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Company la1

COMPANY lAW

CASE MATERALS – SEMINAR 2

*1099 Bushell Appellant v. Faith Respondent

House of Lords

HL

Lord Reid, Lord Morris of Borth-Y-Gest, Lord Guest, Lord Upjohn and Lord

Donovan.

1969 Nov. 10, 11; Dec. 16


Company--Director--Removal--Private company--Resolution for removal of director--Article attaching multiple votes to director's shares on such resolution--Whether article valid--"Ordinary resolution"--Meaning--Companies Act, 1948 (11 & 12 Geo. 6, c. 38), s. 184 (1).

By section 184 (1) of the Companies Act, 1948:
"A company may by ordinary resolution remove a director before the expiration of his period of office, notwithstanding anything in its articles ..."
Article 9 of the articles of association of a private company provided that, in the event of a resolution being proposed at a general meeting of the company for the removal of a director, any shares held by that director should carry three votes per share. The company had an issued capital of <<PoundsSterling>> 300 in <<PoundsSterling>>1 shares, which were distributed equally between the plaintiff, the defendant (her brother) and B., their sister. The plaintiff and *1100 defendant were the only directors of the company. The two sisters, being dissatisfied with their brother's conduct as a director, requisitioned a general meeting of the company for the purpose of passing a resolution removing him from office as a director. On a poll at the meeting they both voted for the resolution, and he voted against it. A dispute having arisen as to whether the resolution had been passed or defeated, the plaintiff contended that it had been passed by 200 votes, being those of herself and her sister, to 100, those of the defendant. The defendant contended that in accordance with article 9 his 100 shares carried 300 votes, and that, therefore, the resolution had been defeated by 300 votes to 200. The plaintiff claimed a declaration that the resolution had been validly passed and an injunction restraining the defendant from acting as a director of the company:-
Held, (Lord Morris of Borth-y-Gest dissenting), that article 9 was valid and applicable, despite the provisions of section 184 (1), since Parliament was only seeking to make an ordinary resolution sufficient to remove a director and had not sought to fetter a company's right to issue a share with such rights or restrictions as it thought fit and these need not be of general application but could be attached to special circumstances and particular types of resolution. Accordingly the resolution had been defeated.
Decision of the Court of Appeal [1969] 2 Ch. 438; [1969] 2 W.L.R. 1067; [1969] 1 All E.R. 1002, C.A. affirmed.

No cases are referred to in their Lordships' opinions.
The following cases were cited in argument:
El Sombrero Ltd., In re [1958] Ch. 900 ; [1958] 3 W.L.R. 349; [1958] 3 All E.R. 1.
Inglefield (George) Ltd., In re [1933] Ch. 1, C.A..
Pye v. Minister for Lands for New South Wales [1954] 1 W.L.R. 1410; [1954] 3 All E.R. 514 , P.C..

