COUNSEL: Felix Cassel, K.C., and Owen Thompson, for R. E. Lembcke.

Clauson, K.C., and Arthur Mulligan, for the liquidator.

G. C. Rankin, for Myring.

 

SOLICITORS: Castle & Co.; Lewis & Lewis; Maffey & Brentnall; Frank L. Vanderpump.

 

JUDGE: Astbury J.

 

DATES: 1913 Nov 11, 12, 13, 14, 18, 19; Dec. 2.

 

 

International Law – Diplomatic Agent – Privilege – Waiver – Diplomatic Privileges Act, 1708 (7 Anne, c. 12).

 

Company – Auditors – Duties – Legal Knowledge – Balance-Sheet – Ultra vires Payments.

 

Both under the common law and under the Diplomatic Privileges Act, 1708, a diplomatic agent accredited to the Crown by a foreign State is absolutely privileged from being sued in the English Courts and any writ issued against him is absolutely null and void.

 

This diplomatic privilege can be waived, if at all, only with full knowledge of the party’s rights, and (semble) with the sanction of his Sovereign or (if he is of inferior rank to a minister plenipotentiary) his official superior.

 

Except in cases like Taylor v. Best (1854) 14 C. B. 487, where the agent is merely joined as a formal defendant, it is doubtful if any such waiver is possible.

 

Barbuit’s Case (1737) Cas. t. Tal. 281; Triquet v. Bath (1764) 3 Burr. 1478; Hopkins v. De Robeck (1789) 3 T. R. 79; Fisher v. Begrez (1833) 2 Cr. & M. 240; Taylor v. Best 14 C. B. 487; Magdalena Steam Navigation Co. v. Martin (1859) 2 E. & E. 94; Musurus Bey v. Gadban [1894] 1 Q. B. 533; 2 Q. B. 352; Mighell v. Sultan of Johore [1894] 1 Q. B. 149; and The Jassy [1906] P. 270, discussed and explained.

 

Company auditors are bound to know or make themselves acquainted [*140] with their duties under the company’s articles and under the Companies Acts for the time being in force, and if the audited balance-sheets do not shew the true financial condition of the company, and damage is thereby occasioned, the onus is on the auditors to shew that this damage is not the result of any breach of duty on their part.

 

Auditors are prima facie responsible for ultra vires payments made on the faith of their balance-sheet, but whether and to what extent they are responsible for not discovering and calling attention to the illegality of payments made prior to the audit must depend on the special circumstances of each case.

 

The payment of a commission for placing shares was authorized by the company’s memorandum and a board resolution.

 

In reliance on the memorandum and resolution the auditors passed certain payments for commission in their balance-sheet without discovering and drawing attention to the fact that they were not authorized by Table A (1906), by which in default of articles the company was regulated:–

 

Held, in the special circumstances, that the auditors were not liable for this omission.

 

A solicitor who became a director three months after the incorporation of the company was subsequently paid certain sums for agreed costs of incorporation and other sums for costs, rent of office, and clerical assistance. These payments were confirmed as such by boards of which the solicitor was a member.

 

The auditors passed these payments in their balance-sheet without discovering, appreciating, and drawing attention to the fact that as there was no power under Table A (1906) for a director to contract with the company, the solicitor could not charge profit costs, so that the payments to him were pro tanto unauthorized.

 

Held, in the special circumstances, that the auditors were not liable.

 

Principles stated in Spackman v. Evans (1868) L. R. 3 H. L. 171; Leeds Estate Building and Investment Co. v. Shepherd (1887) 36 Ch. D. 787; In re London and General Bank (No. 2) [1895] 2 Ch. 673; In re Kingston Cotton Mill Co. (No. 2) [1896] 2 Ch. 279 (as to company auditors); and in Thomas v. Devonport Corporation [1900] 1 Q. B. 16 (as to public auditors), discussed and applied.

 

MISFEASANCE SUMMONS.

 

On May 7, 1912, the liquidator of the above company issued this summons against the directors T. H. Myring, R. E. Lembcke, and Paul E. Vanderpump (since deceased), and the auditors Woodington and Bubb, claiming damages for various acts of misfeasance.

 

On the hearing of the summons R. E. Lembcke took the preliminary objection that as a second secretary of the Peruvian Legation he was entitled to diplomatic privilege. [*141]

 

The liquidator admitted that R. E. Lembcke was entitled to diplomatic privilege, but contended that he had waived it.

 

The facts relating to this point were as follows. On May 15, 1912, R. E. Lembcke entered an unconditional appearance to the summons, and on October 14, 1912, he issued a summons for further time to file evidence. On October 31, 1912, he swore an affidavit on the merits, stating his official position, but not raising any objection to the jurisdiction. On June 10, 1913, the case was mentioned in Court on an application by the liquidator to fix a time for hearing, and R. E. Lembcke’s counsel then stated that he should insist on his diplomatic privilege. The objection was taken with the sanction and at the wish of the Peruvian Legation.

 

The preliminary point was argued and decided before the rest of the summons was opened.

 

Felix Cassel, K.C., and Owen Thompson, for R. E. Lembcke. Under the Diplomatic Privileges Act, 1708, s. 3, which section is merely declaratory of the common law, the summons, as against R. E. Lembcke, is “utterly null and void, to all intents, constructions, and purposes whatsoever”: Barbuit’s Case (1); Triquet v. Bath (2); Hopkins v. De Robeck (3); Magdalena Steam Navigation Co. v. Martin (4); Parkinson v. Potter (5); Musurus Bey v. Gadban. (6) It cannot therefore be set right by waiver of the privilege: Barbuit’s Case. (1) Taylor v. Best (7), the only case in which waiver was upheld, turned on very special circumstances. The privileged person was one of several joint contractors and was apparently joined as a necessary though formal defendant. Having appeared and allowed the action to go through several stages he was not allowed to raise his privilege so as to cause the entire action to abate. Even if the decision can possibly stand in the light of the subsequent authorities, it is far removed from the present case. R. E. Lembcke is personally sued for damages. He is not a

 

(1) Cas. t. Tal. 281.

 

(2) 3 Burr. 1478, 1480.

 

(3) 3 T. R. 79.

 

(4) 2 E. & E. 94.

 

(5) (1885) 16 Q. B. D. 152, 162.

 

(6) [1894] 1 Q. B. 533; 2 Q. B. 352.

 

(7) 14 C. B. 487. [*142]

 

necessary party to the action, which can quite well go on against the other defendants without him. Even if it were conceivable that a diplomatic agent can waive his privilege, which is really the privilege of his Sovereign, he can only do so intentionally, with full knowledge of his rights, and with the sanction of his Sovereign or Legation. He cannot waive his rights by inadvertence: The Jassy. (1) In the present case R. E. Lembcke being a foreign subject cannot be presumed to have had any knowledge of his rights or any intention to waive them, and the objection was taken at the instance of the Legation. It was taken at the earliest proper time, namely, when the matter first came before the Court: Mighell v. Sultan of Johore. (2)

 

Clauson, K.C., and Arthur Mulligan, for the liquidator. A writ against a diplomatic agent is not void unless it is put in force by an arrest: English v. Caballero (3); and it is possible that the right to freedom from arrest or execution cannot be waived: Barbuit’s Case. (4) But apart from this, diplomatic privilege can be waived by a Sovereign – The Charkieh (5); Mighell v. Sultan of Johore (6) – or by a diplomatic agent – Fisher v. Begrez (7); Taylor v. Best (8) – and there is no authority that in the latter case the consent of the Sovereign or the Legation is required. In the present case R. E. Lembcke ought to have appeared under protest and applied in due course to set aside the summons: Keymer v. Reddy. (9) Instead of doing this he took steps to defend the action on the merits, thereby waiving his privilege. The objection on the ground of privilege was clearly an afterthought, as it was not raised till June 10, 1913. In the circumstances it should be disallowed.

 

ASTBURY J. (after stating the facts). The liquidator admits that apart from the question of waiver R. E. Lembcke is privileged, and the question I have to decide is whether the summons shall proceed against him under the special circumstances of this case.

 

(1) [1906] P. 270.

 

(2) [1894] 1 Q. B. 149, 159.

 

(3) (1823) 3 Dow. & Ry. 25, 27.

 

(4) Cas. t. Tal. 281.

 

(5) (1873) L. R. 4 A. & E. 59.

 

(6) [1894] 1 Q. B. 149.

 

(7) 2 Cr. & M. 240, 242.

 

(8) 14 C. B. 487.

 

(9) [1912] 1 K. B. 215. [*143]

 

Whether diplomatic privilege can be waived is a point of considerable difficulty. Sect. 3 of the Diplomatic Privileges Act, 1708, which section is merely declaratory of the common law, provides that “All writs and processes that shall at any time hereafter be sued forth or prosecuted, whereby the person of any ambassador, or other publick minister of any foreign prince or state, authorized and received as such by her majesty, her heirs or successors, or the domestick, or domestick servant of any such ambassador, or other publick minister, may be arrested or imprisoned, or his or their goods or chattels may be distrained, seized, or attached, shall be deemed and adjudged to be utterly null and void, to all intents, constructions, and purposes whatsoever.”

