CHANCERY DIVISION In re REPUBLIC OF
BOLIVIA EXPLORATION SYNDICATE, LIMITED. [00158 of 1912.] [1914] 1 Ch. 139 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 partys 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. Barbuits 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 companys 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 companys 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. Lembckes 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:
Barbuits 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:
Barbuits 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: Barbuits 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 Barbuits
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 Masters 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 plaintiffs
argument (4), namely, that, on the writ being issued, the plaintiffs
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 partys engaging in trade, as it would, by
virtue of the proviso in the 7 Anne, c. 12, s. 5, in the case of an ambassadors
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
plaintiffs 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 ambassadors 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
ambassadors 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 defendants 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 ambassadors 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 ambassadors
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 plaintiffs 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 Campbells 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 ambassadors 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 Campbells 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 ambassadors servant was arrested for debt. He paid the money
immediately upon his arrest without protest; and upon being asked by the
sheriffs 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. Lembckes
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. Lembckes 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,
Vanderpumps 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 companys 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 companys 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 companys 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 Myrings 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 companys
solicitors for 100l. balance of agreed costs of incorporation including duty,
fees, etc. and The companys 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 solicitors 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 companys 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. Myrings
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. Myrings 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
companys 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. Woodingtons 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); Palmers Company Precedents,
11th ed. pt. i. p. 732. Myrings 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 companys
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
companys 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 companys 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
companys 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 companys 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
Myrings 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 companys 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. Myrings 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 solicitors 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 liquidators 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 companys
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 companys 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
companys affairs. And the learned judge, referring to the
fact that the auditor who knew of the companys 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 auditors breach of duty, payments are made which are a
misapplication of the companys 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 auditors 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 companys 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 companys 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 cashiers 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 solicitors 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. |