[1939] 3 All ER 271

The respondent purchased from the appellant his holding of 2,925 shares in a private company at the price of £2,250, which sum was made up of the sum of £1,350, being the value of the shares, and the sum of £900, being the amount of a loan which had been granted by the appellant to the company. By the terms of the contract, the respondent also undertook to relieve the appellant of his obligations to a bank in respect of the company's overdraft and to have the securities, belonging to the appellant and pledged with the bank against the company's overdraft, transferred back to the appellant within 2 years. The appellant undertook to resign office as a director of the company and to cease to have any further interest in the profits or losses of the company, or in any dividends which might be declared on the shares. Both the appellant and the respondent duly fulfilled the terms of the contract. The appellant sought to have the contract set aside on the ground that he had been271 induced to part with the shares by fraudulent misrepresentations on the part of the respondent as to the financial position and prospects of the company, and he also claimed restitutio in integrum. The respondent denied the appellant's allegations, and contended that restitutio in integrum was now impossible, on the ground, inter alia, that the appellant, by the release of his securities and by his own release from his obligations to the bank, had obtained a contractual benefit which could not now be restored:-

Held - (i) on the facts, the appellant was induced to enter into the contract by fraudulent misrepresentations on the part of the respondent, who was therefore not entitled in bar of restitution to found on dealings with the subject purchased, which he had been enabled by his fraud to carry out.
   (ii) the appellant was, therefore, entitled to the remedy of rescission, accompanied by restitutio in integrum, as the substantial identity of the subject-matter of the contract remained.

Notes
The doctrine of restitutio in integrum is the same in Scotland as in England. The usual case is where a purchaser is seeking to set aside a transfer of property and to be repaid the purchase price with all proper allowances and accounts. In the present case, the vendor is seeking rescission, and the subject-matter of the sale is the shareholding in a company, the latter having been developed considerably since the sale. Commercial development and expansion of the subject-matter are not, however, an absolute bar to the remedy by way of restitutio in integrum, although the replacing of the parties in statu quo ante is thereby rendered more difficult. The opinions to some extent explore the distinction where rescission is the result of an innocent misrepresentation and where there is proof of fraud, but upon this aspect of the matter no concluded opinion is stated.
   As to Restitutio in Integrum, see Halsbury (Hailsham Edn), Vol 23, pp 104-107, para 145; and for Cases, see Digest, Vol 35, pp 66-72, Nos 623-707.

Appeal
Appeal against an interlocutor of the First Division of the Court of Session in Scotland, dated 6 May 1938, affirming an interlocutor of the Lord Ordinary, dated 16 December 1937. The facts and the arguments are fully set out in the opinions of Lord Thankerton and Lord Wright.

18 May 1939. The following opinions were delivered.

LORD THANKERTON. My Lords, the appellant is the pursuer in this action, by which he seeks reduction of the contract constituted by the respondent's offer dated 18 August 1931, and the appellant's acceptance272 thereof, dated 27 August 1931, on the ground that his acceptance was induced by false and fraudulent misrepresentations by the respondent. On this main issue of fact, the appellant has failed in both courts below, and the decree of absolvitor pronounced by the Lord Ordinary's interlocutor, dated 16 December 1937, was adhered to in the First Division by interlocutor dated 6 May 1938, against both of which interlocutors the present appeal is taken.
   The offer and acceptance which constituted the contract under reduction are as follow. First, the offer is in the following terms:

   The acceptance of that offer is as follows:

Glencairn Metals Ltd, is a private company formed in 1919 with a capital of £6,000 in £1 shares, 5,850 of which shares were issued, and, at the date of the contract in August 1931, the holdings were as follow: the appellant 2,825, the respondent 2,825, and William Thomas Richardson 200, of which 100 were held by him as nominee of the appellant and 100 as nominee of the respondent. The directors were the appellant, the respondent and Richardson.
   The appellant's case is that he was induced to sell his shares and to273 sever his connection with the company by the respondent's fraudulent misrepresentations. He does not challenge the adequacy of the consideration, but maintains that he would not have parted with his shares or his interest in the company but for these misrepresentations. The two particular misrepresentations on which the appellant bases his case are (i) that in February 1931, he was shown in the office of the company by Richardson, in the presence of the respondent, a rough statement showing a loss of £900 for 1930, which was prepared by Richardson on the respondent's instruction on falsified figures for the purpose of inducing the appellant to part with his shares, and (ii) that in May 1931, the appellant saw in the office of the auditors of the company the draft accounts and balance sheet of the company for 1930, which had been prepared by them from the information supplied to them on the respondent's instructions, and which included a deliberate undervaluation of stock, and which showed a profit of £134, that the undervaluation of stock, which was made by a falsification of the stock tonnage, amounted to £2,186, and that it was made on the respondent's instructions. The appellant also founds on certain gloomy statements and predictions about the prospects of the company made by the respondent to him and his wife in December 1930, and January 1931. It is true, as the Lord Ordinary and the Lord President state, that these incidents are of no moment by themselves, but they were clearly proved, and they have a bearing on the credibility of the respondent, who denies them, and they seem to destroy any significance in the fact that the proposal to sell his shares first came from the appellant.
   The crucial facts which the appellant requires to establish are (a) that the valuation of stock in the 1930 balance sheet was understated by about £2,186, (b) that that undervaluation was arrived at by a deliberate falsification of the tonnage figures made by Richardson, and is not capable of an innocent explanation, (c) that the rough statement, showing a loss of £900, was made by Richardson on falsified figures, and (d) that these falsifications were made by Richardson on the instructions, or with the knowledge and consent, of the respondent. If the appellant had proved these facts, it seems clear to me that most, if not all, of the judges in the Inner House would have held that the evidence further established that the appellant was shown the rough statement by Richardson in the presence of the respondent, that the respondent knew that the appellant was relying on them, and that the appellant was induced by them to enter into the contract with the respondent. In my opinion, that is clearly established, and, if so, there would remain only the question as to whether restitutio in integrum is possible in the circumstances. The appellant has no alternative conclusion for damages. I may at once deal with the opinion expressed by the Lord Ordinary when he said:

