OHANOEEY DIVISION. [VOL. X.

. In re FOREST OF DEAN COAL MINING COMPANY.

CompanyWinding-upPromotion MoneyDirector, Liability of, for alleged MisfeasanceCompanies Act, 1862, s. 165.

Upon the formation of a company promotion money had been improperly paid, of which B. was cognizant though not a party thereto. B. suhse-. quently became a director, but took no steps to recover the money for the company.

The company was now being wound up. On a summons by tho liquidator to make B. liable under the above circumstances:

Held, that B. was not liable for wilful default or for misfoasance under sect. 165 of the Companies Act, 1862.

THE Forest of Dean Coal Mining Company was formed in 1873 for the purchase of certain collieries of which J. F. Corbett was the owner.

In the negotiations for the purchase, in 1872, it was agreed that the purchase-money for the collieries should be 35,000, to be paid by the company partly' in money and partly in shares; and it was agreed between Corbett and J. F. Johnson, the promoter of the company, that Johnson and his nominees should receive out of the purchase-money 10,000 for its promotion, which sum was subsequently paid to them. At that time Osman Barrett had a mortgage on the collieries for 7000, and it was agreed that he should join in the conveyance, and take a fresh mortgage for the same amount. The property was accordingly conveyed to the trustees of the company, and a fresh mortgage executed.

Barrett was informed by Corbett at the time of these transac-tions of the payment of the said sum of 10,000, but he was not then a shareholder in the company nor one of the proposed directors. He afterwards qualified, and, in December, 1875, he became a director, but he did not take any steps towards recover-ing for the company the said sum of 10,000.

In 1877 an order was made for winding up the company, and the liquidator now applied, by way of adjourned summons, to make Johnson and his nominees liable to repay to the company the said sum, and also to make Barrett liable for his alleged mis-feasance in not taking steps to recover the money of the payment of which he was cognizant.

VOL. X.] CHANCERY DIVISION. 451

The main question was whether, under the above circumstances, Barrett was to be made liable.

M . E .

1878

In re Chitty, Q.C., and Whitehome, for the liquidator, in support of the FOBEST OP

DEJAN COAL s u m m o n s : MINING

COMPANY. There is no question as to the liability of Johnson and his nominees to refund the sum of 10,000, which was improperly-paid to them out of the purchase-money of the collieries, but we contend that Barrett is also liable. ' He was at the time of the purchase mortgagee of the collieries, and it will not be disputed that he was cognizant of the transaction. He subsequently be-came a director, and then it was his duty to communicate to the shareholders the misappropriation of the company's property and to move his co-directors to take steps to recover the money. He is in the position of a trustee who has been guilty of wilful default. At any rate, he is within the terms of sect. 165 of the Companies Act, 1862, inasmuch as he is a past director who " has been guilty of a misfeasance or breach of trust in relation to the company."

Baveij, Q.O., and Bush, for Mr. Barrett, were not called on.

Argument.

JESSEL, M.E.: I am quite clear about this case. One must be very careful in

administering the law of joint stock companies not to press so hardly on honest directors as to make them liable for these con-structive defaults, the only effect of which would be to deter all men of any property, and.perhaps all men who have any character to lose, from becoming directors of companies at all. On the one hand, I think the Court should do its utmost to bring fraudulent directors to account, and, on the other hand, should also do its best to allow honest men to act reasonably as directors.

Wilful default no doubt includes the case of a trustee neglect-ing to sue, though he might by suing earlier have recovered a trust fund,in that case he is made liable for want of due dili^ -gence in his trust. But I think directors are not liable on the same principle. Directors have sometimes been called trustees, or commercial trustees, and sometimes they have been called

2 1 2 1

Judgment.

452 CHANCERY DIVISION. [VOL. X.

Judgment.

M. R. managing partners, it does not much matter what you call them 1878 so long as you understand what their true position is, which is j n re that they are really commercial men managing a trading con-

DBANSCOAL c e r n ^or t n e k e n e n ^ of themselves and of all the other shareholders MINING in it. They are bound, no doubt, to use reasonable diligence

COMPANY. . . having regard to their position, though probably an ordinary director, who only attends at the board occasionally, cannot be expected to devote as much ,time and attention to the business as the sole managing partner of an ordinary partnership, but they are bound to use fair and reasonable diligence in the management of their company's affairs, and to act honestly.

But where without fraud and without dishonesty they have omitted to get in a debt due to the company by not suing within time, or because the man was solvent at one moment and became insolvent at another, I am of opinion that it by no means follows as a matter of course, as it might in the case of ordinary trustees of trust funds or of a trust debt, that they are to be made liable. Traders have a discretion as to whether they shall sue their customers, a discretion which is not vested in the trustees of a debt under a settlement. In fact the customers of a trading part-nership are very often allowed time, because the partners may think that, if they do not allow them time, they will drive the customers into bankruptcy and so suffer a greater loss than by giving them time; indeed they not only very often give them time, but they lend them money or sell them goods in the hope that better times may come and enable them to pay their debts.