APPEAL from the Court of Appeal (Harman, Russell and Karminski L.JJ.).
This was an appeal from an order of the Court of Appeal dated February 21, 1969, which allowed an appeal by the present respondent, Geoffrey Leopold Faith (the first defendant), from an order of the Chancery Division of the High Court of Justice made on December 3, 1968, whereby Ungoed-Thomas J. had granted on motion of the present appellant, Constance Anna Bushell, widow (the plaintiff), an injunction, suspended pending appeal, restraining the respondent from acting or purporting to act as a director of Bush Court (Southgate) Ltd., the second defendant.
The plaintiff was a director of and shareholder in the company, which had been incorporated on September 19, 1960, by herself and her mother, Mrs. Agnes Sophia Mary Faith. Mrs. Agnes Faith was, prior to the incorporation of the company, the owner of a block of 17 flats situate at and known as Bush Court, Southgate, N.14, in the County of Greater London. She transferred that block of flats to the company in consideration of which the company issued 299 of its 300 shares to her and one share to her nominee. The company was incorporated with the object of acquiring, owning, leasing and managing Bush Court. It had an issued capital of *1101 <<PoundsSterling>>300 in <<PoundsSterling>>1 shares. It was a private company and adopted Table A of the Companies Act, 1948, as its articles of association with certain modifications, of which one was contained in article 9 of its articles and read as follows:
"In the event of a resolution being proposed at any general meeting of the company for the removal from office of any director, any shares held by that director shall on a poll in respect of such resolution carry the right to three votes per share and regulation 62 of Part 1 of Table A shall be construed accordingly."
In November, 1968, the company had three shareholders: the plaintiff, the defendant, Geoffrey Leopold Faith, who was her brother and the only other director, and their sister, Dr. Kathleen Bayne. Each of them held 100 shares. The plaintiff and her sister, being dissatisfied with the conduct of the defendant as a director, requisitioned a general meeting of the company to be held on November 22, 1968, to consider and, if thought fit, to pass a resolution for the removal of the defendant from office as a director. On a poll at the meeting, the plaintiff and her sister voted for the resolution, and the defendant voted against it. A dispute then arose as to whether the resolution had been passed or defeated. The plaintiff contended that it had been passed by 200 votes, being those of herself and her sister, to 100, being those of the defendant. He, however, contended that in accordance with article 9 his 100 shares carried 300 votes and that, therefore, the resolution was defeated by 300 votes to 200. The plaintiff issued a writ on behalf of herself and all the other shareholders in the company other than the defendant, claiming a declaration that the defendant had been validly removed from office as a director and an injunction restraining him from acting or purporting to act as a director. The company was joined as a defendant formally for the purpose of being bound by the decision of the court. On an application by motion for an interlocutory injunction Ungoed-Thomas J. held that article 9 was invalid because it infringed section 184 (1) of the Companies Act, 1948, and that, therefore, the resolution had been validly passed, so that the defendant had been removed from office as a director.
G. B. H. Dillon Q.C. and D. J. Nicholls for the appellant. Section 184 (1) of the Companies Act, 1948, overrides anything in a company's articles. Accordingly, it would render void any provision in them aimed at making a director irremovable. It is designed to deal with any situation in which a director might otherwise be irremovable. It would make none sense of section 184 (1) if article 9 of this company's articles were valid. This article only deals with the case of removing a director from office. An article which said that a director holding shares could not be removed from office without his own consent would clearly be invalid. Yet this device is designed to achieve that result. One can give a director general rights but one cannot give him the special rights aimed at in this particular article. A similar situation might arise under section 10 of the Act dealing with the alteration of articles by special resolution.
If it were possible to avoid section 184 (1) by simple verbal expedients, it would make nonsense of it. It would be invalid if the article said that *1102 only the director concerned should have a vote. So too would be an article saying that a director could only be removed by the unanimous consent of the corporators. Such an article would be void whether the provision was direct or indirect in weighting the votes by means of special voting rights. The words of section 184 (1) are "notwithstanding anything in its articles." It applies to all companies and not just public companies.
An article which purported to provide that only a member of the company should be appointed a proxy must be void under section 131 (1), subject to the proviso: see also sections 137 (1), 205 and 455 (4).
Section 184 (which reproduces section 29 of the Companies Act, 1947) is a provision overriding the company's articles. It protects the shareholders' right to be heard in the control of the company.
As to the powers in relation to share capital dealt with by ordinary resolution, see regulations 2, 3, 40, 44 and 45 of Table A in Schedule Ito the Act of 1948. Section 61 does not provide any particular form of resolution for the exercise of the power to alter share capital. See also regulations 94, 96 and 97 of Table A as to the increase or reduction of the number of directors, their removal or replacement by ordinary resolution. Table A envisages a general voting pattern.
In Palmer's Company Precedents, 17th ed. (1956), edited by the late Mr. K. W. Mackinnon Q.C., Vol. I, pp. 573-574, see article 109 dealing with the power to remove a director (corresponding to regulation 96 in Table A) and the footnote appended. At pp. 674-676 there is a selection of articles dealing with the power of various classes of shareholders to appoint directors.
In the Encyclopaedia of Forms and Precedents, 4th ed. (1966), Vol. 5, p. 384, see article 20 dealing with the appointment and removal of directors. Footnote 22 is adopted. If in the circumstances there envisaged a removed director were reappointed, the ultimate position would be either that one side or the other would give way or the court would have to exercise its residual powers under section 210. But that would not affect the rule under section 210 that any director can be removed, save a director of a private company holding office for life.
In a group of forms in Palmer's Company Precedents are some which seek to introduce special protection for directors by way of weighted voting rights: see in particular Form 254 in Vol. I at p. 734, which attaches special voting rights to named shares. Such an article in so far as it covered a resolution to remove directors would be invalid. Despite his eminence, the late editor of the work was not infallible. Form 255 (pp. 734-736), relating to governing directors, does not include any special rights to secure from removal from office: see also Forms 256 (p. 737) and 259 (p. 740). In the notes on pp. 736, 737 and 740 reference is made to Form 254 as preventing a resolution for removing a director from being passed.
The form in the Encyclopaedia of Forms and Precedents which is most in line with Form 254 in Palmer is Form 4: 36, Vol. 5, p. 428, providing special voting rights for a named person. But footnote 14 gives the warning
"The validity of such a provision as this in relation to a resolution to remove a director from office remains to be tested in the courts."
*1103 In Palmer there is no warning that one cannot be sure the provision is effective.
There is a reference to the decision of the Court of Appeal in the present case in Gower's Modern Company Law, 3rd ed. (1969), p. 133, n. 54.
Parliament has only singled out certain matters in which the articles of a company are overridden by the Act. Where there is a special provision to circumvent the Act the court should hold it to be ineffective. It is not the function of the court to frustrate the object of a section and a decision which does so is wrong. The object of Parliament was to bring directors more under the control of the general body of shareholders and to do away with provisions under which they could not be removed without their own consent.
The House of Lords should be slow to give to section 184 (1) the limited construction which would allow it to be overridden by a slight alteration in the articles: see Pye v. Minister for Lands for New South Wales [1954] 1 W.L.R. 1410, 1423. If section 184 (1) were narrowly construed, as it was by the Court of Appeal, the result would be to treat the Act as inept and frustrate its purpose. The court would be holding that the subsection, though expressed to override the articles, was to be made subject to a provision in the articles.
In re George Inglefield Ltd. [1933] Ch. 1, 26, 27, does not help to decide what is within the ambit of the section.
In re El Sombrero Ltd. [1958] Ch. 900, 902 is relied on. There a question arose on a quorum provision which might have defeated a provision of the Act. If in the circumstances a special quorum provision in the articles would be invalid, so would a weighting of the shares.
The trial judge in the present case adopted the broad approach of not allowing the Act to be defeated. His view that the majority of the shareholders should have the right to remove this director from office should be adopted, because section 184 (1) is overriding.
Michael Wheeler Q.C. and George Hesketh for the respondent. Difficulty only creeps in if one approaches section 184 (1) with a preconceived notion of what the law ought to be, ignoring the section's clear language. Even if there were any substance in the preconceived idea, it must fail in the face of the section's unambiguous language. The appellant's approach to the legislature's intention is misconceived. The legislature achieved a limited advance in shareholders' control.
Prior to 1948, it was not unusual to provide in the articles that directors should be irremovable or should be removable only by extraordinary resolution (as to the latter, see regulation 80 of the 1929 Table A). Thus removal required a three-fourths majority either to alter the articles by special resolution or to pass the necessary extraordinary resolution. The Cohen Committee on Company Law Amendment (Cmd. 6659/1945) recommended that shareholders should be given a greater degree of control over directors. The result was section 184 which had the effect of reducing the votes required to remove a director from three-fourths to a bare majority. This largely achieved the desired object because loaded voting rights such as article 9 would not ordinarily be required or permitted e.g., in quoted companies. As to companies governed by the 1948 Table A, see regulations 94 to 97.
*1104 But there are other types of company where some form of protective voting provisions are not only reasonable but essential, e.g., in a quasi partnership company with three equal "partners" each of whom requires protection against being removed from his directorship by the other two. (Note that irrespective of the construction of section 184 this protection could be obtained by an agreement between the three partners outside the articles because this would not be an agreement between the company and a director.) Since the passing of the Companies Act, 1862, company law has never sought to interfere with the free right of shareholders to attach to shares such voting rights as they chose or lay down rules about the attachment of voting rights, the varieties of which are infinite. The ordinary resolution reflects the democratic concept of majority rule. The Act is dealing in majorities and not in the attachment of voting rights.
The implications of the argument for the appellant go far beyond this case, so as to prevent loaded voting rights, a great change in company law. It is not wrong for a minority to be protected against an alteration of the articles of a company under section 10 of the Act. Such a minority might want a guarantee that the status quo would be maintained and that could be done by loaded voting rights. One cannot contract out of either section 10 or section 184, but that has nothing to do with voting rights. Reliance is placed on the forms in Palmer's Company Precedents without claiming infallibility for them: see Form 256 (c) at p. 737.
If it is wrong to attach special voting rights to shares for the purpose of an ordinary resolution under section 184, presumably by parity of reasoning it would also be wrong to attach special voting rights to shares for the purpose of passing or defeating a special or extraordinary resolution. But this latter practice is by no means uncommon and has never been challenged (cf. section 141 (5) of the Act of 1948 which impliedly recognises that voting rights are governed by the articles).
The judge of first instance reached his conclusion because of a misconception of what an ordinary resolution is. He attributed to the legislature intentions which plainly it had not got.
In Table A the expression "ordinary resolution" must be looked at in the context of the Act of 1948. Prima facie the words mean the same thing in every place where they are used unless the context drives one to another conclusion: see regulations 94, 96 and 97 of Table A, where prima facie the words mean the same as elsewhere. Regulation 96 reflects section 184. The other regulations have nothing to do with it. The words "ordinary resolution" in section 184 do not have a special meaning. An ordinary resolution is one capable of being passed by a bare majorette of the votes cast: see Buckley on the Companies Acts, 13th ed. (1957) p. 861, a passage which has remained unaltered since the 8th ed. (1902), p. 557.
If it had been intended to do what the appellant suggests, the form of section 184 would have been totally different. The shareholders are not prevented from attaching restrictions on voting appropriate to their own case. The reasons given for the judgments in the Court of Appeal are sound. The other view would introduce uncertainty into the law.
G. B. H. Dillon Q.C. in reply. This sort of article is calculated to get round section 184. The basis of the submissions for the respondent is that in company law Parliament has never interfered with the attachment of *1105 voting rights. But by section 184 Parliament intends to interfere effectively with the right of a company to make whatever provision it likes by its articles: see Palmer, Vol. I, p. 574. The object of Parliament was to change the law. But weighted voting would create a situation in which, though the section said that the articles were not to override it, yet appropriately worded articles could get round it. There is no indication that the legislature had any thought of limiting section 184. As to section 10 of the Act of 1948, see Buckley, p. 37, and footnote (b) on that page. There is no reported case in which loaded voting rights affecting the alteration of articles or the dismissal of a director have been considered judicially. It is not a question into which moral issues come. It is simply a question of the fundamental right to alter articles or dismiss directors. There is no question of upsetting a settled title if article 9 were held invalid. Parliament could have said that section 184 (1) should not apply to a private company, if that was what was meant. But it went out of its way to say that it should apply to all companies and it should be given effect to in the case of both public and private companies. In any company a director may be removed; This particular device could only be adopted in the case of a private company, because in the case of a quoted company the Stock Exchange requirements must be observed. There is no practical difficulty in giving effect to section 184, which was intended as an important protection for shareholders, despite anything in the articles. The only way round section 184 is a personal contract between one shareholder and another as to voting, but that has nothing to do with the present case.
Their Lordships took time for consideration. Dec. 16, 1969.

LORD REID.
My Lords, with some reluctance I agree with the majority of your Lordships that this appeal must be dismissed. Article 9 of the articles of association of this company is obviously designed to evade section 184 (1) of the Companies Act, 1949, which provides that a company may by ordinary resolution remove a director notwithstanding anything in its articles. The extra voting power given by that article to a director, whose removal from office is proposed, makes it impossible in the circumstances of this case for any resolution for the removal of any director to be passed if that director votes against it.
We were informed that this device for giving extra votes to a particular share or a particular shareholder did not appear in any textbook or any reported case until 1956. In Palmer's Company Precedents, 17th ed., published in that year, Vol. I, Form No. 256 (c) on p. 737 in effect would give to the named shareholder power to prevent any alteration of the particular article, thereby preventing the application of section 10 of the Act, and Form No. 259 at p. 740 is similar to article 9 in the present case. Form No. 254 confers on the holder of a particular share what is in effect a veto by which he can prevent any resolution of any kind from being passed without his consent.
But the practice of giving special voting rights or special lack of voting rights to a particular class of shares is old and is recognised in article 2 of Table A in the First Schedule to the 1948 Act. The novel use of this practice in the forms set out in Palmer may not have been contemplated *1106 in 1948, and it may be that the whole practice will be reviewed when amendments to the Companies Act are being proposed. But we must take the law as we find it.
Counsel for the appellant found it impossible to deny that an article like that in Form No. 254 would be effective to prevent the removal of a director without the consent of the shareholder having the veto thereby given to him, and I cannot find any sufficient reason for holding that a veto in that form would be effective but that what amounts to a veto in article 9 in the present case is ineffective to prevent evasion of section 184.

LORD MORRIS OF BORTH-Y-GEST.

My Lords, it is provided by section 184 (1) that a company may by ordinary resolution remove a director before the expiration of his period of office. The company may do so notwithstanding anything to the contrary in its articles. So if an article provided that a director was irremovable he could nevertheless be removed if an ordinary resolution to that effect was passed. So also if an article provided that a director could only be removed by a resolution carried by a majority greater than a simple majority he would nevertheless be removed if a resolution was passed by a simple majority.
Some shares may, however, carry a greater voting power than others. On a resolution to remove a director shares will therefore carry the voting power that they possess. But this does not, in my view, warrant a device such as article 9 introduces. Its unconcealed effect is to make a director irremovable. If the question is posed whether the shares of the respondent possess any added voting weight the answer must be that they possess none whatsoever beyond, if valid, an ad hoc weight for the special purpose of circumventing section 184. If article 9 were writ large it would set out that a director is not to be removed against his will and that in order to achieve this and to thwart the express provision of section 184 the voting power of any director threatened with removal is to be deemed to be greater than it actually is. The learned judge thought that to sanction this would be to make a mockery of the law. I think so also.
I would allow the appeal.