 

The exact point, namely, whether a public minister sued individually and not as one of several joint contractors, as in Taylor v. Best (1), can waive his privilege, has not been directly determined; but in Barbuit’s Case (2) Talbot L.C. expressed an opinion to the contrary, although the privilege was not claimed until ten years after action brought. Talbot L.C. said: “A bill was filed in this Court against the defendant in 1725 upon which he exhibited his cross bill, stiling himself merchant. On the hearing of these causes the cross bill was dismissed; and in the other, an account decreed against the defendant. The account being passed before the Master, the defendant took exceptions to the Master’s report, which were overruled; and then the defendant was taken upon an attachment for non-payment, etc. And now, ten years after the commencement of the suit, he insists he is a public minister, and therefore all the proceedings against him null and void. Though this is a very unfavourable case, yet if the defendant is truly a public minister, I think he may now insist upon it; for, the privilege of a public minister is to have his person sacred and free from arrests, not on his own account, but on the account of those he represents; and this arises from the necessity of the thing, that nations may have intercourse with one another in the same manner as private persons, by agents, when they cannot meet themselves. And if the foundation of this privilege is for the sake of the prince by whom an

 

(1) 14 C. B. 487.

 

(2) Cas. t. Tal. 281. [*144]

 

ambassador is sent, and for sake of the business he is to do, it is impossible that he can renounce such privilege and protection: for, by his being thrown into prison the business must inevitably suffer.” This passage, though only a dictum, as Barbuit was not in fact a public minister, is of very great weight.

 

The question before me is whether or no Taylor v. Best (1) is an absolute decision as to the possibility of waiver. I will first refer to the earlier dicta or decisions. In Triquet v. Bath (2) Lord Mansfield said: “This privilege of foreign ministers and their domestic servants depends upon the law of nations. The Act of Parliament 7 Ann c. 12 is declaratory of it. All that is new in this Act, is the clause” – s. 4 – “which gives a summary jurisdiction for the punishment of the infractors of this law.” In Hopkins v. De Robeck (3) Buller J. said: “The statute of Ann is only explanatory of the law of nations; and the words ‘domestic and domestic servant’ are only put by way of example. The privilege was held, in the case in Burrow (2), to extend to secretaries.”

 

In Taylor v. Best (1), relied on by the liquidator, the action was brought against Best, Drouet, Sperling, and Clarke as directors to recover 250l. paid as a deposit on shares. Drouet was in fact First Secretary of the Belgian Legation. Best, Drouet, and Sperling pleaded severally never indebted. Clarke suffered judgment by default. Notice of trial was given, and on December 8, 1853, Drouet obtained a rule for a special jury. Two days later he issued a summons calling upon the attorneys for the plaintiff and for the defendants Best and Sperling to shew cause why the action should not be stayed on the ground of diplomatic privilege. The plaintiff contended that the privilege had been waived. The exact facts of waiver relied on are stated in the plaintiff’s argument (4), namely, “that, on the writ being issued, the plaintiff’s attorney wrote to the defendant Drouet, to inquire the name of his solicitor to whom he should send the process for an undertaking to appear; that, in answer to such inquiry, he received a letter from the attorneys of M. Drouet, requesting that the writ might be sent to them for that purpose;

 

(1) 14 C. B. 487.

 

(2) 3 Burr. 1478, 1480.

 

(3) 3 T. R. 79, 80.

 

(4) 14 C. B. 498. [*145]

 

that an appearance was duly entered, and that, after time obtained to plead, and after issue joined, a rule for a special jury was obtained on behalf of Drouet.” Jervis C.J. said (1): “There is no doubt that the defendant Drouet fills the character of a public minister to which the privilege contended for is applicable: and I think it is equally clear, that, if the privilege does attach, it is not, in the case of an ambassador or public minister, forfeited by the party’s engaging in trade, as it would, by virtue of the proviso in the 7 Anne, c. 12, s. 5, in the case of an ambassador’s servant. ... Admitting, then, that M. Drouet is a person entitled to the privileges and immunities which the law of England accords to ambassadors from foreign friendly Courts, and that he does not forfeit them by engaging in commercial ventures, – the question is, whether he is, under all the circumstances disclosed by the affidavit before us, entitled to the privilege which he claims. Although it is admitted that no process can be available against the person or the goods of a foreign ambassador or minister, no case has been cited to shew that an application in the present form, to stay all proceedings, is available in the Courts of this country .... No case has been cited, of a motion to stay the proceedings, where the personal liberty of the applicant has not been interfered with. Further, I am aware of no case in which, where there are several defendants, and the action has been allowed to go on to the verge of trial, the proceedings have been stayed upon the application of one of the defendants. Such a course would be obviously unjust to the other defendants, seeing that the expense they had already incurred would thereby be rendered useless. Without, however, dwelling upon that, it seems to me that this motion must fail, upon the merits.” He then continues (2): “The action is brought against four defendants, – the writ being sued out against M. Drouet and the three others as joint-contractors. No doubt, the plaintiff was bound, at the peril of a plea in abatement, to sue all. The writ being issued, nothing is done upon it which can at all interfere with the exercise by M. Drouet of his diplomatic functions, or with his personal comfort or dignity. But, knowing that a writ has issued, or having reason to believe

 

(1) 14 C. B. 519.

 

(2) 14 C. B. 521. [*146]

 

that it is about to issue, he causes his attorney to write to the plaintiff’s attorney, desiring that the process may be sent to him for an undertaking to appear. He, therefore, voluntarily attorns and submits himself to the jurisdiction of the Court. Under these circumstances, I think he cannot be permitted now to complain that the suit has been improperly instituted against him. On the contrary, I think, that, by analogy to the doctrine cited from the learned jurists whose works have been so laboriously consulted, the action may well be maintained. It is said, – and perhaps truly said, – that an ambassador or foreign minister is privileged from suit in the Courts of the country to which he is accredited, or, at all events, from being proceeded against in a manner which may ultimately result in the coercion of his person, or the seizure of his personal effects necessary to his comfort and dignity; and that he cannot be compelled, in invitum, or against his will, to engage in any litigation in the Courts of the country to which he is sent. But all the foreign jurists hold, that, if the suit can be founded without attacking the personal liberty of the ambassador, or interfering with his dignity or personal comfort, it may proceed.” It is clear that that view of the foreign jurists is not the law of this country. Jervis C.J. then refers to certain cases of proceedings in rem where the means of litigation is established without any molestation or interference with the person of the defendant, and adds (1): “Yet, if the defendant chooses to appear, for the purpose of protecting his goods and investigating the matter in dispute, he may convert that which was originally a proceeding in rem into a proceeding in personam. .... If, therefore, as in Holland, and in some other countries, where goods may be taken for the purpose of founding jurisdiction, the defendant may come in and convert the proceeding in rem into a proceeding in personam, and so attorn or submit himself to the jurisdiction, it seems to me that there is no distinction between that case and the present, where there has been no attempt on the part of the plaintiff to disturb the comfort or interfere with the personal liberty of the foreign minister, but where there has been the mere issuing of a writ to which he has

 

(1) 14 C. B. 522. [*147]

 

voluntarily appeared, and thus submitted himself to the jurisdiction.” – There again the same point as to the distinction between a writ of execution and an ordinary writ is indirectly referred to. – “I do not feel myself at all pressed by the argument urged by Mr. Willes, that the privilege in question, being the privilege of the Sovereign, cannot be abandoned or waived by the ambassador: for, when the authorities upon which that argument is sought to be sustained, come to be examined, they do not shew that the ambassador may not submit himself to the jurisdiction, for the purpose of having the matter in difference investigated and ascertained; but only that the sacred character of the person of the ambassador cannot be affected by any act or consent on his part; and that, by interfering with the person of the ambassador, or with the goods which are essential to the personal comfort and dignity of his position, you are in effect attacking the privilege of his master. That, however, is not the case here:” – then follows a very important passage (1) – “for anything that appears, M. Drouet is sued, – he being a joint-contractor, and so a necessary party to the action, – merely for the purpose of ascertaining the liability of the other defendants. If he had not thought fit to attorn to the jurisdiction, but had allowed judgment to go against him by default, non constat that anything would have been done upon the judgment, otherwise than by enforcing it against the other defendants. If any ca. sa. or fi. fa. were issued against him upon the judgment, the statute of Anne would have applied, and the Court might have been called upon to interfere to prevent its being put in force against him. It seems to me that M. Drouet here has courted the jurisdiction, and that we ought not to interfere.” Then Maule J. says (2): “I am of opinion, that, as M. Drouet has voluntarily appeared to the action, and allowed it to go on through several stages, so that the application could not be granted without prejudice to the rights of the other defendants, as well as to those of the plaintiff, the present motion ought not to succeed.” Of course that point does not apply here, as the liquidator can go on against the other defendants.

 

(1) 14 C. B. 523.

