COURT OF APPEAL
1904 Feb. 5, 6, 10
[1903 B. 2364.]
 1 Ch. 374
Stirling, and Cozens-Hardy L.JJ.
Warrington, K.C., and Whinney – for the company
P. O. Lawrence, K.C., and Gatey – for the plaintiff.
COMPANY LAW: Company – Alteration of Regulations – Life Assurance Company – Mutual Assurance – Policy-holder participating in Profits – Power of Company to alter Rights of Policy-holder – Companies Act, 1862 (25 & 26 Vict. c. 89), ss. 50, 209 – Companies (Memorandum of Association) Act, 1890 (53 & 54 Vict. c. 62), s. 1.
INSURANCE AND REINSURANCE: Mutual assurance – policy holder participating in profits – power of company to alter rights of policy holder – relevant considerations
The deed of settlement of a life insurance company formed in 1854 provided that the profits should be divided in manner to be directed by a by-law or by-laws made as therein stated, and that any provision of the deed and every by-law might be altered by a by-law or by-laws.
The company had a department called the “Mutual Life Assurance Department,” and a by-law made in 1854 provided that the profits of that department, ascertained at a valuation made triennially, should, after deduction of expenses, be divided among the policy-holders in that department.
In 1862 the company was registered with unlimited liability under s. 209 of the Companies Act, 1862.
In 1886 the plaintiff applied for a policy on his own life in the Mutual Department. He made his application in reliance on the statements contained in a printed prospectus issued and circulated by the company. This document stated (inter alia) that the entire profits in the Mutual Department, after deducting the expenses, “are divided among the policy-holders without any deduction for a reserve fund.” A policy for 400l. was issued by the company to the plaintiff, by which the company covenanted to pay 400l. on his death, “and all such other sums (if any) as the company by their directors may have ordered to be added to such amount by way of bonus or otherwise according to their practice for the time being.” The policy was made subject to conditions indorsed on it, and in those conditions there was a reference to the deed of settlement and the by-laws, and also to “the documents addressed to or deposited with the company in relation to the within assurance.”
In 1903 it was proposed, under s. 1 of the Companies (Memorandum of Association) Act, 1890, to register the company with limited liability, and to substitute a memorandum of association and articles of association for the deed of settlement. The proposed articles provided that 5 per cent. of the profits of the Mutual Department should be carried to the credit of a reserve fund until that fund should amount to 37,500l.:-
Held, that the company must be taken to have contracted with the plaintiff that the whole of the profits of the Mutual Department should be divided among the policy-holders in that department, and that the company could not, either under the by-laws or under s. 50 of the Companies Act, 1862, by an alteration of their regulations affect the right so given to the plaintiff.
Decision of Kekewich J. affirmed.
A company cannot by altering its articles justify a breach of contract.
Allen v. Gold Reefs of West Africa,  1 Ch. 656, distinguished.
Punt v. Symons & Co.,  2 Ch. 506, not followed.
APPEAL by the defendant company against a judgment of Kekewich J., which declared that the company ought to continue to distribute the entire profits arising from the mutual and participating branch of its business (after payment of the proportion of the rateable expenses and of the interest at the rate of 7 per cent. per annum hitherto paid to its members) among the holders of participating policies.
The company was formed, under a deed of settlement dated July 15, 1854, for the purpose of carrying on the business of life and fire insurance. Clause 9 of the deed provided that “the profits of the company shall be ascertained and divided in manner to be directed by a by-law or by-laws.” Clause 24 provided that “it shall be lawful for an extraordinary general meeting [of the shareholders] to make by-laws for the government of the company, but such by-laws shall not be valid until confirmed by a subsequent extraordinary general meeting.” By clause 56, “Any provisions of these presents and any by-law of the company may be altered, repealed, or suspended by a by-law or by-laws but not otherwise.” At an extraordinary general meeting on December 6, 1854, by-laws were made among which were the following:
“(2.) That in the beginning of January and July in each year a calculation shall be made of interest upon the amount paid up in respect of each share in the company at the rate of 7 per cent. per annum up to the next preceding December 31 and June 30 respectively, and such interest shall at some time in the months of January and July, to be fixed by the directors for that purpose, be payable to the holders of the shares out of the profits of the company only at the company’s chief offices for the time being, but every shareholder shall be entitled to receive interest only from the time of the actual payment of the amount so paid up, notwithstanding the payment by any shareholder of interest for the time any call was in arrears.
(3.) That in the month of January in the year 1858 and in every subsequent third year a general valuation and calculation shall be made of the whole assets and liabilities of the company, and, after carrying forward such portions (if any) of the expenses of establishing the company as the directors shall consider equitable, the net profits of the company’s business shall be ascertained by the actuary under the direction of the board of directors.