274

For this opinion, the Lord Ordinary gives two reasons. First, if there was an understatement of stock as at 31 December 1930, it did not follow that there was a corresponding understatement of profits for 1930, as that depended upon whether the statement of stock as at 31 December 1929, was or was not accurate, as to which there was not reliable evidence. I find it difficult to reconcile this view with the judge's assumption that the false representations were proved, but, in any event, in my opinion, it is proved that the undervaluations of stock only began in 1930, and that, accordingly, the profits for 1930 were understated by a corresponding amount. The Lord Ordinary's second reason is his doubt as to the materiality of the alleged difference, and whether he was bound to accept the pursuer's evidence that, if he had known of the alleged difference, he would not have contracted. I regret to differ from the judge on both these points. In 1928 there was a trading profit of £1,663, in 1929 a trading loss of £1,011, and in the 1930 accounts shown to the appellant there appeared a trading profit of £133 14s 4d, which was set against the debit of £2,270 15s 3d brought forward from 1929, whereas the appellant's case is that the 1930 trading profit was really £2,320 or thereabouts, which would have wiped out the debit and shown a very material increase in the profit-making capacity of this small company. Surely this would have been a most material fact for the appellant in deciding whether he should abandon any hope of getting salary, director's fees or dividends and take less than 50 per cent of the face value of his shares. The fact that the business was highly speculative, as the Lord Ordinary puts it, seems to me to make this fact, if anything, the more material, and I see no good reason for rejecting the appellant's assertion that, if he had known it, he would not have entered into the contract. It is possible that the Lord Ordinary's view as to the draft letter of April 1930, may have also affected his mind on this point, but I agree with the Lord President that the draft letter is not proved to have emanated from the appellants and that it should be entirely disregarded. I do not propose to recapitulate the detailed history of the company, or the qualifications of, and the positions held in the company's work by, the appellant, the respondent and Richardson, or their respective holdings in the company down to the date of the action. It is sufficient to refer to the opinion of the Lord Ordinary, who has set out these matters at length.
   I turn now to the evidence as to the four crucial matters which I have set out above. Admittedly, the decision of these matters depends on the consideration of the report by Messrs French and Cowan, dated 16 March 1936, so far as contained in the excerpts therefrom, which was proved by Mr Cowan, and on the oral evidence of Mr Cowan, the appellant, the respondent, Richardson and Miss Forsyth, who entered the service of the company as bookkeeper in the office, and became secretary of the company in September 1931, which position she still holds.
   In my opinion, the Lord Ordinary, the Lord President and Lord Fleming have not sufficiently appreciated the weight of Messrs French275 and Cowan's report taken along with Mr Cowan's evidence, and its effect in corroborating the evidence of Richardson and Miss Forsyth. I regret, in common with some of the judges, that the whole report was not admitted, for it seems to me that, if the report was relevant in the present issue at all, the whole of it was relevant, in view of the basis on which Messrs French and Cowan's inquiry was conducted-namely, by working back from the tested figures at the close of 1935. I agree with the Lord President that the present issue is not concerned with proof of the admitted fraud against the Inland Revenue, but it is concerned with the identical figures in 1930 and 1931, which, in the report, are arrived at by such backward calculations. I may say at once, however, that I find in the excerpts, along with the evidence of Mr Cowan, sufficient to establish (a) that the valuation of stock in the 1930 balance sheet was understated by a substantial amount of over £2,000, and (b) that such undervaluation is not capable of explanation as the result of an omission of stock in transit already paid for.
   As the report states, the amended figures were agreed by the respondent and Richardson, though the figures for the intermediate years could only be regarded as approximate, and the inquiry did not go further back than 1930 because the directors stated that, to the best of their knowledge and belief, there were no irregularities prior to that time, and, further, the report states as follows:

It was an essential condition of the indemnity which was being sought from the Inland Revenue that such a disclosure should be made. This, in my opinion, clearly establishes, in the appellant's favour, that there was an undervaluation of stock at the close of 1930 amounting approximately to £2,186, and that there was no similar irregularity in the commencing figure of stock value for that year. On that basis, the only explanation compatible with innocence which is put forward by the respondent is that the shortage may be accounted for by an omission to take into account stock in transit, already paid for, but not yet entered in the yard records, as it had not reached the yard. In my opinion, this explanation rests on a fallacy. If stock in transit had been so omitted, by a faulty system of bookkeeping, it would, on its arrival at the yard, have been entered in the stock books, and such entry would affect by that amount the figures for 1931 and for the ensuing years down to the end of 1935, when its effect would be reflected in the actual stock figures found by Messrs French and Cowan, and it would not have affected the amount of the deficit then found by them. It would still have left the shortage of £2,186 in the stock valuation for 1930. This is clearly referred to by Mr Cowan in the following question and answer:

Finally, it is not without significance that there was an undervaluation of stock by over £10,000 in the closing stock of 1931, after allowing over £8,000 as representing stock in transit, and that there were similar undervaluations of stock in the 3 following years to a total amount of about £4,500. It is impossible, in my opinion, to avoid the conclusion, that these undervaluations were deliberate, and, like Lord Carmont, I find it difficult not to connect the suppression of sales in 1932 to an amount of nearly £3,000 with the accumulated undervaluations of the 2 preceding years amounting together to about £12,300, whereas the closing value shown in the 1931 balance sheet was £26,715, which means that nearly one-third of the stock was suppressed. It is to be remembered that the stock was being financed by bank overdraft. Though it relates more to the respondent's knowledge of, and participation in, the deliberate undervaluations of stock, it may be recalled here that the respondent admitted that the suppression of sales was mutually arranged and carried out by him and Richardson.
   While the above evidence is sufficient, in my opinion, to establish a deliberate suppression of stock value at the close of 1930, which is incapable of innocent explanation, this conclusion is confirmed by the rest of the oral evidence, which I will next consider. I do not think that it can be doubted, on the evidence, that the falsification of the closing stock value of 1930 was made by Richardson, who was responsible for providing the stock abstract figures on which the accounts were made up by the auditors, and the crucial question is as to the respondent's association with the falsification. I agree with and accept the view of the Lord President that the respondent's evidence is not reliable, and his deprecation of the Lord Ordinary's palliation of the respondent's moral guilt in regard to his confessed fraud on the Revenue. I agree with the acceptance of the appellant as a reliable witness, and, although he might, if he had so chosen, have had access to information from which he could have ascertained the true state of matters, there is no suggestion that he did seek such information, and clearly, in my opinion, he was entitled to rely on the information given to him by the respondent or Richardson, and his evidence is that he did so rely. The progress of the negotiations after he saw the company's accounts for 1930 appears to me to confirm his evidence. Again, as regards Richardson, I agree that, unless corroborated, his evidence cannot be treated as reliable. In my opinion, however, sufficient weight was not given to the evidence of Miss Forsyth by the Lord Ordinary or by the two judges who agreed with him on this part of the case.
   It is important to bear in mind the position of the parties in the early part of 1931. Richardson had no shares of his own at that time, and I cannot conceive what motive he could have for falsification of the stock values, which would not be likely to increase any chances277 of a rise in salary, unless he had some understanding with the respondent, or acted, as he said he did, on the instructions of the respondent. As already stated, it is significant that in 1932 the suppression of sales was admittedly made by arrangement with the respondent, and it may also be noted that, subsequent to the transfer of the appellant's shares to the respondent, the latter made a present of 800 shares to Richardson. Miss Forsyth, in whose demeanour, according to the Lord Ordinary, there was nothing to suggest, that she was a dishonest witness, still remains as secretary of the company, and I find it difficult to conceive any reason why she should deliberately perjure herself in the interests of the appellant and against the interests of the respondent. There is no suggestion, as in the case of Richardson, of any animus against the respondent. I confess that I am not impressed with the Lord Ordinary's grounds for rejection of her evidence. Inconsistencies in the details which he criticises appear to me to be such as might well be made after the lapse of several years by an honest witness, and, unlike the Lord President, I see no valid reason for rejecting her evidence as to hearing the respondent instructing Richardson to falsify the stock valuation in order to deceive the appellant, especially as the Lord President refuses to accept the respondent's denial of Miss Forsyth's later protest to him. With all respect to the Lord Ordinary, I have difficulty in agreeing with him in so far as he treats as a reason for not accepting her evidence that, if her whole evidence were to be accepted as true, it would convict her of at least passive participation in something which she clearly recognised as a fraud. For myself, I should regard this as an element in favour of the truth of her evidence. It is right to observe, however, that the Lord Ordinary and the judges who agreed with him might well have taken a different view of the value of Miss Forsyth's evidence if they had been otherwise satisfied, as I am, that there was a deliberate suppression of stock value-incapable of innocent explanation-made by Richardson. I therefore regard the evidence of Miss Forsyth as good proof of the way the falsification was achieved and of the respondent's instructions to Richardson, and also as corroborative of Richardson's evidence. Further, on the question of the respondent's participation in the fraud, one is bound to take into account the exhibition to the appellant by Richardson, in the presence of the respondent, of the rough statement which brought out an estimated profit of £900. This is proved by the appellant, whose evidence is corroborative of Richardson on this matter.
   In my opinion, the inevitable inference from the above facts and circumstances is that the fraud was carried out in the sole interest of the respondent and at his instigation, as well as with his knowledge. I am therefore of opinion, in agreement with Lord Moncrieff and Lord Carmont, that the appellant is entitled to have the contract reduced, provided he is able to effect restitutio in integrum, which will fall to be next considered.

