United Kingdom House of Lords Decisions

LORD TOMLIN .—This is an appeal by the executor of a deceased director, named Tomlinson, of the company to which I am about to refer. It has been held below that certain expenses, incurred by the deceased in defending a criminal prosecution brought against him at the instance of the Lord Advocate in connexion with the issue of a prospectus of the company and other matters relating to the company, cannot be recovered by his executor from the assets of the company in the voluntary liquidation of the company. It is against that decision that complaint is made here to-day.

The facts of the case are these. The company concerned is the Scottish Amalgamated Silks, Limited. It was incorporated in 1928, and on 8th June 1928 the first meeting of the company was held, at which directors were appointed. On the same day the directors elected the deceased as their chairman, he being one of the directors appointed. On the 29th June 1928 a prospectus was issued, and shares were applied for by the public and allotted in due course. On the 6th July 1928 certain payments were authorised by the directors to be made to the vendors to the company in respect of the purchase price of the properties which were being acquired by the company and for other purposes. On the 17th September 1930 the company, not having been operating successfully, went into voluntary liquidation, and the respondents were appointed liquidators. In February 1931 the deceased was arrested on a complaint charging him with fraudulent acting, and the indictment, as ultimately framed against him and certain other persons, including co-directors, contained two counts in which he was concerned. The first count was directed to a charge of having issued a fraudulent prospectus, and it was framed in this way, that the deceased, who is described as "a promoter and director and chairman of the company," and the other parties charged, who are described as "all being promoters and directors of the company," are alleged, on or about the 29th June 1928, to have issued, or caused to be issued, to the public a prospectus in which they invited the members of the public to subscribe for certain shares of the company, which prospectus they knew to be false in certain material particulars including the non-disclosure of material facts relating to properties and assets acquired or to be acquired, and liabilities incurred or to be incurred, by the company, and the true nature and values of the properties and assets, and the underwriting of the shares of the company, in relation to which there was on them, as promoters and directors, a duty to the public to furnish in the prospectus true information, and not to

suppress or conceal material information so as to convey to the public a false impression as to the properties, assets, and liabilities acquired and incurred, or to be acquired and incurred, by the company.

The particulars of the material matters are then set out, and the concluding part of the first count contains this passage:

"And you did issue and publish, or cause to be issued and published, the said false prospectus with said false particulars, and non-disclosure of said material facts which you had a duty to disclose, in pursuance of a common fraudulent purpose or design to deceive the public, and so as to convey a false impression as to the true nature and values of the properties and assets acquired, or to be acquired, and liabilities incurred, or to be incurred, by said company, and with intent to induce members of the public to invest money and to become shareholders in said Scottish Amalgamated Silks, Limited, and by means of the said false and fraudulent prospectus or part thereof you did induce members of the public"

(certain of whom are named) "to apply for, accept, and pay for shares in said company."

Then the second count is in the nature of a charge of having fraudulently misapplied moneys of the company. The circumstances as alleged seem to be these: That the vendors to the company of certain mills were limited companies having no substantial assets of their own but having contracted to acquire from the real owners the mills in question, and that these vendor companies were paid by the directors of the Scottish Amalgamated Silks, Limited, part of their purchase money before they had themselves acquired a title to enable them to pass the property to the last-named company, and that that was done with a view to enable these impecunious companies to discharge their obligations, or part of their obligations, under applications put in by them for shares in the purchasing company. That was alleged to be a misappropriation of moneys of such company, and a sum exceeding £300,000 was charged to have been misapplied in that way.

The matter came for trial in 1932, and in April 1932 the deceased was acquitted, the verdict on the first count being not proven and on the second count not guilty.

Some civil proceedings also were in the meantime launched against the deceased at the instance of the liquidators, claiming money from him, based upon allegations similar to the allegations made in the criminal proceedings. Those civil proceedings also failed.

On the 3rd March 1933 the deceased lodged with the liquidators a claim for his expenses in defending himself in the criminal proceedings, those expenses being said to have amounted to over £11,000. On the 19th October 1933 the liquidators rejected the claim, and thereupon the deceased lodged a note of appeal with the Inner House. Answers were lodged, and ultimately the liquidators' decision was affirmed.

After that, the death of the deceased occurred, and in the course of the proceedings before your Lordships' House the matter was revived by the present appellant, his executor.

The case is put in two ways. It is said that the deceased was entitled to recover from the assets of the company the amount of his expenses, either on the basis of an article which is contained in the articles of association giving indemnity to the directors, officers, and servants of the company, or, alternatively, under the common law. The article is sufficiently stated in the opinion of the Lord President in these terms:—

"Every Director … of the Company shall be indemnified by the Company against … all costs, losses, and expenses which any such Director … may incur or become liable to by reason of any contract entered into, or act or deed done, by him as such Director … in any way, in the discharge of his duties, including travelling expenses."

