the defendants are responsible.

It was further contended that the true measure of damages is, the difference between the value of what the plaintiff intended to get and the value of what he did in fact get. Adopting this principle, two results were contended for. First, it was said that the plaintiff intended to get shares in a company such as that described in the prospectus, and he got shares worth less than they would have been worth if the concealed contracts had not been entered into; and that the utmost measure of damage is, the diminished value of the shares consequent on the payment out of

the capital of the company of the sums mentioned in the concealed agreements. Secondly, it was argued that as, according to the plaintiff's own contention, the company's undertaking was impracticable, the shares which he really intended to get were worthless, and that consequently he had sustained no damage at all by reason of the concealment of which he complains. But, in our opinion, the defendants are not entitled to avail themselves of the fact that the plaintiff intended to take shares in such a company as that described in the prospectus, or in the company unaffected by the concealed contracts. That intention was itself the result of the wrongful act of the defendants; and, as between the plaintiff and them, he is entitled to repudiate any intention of his own based on their fraudulent concealment. He is entitled to say that, but for their fraud, he would never have parted with his money. He has parted with it for shares as to which there was abundant evidence that they never had any real value at all; and his loss is the direct consequence of the defendants' conduct in issuing the prospectus. His slight and temporary profits hardly equal the ordinary interest of his money; and we think, therefore, there is no reason for disturbing the verdict of the jury either wholly or in part.

For these reasons, our judgment will be for the plaintiff.

The defendants appealed.

May 7, 10, 11, 14, 15, and 17. The defendant Grant appeared in person.

Thesiger, Q.C., and C. Bowen, for Clark & Punchard.

Sir H. James, Q.C., Morgan Howard, Q.C. (H. T. Atkinson, with them), for the plaintiff.

The arguments sufficiently appear in the judgments of the Court. The cases cited were the same as in the Court below.

June 2. The following judgments were delivered.

BRAMWELL, L.J. Matters have been introduced into this case which are wholly irrelevant; matters which have absolutely

nothing to do with the questions we have to decide. Reluctant as I am to deal with subjects not properly involved in the case in hand, it is nevertheless necessary I should speak of some of the things I have referred to, in order to shew they have no bearing on the questions before us, and in order to shew I am not insensible to their intrinsic importance. I shall speak of the persons concerned as if they were unknown to me by name even, and I speak of the directors with all reserve. They are not before us, and if they were, might very much alter the case suggested against them. The facts before us are these: the Duke de Saldanha, a Portuguese nobleman, ambassador to this country, had a concession of powers to make and work tramways from Lisbon to other places. This concession, from motives of interest, or patriotism, or both, he was desirous of selling to some person or company who would buy it and make and work the tramways. To accomplish this wish he applied to the defendant Grant as a person who would assist him. The defendant Grant applied to the other defendants, Clark & Punchard, contractors, and persons whose business it was to make such tramways. The arrangements come to after various negotiations were as follows: that a company should be formed with a share capital of 200,000l., and a borrowed preferential capital of 150,000l.; that Clark & Punchard should contract with this company to make and deliver to it two lines of tramway to Cintra and Torres Vedras in working order, with proper stations and with necessary locomotives and working stock, and with all preliminary expenses paid, for the sum of 309,810l. So that the company would have its line in working order, with the necessary plant, and a capital of 40,190l. where with to work it. Clark & Punchard also were to agree with the company to guarantee two years' interest on the capital. This was to be the agreement with the company when it came into existence, but of this 309,810l. Clark & Punchard were to give the duke 22,000l. in money and shares, they were to give one Larmanjat, for the right to use hie patent, about 7000l., I believe, and they were to give Grant 45,800l. for services rendered and to be rendered in and about obtaining for them, Clark & Punchard, a contract "upon such terms as should be satisfactory to them," and in the formation of the company and preparation of, advertising

and making public the prospectus, raising and placing the capital. It was also agreed that, if required by Grant within thirty days of the first allotment of shares, Clark & Punchard should take from him not exceeding 4200 shares at par. It is in respect of the not setting forth in the prospectus of these two contracts, viz. the one between Grant and Clark & Punchard, and the other between the duke and Clark & Punchard, and the alleged damage therefrom, that this action is brought. It may be added that Clark & Punchard were to qualify the directors, that is to say, to transfer to them or give them the price of shares free of expense to such an amount as to qualify them to be directors. The cost of this was estimated at 6000l. So that Clark & Punchard would pay to the duke, 22,000l.; to Larmanjat, 7000&L; Grant, 45,800l.; in interest, 32,000l.; in directors' qualification, 6000l.; in all 112,800l., leaving them out of the 309,810l. the sum of 197,010l.: from this, however, must be deducted what they might lose under their agreement with Grant to take the 4200 shares at par. This loss amounted to 10,000l., leaving therefore net about 187,000l. as to costs of the tramways and plant. There is no suggestion that the price paid to the duke was unfair, except this, that the thing turned out worthless, and that no inquiry worth speaking of was made to see if it was worth anything; there is no evidence that the price to be paid to Larmanjat was excessive; as to the 32,000l., the shareholders were told they were to have that amount of interest from the contractors, and therefore, with the least thought, must have known that it came out of their pockets to be returned to them; as to the payment to Grant, he says it was not excessive, and it may not have been, supposing it was right to buy and render such services as he rendered. As to the cost of qualifying the directors, nothing can be said to extenuate it, except that honourable men have been parties to such transactions, though not seeing their, to me, obvious impropriety. The impropriety of being nominees of sellers and at the same time agents of buyers, a thing the impropriety of which I had occasion to point out as long as thirty-five years ago, with a warning that it might bring the parties to it within the law of conspiracy. Still, obvious as it is to people who will reflect on the matter, it seems not to be

generally appreciated. But to go on with the narrative. Directors were found, mainly if not wholly I believe by Clark & Punchard, they were qualified subsequently, but they became directors originally, no doubt, with a promise that they should be so qualified, and a knowledge that unless the company was floated, or whatever it may be called, they would not get their qualification. That followed which might be expected. The directors were brought into existence, as such, to enter into a contract for the company prepared ready for their signature. Of course they did that which they were created for, doubtless trusting to their creators that it was "all right." They signed the contract pledging the company to pay Clark & Punchard 309,810l., and they did so, as far as we know, without any inquiry as to how that sum was got at, whether the concession was worth having, what were the prospects of traffic, what was the nature of the country, what was the character of Larmanjat's process. It is idle to talk of the duke's knowledge of his own country, and of the municipal returns. It may be said safely that, as far as we know, the directors omitted to do everything that prudent agents of their principals the vendees, the company, would have done, and which it is difficult to suppose they would have omitted if they had been venturing their own money in the matter. No better proof can be given than that near half the line included in the price 309,810l. was abandoned, and a new line substituted wholly different except as to one terminus, Cintra. And this was done at once on the report of Mr. Trevithick, the engineer, who was sent out after instead of before the contract for the 309,810l. was signed. No doubt, as Mr. Thesiger said, it does not follow that the original scheme was bad because the second was better; but the abandonment of the first for the second at once on the report of the engineer directly he saw the place, and the terms of the report, are the strongest evidence of the improvidence of the directors and that the first scheme was bad. And, without wishing to promote litigation, I cannot help saying I think they would be in great danger if sued by the company for breach of trust and duty in making the contract they did, and as they made it, and for going on with the scheme, especially in connection with what I am about to state. The defendant Grant

went into the market and bought a large number of shares, and various newspapers were induced, by payments to subordinate persons, to write favourably of the company. The shares rose to a premium; the public were attracted, and subscribed for the capital or a large part of it, both shares and debentures. The defendant Grant attempted to justify giving this false appearance of value to the shares by saying that it continually happens that shares are made to appear worth less than their real value by people selling them when they have not got them. There are two answers to this: first, there is no reason to suppose that any such practice was apprehended by the company; next, that it cannot be right to counteract such a proceeding in the way here adopted; and, indeed, further, if it is believed that a scheme is a good one, and people try to depreciate it by selling its shares, they will be countermined honestly, and not by a trick, by those who think well of it buying the shares so sold. It must not be supposed I think that the defendant Grant is the only one who ever did this, I know it is often done, and is always wrong. To go on, however, the report of the engineer came in. The defendant Grant, creditably to him (indeed it is the only thing I can find in this case to approve of), recommended on the coming in of that report that the scheme should be abandoned; but, if true, marvellous to say, the directors, though they thought it ought to be abandoned, went on with it because there had been dealings on the Stock Exchange which would become null unless a settling day was appointed, and a settling day could not be named unless the directors went on with the scheme. So that for this reason they continued what they believed was likely to turn out ill for the shareholders. It did turn out ill. The tramway was worked for twenty-two months at a loss, then stopped; and an order made for winding-up the company, which stands now in debt on its debentures 150,000l., and with no assets but what its rails and plant may sell for, unless, indeed, its right of action (if any) against its directors may be called assets. I may mention (to shew I have not forgotten it) that when the first route to Cintra was abandoned and a new one substituted, the duke, Larmanjat, Grant, and Clark & Punchard all gave up a part of their expected profits; so that the line, shorter indeed, but more expensive to

make, might still be made, with its plant, &c., for the contract price of 309,810l. I have stated these facts, but I repeat they are wholly irrelevant. For though the sum to be paid to the duke had been fair, as perhaps it was, and that to Larmanjat, and the sum to be paid to Grant had been 500l. only, a bare return for the expense of advertisements, and though he had not been bound to lay out a shilling in raising the price of shares and in bribing the press, if the price to Clark & Punchard had been fair, if the directors had subscribed their own money, if the scheme had been a good one and carefully considered, still, according to the argument for the plaintiff, the contract between Clark & Punchard and the duke, and the contract between Clark & Punchard and Grant to pay him the supposed 500l., ought to have been stated in the prospectus. Nor can it be said it was necessary to shew the actual facts, because if they had been as I have supposed the plaintiff could not have said, as he did, that knowing such reasonable contracts would have prevented him taking the shares, because we have no question before us as to whether he was influenced or not, - that has been found in his favour.