278

   On record, the appellant offered repayment of the price of £1,350 which the respondent paid for the shares, with interest at 4 per cent from 27 August 1933, and, if anything further were required to effect restitutio in integrum, he stated that he was prepared to do or pay what was necessary. I may repeat the well-known statement of Lord Cranworth in Western Bank of Scotland v Addie, in which the respondent, under the first head, claimed the right of repudiating altogether the contract for the purchase of 135 shares from the bank, on the ground of fraudulent misrepresentations. Lord Cranworth said, at pp 164, 165:

It is to be noted that the condition of the relief is the restoration of the defender to his pre-contract position, and that no stress is placed on whether the pursuer is so restored. The normal type of case in which the question has arisen is one where the pursuer is purchaser, and seeks to recover the price on restoration of the subject purchased, and the question in issue is whether the pursuer by his treatment of the subject purchased, while in his possession, has so treated it that it is no longer identifiable in any reasonable sense. I should add that the alteration of the subject purchased might also have been caused by circumstances outside the control of the pursuer, such as the conversion of shares into shares of an essentially different character. This type of case is well illustrated by Adam v Newbigging, in which the plaintiff claimed rescission of a contract, under which he became a partner in the defendants' business, on the ground of misrepresentations without fraud. It was held that the deterioration of the business during the period of the plaintiff's partnership, which had resulted in its failure with large liabilities, was due to the inherent vice of the business itself, and did not depend to any degree on the bargain entered into between the plaintiff and the defendants, and that the plaintiff was entitled to rescission. In other words, the vice was already there when the contract was made.
   It is well established that the doctrine is not to be applied too literally. This was pointed out in the opinion of Lord Blackburn in Erlanger v New Sombrero Phosphate Co, at p 1278, which is quoted by Rigby LJ, in his opinion in Lagunas Nitrate Co v Lagunas Syndicate, at pp 456, 457, where he sets out more fully the modifications of the doctrine as follows:

The fact that the Scottish court is a court of both law and equity does not affect the application of these modifications of the doctrine in Scotland.
   Some discussion took place at the hearing of this appeal as to whether the application of the doctrine was to be measured by different standards according as the misrepresentations were fraudulent or not. Lord Lindley, then Lindley MR, undoubtedly took the view that there was a difference, as appears from his opinion in the Lagunas Nitrate Co case, and, as I shall indicate later, I am of opinion that this must be so. Lindley MR, said, at pp 433, 434:

   The above cases were all examples in substance of a purchaser seeking relief against a vendor, but in the present case the position is reversed. Counsel were only able to refer to one case in which the position was similar-namely, Hay v Rafferty, in which Lord Kyllachy, Lord Ordinary, referred to this matter, and his decision was affirmed by the First Division. The pursuer sought reduction of an assignation by him of his share in a Crown fishery lease, which excluded assignees and subtenants without the consent of the Crown, on the ground of fraudulent misrepresentation. The assignee was accepted by the Crown as a tenant. The purchaser made no offer to repay the consideration which he had received, nor did he state that he was in a position to relieve the defender of his obligations to the Crown. The defender was assoilzied. The case was a clear one, and is of no assistance in the present case.
   As I have already observed, the doctrine relates to the restoration of the defender to his pre-contract position, and the above statements as to the modifications of the doctrine relate to what the defender is280 to get. None of these statements deals directly with the case of the vendor seeking relief against the purchaser in regard to the effect on the application of the doctrine of changes in the subject-matter while in the hands of the purchaser, and it is in regard to this question that, in my opinion, there may well be a different conclusion according as the misrepresentations are fraudulent or not. While the decision in any case must turn on the terms of the contract under reduction and the facts of the particular case, I may say broadly that, in my opinion, the defender who, as purchaser, has been guilty of fraudulent misrepresentation is not entitled in bar of restitution to found on dealings with the subject purchased, which he has been enabled by his fraud to carry out. I rather think that the Lord President had something of this sort in his mind when he said:

   I may illustrate my view by an argument in the present case, which is stated in the respondent's case in this appeal as follows:

This would in fact be true, but it is to be remembered that, after the acquisition of the appellant's shares, the respondent owned the whole issued capital of 5,850 shares, though 200 were in the name of Richardson as his nominee, that in 1934 he gave 800 shares to Richardson, and that, the capital having been increased in 1935 from £6,000 to £10,000, at the time of the proof the respondent held 5,000 shares his wife 2,500 shares, and Richardson 2,500 shares. The Lord Ordinary says:

   My Lords, I regret to be unable to agree with this view of the Lord Ordinary, and I think that counsel for the respondent was well-advised in not pressing this contention before this House. To hold that the respondent's quarrel with his particeps criminis was to affect the question of restitution appears to me to be untenable, and exposes the possible consequences of holding that the respondent's dealings with the fruits of his fraud are to provide a bar to restitution. In a case of innocent misrepresentation, however, it may well be that an alteration of the holdings in the company, made on the footing that the contract was valid, might, in certain circumstances, prove a bar to restitution. If281 the purchaser of the shares thereby gained ample control of the company, both parties being aware that that was the purpose of their acquisition, and thereafter disposed of so many shares as still left him in control if the contract stood, but would not do so if the contract were rescinded, it may be that, if the contract were reducible for fraudulent misrepresentation, there would be no bar to restitution, and that, if the misrepresentation were without fraud, it might be held to provide such a bar. I express no opinion upon the point.
   I now turn to the respondent's averments in bar of restitution in answer 9 of the condescendence, in which he states as follows:

As regards the first point, the appellant agreed that, while the original capital was referred to in the conclusion, it was only for identification, and was not a necessary or appropriate element in the decree. I have already dealt with the argument that the altered capital and the present holdings are a bar to restitution, which might affect the controlling interest in the company. Beyond that, the alteration of the capital does not appear to affect the question of the restoration of the respondent to his pre-contract position, and it is for the appellant to say whether he is content to take the number of shares sold by him, though they no longer amount to one-half of the issued capital.
   There remain the payments made and obligations undertaken by the respondent in implement of the contract. Turning to the contract itself, it appears clear to me that the main purpose and effect of the contract were that the interest of the appellant in the company as a director, as works manager and as a shareholder should cease as at the date of the contract. Head 7 of the offer makes this clear, and, although the payment of the price and the transfer of the shares were postponed, any dividends were to go to the respondent. In that view, I agree with the view expressed by Lord Moncrieff, who alone has held that restitution is possible, that the postponement of the payment of the price was a benefit to the respondent, and that the obligations of the appellant to leave his securities meantime with the bank and the obligations of the respondent to secure the release of these securities within 2 years were natural conditions of the postponement of the payment of the price and of the release of the securities over a period during which the appellant was excluded from any part in the management or control of the business, and were a benefit to the respondent. In any event, I am clearly of opinion that they were ancillary to the282 main purpose of the contract, and on this point I am unable to agree with Lord Carmont, who differed from Lord Moncrieff on the question of restitution.
   The payments made and obligations undertaken by the respondent founded on by him in answer 6 of the condescendence are as follow: (i) the repayment of the £900 loan to the company referred to in heads 1 and 4 of the offer, but this repayment was in fact made by the company, and not by the respondent; (ii) the sale by the bank in 1932 of certain of the respondent's holdings of Bank of Scotland stock and Midland Bank stock, which the bank held as security for the company's overdraft; I will deal with this matter later; and (iii) a guarantee for £3,000 given by the respondent to the bank in September 1933, a guarantee for the same amount given by the respondent's mother in December 1931, and an assignation, dated 6 September 1933, by the respondent in the bank's favour of the £5,638 loan due to him by the company and, in addition, of all claims competent to him against the company in respect of securities transferred to the bank in security of the company's obligations to the bank. The bank in fact never claimed payment under either of these guarantees, though doubtless they were useful in the financing of the business of the company, and, in my opinion, they cannot affect the question of restitution. The sale by the bank of the respondent's stock might raise a difficult question, but that question does not arise in view of the offer of the appellant, at the hearing of the appeal, to give credit to the respondent for an amount which would compensate him for the difference between the market value of the stocks when they were sold in 1932, when prices were low, and the present market value, if this House thought it just to do so. This also covers the assignation of September 1933, as the £5,638 loan represented the amount realised by the sale of the stocks, which had been applied in reduction of the company's overdraft, and had been entered as a loan by the respondent in the company's books. In my opinion, to use the phrase of Lord Blackburn, the court will be doing what is practically just by making it a condition of restitution that the respondent should be compensated as above suggested, and such payment, along with repayment of the price of the shares with interest, will, in my opinion, satisfy the doctrine of restitutio in integrum.
   It is right that I should refer to two cases to which Lord Carmont refers, but which, in my opinion, are of no assistance in the present case. The case of Boyd & Forrest v Glasgow & South Western Ry Co related to a contract for construction of a railway, which had been completed before the action was raised. The appellants had already failed in an earlier appeal to this House ([1912] SC (HL) 93) in their claim to have the contract reduced on the ground of fraudulent misrepresentation, and in this second appeal they sought to have the contract rescinded on the ground of innocent misrepresentation as to the nature of the strata in which the work was to be done, which they alleged283 had made the work actually performed totally different from the work contracted for, and they claimed to be paid on the basis of a quantum meruit. The appeal was dismissed on a variety of grounds, among which was the impossibility of restitutio in integrum. It was obvious that the land could not be restored to its condition prior to the construction of the railway, and no offer was made to restore it. There is no analogy between the facts of that case and those of the present one, and the same remark applies to Hunt v Silk, where there had been an intermediate occupation by the plaintiff, a part execution of the agreement, which was incapable of being rescinded.
   On the whole matter, I am of opinion that the appellant is entitled to reduction of the contract, on repayment of the price of the shares and making compensation as above stated, and to the execution of a transfer in his favour. The appellant stated that he did not press for decree in terms of the third conclusion of the summons. In this view, it seems clear that the appellant would be entitled to have an accounting from the respondent for all dividends, or other payments in respect of the shares by the company since the date of the contract. However, although this matter is referred to in condescendence 9, it is not covered by the conclusions of the summons, and would involve further proceedings, unless the parties could by agreement adjust the amount due, so as to set it against the sums due to the respondent as above set forth, including interest where properly payable, and thus strike an agreed balance, so that the whole question could be disposed of in this appeal. In order to save such further proceedings, in the event of your Lordships coming to the conclusions which I have expressed, counsel for the parties, on the suggestion of my noble and learned friend then on the Woolsack, have agreed on the form of order which should be pronounced by this House in that event, including an adjustment of the sum falling to be paid by the appellant to the respondent and of the sums falling to be paid by the respondent to the appellant, and the resulting balance in favour of the appellant, and have submitted it for your Lordships' acceptance. The balance thus brought out in favour of the appellant amounts to the sum of £1,936 6s 10d, and a statement showing how that balance has been arrived at has been embodied in a joint minute which has been lodged by the parties. The statement thus agreed upon may be summarised as follows:

As the accounting by the respondent is not covered by the conclusions284 of the summons, it would in strict procedure be necessary that an appropriate amendment should be made by the appellant, but I suggest to your Lordships that, as the parties are really in accord in the matter, any further expense and delay may be avoided if the respondent is willing to agree that the order for payment by him of that balance should be made with his consent. If the respondent does so consent, I propose to your Lordships that the appeal should be allowed and that the interlocutor of the Lord Ordinary, dated 16 December 1937, and the interlocutor of the First Division, dated 6 May 1938, should be recalled, and that, in accordance with the form of order agreed on by the parties, the case should be remitted to the Court of Session (a) to pronounce decree of reduction in terms of the first conclusion of the summons, and (b) to pronounce, in lieu of the decree asked for in the second conclusion of the summons, decree (i) ordaining the respondent, within 14 days from the date of decree, to execute and deliver to the appellant a transfer in his favour of 2,925 fully paid shares of £1 each in Glencairn Metals Ltd, and authorising the clerk of court, in the event of the respondent's failing so to execute and deliver such transfer, to execute on behalf of the respondent and deliver to the appellant a transfer of the shares, and (ii) of consent ordaining the respondent to pay to the appellant the sum of £1,936 6s 10d sterling, and (iii) to find the appellant entitled to the costs of the action in the Court of Session other than those awarded to the respondent by the interlocutor of 20 May 1937. The respondent should pay to the appellant the costs of this appeal.
   I am asked by my noble and learned friends, Lord Atkin and Lord Russell of Killowen to state that they concur in the opinion which I have just expressed.

LORD MACMILLAN. My Lords, I agree with the opinion which has just been delivered by my noble and learned friend Lord Thankerton and that about to be delivered by my noble and learned friend Lord Wright, which I have had an opportunity of considering.

