[HOUSE OF LORDS.]

Company - Stoppage - Action to rescind Contract on the Ground of Fraud - Commencement of Winding-up - Companies Act, 1862, ss. 18, 38, 84, 130.

Since 1873 A. had appeared on the register of a joint stock banking company as the holder of £6000 of stock. On the 2nd of October, 1878, the bank stopped payment. On the 5th of October the directors issued circulars summoning an extraordinary general meeting to pass a resolution to wind up the company. On the 18th of October a report made by independent investigators was sent to all the shareholders, which shewed that the insolvency of the company was of such an overwhelming character that large calls would have to be made to meet its liabilities. On the 21st of October A. raised an action for reduction of his contract to take stock, on the ground that he was induced to purchase by the fraudulent misrepresentation of the directors. The summons in this action was served on the company on the same day. On the 22nd of October an extraordinary resolution to wind up the company voluntarily was passed. A. was put on the list of contributories. In a petition by A. for rectification of the register and list of contributories based on the action of the 21st of October:-

Held, affirming the decision of the Court below, that the rights of innocent third parties had intervened; and that A.'s action for reduction of his contract was too late to exempt him from liability.

APPEAL from an interlocutor of the Court of Session, refusing to remove the name of the Appellant, Mr. Hugh Tennent, from the list of contributories and from the register of the City of Glasgow Bank. The bank was established in 1839.

The original capital was £750,000, divided into shares of £10 each. In November, 1857, the bank temporarily stopped payment for a short period. In 1858 the shares were converted into stock; and in 1873 additional capital was created, making the total capital of the bank £100,000. By the articles of co-partnership the shareholders' liability was unlimited, and the directors had power to purchase the shares of the bank (clause 32), and no one not a director was entitled to examine the books of the company

(clause 44). In 1862 the bank was registered under the Companies Act of that year.

Since 1873 the Appellant's name has appeared on the register of shareholders as the holder of £6000 of stock. He acquired this stock at three different times, namely, in December, 1872, from a Mr. Thomas Matthew, £2500 of stock at the price of 207 per cent.; in July, from a Mr. Dugald Bell, another £2500 of stock at 212 per cent.; and on the 21st of August he took directly from the bank £1000 of new stock, which was then created, at £200 per cent. For this stock Mr. Tennent was registered the owner, and stock certificates certifying this had been done were sent to him by the bank. The two transfers were executed by Matthew and Bell"in trust;" and it was alleged they held the stock as trustees for the bank.

Previous to October, 1878, the Appellant took no steps to relieve himself of these three contracts.

On the 2nd of October, 1878, the bank suspended payment, and its stoppage on account of its insolvency was notorious throughout the United Kingdom.

On the 5th of October the directors, by means of circulars and advertisements, gave notice of an extraordinary general meeting to be held on the 22nd of October with a view to wind up the bank.

On the 18th of October a report on the state of the bank's affairs, which had been obtained from independent investigators, was sent to all the shareholders, and was published in the newspapers on the 19th of October. This report disclosed, what the directors had known before, that the bank as a corporation was irretrievably insolvent, and could only pay its debts by making large calls.

On the 21st of October the Appellant raised in the Court of Session an action against the City of Glasgow Bank, and also against Matthew and Bell, concluding for reduction of the transfers, entries in the bank books and stock certificates in his favour as holder of the above stock on the ground of fraud. He reserved right of action for the price paid for the stock. The summons in this action was served on the bank on the same day, the 21st of October, which was one day before the passing of the resolution to wind up voluntarily.

On the 22nd of October an extraordinary resolution was passed

to wind up the bank voluntarily; and liquidators were appointed. Subsequently a list of contributories was made up, in which the Appellant's name was placed. On the 27th of November the voluntary liquidation was placed under the supervision of the Court in terms of the Companies Acts, 1862 and 1867.

On the 8th of December the Appellant raised a supplementary action of declarator, and damages against the liquidators and the bank for, inter alia, removal of his name from the lists.

The liquidators having refused to remove the Appellant's name from the list of contributories, he, on the 13th of December, presented a petition to the Court of Session for rectification of the bank register, the removal of his name from the list; and to stay proceedings for enforcement of calls.