Again, it may very often be most injurious to the trading concern to sue some of their debtors after the first few losses, because driving some of their debtors into bankruptcy might be very injurious to the trade, more so, in fact, than the chance of suffering a loss by letting them go on without taking action against them. Such a case as this has, in my opinion, no direct relation to the rule which makes it incumbent on a trustee to sue a debtor at once under pain of having the liability for the debt afterwards thrown upon him, on the ground that if he had sued he could have got the money. On the other hand, as we know, a debtor must be presumed to be solvent unless the trustee can show he was insolvent. .

VOL. X.] CHANCEEY DIVISION. 453

But in my opinion no such liability attaches to directors of joint stock companies. They must, as ordinary managing partners of a trading concern, be allowed a discretion, and not be too much interfered with by the Court, or have inquiries made by the Court as to whether the debtor could have paid at a particular moment a larger or a smaller amount if he had been sued. So much with regard to ordinary debts.

Again, directors are called trustees. They are no doubt trustees of assets which have come into their hands, or which are under their control, but they are not trustees of a debt due to the company. The company is the creditor, and, as I said before, they are only the managing partners. In my opinion it is extra-vagant to call them trustees of a debt- when it has not been received. You may of course have an actual trust of a debt, as in the case I put before, where trustees have assigned to them a debt to get in, but that is not the case with directors of a company. A director is the managing partner of the concern, and although a debt is due to the concern I do not think it is right to call him a trustee of that debt which remains unpaid, though his liability in respect of it may in certain cases and in some respects be analogous to the liability of a trustee. So much for the question of unpaid debts.

The next point is this: does that reasoning which applies to a debt apply to a demand of this kind, which is a liability, though not strictly a debt ? I do not think it does. There are totally different considerations applicable to this kind of demand or lia-bility from those applicable to an uncontested debt.

Analogy or illustration is sometimes useful. In the case of trustees newly appointed, their liability extends to seeing that they get the trust funds into their hands; but did anybody ever imagine that their liability extended beyond that, or that they are bound to inquire into all the dealings with the trust fund from the origin of the trust, and to pursue every past trustee who might by any means whatever have become liable to pay more than the actual trust funds ? The case I would put in illustration is this : suppose a trust of 10,000 consols, and one of the trustees with the connivance of the other sells out the stock and engages with it in trade; ten years afterwards he replaces i t ; five years after

M. E. 1878

In re FOREST OP DEAN COAL

MINING COMPANY.

Judgment.

454 CHANCEET DIVISION. [VOL. X.

M. R.

1878

In re FOREST OP DEAN COAL

MINING COMPANY.

Judgment.

that the trustees retire, and new trustees are appointed in their place, who find the fund intact. One of the trustees is then told, " I t is all right now, but the money has only been paid in live years before," and is told that one of the former trustees had used it in his trade. It is intolerable to suppose that the new trustee should be made liable for not filing a bill, as it was formerly under the old procedure, or bringing an action, as it is now, against the former trustee, or his representative supposing he is dead, with the view of getting from him either the extra interest over and above the interest of the consols, or the profits he might have made from the use of the money in his business. Is that sort of liability on the part of a former trustee one which the new trustee is bound to enforce, though no doubt it would be one which the cestui que trust has power to enforce ? In my opinion it would be extending the liability of trustees, which in my judgment is quite heavy enough as the law stands, to a point to which, it has never been stretched before; and, as I have said before, I think if there has been any error at all in the course taken by the Courts of Equity against trustees it has been in pressing honest trustees too far, one result of which has been that it is now very difficult to get people to accept offices of trust for which they receive no remune-ration, and in respect of which they may be placed under great liabilities. I am always ready to make, and have always been desirous of making, a dishonest man liable for every farthing of which, he has defrauded a trust, and of making him liable also to pay exemplary damages or interest in every case in which the law will allow it; but at the same time I have always thought it would have been much more wise in Courts of Equity had they been less strict as regards mere omissions, or even what they have chosen to call neglect, on the part of persons who endeavour honestly and faithfully to perform their trust, but who notwithstanding, either from some mere mistake, or some error in law or of judgment on the part of themselves or their legal advisers, or of some defalcation on the part of their agents, have been made liable sometimes for vast sums of money, although they had taken every possible pains to appoint proper solicitors and counsel^ and to engage proper agents to advise them, and to manage the estates, and to receive the rents and profits of them.