LORD WRIGHT. My Lords, I have had the advantage of reading in print the opinion which has just been delivered by my noble and learned friend Lord Thankerton, and I agree with it. I merely add a few observations out of respect to the judges from whom I have the misfortune to differ.
   I shall deal first with the issue of fact. It is true that, in this as in any other action, a strong case is required to justify an appellate court in differing from the conclusion of fact reached by the trial judge, who has heard and seen the witnesses and has found that fraud was not proved, particularly when his decision has been supported by the two senior judges of the First Division of the Court of Session, though their two brethren were for holding that fraud was established. I feel constrained, after very carefully considering the whole evidence, to agree with Lord285 Moncrieff and Lord Carmont, and to hold that fraud has been made out. I do not think it necessary to repeat in detail the reasoning by which Lord Moncrieff and Lord Carmont reached that conclusion, or to repeat the reasoning of Lord Thankerton in the opinion which your Lordships have just heard. I shall, however, shortly indicate what appear to me to be the most crucial matters in the case. I may also add with respect that it seems to me that the Lord Ordinary, the Lord President and Lord Fleming have, in dealing with the evidence, failed sufficiently to dovetail or correlate the various pieces, but have rather treated the pieces of evidence individually, instead of cumulatively. Proof of a complicated fraud generally depends on a process of correlation and corroboration. I regard as the most crucial pieces of evidence, first, the accountants' report of 16 March 1936, explained and supplemented by the evidence of Mr Cowan and by the balance sheets, and, secondly, the oral evidence of Miss Forsyth. The material issue in the case is whether the respondent fraudulently misrepresented to the appellant the company's profits for 1930, and did so by means of a false balance sheet and statement of account based on an understatement of stock at the end of 1930, and thereby induced the appellant to sell his shares. It is most unfortunate that the whole report was not available to the court, instead of merely the excerpts allowed under the Lord Ordinary's interlocutor, the reason for which I do not understand. The whole period covered by the report was, in my opinion, relevant, both as evidence of intention or system, and also because the estimate of the stock for 1930 was arrived at by the accountants by working backwards from the 1935 figures. However, I see no reason to doubt the substantial accuracy of the report which was prepared on the respondent's instructions and accepted by him as correct. I think also the report shows that the respondent agreed that there was for 1930 an understatement of stock of approximately £2,000, thus showing an understatement of profits for the year of about that sum. It seems an inevitable inference that the understatements of profits were not made for one year only, but were continued cumulatively until 1935, and were not made without the respondent's knowledge. The understatements were made in order to defraud the Inland Revenue. They involved the falsification of books, and constituted a fraud which I regard as peculiarly gross. They also enabled the fraudulent suppression of sales in 1932, to which undoubtedly the respondent was a party. In my judgment, the understatement was also used, so far as concerned 1930, in order to exhibit a false statement of profits to the appellant and so induce him to sell the shares. Quite apart from the admission by the respondent which I find in the report, I cannot accept the view that such a course of falsification could have been adopted except on the respondent's instigation and responsibility. Richardson had no interest in the company at the material time, and I find it incredible that he should have committed, or been a party to, the fraudulent286 understatements of stock on his own initiative. That it was an intentional fraud I have no doubt, even though it is called an irregularity in the report.
   I think the attempted explanation that the discrepancy was due to stock in transit at the end of 1930 is unsubstantial. The accountants who made the report could not have failed to mention such an obvious matter of extenuation, if it existed. It is also clear that stock was systematically suppressed until it amounted to almost £17,000 by 1935. I cannot believe that the respondent would have agreed the irregularities, ie, the understatements of the stock, as he did in the report, unless he was a party to them. In my opinion, however, that he was a party to the fraud is corroborated and confirmed by the evidence of Miss Forsyth, which, if believed, is conclusive that the respondent knew of the understatements of stock and instigated them, and intended to use them as regards the 1930 figures to induce the appellant to sell his shares. It is true that the Lord Ordinary has not accepted her evidence. If he had so acted because, on his impression of her personality, he regarded her as dishonest, and not worthy of credit, I should have felt the greatest hesitation in taking a different view. However, his reason for not accepting her evidence is not based on her demeanour, or his estimate of her as a woman, but on a course of reasoning. Thus, he said that she was in a sense implicated in the fraud if she was speaking the truth, and that there were some discrepancies in her evidence as compared with that of Richardson, and also some internal inconsistencies. I think an appellate judge is entitled to form his own opinion on the value of such considerations, once the Lord Ordinary has said there was nothing in her demeanour to indicate that she was a dishonest witness. If her evidence was not true, she must have been guilty of gross and inexplicable perjury. She said that there was an alteration of the quantities of stock, as at the end of 1930, involving an understatement of about 500 tons at £4 10s per ton. She said that that was done after she heard the respondent telling Richardson that the figures shown must be reduced, and that he did not want to show a profit. She said that that practice went on afterwards for some years, and that some time after the first 2 years she protested to the respondent, because the practice was continuing. She is still in the company's employment and is a highly qualified secretary. Her evidence fits in precisely with the report. I see no reason why she should be disbelieved. If it is said that she was guilty of acquiescence in the fraud, it should be noted that she was then a girl of about 22 years of age, and acted under the orders of her employers and superiors. It is to be added that the respondent, when cross-examined as to whether Miss Forsyth may have protested about the falsification, said: "She may. I don't remember." While it is true that at a later stage he gave a categorical denial to the Lord Ordinary, I do not think that his earlier answer can be ignored. As to the evidence of Richardson for the appellant, I should not attach287 importance to it without corroboration, but it does in substance agree, on the essential matters, with that of Miss Forsyth. As to the evidence of the respondent on his own behalf, he is clearly a discredited witness. If the fraudulent representations to the appellant by the respondent are made out, I think it must follow that they had their effect in inducing the appellant to decide that it was time to get out of the concern. It would have been very different if he had known that the profits for 1930 were not about £133 but about £2,000.
   I have briefly indicated the evidence which appears to me to be most crucial in supplement to the detailed examination of the evidence in the judgments of Lord Moncrieff and Lord Carmont, and in the opinion of Lord Thankerton. On the basis that the fraud is established, I think that this is a case where the remedy of rescission, accompanied by restitutio in integrum, is proper to be given. The principles governing that form of relief are the same in Scotland as in England. The remedy is equitable. Its application is discretionary, and, where the remedy is applied, it must be moulded in accordance with the exigencies of the particular case. The general principal is authoritatively stated in a few words by Lord Blackburn in Erlanger v New Sombrero Phosphate Co, where, after referring to the common law remedy of damages, he went on to say, at p 1278:

In that case, Lord Blackburn is careful not to seek to tie the hands of the court by attempting to form any rigid rules. The court must fix its eyes on the goal of doing "what is practically just." How that goal may be reached must depend on the circumstances of the case, but the court will be more drastic in exercising its discretionary powers in a case of fraud than in a case of innocent misrepresentation. This is clearly recognised by Lindley MR, in the Lagunas case. There is no doubt good reason for the distinction. A case of innocent misrepresentation may be regarded rather as one of misfortune than as one of moral obliquity. There is no deceit or intention to defraud. The court will be less ready to pull a transaction to pieces where the defendant is innocent, whereas in the case of fraud the court will exercise its jurisdiction to the full in order, if possible, to prevent the defendant from enjoying the benefit of his fraud at the expense of the innocent plaintiff. Restoration, however, is essential to the idea of restitution. To take the simplest case, if a plaintiff who has been defrauded seeks to have the contract annulled and his money or property restored to him, it would be inequitable if he did not also restore what he had got under the contract from the defendant. Though the defendant has been fraudulent, he must not be robbed, nor must the plaintiff be unjustly288 enriched, as he would be if he both got back what he had parted with and kept what he had received in return. The purpose of the relief is not punishment, but compensation. The rule is stated as requiring the restoration of both parties to the status quo ante, but it is generally the defendant who complains that restitution is impossible. The plaintiff who seeks to set aside the contract will generally be reasonable in the standard of restitution which he requires. However, the court can go a long way in ordering restitution if the substantial identity of the subject-matter of the contract remains. Thus, in the Lagunas case, though the mine had been largely worked under the contract, the court held that, at least if the case had been one of fraud, it could have ordered an account of profits or compensation to make good the change in the position. In Adam v Newbigging, where the transaction related to the sale of a share in a partnership, which had become insolvent since the contract, the court ordered the rescission and mutual restitution, though the misrepresentation was not fraudulent, and gave ancillary directions so as to work out the equities. These are merely instances. Certainly in a case of fraud the court will do its best to unravel the complexities of any particular case, which may in some cases involve adjustments on both sides.
   In the vast majority of cases of the transfer of property, it is a purchaser who is seeking to reduce the contract, on the terms, on the one hand, of restoring what he has purchased, and, on the other hand, of being repaid the purchase price with all proper allowances and accounts. The present case is peculiar in that it is a vendor who seeks rescission. Nevertheless, the principles must be the same. The appellant is content to take back 2,925 shares in the company, though the constitution of the company has been changed by a reconstruction and enlargement of the share capital. He is willing to pay back what he received with interest. He is also willing to pay any further compensation which the court thinks is due. So far the position might seem to be clear. The difficulties which have been raised have reference to the collateral terms of the contract. Of these I need only refer to cll 5 and 6. These clauses were primarily due to the fact that completion of the transaction was deferred for the benefit of the respondent for 2 years, but they also involved relieving the appellant of the obligations which he had assumed while a shareholder and director. When he sold all his shares and interest in the company, it was natural that he should be relieved of these liabilities, in particular of his guarantee to the bank, and of the deposit of his shares with the bank. When, however, the status quo ante is restored and he again becomes holder of 2,925 shares, it might seem equitable that he should reassume the liabilities to which he was subject when he made the contract. However, during the years since the sale, during which the respondent has been conducting the affairs of the company on his own responsibility and in his own interest, the financial position of the company has been so changed that it is not clear to me289 that anything further is necessary to restitution than the retransfer of 2,925 shares and repayment of the purchase price with interest. The appellant's claim for intermediate profits or dividends was not originally brought into the action. I cannot see how the fact that for the 2 years between the contract and its completion the respondent relieved, under cl 6, the appellant of his liability can affect the position. If the respondent had been compelled to pay moneys, or was still under the liabilities under which the appellant had been, it would be different. However, the whole financial position of the company changed. It is not suggested that an indemnity for the past liabilities would be of any use. Though there is a further point on which I feel more difficulty, I am not satisfied that the sale which the bank required of the respondent's shares held by it as security would ever have been necessary, even to secure the release of the appellant's shares, except for the manner in which the respondent conducted the affairs of the company, in particular in regard to the understatement of stock and suppression of sales in the balance sheets. However, it is unnecessary to decide finally how these matters should be dealt with, because, as my noble and learned friend Lord Thankerton stated, the parties have agreed upon a form of order which is to be made in the event of this House holding that the contract should be rescinded and that there should be restitution.
   I should, however, refer shortly to Hunt v Silk, which was quoted by Lord Carmont. With all respect, I do not think that that decision affords any assistance here. That was an action at common law for money had and received. The plaintiff had paid £10 under an agreement for a lease of premises which contained certain conditions. The plaintiff entered into possession of the premises, and continued in possession after the conditions had to his knowledge been broken. It was held that he could not claim to rescind and recover the money he had paid, but that his action was in damages. It appears from the judgment of Lawrence J, that he failed because there had been no total failure of consideration, so that the money could not be recovered in that form of action. Nor could he claim to rescind the contract, because he had held possession after he knew of the breach on condition, and had thereby waived any right to rescind. The contract could not be rescinded in toto and the parties replaced in statu quo, because there had been a part execution of the agreement. It is clear that the form of action at law in that case was different from the equitable jurisdiction which the appellant invokes in these proceedings.

Solicitors: Lawrence Jones & Co, agents for Macpherson & Mackay, WS, Edinburgh, and Niven Macniven & Co, Glasgow (for the appellant); Botterell & Roche, agents for Martin Milligan & MacDonald, WS, Edinburgh, and Brownlie Watson & Beckett, Glasgow (for the respondent).