(4.) That in the month of January in the respective years last aforesaid a calculation shall be made by the actuary of the profits that have arisen in the departments of business in which the assured are to be entitled to participate in profits, and in such calculation a fair proportion of the interest hereinbefore directed to be paid and of the other expenses of the company shall be charged upon such last-mentioned departments, and the profits so ascertained to have arisen from the said last-mentioned departments of business shall be set apart and divided amongst the policy-holders in such departments by the actuary under the superintendence of the directors, and the remainder of the profits of the company shall be divided amongst the shareholders according to the amount of shares held by each, and be paid to them along with the next half-yearly dividend.”
By by-laws made in 1893, a quinquennial ascertainment of profits and a like quinquennial division of profits between policy-holders were substituted for the triennial ascertainment and division of profits prescribed by the by-laws of 1854.
The company had a department called the “Mutual Life Assurance Department.” The holders of policies issued in this department were entitled to participate in the profits of that department as provided by the above by-law 4. The premiums payable in respect of policies issued in that department were stated in a table called Table A. They were higher than the premiums in respect of non-participating policies.
The company issued and circulated from time to time a printed prospectus, which contained (inter alia) the following statements:-
“Mutual Life Insurance Department.
In ordinary mutual societies the public sustain the following disadvantages, which are here avoided:
(1.) Each assurer in such societies is personally liable for the entire engagements of the society;
(2.) the policy-holder in such societies loses a large portion of his profits to form a reserve fund, which is in fact so much property taken from his family and put into the pockets of foreign parties;
(3.) the frequent alterations of the constitution of such societies involve considerable risk to the policy-holders.
In the British Equitable Assurance Company these defects are avoided.
(1.) Complete security is given to every policy-holder absolutely without responsibility;
(2.) the current expenses of working the company are assessed rateably on the premiums received in the Mutual Life Assurance Department and the general premiums, and the entire profits made by the company in the Mutual Department, after deducting the expenses, are divided among the policy-holders without any deduction for a reserve fund.
The policy-holders are thus placed in as good a position the moment they enter the company as if they had been ten years in most other societies. The profits are divided every three years.”
Table A was also printed in the prospectus. At the head of the table were the words, “Annual premiums to assure a sum of money at death with profits in addition,” and at the foot were the words, “The entire profits divided triennially.”
In 1862 the company was registered under the provisions of s. 209 of the Companies Act, 1862, with unlimited liability.
In January, 1886, the plaintiff, having seen a copy of the company’s prospectus in the terms above stated, and relying on the statements therein contained, signed a proposal addressed to the company for an insurance upon his own life in the sum of 400l. in the Mutual Department. The proposal was made on a printed form, which contained various questions to be answered by the proposer. One of the questions was this: “Are any profits which may be declared to be appropriated by way of addition to the policy, or reduction from the future premiums, or making the policy payable during lifetime?” The plaintiff answered this question, “By way of addition.”
On the back of the form of proposal were printed the above-quoted statements in the prospectus and also Table A.
The company accepted the plaintiff’s proposal, and on January 30, 1886, they granted a policy for 400l. on his own life, by which they covenanted with him that they would after the expiration of one month, after satisfactory proof of the death of the assured, pay to his executors or administrators the full sum of 400l., “and all such other sums (if any) as the company by their directors may have ordered to be added to such amount by way of bonus or otherwise according to their practice for the time being; provided always that this policy is made subject to the conditions and regulations hereon indorsed.”
Among the indorsed conditions were the following:-
“(4.) In case any fraudulent or untrue statement is contained in any of the documents addressed to or deposited with the company in relation to the within assurance …. then this policy shall be void.
(5.) The corporate funds, property, and assets of the company as within mentioned, after satisfying all prior claims and charges, according to the provisions of the deed of settlement and the by-laws of the company for the time being, shall alone be liable for the payment of the moneys payable under the within policy.”
The plaintiff paid the yearly premiums in respect of the policy as they from time to time became due.
In April and May, 1903, under the provisions of s. 1 of the Companies (Memorandum of Association) Act, 1890, it was proposed to alter the constitution of the company by registering it with limited liability and substituting a memorandum and articles of association for the deed of settlement, and a petition was prepared for the confirmation of the proposed alteration by the Court.
The proposed articles contained (inter alia) the following clauses:-
“(103.) Unless and until otherwise determined by the company in general meeting, there shall, on every valuation of the assets and liabilities of the life assurance branch of the company’s business” (this valuation was by clause 101 to be made every fifth year), “be carried to the credit of a capital call account a sum equal to 5 per cent. of the divisible profits of such life assurance branch until the sums so carried to the credits of such account shall amount to 37,500l., and then shall, on every valuation of the assets and liabilities of the other branches of the company’s business, be carried to the credit of the members’ profits account one-half of the divisible profits of such other branches. Subject as aforesaid and to the provisions of art. 104, and unless and until otherwise determined by the company in general meeting, the divisible profits of the whole of the company’s business shall be carried to the credit of the life assurance branch and to such fund thereof as the directors shall determine.”