 

(2) 14 C. B. 523. [*148]

 

“Whether an ambassador or public minister duly accredited to the Queen, – which M. Drouet undoubtedly is, – is so far privileged as to be free from all liability to be sued in the Courts of this country, is a very grave question, and one which does not seem to have been settled by any judicial determination in our Courts, or indeed elsewhere.” It is now well settled that the common law and statutory immunity apply both to the issue of an ordinary writ as well as to a writ of execution. After referring to the cases of applications on behalf of domestic servants of ambassadors, Maule J. proceeds (1): “These cases do not in any degree determine the point which has been attempted to be raised on the present occasion, – and undoubtedly it is a point which is very fit to be considered whenever it may be properly presented for decision, – viz. Whether an ambassador or public minister can be brought into Court against his will, by process not immediately affecting either his person or his property, and have his rights and liabilities ascertained and determined. Unquestionably it must to a certain extent interfere with the ambassador’s comfort to have his rights in any way made the subject of litigation; and therefore it may well be that the privilege he enjoys is as large and extensive as Mr. Justice Blackstone affirms it to be. But it is unnecessary to determine that question upon the present occasion,” – it has since been absolutely determined – “because, whatever may be the extent of the ambassador’s privilege in that respect, I think, that, where he is sued jointly with others, and appears to the process, and allows the suit to go on to an advanced stage without offering any objection, and where there does not appear to be any intention on the part of the plaintiff to interfere with either the person or the property of the ambassador, and where the action may proceed to its ultimate termination without any such molestation or interference, we should do wrong to give effect to a claim of privilege which has been so abandoned by the voluntary act of the party.”

 

Before passing on it is necessary to observe that this is a decision of the Court of Common Pleas that in certain cases and in certain ways and to a certain extent a diplomatic

 

(1) 14 C. B. 524. [*149]

 

agent can waive his privilege, and that in the particular case before that Court Drouet was a joint contractor, treated as a necessary party, and it did not appear that the plaintiff intended to enforce any remedy against him, or that he was more than a formal defendant. Having appeared and taken steps and allowed the action to go through several stages he was not allowed subsequently to insist on his privilege so as to cause the action to abate to the prejudice of the plaintiff and his co-defendants who had incurred expense in reliance on his apparent waiver. It was under those special circumstances that the Court held the privilege had been waived.

 

In Magdalena Steam Navigation Co. v. Martin (1) it was held that the common law and statutory privilege extended to ordinary writs and other initial processes of action and was not confined to writs or processes of execution. Lord Campbell C.J. said (2): “The question raised by this record is, whether the public minister of a foreign State, accredited to and received by Her Majesty, having no real property in England, and having done nothing to disentitle him to the privileges generally belonging to such public minister, may be sued, against his will, in the Courts of this country, for a debt, neither his person nor his goods being touched by the suit, while he remains such public minister.” He held that the plea to the jurisdiction was good and added (3): “He does not owe even a temporary allegiance to the Sovereign to whom he is accredited, and he has at least as great privileges from suits as the Sovereign whom he represents. He is not supposed even to live within the territory of the Sovereign to whom he is accredited, and, if he has done nothing to forfeit or to waive his privilege, he is for all juridical purposes supposed still to be in his own country.” The forfeiture or waiver there spoken of refers to a passage in 4 Co. Inst. 153 dealing with forfeiture by crime, which was cited in the plaintiffs’ argument. (4) In the defendant’s argument the following passage appears (5): “It cannot be contended that the defendant has, by appearing to the writ, precluded himself from saying

 

(1) 2 E. & E. 94.

 

(2) 2 E. & E. 111.

 

(3) 2 E. & E. 111.

 

(4) 2 E. & E. 99.

 

(5) 2 E. & E. 110. [*150]

 

that the suit is improperly brought. [Lord Campbell C.J. His plea denies that the Court has jurisdiction. Erle J. Supposing that he had made an affidavit in Court, and had moved to stay proceedings, it could not have been said that he thereby admitted the jurisdiction. Lord Campbell C.J. The plea is only another mode of doing that.]” Later on in the judgment Taylor v. Best (1) is referred to, but not on the question of waiver. Lord Campbell C.J. said (2): “Mr. Bovill, being driven from his supposition that the writ in this case might be sued out only to save the Statute of Limitations, by the fact that it had been served upon the defendant, and by the allegation in the plea that it was sued out for the purpose of prosecuting this action to judgment, strenuously maintained that at all events the action could be prosecuted to that stage, with a view to ascertain the amount of the debt, and to enable the plaintiffs to have execution on the judgment when the defendant may cease to be a public minister. But although this suggestion is thrown out in the discussion which took place in the Common Pleas, in Taylor v. Best (1), it is supported by no authority; the proceeding would be wholly anomalous; it violates the principle laid down by Grotius; it would produce the most serious inconvenience to the party sued; and it could hardly be of any benefit to the plaintiffs. In the first place, there is great difficulty in seeing how the writ can properly be served, for the ambassador’s house is sacred, and is considered part of the territory of the Sovereign he represents; nor could the ambassador be safely stopped in the street to receive the writ, as he may be proceeding to the Court of our Queen, or to negotiate the affairs of his Sovereign with one of her ministers. It is allowed that he would not be bound to answer interrogatories, or to obey a subpoena requiring him to be examined as a witness for the plaintiffs. But he must defend the action, which may be for a debt of 100,000l., or for a libel, or to recover damages for some gross fraud imputed to him. He must retain an attorney and counsel, and subpoena witnesses in his defence. The trial may last many days, and his personal attendance may be necessary to instruct his legal advisers. Can all this take place without ‘coactio’ to the ambassador?

 

(1) 14 C. B. 487, 493.

 

(2) 2 E. & E. 113. [*151]

 

Then, what benefit does it produce to the plaintiffs? There can be no execution upon it while the ambassador is accredited, nor even when he is recalled, if he only remains a reasonable time in this country after his recall.” Towards the end of his judgment, after pointing out that the 1st and 3rd sections of the Diplomatic Privileges Act, 1708, were only declaratory of the law of nations, Lord Campbell C.J. said (1): “Some inconveniences have been pointed out as arising from this doctrine, which, we think, need not be experienced. If the ambassador has contracted jointly with others, the objection that he is not joined as a defendant may be met by shewing that he is not liable to be sued.” – That is indirectly pointed at the reasoning in Taylor v. Best. (2) – “As to the difficulty of removing an ambassador from a house of which he unlawfully keeps possession, De Wicquefort, and other writers of authority on this subject, point out that in such cases there may be a specific remedy by injunction. Those who cannot safely trust to the honour of an ambassador, in supplying him with what he wants, may refuse to deal with him without a surety, who may be sued; and the resource is always open of making a complaint to the Government by which the ambassador is accredited. Such inconveniences are trifling, compared with those which might arise were it to be held that all public ministers may be impleaded in our municipal Courts, and that judgment may be obtained against them in all actions, either ex contractu or ex delicto. It certainly has not hitherto been expressly decided that a public minister duly accredited to the Queen by a foreign State is privileged from all liability to be sued here in civil actions; but we think that this follows from well established principles, and we give judgment for the defendant.”

 

In Musurus Bey v. Gadban (3) the plaintiff as executor of the Turkish ambassador Musurus Pacha was interested in arguing that the ambassador’s privilege was not absolute. In the Divisional Court Wright J. said (4): “To some extent, the point raised to-day is new. It is this: Admitting that

 

(1) 2 E. & E. 115.

 

(2) 14 C. B. 521, 523.

 

(3) [1894] 1 Q. B. 533; 2 Q. B. 352.

 

(4) [1894] 1 Q. B. 542. [*152]

 

Musurus Pacha, whilst he retained his privilege, could not have been sued to judgment or execution, still it is said that a writ could have been issued against him for the purpose of avoiding the application of the Statute of Limitations, and, therefore, that the statute began to run whilst he was in England.” – That refers to the issue of an ordinary writ. – “We think, on the whole, that we ought to follow the indication of opinion of Lord Campbell in Magdalena Steam Navigation Co. v. Martin (1), to the effect that the statute 7 Anne, c. 12, prohibits and makes null and void the issue of any writ or process against an ambassador, and not merely writs or processes in the nature of writs of execution.” Several passages in the judgments of the Court of Appeal must also be referred to. A. L. Smith L.J. said (2) that the plaintiff’s counsel “did not assert, for this would have been useless, that Musurus Pacha could have been effectively sued during the period he was de facto ambassador in London, for the case of Magdalena Steam Navigation Co. v. Martin (1), which has never since been doubted, settled that he could not, as during that period he was exempt from the jurisdiction of the Courts of this country.” And later he said (3): “The writs and processes mentioned in the Act are not confined to such as directly touch the person or goods of an ambassador, but extend to such as in their usual consequences would have this effect as was held in the Magdalena Steam Navigation Co. Case (1) above cited.” He then read the passage from Lord Campbell’s judgment as to forfeiture or waiver to which I have already referred. Again, in dissenting from the contention that to issue a writ without serving it would have been no breach of the ambassador’s privilege, and that therefore a writ might have been issued for the purpose of saving the statute, and have been renewed from time to time, Davey L.J. said (4): “It is in my opinion sufficient to refer to the 3rd section of 7 Anne, c. 12, which makes all writs and processes, whereby the person of any ambassador or other public minister may be arrested or imprisoned, or his goods and chattels may be distrained, seized, or attached, utterly null and void. It

 

(1) 2 E. & E. 94.