Having finished with what is not relevant, I will now address myself to what is. The first question is, whether the two contracts mentioned in the declaration are contracts within s. 38 of the Companies Act, 1867. The question is the same as to each. If one is within the section and not the other a difficulty might arise. For the plaintiff has sworn and the jury have found, that if the two had been stated, the plaintiff would not have taken his shares, the jury have not found that if either one had been stated he would not. However, in my judgment this is immaterial; as if either contract is within s. 38 so is the other. I will not quote Mr. Buckley's (1) vigorous remark on this section as I do not think it desirable for those who have to administer the law to speak disrespectfully of it, a thing, as Lord Coleridge said, more often done as to Acts of Parliament by those who have not had, than by those who have had to do with the framing of them. But it is admitted on all hands that some limitation must be put on the words of s. 38, and undoubtedly the legislature have imposed a difficult task

(1) Buckley on The Companies Acts, 1862 and 1867, 2nd Ed. p. 482.

in having to say what, on those who have to administer the law. It is a task very nearly that of legislating. The section in terms comprehends "every contract entered into by the promoters before the issue of the prospectus" without limitation of antecedent time or subject, and would therefore in terms include a contract made twenty years before for taking a dwelling house in which the promoter had lived since. This cannot be; there must be some limitation. Two have been suggested. One by the plaintiff, viz., that every contract is meant which would assist a person in determining whether he would be a shareholder; the other that only those contracts are meant which affect the company, which put an obligation on it, whether with or without some benefit attached. There may be other limitations better than either of them, but I think the choice lies between the two, and I am of opinion that the latter is right. I see no reason for the former. I think it is enough to let the public know on what terms they can have the subject-matter of the scheme they are invited to join. I think that if a mine is offered for purchase it is immaterial when and how the proposed vendor got it. No doubt if he got it cheap it would shew that his vendor had not a high opinion of it, but its intrinsic value would be the same. Such an argument as this would lead to legislation that the prices paid for the last century should be stated. Such a construction of this section would make it a matter of prudence to state every contract that a promoter had at any time been party to. It is true that if a contract obviously immaterial were left out, no jury or tribunal ought to find a shareholder would have been influenced by its being mentioned, but who would risk this? Extravagant cases may be put, but prudence would require that the dates and names of the parties to every contract a man had ever entered into should be stated. I do not want to create a smile, but suppose a director of the company engaged to be married to the daughter of a promoter, and his reason for becoming a director was his wish to stand well with his intended father-in-law. Is the contract of marriage to be stated? If the father has agreed to settle money on his daughter is that to be stated? Why not? A shareholder might truly say, if I had known these things I should have known that the director had a motive for joining the scheme other than his good opinion of

it. I trusted to his unbiassed good opinion of it, and took shares accordingly, and would not if I had known of their intended marriage contract, and he might be believed. Suppose a contract by one director to indemnify another perfectly bon‰ fide. Is it to be stated? But in like way it might influence intending shareholders. Every sub-contract with Clark & Punchard must be stated; five hundred contracts with workmen and with those who supply materials; so of all sub-contracts by the directors. So of all contracts for advertising, stationery, &c. Take this very case. The plaintiff in his evidence said that the mention of the name of the defendant Grant would have influenced him. A man is not bound to be a shareholder, and if he does not like the information given, need not be. He may ask as he might have asked here, How have you got at the price of 309,810l., and if not answered, or the answer not satisfactory, might have declined the shares. I know that practically this is not done. I think it is better to teach people to look after themselves, and not have this sort of paternal legislation taking care of them and giving them information they will not take the trouble to ask for.

It has been said that to the intending shareholder it is all important to know what sort of persons are to have the control of his money when he has paid it, and how that money is to be applied, whether upon the enterprise itself or in remunerating, perhaps, with lavish extravagance those who have brought the company into existence. Again, it is all important for him to know whether shares applied for by other people are applied for honestly as by himself, or by persons whose only object is to create a fictitious demand for them, and get rid of them as soon as they have succeeded in deluding others to take them on the faith of their apparent value. I feel bound to notice this on account of its force. But with all submission, are these objects attained by saying that "contracts" shall be stated? To accomplish such objects ought not much more to be enacted? Would it not be necessary not only to state contracts, but anything that had been done by promoters, and persons not promoters? I think so. I construe the section, or endeavour to do so, and not legislate, or as little as possible. The construction I adopt leaves everything affecting the company provided for. Fraudulent statements in

the prospectus were before provided against, and if the statements in the prospectus are untrue, and made without adequate inquiry, they would be fraudulent. This enactment guards against knowingly suppressing the truth. If in the contract entered into and stated there had been any breach of duty or trust in the directors; if they had entered recklessly into improvident engagements, as it is said they have here, they are liable to their cestuis que trust and principal, the company; if they have reserved benefits for themselves, they must give them up to the company. For instance, it may be they would be liable for the amount of their qualification which in reality comes out of the contract price.

Then the occasion of this Act must be remembered, viz., the omission from the prospectus of a contract in the Overend & Gurney case which burdened the company. Further, I think this limitation of the enactment is much helped by its words. They are, "Any contract entered into by the company," that must be a contract binding on it; the next words are, "or promoters, directors, or trustees thereof." Surely a contract entered into by trustees must mean as such, and so be a contract binding on the company. A similar observation is nearly as strong as to "directors." Then the only word left is "promoters," and the section can hardly mean contracts other than those they enter into as such; that is to say, binding on the company. That would make the statute speak of one class of contracts as to the company, its directors and trustees, and two classes as to its promoters. The words are in the plural, "promoters," "directors." I do not suggest that a contract intended to bind the company entered into by a single promoter need not be in the prospectus, but the use of the plural helps to shew that the promoters as such were meant. Then the words, "whether subject to adoption by the company or directors, or otherwise," strongly confirms this. I believe they are intended to include contracts binding on the company or contracts which they have power to reject. Some strange remarks have been made about this. The matter is very clear. The company before issuing a prospectus may enter into a contract; that must be stated. Its directors or promoters may enter into a contract after or before it is formed, subject to adoption by the company. Such contracts must be stated. They must be stated, because

though not binding at the time of the prospectus, they in all probability will become so by adoption after. The present case may give an illustration. If a prospectus had been issued on the 1st of July of the company it would have been necessary to state the contract of Clark & Punchard to make the line for 309,810l., to which practically Clark & Punchard had bound themselves. Certainly if they had so agreed with the defendant Grant as a trustee for the company, though the company might have refused to adopt that contract. Again, the prospectus is "to be deemed fraudulent on the part of the promoters and directors" (in the plural), "and officers of the company knowingly issuing the same." It is impossible to say that this is levelled at the case of a contract between a promoter and a third person not affecting the same.

The issuing also refers to an act of the company. Suppose one promoter, having given a director his qualification, gave him a prospectus. Could that be deemed an issuing of the prospectus by the promoters, so as to make the issuer of the single prospectus liable to a person who never saw or knew of the particular copy of the prospectus? What I mean is, that the section is speaking of the acts of the company and its promoters as a body, so of its directors and trustees, and refers to contracts presumably within the knowledge of all, which would be contracts binding the company. Then there is the general heading "contracts" before s. 37, which must mean contracts binding on the company. On these grounds I have come to this conclusion. Of course, if the contracts are within the section they ought to have been stated, and if stated and understood must have influenced intending shareholders. As to the authorities, the judgment of Lord Justice Mellish in Gover's Case (1) seems to me to be to the same effect. He says, indeed, at page 190, that "the object of the section was to prevent the concealment of contracts which it might be material for applicants of shares to know," but he explains that afterwards: he says that he does not agree with the whole of the reasoning of James, L.J. Now with what part does he differ? He says, "He thinks it too narrow a construction to exclude from the section cases where there was no fiduciary relation at the time of

(1) 1 Ch. D. 182.

the contract, and that it ought to be held to extend to every contract made with a person who afterwards becomes a promoter provided the company have become entitled to the, benefit of the contract or liable to perform its provisions." The judgment of James L.J., is also in favour of the conclusion I have come to. The whole tenor of his reasoning is that way, and his opinion is shewn by the passage beginning, "I may illustrate ..." that shews that in his opinion if the contract bound the company, or they were entitled to the benefit of it, it would be within the statute. The opinion of my Brother Brett is the other way, and so no doubt is that of the late Mr. Justice Honyman, an opinion which I may now say, I value most highly. He had the same point made before him as Mr. Thesiger has made before us, and founded his opinion on the same reasons as my Brother Brett in Gover's Case. (1) As for the case of Charlton v. Hay (2), the best remark to be made on it is that the point made before us was not made there. For some reason, which may be guessed from the shorthand report as read to us by Mr. Thesiger, the case is not reported in the Law Reports or the Law Journal.

This, then, is the opinion I have come to. I do not advance it confidently. I do not think the question admits of a confident opinion, and I think those who express one cannot appreciate the difference between those cases where one may be formed and those where it cannot be. No question of principle, no question to be solved by industry and research exists. The question is, what limitation should be put on an enactment unlimited in words but necessarily requiring a limit in application?

It has been suggested that there is some fiduciary relation between Clark & Punchard or Grant, and the company, which may enable the latter to make some claim on Clark & Punchard, or Grant, or both; and, consequently, that even if only contracts affecting the company ought to be stated in the prospectus, that the contracts in question ought to be. I do not see any such case, certainly not as to the contracts with the duke; and, as if such case existed, the stating of those contracts would be the stating of contracts giving a benefit with no burden to the company, it would be difficult to suppose that the statute meant that the omission of

(1) 1 Ch. D. 182.

(2) 31 L. T. (N.S.) 437.

such contracts should be deemed fraudulent. If there is anything in this point it was not made at the trial, nor the opinion of the jury taken upon it. The verdict, therefore, could not be returned on this ground, and at the outside there should be a new trial that the plaintiff might make the point.

I do not apologise for this opinion, because I believe it to be the right one. But I am fully aware it is not likely to be the popular one; that would probably be to hold the section wide enough to comprehend these particular defendants and all transactions of a like nature.

I should rejoice if such nefarious transactions could be reached, proved, and prevented. Besides the loss of 350,000l. in this particular case, immense mischief has been done by practices such as these. It is the opinion of some of the ablest men of the day that the present stagnation of business is partly attributable to the want of confidence caused by the public knowledge of such cases as that of this company. But as is said in an able pamphlet which has been sent to me, "We must be careful lest righteous indignation against wrong-doers should lead us to throw the net too wide and, so make a share for the honest and law abiding." I think I have shewn that I have no approval of what has been done in the case of this company. But I must construe the Act as it is, and not as I would have it in this particular case. The wrong-doers, indeed, ought not to escape. They can, in my opinion, be reached in a different way. On the other hand, it is frightful to think of the litigation and ruin there is in store for possibly perfectly honest persons if the construction contended for by the plaintiff is supported. The statute has existed for ten years. Thousands of companies have been formed, and honestly formed, and prospectuses of them issued, in which there has been no mention of contracts not affecting the company. Many of these schemes doubtless have been unsuccessful. When there has been such omission from the prospectus, however honest, the parties to it are subject to actions in which they may indeed succeed, but also may fail.

Supposing that I am wrong, and that the contracts are within s. 38. Other questions arise; they arise on the rules moved for and obtained. There is no other complaint of misdirection,

or that the verdict was against evidence, before us. First, I am of opinion that there was evidence that the defendants were promoters, and that they issued the prospectus "knowingly" within the statute. There is nothing to limit the word "promoters" to persons acting before the company is formed. It is not a word of art, it must be understood by lawyers as it would be by laymen. It is impossible to say that the defendants Grant and Clark & Punchard were not promoters of the company, at least till the share capital was engaged. Also, they issued the prospectuses, not any one particular prospectus, indeed, but the whole of them. They were jointly engaged: what the defendant Grant distributed were issued by the others, and so were what Clark & Punchard distributed. Mr. Thesiger admitted that till the case was before us it was never objected that there was no evidence of an issue in fact by Clark & Punchard of the prospectus. Further, "knowingly" does not mean fraudulently. If, therefore, the contracts are within the section, I am of opinion that these points fail the defendants, and that the judgment must stand.