LORD GUEST.

My Lords, I have had the advantage of reading the opinion of my noble and learned friend, Lord Donovan, with which I agree. I would dismiss the appeal.

LORD UPJOHN.

My Lords, this appeal raises a question of some importance to those concerned with the niceties of company law, and the relevant facts, which are not in dispute, can be very shortly stated.
The respondent company, Bush Court (Southgate) Ltd. (a formal party to the proceedings), was incorporated on September 19, 1960, and at all material times had an issued capital of 300 fully paid up shares of <<PoundsSterling>>1 each held as to 100 shares each by a brother and his two sisters, namely, the appellant Mrs. Bushell, the respondent Mr. Faith and their sister Dr. Kathleen Bayne.
Mr. Faith was a director but his conduct as such displeased his sisters who requisitioned a general meeting of the company which was held on November 22, 1968, when a resolution was proposed as an ordinary resolution *1107 to remove him from his office as director. On a show of hands the resolution was passed, as the sisters voted for the resolution; so the brother demanded a poll and the whole issue is how votes should be counted upon the poll having regard to special article 9 of the company's articles of association.
The company adopted Table A in the First Schedule to the Companies Act, 1948, with variations which are immaterial for present purposes. The relevant articles of Table A are:
"2. Without prejudice to any special rights previously conferred on the holders of any existing shares or class of shares, any share in the company may be issued with such preferred, deferred or other special rights or such restrictions, whether in regard to dividend, voting, return of capital or otherwise as the company may from time to time by ordinary resolution determine."
"62. Subject to any rights or restrictions for the time being attached to any class or classes of shares, on a show of hands every member present in person shall have one vote, and on a poll every member shall have one vote for each share of which he is the holder."
Special article 9 is as follows:
"In the event of a resolution being proposed at any general meeting of the company for the removal from office of any director, any shares held by that director shall on a poll in respect of such resolution carry the right to three votes per share and regulation 62 of Part 1 of Table A shall be construed accordingly."
Article 96 of Table A, which empowers a company to remove a director by ordinary resolution is excluded by the articles of the company so that the appellant relies on the mandatory terms of section 184 (1) of the Companies Act, 1948, which so far as relevant is in these terms:
"A company may by ordinary resolution remove a director before the expiration of his period of office, notwithstanding anything in its articles or in any agreement between it and him ..."
It is not in doubt that the requirements of subsection (2) have been satisfied. So the whole question is whether special article 9 is valid and applicable, in which case the resolution was rejected by 300 votes to 200, or whether that article must be treated as overridden by section 184 and therefore void, in which case the resolution was passed by 200 votes to 100. So to test this matter the appellant began an action for a declaration that the respondent was removed from office as a director by the resolution of November 22, 1968, and moved the court for an interlocutory injunction restraining him from acting as a director. This motion comes by way of appeal before your Lordships.
The appellant argues that special article 9 is directed to frustrating the whole object and purpose of section 184 so that it can never operate where there is such a special article and the director in fact becomes irremovable. So she argues that, having regard to the clear words "not withstanding anything in its articles" in section 184, special article 9 must be rejected and treated as void. The learned judge, Ungoed-Thomas J., so held. He said: "It would make a mockery of the law if the courts *1108 were to hold that in such a case a director was to be irremovable." and later he concluded his judgment by saying: "A resolution under article 9 is therefore not in my view an ordinary resolution within section 184. The plaintiff succeeds in the application."
The brother appealed, and the Court of Appeal (Harman, Russell and Karminski L.JJ.) allowed the appeal. Harman L.J. did so on the simple ground that the Act of 1948 did not prevent certain shares or classes of shares having special voting rights attached to them and on certain occasions. He could find nothing in the Act of 1948 which prohibited the giving of special voting rights to the shares of a director who finds his position attacked. Russell L.J. in his judgment gave substantially the same reasons for allowing the appeal and he supported his judgment by reference to a number of recent precedents particularly those to be found in Palmer's Company Precedents,17th ed. (1956), but, with all respect to the learned Lord Justice, I do not think these precedents which, so far as relevant, are comparatively new can be said to have the settled assent and approbation of the profession, so as to render them any real guide for the purposes of a judgment; especially when I note the much more cautious approach by the learned editors of the Encyclopaedia of Forms and Precedents, 4th ed. (1966), Vol. 5, p. 428, where in reference to a form somewhat similar to special article 9 they say in a footnote:
"The validity of such a provision as this in relation to a resolution to remove a director from office remains to be tested in the courts."
My Lords, when construing an Act of Parliament it is a canon of construction that its provisions must be construed in the light of the mischief which the Act was designed to meet. In this case the mischief was well known; it was a common practice, especially in the case of private companies, to provide in the articles that a director should be irremovable or only removable by an extraordinary resolution; in the former case the articles would have to be altered by special resolution before the director could be removed and of course in either case a three-quarters majority would be required. In many cases this would be impossible, so the Act provided that notwithstanding anything in the articles an ordinary resolution would suffice to remove a director. That was the mischief which the section set out to remedy; to make a director removable by virtue of an ordinary resolution instead of an extraordinary resolution or making it necessary to alter the articles.
An ordinary resolution is not defined nor used in the body of the Act of 1948 though the phrase occurs in some of the articles of Table A in the First Schedule to the Act. But its meaning is, in my opinion, clear. An ordinary resolution is in the first place passed by a bare majority on a show of hands by the members entitled to vote who are present personally or by proxy and on such a vote each member has one vote regardless of his share holding. If a poll is demanded then for an ordinary resolution still only a bare majority of votes is required. But whether a share or class of shares has any vote upon the matter and, if so, what is its voting power upon the resolution in question depends *1109 entirely upon the voting rights attached to that share or class of shares by the articles of association.
I venture to think that Ungoed-Thomas J. overlooked the importance of article 2 of Table A which gives to the company a completely unfettered right to attach to any share or class of shares special voting rights upon a poll or to restrict those rights as the company may think fit. Thus, it is commonplace that a company may and frequently does preclude preference shareholders from voting unless their dividends are in arrear or their class rights are directly affected. It is equally commonplace that particular shares may be issued with specially loaded voting rights which ensure that in all resolutions put before the shareholders in general meeting the holder of those particular shares can always be sure of carrying the day, aye or no, as the holder pleases.
Mr. Dillon, for the appellant, felt, quite rightly, constrained to admit that if an article provided that Mr. Faith's shares should, on every occasion when a resolution was for consideration by a general meeting of the company, carry three votes such a provision would be valid on all such occasions including any occasion when the general meeting was considering a resolution for his removal under section 184.
My Lords, I cannot see any difference between that case and the present case where special voting rights are conferred only when there is a resolution for the removal of a director under section 184. Each case is an exercise of the unfettered right of the company under article 2 whereby
"any share in the company may be issued with such ... special rights ... in regard to ... voting ... as the company may from time to time by ordinary resolution determine."
Parliament has never sought to fetter the right of the company to issue a share with such rights or restrictions as it may think fit. There is no fetter which compels the company to make the voting rights or restrictions of general application and it seems to me clear that such rights or restrictions can be attached to special circumstances and to particular types of resolution. This makes no mockery of section 184; all that Parliament was seeking to do thereby was to make an ordinary resolution sufficient to remove a director. Had Parliament desired to go further and enact that every share entitled to vote should be deprived of its special rights under the articles it should have said so in plain terms by making the vote on a poll one vote one share. Then, what about shares which had no voting rights under the articles? Should not Parliament give them a vote when considering this completely artificial form of ordinary resolution? Suppose there had here been some preference shares in the name of Mr. Faith's wife, which under the articles had in the circumstances no vote; why in justice should her voice be excluded from consideration in this artificial vote?
I only raise this purely hypothetical case to show the great difficulty of trying to do justice by legislation in a matter which has always been left to the corporators themselves to decide.
I agree entirely with the judgment of the Court of Appeal, and would dismiss this appeal.

LORD DONOVAN.