 

(2) [1894] 2 Q. B. 354.

 

(3) [1894] 2 Q. B. 356.

 

(4) [1894] 2 Q. B. 360. [*153]

 

has been decided in Magdalena Steam Navigation Co. v. Martin (1) that this section applies not only to writs of execution against the property or person of a privileged person, but also to writs which lead up to and would in ordinary course have the consequence of attaching his goods or person. If so, I am of opinion that a writ of summons in an action is of that character, and that the effect of the statute (which is said to be declaratory only of the common law) is to make such a writ void and of no effect. Mr. Pollard is quite right in saying that the writ had been served in the Magdalena Case (1), and that all that it was necessary to decide was that that service was bad. But the grounds upon which the decision was based in Lord Campbell’s judgment go beyond that point, and in my opinion shew a total want of jurisdiction of the Court to entertain the action at all.” After referring to passages in that judgment Davey L.J. proceeds (2): “These passages, in my opinion, correctly state the legal principles on which the exemption is founded, and are in accordance with the course of decisions in our Courts: see, for example, the latest case of The Parlement Belge (3) in the Court of Appeal, in which it was said (I am reading from the marginal note, which is fully borne out by the judgment) that as a consequence of the absolute independence of every sovereign authority and of the international comity which induces every sovereign State to respect the independence of every other sovereign State, each State declines to exercise by means of any of its Courts any of its territorial jurisdiction over the person of any Sovereign or ambassador, or over the public property of any State which is destined to its public use, or over the property of any ambassador, though such Sovereign, ambassador, or property be within its territory. I am unable to think that the issue of a writ in an action which action the Court has no jurisdiction to entertain, and which writ, therefore, the Court has no jurisdiction to issue, can prevent the statute running. .... I am therefore of opinion that Gadban and Watson, or Gadban or his executors, could not have properly issued a writ against Musurus Pacha or (in other words) had no right of action against him while he was

 

(1) 2 E. & E. 94.

 

(2) [1894] 2 Q. B. 361.

 

(3) (1880) 5 P. D. 197. [*154]

 

ambassador. The doubts suggested in Taylor v. Best (1) cannot in my opinion be supported.” He is referring to the doubts on the question of absolute privilege.

 

In the course of his able argument Mr. Clauson referred to Mighell v. Sultan of Johore. (2) In that case the question was whether a foreign potentate had submitted to the jurisdiction by his conduct. Lord Esher M.R. read the following passage from The Parlement Belge (3), namely, “The principle to be deduced from all these cases is that, as a consequence of the absolute independence of every sovereign authority, and of the international comity which induces every sovereign State to respect the independence and dignity of every other sovereign State, each and every one declines to exercise by means of its Courts any of its territorial jurisdiction over the person of any Sovereign or ambassador of any other State, or over the public property of any State which is destined to public use, or over the property of any ambassador, though such Sovereign, ambassador, or property be within its territory, and therefore, but for the common agreement, subject to its jurisdiction.” Lord Esher proceeded: “It appears to me that, by the authority of this Court, the rule was thus laid down absolutely and without any qualification. We had not then to deal with the question of a foreign Sovereign submitting to the jurisdiction; everybody knows and understands that a foreign Sovereign may do that. But the question is, How? What is the time at which he can be said to elect whether he will submit to the jurisdiction? Obviously, as it appears to me, it is when the Court is about or is being asked to exercise jurisdiction over him, and not any previous time. Although up to that time he has perfectly concealed the fact that he is a Sovereign, and has acted as a private individual, yet it is only when the time comes that the Court is asked to exercise jurisdiction over him that he can elect whether he will submit to the jurisdiction. If it is then shewn that he is an independent Sovereign, and does not submit to the jurisdiction, the Court has no jurisdiction over him. It follows from this that there can be no inquiry by the Court into his conduct prior

 

(1) 14 C. B. 487.

 

(2) [1894] 1 Q. B. 149, 159.

 

(3) 5 P. D. 197. 214. [*155]

 

to that date. The only question is whether, when the matter comes before the Court, and it is shewn that the defendant is an independent Sovereign, he then elects to submit to the jurisdiction.” Lopes L.J. said (1): “In my judgment, the only mode in which a Sovereign can submit to the jurisdiction is by a submission in the face of the Court, as, for example, by appearance to a writ.” He does not of course mean by a mere appearance, but by appearance and subsequent proceedings. Kay L.J. said (2): “The foreign Sovereign is entitled to immunity from civil proceedings in the Courts of any other country, unless upon being sued he actively elects to waive his privilege and to submit to the jurisdiction.”

 

There is one other dictum to which I must refer. In Fisher v. Begrez (3) an ambassador’s servant was arrested for debt. He paid the money immediately upon his arrest without protest; and upon being asked by the sheriff’s officer whether he intended to make any application, he said he did not, and the sheriff in due course paid over the money. Five months later the defendant obtained a rule calling on the plaintiff and the sheriff to shew cause why the ca. sa. should not be set aside and the money returned. The ambassador refused to interfere. In the course of the argument Lord Lyndhurst C.B. said: “A party may waive his privilege, and if he pays the money without insisting on his privilege, does he not thereby waive it? Besides, it is sworn that he expressly said, he should not make any application.” This was properly relied on as a dictum in favour of the possibility of waiver. In his judgment Bayley B. said: “The privilege is not the privilege of the servant, but of the ambassador. This application is not made on behalf of the ambassador, or of any one connected with him; but on behalf of the defendant alone.” In that case it is to be observed that the servant said he should not claim privilege, and the ambassador refused to claim it on his behalf. In other words he refused to acknowledge the servant as within the privilege. The decision does not touch the question of waiver by a privileged person.

 

(1) [1894] 1 Q. B. 161.

 

(2) [1894] 1 Q. B. 163.

 

(3) 2 Cr. & M. 240, 242, 243. [*156]

 

It seems to me that both at common law and under the statute all writs against foreign public ministers accredited to the Court of this country are absolutely null and void, and that if and so far as waiver of that diplomatic privilege is possible it must be confined to cases of some very special nature as was the case in Taylor v. Best. (1) The question is whether R. E. Lembcke’s conduct brings him within that decision. I have felt considerable difficulty as to this. No doubt he entered an unconditional appearance, asked for further time to file evidence, and filed evidence on the merits stating his official position, but not raising any question of privilege. Has he thereby waived his privilege? It seems to me that on this question there are three matters to be considered. In the first place, having regard to the earlier cases as to the absolute nullity of proceedings against foreign public ministers I am satisfied that waiver, if it be possible, must be strictly proved. It implies a knowledge of the rights waived, and I am not satisfied that R. E. Lembcke when he entered appearance and took the subsequent steps was aware of his privilege. Secondly, knowledge of our common and statute law cannot be imputed to a foreign subject residing here as diplomatic agent of a foreign State. Thirdly, I am far from satisfied that a subordinate secretary can effectually waive his privilege without the sanction of his Sovereign or Legation, and it is clear that, whatever knowledge R. E. Lembcke possessed, the objection on the ground of privilege is now taken with the sanction and at the instigation of the Peruvian Legation.

 

To some extent my view is supported by The Jassy (2), which was a motion to dismiss an action for damage by collision on the ground that the vessel proceeded against was the property of a foreign sovereign State and destined to its public use. On March 6, 1906, the plaintiffs issued a summons in rem addressed to the owners of the Jassy, and on March 18 the Jassy was arrested at Liverpool, but released on an undertaking to put in bail given by solicitors acting for the owners’ agents. On March 22 appearance for the owners was entered, and on April 12 the owners raised the question of privilege. Gorell Barnes P. said: “The result is that the principle laid down in

 

(1) 14 C. B. 487.

 

(2) [1906] P. 270, 273. [*157]

 

The Parlement Belge (1) applies, in spite of the undertaking to put in bail and appearance entered by some agent in Liverpool without the knowledge of the Roumanian Government and under a misapprehension as to the privilege enjoyed by a sovereign State in respect of the immunity of its public vessels from arrest. The action will be dismissed with costs.”

 

There is one other matter to be considered. Whatever be the true view of R. E. Lembcke’s conduct in entering appearance and taking the subsequent steps, it is clear that the summons must prove abortive against him. No judgment or execution can be enforced or levied against him, and the authorities shew the impropriety of allowing the action to go on merely for the purpose of defining his liability.

 

On the grounds above stated I am of opinion that there has been no effective waiver established in this case and that the plea of privilege must prevail with costs since June 10, 1913, when the objection was first taken.

 

Clauson, K.C. I am willing to undertake not to appeal on this preliminary point if my friend is willing to have the action against him dismissed without costs.

 

Owen Thompson. I accept that offer.

 

ASTBURY J. Very well.