I think it is reasonably plain that, if the executor is unable to bring the case within the language of the article, he would have little hope of succeeding upon the alternative claim under the common law. He puts it in this way. He says that the deceased in the course of his duty issued a prospectus of the company; as a result of his issuing a prospectus of the company in the course of his duty a criminal charge was brought against him, and therefore the expenses which he incurred in successfully defending himself against that criminal charge were expenses incurred by reason of an act done by him in the discharge of his duty; and it is said that that is within the plain words of the article, and, even if it is not, it is within the principles of the common law applicable to cases of principal and agent. In support of that two cases have been cited to your Lordships' House. First, the case of The "James Seddon." That was a case decided by Dr Lushington in which the master of a ship in a foreign port, at the instance of two of the crew whom he had punished in the course of his duty for breaches of discipline, was, in revenge, charged with a murder. He successfully defended himself against that charge, and was held to be entitled to the expenses of his defence. It was put by Dr Lushington on two grounds, the second of which seems to me to be the stronger ground of the two. That second ground was expressed in this way. After referring to the very special position which the master of a ship holds when the ship is on a voyage and in a foreign port, he said (at p. 65):

"You must not fetter your masters too closely, and I say that the expenses now objected to were actually incurred for the benefit and advantage of the owners themselves. For what would have been the consequence? The master must have been incarcerated; he would not have been protected in any way against the false evidence brought against him; and even the temporary absence of the master in those distant countries would have been attended with great disadvantage and serious inconvenience to the owners themselves."

It is true that by way of a first ground he had already said (at p. 65):

"The very cause which originated the charge against the master was the performance of his own duty in correcting these very men for their misconduct, and the false charge emanated instantly from it, and there were no intervening circumstances whatsoever which could cause it to be considered remote."

Here, of course, in this case the second ground, namely, benefit to the principal, has no application at all, and the first ground seems equally inapplicable when one considers that, so far from there being a false charge emanating instantly from the act which it was the duty of the

master to perform, the charges were based upon alleged conduct which would have been contrary to his duty and were made only after considerable delay, and at the instance of the Lord Advocate in the interests of public justice.

The second case referred to is the Famatina Development Corporation, Limited. That was the case of a company which sent out an officer abroad to report upon the affairs of the company there and upon the conduct of the local manager, special attention being directed to the possibility of unlawful commission having been received by the local manager. The report which was made was unfavourable to the local manager, and in terms which were necessarily prima faciedefamatory, with the result that an action for libel was brought by the local manager and was defended with success by the officer of the company. Afterwards that officer claimed reimbursement from his principals for the expenses which he had so incurred. It was held by Mr Justice Sargant that he was not entitled to them. Mr Justice Sargant took the view upon the facts that what he had done was not what it was his duty to do. "As I have already said," says Mr Justice Sargant on p. 280, "I come to the conclusion that the company never did order Mr O'Driscoll to do anything of the sort." The matter went to the Court of Appeal, and the Court of Appeal took another view of the facts, the Master of the Rolls saying that he was undoubtedly appointed to be the agent of the company for many purposes, and that all that he had done was done in pursuance of his duty as agent. So far as that case is concerned, the matter cannot, I think, be put better, if I may say so with respect, than it is put in the opinion of Lord Sands when he said, referring to that case:

"When a candid report is called for by a board from one of its officials, the communication of that report, if it be a bona fide one, to the board is the action of the board."

He explains the decision on those grounds, that it was something arising directly out of that which it was the duty of the agent to do and which he had in fact done.

When your Lordships come to consider the facts of this case you will find how far they are away from the facts of either of those cases to which I have referred. Here the allegation against the agent was that he had done something which he did not in fact do, and which it would have been against his duty to have done; and the question really is, upon the construction of the article, whether the expenses incurred by him by reason of an allegation that he did something which he did not do, and which it was not his duty to do, are expenses incurred by him by reason of an act done by him as a director in discharge of his duty. Upon the true construction of that article I am unable to see how that can possibly be maintained. In my view the expenses incurred by reason of the allegations made against the deceased, being allegations of matters which would have been a breach of his duty and which were held to be disproved or non-proven, are not expenses incurred by him by reason of an act done by him as a director in the discharge of his duties.

If the case does not fall, as I think it does not fall, within the language

of article 160 of the articles of association, it is difficult to see upon what principle it can possibly be brought within the common law rule. My conclusion is that this appeal fails, and I recommend to your Lordships that it be dismissed with costs.

There is one point dealt with in the Courts below which I ought to mention, that is, as to the effect of the date of the liquidation having been prior to the actual incurring of the expenses. That is a matter which, upon the view already expressed by me, does not arise for decision, and I submit to your Lordships that it is not desirable that any opinion should be expressed upon it to-day.