*1110 My Lards, the issue here is the true construction of section 184 of the Companies Act, 1948: and I approach it with no conception of what the legislature wanted to achieve by the section other than such as can reasonably be deduced from its language.
Clearly it was intended to alter the method by which a director of a company could be removed while still in office. It enacts that this can be done by the company by ordinary resolution. Furthermore, it may be achieved notwithstanding anything in the company's articles, or in any agreement between the company and the director.
Accordingly any case (and one knows there were many) where the articles prescribed that a director should be removable during his period of office only by a special resolution or an extraordinary resolution, each of which necessitated inter alia a three to one majority of those present and voting at the meeting, is overridden by section 184. A simple majority of the votes will now suffice; an ordinary resolution being, in my opinion, a resolution capable of being carried by such a majority. Similarly any agreement, whether evidenced by the articles or other vise, that a director shall be a director for life or for some fixed period is now also overreached.
The field over which section 184 operates is thus extensive for it includes, admittedly, all companies with a quotation on the Stock Exchange.
It is now contended, however, that it does something more; namely, that it provides in effect that when the ordinary resolution proposing the removal of the director is put to the meeting each shareholder present shall have one vote per share and no more: and that any provision in the articles providing that any shareholder shall, in relation to this resolution, have "weighted" votes attached to his shares, is also nullified by section 184. A provision for such "weighting" of votes which applies generally, that is as part of the normal pattern of voting, is accepted by the appellant as unobjectionable: but an article such as the one here under consideration which is special to a resolution seeking the removal of a director falls foul of section 184 and is overridden by it.
Why should this be? The section does not say so, as it easily could. and those who drafted it and enacted it certainly would have included among their numbers many who were familiar with the phenomenon of articles of association carrying "weighted votes." It must therefore have been plain at the outset that unless some special provision were made, the mere direction that an ordinary resolution would do in order to remove a director would leave the section at risk of being made inoperative in the way that has been done here. Yet no such provision was made, and in this Parliament followed its practice of leaving to companies and their shareholders liberty to allocate voting rights as they pleased.
When, therefore, it is said that a decision in favour of the respondent in this case would defeat the purpose of the section and make a mockery of it, it is being assumed that Parliament intended to cover every possible case and block up every loophole. I see no warrant for any such assumption. A very large part of the relevant field is in fact covered and covered effectively. and there may be good reasons why Parliament should leave some companies with freedom of maneuver in this particular matter. There are many small companies which are conducted in practice as though *1111 they were little more than partnerships, particularly family companies running a family business; and it is, unfortunately, sometimes necessary to provide some safeguard against family quarrels having their repercussions in the boardroom. I am not, of course, saying that this is such a case: I merely seek to repel the argument that unless the section is construed in the way the appellant wants, it has become "inept" and "frustrated."
I would dismiss the appeal.

Representation

Solicitors: White & Leonard & Corbin Greener: Layzell, Hayes & Morley-Slinn.

Appeal dismissed. (F. C. )

(c) Incorporated Council of Law Reporting For England & Wales
[1970] A.C. 1099

*821 Howard Smith Ltd. Appellant v. Ampol Petroleum Ltd. and Others

Respondents

Privy Council

PC

Lord Wilberforce, Lord Diplock, Lord Simon of Glaisdale, Lord Cross of Chelsea

and Lord Kilbrandon

1973 Nov. 26, 27, 28, 29; Dec. 3; 1974 Feb. 14

[On Appeal from the Supreme Court of New South Wales]


Company--Director--Fiduciary duty--Allotment of shares--Australian company in need of capital--Primary object of directors to alter majority share holding of issued shares--No personal advantage to directors--Whether power to allot shares validly exercised by directors

Two companies, A and B, held 55 per cent. of the issued shares of company M, which required more capital. A made an offer for all the issued shares of M, and another company, H, announced an intention to make a higher offer for those shares. M's directors considered A's offer too low and decided to recommend that the offer be rejected. A and B then stated that they intended to act jointly in the future operations of M and would reject any offer for their shares. H then applied to M for an allotment of 4 1/2 million ordinary shares; M's directors decided by a majority to make the allotment and immediately issued the shares. The effect of that issue was that M had much needed capital; A and B's share holding was reduced to 36.6 per cent. of the issued shares and H was in a position to make an effective takeover offer. A challenged the validity of the issue of the shares to H and sought an order in the Supreme Court for the rectification of the share register by the removal of H as a member of M in respect of the allotted shares. M's directors contended that the primary reason for the issue of the shares to H was to obtain more capital.
Street J. found that M's directors had not been motivated by any purpose of personal gain or advantage or by a desire to *822 retain their position on the board, that M needed capital, but that the primary purpose of the allotment was to reduce the proportionate share holding of A and B so that H could proceed with its takeover offer. The judge held that in those circumstances the directors had improperly exercised their powers and he ordered that the allotment of shares be set aside and the share register rectified.
On appeal by H to the Judicial Committee:-
Held, dismissing the appeal, that, although the directors had acted honestly and had power to make the allotment, to alter a majority share holding was to interfere with that element of the company's constitution which was separate from and set against the directors' powers and, accordingly, it was unconstitutional for the directors to use their fiduciary powers over the shares in the company for the purpose of destroying an existing majority or creating a new majority; and that, since the directors' primary object for the allotment of shares was to alter the majority share holding, the directors had improperly exercised their powers and the allotment was invalid (post, pp. 837F - 838C).
Mills v. Mills (1938) 60 C.L.R. 150 considered.
Per curiam. A matter such as the raising of finance is one of management, within the responsibility of the directors. It would be wrong for a court to question the correctness of the management's decision if bona fide arrived at. But, when a dispute arises whether the directors of a company made a particular decision for one purpose or for another, or whether there being more than one purpose, one or another purpose was the substantial or primary purpose, the court is entitled to look at the situation objectively in order to estimate how critical or pressing or substantial an alleged requirement may have been. If it finds that a particular requirement, though real, was not urgent or critical at the relevant time, it may have reason to doubt or discount the assertions of individuals that they acted solely in order to deal with the matter (post, p. 832D-G).
Judgment of the Supreme Court of New South Wales affirmed.

The following cases are referred to in the judgment:
Australian Metropolitan Life Assurance Co. Ltd. v. Ure (1923) 33 C.L.R. 199.
Automatic Self-Cleansing Filter Syndicate Co. Ltd. v. Cuninghame [1906] 2 Ch. 34, Warrington J. and C.A.
Fraser v. Whalley (1864) 2 Hem. &; M. 10.
Harlowe's Nominees Pty. Ltd. v. Woodside (Lakes Entrance) Oil Co. N.L. (1968) 121 C.L.R. 483.
Hindle v. John Cotton Ltd. (1919) 56 Sc.L.R. 625, H.L.(Sc.).
Hogg v. Cramphorn Ltd. [1967] Ch. 254; [1966] 3 W.L.R. 995; [1966] 3 All E.R. 420.
Mills v. Mills (1938) 60 C.L.R. 150.
Ngurli Ltd. v. McCann (1953) 90 C.L.R. 425.
Piercy v. S. Mills & Co. Ltd. [1920] 1 Ch. 77.
Punt v. Symons & Co. Ltd. [1903] 2 Ch. 506.
Teck Corporation Ltd. v. Millar (1972) 33 D.L.R. (3d) 288.
The following additional cases were cited in argument:
Allen v. Gold Reefs of West Africa Ltd. [1900] 1 Ch. 656, C.A.
Ansett v. Butler Air Transport Ltd. (No. 1) (1958) 75 W.N.(N.S.W.) 299.
Ashburton Oil N.L. v. Alpha Minerals N.L. (1971) 123 C.L.R. 614 *823 .
Bamford v. Bamford [1970] Ch. 212; [1968] 3 W.L.R. 317; [1968] 2 All E.R. 655; [1970] Ch. 212; [1969] 2 W.L.R. 1107; [1969] 1 All E.R. 969, C.A.
Benmax v. Austin Motor Co. Ltd. [1955] A.C. 370; [1955] 2 W.L.R. 418; [1955] 1 All E.R. 326, H.L.(E.).
Gaiman v. National Association for Mental Health [1971] Ch. 317; [1970] 3 W.L.R. 42; [1970] 2 All E.R. 362.
Grant v. John Grant and Sons Pty. Ltd. (1950) 82 C.L.R. 1.
Greenhalgh v. Arderne Cinemas Ltd. [1951] Ch. 286; [1950] 2 All E.R. 1120, C.A.
Jermyn Street Turkish Baths Ltd., In re [1971] 1 W.L.R. 1042; [1971] 3 All E.R. 184, C.A.
Orion Property Trust Ltd. v. Du Cane Court Ltd., March 15, 1963; Bar Library Transcript No. 77 of 1963, C.A.
Peters' American Delicacy Co. Ltd. v. Heath (1939) 61 C.L.R. 457.
Richard Brady Franks Ltd. v. Price (1937) 58 C.L.R. 112.
Royal British Bank v. Turquand (1855) 5 E. &; B. 248; (1856) 6 E. &; B. 327.
Salmon v. Quin & Axtens Ltd. [1909] 1 Ch. 311, C.A.; [1909] A.C. 442, H.L.(E.).
Savvy Corporation Ltd. v. Development Underwriting Ltd. (1963) 80 W.N. (N.S.W.) 1021.
Shuttleworth v. Cox Brothers & Co. (Maidenhead) Ltd. [1927] 2 K.B. 9, C.A.
Smith and Fawcett Ltd., In re [1942] Ch. 304; [1942] 1 All E.R. 542, C.A.
Surrey Garden Village Trust Ltd., In re [1965] 1 W.L.R. 974; [1964] 3 All E.R. 962.

