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L. SMITH L.JJ.
Solicitors for the Appellant: Thorne & Welsford.
Solicitor for the Respondent: W. Brookes Palmer.
Company – Winding-up – Director – Misfeasance – Misapplication of Assets of Company – Presents to Directors – Companies (Winding-up) Act, 1890 (53 & 54 Vict. c. 63), s. 10.
Directors cannot pay themselves for their services, or make presents to themselves out of the company’s assets, unless authorized so to do by the instrument which regulates the company, or by the shareholders at a properly convened meeting.
N., the chairman of a company in which substantially all the shares were held by himself and his family, purchased on behalf of the company the right to a building agreement to be obtained from certain commissioners. The commissioners objected to the company as tenant, and proposed to substitute N., who thereupon sold the benefit of the agreement to the company at an advance of £10,000, of which £7000 was spent upon commissions and otherwise in order to obtain the agreement from the commissioners, and £3000 was applied by N. to his own use. A further sum of £3500 was spent by N. out of the assets of the company upon his private house. These payments were made out of money borrowed by the company for the purpose of its business; they were sanctioned by resolutions of the directors, and were approved of by all the shareholders. The articles contained no power to make presents to directors
Upon a summons taken out by the liquidator in the winding-up of the company against N. under sect. 10 of the Companies (Winding-up) Act,1890:-
that N. was not liable for the £7000, but was liable for the £3000 and the £3500, first, because the shareholders for the time being had no power to authorize the making of presents to directors out of money borrowed by the company; secondly, because if there had been such power it could be exercised only at a general meeting.
THIS was an appeal from a decision of Mr. Justice Vaughan Williams.
The Official Receiver and liquidator took out a summons in the winding-up of the above-named company under sect. 10 of the Companies (Winding-up) Act, 1890, asking for a declaration that George Newman, the chairman of the company, was liable to contribute to the assets of the company (a) the sum of £10,000, alleged to be a profit or commission improperly made or retained by him upon the purchase by the company of a certain building agreement relating to land in the rear of the Albert Hall; (b) the sum of £2500, being the amount of a cheque drawn by the Liberator Permanent Benefit Building Society in favour of the company, and alleged to have been converted by George Newmanto his own use; (c) two sums amounting to £3496 18s. 4d., alleged to have been expended by George Newman out of the assets of the company in improving his private residence, with interest thereon at 5 per cent.
The summons was based upon a report made by the Official Receiver and liquidator under the Act of 1890.
George Newman & Co., Limited, was one of the group of companies formed in connection with the notorious Liberator Permanent Benefit Building Society. The company was formed in January, 1886, under articles of association made between George Newman, a builder, of the one part, a Mr. Bromham of the second part, and the several persons who had executed, or should thereafter execute, the said articles of the third part, and the company was registered under Part VII. of the Companies Act,1862, as an existing company governed by these articles. Why the company was not formed and registered under Part I. of the Companies Act, 1862, did not appear. Seven persons executed the articles as parties of the third part. Four of them were brothers of George Newman; another was a builder named Morgan; and the seventh was a clerk named Shotter. All of them signed in respect of one share each.
The articles, so far as material, were to the following effect:-
Article 3 stated the objects of the company. The first object was declared to be to carry on the business of builder and contractor in all its branches, and also all ancillary businesses. This general description was followed by a long enumeration of other objects in order to enable the company to do anything connected with land and buildings. Amongst the enumerated objects were buying and taking on lease any land or buildings; building operations of every description; lending money with or without security; making arrangements for sharing profits with other persons or companies and financing them; borrowing money; selling, leasing, mortgaging, or otherwise turning to account any property of the company. Article 4 declared the nominal capital to be £50,000, divided into 5000 shares of £10 each. Article 5 provided that George Newman should be entitled to 2500 shares, and each of the parties of the third part to the number opposite his name (i.e., one share each). By article 6 these shares were to be treated as fully paid up in consideration of the transfer to the company of certain assets of George Newman, which consisted of his building property and the goodwill of his business, which the company was to take over with its debts and liabilities. By article 13 the conduct of the company’s business was exclusively vested in the directors. Article 25 authorized members to transfer their shares to children and others. Article 26 gave the directors power to refuse to register certain transfers, but not any made under article 25, or by George Newman. Article 32 provided for the transfer of shares of members who were infants, lunatics, dead, or bankrupt. Articles 51 to 54 related to borrowing, and power was given to the directors to borrow from themselves. Articles 55 to 61 provided for holding general meetings of the shareholders. By article 73 guardians might vote for infant shareholders. By article 80 the number of directors was to be not more than seven, and the first directors were George Newman, William Newman, and H. G. Wright. By article 82 their remuneration was to be determined by the company in general meeting. By article 87 no director was to be disqualified from contracting with the company, nor was any director making any profit out of any contract with the company to be liable to account to the company for such profit by reason only of his office or fiduciary relation. By article 88 the directors might appoint one of their body a managing director, and by article 90 might fix his remuneration by way of salary, commission, or a share of profits. By articles 102 and 103 the management of the business and the control of the company were vested in the directors, and amongst other powers specially enumerated were powers to acquire for the company any property on any terms they thought fit, to pay for any services rendered to the company, to give any officer or other person employed by the company a commission on the profits of any transaction, and to pay commissions and to make allowances to any persons introducing business to the company or otherwise promoting the business thereof. Article 141 was a general indemnity clause in favour of directors and other officers for what they might do on behalf of the company.