VOL. X.] CHANCERY DIVISION. 455

Therefore, I think it is not the duty of a Judge to strain or stretch the law so as to make it apply to new liabilities, and if such a case as I have mentioned came before me I certainly should not hold the new trustee liable.

Now, to apply these observations to the actual case before me, I must first of all consider what the position of the Eespondent Barrett was here, and I find that he was mortgagee of the vendor, and a mortgagee, as I understand, for some 7000. The vendor had a mine worth, to sell, 25,000. A company was formed to buy the mine, and the promoters of the company induced the vendor to do what was no doubt very wrong, and indeed amounted to a fraud on the company, namely, to add nominally 10,000 to the purchase price, so as to make the actual purchase price to the company 35,000 instead of 25,000, so that the company was to pay to the vendor 35,000 in money and shares, and the directors were to divide the plunder or extra sum between themselves and the promoters. Of course as regards all these promoters, some of whom are not now accessible, there can be no question of their liability for what was no doubt a gross fraud. The vendor got nothing by it except this, that he got 25,000 for his mine, which probably was not very readily saleable at that price, and no doubt, therefore, he had an interest in the matter to that extent. But still we must not forget that the company has affirmed the sale for 25,000, taking away the profits of the directors, and it cannot be possible, therefore, for the liquidator to say now that it was not a good sale to the extent of 25,000.

Now, Mr. Barrett as mortgagee knew of the transaction, and he got paid to some extent, not out of the 10,000, because he got none of that, but out of the 25,000. Therefore he did not receive any part of the plunder, and he is not responsible on that ground any more than you could make the vendor responsible for any part of the 25,000 on the ground that he would not have got as much as 25,000 if he had not assented to it. But the ground on which it is sought to make Mr. Barrett liable is t h i s :

The transaction took place in 1872, and he became a director of the company in December, 1875. In 1877 the company went into liquidation, and it is said that, having knowledge when he was appointed a director, of the company of the facts I have mentioned,

M.E.

1878

In re FOBBST OT DEAN COAL

MINING COMPANY.

Judgment.

456' CHANCERY DIVISION. [VOL. X.

M. R. it was his duty to communicate that knowledge, acquired by him 1878 three years and a quarter before he became a director, to the ^7e shareholders of the company; and that it was also his duty to

FOREST OP institute, or to endeavour to institute, proceedings against the MINING promoters, in order to obtain the return of this 10,000 of which _ ' the company had been defrauded.

gment' And then it is said that, because he did not communicate to the shareholders the knowledge he had acquired previously to be-coming a director, and because he took no steps as a director of the company to institute proceedings against the promoters, he is now to be made liable for this 10,000 under the doctrine of wilful default, which means, I suppose, that he is bound to shew that if proceedings had been instituted soon after December, 1875, when he became a director of the company, those proceedings would not, before the end of 1876, have produced the 10,000. To my mind it is simply unreasonable to suppose it, and it is incredible that that would have been the case.

In the first place, I have never heard that it has been held to be the duty of a director to communicate to his shareholders knowledge acquired by him years before, as to misconduct with reference to the affairs of the company on the part of other persons for which they may be still liable. I know of no reason whatever why he should do so, or of anything which compels a director to disclose to his shareholders his antecedent knowledge even of frauds committed on the company.

I put a case which perhaps may sound ridiculous, but when you have extravagant propositions to deal with, ridiculous illustrations are really not the worst mode of meeting propositions of such a character. Suppose the case of a company dealing with a man for butter, and one of the directors of the company had, three years before he became a director, purchased the butterman's business, and had discovered that that butterman had been in the habit of supplying the company for some years, and had also discovered from the books of his vendor that he had supplied the company with butter at short weight, and had already defrauded the company of 1000he himself, of course, not continuing the systemwould he, under such circumstances, be liable to the com-pany for not disclosing to the shareholders that he had ascertained

VOL. X.] CHANCERY DIVISION. 457

that this retired butterman had in this way defrauded the com-pany of 1000, for which he or his estate might be made liable ? It would be obviously, to my mind, an extravagant proposition that that director could be made liable for not disclosing the knowledge so acquired by him at so long a period before he became a director of the company.

This however has, of course, no relation whatever to cases where the whole matter forms part of one transaction, and where there has been some arrangement, some juggle by which the parties to a fraud might say, " we will not go on the direction of the com-pany until the fraud is completed," because the Courts are quite strong enough to reach cases of that sort when they arise, but this is a case where the man derived no benefit whatever from the frauds of the promoters. It appears to me that I should tnot be expounding or applying the law, but that I should be making new law, if I were to hold directors liable for withholding their knowledge from shareholders under such circumstances.