 

The summons then proceeded against Myring and the auditors, Vanderpump’s estate not being represented, but during the proceedings the case against Myring was settled for 2500l. payable by quarterly instalments of 500l. each, the first instalment being payable on February 18, 1914.

 

The case against the auditors was that they had passed certain payments by way of commission for placing shares, certain sums paid by way of profit costs to Paul E. Vanderpump, the company’s solicitor, who was also a director, and a sum of 36l. 3s. 8d. paid to Myring and not accounted for, without calling attention to the illegality of these payments. These payments were also included in the case against Myring.

 

The facts were as follows. The company was promoted by

 

(1) 5 P. D. 197. [*158]

 

Myring, who had received certain information as to the existence of gold in Bolivia. It was incorporated on March 22, 1907, to acquire mining property in Bolivia and with powers under its memorandum “to remunerate any parties for services rendered or to be rendered in placing or assisting to place any shares in the company’s capital” and “to pay or receive commission, for or in respect of the subscribing or underwriting or guaranteeing the subscription of the shares of this or any other company.” The capital was 30,000l. in 1l. shares. There were no special articles, so that the company was governed by Table A Revised (1906), which does not authorize the payment of a commission for placing shares or enable a director to contract with the company.

 

On March 15, 1907, the signatories to the memorandum appointed Myring and Lembcke directors under Table A, art. 68.

 

On March 25, 1907, the board appointed Paul E. Vanderpump solicitor to the company. He carried on business under the style of Paul E. Vanderpump & Eve, and in the minutes the firm is frequently referred to as the company’s solicitors.

 

On May 16, 1907, an agreement was entered into between Myring and the company reciting that Myring was about to proceed to Bolivia for the purpose of taking up certain gold mining properties already prospected on his behalf and of prospecting and acquiring others. The company agreed to pay Myring his expenses and other payments made for the above purpose and to accept a statement from Myring of those expenses and payments without requiring vouchers. Myring on his part agreed to convey the mining properties to the company. The consideration for Myring’s services and for the assignment of the mining properties was agreed at 20,000l., namely, 5000l. in cash and 15,000l. in shares. The resolution authorizing the execution of this agreement was passed by the board, i.e., Myring and Lembcke, on the same day. Very large sums were paid to Myring under this agreement, which was filed on July 12, 1907, but he did not in fact succeed in obtaining any mining properties.

 

On June 13, 1907, a cheque for 100l. was paid to Paul E. Vanderpump & Eve for stamp duty on the contract. This was signed by Myring and Lembcke. On June 14, 1907, Paul E. [*159] Vanderpump was appointed a director and the payment of the stamp duty cheque was confirmed by the board. On November 21, 1907, a cheque for 50l. was paid to Paul E. Vanderpump & Eve on account of costs of incorporation. It was signed by Myring and Paul E. Vanderpump.

 

On November 29, 1907, a supplemental agreement with Myring confirming the first agreement was approved and executed. This was filed on December 11, 1907. Woodington and Bubb were appointed auditors. The payment of the 50l. on account of costs of incorporation was confirmed. Paul E. Vanderpump reported that the 100l. previously paid was not required for stamp duty and had been credited to the company as paid on account of costs of incorporation. This was confirmed by the board consisting of Myring, Lembcke, and Paul E. Vanderpump.

 

On December 13, 1907, a cheque for 100l. was drawn by Paul E. Vanderpump & Eve for “Balance of costs as agreed of incorporation, duty, and fees.” This was signed by Myring and Paul E. Vanderpump. This made a total of 250l. for costs of incorporation. On January 31, 1908, a cheque for 20l. on account of costs since incorporation was signed by Myring and Paul E. Vanderpump and paid to the solicitors. The drawing of these cheques was confirmed by the board, i.e., Myring, Lembcke, and Paul E. Vanderpump, on February 7, 1908, under the headings “The company’s solicitors for 100l. balance of agreed costs of incorporation including duty, fees, etc.” and “The company’s solicitors 20l. on account of costs since incorporation.”

 

On March 9, 1908, a cheque on account of stores was drawn in favour of the Army and Navy Stores or bearer. This was drawn by Myring and Paul E. Vanderpump and handed to Myring for the purchase of stores. The drawing of this cheque was confirmed by the board, i.e., Myring, Lembcke, and Paul E. Vanderpump, on March 18, 1908, as “Army and Navy Stores 100l. on account for stores and equipment for expedition.” Myring, however, only expended 63l. 16s. 4d. of this amount at the Army and Navy Stores, and vouchers for this amount alone were forthcoming. The liquidator sought to render the auditors liable for the unvouched balance, namely, 36l. 3s. 8d. [*160]

 

The statutory report dated March 20, 1908, and made pursuant to s. 12 of the Companies Act, 1900, stated that 15,000 fully-paid shares had been allotted to Myring for services rendered and to be rendered and for the assignment or transfer of gold mining properties to the company and that 11,745l. had been received in respect of shares allotted for cash. Under the head of particulars of payments on capital account it stated (inter alia):–

 

Preliminary expenses of incorporation, registration,   £    s.   d.

  duty, fees, etc.    .    .    .     .    .    .     250   0    0

Cash consideration to Mr. Myring under contracts

  with company  .     .    .    .     .    .    .    5000   0    0

On account of equipment and passage money of

  expedition, machinery, stores, etc. .    .    .    1016   3    0

On account solicitor’s costs    .     .    .    .      20   0    0

 

It then stated: “The following is an account of the preliminary expenses of the company:– Costs of incorporating the company, duties, fees, stamps, etc., 250l.” The auditors certified that so much of the report as related to the shales allotted and to the cash received in respect of such shares “and to the receipts and payments of the company on capital account is correct.” The 100l. Army and Navy Stores cheque was included in the 1016l. 3s. This report was adopted at the statutory meeting of April 2, 1908. In the meantime, namely, on March 25, 1908, Caldwell was appointed a director, and on March 26, 1908, Myring and R. E. Lembcke left for Bolivia. On September 18, 1908, Edgar was appointed a director.

 

On March 16, 1908, the board, then consisting of Myring, Lembcke, and Paul E. Vanderpump, had resolved that a commission of 10 per cent. in cash be paid to Thew for introducing subscribers for shares in the company. In pursuance of this resolution a total amount of 329l. 10s. was paid to Thew on March 21 and May 8, 1908, and on April 29, 1908, a cheque for 9l., being a 5 per cent. similar commission to Scott, was drawn and sanctioned by the board. Thew and Scott were not [*161] stockbrokers. The liquidator impeached the payment of these commissions. Other cheques were drawn to Paul E. Vanderpump & Eve on account of costs and for rent of office and clerical work. They were signed by Paul E. Vanderpump and another director and subsequently confirmed by a board consisting of Paul E. Vanderpump and one or at most two other directors. These payments were stated in the statutory report and balance-sheets. It was admitted that the 250l. for costs of incorporation included 150l. profit costs and that the 20l. and other payments for costs, rent of office, and clerical work included 50l. profit costs. The liquidator impeached the payment of the profit costs on the ground that Paul E. Vanderpump was a director. The first balance-sheet, made up to November 30, 1908, contained (inter alia) the following items on the assets side:–

 

                                                       £      s.   d.

By Properties Account   .    .    .    .       .    20,000    0    0

  (Consideration paid, 15,000l. in fully-paid

    shares and 5000l. in cash)

Preliminary expenses for incorporation of

  company, duty, fees and other disbursements  .       250    0    0

Commissions paid for obtaining subscriptions for

  shares   .    .     .    .    .    .    .    .       338   10    0

Paul E. Vanderpump & Eve – Paid on account of

  current law charges        .   .    .    .   .        65    0    0

Expedition Account: Moneys paid to Mr. Myring

  for purchase of stores, plant, and outfits and to

  be disbursed by him in Bolivia as per agreements

  with the company               .    .    .    .     7381    8    3

 

The last item included the 100l. cheque to the Army and Navy Stores.

 

The auditors certified as follows: “We have audited the balance-sheet of the Republic of Bolivia Exploration Syndicate, Limited, above set forth. We have obtained all the information and explanations we have required. In our opinion such balance-sheet is properly drawn up so as to exhibit a true and correct view of the state of the company’s affairs, according to [*162] the best of our information and the explanations given us, and as shown by the books of the company.”

 

This balance-sheet was presented at the general meeting of December 14, 1908. The payment of the commission was challenged as improper, but Mr. Woodington said it was a matter for the shareholders to sanction it or not and that he had no power to surcharge. The solicitors’ fees were not challenged. Drummond was appointed a director at this meeting. The meeting was adjourned until April 22, 1909, when the balance-sheet was adopted.

 

The second balance-sheet, made up to February 28, 1910, contained (inter alia) the following items on the assets side:–

 

                                                         £      s.   d.