It appeared from the evidence before the Court that there never were more than fourteen shareholders in this company – namely, George Newman and five brothers and six sons of his, all of whom were infants, and Shotter and Morgan. There never were more than 2500 shares, which were issued to George Newman as fully paid up under article 5. He distributed 1831 of these amongst his brothers and sons and Shotter and Morgan, each of these two last-named persons having one each. The directors of the company were George Newman and his brothers, William, Charles, Daniel, and John Henry, and H. G. Wright. The business of the company was transacted by these persons. Debts were contracted to a large amount; no profits were ever made. The company was ordered to be wound up in November, 1892, and it was then found that the assets of the company were practically nil, whilst the debts and liabilities of the company amounted to £88,000 in respect of money borrowed from the Liberator Building Society and other companies connected with it. The company never had any assets except those taken over from George Newman and such as were acquired with borrowed money.
With regard to the £10,000, the facts found by the Court of Appeal were as follows: The Commissioners of the Exhibition of 1851 had some land near the Albert Hall, and in 1890 they agreed with William Sarl for the erection of buildings on this land and for granting leases of the buildings when erected. This agreement imposed heavy liabilities on the builder; but the ground-rents were at first nominal, although ultimately they were to be £8000 a year. The agreement, however, was so beneficial to Sarl that he agreed to sell the benefit of it to George Newman for £16,000, and George Newman got £26,000 for it from the company. The company paid him £26,000 for it out of money borrowed by the company for the purpose, and the difference between this sum and the £16,000 paid for it by Newman to Sarl was the £10,000 which the liquidator sought to recover. The mode in which this transaction was carried out was as follows: George Newman was to obtain the benefit of Sarl’s agreement for the company; but Sarl had not got any formal agreement which he could assign, and the Commissioners would not enter into any agreement with the company. It was therefore agreed that George Newman should himself enter into a formal agreement with the Commissioners. On the 3rd of December, 1889, George Newman wrote a letter to the Liberator Society informing them that the company had resolved to take over the agreement, and asking for an advance on its security, which the Liberator Society afterwards agreed to make and did make. On the 6th of December, 1889, the directors met and discussed the matter, and resolved to buy the agreement from George Newman for £26,000 and to pay the Commissioners £7500 for rent in advance, and to indemnify George Newman from all liability under the agreement. On the 18th of December, 1889, the building agreement was executed by Newman, and the Commissioners and Newman then paid Sarl’s solicitor, Mr. R. B. Johnson, £16,000, as agreed, and he also paid £7500 to the Commissioners, to their solicitors, for rent in advance. This completed the matter so far as Sarl and the Commissioners were concerned. These moneys were paid by means of cash and bills supplied by the company, and George Newman was therefore a mere trustee of this agreement for the company. On the 18th of December, 1889, another instrument was executed by George Newman and the company by which George Newman assigned the benefit of the agreement to the company for £26,000, and the company agreed to indemnify him from all liabilities under the same. £10,000, being the difference between the price paid to Sarl and that paid by the company, was thus obtained by George Newman from the company. In order to obtain this agreement for the company George Newman had to pay and did pay large sums of money for commissions, introductions, and other matters, and only £3000 out of the £10,000 was in fact got by him out of the transaction. The directors knew that large sums beyond the £16,000 payable to Sarl would have to be paid in order to obtain the agreement, and they gave George Newman £10,000 to cover whatever might have to be paid for that purpose, with liberty to retain what he could for himself.