The next question is the question of damages, and I am of opinion that there is not the least ground for a new trial on this head. If irrelevant topics were introduced by the plaintiff on this part of the case, topics equally irrelevant were urged in favour of the defendants. Fault was found with the judge for not assenting to the jury giving the plaintiff a verdict by consent. I think he was right. The very fact the defendants offered it and that the plaintiff objected was enough. It could do the defendants no harm. They could not be worse off than by a verdict against them. The complaint about extra costs is unfounded; I am by no means satisfied that the plaintiff is entitled to those of the trial as he needlessly caused them; and they would have been trifling had not the defendant Grant appeared in the course of the trial. Really the complaint is ludicrous. It is a complaint that the defendants have had an opportunity given them of complaining. They would have been no better off than they are, and would have been this worse off: that they could not have complained. The damages are less than the defendants were willing to agree to. On the question of damages I am of opinion the

verdict is right and should stand. The plaintiff's case is that the defendants omitted certain contracts in the prospectuses that they issued; that if those contracts had been in the prospectuses he would not have taken shares. The jury believed this, and I have no doubt the plaintiff believed it, if not as to the contract, with the duke, certainly as to that with the defendant Grant. Of course I do not mean on account of his name. I treat him, as I said before, as a person I never heard of. But if it had been said there was a contract to pay a company-maker 48,500l., to launch, or float, or finance the company - about one seventh of its capital - no one knowing that would have taken shares in it. But this being believed, the consequence follows that through what is deemed fraudulent on the defendant's part the plaintiff has taken shares. Then those shares turning out worthless, the plaintiff's damage is what they cost him. What is the answer to this? First, the argument of the defendant Grant, that if an earthquake had destroyed the line after profitable working for seven years, the plaintiff could not recover the amount he had paid, therefore neither can he now. But in that case the thing would not have been worthless through its intrinsic and inherent defect. Here it is. It is said no, it failed through mismanagement. There is no evidence of this. Then it was argued that as at the outside the contracts with the duke and Grant only amounted to 67,800l., the injury to the company could not be more than that, and so the plaintiff's loss ought to be proportioned in some way. How does that touch the plaintiff's argument, that he would not have subscribed at all, but for the omission of the contracts? A remark of my Brother Brett was decisive. By a fraudulent statement that the takings of a business are 50l. a week a man is induced to buy it. It turns out that they are worth only 40l. a week, and the business is worse than worthless. But it also appears that if the takings were 50l. a week it would be worthless. Would the damages then be nought? The plaintiff says but for your fraud I should not have touched it. Then it was said that the plaintiff had extinguished the concern, or put it to death by petitioning for its winding up. It is wonderful. Any one would suppose that Winding up Acts ought to be entitled, "Acts for the more effectual ruin of companies and waste of their assets." He had a right to

do what he did. The proper tribunal made the order (not on his petition alone indeed) because it was right to make it, and therefore right to ask for it. And doubtless it was. The line was worked at a loss, and the longer the working the larger the loss. Then it was said that the shares could have been sold for 5s., or 10s., or something, each, and so his loss was not total. I think this was effectually answered by Sir H. James when he said that the plaintiff was not bound to sell his shares, that he had a right to see what the assets would realise. I put, again, the case of a horse fraudulently warranted sound, the seller knowing that it is not. The disease appears, and a man is willing to trust to the recovery of the horse and give 10l. for it. The offer is refused, and the horse dies. Are the 10l. to be deducted from the price? Impossible. Then it was said there might be some salvage. There was no evidence of any. And when it is remembered that there are preferential creditors to the amount of 150,000l., it is impossible to suppose there will be anything for the shareholders, unless, indeed, the directors should be made to make good to the company the loss consequent on their adopting the scheme, agreeing to pay 309,810l., and carrying it on when of opinion that it was bad - if it should appear that they have failed in their duty to their shareholders in these particulars.

I think I have gone through all the objections. I am of opinion that they all fail, that the right question was left to the jury on this head, and the right verdict found by them.

In the result, I am of opinion that judgment should be entered for the defendants, on the ground that the contracts are not within the statute. But on all other matters I am against the defendants, and think their appeal fails.

KELLY, C.B. It appears to me upon the most attentive consideration of the numerous and complicated facts, which have been introduced into this case, that the action is altogether misconceived; that the contracts complained of are not within the Act of Parliament, and that the fraud or frauds alleged to have been committed, and of which it may be that there is cogent evidence, are open to a remedy by a bill in equity, or possibly by an action at law, in which it may well be, that Mr. Grant and Messrs.

Clark & Punchard, should be made defendants, but which should also include the directors as defendants, and in which ample redress might be obtained. As to the contracts, the suppression of which in the prospectus is complained of, it appears to me, that s. 38 of the Act of 1867, has no application to them whatever; that a contract to be within the provision must have been made with the company, if it has been formed, and if not, with the promoters or the directors, or the trustees, representing or purporting to act on behalf of the future company, and with the intent that the company when formed shall execute a corresponding contract, and so in effect ratify the act done by the promoters, or other body of persons mentioned before its formation; also that it must be such as to impose, or to be intended to impose a burden, or obligation, or a loss, or a liability upon the company, which would affect the value of the shares in the hands of a purchaser.

It seems clear to me likewise, that no contract made between one promoter and another, or by or between any person or persons, and to which neither the company, nor one of the three bodies of persons mentioned in the clause are parties, can be brought within its operation. We must first consider the precise language of the section, and this appears clearly to contemplate that the contracts within it must be such as that the company itself shall become, or is intended to become a party to them, and that if entered into before the formation of the company, it must be made by the promoters, or intended directors, or trustees, as a body, and purporting to represent and to act on behalf of the company to be afterwards formed.

The words of the Act, are, "any contract entered into by a company or the promoters, directors, or trustees thereof." These words obviously apply only to the bodies of persons there mentioned, that is the company itself, or the promoters, or the directors, or the trustees thereof, who may represent the company or enter into any contracts on the company's behalf, and which if entered into before the company is formed are such as that, inasmuch as strictly speaking, the company cannot ratify a previous contract, yet corresponding contracts to the same effect may be afterwards entered into by the company, thus in effect ratifying the act of the promoters or other bodies of persons who had acted for them before

their formation. The clause, therefore, does not refer to contracts by individuals though they may happen to be promoters, or directors, or trustees, the words being, "the promoters, directors, or trustees," in the plural number, without the addition of the words "or any or either of them." It is by such contracts only, that is, contracts entered into by the promoters as a body, or the directors, or the trustees, and to which, or to contracts to the same effect, the company itself afterwards becomes, or is intended to become a party that the company can be in any way bound or subjected to any burden, or loss, or liability, or disadvantage, or the interests, or the value of the undertaking in any way affected, or the shares in the hands of the shareholders become of less value

We may take the contracts between the company and Clark & Punchard, as an example. If this contract had been entered into between these contractors and the intended directors before the company had been formed, and as it could not be ratified by law by the company after its formation, they had entered into a corresponding contract as they have actually done, with the company, and this contract had been suppressed in the prospectus, it would clearly have been a fraud within the Act of Parliament, as against the publisher of the prospectus: first, as having been a contract within the express words of the statute as made with the company, and having imposed a heavy burden and loss upon the company by their having become liable to pay 309,000l. for works and concessions, and preliminary expenses of less value than the sum so payable, if in no other way by the 40,000l. contracted to be paid to Mr. Grant, alleged or assumed to be for little or no service or consideration whatsoever. This would have been a contract within the express words of the clause, first, because it would have been made between the contractors, and the intended directors, and afterwards between the contractors and the company itself; and it would have been within the mischief of the statute, because it would have subjected the company to the loss or waste of the 40,000l. before-mentioned. But this contract which was a part and a natural part of the real fraud actually committed, was expressly mentioned in the prospectus, and therefore does not bring the case within the Act of Parliament. And when we consider its terms and its full effect in connection with the multifarious

and complicated facts of this case, it becomes obvious that on the one hand if it had been suppressed in the prospectus, it would have been clearly within the Act of Parliament; having been disclosed, it at once opens to us the real fraud, of which it is a part, but a part only, and of which the shareholders complain in this action, and for which an ample remedy would have been found, if the case had been established in a suit in equity.

What then was that fraud? Certainly not the agreement by these contractors to pay the sum of 40,000l. to Mr. Grant for little or nothing, and which the contractors alone had to pay, and upon which the company could never, under any circumstances, before or after its formation, become liable, or in any way injured or damnified; but the great and real fraud was the setting up as a body of directors, to whom the whole conduct of the affairs of the company was intrusted, whose qualifications were supplied to them gratuitously, and who regardless of their duties to the shareholders allowed themselves to be persuaded to enter into this contract for the payment of 309,000l. of the company's money without inquiry or investigation by engineers, or other competent persons, of the value of the works to be performed, and without the slightest knowledge or attempt to obtain the slightest information as to how this large sum of 309,000l. was made up, and consequently without discovering that 40,000l. of it was to be paid to Mr. Grant for nothing, or next to nothing.

This fraud, however, this real grievance, upon which all the eloquence and rhetoric of the learned counsel for the plaintiff was expended for days together, is clearly not within the Act of Parliament, because the contract was disclosed in the prospectus. But it is equally clear that if the works were not of the real value put upon them in this contract, and if the whole advantages resulting to the company from the contract were less by 40,000l., or, as the plaintiff contends, by 70,000l., than the price to be paid for them, the shareholders, as the aggrieved parties, would be entitled to complete redress, not by an action like this, but in a suit in equity against the parties, whoever they may have been, who put the directors in motion and conferred upon them the power to enter into this contract, and induced them to enter into it the very day after the formation of the company, and, as before observed,

blindly and without inquiry, or any knowledge or information as to what it was for which they were engaging to pay this large sum of the company's money. And in such a suit the directors themselves must, of course, have been made defendants. But with respect to these contracts between the Duke de Saldanha and the contractors, and the contractors and Mr. Grant, the company were not parties to them and were never intended to be made parties to them, and could not, by any possibility, under any circumstances have become liable to pay a single shilling of the 40,000l. payable to Mr. Grant, or the 7000l. to Larmanjat, or the 22,000l. to the Duke de Saldanha; and, further, if all the money had been paid to the last shilling to the duke and to Mr. Grant, it never could have been recovered back by the company or the shareholders, and the loss, if loss it be, must have fallen upon the contractors, and upon them alone. If the company or the shareholders were indirectly damnified, their remedy must have been sought against the contractors. Whether the company had prospered or failed, whether the contract with Clark & Punchard was a mass of fraud and deception and helped to ruin the company or not, they, the contractors, alone were liable to pay these large sums to Grant and the others, and the company could never have been in any way affected by the payment or non-payment of any one or all of them. If these two contracts should be held to be within this clause of the Act of Parliament, I do not see how any contractors with a company, perhaps, for the construction of a line of railway at an expense of half a million of money, can escape the obligation to disclose in a prospectus, or refer to every subcontract they may have entered into for any quantity of materials, or of labour, or of anything else connected with their works, because they might have agreed to pay, perhaps, to some favoured relative, an unreasonable or exorbitant sum of money for something purchased of him in order to perform their contract, but which would in effect be a loss to themselves and could not in any way fall upon the company. In what a condition would a fair and honest contractor be placed if this contract with Grant be within the Act of Parliament. A contractor might also be a promoter, and might enter into a sub-contract with another promoter to pay him, in such a case as this, it might be 5000l., for having proceeded

to Portugal accompanied by an engineer, whom he had paid largely for his services, to survey the intended line. This he might honestly believe to be a reasonable sum, and it might really be a reasonable sum, but a jury might find it unreasonable, and perhaps on grounds unknown to the contractor; and upon this the contractor is to be made liable to every shareholder for the entire amount of the purchase-money of the shares and to be stigmatised with fraud, or, in other words, to be exposed to disgrace and ruin. Nor had this agreement for the 40,000l. anything to do with the subsequent failure of the undertaking or the ultimate valuelessness of the shares. And it certainly appears to me that nothing but the wide-spread and all-absorbing prejudice against Mr. Grant which seems to have possessed the minds of so many of those who have had to deal with this case could have led to the idea that the engagement for the 40,000l., which was never performed (for a small portion only of the money was paid), had the slightest effect upon the interests of the undertaking, or in any way led or conduced to its subsequent depreciation or ultimate ruin. No doubt the large sums paid to Clark & Punchard may have assisted, together with the general mismanagement of its affairs, arising from the indifference and incompetence of the directors, and the difficulties in the construction of the line, and the selection of sites for the stations, in bringing about the overwhelming embarrassments, and at last the falling to pieces of the company. But I repeat that neither the contract to pay, nor the payment of money by the contractors to Grant, whether known or unknown, had or could have had the slightest effect upon the success or failure of the undertaking. And this is further proved by the fact that the whole sum paid to Clark & Punchard was 213,000l., which left unprovided by the company the whole aggregate of the sums agreed to be paid to the Duke de Saldanha, Larmanjat, and Grant.