Properties Account      .     .    .    .    .    .   20,000    0    0

  (Consideration paid, 15,000l. in fully paid up

    shares and 5000l. in cash)

Preliminary expenses for incorporation of company,

  duty, fees and other disbursements              .      250    0    0

Commission paid for obtaining subscriptions for

  shares as set out in last balance-sheet    .    .      338   10    0

Expedition Account –

  Mr. Myring’s outlay and expenses      .    .    .     6781    3    0

R. E. Lembcke: Amounts paid to him to be

  accounted for   .     .     .    .    .    .    .     1310    0    0

Law charges from March, 1907, to July, 1909       .      169   18    3

 

The auditors certified as follows: “We have to report that the first three items on the assets side are stated in exactly the same form as on the last balance-sheet adopted by the shareholders, that the only voucher we have seen for Mr. Myring’s outlay and expenses amounting to 6781l. 3s. has been a copy of an account signed by him, and that the 1310l. charged against Mr. Lembcke has been paid and remitted to him, but no account of the expenditure has yet been rendered. With these qualifications we report that we have obtained all the information and explanations we required, and in our opinion such balance-sheet is properly drawn up so as to exhibit a true and correct view of [*163] the state of the company’s affairs according to the best of our information and the explanations given us and as shown by the books of the company.” The 100l. cheque to the Army and Navy Stores was included in the 6781l. 3s. debited to Myring. This balance-sheet was adopted at the general meeting of March 17, 1910. Edgar having died, Drummond having retired, and Caldwell not seeking re-election, Pratt and Van Heemstede were appointed directors. The auditors were not re-elected. The meeting was adjourned to June 30, 1910.

 

On January 3, 1912, an extraordinary resolution for voluntary winding up was passed and a liquidator appointed, and on May 7, 1912, the present summons was issued. Mr. Woodington’s evidence as to the two audits is stated in the judgment.

 

Clauson K.C., and Arthur Mulligan, for the liquidator. The payment of the commission for placing shares was not authorized by the articles, namely, Table A (1906). It was therefore illegal under the Companies Act, 1900 (63 & 64 Vict. c. 48), s. 8, and the Companies Act, 1907 (7 Edw. 7, c. 50), s. 8, now replaced by the Companies (Consolidation) Act, 1908 (8 Edw. 7, c. 69), s. 89. Again, Table A contains no power for a director to contract with the company. The payment of profit costs to Paul E. Vanderpump was therefore illegal: Aberdeen Ry. Co. v. Blaikie (1); Palmer’s Company Precedents, 11th ed. pt. i. p. 732. Myring’s contracts, including the provision against vouching, were also void, so that the 36l. 3s. 8d. required vouching.

 

The auditors ought to have drawn attention to all these points. Under Table A, art. 109, their duties were regulated by the Companies Act, 1900, ss. 21, 22, 23, or any statutory modification thereof for the time being in force. At the first audit they were regulated by the Companies Act, 1907, s. 19, and at the second by the Companies (Consolidation) Act, 1908, s. 113, and under each section they had to report whether they had obtained all the explanations and information they required and whether the balance-sheet was properly drawn up so as to exhibit a true and correct view of the company’s affairs “according to the best of their information and the explanations given them, and” as

 

(1) (1854) 1 Macq. 461, 471. [*164]

 

shewn by the books of the company. The words in inverted commas were first added in 1907. It is obvious that the balance-sheets in fact fell very far short of those requirements, and it is submitted that the auditors were guilty of culpable negligence.

 

Company auditors are bound to make themselves acquainted with the company’s memorandum and articles and with the company law for the time being and to audit on that footing: Leeds Estate Building and Investment Co. v. Shepherd (1); In re London and General Bank (No. 2) (2); In re Kingston Cotton Mill Co. (No. 2) (3); just in the same way that auditors under the Public Health Act, 1875 (38 & 39 Vict. c. 55), must learn their statutory duties under s. 247 and audit accordingly: Thomas v. Devonport Corporation (4); Attorney-General v. De Winton (5); Rex v. Roberts. (6) The respondent auditors were therefore bound to know and point out that the commission and profit costs were illegal payments and that the 36l. 3s. 8d. required vouching.

 

G. C. Rankin, for Myring.

 

Frank Dodd, for the auditors. The Companies Act, 1900, s. 8, sub-s. 3, provides that nothing in the section shall affect the power of any company to pay such brokerage as it has heretofore been lawful for a company to pay. This proviso was left untouched by the Companies Act, 1907, s. 8, and the Companies (Consolidation) Act, 1908, s. 89, sub-s. 3, contains a similar proviso. Now the payment of commission or brokerage to brokers for placing shares was clearly lawful before 1900: Metropolitan Coal Consumers’ Association v. Scrimgeour (7); Buckley on Companies, 9th ed. p. 215. Thew and Scott were in fact acting as the company’s brokers for this purpose, and the payment of their commission was lawful. In any case the auditors were entitled to rely on the memorandum and the board resolution of March 16, 1908, and assume the latter was in order. Auditors are not concerned to see whether the directors’ acts have been intra vires or ultra vires – Spackman v. Evans (8); Buckley on Companies,

 

(1) (1887) 36 Ch. D. 787, 802.

 

(2) [1895] 2 Ch. 673, 682.

 

(3) [1896] 2 Ch. 279, 284.

 

(4) [1900] 1 Q. B. 16, 21.

 

(5) [1906] 2 Ch. 106, 119.

 

(6) [1908] 1 K. B. 407.

 

(7) [1895] 2 Q. B. 604.

 

(8) (1868) L. R. 3 H. L. 171, 236. [*165]

 

9th ed. p. 509 – at all events unless their suspicion is aroused. They were therefore entitled to pass the payment in their first balance-sheet, and a fortiori in their second balance-sheet after it had been questioned and confirmed in general meeting. No damage resulted from either entry, and the auditors are not liable: Bentinck v. Fenn. (1)

 

A similar principle applies to the costs. The payments were all confirmed by board resolutions and the 250l. was treated as an agreed sum. The payments of the 250l. and the 20l. were not questioned at the first general meeting and the balance-sheet containing these entries was confirmed at the adjourned meeting. The second balance-sheet containing similar costs was confirmed at the second general meeting. It did not occur to the auditors or any one else at either meeting that these payments to the extent of profit costs were illegal. That is not really a matter of company law, but of the general law of trusts or the law of principal and agent, which an auditor can scarcely be expected to have at his fingers’ ends. It is indeed tolerably certain that if the point had been thought of and the question raised in general meeting the company would not have deprived its solicitor of his ordinary profit costs, so that the liquidator has not shewn any damage under this head.

 

The 36l. 3s. 8d. was included in the amounts debited to Myring under his contracts. These contracts were authorized by board meetings and their validity was never questioned. It was not the auditors’ duty to go behind the resolutions of the board, but even if they had been sufficiently astute to discover the point and draw it to the attention of the company, it is inconceivable that the company would not have confirmed contracts forming its whole and only substratum. The liquidator fails to prove any damage under this head.

 

Company auditors must of course have a general working knowledge of company law, but they are not required to be highly trained legal experts or to be suspicious. Their duties are exhaustively defined in In re London and General Bank (No. 2) (2), In re Kingston Cotton Mill Co. (No. 2) (3), and Henry

 

(1) (1887) 12 App. Cas. 652, 662, 669.

 

(2) [1895] 2 Ch. 682 – 685.

 

(3) [1896] 2 Ch. 279, 284. [*166]

 

Squire Cash Chemist Ld. v. Ball, Baker & Co. (1) Their business is “to ascertain and state the true financial condition of the company at the time of the audit and nothing more,” and they are not in the position of auditors under the Public Health Act, 1875, s. 247, who have quasi-judicial duties of surcharging past illegal payments: Rex v. Roberts. (2) In Leeds Estate Building and Investment Co. v. Shepherd (3) wholly delusive balance-sheets were prepared by the manager with the object of shewing a profit available for dividend. The auditor was guilty of the grossest negligence in passing them and was consequently liable for the improper payment of a dividend based thereon. That is far removed from the present case.

 

Clauson, K.C., in reply. The costs cheques were all signed by Paul E. Vanderpump and another director and confirmed by a board including Paul E. Vanderpump. The auditors ought to have ascertained in each case whether there was a quorum without him. A company auditor must have a competent knowledge of company law. He must call attention to that which is wrong: Newton v. Birmingham Small Arms Co. (4) The auditors ought to have drawn express attention to the illegality of the contracts, commissions, and profit costs, and the onus is on them to shew that no damage resulted from their omission. At the time of the audits the company could probably have recovered some of the money from the directors, and I ask for an inquiry as to damages.

 

Cur. adv. vult.

 

Dec. 2. ASTBURY J. This is a misfeasance summons by the liquidator of this company, which was brought originally against two directors of the name of Myring and Lembcke, the solicitor, who was also a director, of the name of Vanderpump, and the two auditors, Messrs. Woodington and Bubb, seeking to make the first two respondents liable for very large sums retained by one or other of them in connection with the company out of its assets, seeking to make the solicitor liable for profit costs, and the

 

(1) (1911) 27 Times L. R. 269; 28 Times L. R. 81.

 

(2) [1908] 1 K. B. 407, 437, 438.

 

(3) 36 Ch. D. 787.