With regard to the £2500, the report stated that, on the 12th of June, 1891, the Liberator Society gave to the company a cheque for £2500 on account of advances which the society had agreed to make on the security of the building agreement relating to the Albert Hall estate; that the cheque was indorsed by George Newman and handed to Wright, by whom it was misappropriated; and that Newman then directed the secretary of the company to write off the amount to an account called “Fees Account,” which he did. The account of this transaction given by Newman and accepted by the Court was to the effect that the cheque had been left by him with Wright, who was the financial agent of the Liberator Society as well as the solicitor of George Newman & Co., in order that the amount of the cheque might be indorsed on the mortgage to the Liberator Society, after which it was to be paid into the bank of George Newman & Co., to be credited to the company’s account; that, on finding that the cheque had not been paid into the bank, he made repeated inquiries of Wright with regard to it, and was ultimately informed by him that the money had been applied for the purposes of Jabez Balfour; that, inasmuch as Balfour was at the head of a group of companies who had undertaken to finance the present company in its building transactions, it was impossible to take proceedings against him for the recovery of the money; and that it was, therefore, determined by the directors to consider the amount as paid to Balfour for services rendered by him to the company.
With regard to the expenditure upon Newman’s private residence, the report extracted the following statement from the minutes of the company: “The chairman reported that the company had done considerable works during the last six months, incurring a large outlay, in altering and adapting his private residence, and suggested that, as such alterations were considered by him necessary to maintain the social position held by him as chairman of this company and having regard to the many important operations now being conducted by this company entailing upon him constant and assiduous attention, it would not be unreasonable for the expenditure above referred to be treated as a proper expenditure of the company for its purposes. Thereupon it was unanimously resolved that the cost of the works at North End Lodge, Croydon, be debited to the separate account of the chairman, and liquidated by a credit entry authorized by this resolution.” The report further stated that, in pursuance of this resolution, George Newman was debited with two sums of £3292 16s. 11d. and £204 1s. 5d., which sums were liquidated by a credit entry of £3496 18s. 4d., charged to the revenue account for 1891 under the head of “Purchase of plant and building material.” Newman did not offer any explanation of this payment beyond that appearing on the face of the resolution.
The whole of these transactions were entered into with the knowledge and approval of all the shareholders.
Mr. Justice Vaughan Williams, having regard to the peculiar constitution of the company and to the fact that throughout the transactions complained of there had been no concealment from the shareholders, held that the case fell within the principle of In re British Seamless Paper Box Company (1), and that the application of the liquidator failed, and he dismissed the summons accordingly. The liquidator appealed.
Theobald, for the liquidator:-
The misapplication of the £2500 was an ultra vires act, and even the consent of all the shareholders could not render it lawful.
In re British Seamless Paper Box Company is distinguishable.
[LORD HALSBURY referred to Society of Practical Knowledge v. Abbott (2); In re Crenver and Wheal Abraham United Mining Company (3).]
The expenditure of £3496 upon Newman’s house was also ultra vires, and the shareholders did not sanction it. In fact some of the shareholders were infants, and in no event could their sanction be of any avail. The learned Judge seems to have thought that the shares which stood in the names of the infants were really their father’s shares, and that his sanction was sufficient, the shares being also fully paid. But in Cox’s Case (1), on which he relied, a liability was imposed upon a person who, for the purpose of deluding the public, had had shares registered in the names of mere nominees for him, and in In re British Seamless Paper Box Company (2) everyone had acted honestly, and a general meeting of the company had approved what had been done. In the present case the transaction was dishonest from beginning to end.
The manner in which the sum of £10,000 has been applied has never been satisfactorily explained. There is no doubt that there was an agreement to purchase Sarl’s contract for £16,000, and that Newman received £26,000 before the business was conveyed to the company. The difference went into Newman’s pocket, or was spent in a way which brought no benefit to the company.
Dunham, and Johnston Edwards, for George Newman:-
The Official Receiver and liquidator has no higher right to take proceedings against a director for breach of duty than the company had: Coventry and Dixon’s Case (3). He must, therefore, shew that Newman has been guilty of misfeasance for which he could have been called to account by the company before it was wound up; and further, that the company had not sanctioned his acts.
With respect to the sum of £10,000, it was given to Newman in order to enable him to carry through the purchase of Sarl’sbuilding agreement. The greater part of it was spent in this way, whether in bribery, as has been alleged, or not makes no difference, for it was spent in the interest of the company. Even as regards the £3000 retained by Newman for himself, the company is not entitled to have the money refunded as being a secret profit, for there was no secrecy, and the contract to sell the contract to the company was entered into by the governing body of the company.