This construction of the Act is, as above noticed, supported by the omission of the words "or any or either of them" after the words "promoters, directors, or trustees," which seems to confine the application of the clause to the bodies of persons mentioned, and who would represent the company and contract on its behalf for whatever might be required to be provided before its formation.

So the words "whether subject to adoption by the directors, or the company, or otherwise," seem to imply that the contract is intended ultimately to become the contract of the company.

This view of the section involves the question, whether a contract strictly within its terms as being made by the promoters or the intended directors, and to be afterwards the contract of the company, is still to be disclosed in the prospectus, although it should be in no respect detrimental, but obviously advantageous to the company. Thus, if the promoters had agreed for the purchase of a piece of land for the erection of a station, and the purchase had been made at a sale by auction by the Government, so that no fraudulent excess in the amount of the price to be paid could be suspected, must this contract of purchase have been disclosed?

It is unnecessary, however, to consider this question further, as it has no application to the present case; but, on the other hand, it may be fit and necessary within the Act, that any such contract should be stated, because if made on behalf of the company, and it was ultimately to become the contract of the company, it might be that the price to be paid, or perhaps the purchase of the land itself might be such as to subject the company to a heavy liability, or to the payment of an exorbitant sum of money to some one unduly favoured by the contractors. This question, however, may well be determined, when it shall arise in some case in which the interests of the company are affected by it. I have only, therefore, to observe that I adopt the argument of Mr. Thesiger, that the objects of the statute were to protect the shareholders of the company against some secret contract entered into, as in Overend & Gurney's case, and directly and largely affecting the interests of the company and the value of the undertaking to the company itself, and consequently to the shareholders. And I do not see that the construction which I put upon the Act is substantially at variance with any opinion pronounced, and directly bearing upon the question in this case by any of the judges in Gover's Case (1), or in other cases cited. I except, however, the opinion expressed by my Brother Brett (2), and also by the late Mr. Justice Honyman (3), which, although every way entitled to great

(1) 1 Ch. D. 182.

(2) In Gover's Case, 1 Ch. D. 182.

(3) In Cornell v. Hay, Law Rep. 8 C. P. 328.

weight, appear to me to be at variance with the language as well as the spirit of the Act of Parliament.

If, however, this view of the statute be incorrect, I am still of opinion that there ought to be a new trial, by reason of the mode in which the questions supposed to arise were left to the jury. As far as I can collect from the report of the summing up, the learned judge at once declared that in his judgment the contracts were within the words of s. 38, and if that be so, there was no question for the jury upon this point at all, for the suppression of them in the prospectus would at once have constituted the fraud complained of by the plaintiff. But the jury were asked whether it was important to have these contracts disclosed to the public, and whether they were material to be communicated to the public or to the purchasers of shares. Now I must say that these questions appear to me to be far too vague and undeterminate in their effect to be left to a jury in a case like this. The statute contains no guide or indication upon which a jury can arrive at any intelligible, and reasonable principle of construction, and if any test is to be applied of the importance or the materiality of the disclosure of the contracts, it must be surely the question whether the effect of the contracts is substantially detrimental to the company, and such as to impose upon them some burden or liability directly affecting the value of the shares in the hands of the shareholders. Again, the plaintiff was asked whether, if he had known of these contracts, he would have become the purchaser of the shares. Surely this is no criterion upon which the decision of such a case can by law depend. The plaintiff might have sworn, and truly sworn, that he would not have become a shareholder if he had known that Mr. Grant had anything to do with the formation of the company, and yet his interposition in its formation might have been in every way advantageous to the company, and have enhanced the value of the shares. And whichever way all or either of these questions might have been answered by the jury, the company might have been benefited and not injured by the contracts in question, and the value of the shares increased and not diminished; and yet a jury might think it material or important that they should have been made known, and the plaintiff might have refused to purchase the shares, if the contracts had been disclosed.

I pursue this part of the case no further, and proceed, I hope briefly, to consider the question of damages. Upon this point it is difficult to deal with the evidence at one view, and to determine whether or not there has been a miscarriage of justice in the verdict delivered. Let me consider, first, what the case for the plaintiff really was, and what evidence he was bound to lay before the jury in order to entitle himself to a verdict with damages.

Assuming that the suppression of the contracts in the prospectus was fraudulent as against the defendants, and that the plaintiff was induced by his ignorance of the existence of these contracts to become a purchaser of the shares, it was still incumbent upon him to prove that the shares were of less value to him than the sum of money which he paid for them, and as the verdict is for the entire sum, he was bound to prove that they were of no value at all. The circumstances of this case are, however, peculiar, because it is left in uncertainty at what time the plaintiff was first aware of the existence of these contracts, and it is the value of the shares at that time, or the difference between the value or price which he could then have obtained for them, and the price that he paid, that he is entitled to recover in this action.

Now it appears to me that it was for the plaintiff to prove, and to prove distinctly and expressly, the time when the existence of these contracts became known to him, because it was then, and I agree it was not before that he became entitled to maintain the action. I see no difference between this case and the case hypothetically put during the argument that the plaintiff had become the purchaser of a picture falsely represented to be a Vandyke, and that he afterwards discovers that it is not an original but a copy. He is then entitled to maintain his action, and if the circumstances of the case be such as that he can restore the picture to the seller he is entitled to deliver back the picture, to rescind the contract, and to recover the entire price which he has paid. But if he think fit to retain the picture, he can recover only the difference between the price he has paid and the value of the picture when his right of action accrues. In this case it was, I think, incumbent upon the plaintiff to prove first that he purchased the shares at the price of 700l. I agree that he was not bound to sell the shares at the time of the purchase, or at any

time afterwards, until the suppression of these contracts became known to him; and therefore I do not agree with Mr. Thesiger that the right of the plaintiff is limited to the difference between the price paid for the shares, and the value of the shares either at the time of the purchase, or at any given time afterwards until he became acquainted with the suppression; but it was for him to shew what and when that time was; and this he failed to shew distinctly, but left it in uncertainty; for while he said in general terms that he knew of the contracts only at the time of or after the petition, his solicitor who presented the petition swore that he presented and conducted it from information received, as well before as after it was presented. And it was further proved that the shares were quoted on the Stock Exchange at from 15s. to 25s. a share, that is at the intermediate price of 1l., as late as the month of March next after the month of November in which the petition was presented. Unfortunately the witness, who was the plaintiff's witness, came unprovided with the price of the shares in 1874, or particularly in the month of November in that year; but as they declined for nearly the last year before the month of March, 1875, when they were at 1l. per share, they must have been at a higher price when the petition was presented in November. Under these circumstances I consider that the attention of the jury ought to have been distinctly called to all this evidence, and it should have been put to them pointedly to find the time when the plaintiff first knew of the contracts, and then to find the price, which could have been obtained in the market for the shares; because that price, whatever it might have been, should have been deducted from the 700l., the entire price of the shares to the plaintiff, for which entire sum he has obtained the verdict. Whereas I find that the case was thus left: "On this matter of the damage I leave the question to you thus: The plaintiff is entitled, if you think there has been fraud, to what that fraud has cost him; the real damage occasioned by the fraud. If you think the real damage occasioned by the fraud is the full amount of the shares, give him the full amount of the shares, 700l. If you think there is evidence in this case to shew, that the amount of fraud is not to the extent of 700l., then give him as much less as you think in your judgment the fraud has really occasioned him loss."

Thus the jury were left with this vague and general direction, instead of being told expressly that they were to compare the whole sum paid for the shares with what the shares would have produced, if sold when the plaintiff first knew of the suppression. In any case I think this charge would have been unsatisfactory; but when we remember the cause was tried as undefended, that the defendants had no counsel to cross-examine the witnesses, or request the attention of the judge to the particular evidence above adverted to, it seems to me impossible to hold that this verdict was satisfactory. And this brings me to the cause of the case being undefended. The rule for a new trial does not specify the refusal of the judge to allow the defendants to submit to a verdict for the damages claimed, and the costs, and to suffer judgment for all that the plaintiff demanded, or could or desired to recover, as one of the grounds of the motion for a new trial. But still the case was tried against the will and notwithstanding the protest of the defendants; and the plaintiff's case during nine days was conducted by some of the ablest counsel at the bar, and unopposed, and all this at the cost of the defendants, and with the prejudice necessarily created in the minds of the jury by the defendants having withdrawn from the defence of the case; and the plaintiff's case being urged upon them with all the power and eloquence of his counsel as a case of atrocious and unparalleled fraud. Thus too the evidence that the petition, which in effect put an end to the existence of the company, and rendered the shares unsaleable in the market, and at last reduced their value to nothing, was the act of the plaintiff himself, was altogether disregarded and unnoticed; and upon these grounds I think, that as respects Mr. Grant, there ought to be a new trial.

It also appears to me that there was no evidence to go to the jury of the issuing or publishing the prospectus by the defendants Clark & Punchard. They had sworn, I believe, in answer to interrogatories: "The prospectus was not issued by or by the direction or authority of us or either of us." "We believe we or one of us had seen it, and Mr. Punchard, as contractor, was one of those present at a board meeting at which it was discussed. But save as aforesaid it was not issued with the sanction of us, or either of us, nor was our sanction required." All that I can find

directly to the point is that Mr. Keith being asked by Sir H. James, "To this meeting was a proof of the prospectus brought?" Answer: "It was." Question: "By whom?" Answer: "I believe by the secretary. There was only one copy, and I am not aware how it came to the office." Question: "Was it brought by Mr. Morgan?" Answer: "Either by Mr. Morgan or Mr. Punchard." Surely this is no evidence against the one or the other. If it was brought by Mr. Morgan, who had certainly acted as the solicitor of Clark & Punchard, yet he was also the solicitor of others of the company, and although the solicitor of Clark & Punchard, still there was no evidence that they or either of them had authorized him to deliver the prospectus.

The remaining evidence is simply that it appears in a letter that Grant transmitted a number of those prospectuses to Clark & Punchard, and requested them to distribute them; but there was no evidence that they did in fact distribute a single prospectus. On this ground I think if it stood alone, that there ought to be a new trial.

I am therefore of opinion that the verdict should be entered for the defendants upon the ground that the contracts are not within the Act, or that there should be a new trial, and without payment of costs.

COCKBURN, C.J. This was an action brought by the plaintiff, upon s. 38 of the Joint Stock Companies Act of 1867 (30 & 31 Vict. c. 131), to recover the amount paid by him on seventy shares, of 10l. each, in a joint stock company, called the "Lisbon Steam Tramways Company," on the ground of the fraud of the defendants, within the meaning of that enactment, in omitting from the prospectus of the company, issued, as was alleged, by them as promoters, two contracts entered into by them, also, as was alleged, as promoters - the one a contract between the defendants Clark & Punchard, and the Duke de Saldanha, the proprietor of certain concessions which the company was formed to work; the other a contract between Clark & Punchard and the defendant Grant, as to certain payments to be made by Clark & Punchard to Grant, in consideration of his obtaining for them a contract from the company for the construction of the tramways -

by means of which fraud the plaintiff had been induced to apply for and take the shares in question, which had proved worthless.

The cause came on for trial before the Lord Chief Justice of the Common Pleas Division and a special jury, at Guildhall, when evidence was given to the following effect:-

In 1871, the Duke de Saldanha, then being the representative of Portugal in this country, had obtained concessions from the Portuguese government for making steam tramways, according to the patent of a Monsieur Larmanjat, on the public roads between Lisbon and Cintra, with an extension from cintra to Pero Pinheiro, and between Lisbon and Torres Vedras, and thence on to Leiria - the whole (with the necessary sidings) being a distance of about 120 miles - and had completed a distance of about four miles between Lisbon and Lumiar, on the way to Torres Vedras. Being without the necessary capital to give further effect to the concessions, it occurred to him to form an English joint stock company, to which the concessions should be made over, on their paying him a certain sum in cash, and a further consideration in shares.