“(104.) Unless and until otherwise determined by the company in general meeting, there shall be paid to the members out of the profits of the company a fixed annual dividend of 2s. 6d. per share, and on the valuation in the year 1904 and in every subsequent fifth year there shall be carried to the credit of the members’ profits account a bonus equal to 5 per cent. of the divisible profits of the life assurance branch of the business in the quinquennium ending in such year.”
Doubts having been entertained as to the power of the company to alter in this way the rights of the holders of participating policies, this action was brought by the plaintiff, on behalf of himself and the other holders of participating policies, against the company, for the determination of the question.
Upon the hearing of the action upon motion by the plaintiff for judgment, Kekewich J. made the above-stated declaration.
The company appealed.
Warrington, K.C., and Whinney, for the company:
The question is whether the company has so bound itself by contract with the participating policy-holders that it cannot make the proposed alteration as regards their interest in the profits. The deed of settlement, of which the plaintiff had notice, expressly authorizes the company to alter by a by-law any provision of the deed or any by-law. It is submitted that the prospectus could not bind the company to continue forever the practice mentioned in it, whatever the nature of their business might be. Moreover, by the plaintiff’s policy itself the company only covenanted to pay “such other sums (if any) as the company by their directors may have ordered to be added … according to their practice for the time being.” The plaintiff must establish a contract between the company and himself. The contract between the company and a policy-holder is to be found in the policy and not elsewhere. When a formal document is executed it contains the final contract between the parties. There cannot be a collateral contract with regard to a subject-matter as to which the formal document is not silent; a collateral contract cannot vary the terms of the formal document.
[STIRLING L.J. referred to Erskine v. Adeane. (1)]
In that case the collateral agreement did not refer to anything contained in the lease and did not contradict its terms, and it was proved that the tenant had agreed to take the lease in reliance on the collateral agreement.
In the present case the supposed collateral agreement would vary the express provisions of the policy.
Moreover, a company can only contract under its corporate seal. The company cannot vary the terms of a policy entered into with an individual policy-holder by means of some informal transaction before the policy was executed. If the plaintiff is right the Court must hold the company bound by a representation, not of an existing fact, but of a future intention. Under the circumstances the plaintiff is not entitled to prevent the company from altering its regulations, even though he may be prejudiced by the alteration.
The company was compelled to register, and it was registered under s. 209 of the Companies Act, 1862, and, consequently, under s. 50 of that Act it had power, independently of the power given by clause 56 of the deed, by special resolution to alter the regulations contained in the deed of settlement: Ramsay’s Case. (2) A company cannot deprive itself of this statutory right: Allen v. Gold Reefs of West Africa ; Pepe v. City and Suburban Permanent Building Society. (4)
(1) (1873) L. R. 8 Ch. 756.
(2) (1876) 3 Ch. D. 388.
(3)  1 Ch. 656.
(4)  2 Ch. 311.
It is true that in those cases the question arose as between the company and a shareholder, but the principle has been extended to outsiders: Punt v. Symons & Co. (1) It is essential for the plaintiff, in order to prove that he is entitled to an addition by way of bonus to the amount of his policy, to shew that there was an order of the directors, according to their practice for the time being, that the addition should be made.
P. O. Lawrence, K.C., and Gatey, for the plaintiff:
No doubt the company has power to alter its regulations; but it is submitted that this does not enable it to take away any part of the profits of the mutual branch from the participating policy-holders and give it to the shareholders, or even to use it for the purpose of a reserve fund. Such a fund will never be divided, but will be retained as capital. The company is now proposing to do the very thing which the prospectus pointed out as one of the disadvantages of other mutual societies, and as one which did not exist in the case of the defendant company. It is admitted that the plaintiff applied for his policy on the faith of the statements in the prospectus, and that he applied for a policy under Table A. An application made on the faith of those statements and accepted by the company constituted a contract between the plaintiff and the company, the performance of which he could specifically enforce. The plaintiff might have to wait till the directors declared a bonus, but still the whole of the profits of the mutual branch are appropriated to the policy-holders in that branch. It is only the mode of division which is to be according to the practice in that branch. The company cannot now go back from the bargain which it has made with the plaintiff. The cases cited shew that a company cannot contract not to alter regulations which it has a statutory right to alter. But that does not apply to regulations contained in a deed of settlement.
Warrington, K.C., in reply.
A participating policy-holder in this company is really in the position of a partner in the business carried on by the company: Re English and Irish Church and University Assurance Society (2); and if so, the company may, as his agents, alter the regulations under which that business is being carried on.
(1)  2 Ch. 506.
(2) (1863) 1 H. & M. 85, 104.
P. O. Lawrence, K.C., in reply, on the case cited in reply. It is submitted that there is nothing in the last point.
Kearns v. Leaf (1) shews that to a certain extent a policy-holder can interfere to prevent the insurance company from dealing in a particular way with its assets. But he is nothing more than a contingent creditor, and entitled as such to see that the funds are protected. Here the plaintiff has an express bargain that he shall not be liable for the engagements of the society – that is to say, that he is not to be a partner in the concern: that is clear on the documents.