With respect to the cheque for £2500, there is no evidence that it was appropriated by George Newman; on the contrary, it is clear that he entrusted it to Wright to be paid into the bank and he applied it to his own use.
The sum of £3496 was, no doubt, spent by Newman on his own home; but it was within the powers of the directors to vote this sum. At that time the company was carrying on an extensive business, and it was considered necessary that Newman should live in a certain style and exercise hospitality for the benefit of the company. Directors have always power to make presents and confer pensions, if by so doing they can further the interests of the company.
But even if any of these transactions were ultra vires, the company cannot complain of them, as it acquiesced in them. It was, in fact, a private company, consisting only of Newman and his nominees. All the shareholders sanctioned the expenditure except the infant members, and they were represented by Newman,their father, as provided by art. 73 of the articles of association. The case is within the principle of In re British Seamless Paper Box Company (1).
Theobald, in reply.
Cur. adv. vult.
March 14. LINDLEY L.J. delivered the judgment of the Court (Lord Halsbury, Lindley L.J., and A. L. Smith L.J.):-
This is an appeal from the refusal of Mr. Justice Vaughan Williams to make an order under sect. 10 of the Companies (Winding-up) Act, 1890, for the payment by Mr. George Newmanof certain sums of money to the liquidator of the above-named company. [The Lord Justice stated the constitution and history of the society as above set out, and continued:-]
Such being a short account of the company, it is necessary to allude to the circumstances which give rise to the present application on the part of the liquidator. He seeks to obtain an order for the payment by George Newman of three sums of money – namely, (1.) £10,000 in respect of what is called the Albert Hall purchase; (2.) £2500 in respect of what is called the Albert Hall advances; (3.) £3500 in respect of money of the company expended in George Newman’s own house.
[The Lord Justice stated the facts relating to the £10,000, and continued:-]
The question arises whether the company can now by its liquidator recover this sum of £10,000, or any part of it, from George Newman. Mr. Justice Vaughan Williams has decided this question against the company, and as regards everything except the £3000 profit actually made by George Newman the learned Judge was correct. Except as to that sum the evidence is not sufficient to prove any misapplication of the company’s assets. The money spent appears to have been part of the cost of acquiring the contract, and that expenditure having been necessary for its acquisition and authorized by the directors, the Company cannot treat it as a misapplication of its assets. It was suggested that the money went in bribes, and that the expenditure was therefore ultra vires; but, although this suggestion may be true, there is no proof of it on which the Court can judicially act. It must be taken that the company acquired the benefit of the contract on certain terms which, as regards the sums expended, are not shewn to have involved a breach of trust, and it would not be just to compel Mr. George Newman to repay more than the £3000 which he actually retained for his own benefit. Whether he can be made to account for this sum is another matter, which will be examined later on.
The £2500 is claimed as the amount of a cheque belonging to the company, and improperly given by George Newman to Wright and applied by him for his own purposes with the knowledge and consent of George Newman. [The Lord Justice stated the facts relating to this sum, and continued:-] Under these circumstances, George Newman cannot be charged with this sum. When he found that the cheque had been misapplied, he did not know what to do, and, although he ultimately told the secretary to write the amount off and put it to the fees account, it would not be just to infer from this that George Newman sanctioned or approved of what had been done. No part of this sum ever came to Newman; he is in no way benefited by the misapplication of the cheque, and on the evidence Wright or Jabez Balfour, and not Newman, is responsible for the loss of this cheque.
The last sum claimed by the liquidator is £3500. The facts relating to this are correctly set out in his report, and are not contradicted or explained. George Newman applied assets of the company to this amount in decorating his own house, and the directors afterwards resolved that no charge should be made for it, and it was accordingly written off.