With this view he entered into communication with the defendant, Mr. Grant, and the terms on which the concessions should be assigned were arranged between them. But Grant, not being willing, as it seems, to appear as taking part in the transaction, instead of himself purchasing the concessions, and disposing of them to a company, entered into communication with the defendants, Clark & Punchard, who are railway contractors, and proposed to them to purchase the concessions, and make them over to a company which he undertook to form; stipulating however, that, if he should succeed in obtaining a contract for the construction of the work, which should be satisfactory to Clark & Punchard, they should pay him 40,000l. in cash, and 5800l. in fully paid-up shares, or cash at their option. The contractors were further to find a sum of 6000l., for the purpose of qualifying the directors, which Grant was in the first instance to pay, which, with the 45,800l., would make, in round numbers, a sum of 52,000l. This amount was to be covertly included in the price to be obtained by Clark & Punchard from the company.

Besides this, Clark & Punchard undertook to take, if required by Grant so to do within thirty days after the allotment of shares,

4200 shares from Grant at par - the purpose of this apparently mysterious stipulation being beyond doubt to enable the defendant Grant to buy shares in the stock market at a premium, with the view of giving to the shares a fictitious value when the undertaking should be presented to the public, with no greater possible loss to himself than the difference between the amount of such premium and the par price of the shares, while if the shares should rise to a premium, the profit would be his.

These terms having been agreed on between Grant and Clark & Punchard, it was arranged with the Duke de Saldanha that Clark & Punchard should purchase the concessions, to be by them made over to the company to be formed. This done, the defendants set to work to form the company.

In the meantime Clark & Punchard - treating Grant as representing the future company - sent in to him a tender on the 2nd of June, which, however, had reference to the cost of the works and rolling stock alone, and did not include the payments to be made by them to Grant. In this tender they estimate the cost of laying down the tramways upon 120 miles including sidings - the distance at that time contemplated - at 171,000l., being at the rate of 1425l. per mile; that of finding rolling stock at 74,968l.; and that of doing the necessary work on the stations at 26,000l. - making in all 271,968l.

On the 12th of June, Clark & Punchard sent in another tender, not addressed to Mr. Grant, but, by anticipation, to the directors of the company - at this time no directors had been appointed, nor was the company as yet in existence - in which the proposed price was raised to 307,600l. In the contract actually executed between them and the company the sum was slightly raised, and fixed at 309,810l.

By the beginning of July the company was provisionally formed. Articles of association were executed on the 6th of July, and registered on the same day, the company then consisting of seven persons, each taking one share; and a board of six directors having been provided by the defendants, besides the Duke de Saldanha, who was to be the chairman, the board was appointed accordingly by the seven shareholders on the same day, after which the directors proceeded to appoint the officers of the company.

It now becomes necessary to advert to the contracts in respect of which the charge of fraud is preferred. On the 5th of July, the day previous to the registration of the company, a contract had been executed between the Duke de Saldanha and Clark & Punchard, whereby the duke assigned to them his interest in the concessions, together with his right to use Larmanjat's invention, for 22,000l. - 6000l. in cash, to be paid within three calendar months after the first allotment of shares and payment made thereon, and 16,000l. in paid-up shares in the company. If, however, a sufficient amount of capital should not be subscribed to warrant the issuing of shares, or if Clark & Punchard should fail to obtain the contract for constructing and equipping the lines, the agreement was to be void. At the same time a subsidiary contract was made with Larmanjat by Clark & Punchard, whereby Larmanjat was to accept from them a fixed sum of 7000l., instead of the royalties he was to have received under his contract with the duke.

On the ensuing day, the 6th, a contract was executed between Grant and Clark & Punchard, embodying the terms previously agreed upon between them, and which have already been stated.

A contract, of the same date, between Clark & Punchard and the company, was adopted by the directors at a meeting held on the next day, the 7th, and was duly executed. By this instrument Clark & Punchard assign the concessions to the company, and undertake the construction of the tramways, according to the plans and specifications, for the sum of 309,810l., to be paid as follows: 75,000l. after the first payment on the shares, and, thenceforward, 14,000l. on the 1st of every month, subject, however, to the condition that after 190,000l. should have been paid in cash, the rest, if the company so required, should be taken in debentures of the company bearing interest at 8 per cent. But here a remarkable circumstance presents itself. In the plans and specifications attached to this contract the line from Torres Vedras to Leiria was omitted, that part of the projected line being abandoned altogether; and the mileage was thereby reduced from 120 to 68 miles, while the number of stations was reduced from eight to five. Yet the price to be paid to the contractors was slightly increased instead of being rateably diminished. No explanatio

of this singular fact has been offered. It does not seem to me unreasonable to infer that the reduction was found necessary in order to enable the contractors to meet the heavy amount which they were called upon to pay in cash or shares to the Duke de Saldanha and Mr. Grant. These, as we have seen, amounted in the whole to 74,000l. - 22,000l. to the duke, and 52,000l. (in round numbers) to Mr. Grant. A reduction of 52 miles - the difference between the lines contemplated in the tenders and the 68 miles to be laid down under the contract - at the rate of 1425l. a mile - the estimated cost of Clark & Punchard for the execution of the work - comes exactly to 74,000l., the identical amount so to be paid. The coincidence, to say the least of it, is a very striking one.

By the terms of this contract, it should be further observed, the entire line was to be completed by the 31st of December, 1872, the contractors agreeing to pay 7 per cent. interest on the paid-up capital of the company in the meantime.

The adoption of this contract appears to have been taken as a matter of course. It was brought before the directors, not in draft, or for consideration, but ready prepared for execution. No inquiry had been made on behalf of the company as to the charge proposed for the execution of the work. No engineer had up to that time been consulted. The terms had been arranged between the contractors and Mr. Grant, and this appears to have been considered sufficient. No estimate appears to have been submitted to the directors; the previous tender of the contractors does not appear to have been brought before them; nor do they appear to have been aware of the reduction of the mileage.

At this second meeting of the directors, held, as I have just said, on the 7th of July, the contract with Clark & Punchard having been adopted, the proposed prospectus was taken into consideration. It had been prepared by the defendant Grant, in communication with Clark & Punchard; and the original draft, partly printed and partly altered in manuscript, which was produced on the trial, bears marks of extreme haste. It contains very numerous alterations, interlineations, and passages expunged, in the handwriting of Mr. Maurice Grant, the defendant's manager. In this state, there not being time to make a fair copy, it was

brought to the board, either by the defendant Punchard or his solicitor, Mr. Morgan, who the day before had been appointed solicitor to the company - both appear to have attended on that day - and was adopted by the directors, and ordered to be advertised and published.

That Grant and Clark & Punchard were acting in concert in the preparation of the prospectus is manifested by a particular circumstance. In the draft prospectus, as originally printed, there appeared a passage stating that there was "every probability of dividends ranging between 15 and 25 per cent. per annum." This passage had been struck out by Mr. Grant on revising the draft. But the draft as revised having been sent to Clark & Punchard for approval, Punchard wrote against the expunged passage the words, "Stet. C. P. & Co." In a letter from Mr. Grant to Punchard of the 8th of July, he writes, "On second thoughts, after I sent up to you yesterday, I did not think it prudent to vary the prospectus as to estimate of traffic, and consequently did not use the power you gave me to do so."

In the prospectus as adopted the lines of tramway to be laid down are specified, and shewn to extend to about 68 miles - from Lisbon to Torres Vedras 35 miles; from Lisbon to Cascaes 17 miles; from Cascaes to Cintra 9 miles; and from Cintra to Pero Pinheiro 7 miles. The contract with Clark, Punchard, & Co. is referred to as having been made for "the construction of the lines, erection of stations, and a complete equipment of rolling stock, for the sum of 309,810l., payable as to 190,000l. in cash, and the balance in cash or debentures at the the option of the company." After which follow these words: "This sum includes the acquisition of the concessions, and the license of the patent rights;" to which, in the original draft, was added, in the handwriting of Mr. Grant, "and also all payments incidental to the formation of the company." But, except so far as they may have been meant to be included in the last-mentioned words, there is no reference in this document to the pecuniary arrangements entered into between Clark & Punchard and the duke, or between Clark & Punchard and Grant, still less any such reference to the contracts between these parties as is required by s. 38 of the Companies Act of 1867, supposing these contracts to be within that section.

There is no ground for believing that the directors were at this time aware of the secret contract between Clark & Punchard and Grant. They must, of course, have been aware that there had been a contract between Clark & Punchard and the duke, whereby Clark & Punchard had acquired the concessions; but, with the exception of the duke himself, it is quite possible that all may have been unacquainted with the terms of the bargain. There is every reason to think that all parties believed that the undertaking was a genuine one, and likely to be successful. It is probable that the Duke de Saldanha took the sanguine view of the undertaking which a man deeply interested in a given result is apt to take, and inspired his colleagues with equal, and equally mistaken, confidence. The prospectus was issued with great precipitation, and the project offered to the public, and the shares allotted, before the line had been duly surveyed, or even inspected, on behalf either of the company or the contractors. In the result, after the company had been completely formed and the shares paid for, the line from Lisbon to Cintra, as originally proposed in the prospectus, had to be abandoned for another route, and the branch from Cintra to Pero Pinheiro was given up altogether. The only misgiving which, according to Mr. Keith, the secretary, appears to have occurred to the directors, was as to the sufficiency of the capital of the company. That that misgiving would have been strengthened had they been made aware of the arrangement by which upwards of 50,000l., supposed to be part of the amount to be paid to the contractors for constructing the line, was to go to Mr. Grant, may readily be assumed. But for the blind faith which the directors appear to have placed in those with whom they were dealing and the haste with which the business was conducted, the directors might have been struck with the reduction of the mileage to the extent of one-half from that of the tender, with no corresponding reduction of cost - that is if they had inquired, as they should have done, if any tender had been made - and might have instituted inquiries which would have brought this part of the transaction to light.

The issuing of the prospectuses having been ordered by the directors, the draft was delivered to Mr. Grant, for the purpose of having it printed and published in the usual manner, this part of

the business being left entirely to him; and this he accordingly did. In the meantime he had carried on certain operations on the Stock Exchange, the effect of which was to give a fictitious value to the shares about to be issued. Applications for shares came in abundantly; upwards of 35,000 were applied for. The applications were referred to Mr. Grant, who decided to whom shares should be allotted. The allotment commenced on the 1st of August. The whole number was speedily taken up, and the company was formed. The borrowing power was exercised, and 50,000l. was raised on debentures of the company.

In the meantime, Mr. Trevithick, who had been appointed engineer to the company, had gone out to Portugal to survey the lines, and the report made by him, bearing date the 21st of August, at once shewed the impracticability of the scheme, as proposed in the prospectus. He had found the line from Lisbon to Cascaes, and thence to Cintra, impracticable, except at a greatly increased expense, owing to the exceptional steepness of the gradients, which would render considerable detours necessary, and to the narrowness of the road in places, which would have to be widened. He also found that under the existing concession, the line could only be commenced from Belem, a suburb distant a mile and a half from the entrance to Lisbon itself.

On the receipt of this report, Mr. Grant, foreseeing, no doubt, the disturbance which would ensue if the project should be persevered in under the certainty of failure, proposed to Clark & Punchard at once to give up the undertaking, and to return their money to the shareholders, which might then have been effected at the loss of a few thousand pounds. Concurring in this view, Clark & Punchard, at the suggestion of Grant, who was absent from town, urged this course on the directors, who it appears would have assented to it, but for the remonstrance of the company's brokers, who represented that as there had been dealings in the shares on the Stock Exchange, it was absolutely necessary that the company should go on and a settling day be appointed. The directors, perhaps not altogether uninfluenced by an unwillingness to give up the concern, unfortunately yielded to this representation, and the company was kept alive, only to come to a more distressing end at a later period.