 

(4) [1906] 2 Ch. 378, 388. [*167]

 

auditors liable in respect of certain payments which I will deal with in a moment. The first two directors were also charged with the same sums as are sought to be recovered from the auditors. The present respondents who remain are the auditors, with whom alone I have to deal. A consent judgment has been taken against the respondent Myring, the respondent Lembcke has escaped liability on the ground of diplomatic privilege, and the solicitor, Mr. Vanderpump, is dead.

 

The company was incorporated on March 22, 1907, generally to acquire mining property in Bolivia. In the absence of special articles Table A (1906) applied, and the directors obtained, therefore, no power under the company’s regulations to contract with the company. Myring and Lembcke were appointed directors by the signatories on March 15, 1907, and Mr. Vanderpump was appointed solicitor to the company ten days later. On May 16, 1907, a very extraordinary contract was entered into between Myring and the company, reciting that Myring was about to proceed to Bolivia for the purpose of taking up certain gold mining properties already prospected on his behalf, and of prospecting and acquiring others, and provision was made for the payment of his expenses of going out to Bolivia without requiring any vouchers from him in respect of the expenses, and the consideration money in the contract was 20,000l., 5000l. in cash and 15,000l. in shares. On June 14, 1907, Mr. Vanderpump was appointed a director. On November 29, 1907, a second agreement was made with Myring confirming the first one. The present respondents were appointed auditors of the company on the same date. Now, a minute of a board meeting of February 7, 1908, referred to a payment to the company’s solicitor of 100l. as “balance of agreed costs of incorporation.” This sum was paid by a cheque to the solicitor, signed by himself and Myring. The minute of a board meeting of March 16, 1908, contains a resolution that a commission of 10 per cent. in cash be paid to a Mr. Thew, for introducing subscribers for shares. This gentleman is not shewn to have been a stockbroker, nor did the company in connection with the payment subsequently made in respect of this commission comply with the requirements of s. 8 of the Companies Act, 1900, or s. 8 of the Companies Act, [*168] 907. Myring and Lembcke left England for Bolivia in March, 1908, on what proved to be a wholly abortive attempt to either locate or obtain any title to any of the mining properties referred to in Myring’s agreement with the company. On December 14, 1908, the first ordinary general meeting of the company was held, when the first of the two balance-sheets of the company, audited by the respondents with their note appended, was produced. Adverse criticism of the accounts took place at this meeting, which was consequently adjourned, but the balance-sheet and accounts were adopted at the adjourned meeting which took place on April 22, 1909. On March 17, 1910, the second general meeting took place, when the second of these balance-sheets was adopted. The respondent auditors were not re-elected, and ceased as from this date to be officers of the company.

 

There are four claims made against the respondents, the auditors, as follows: First, for payment of two sums, 329l. 10s. and 9l. paid for commission for placing shares under the above-mentioned resolution of March 16, 1908; secondly, for 150l. profit costs admittedly received by the solicitor-director Vanderpump in an amount of 250l. paid to him for costs of incorporation of the company; thirdly, the sum of 50l. further profit costs admittedly received by the same gentleman out of sums paid to him in respect of rent, clerical work, and further costs; and lastly, 36l. 3s. 8d., the balance of a cheque drawn by the company in favour of the Army and Navy Stores or bearer, received by Myring and not accounted for. None of these moneys were paid by the company or its directors in consequence of any report or audit made by the respondents, but it is contended by the liquidator that they failed in their duty in passing these amounts in their balance-sheets without drawing attention to the fact that they were wrongful payments under the circumstances, and that the balance-sheets which included them did not in consequence shew the true financial position of the company, and that damage accrued to the company in consequence of this alleged breach of duty.

 

I will deal first with the audited balance-sheets and what they contain. There are, as I said, two: the first for the period ending November 30, 1908. This shews the 20,000l. paid to [*169] Myring, and then it contains the following items: “Preliminary expenses for incorporation of company, duty, fees and other disbursements: 250l.” That is the sum in respect of which the 150l. claim for profit costs is made. The next item is: “Commissions paid for obtaining subscriptions for shares: 338l. 10s.,” and then there are various sums paid to Messrs. Vanderpump on account of law charges and fees and general expenses detailed as in the account, and then there is a sum of 7381l. odd stated to be: “Moneys paid to Mr. Myring for purchase of stores, plant and outfits and to be disbursed by him in Bolivia as per agreements with the company.” Then the auditors’ note is: “We have obtained all the information and explanations we have required. In our opinion such balance-sheet is properly drawn up so as to exhibit a true and correct view of the state of the company’s affairs, according to the best of our information and the explanations given us, and as shown by the books of the company.” The second balance-sheet is for a period ending February 28, 1910. That contains, as far as the present case is concerned, the same items, but at the foot of the balance-sheet is the following note: “We have to report that the first three items on the assets side are stated in exactly the same form as on the last balance-sheet” – that is, the 20,000l., the 250l., and the 338l. – “adopted by the shareholders, that the only voucher we have seen for Mr. Myring’s outlay and expenses, amounting to 6781l. 3s., has been a copy of an account signed by him, and that the 1310l. charged against Mr. Lembcke has been paid and remitted to him, but no account of the expenditure has yet been rendered. With these qualifications we report that we have obtained all the information and explanations we required, and in our opinion such balance-sheet is properly drawn up,” and so on.

 

Mr. Woodington, one of the respondent auditors, has given his account of his conduct as auditor in an affidavit upon which he has been cross-examined before me, and the result of his evidence is as follows: First, as to the moneys paid for commission. Mr. Woodington attended the shareholders’ meeting on December 14, 1908, when attention was called to this item – and it was alleged to have been an improper payment – [*170] Mr. Woodington said at the meeting that it was a matter for the shareholders to sanction or not, that he had no power to surcharge, and could only shew what had become of the money. Mr. Woodington admitted to me that he knew there were provisions in the Act as to underwriting commissions, and that there must be authority in the articles to pay them, but he says that when he saw the payments in the books he looked at the memorandum of association to see if there was power to pay such commissions, and found it there, as is the fact. No further mention was made of the matter, and the same item was entered and passed in the second balance-sheet as above mentioned, without further inquiry or investigation. Secondly, as to the 150l. profit costs received by Mr. Vanderpump, Mr. Woodington says that the payment of the bill of which this forms part was authorized by the directors as appearing in the minutes, but he never inquired whether, excluding Mr. Vanderpump, there was a quorum present at the meeting authorizing it. He says that a voucher was produced to him, and that it never suggested itself to him that it was a part of his duty as auditor to decide whether the payment was legally proper or not – that he saw the minute of February 7, 1908, referring to the agreed costs of incorporation, which agreement he presumed was made before Vanderpump became a director. He never asked for the agreement, and it did not occur to him that there was any difficulty in a solicitor-director making a profit. He cannot say whether he saw the cheques given in payment; the receipt which he saw for the money appears to refer to directors’ meetings, the dates of which are wrongly given, but he made no further inquiry or investigation with regard to it. Thirdly, as to the 50l. further profit costs made by Mr. Vanderpump, Mr. Woodington says in his affidavit: “The whole of the items making up the said sum with the exception of the last three” – that is, referring to a total sum of which this forms part – “were expended before my said firm had been called upon to act as auditors for the company while the last item (15l. 3s. 3d. of September 9, 1911) is after my firm had ceased to be auditors they not having been re-elected at the second ordinary general meeting held on March 17 and (by [*171] adjournment) June 30, 1910. All the said payments made during the period of my auditorship were authorised or ratified by resolutions of the board of directors and appear clearly in the books of the company.” He says with regard to these payments no objection to the same on the ground of illegality was raised at any of the meetings which he was present at, and he states he is not competent, nor does he consider it part of his duty as auditor, to tax a solicitor’s bill of costs. Fourthly, with regard to the last item of 36l. odd, Mr. Woodington states that this amount is the balance of a sum of 100l. paid to the respondent Myring by an open cheque made payable to the Army and Navy Stores or bearer handed to and cashed by Myring, and that he has acknowledged the receipt of the same, and that the full amount of the cheque forms part of the sum appearing on the assets side of the balance-sheets in the items I have read.

 

In support of the liquidator’s contention on the above facts, it is alleged that as regards company finance, of which they profess to be experts, auditors must at least make themselves acquainted with the general features of such legal regulations as govern the methods and restrictions as to limited companies’ accounts and finance, and that the accounts as audited by them must correspond with the reality in law of the company’s financial position, and that damages must be assumed to have resulted in this case from its not having been pointed out in time that the directors were liable to refund these moneys.

 

Now, there are some legal matters which an auditor must obviously know, as there are others which it is equally obvious he could not be held responsible for not knowing, and it may not always be easy to say in which category any particular case falls. I think that auditors of a limited company are bound to know or make themselves acquainted with their duties under the articles of the company whose accounts they are appointed to audit, and under the Companies Acts for the time being in force; and that when it is shewn that audited balance-sheets do not shew the true financial condition of the company and that damage has resulted, the onus is on the auditors to shew that this is not the result of any breach of duty on their part. The [*172] authorities, however, are not very clear as to what, if any, is the liability of auditors of a limited company for including or passing in accounts audited by them sums paid by the company or its directors prior to the audit, and which by reason of the want of authority in the regulations of the company or non-compliance with some statutory provision of the Companies Acts ought not in the particular circumstances to have been paid, nor, if any liability would otherwise exist, what is sufficient by way of warning or identification in the audited accounts for the necessary information to be expressly conveyed by the auditors to the company in order to free them from further responsibility.