APPEAL (No. 9 of 1973) from a judgment and order (December 14, 1972) of the Supreme Court of New South Wales (Street C.J. in Eq.) in proceedings brought by the respondent, Ampol Petroleum Ltd., against the appellant, Howard Smith Ltd., and others, that an allotment and issue to Howard Smith Ltd. of 4,500,000 ordinary shares of $1 each in the capital of R. W. Miller (Holdings) Ltd. was invalid and should be set aside.
The facts are stated in the judgment of their Lordships.
K. A. Aickin Q.C. and A. M. Gleeson (both of the New South Wales Bar) for the appellant, Howard Smith Ltd. The purpose of the joint announcement by Ampol and Bulkships on June 27, 1972, was clearly to force Howard Smith out of the bidding for Millers and to preclude any other bids being made, so that the outside shareholders in Millers would have to accept the Ampol offer. After considering a letter from Howard Smith on July 7, 1972, the Millers' directors made the allotment and issue of 4,500,000 shares to Howard Smith the same day. This had the effect of destroying the existing majority bloc. The trial judge expressly found that the Millers' directors were not motivated by any purpose of personal gain or advantage in making the allotment. The reasons for which the directors made the allotment were: (a) to obtain a fair deal for all their shareholders, (b) to protect the minority shareholders, (c) to keep the Howard Smith offer open, and (d) to obtain additional capital needed. The judge rejected the argument that there was this mixed combination of purposes rather than one primary purpose, but the directors themselves *824 believed that there was such a combination and they were honestly acting in the discharge of their powers in interests which they were entitled to serve. There was adequate material from which such a conclusion could be drawn.
In holding the issue to be invalid the trial judge relied on the dictum of Dixon J. in Mills v. Mills (1938) 60 C.L.R. 150, 185-186, that the substantial object, the accomplishment of which formed the real ground of the board's action, was to be ascertained. That dictum cannot properly be applied here because it is inadequate to deal with a case in which there are collateral purposes. In so far as the judge based his decision on his finding of fact that the primary purpose of the directors in making the allotment was to reduce the proportionate share holding of Ampol and Bulkships, it was contrary to the weight of evidence.
Ampol challenged the allotment on the ground that the directors were not acting bona fide for the benefit of the company as a whole. The interests of the majority shareholders differed from the interests of the minority shareholders. In such circumstances the phrase 'bona fide for the benefit of the company as a whole,' as used by Sir Nathaniel Lindley M.R. in Allen v. Gold Reefs of West Africa Ltd. [1900] 1 Ch. 656, 671, is not an applicable phrase. It is not easy to define the interests of 'the company as a whole.' The inquiry should be directed as to whether the directors exercised their power in the interests of 'the company as a commercial entity.' The company, as a commercial entity, stood to benefit from the share issue, and this was a substantial ground on which the directors supported the proposal to make the allotment. All the shareholders in fact benefited, including Ampol and Bulkships in their capacity as shareholders. The test in Allen v. Gold Reefs of West Africa Ltd. [1900] 1 Ch. 656 that the power of directors must be exercised 'bona fide for the benefit of the company as a whole' was adopted in subsequent cases, but in Shuttleworth v. Cox Brothers & Co. (Maidenhead) Ltd. [1927] 2 K.B. 9, Atkin L.J., at p. 26, warned against being fettered by the form of the words.
The present is the first case in which it has been contended that an issue of shares was invalid because it had the effect of destroying the majority bloc, although the purpose of the issue was legitimate. There is no reported case in which an issue of shares made within the directors' powers has been held invalid for any reason other than personal advantage to the directors. The effect of an issue should not be confused with the purpose for which the issue is made. Directors cannot use their powers merely to destroy the majority bloc, but if that is only the effect, they may do so for a legitimate purpose. The Millers' board reacted favorably to Howard Smith's proposal for three reasons: (1) to enable the minority shareholders to sell at a higher price, (2) because the cash would ease the company's financial problems, and (3) because of the expressed intention of Howard Smith to maintain the company intact as a trading organization. Even if reasons (1) and (3) be regarded as illegitimate, reason (2) was clearly one on which the directors could validly act. There was no basis on which to infer that the substantial purpose was illegitimate. Where there are two or more concurrent purposes it is wrong to assume that one must be predominant. The proper question is: 'Would the directors have acted in the way which they did if there had not been the need for capital?' *825 What was done would not have been done but for the existence of that legitimate purpose. The trial judge failed to pay sufficient regard to the consideration that what was in question was the beliefs and understandings of the directors on factual matters, not the correctness of such beliefs and understandings, and he erred in substituting his own view of Millers' financial situation for that of the directors honestly formed on relevant financial and legal advice. The judge also erred in proceeding upon the footing that there must be a single ' primary purpose' and in failing to take account that the purposes which actuated the majority of the directors were at least twofold and that they would not have acted as they did in the absence of the purpose of obtaining needed capital.
Ansett v. Butler Air Transport Ltd. (No. 1) (1958) 75 W.N.(N.S.W.) 299 does not support the judge's view that the directors did not have it within their power to issue shares for the purpose of destroying an existing majority bloc, whether or not there was an indirect or consequential objective that they believed it to be for the benefit of the company, having regard to his finding that the directors in making the allotment were not concerned to preserve their own positions on the board. Directors acting within their management powers are not subject to the wishes of the majority shareholders. [Reference was made to Automatic Self-Cleansing Filter Syndicate Co. Ltd. v. Cuninghame [1906] 2 Ch. 34; Salmon v. Quin & Axtens Ltd. [1909] 1 Ch. 311; [1909] A.C. 442; and Ashburton Oil N.L. v. Alpha Minerals N.L. (1971) 123 C.L.R. 614.]
Where directors have acted in what they believed to be an interest or interests which they were entitled to serve, their exercise of power can only be set aside if it be found that the interest or one of the interests they were serving was an inadmissible or corrupting interest, such as self-interest, or that they so misconceived their function that it cannot be said that they were acting substantially for the purpose of serving any legitimate interest. There may be legitimate reasons, other than to raise capital, for which shares may be validly issued. The power of the directors of a company to issue shares is a fiduciary power. A court will not interfere with or set aside an exercise of the power unless satisfied that the power has been exceeded or abused. The ultimate inquiry is to the bona fides of the directors. [Reference was made to Fraser v. Whalley (1864) 2 Hem. & M. 10; Punt v. Symons & Co. Ltd. [1903] 2 Ch. 506; Hindle v. John Cotton Ltd. (1919) 56 Sc.L.R. 625; Piercy v. S. Mills & Co. Ltd. [1920] 1 Ch. 77; In re Smith and Fawcett Ltd. [1942] Ch. 304; Greenhalgh v. Arderne Cinemas Ltd. [1951] Ch. 286; In re Surrey Garden Village Trust Ltd. [1965] 1 W.L.R. 974; Hogg v. Cramphorn Ltd. [1967] Ch. 254; Bamford v. Bamford [1970] Ch. 212; In re Jermyn Street Turkish Baths Ltd. [1971] 1 W.L.R. 1042; and to the Australian cases of Australian Metropolitan Life Assurance Co. ltd. v. Ure (1923) 33 C.L.R. 199; Richard Brady Franks Ltd. v. Price (1937) 58 C.L.R. 112; Mills v. Mills, 60 C.L.R. 150; Peters' American Delicacy Co. Ltd. v. Heath (1939) 61 C.L.R. 457; Ngurli Ltd. v. McCann (1953) 90 C.L.R. 425; Savoy Corporation Ltd. v. Development Underwriting Ltd. (1963) 80 W.N.(N.S.W.) 1021; and Harlowe's Nominees Pty. Ltd. v. Woodside (Lakes Entrance) Oil Co. N.L. (1968) 121 C.L.R. 483.]
Most of the cases in which issues of shares by directors have been set *826 aside were cases where the directors were held to have been acting from the motive of personal advantage, in particular for the purpose of entrenching their own positions as in Fraser v. Whalley, 2 Hem. & M. 10; Punt v. Symons & Co. Ltd. [1903] 2 Ch. 506; Piercy v. S. Mills & Co. Ltd. [1920] 1 Ch. 77; and Ngurli Ltd. v. McCann, 90 C.L.R. 425. Such a purpose is wholly impermissible and corrupting and vitiates the exercise of the power. In the present case it was expressly found that there was no such purpose.
The recent Canadian decision in Teck Corporation Ltd. v. Millar (1972) 33 D.L.R. (3d) 288 held that the directors of a company were entitled to use their powers to defeat the majority shareholders in order to fight off a takeover if they considered it reasonable in the interests of the company to do so. The purpose of the directors in that case was to obtain the best contract for the company. They had reasonable ground for their beliefs and they acted in good faith and not in their own self-interests. It was held that their motive was not improper. Similarly, in the present case, the directors acted to keep the Howard Smith offer open and they did so in the belief that this was in the best interests of the company despite the wishes of the majority shareholders. The important question is why the directors acted as they did. The judge misapplied the law because he failed to ask that question. He was wrong in his view that directors can never destroy a majority. It was within the power of the directors to destroy the majority, being in the interests of the company to do so, and the exercise of the power was not vitiated by pursuing their own self- interests.
The judge further erred in finding that Howard Smith had notice of the impropriety of the purposes of the Millers' directors in making the allotment.
The judge held that there was an infringement of Stock Exchange rules 11 (a) and 11 (b) but that that did not of itself establish invalidity of the issue. Nevertheless he attached undue significance to the breach of the Stock Exchange rules and appeared to take the view that the 'imprudence' of the action contributed to the invalidity.
W. P. Deane Q.C., David F. Rofe (both of the New South Wales Bar), Bruce Coles and R. R. Stitt (of the New South Wales Bar) for the respondent, Ampol Petroleum Ltd. Street J.'s decision was based on findings of fact with which an appellate court should not interfere unless satisfied that such findings of fact were clearly and demonstrably wrong. [Reference was made to Benmax v. Austin Motor Co. Ltd. [1955] A.C. 370.] There was no evidence to support the appellant's claim that Ampol was inimical to Millers and likely to dismember the company if it took it over, and no evidence to suggest that it was a purpose of the allotment to Howard Smith to prevent the break-up of Millers. As found by the judge, the substantial or dominant purpose of the allotment was foreign to the powers of the Millers' directors to allot shares, and was for an impermissible purpose. The judge rightly relied on the dictum of Dixon J. in Mills v. Mills, 60 C.L.R. 150, that the substantial object was to be ascertained, and correctly applied it to the facts in the instant case.
The allotment was invalid either if made for the purpose found by the judge or even if made for the purposes suggested by the appellant. The judge found that the only operative purpose was to destroy the existing majority so that the minority might sell its shares at a higher price to *827 Howard Smith who wished to gain control. In coming to that decision he extracted the principle in Mills v. Mills, 60 C.L.R. 150, that the task was to ascertain the substantive purpose of the allotment and his use of the passage cited at pp. 185-186 was beyond exception. That principle was adopted in a succession of cases culminating in Ashburton Oil N.L. v. Alpha Minerals N.L., 123 C.L.R. 614, which is a decision very relevant to the present case. The object was that the minority would get a better price for their shares. That was not a purpose within the powers of the directors to allot shares. No corporate purpose was involved.
There is no dispute that a majority of shareholders cannot control the directors as to the exercise of their fiduciary powers, but the directors of a company cannot use their fiduciary powers over the shares of the company purely for the purpose of destroying an existing majority. The cases concerning the allotment of shares show that the primary purpose of the power is to raise capital for the company. The purpose of altering the balance of voting power is never permissible. [Reference was made to Hindle v. John Cotton Ltd., 56 Sc.L.R. 625, 630-631 and Fraser v. Whalley, 2 Hem. & M. 10.] None of the cases subsequent to Fraser v. Whalley conflicts with it. [Reference was made to Piercy v. S. Mills & Co. Ltd. [1920] 1 Ch. 77; Punt v. Symons & Co. Ltd. [1903] 2 Ch. 506; Mills v. Mills, 60 C.L.R. 150; Grant v. John Grant and Sons Pty. Ltd. (1950) 82 C.L.R. 1; Ngurli Ltd. v. McCann, 90 C.L.R. 425; Hogg v. Cramphorn Ltd. [1967] Ch. 254; Harlowe's Nominees Pty. Ltd. v. Woodside (Lakes Entrance) Oil Co. N.L., 121 C.L.R. 483; and Ashburton Oil N.L. v. Alpaca Minerals N.L., 123 C.L.R. 614.] All the cases show that an allotment for the purpose of destroying a majority is impermissible; a fortiori if not for a corporate purpose. Megarry J. in Gaiman v. National Association for Mental Health [1971] Ch. 317, 330, correctly stated the broad general principle.
In Teck Corporation Ltd. v. Millar, 33 D.L.R. (3d) 288 the approach of Berger J. was inconsistent with the authorities accepted in Australia and should not recommend itself in an Australian context. Even if it be accepted that directors can allot shares to baulk the wishes of the majority shareholders if the directors believe on reasonable grounds that the wishes of the majority would damage the company, the present case is distinguishable in that there were no reasonable grounds to apprehend damage to the company. In Orion Property Trust Ltd. v. Du Cane Court Ltd. (unreported), Bar Library Transcript No. 77 of 1963, C.A., the issue of shares to frustrate a take-over was held to be for a non-corporate purpose and invalid.
The purported allotment was not made bona fide for the benefit of Millers as a whole, and Howard Smith, having instigated the making of the allotment, had knowledge and notice that the allotment was being made for an improper purpose. Consequently neither the defence of bona fide purchaser for value without notice nor the benefit of the rule in Royal British Bank v. Turquand (1855) 5 E. & B. 248; (1856) 6 E. & B. 327 was available to Howard Smith.
The Stock Exchange requirements were a matter of contract between Millers and the Stock Exchange. The allotment was in breach of contract and cannot therefore be said to have been made bona fide. Although the *828 breach of the Stock Exchange regulations did not in itself invalidate the issue it clearly indicated that the directors knew that their action was improper.
Aickin Q.C. in reply. In Orion Property Trust Ltd. v. Du Cane Court Ltd. (unreported) the Court of Appeal regarded the directors as pursuing their own interests; that case therefore adds nothing to those already cited.
As regards the question of notice: it was not shown that Howard Smith had knowledge of what moved the Millers' board. The inference drawn by the judge that Howard Smith was fixed with notice that the Millers' board was influenced by an inadmissible purpose was not a reasonable inference.
Even though the Millers' board may have acted in breach of the Stock Exchange rules the allotment was nevertheless justified in the interests of the shareholders. The directors made a commercial judgment and took a calculated risk in regard to what was best in the circumstances.
The respondent argued that in the absence of a corporate purpose for the allotment it was invalid. If the proposition is that an allotment will be invalid unless the sole or principal purpose is the benefit of the company as a commercial entity, such a proposition cannot be reconciled with Mills v. Mills, 60 C.L.R. 150 having regard to the facts of that case. Here there was a conflict of interest between two groups of shareholders and the directors were entitled under the circumstances to prefer one group. Their action was permissible so long as they did not act in their own personal interests. The requirement of corporate purpose cannot lie either with the decision in Mills v. Mills, 60 C.L.R. 150, or with that in Peters' American Delicacy Co. Ltd. v. Heath, 61 C.L.R. 457, where the conflict was one between groups of shareholders. So also in Savoy Corporation Ltd. v. Development Underwriting Ltd., 80 W.N.(N.S.W.) 1021, and Greenhalgh v. Arderne Cinemas Ltd. [1951] Ch. 286, the action of the directors was valid although there was no 'corporate purpose.' The proper test is whether the directors have endeavoured to obtain some personal benefit. If the purpose is permissible incidental consequences cannot invalidate the allotment. The judge held that the primary purpose was to keep the Howard Smith offer open and that raising capital was a secondary purpose. It is permissible to issue shares primarily for purposes other than to raise capital, e.g. as in In re Jermyn Street Turkish Baths Ltd. [1971] 1 W.L.R. 1042.
In Teck Corporation Ltd. v. Molecular, 33 D.L.R. (3d) 288, Berger J. considered the leading Australian authorities and his reasoning did not run contrary to them. The present case is unique in that the directors wished to keep the Howard Smith offer open and were advised that they could not do so unless their action was for the benefit of the company as a whole. There was a need for capital and they went ahead with the issue for the purpose of satisfying that need. They would not have acted but for the legitimate purpose of satisfying the capital need. The judge found that in making the issue the object of keeping the Howard Smith offer open was uppermost in their minds, but the issue was made for the co-lateral purpose of raising capital.
[LORD WILBERFORCE: Their Lordships do not desire to hear argument on the issue as to whether the chairman of the Millers' directors acted *829 within his powers in excluding one of the directors, Sir Peter Abeles, from the discussion and voting on the proposal to allot the shares to Howard Smith, or on any other aspects of the case.]
February 14, 1974. The judgment of their Lordships was delivered by
Cur. adv. vult.