And now a most material change, so far as Cintra was concerned, was introduced into the scheme, probably at the suggestion of the engineer. The line from Lisbon to Cascaes, along the right bank of the Tagus, and from Cascaes to Cintra, was abandoned, and a new line direct from Lisbon, across the country to Cintra, substituted for it, whereby the distance was reduced from 25 or 26 miles to 16; besides which, the branch from Cintra to Pero Pinheiro was wholly given up, still further lessening the mileage by 7 miles; thus reducing the 68 miles of the prospectus to 51 or 52. Yet, though by this change the difficulties of the original line were avoided, and the distance materially dimished, it was found necessary, in order to obtain means to construct the line as thus altered, to find further capital to the extent of 40,000l. This, as the whole of the share capital of the company had been raised, and it was probably deemed unwise to have further recourse to the borrowing power, was effected by an agreement of the 20th of September, whereby the duke relinquished in favour of the contractors 11,000l. of the amount he was to have received; Larmanjat, 3000l.; Grant, 17,500l.; but the last with an increase of the amount to be paid to him in shares to 11,000l.; while the contractors themselves made up the rest. No notification of this important modification of the original scheme was made to the shareholders till the 25th of June, 1872, when the directors in transmitting to them the warrants for interest due on the 1st of July, informed them that the directors had been enabled "immediately after the formation of the company, through the assistance of the Duke of Saldanha, in obtaining a further concession, to adopt a direct road to Cintra, in lieu of the more circuitous and inconvenient road first proposed, and thus to prevent all possibility of competition by the shorter route." No steps were taken to obtain the assent of the shareholders to this important change.

The lines from Lisbon to Torres Vedras, and from Lisbon to Cintra, as thus finally settled, were not begun for some months, and were not completed till July, 1873, instead of by the 31st of December, 1872, as stipulated for by the contract. Notwithstanding this delay the periodical payments were regularly made to the contractors, as though the work had been carried on and executed

as required by the contract. The entire cost appears to have amounted to 254,050l. The lines having been completed and worked for a period of sixteen months, it was found that, the traffic proving less than had been expected, instead of a profit being realised, a loss of 6000l. had taken place on the working of the lines during that time. The gross takings during these sixteen months had been 10,439l. the expenditure 16,462l. In the meantime no payments had been made on the debentures; and the interest due to the share and debenture holders, already amounting to 12,000l., was, of course, accumulating. On the other hand, there appeared to be nothing to lead to any reasonable expectation either of the traffic increasing or of the expenses of working the lines being capable of being diminished. Under these circumstances, on the 1st of December, 1874, the plaintiff presented a petition for winding-up the company, and an order was made thereupon, after full inquiry and discussion, on the 16th of July following. We must take it, therefore, that the judge was satisfied that all hope of working the lines with success was at an end. No evidence is before us to shew that the lines were not properly constructed or efficiently worked. The failure of the undertaking appears to have arisen solely from the insufficiency of the traffic to afford a remunerative return on the outlay expended. In the course of the proceedings on the petition the plaintiff became aware of the contracts between Clark & Punchard and the Duke of Saldanha, and between Clark & Punchard and the defendant Grant, whereupon the present action was brought.

On these facts the learned judge left to the jury as the two main issues in the cause whether the contracts in question materially affected the interests of the company and were material to have been made known to the shareholders, and whether the prospectus had been issued by the defendants as promoters. The jury, on questions specifically put to them, found that the defendants were promoters of the company at the time the contracts in question were entered into; that the contracts were connected with the affairs of he company, and materially affected the interests of the company, and were material to be made known to a person about to apply for shares; that the plaintiff took his shares on the faith of the statements in the prospectus, and would not have taken them if these

contracts had been disclosed or referred to in it. They further found that the prospectus was issued by the defendants as promoters, and that mention of these contracts was knowingly, that is, intentionally, omitted from it, but under a bon‰ fide belief that in point of law these contracts needed not to be set forth. To the question whether these contracts had been entered into, and the mention of them suppressed, in fraud of the company and of persons invited to take shares, the jury returned no answer. Treating the shares as valueless, they found a verdict for the plaintiff for the full amount of the price paid for them.

Looking upon the omission to answer the last question, which in fact was not in issue, and was therefore wholly superfluous, as unimportant, and on the finding as to the belief of the defendants relatively to the law - which by the way I do not see a tittle of evidence to support - in the same light, the learned judge, on the other findings of the jury, directed a verdict to be entered for the plaintiff, but respited judgment, giving leave to either party to move for judgment on the findings. Application was made to the Divisional Court for judgment by both parties, but the defendants applied also for a new trial, on the ground, 1, of misdirection on the part of the judge in not directing a verdict for the defendants or a nonsuit; 2, that the finding of the jury that the defendants had issued the prospectus as promoters was contrary to the evidence; 3, that the verdict of the jury in respect of the amount of damages was contrary to the evidence, and also to the direction of the judge. A rule nisi was granted as regards the alleged misdirection, but was refused as regards the verdict being against evidence. The rule as granted was discharged after argument, and judgment ordered to be entered for the plaintiff for the amount of the verdict. Against these decisions of the Divisional Court the present appeal is brought.

The questions for our decision are: 1. Were the defendants, at the time the contracts in question were entered into, promoters of the company? 2. If so, were these such contracts as it was necessary to refer to in the prospectus, under the 38th section of the Act of 1867? 3. Was the prospectus issued by the defendants, or either of them, within the meaning of the Act? 4. Were they, or either of them, promoters at the time of such issuing? 5. Was

the prospectus issued by them "knowingly" within the meaning of the section? 6. Were the damages awarded on the right footing?

That the defendants at the time these contracts were entered into were promoters of the company cannot admit of doubt. They were in reality the creators of the company, and were engaged in forming and constituting it at the time the contracts were made. It was with a view to, and in the course of its formation, that these contracts were executed. The question whether these contracts were within the 38th section is one of greater difficulty. It becomes necessary to consider the words of the enactment. "Every prospectus of a company shall specify the dates and the names of the parties to any contract entered into by the company, or the promoters, directors, or trustees thereof, before the issue of the prospectus, whether subject to adoption by the directors, or the company, or otherwise; and any notice or prospectus not specifying the same shall be deemed fraudulent on the part of the promoters, directors, and officers of the company knowingly issuing the same, as regards any person taking shares in the company on the faith of such prospectus, unless he shall have had notice of such contract."

That it was material that the contracts in question should be made known to persons invited to take shares, in order to enable them to form a judgment as to the policy of so doing, is established by the finding of the jury; and the facts to which attention has been drawn abundantly warrant that finding. That it was important to such persons to know what these contracts would have disclosed, namely, that the scheme was one got up between the owner of the concessions, the promoter, or, as he has been called, the financier, of the company, and the contractors - that the chairman of the intended company had entered into an agreement with the contractors whereby they were to pay him a sum of money for the concessions if the company should be formed and the contractors should obtain a contract, and still more, that the principal promoter was to receive a sum of 52,000l., upwards of one-seventh of the entire capital of the company - of which 6000l. was to go to the directors, and 10,000l. was to be expended in giving a fictitious value to the shares - that while the capital of the company was

stated to be 200,000l. with a power of borrowing to the extent of 150,000l. more, in reality it would be less by 72,000l.; and that while the sums to be expended on the work and on the acquisition of the concessions and the preliminary expenses was stated to be 310,000l., the items referred to were to swallow up a sixth of that amount - or that such circumstances, if known, would have been calculated to create a well-founded distrust - cannot, I think, admit of a moment's doubt. Such a state of things could not but inspire distrust. The prospect of gain is apt to make men careless of the interests of others. In the present instance a prudent man, if he had been made aware of these contracts, might well have anticipated what in fact came to pass, namely, haste and precipitancy in launching this project, in which the parties to these contracts were so much interested, without due inquiry or consideration of the interests of the future shareholders, to say nothing of an unwise perseverance in it when it ought to have been seen to be a failure, and should have been abandoned. These were clandestine contracts which involved spoliation of the future company. It is in vain that Mr. Grant tells us that he was justified in demanding 10 per cent. on the capital of the company in reward for his services in forming it. He was to receive more than twice that amount, a sum extravagantly in excess of any services rendered by him. But whether a promoter may claim for his services in forming a company a reward to be paid from its funds, or whether the sum to be paid may be fair or excessive in the particular instance, is not the question. The question is whether, to prevent extortion and abuse, such contracts must not be disclosed. While, on the one hand, the amount of such secret payment may be reasonable, on the other, it may obviously be so large as to cripple the resources, and frustrate the success of the future company.

Among the first things as to which a careful man, disposed to invest in an undertaking, would inquire, would be the adequacy of the capital to the intended purpose, adequacy of capital being essential to the success of an enterprise. He satisfies himself on the point; but he is kept in ignorance of a secret agreement, whereby a large proportion of the capital, or of the amount to be paid to a contractor, is to be withdrawn from its ostensible

purpose, and expended in corruption. Had he been made aware of this, he might not have consented to join the company.

The next point which a man would desire to ascertain would be the constitution and probable management of the company. What would he say if he were told that the owner of the concessions which the intended company was to purchase was to be the chairman of the board, and was only to be paid by his buyer if he (the buyer) got a contract from the board, which contract was to be procured for him by the promoter, who, again, was to receive a large sum of money for getting it, which, however, he was sure to do from the chairman and the other directors, the first being interested in giving it in order to get his price for the concessions, the last knowing nothing about the business except what these interested parties thought proper to tell them.

It thus being manifestly to the interest of the shareholders that such arrangements should not be kept secret, why is it to be said that they are not within the section? That the terms of the section are large enough to embrace such contracts cannot be denied. Its terms could not be more general or comprehensive. Indeed, it is from this very comprehensiveness that, strange to say, the main argument for the limitation sought to be put on the section, so us to exclude these contracts, is derived. It is said you cannot take this enactment in its literal effect; for, if you did, it would include all the contracts of a man who happened to be a promoter or director, though relating to his own private affairs. True; and as the legislature is here dealing with public companies only, we may with perfect safety assume that the section is intended to apply to contracts relating to such companies alone. But when we have to deal with a contract undoubtedly having reference to a company, why are we to put any further restriction on the operation of the statute? It is said that the legislature in passing this section had in view a particular mischief only, such as had come to light in the case of Overend & Gurney - where in the articles of association the estate of the firm intended to be transferred to the company had been represented as solvent, while by a secret deed a sum amounting to upwards of three millions or more, and in the public statement included in the assets, was dealt with by the directors as in fact lost, so that the estate was

hopelessly insolvent - and that the enactment must therefore be limited to contracts by which either a benefit is secured to, or an obligation or burden is imposed upon, the nascent company. But this limitation appears to me to be much too arbitrary and narrow, and unwarranted either by the language of the Act, or by what we know of this legislation. If it had been the intention of the legislature thus to confine the effect of the enactment, nothing would have been easier than to say so in distinct terms. Why then is it to be limited to contracts entered into on behalf of, or binding on, the company? Not only is the language of the section unrestricted, but it expressly refers to contracts which do not require to be adopted by the company, as well as to those which do. Now I know of no contract which can impose an obligation or a burden on a company which would not require to be adopted by it.