 

The following are the principal authorities dealing with the duties and responsibilities of auditors.

 

In Spackman v. Evans (1) Lord Chelmsford said “It would be no part of their office to inquire into the validity of any transaction appearing in the accounts of the company,” and it has been doubted by a text-writer of great authority whether a company’s auditors are under any duty to determine whether the acts of the board have been intra or ultra vires, their duty being, on the other hand, to ascertain and state the financial result of these acts.

 

In Leeds Estate Building and Investment Co. v. Shepherd (2) Stirling J. said: “It was in my opinion the duty of the auditor not to confine himself merely to the task of verifying the arithmetical accuracy of the balance-sheet, but to inquire into its substantial accuracy, and to ascertain that it contained the particulars specified in the articles of association (and consequently a proper income and expenditure account), and was properly drawn up, so as to contain a true and correct representation of the state of the company’s affairs.” And the learned judge, referring to the fact that the auditor who knew of the company’s articles did not look at them, stated that this fact afforded some evidence as to the degree of care exercised by him. This case established that if, as the natural consequence of an auditor’s breach of duty, payments are made which are a misapplication of the company’s funds, the auditors are responsible.

 

(1) L. R. 3 H. L. 171, 236.

 

(2) 36 Ch. D. 787, 802. [*173]

 

In In re London and General Bank (1) Lindley L.J. says: “It is impossible to read s. 7 of the Companies Act, 1879, without being struck with the importance of the enactment that the auditors are to be appointed by the shareholders, and are to report to them directly, and not to or through the directors. The object of this enactment is obvious. It evidently is to secure to the shareholders independent and reliable information respecting the true financial position of the company at the time of the audit. The articles of this particular company are even more explicit on this point than the statute itself, and remove any possible ambiguity to which the language of the statute taken alone may be open if very narrowly criticised. It is no part of an auditor’s duty to give advice, either to directors or shareholders, as to what they ought to do. An auditor has nothing to do with the prudence or imprudence of making loans with or without security. It is nothing to him whether the business of a company is being conducted prudently or imprudently, profitably or unprofitably. It is nothing to him whether dividends are properly or improperly declared, provided he discharges his own duty to the shareholders. His business is to ascertain and state the true financial position of the company at the time of the audit, and his duty is confined to that. But then comes the question, How is he to ascertain that position? The answer is, By examining the books of the company. But he does not discharge his duty by doing this without inquiry and without taking any trouble to see that the books themselves shew the company’s true position. He must take reasonable care to ascertain that they do so. Unless he does this his audit would be worse than an idle farce. Assuming the books to be so kept as to shew the true position of a company, the auditor has to frame a balance-sheet shewing that position according to the books and to certify that the balance-sheet presented is correct in that sense. But his first duty is to examine the books, not merely for the purpose of ascertaining what they do shew, but also for the purpose of satisfying himself that they shew the true financial position of the company. This is quite in accordance with the decision of Stirling J. in Leeds Estate Building and

 

(1) [1895] 2 Ch. 673, 682. [*174]

 

Investment Co. v. Shepherd. (1) An auditor, however, is not bound to do more than exercise reasonable care and skill in making inquiries and investigations. He is not an insurer; he does not guarantee that the books do correctly shew the true position of the company’s affairs; he does not even guarantee that his balance-sheet is accurate according to the books of the company.” Then a little lower down the learned judge says (2): “Such I take to be the duty of the auditor: he must be honest – i.e., he must not certify what he does not believe to be true, and he must take reasonable care and skill before he believes that what he certifies is true. What is reasonable care in any particular case must depend upon the circumstances of that case. Where there is nothing to excite suspicion very little inquiry will be reasonably sufficient, and in practice I believe business men select a few cases at haphazard, see that they are right, and assume that others like them are correct also. Where suspicion is aroused more care is obviously necessary; but, still, an auditor is not bound to exercise more than reasonable care and skill, even in a case of suspicion.” Then a little further on the learned judge proceeds (3): “A person whose duty it is to convey information to others does not discharge that duty by simply giving them so much information as is calculated to induce them, or some of them, to ask for more. Information and means of information are by no means equivalent terms. Still, there may be circumstances under which information given in the shape of a printed document circulated amongst a large body of shareholders would, by its consequent publicity, be very injurious to their interests, and in such a case I am not prepared to say that an auditor would fail to discharge his duty if, instead of publishing his report in such a way as to insure publicity, he made a confidential report to the shareholders and invited their attention to it and told them where they could see it.” And then lastly upon these points the learned judge says (4): “But, as already stated, the duty of an auditor is to convey information, not to arouse inquiry, and, although an auditor might infer from an unusual statement that something was seriously wrong, it by no means follows that

 

(1) 36 Ch. D. 802.

 

(2) [1895] 2 Ch. 683.

 

(3) [1895] 2 Ch. 684.

 

(4) [1895] 2 Ch. 685. [*175]

 

ordinary people would have their suspicions aroused by a similar statement if, as in this case, its language expresses no more than any ordinary person would infer without it.”

 

In In re Kingston Cotton Mill Co. (No. 2) (1) Lindley L.J. said: “I protest, however, against the notion that an auditor is bound to be suspicious as distinguished from reasonably careful.” But after holding that the auditor was entitled to rely on returns as to stock made by the manager, who had no apparent conflict between his interest and his duty, he contrasted this with a cashier’s accounts of receipts and payments which he said could not be reasonably taken by an auditor without further inquiry.

 

In Thomas v. Devonport Corporation (2) Lord Russell C.J., speaking of the duty of an auditor of an urban sanitary authority, said: “I do not subscribe to the doctrine that his sole duty is to see whether there are vouchers, apparently formal and regular, justifying each of the items in respect of which the authority seeks to get credit upon the accounts put before the auditors for audit. I think that is an incomplete and imperfect view of the duties of the auditors. I think an auditor is not only entitled, but justified and bound to go further than that, and by fair and reasonable examination of the vouchers to see that there are not amongst the payments so made payments which are not authorized by the duty of the authority, or contrary to the duty of the authority, or in any other way illegal or improper. If he discovers that any such improper or illegal payments appear to have been made, his duty will certainly be to make it public by report to the authority itself, and the burgesses who create that authority.”

 

Applying these principles as best I can to the facts of this case, I have arrived at the following results.

 

First, as to the sums improperly paid for commission for obtaining subscriptions for shares, I am not satisfied that the respondents failed in their duty to the company in not knowing or ascertaining that the payments were in the circumstances improper in law before they passed them in the first audited balance-sheet, especially having regard to the fact that the balance-sheet states in terms for what the sums in question were

 

(1) [1896] 2 Ch. 279, 284, 287.

 

(2) [1900] 1 Q. B. 16, 21. [*176]

 

paid. After they learned at the shareholders’ meeting of December 14, 1908, that the legality of these payments was questioned, the meeting was adjourned for the purpose inter alia of inquiries being made into the matter, and the balance-sheet and accounts were subsequently approved by the shareholders at the adjourned meeting, and I do not think that they ought to be held guilty of breach of duty for passing the same entry as to these sums in the second audited balance-sheet, nor do I think, having regard to the fact that the shareholders approved them after discussion as above mentioned, that the liquidator has established that any damage resulted to the company from the auditors having acted as they did.

 

Secondly, as to the sum received by the solicitor-director, Vanderpump, for profit costs, the position of the respondents seems to me more doubtful. Mr. Woodington has admitted in the box that he made no inquiries beyond asking for and being shewn the receipts for payment, but having regard to the fact that as to the payment of the 250l. the minutes stated it to be an agreed sum for the costs of incorporation, and as to both the sums claimed in respect of profit costs that Mr. Vanderpump was not appointed a director until three months after incorporation, and to the question as to how far the auditors were bound to ascertain that in this company no authorization existed for directors to contract with the company and to appreciate that the profit costs of the solicitor’s bill were consequently payments unauthorized in law, I do not think that I ought to make any order for payment of these sums by the auditors, although I am far from satisfied with the way in which this part of their audit was conducted. I may add further that I am not satisfied that the shareholders would in this case, any more than in the case of the commissions for placing shares, have taken any proceedings against the directors if this question had been expressly placed before them by the respondents, failing which no damage would have resulted to the company from their action.

 

Thirdly, as to the sum of 36l. 3s. 8d., the bearer cheque for 100l. was, together with other large sums, handed to Myring for the purchase of stores, plant, &c., and the total amount of these sums was entered in the audited balance-sheets under this [*177] heading with the note appended to the second balance-sheet which I have read, and I see no sufficient ground for charging the auditors with any breach of duty as to this.

 

The result, therefore, is that I do not propose to make any order against the auditors on this summons, but having regard to the general manner in which the audit was conducted, and to the evidence of Mr. Woodington himself, I dismiss the summons against the auditors without costs.