In the action for reduction and in the petition the Appellant substantially averred that he was induced to become a partner of the bank and to purchase all the three parcels of stock by the false and fraudulent representations, and the fraudulent concealment made by the City of Glasgow Bank. That at and prior to the time of the respective dates of the transfers and purchases, the bank was in a state of absolute and hopeless insolvency, the debts of the company enormously exceeding its assets; but the bank regularly issued reports or balance-sheets falsely stating that it was in a condition of great prosperity, and fraudulently concealed its true condition from the Appellant. That the shares transferred by James Matthew and Dugald Bell, though nominally held by them, truly belonged to the bank itself; and it was for the bank that they held them in trust and transferred them to the Appellant. Also that it was the practice of the directors, for the purpose of concealing the fact that the bank was a large holder of its own stock to take transfers for behoof of the bank in favour of Matthewand Bell, and that these transfers were expressed to be taken "in trust," but the trust for the bank was not disclosed on the face of the transfers, or of the stock ledger. The Appellant further alleged that he had no means of discovering the fraud practised on him by the bank until its stoppage.

The liquidators contended that, whatever might have been the Appellant's rights had he taken steps to avoid his contract while the City of Glasgow Bank was a going concern, he could not be

allowed to do so when he took no steps to avoid the contract till after the known irretrievable insolvency of the bank; the rights of innocent third parties had intervened; and restitution in integrumwas no longer possible.

On the 22nd of January, 1879, the First Division of the Court of Session, refusing the prayer of the petition, held that the action raised on the 21st of October came too late after the bank had stopped payment and had declared its insolvency (1).

On appeal,

April 4. Mr. Southgate, Q.C., Mr. Macnaghten, and Mr. Whiteway,for the Appellant, contended that there was no question as to the facts, and it was not disputed that the Appellant was induced to purchase the shares by fraud, the only question to decide was simply the time when the action could be successfully brought for rescission of the contract. They maintained that a person induced by the fraud of a company to become a member of that company was entitled to be relieved from the contract of membership, although the company might be in liquidation, provided he had rescinded the contract, and rescinded his shares, on discovering the fraud, and had actually commenced legal proceedings to enforce the rescission of the contract before the commencement of the winding-up. And here the Appellant at the earliest moment after the discovery of the fraud practised on him, took action to rescind the contract, and this he did before the commencement of the winding-up, which commenced at the date of the resolution. From the passing of the resolution only the right of creditors accrued as against equally innocent shareholders.

[They relied on In re Reese River Company, Smith's Case (2); they also commented on Oakes v. Turquand (3); In re Smith Knight, & Co., Weston's Case (4); opinion of Lord Justice Brettin Stone v. City and County Bank (5); Webb v. Whiffin(6); Henderson v. Lacon (7); Henderson v. Royal British Bank(8),

(1) Scot. Law Rep. vol. xvi. p. 238; Court Sess. Cas. 4th Series, vol. vi. p. 554.

(2) Law Rep. 4 H. L. 64; Law Rep. 2 Ch. 604.

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

(4) Law Rep. 4 Ch. 20.

(5) 3 C. P. D. 282, p. 309.

(6) Law Rep. 5 H. L. 711, at p. 734.

(7) Law Rep. 5 Eq. 249.

(8) 7 E. & B. 356, at p. 364; 26 L. J. (Q.B.) 112.

which did not apply here; In re Whitehouse & Co. (1); Addie v. Western Bank of Scotland (2): Re Cleveland Iron Company, Ex parte Stevenson (3); Companies Act, 1862, ss. 18, 38, 129, 130, 131.]