But I desire to place the argument on broader grounds. I do not feel myself at liberty to speculate on what may have been the intention of the legislature when I find a positive enactment, framed in general terms, and a positive evil which is within it terms, and, as I cannot but think, altogether within its spirit, and to which it may be applied beneficially. If such a case as the present be not within the enactment, all I can say is that it ought to be. And I cannot allow myself to be led into splitting hairs, or to entering into minute verbal criticism on what I believe to be beneficial legislation. When, therefore, I find the case indisputably within the terms of the Act, when taken in their ordinary sense, why am I to give a different and narrower meaning to those terms in order to exclude it? It is admitted that a contract which imposed a burden on the company would come within the section. But, in the name of common sense, what difference is there in principle between a contract which takes money from the company's funds by an obligation directly binding the company, and one which saps those funds through a clandestine contract with a contractor? The one form of proceeding is no doubt more subtle and insidious than the other, but it is not the less prejudicial to the interest of the company, or less essential to be made known to those who are invited to join it.

I take it to be a sound canon of construction in the application of

a statutory enactment, that full effect should be given to general terms, unless from the context, or other provisions of the statute, a limitation on the general language must necessarily be implied, more especially where, had such a limitation been intended, it might reasonably have been expected to be expressed. Here nothing would have been more easy than for the legislature to say that the contracts of the promoter, to which the section applies, should be such only as affected the company prejudicially or otherwise. But nothing of the kind appears, and I do not feel myself at liberty to introduce by implication the restriction contended for, more particularly as I am at a loss, as I have already pointed out, to see to what class of contracts, as thus directly affecting the company, the enactment can have been intended to apply. It is notorious that among the various forms of spoliation to which shareholders have been exposed, private bargains made by promoters for their own gain, at the expense of the company about to be formed, have not been the least frequent. I see no reason to think that the statute was not intended to strike at such surreptitious transactions, and I do not feel myself at liberty to abridge what I think will be its salutary effect if applied to them.

I purposely abstain from entering on the question whether in this particular instance the contracts in question had any effect in bringing about the eventual failure of the company. The fraudulent character which the statute attaches to the omission to refer to such contracts in the prospectus does not in any degree depend on the result. If a contract is within the section, the omission to refer to it is made fraudulent whatever the result. The fact whether the result was brought about by it is, therefore, altogether beside the question.

It was urged on us that, if the full effect contended for was given to the 38th section, every petty contract entered into in the preliminary formation of a company, such as contracts for advertising and printing, or for stationery or offices, would have to be referred to, at the risk of otherwise incurring the penalty of the statute. But the answer to this is to be found in the provision which gives the statutory remedy only when the shareholder has taken his shares on the faith of the prospectus as published.

When it is urged that there is no impropriety in the promoter

of a company receiving remuneration for his trouble in forming it, and that the necessity of referring to such a contract as this would apply to cases in which no more than a legitimate remuneration had been secured, the answer is, that while the reference to such a contract in the prospectus would occasion little inconvenience, on the other hand, as such a bargain might be a most extortionate one, amounting possibly to a large proportion of the company's funds, it is essential that its disclosure should be held to be necessary. If a company, whose works can be executed for 250,000l., are asked to pay 300,000l. to a contractor, in order that the contractor may be able to afford a bonus of 50,000l. to the promoter, it is but right that the shareholders should be made aware of what they are about to assent to.

Again, when it is said, as a reason for putting the restricted construction contended for on the comprehensive language of the Act, that the shareholder, if any fraud is practised upon him, has already his action at law, the obvious answer is that the statute was intended to give him protection beyond what his legal remedies afforded him. There are cases in which, in the absence of active fraud, passive misrepresentation, that is to say, silence as to some fact which it would be material to the one party to know, but which the other is not legally bound to communicate, may involve the one in loss, but in which the party suffering what amounts to a moral, but not a legal, wrong, has no remedy at law. In the ordinary transactions of life, an individual can make inquiries and require positive information, or insist on a warranty, before entering into a contract or embarking in a common enterprise. But in these vast undertakings, carried on by the united enterprise and capital of hundreds, perhaps thousands, of shareholders, the individual shareholder is more or less at the mercy of those who invite him to join the company, as to the facts on which he may be led to invest his money. Experience has shewn that shareholders may be plundered, not only by being led to invest in bubble companies, but also where the undertaking is intended to be carried out (as was, I have no doubt, the case in the present instance) by the resources of the company being impoverished by clandestine agreements, from which failure of the enterprise results, or by the company

being made to pay largely in excess of the value of what it gets by the cupidity of those who set it going, and that shareholders may be victimised by being made to pay more than the real value of their shares, owing to dishonest or improvident bargains made in the inception of the undertaking, and not disclosed in the prospectus. It was, I must assume, to protect the shareholder against these things, and to insure him all the information necessary to judge of the merits of the undertaking, that the enactment in question was passed, which requires, as I read it, that he shall be informed of all contracts entered into in the inception and formation of the company prior to the invitation to the public to join it by taking shares. It was for this reason, I presume, that contracts entered into by promoters, who are the parties by whom companies are usually formed and set going, are expressly included. If contracts binding or affecting the company had alone been intended to be within the operation of the statute, as these contracts, to be binding, would have required to be adopted by the directors, or the company, they would have become the contracts of the company, and would not have needed to be referred to as contracts of the promoters. To hold that the statute left the shareholder in no better position than that of a party to an ordinary contract at law would be simply to render the enactment nugatory.

The case in which a man, who has acquired a right, makes it over to a company, though perhaps at an exorbitant price, falls very far short of this. Here by an insidious contrivance, the exorbitant price is concealed in the sum to be paid to the contractor, whose clandestine arrangement with the recipient is unsuspected, and who is supposed to be asking no more than a fair remuneration for the work to be done.

Taken at its best the statute affords but a poor protection to the shareholder, and falls very far short of what it should have effected, inasmuch as it requires only the names of the parties and the dates to be stated, without any reference to the substance of the contracts. Nevertheless, the mention of such names and dates, may afford some assistance to the invited shareholder, and help him towards judging of the soundness of the proposed undertaking. Thus the fact of contracts having been entered into between the chairman and the contractors, and between the

latter and a well-known financier, on the very eve of the company being formed and the prospectus issued, if disclosed, might have made a prudent man hesitate to join the company until further information as to the nature of these contracts had been obtained. The insufficiency of the legislation affords no ground for abridging its operation. All we have to look to is whether a contract, if set out in full, would have been within the section. If it would, we must hold that the omission of the particulars which the enactment requires amounts to a fraud on the shareholder who has acted on the faith of the prospectus.

Thus far I have dealt with the question on principle, irrespectively of authority. Nor is there very much authority on the subject. In Cornell v. Hay (1), which was an action brought by a bondholder in the Canadian Oil Works Corporation against a director, under the 38th section, for not having disclosed in the prospectus certain contracts entered into by the promoters with the defendant and the other directors, whereby the promoters engaged to give them certain sums in cash, or paid-up shares, in consideration of their becoming directors, Mr. Justice Honyman observing on the argument of Mr. Williams, that the contracts referred to in the 38th section were limited to contracts "made by promoters, as representing, or on behalf of, the company," "contracts of which the burden would fall on the company, and which, in substance, though not in form, amount to contracts of the company," says: "In the view I take, it is unnecessary to decide whether we shall adopt the construction of the section for which Mr. Williams so ably contended, namely, that the contracts intended by the section are only contracts made, or intended to be made, on behalf of the company; but I wish for my own part to say that I am not, as at present advised, prepared to adopt that construction. I cannot think it is a matter of indifference to the shareholders what contracts were entered into by promoters in their private capacity relating to the formation of the company. It is obvious that it may be of vital importance to them to know of such contracts in forming a correct judgment as to the position of the company. It might obviously make a very great difference if the names of persons who appeared on the prospectus as interested in or connected

(1) Law Rep. 8 C. P. 328.

with the company were mere dummies, and such persons really had no stake in the concern at all." Mr. Justice Keating says: "I do not wish to be understood as giving any countenance to the argument that the contract disclosed in this declaration is not a contract such as the directors would be bound to disclose in the prospectus under the section. It seems to me that its subject-matter was such that a shareholder might reasonably be entitled to be made acquainted with it, and its non-disclosure appears to me to be within the mischief contemplated by the Act." But these observations can only be received as obiter dicta, for the case was decided on another ground, namely, that the plaintiff, not being a shareholder, but a bondholder, was not within the protection of the statute - another instance, I may observe in passing, of the carelessness with which this section was drawn.

But in another case arising out of the same company, the case of Charlton v. Hay (1), the question now raised came before the Court of Queen's Bench for decision, the action being founded on the non-disclosure of the same contracts as were relied on in Cornell v. Hay (2), as also of a contract between Prince, the vendor to the company, and the promoters, whereby Prince was to receive only part of the purchase-money, leaving the remainder to be divided among the promoters. Mr. Justice Blackburn, with whom Mellor and Lush, JJ., concurred, held all the contracts to be within the 38th section. With reference to the contracts with Prince, he says: "We have to say whether this is a contract required to be disclosed by the terms of the section; and it seems to me that not only is it clearly included in these terms, but further, if it were not, the legislature has failed to express what was certainly its intention and object. This one of the alleged contracts is at all events of immense importance to all the shareholders of the company, and even if not subject to adoption by the directors or the company, it otherwise comes within the description given of the contracts required to be specified." This decision is directly in point to the case before us. For what difference can there be in principle between money taken from the funds of a company by a secret bargain between the vendor and the promoters, and money so taken by secret bargains between the vendor, the promoter, and the contractor?

(1) 31 L. T. (N.S.) 437.

(2) Law Rep. 8 C. P. 328.

But we are referred to Gover's Case (1) as in conflict with the foregoing; and as the decision in Gover's Case (1) was that of a Court of Appeal, if the decision really governed the case before us, we should be bound by it. But it does nothing of the sort. The question how far the omission of the contract there relied on by the plaintiff was within the 38th section was unnecessary to the decision of the cause, which proceeded, as held by all the Court, on the ground that, the suit being instituted by the plaintiff, Miss Gover, to have her name removed from the list of shareholders on the ground of the omission of a particular contract from the prospectus, the suit could not be maintained, as the section gave no right to a person who complained only of fraud within the 38th section, to have his or her name removed from the list of shareholders, the only remedy given by it being a right of action against the individual wrongdoer. It is true there fell from the Lord Justice James expressions with reference to the contract which might lead to the conclusion that he deemed such a contract as not within the statute. But his reasoning is entirely founded on the assumption that at the time the contract relied on was entered into, there had been neither company nor promoter. The contract in question was one by which one Mappin had bargained with a man named Skoines, the owner of a patent for an invention relating to gas-lighting, that, in consideration of 1000l. paid down, Skoines should convey the patent-right, if he (Mappin) could form a company to buy and work the patent, on receiving a further sum of 4000l. in cash and 60,000l. in paid-up shares of such company. If Mappin failed to form the company within a certain time, the bargain was to be void, Skoines retaining the 1000l. At a later date an agreement was entered into by Mappin with one Wright, as trustee for an intended company, by which Mappin agreed to sell the patent to Wright for about twice the amount he had agreed to pay to Skoines. Referring to the agreement between Skoines and Mappin, Lord Justice James says: "At the time when this agreement was made there was no company in existence, and no promoter, trustee, or director; the company had not even an inchoate existence, except in the brain of Mappin; and the utmost that can be said of Mappin was that he was a projector of a company which he intended and

(1) 1 Ch. D. 182.

had agreed to promote." Further on the Lord Justice says, "It is said, that when the bargain with Skoines is looked at, it contains stipulations about the forming of the company, and the shares of the company. I cannot myself see that the Court has, for this purpose, any right to read those stipulations. They were stipulations between Mappin and Skoines alone, and obligations as between them. Even if they were stipulations by Mappin to do something wrong in the company, or to the company, this might be evidence of that wrong, and proper redress might be given for that wrong, as a substantive ground for complaint. But that is, in my judgment, wholly beyond this section; and no impropriety in the contract can make it the contract of the company, or the contract of a promoter, trustee, or director of a company, when at the date of the contract there was no company, no promoter, no trustee, no director. The character of the contract cannot operate as a transformation of the contracting parties."