LORD WILBERFORCE.
This is an appeal from a decision of Street J., Chief Judge in Equity, in the Equity Division of the Supreme Court of New South Wales. On December 14, 1972, the judge made certain declarations and orders, the effect of which was to set aside the issue to the appellant ('Howard Smith') of 4,500,000 ordinary shares of $1 each in the capital of R. W. Miller (Holdings) Ltd. ('Millers'). The proceedings, for the setting aside of this issue, were brought by the respondent to the appeal ('Ampol') as plaintiff against 14 defendants, which included Howard Smith, Millers, 11 directors or alternative directors of Millers, and a company which acted as registrar for Millers in New South Wales. Only Howard Smith, as appellant, and Ampol, as respondent, appeared on the present appeal to the Board.
The litigation arose out of a struggle for the takeover and control of Millers, the rival parties to which were Ampol on one side and Howard Smith on the other. Associated with Ampol was Bulkships Ltd., a substantial shareholder in Millers. Ampol had acquired, in May 1972, a large share holding in Millers; this holding was 29.8 per cent. of Millers' issued share capital; Ampol bought it for a price of $2.27 a share. Bulkships owned 25.1 per cent. of Millers' issued share capital so that Ampol and Bulkships together had about 55 per cent., the remaining 45 per cent. being held by outside shareholders. By the allotment, made on July 6, 1972, Howard Smith obtained 4,500,000 shares at $2.30 a share. The effect of this, if valid, would be that Ampol and Bulkships would no longer be the majority shareholders in the company.
The rival takeover propositions, to which reference has been made, were as follows. On June 15, 1972, Ampol formally made an offer for all issued shares in Millers at $2.27 per share. On June 23, 1972, the directors of Millers met and considered the offer. They unanimously decided to recommend that it be rejected as too low. Before this date there had been discussions between Howard Smith and persons concerned in the management of Millers who included Mr. A. N. Taylor, the managing director; these persons have been referred to in the proceedings as 'the management team.' No other Millers' director than Mr. Taylor was involved at this stage. These discussions first focused upon the possible acquisition by Howard Smith of two tankers which were under construction for Millers; the concern of Howard Smith, and to some extent of the management team of Millers, being to prevent these tankers passing under the control of Ampol. Objections were found to exist to this proposal and then there emerged an alternative, namely, that Howard Smith should make an offer to take over Millers in toto. On June 22, 1972, Howard Smith announced its intention to make a takeover offer at $2.50 cash per share (there was an alternative offer of cash and shares worth at that date $2.76). On June 27, 1972, a press statement was issued by Ampol and Bulkships stating that the *830 two companies intended to 'act jointly in relation to the future operation' of Millers: that they had decided to reject any offer for their shares 'whether from Howard Smith Ltd. or from any other source': that Ampol and Bulkships between them controlled in excess of 55 per cent. of the issued shares of Millers. This statement conveyed the message, unmistakably, that, with the share holding as it was, it would be useless for the outside shareholders to accept the Howard Smith offer or to decline the Ampol offer and that it would be useless for Howard Smith to proceed.
The position was then considered afresh by Howard Smith and the Millers management team and a plan was evolved to make an issue of shares to Howard Smith of sufficient size to convert Ampol and Bulkships together into minority shareholders, so that Howard Smith could proceed with its offer. Since this was higher than the Ampol offer, there was every prospect of it succeeding, and Howard Smith would then control Millers. The exact number of shares to be issued was worked out upon the basis of Millers' known or assumed capital requirements and upon the footing of legal advice that an issue could be justified if, and only if, it were bona fide related to these requirements. Millers in fact did require some $10,000,000 to finance the tankers under construction and generally to secure its financial position, so it was calculated that, at an issue price of $2.30 per share, 4,500,000 shares needed to be issued: the figures were fixed accordingly.
On July 6, 1972, Howard Smith addressed a letter to Millers applying for an allotment of 4,500,000 $1 ordinary shares at a premium of $1.30 per share. It contained the following passages:
'This combination by the two largest shareholders of your company [viz. Ampol and Bulkships] would in the present circumstances effectively deprive the very large number of minority shareholders of R. W. Miller (Holdings) Ltd. of the opportunity of securing a substantially higher price for their shares. My board would be most reluctant to proceed with a bid which, even if every shareholder other than Ampol or Bulkships accepted, could only result in Howard Smith Ltd. being the largest individual shareholder in a company the future operations of which would be controlled by a combination of two smaller shareholders. We believe that your board is conscious of the injustice being suffered by your smaller shareholders and we submit for your consideration a proposal which, if it meets with the approval of your board, would enable Howard Smith Ltd. to proceed with its intended offer thereby restoring to your minority shareholders the right to sell their shares to the highest bidder, and would give Ampol Petroleum Ltd. and Bulkships Ltd. a similar opportunity. ...
'Notwithstanding the current circumstances I believe that the opportunity of placing such a large parcel of shares at a substantial premium is likely to be of considerable benefit to your company. The infusion of $10,350,000 cash is likely to ease the financing problems your company has faced in recent years, and enable you to rearrange your borrowings with the prospect of interest savings.'
This letter was considered by the directors of Millers at a board meeting held on the same day with Mr. Taylor in the chair, and after discussion the proposal was accepted by a majority of 4-2. One of the directors, *831 Sir Peter Abeles, did not vote because the chairman ruled that he was disqualified by reason of his interest as a director of Bulkships. This ruling was challenged in the proceedings and reference will subsequently be made to the matter. The allotment and issue to Howard Smith was made immediately after the meeting. These proceedings followed on July 7, 1972.
The above is a brief summary of the many sided events which preceded the issue in dispute. These were investigated in all possible detail at the trial which took 28 days. The Millers' directors who voted for the issue all gave evidence, as did other persons involved in the framing of the arrangement with Howard Smith. On this evidence and upon a considerable volume of documentary material, full and lucid findings were made by Street J. and set out at length in his judgment. No purpose would be served by repeating the effect of this and their Lordships have confined their own narrative to the minimum necessary for understanding. The central findings of the judge, directed as they are to a determination of the purpose of the Millers' board of directors in making the disputed issue, and based as they are upon his estimate of the individual directors as seen in the witness box, are such as an appellate tribunal would necessarily respect. Their Lordships in fact are of opinion that upon the evidence given at the trial these findings are not only supportable, but inevitable. They will first endeavour to summarise them and will then consider to what conclusion they should lead in law.