Mr. E. E Kay, Q.C., Mr. Benjamin, Q.C., Mr. Davey, Q.C., and Kinnear, for the Respondents, contended that it was undoubtedly the law in England and Scotland that a contract induced by fraud was not void but voidable, and the rights which exist in favour of the defrauded party to avoid the contract might be defeated by (1.) his own delay in exercising the right; (2.) the intervention of the rights of innocent third parties, as here; and (3.) such a change of circumstances as render it impossible to restore matters to their former position: see Clarke v. Dickson (4); Oakes v. Turquand (5); Reese River Company v. Smith(6). Oakes v. Turquand did not lay down the rule that the winding-up order, or the presentation of a petition to wind up, was the punctum temporis at which the rights of creditors intervene; on the contrary, in that case Henderson v. Royal British Bank (7) was expressly adopted, in which Lord Campbell said it would be monstrous if a person became a partner, and having so remained until the stoppage could afterwards repudiate liability; he also said that the rights of creditors became inchoate when the bank stopped payment; and that was the opinion of all the conferring Judges of the Common Law Courts. It could not be denied that at least on the 6th of October it was in the power of any creditor to file a petition for judicial winding-up, and prevent that which was now attempted. The circular convening the meeting was an acknowledgment in the words of the 79th section of the Companies Act, 1862, that the company was unable to pay its debts. The creditors had not lost their rights because they held their hand on the assurance of the directors.

[They cited also Kent v. Freehold Land and Brickmaking Company (8); Allin's Case(9).]

(1) 9 Ch. D. 595, 599.

(2) Law Rep. 1 H. L., Sc. 145.

(3) 16 W. R. 95.

(4) E. B. & E. 148.

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

(6) Law Rep. 4 H. L. 64.

(7) 7 E. & B. 356; 26 L. J. (Q.B.) 113.

(8) Law Rep. 3 Ch. 493.

(9) Law Rep. 16 Eq. 449, at pp. 454, 455.

Mr. Southgate, Q.C., in reply.

May 20. EARL CAIRNS, L.C.:-

My Lords, the facts of this case lie in a very narrow compass.

The Appellant is the holder of £6000 stock in the bank; £5000 of this stock he bought in the years 1872 and 1873 from trustees who held it for the bank, and £1000 was allotted to him by the bank in 1873. After the bank stopped payment, as your Lordships have heard in the other cases, the directors employed accountants to make a report on the affairs of the bank. This report was made on the 18th of October, 1878, and was on that evening sent by post to the shareholders. The Appellant received his copy of the report on the 19th of October, and thereupon he discovered, as he alleges, that he had been induced to take the stock in the bank by fraudulent misrepresentations of the directors. The 20th of October was a Sunday, and on the 21st of October he commenced an action in the Court of Session for reduction of his contract as a shareholder with the bank. The resolutions to wind up the company voluntarily were passed on the following day, the 22nd of October; and on the 13th of December, the name of the Appellant having been put by the liquidators on the list of contributories, he presented a petition to have his name removed, which petition was refused, and hence the present appeal.

My Lords, I ought to assume, and will assume for the present purpose, that whatever difficulties arising from lapse of time and other circumstances might, as between the Appellant and the bank, lie in the way of his succeeding in the action of reduction he has instituted, he would have been entitled, had the bank been a going concern, to have succeeded in the action. The question is, can he succeed in rescinding his contract after the bank has stopped payment?

The Lord President (1) states that the law upon this subject is contained in three propositions. In the first place, a contract induced by fraud is not void, but only voidable at the option of the party defrauded; secondly, this does not mean that the contract is void till ratified, but it means that the contract is valid till rescinded; and thirdly, the option to void the contract is barred

(1) Scotch Law Rep. vol. xvi. p. 241; Court Sess. Cas. 4th Series, vol. vi. p. 558.

where innocent third parties have, in reliance on the fraudulent contract, acquired rights which would be defeated by its rescission.

Upon the two first of these propositions there cannot, I should think, be any dispute, and none was raised in the argument at your Lordships' bar. Nor was there any dispute as to the principle of the third proposition. The only question was to its precise wording, and the extent and mode of its application.

The case of Oakes v. Turquand (1) in this House has established that it is too late, after winding-up has commenced, to rescind a contract for shares on the ground of fraud. This, no doubt, is on the grounds stated by the Lord President, that innocent third parties have acquired rights which would be defeated by the rescission. The case of Oakes v. Turquand, however, while it decided negatively that a contract could not be rescinded on the ground of fraud after a winding-up had commenced, did not decide affirmatively the converse proposition, that up to the time of the commencement of a winding-up a contract to take shares could be rescinded upon the ground of fraud. Whether it can or not be so rescinded up to that time must, I think, depend upon the particular circumstances of the case.