Then is Mr. Barrett liable in this case for not taking proceed-ings ? I do not think it is very likely that he would have suc-ceeded at the board in persuading his co-directors to take proceedings at all. I do not think the majority of the board would have concurred with him without the sanction of the share-holders j but even supposing he could have got their concur-rence, what would it have amounted to ? It appears to me it would still fall within the range of the observations I have. already made, and that is, that as there was no obligation upon him to tell his brother directors the knowledge he had, so there was no obligation upon him to initiate by resolution or otherwise any attempt to sue the promoters; because it must be remem-bered, as I said before, that it is not an admitted debt; if the transaction had occurred some time before, there would have been probably a protracted and very hostile litigation about it, and it by no means follows that at the end of the litigation any money would have been forthcoming any more than there is now; and any discreet or cautious director might very well have said, " It is not wise to take proceedings in this matter; we shall probably not get anything by it, and if we do, it will do the company a great deal of mischief, and we had far better let bygones be bygones."

M, R.

1878

In re FOREST OP DEAN COAI,

MINING COMPANY.

Judgment.

458 OHANOEEY DIVISION. [VOL. X.

M. E.

1878

In re FOBEST OF DEAN COAL

MINING COMPANY.

Judgment.

I do not think it is for this Court to say that a man is to be made liable simply because he does not choose to sue, or does not take steps to sue under such circumstances.

That being so, I think he is not under any legal liability at all ; but even if he were, he could not be considered liable for the whole 10,000; he could only be held liable for what was lost by his not suing. And supposing the company had brought an action in the beginning of 1876, who can tell that the action would have been ended in 1877, when the company went into liquidation ? I am satisfied that they would have litigated it to the utmost, and the company would have got into liquidation long before the end of the litigation ; so that, even from that point of view, I am not at all satisfied that there was anything really lost by their not suing, and therefore the notion that this gentleman is to be made liable on that ground is entirely unreasonable.

Then the next question is, whether the 165th section of the Act applies to such a case as this ? That section provides that " where in the course of the winding-up of any company under tin's Act it appears that any past or present director, manager, official or other liquidator, or any officer of such company, has misapplied or retained in his own hands, or become liable or accountable for any moneys of the company, or been guilty of any misfeasance or breach of trust in relation to the company," he may be made liable. Now Mr. Barrett is not liable under the first part of the section at all. It was not money in his hands ; he is not liable for money of the company, because the money had gone long ago, and, therefore,-if he is liable at all, it is for misfeasance or breach of trust in relation to the company, and misfeasance or breach of trust means here either non-communication of his knowledge to the shareholders or not endeavouring to institute proceedings. Then the section provides that " the Court may on the applica-tion of any liquidator, or of any creditor or contributory of the company, notwithstanding that the offence is one for which the offender is criminally responsible, examine into the conduct of such director, manager, or other officer, and compel him to pay any money so misapplied or retained, or for which he has become liable or accountable, together with interest after such rate as the Court thinks just, or to contribute such sums of money to the

VOL.X.] CHAJSTCEEY DIVISION. 459

assets of the company by way of compensation in respect of such misapplication, retainer, misfeasance, or breach of trust, as the Court thinks just."

Of course, if I had arrived at the opinion that the man was liable as for a breach of trust, I have jurisdiction under that clause to make him pay, but it must be a liability for breach of trust or under the word " misfeasance." But I should be very sorry to hold that under those words I have a summary jurisdiction to inquire whether a man had or had not properly exercised his discretion as a director as to suing or not suing a debtor to the company, even where the debt was not disputed, and a fortiori where it is a demand of this kind. I do not think the section, when it talks of " mis-feasance or breach of trust in relation to a company," could have been meant to apply to such a case as I have now before me, or that it was intended to enable the Court to say on a summons of this description that it should, after examining into the conduct of an officer of the company, come to the conclusion that there must be negligence on the part of a director in such a case, and that it therefore invests the Court, under those words " misfeasance or breach of trust," with a power to make him pay money to the assets of the company in respect of such a demand.

I do not think myself that the section applies to anythiug but what I may call fairly plain and ordinary cases of misconduct, and when I use the word " ordinary " I mean ordinary as regards these companies, for many of them are certainly quite extraordinary as regards other transactions, or that it was intended to go beyond

what was the settled law on the subject before the statute was passed, so as to make that a case of misfeasance or breach of trust which would not have rendered a man liable as a trustee before the passing of the Act.

The summons as against Barrett will be dismissed with costs.

M. E. 1878,

In re FOBEST OF DEAN COAL

MINING COMPANY.

Judgment.

Solicitors : Wilhins, Blyih, & Fanshawe ; Torr & Co., agents for Borlase & Yearsley, Mitcheldean.