Findings of fact

1. The judge found, as their Lordships think it right to make clear at once, that the Millers' directors were not motivated by any purpose of personal gain or advantage, or by any desire to retain their position on the board. The judge said:
'I discard the suggestion that the directors of Millers allotted these shares to Howard Smith in order to gain some private advantage for themselves by way of retention of their seats on the board or by obtaining a higher price for their personal shareholding. Personal considerations of this nature were not to the forefront so far as any of these directors was concerned, and in this respect their integrity emerges unscathed from this contest.'
2. He then proceeded to consider the main issue which he formulated in accordance with the principle stated in the High Court of Australia by Dixon J. in Mills v. Mills (1938) 60 C.L.R. 150, 185-186. This was to ascertain the substantial object the accomplishment of which formed the real ground of the board's action. The issue before him he considered to be whether the primary purpose of the majority of directors was to satisfy Millers' need for capital or whether their primary purpose was to destroy the majority holding of Ampol and Bulkships.
It was suggested on behalf of the appellants that in stating the issue in these terms the judge did not give adequate recognition to the concern felt by the management team, and by Mr. Taylor in particular, that the future of Millers under the control of Ampol and Bulkships might be uncertain and that he should have considered whether the purpose of the majority *832 directors in deciding to make the allotment to Howard Smith might not have been, at least in part, to secure the company's future as a going concern and to prevent its possible dismemberment. But their Lordships do not consider this criticism to be justified. The judge indeed accepted that during the period antecedent to the issue the Millers' directors felt a growing concern, even apprehension, as to what the intentions of Ampol, or of Ampol and Bulkships together, might be, but what he had to decide was what was the primary purpose of the directors in making the disputed allotment. This decision he had to make on the case as presented by the majority directors and on the evidence. It is important to appreciate that the case put forward by the majority directors was in the terms of the first of the alternatives mentioned above, i.e. that their primary purpose was to raise necessary capital. and as regards evidence, it was clear from what each of them said at the trial, that they did not themselves contend that they were motivated by any other considerations bearing upon the interest of Millers than concern to satisfy Millers' capital needs. It is equally clear that the minutes and partial verbatim account of the critical meeting of July 6, 1972, did not suggest that any other consideration was at that time acting upon their minds. The issue was therefore, in their Lordships' opinion, correctly stated.
In order to assist him in deciding upon the alternative motivations contended for, the judge considered first, at some length, the objective question whether Millers was in fact in need of capital. This approach was criticised before their Lordships: it was argued that what mattered was not the actual financial condition of Millers, but what the majority directors bona fide considered that condition to be. Their Lordships accept that such a matter as the raising of finance is one of management, within the responsibility of the directors: they accept that it would be wrong for the court to substitute its opinion for that of the management, or indeed to question the correctness of the management's decision, on such a question, if bona fide arrived at. There is no appeal on merits from management decisions to courts of law: nor will courts of law assume to act as a kind of supervisory board over decisions within the powers of management honestly arrived at.
But accepting all of this, when a dispute arises whether directors of a company made a particular decision for one purpose or for another, or whether, there being more than one purpose, one or another purpose was the substantial or primary purpose, the court, in their Lordships' opinion, is entitled to look at the situation objectively in order to estimate how critical or pressing, or substantial or, per contra, insubstantial an alleged requirement may have been. If it finds that a particular requirement, though real, was not urgent, or critical, at the relevant time, it may have reason to doubt, or discount, the assertions of individuals that they acted solely in order to deal with it, particularly when the action they took was unusual or even extreme.
This was, in their Lordships' view, the course taken by Street J. His conclusion as to the objective situation was expressed in these words:
'It is clear on the evidence that Millers was, as at July 6, 1972, in a position of tight liquidity. It did not have within its own funds *833 sufficient money to cover its present and forseeable financial commitments. It had, however, been in a position of tight liquidity for many months before July 6, 1972. There is a history of a series of financial crises; but at the same time there is a trend of improvement during the months preceding the meeting of July 6. ...
'In short, I am satisfied that as at July 6, 1972, there was a need for capital. I am satisfied that this need had been recognised for many months past and that a policy had been followed of meeting it by loan capital rather than by share capital. I am satisfied that progress was being made in meeting this need by this policy. I am not satisfied that the company's financial affairs were at crisis point due to unavailability of capital, or that there was a pressing need to obtain cash funds by a share issue.'
Their Lordships accept that the general financial picture as drawn by the judge was correct. On this view of the situation in July 1972 the judge made his findings as to the purpose of the majority directors in voting for the issue.
After hearing and considering the evidence of Messrs. Taylor, Nicholl, Balhorn and Anderson, each asserting that his primary purpose in voting for the allotment on July 6, 1972, was to meet an urgent capital need of Millers, the judge found that he was unable to accept these assertions. He found that the primary purpose so far as the management team was concerned (this is not the directors, but the team headed by Mr. Taylor which negotiated with Howard Smith) was to issue shares to Howard Smith so as to enable the Howard Smith takeover to proceed. As to the Millers' majority directors he said:
'They had found themselves enmeshed in a takeover struggle. The greater part, if not the whole, of their thinking in the critical days up to and including July 6 was directed to this takeover situation. It is unreal and unconvincing to hear them assert in the witness box that their dominant purpose was to obtain capital rather than to promote the Howard Smith's takeover offer, and I do not believe these assertions.
'The conclusion that I have reached is that the primary purpose of the four directors in voting in favour of this allotment was to reduce the proportionate combined shareholding of Ampol and Bulkships in order to induce Howard Smiths to proceed with its takeover offer. There was a majority bloc in the share register. Their intention was to destroy its character as a majority. The directors were, and had for some weeks been, concerned at the position of strength occupied by Ampol and Bulkships together. They were aware that in the light of the attitude of these two shareholders Howard Smiths could not be expected to proceed with its takeover offer that these directors regarded as attractive. They issued the shares so as to reduce the interest of these two shareholders to something significantly less than that of a majority. This was the immediate purpose. The ultimate purpose was to procure the continuation by Howard Smith's of the takeover offer made by that company.'
Their Lordships accept these findings.