In answer to the liquidator’s claim for this sum, and in answer to his claim to the £3000 already referred to, Mr. George Newman relies on the articles of the company and on the fact that all the directors and shareholders knew and sanctioned what was done. It remains to consider this defence with reference to both of these sums. When the facts are understood both these sums were in truth presents by the directors out of the company’s assets to G. Newman with the consent of the other shareholders who were of age; and the question is whether these presents can be treated as valid against the liquidator on the winding-up of the company, which is hopelessly insolvent and which was largely in debt when these presents were made. Mr. Justice Vaughan Williams has held that they are unimpeachable, and he referred to the case of In re British Seamless Paper Box Company (1) as supporting his view. But that case is very unlike this. The directors there had allotted shares to some of themselves as fully paid up. The shares were, in fact, allotted in consideration of some patents taken over by the company; and an agreement to issue the shares as paid up was registered. The transaction, therefore, was intra vires, and it was taken to be so both by counsel and by the Court. Further, the transaction was perfectly honest throughout, and it was sanctioned by a general meeting of the company, which then consisted of only the directors and one other person, who assented to what was done. More than a year afterwards shares were issued to other people, and, the company being ultimately wound up, the liquidator sought to recover the nominal value of the shares, treating them, in fact, as not paid up. The Court held that this could not be done, because the transaction (being intra vires) was honest and was sanctioned by all the members of the company at the time. But in this case the presents made by the directors to Mr. Newman, their chairman, were made out of money borrowed by the company for the purposes of its business; and this money the directors had no right to apply in making presents to one of themselves. The transaction was a breach of trust by the whole of them; and even if all the shareholders could have sanctioned it, they never did so in such a way as to bind the company. It is true that this company was a small one, and is what is called a private company; but its corporate capacity cannot be ignored. Those who form such companies obtain great advantages, but accompanied by some disadvantages. A registered company cannot do anything which all its members think expedient, and which, apart from the law relating to incorporated companies, they might lawfully do. An incorporated company’s assets are its property and not the property of the shareholders for the time being; and, if the directors misapply those assets by applying them to purposes for which they cannot be lawfully applied by the company itself, the company can make them liable for such misapplication as soon as any one properly sets the company in motion. All this is familiar law and must be borne in mind in deciding the present case. Mr. George Newman and his co-directors evidently ignored their legal position entirely. They regarded Mr. George Newman as the company, and it never seems to have occurred to them that he and his brothers could not do as they liked with what they regarded as their own property, or rather as his, for he and his children held the bulk of the shares. If this view were correct in point of law, if the corporate body could be disregarded, it would follow that Mr. George Newman and his brothers would be liable without limit for the debts which were contracted in the name of the company. This would be a just and proper result to arrive at; but the Court is precluded by the terms of the Companies Act,1862, ss. 191, 192, from adopting it. The Court is bound to recognise the company as incorporated, and to give effect to all the consequences of such incorporation.
What, then, are the consequences as regards presents to directors? The cases on the subject are few. The law will be found discussed in York and North Midland Railway Company v. Hudson (1) and Hutton v. West Cork Railway Company (2), but there is no case which quite covers this. Directors have no right to be paid for their services, and cannot pay themselves or each other, or make presents to themselves out of the company’s assets, unless authorized so to do by the instrument which regulates the company or by the shareholders at a properly convened meeting. The shareholders, at a meeting duly convened for the purpose, can, if they think proper, remunerate directors for their trouble or make presents to them for their services out of assets properly divisible amongst the shareholders themselves. Further, if the company is a going concern, the majority can bind the minority in such a matter as this. But to make presents out of profits is one thing and to make them out of capital or out of money borrowed by the company is a very different matter. Such money cannot be lawfully divided amongst the shareholders themselves, nor can it be given away by them for nothing to their directors so as to bind the company in its corporate capacity. But even if the shareholders in general meeting could have sanctioned the making of these presents, no general meeting to consider the subject was ever held. It may be true, and probably is true, that a meeting, if held, would have done anything which Mr. George Newman desired; but this is pure speculation, and the liquidator, as representing the company in its corporate capacity, is entitled to insist upon and to have the benefit of the fact that even if a general meeting could have sanctioned what was done, suck sanction was never obtained. Individual assents given separately may preclude those who give them from complaining of what they have sanctioned; but for the purpose of binding a company in its corporate capacity individual assents given separately are not equivalent to the assent of a meeting. The company is entitled to the protection afforded by a duly convened meeting, and by a resolution properly considered and carried and duly recorded. The articles of this company, wide as they are, do not authorize such presents as those impeached by the liquidator; and the result is that his appeal must be allowed as to £3000, part of the £10,000, and as to the £3500, and Mr. Newman must be ordered to pay these sums, with interest at 4 per cent. He ought also to pay the costs of the appeal and the costs of the summons, except so far as they have been increased by the claims to the £2500 and to the £7000, part of the £10,000. The costs occasioned by these claims ought to be allowed and be set off against those which he is ordered to pay.