In an ordinary partnership, not formed on the joint stock principle, it is impossible, as a general rule, for a partner at any time to retire from or repudiate the partnership without satisfying, or remaining bound to satisfy, the liabilities of the partnership. He may have been induced by his copartners by fraud to enter into the partnership, and that may be a ground for relief against them, but it is no ground for getting rid of a liability to creditors. This is the case whether the partnership is a going concern, or whether it has stopped payment or become insolvent. In the case of a joint stock company, however, the shares are in their nature and creation transferable, and transferable without the consent of creditors, and a shareholder, so long as the company is a going concern, can, by transferring his shares, get rid of his liability to creditors, either immediately or after a certain interval. The assumption is that, while the company is a going concern, no creditor has any specific right to retain the individual liability of any particular shareholder.

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

It is on the same or on a similar principle that, so long as the company is a going concern, a shareholder who has been induced to take up shares by the fraud of the company has a right to throw back his shares upon the company without reference to any claims of creditors. He would have a right to transfer his shares without reference to creditors. The company, as a going concern, is assumed to be solvent, and able to meet its engagements, and to have a surplus, and the company being solvent, its duty to pay the repudiating shareholder what is due to him, and to take the shares off his hands, is an affair of the company and not of its creditors.

But if the company has become insolvent, and has stopped payment, then, even irrespective of winding-up, a wholly different state of things appears to me to arise. The assumption of new liabilities under such circumstances is an affair not of the company but of its creditors. The repudiation of shares which, while the company was solvent, would not or need not have inflicted any injury upon creditors must now of necessity inflict a serious injury on creditors. I should, therefore, be disposed in any case to hesitate before admitting that, after a company has become insolvent and stopped payment, whether a winding-up has commenced or not, a rescission of a contract to take shares could be permitted as against creditors.

But in the case before your Lordships the facts are extremely peculiar, and I do not think that your Lordships, in affirming the judgment of the Court of Session, will find it necessary to lay down any general rule extending beyond the particular facts of the present case. The bank stopped payment on the 2nd of October and never resumed business, its stoppage being caused by its insolvency. It is admitted that the directors knew at the time of the stoppage that the insolvency of the bank was irretrievable. On the 5th of October the directors convened an extraordinary general meeting of the shareholders by advertisement for the 22nd, for the purpose of considering, and, if thought fit, passing extraordinary resolutions under the Companies Act for the purpose of winding up the bank voluntarily by reason of its insolvency. These were steps taken by the directors of the bank as the agents and representatives of the shareholders, and there was imposed upon the shareholders whatever responsibility may fairly be inferred from the steps so taken. Now at this time, and for several days after,

indeed until the 21st of October, the Appellant was to all intents and purposes a shareholder in the bank, not having taken any steps to disaffirm his contract, and the directors during this time were and were acting as his agents.

I have already had occasion to point out to your Lordships in other cases what appeared to me to be the necessary consequence of the steps which the directors thus took. The bank having stopped payment, and its insolvency being well known, it was scarcely within the bounds of possibility that, if nothing had been done by the directors, the creditors, or some one creditor, should not, within a few days after the 2nd of October, have presented a petition for the winding-up of the bank, and with the presentation of such a petition the winding-up of the bank would have commenced, and the repudiation of any share would, according to the case of Oakes v. Turquand (1), have become impossible. It was the action of the directors, taken in the interest of the shareholders, including the Appellant, and taken under the authority of the 46th article of the deed of the company, which, by holding out to the body of creditors the prospect of a voluntary winding-up, stayed the hands of the creditors from proceeding to a compulsory winding-up, and in my opinion it became impossible, after the advertisement of the 5th of October, for the body of shareholders in the company, whose agents the directors were, to make any alteration in their status, whether by a transfer or by a repudiation of shares, which would affect the rights of creditors in the company.

This consideration alone seems to me to be sufficient to dispose of the present appeal, and I have to move your Lordships that the appeal be dismissed with costs.

LORD HATHERLEY, LORD SELBORNE, and LORD GORDON, concurred.

Agent for Appellant: J. McDiarmid.

Agents for Respondents: Martin & Leslie.

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