The Lord Justice deals with the case as though Mappin, having bought from Skoines, had simply sold to the company, and stood to them in the relation of an ordinary vendor to an ordinary purchaser, and was consequently not bound to disclose the contract whereby he himself had acquired the property.

In this judgment Lord Justice Bramwell concurred, adding only that to be within the 38th section a contract entered into by a promoter must be read to mean by a promoter as such.

Lord Justice Mellish appears to have taken a different view. He says: "I do not at present agree with the whole of the reasoning of the Lord Justice on this part of the case. If, indeed, the 38th section could be confined to contracts made by promoters and directors in their character of promoters and directors, or after they had become promoters or directors, the contract between Skoines and Mappin would not be within the section, because I agree that there was no fiduciary relation at the time when the contract between Skoines and Mappin was made. I think, however, that there are grounds for holding that this would be too narrow a construction, and that the section ought to be held to extend to every contract made with a person who afterwards becomes a promoter or director, provided the company have become entitled to the benefit of the contract, or have become

liable to perform the provisions of the contract before the prospectus was issued."

Lord Justice Brett took a still wider view. He held that the enactment was remedial, and must therefore receive as large an interpretation as its phraseology would reasonably admit of, and, consequently, that it was intended to insure the disclosure of everything which might reasonably have an effect on the mind of an interested subscriber for shares as to whether he should trust the representation made to him, and became a shareholder.

It would be sufficient for the purpose of the present case to point out that, independently of this difference of opinion on the effect of the 38th section, Gover's Case (1) differs essentially from the one before us, inasmuch as there can be no doubt that here the contracts were entered into by the defendants when undoubtedly promoters of the company, with a view to, and incidentally to its formation. Mr. Grant cannot in any sense be said to have been a purchaser from the duke, or a vendor to the company. He carefully avoided assuming that relation. His position was, though not ostensibly, yet actually, that of a promoter. Fully admitting that a person who sells to a company is no more bound to disclose how, or upon what terms, he acquired the subject-matter of the sale, than an ordinary vendor to an ordinary purchaser, it seems to me that when the vendor adopts the character of a promoter, the matter assumes a very different aspect. A fiduciary or, at all events, a quasi-fiduciary, relation arises between him and the company. He is bound to protect its interests, and those of the shareholders. All his dealings with them, and for them, should be uberrim¾ fidei. He should conceal nothing from them which it is essential to them to know. If he proposes to appropriate to himself any part of their funds as a reward for his services, or to derive advantage by selling to them at a profit, any contracts by which effect has been given to such purposes come, I cannot but think, within this protective enactment. Nor, as I venture to think, does the reasoning of Lord Justice James, when rightly weighed, militate against this position.

Subsequently to the decision in Gover's Case (1), a judgment

(1) 1 Ch. D. 182.

adverse to the view I feel myself bound to adopt, and which I desire to treat with the utmost respect, but which, sitting here in a court of appeal, I am called upon to review, was pronounced by Vice-Chancellor Bacon in the case of Craig v. Phillips (1). There the defendant, having invited the plaintiff and others to join in a joint stock company for the purchase and working of a colliery, bought the colliery and then sold it at an advanced price to trustees for the company proposed to be formed. In the prospectus which he afterwards issued, and on which his name appeared as managing director, reference was made to the contract with the trustees, but none to the defendant's own purchase. The Vice-Chancellor held that the omission was not fraudulent within the 38th section of the Act of 1867. In this judgment, for the reasons I have already detailed, taking, as I do, a different view of the effect of the statute, I am unable to concur.

Feeling myself, for the reasons I have given, unfettered by what may have been said in Gover's Case (2), I desire to go further. I do not hesitate to say that had this case been on all fours with Gover's Case (2), I should have adopted the view there taken by Lord Justice Brett. I think with him that the enactment of the 38th section was intended to be remedial. I think it was intended to protect the shareholder against deceptions too often practised in the creation of companies, by insuring him full information as to all the material circumstances attending the formation of the company he is invited to join, antecedently to the issuing of the prospectus. I am, therefore, of opinion that it was rightly left to the jury in the present case to say whether the contracts in question were material to the interests of the company, and material to be made known to the shareholder, and that, these questions having been found in favour of the plaintiff, the case was within the 38th section, and consequently that the decision of the divisional Court in discharging the rule nisi for misdirection was right.

I proceed to consider whether there is any ground to quarrel with the verdict as not having been warranted by the evidence. Was the prospectus issued by the defendants? Was it issued by them as promoters? The solution of these questions depends in the first place on whether any special signification attaches to the

(1) 3 Ch. D. 722.

(2) 1 Ch. D. 182.

term "issuing" or to the term "promoter." It is contended, on behalf of the defendants, that the issuing of the prospectus means the passing and publication of it by the directors, and that the issuing, by whosesoever hand effected, must be taken to be their act alone. Now there is nothing in the Act to indicate the sense in which the term "issue" is used. I think it must be taken to mean the making the prospectus public, after its adoption, with a view to inviting persons to take shares and become members of the company. I agree in thinking that it must be taken to refer to an official publication, authorized by those who at the time have the government of the company, which in this instance would be the directors. It would otherwise not be the prospectus of the company. So authorized, the publication, by whomsoever actually carried into execution, would be the act of the directors, on the principle that the authorized act of an agent is always the act of the principal. But the act, though done by the authority of a principal, and in that sense the act of the principal, remains none the less in point of fact the act of the agent, and, if wrongful, makes the agent liable for its consequences. And here, if the issuing of the prospectus was in contravention of the statute, the act would be wrongful, and the party actually issuing would, I think, be responsible. Now, that in this sense the prospectuses, though issued nominally and officially by the directors, were in point of fact actually issued by the defendant Mr. Grant admits of no doubt. The printing and publication of the prospectus were effected under his immediate direction. But the complicity of the other defendants is not equally clear. All that appears is that as soon as the prospectuses were ready to be sent out, a large number were sent to them by Grant for the purpose of distribution. But the proof that all the defendants were acting throughout in concert is so strong that, though I could wish that the question had been left more specifically to the jury, I cannot quarrel with the finding, which includes all the defendants in the issuing of the prospectus.

But were the defendants promoters at the time of issuing? It is contended that, even if promoters in the outset, they ceased to be so the moment the company was constituted and the governing body, the directors, were appointed. This contention was mainly

founded on a provision of the 7 & 8 Vict. c. 110, s. 3, which says that promoters shall continue to be such till the complete registration of the company, at which time directors would be appointed. But that Act, which had reference to a system of registration widely differing from the present, has been repealed, and there is now no statutory limitation to the functions of a promoter. The question as to when one who in the outset was a promoter of a company continues or ceases to be so, becomes, therefore, as it seems to me, one of fact. A promoter, I apprehend, is one who undertakes to form a company with reference to a given project and to set it going, and who takes the necessary steps to accomplish that purpose. That the defendants were the promoters of the company from the beginning can admit of no doubt. They framed the scheme; they not only provisionally formed the company, but were, in fact, to the end its creators; they found the directors, and qualified them; they prepared the prospectus; they paid for printing and advertising, and the expenses incidental to bringing the undertaking before the world. In all these respects the directors were passive; without saying that they were in a legal sense the agents of the defendants, they were certainly their instruments. All the things I have just referred to were done with a view to the formation of the company, and so long as the work of formation continues, those who carry on that work must, I think, retain the character of promoters. Of course, if a governing body, in the shape of directors, has once been formed, and they take, as I need not say they may, what remains to be done in the way of forming the company, into their own hands, the functions of the promoter are at an end. But, so long as the promoters are permitted by the directors to carry on the work of formation, the latter remaining passive, so long, I think, would a jury be warranted in finding that what was done by them was done as promoters. Here again, therefore, I see no reason for disturbing the verdict.

Next, was the prospectus issued by the defendants "knowingly," within the meaning of the section? It was contended that the term "knowingly" must be taken to mean with a knowledge that the contracts were such as the statute required to be referred to: consequently, that, the jury having found that the mention of the contracts was omitted from the prospectus from a bon‰ fide

belief that such mention was unnecessary, the contracts had not been "knowingly" omitted. But this is to misconceive the meaning of the term. "Knowingly issuing" means neither more nor less than issuing with a knowledge of the existence of contracts within the section, and the intentional omission of them from the prospectus. Ignorance or mistake of the law cannot be admitted as an excuse for disobeying an Act of Parliament.

I come, finally, to the question of damages. It is to be observed that no exception is taken to the question as left to the jury. It was left to them to say whether the loss sustained by the plaintiff amounted to the entire price paid for his shares, or to less than that amount, and to give damages accordingly. It is admitted that this was the right issue; nor is any objection taken to the direction of the judge, except that it is suggested that it might have been more full and explicit - a suggestion in which there might have been more weight if there had been fuller materials to which the observations of Lord Coleridge might have been directed. Nevertheless, when the grounds on which the verdict is questioned are more closely looked at, it becomes manifest that they do in substance involve a complaint of the direction of the judge, as not having brought to the attention of the jury the various elements into which the question of damages resolves itself.

The first contention on the part of the defendants is that the utmost loss which has accrued to the shareholders is that which they have sustained through the suppression of the contracts omitted from the prospectus, as to the 72,000l. secured by them to the parties interested, and which has thus been added to the cost of the construction of the lines, which it is contended would equally have been constructed, but which would otherwise have been constructed at the lesser sum; and, consequently, that the utmost that the plaintiff can claim as damages is the proportion of that sum which his seventy shares bear to the 20,000 shares which form the sum total of the company. The shareholders, it is said, have got that which was to be the consideration for their money, namely the tramway and the rolling stock; but they have got it dearer than it need have cost by 52,000l. They are therefore entitled to a return to that amount, and the plaintiff to his

proportionate share, but no more. But this contention is founded on what appears to me to be a transparent fallacy. The complaint of the plaintiff is that he has been induced by a suppression in the prospectus, to which the statute attaches the character of fraud, to take shares in an undertaking, which, but for this suppression, he would not have joined, and which has turned out to be worthless - a fact which the jury have found in his favour. His grievance is not that he has paid too high a price, but that he has been induced to take shares which, but for the fraud, he would not have taken at all. He is, therefore, in the position of a person who has been induced to take shares and pay the price of them by a fraudulent misrepresentation, and he is, therefore, entitled to recover such damages as have resulted to him from taking such shares. If this damage extends to the entire price paid for the shares he is entitled to recover it.

But dismissing this contention as untenable, a more serious objection presents itself. Assuming that the plaintiff is entitled to have all the loss made good to him which has accrued upon his shares, when and how is that loss to be estimated?

A party who has been induced by fraudulent misrepresentation to purchase a given article, unless he rescinds the contract and returns the thing bought, which in such a case as the present it is admitted that the plaintiff is not in a position to do, can only recover damages to the extent of the loss he has actually sustained. He can not recover the entire price he has paid, unless the thing prove wholly worthless. If the thing has any appreciable value, the damages must be reduced pro tanto. If the plaintiff's shares were of any value, that value, in assessing the damages, must be deducted from the price. Now, the first question which presents itself is as to the time at which that value, if any, is to be determined? Is the value to be sought at the time the shares were first acquired? or when, by his own voluntary act, the plaintiff put an end to the undertaking? or at the time when the action was brought? If the first, what was the value of the shares when issued? If the second, was the course taken by the plaintiff in causing the company to be wound up a reasonably proper course under the circumstances? For if the shares had at that time any value, and the plaintiff has, by his