*834 The law

The directors, in deciding to issue shares, forming part of Millers' unissued capital, to Howard Smith, acted under clause 8 of the company's articles of association. This provides, subject to certain qualifications which have not been invoked, that the shares shall be under the control of the directors, who may allot or otherwise dispose of the same to such persons on such terms and conditions and either at a premium or otherwise and at such time as the directors may think fit. Thus, and this is not disputed, the issue was clearly intra vires the directors. But, intra vires though the issue may have been, the directors' power under this article is a fiduciary power: and it remains the case that an exercise of such a power though formally valid, may be attacked on the ground that it was not exercised for the purpose for which it was granted. It is at this point that the contentions of the parties diverge. The extreme argument on one side is that, for validity, what is required is bona fide exercise of the power in the interests of the company: that once it is found that the directors were not motivated by self-interest - i.e. by a desire to retain their control of the company or their positions on the board - the matter is concluded in their favour and that the court will not inquire into the validity of their reasons for making the issue. All decided cases, it was submitted, where an exercise of such a power as this has been found invalid, are cases where directors are found to have acted through self-interest of this kind.
On the other side, the main argument is that the purpose for which the power is conferred is to enable capital to be raised for the company, and that once it is found that the issue was not made for that purpose, invalidity follows.
It is fair to say that under the pressure of argument intermediate positions were taken by both sides, but in the main the arguments followed the polarisation which has been stated.
In their Lordships' opinion neither of the extreme positions can be maintained. It can be accepted, as one would only expect, that the majority of cases in which issues of shares are challenged in the courts are cases in which the vitiating element is the self-interest of the directors, or at least the purpose of the directors to preserve their own control of the management; see Fraser v. Whalley (1864) 2 Hem. & M. 10; Punt v. Symons & Co. Ltd. [1903] 2 Ch. 506; Piercy v. S. Mills & Co. Ltd. [1920] 1 Ch. 77; Ngurli Ltd. v. McCann (1953) 90 C.L.R. 425 and Hogg v. Cramphorn Ltd. [1967] Ch. 254, 267.
Further it is correct to say that where the self-interest of the directors is involved, they will not be permitted to assert that their action was bona fide thought to be, or was, in the interest of the company; pleas to this effect have invariably been rejected (e.g. Fraser v. Whalley, 2 Hem. & M. 10 and Hogg v. Cramphorn Ltd. [1967] Ch. 254) - just as trustees who buy trust property are not permitted to assert that they paid a good price.
But it does not follow from this, as the appellants assert, that the absence of any element of self-interest is enough to make an issue valid. Self-interest is only one, though no doubt the commonest, instance of improper motive: and, before one can say that a fiduciary power has been exercised for the purpose for which it was conferred, a wider investigation may have to be made. This is recognised in several well-known statements *835 of the law. Their Lordships quote the clearest which has so often been cited.
'Where the question is one of abuse of powers, the state of mind of those who acted, and the motive on which they acted, are all important, and you may go into the question of what their intention was, collecting from the surrounding circumstances all the materials which genuinely throw light upon that question of the state of mind of the directors so as to show whether they were honestly acting in discharge of their powers in the interests of the company or were acting from some bye-motive, possibly of personal advantage, or for any other reason.' (Hindle v. John Cotton Ltd. (1919) 56 Sc.L.R. 625, 630-631, per Viscount Finlay.)
On the other hand, taking the respondents' contention, it is, in their Lordships' opinion, too narrow an approach to say that the only valid purpose for which shares may be issued is to raise capital for the company. The discretion is not in terms limited in this way: the law should not impose such a limitation on directors' powers. To define in advance exact limits beyond which directors must not pass is, in their Lordships' view, impossible. This clearly cannot be done by enumeration, since the variety of situations facing directors of different types of company in different situations cannot be anticipated. No more, in their Lordships' view, can this be done by the use of a phrase - such as 'bona fide in the interest of the company as a whole,' or ' for some corporate purpose.' Such phrases, if they do anything more than restate the general principle applicable to fiduciary powers, at best serve, negatively, to exclude from the area of validity cases where the directors are acting sectionally, or partially: i.e. improperly favouring one section of the shareholders against another. Of such cases it has been said:
'The question which arises is sometimes not a question of the interest of the company at all, but a question of what is fair as between different classes of shareholders. Where such a case arises some other test than that of the 'interests of the company' must be applied, ...' (Mills v. Mills, 60 C.L.R. 150, 164, per Latham C.J.)
In their Lordships' opinion it is necessary to start with a consideration of the power whose exercise is in question, in this case a power to issue shares. Having ascertained, on a fair view, the nature of this power, and having defined as can best be done in the light of modern conditions the, or some, limits within which it may be exercised, it is then necessary for the court, if a particular exercise of it is challenged, to examine the substantial purpose for which it was exercised, and to reach a conclusion whether that purpose was proper or not. in doing so it will necessarily give credit to the bona fide opinion of the directors, if such is found to exist, and will respect their judgment as to matters of management; having done this, the ultimate conclusion has to be as to the side of a fairly broad line on which the case falls.
'The application of the general equitable principle to the acts of directors managing the affairs of a company cannot be as nice as it is *836 in the case of a trustee exercising a special power of appointment.' (Mills v. Mills, 60 C.L.R. 150, 185-186, per Dixon J.)
The main stream of authority, in their Lordships' opinion, supports this approach. In Punt v. Symons & Co. Ltd. [1903] 2 Ch. 506 Byrne J. expressly accepts that there may be reasons other than to raise capital for which shares may be issued. In the High Court case of Harlowe's Nominees Pty. Ltd. v. Woodside (Lakes Entrance) Oil Co. N.L. (1968) 121 C.L.R. 483, an issue of shares was made to a large oil company in order, as was found, to secure the financial stability of the company. This was upheld as being within the power although it had the effect of defeating the attempt of the plaintiff to secure control by buying up the company's shares. The joint judgment of Barwick C.J., McTiernan J. and Kitto J. contains this passage, at p. 493:
'The principle is that although primarily the power is given to enable capital to be raised when required for the purposes of the company, there may be occasions when the directors may fairly and properly issue shares for other reasons, so long as those reasons relate to a purpose of benefiting the company as a whole, as distinguished from a purpose, for example, of maintaining control of the company in the hands of the directors themselves or their friends. An inquiry as to whether additional capital was presently required is often most relevant to the ultimate question upon which the validity or invalidity of the issue depends; but that ultimate question must always be whether in truth the issue was made honestly in the interests of the company. Directors in whom are vested the right and the duty of deciding where the company's interests lie and how they are to be served may be concerned with a wide range of practical considerations, and their judgment, if exercised in good faith and not for irrelevant purposes, is not open to review in the courts. Thus in the present case it is not a matter for judicial concern, if it be the fact, that the allotment to Burmah would frustrate the ambitions of someone who was buying up shares as opportunity offered with a view to obtaining increased influence on the control of the company, or even that the directors realised that the allotment would have that result and found it agreeable to their personal wishes: ...'
Their Lordships were referred to the recent judgment of Berger J. in the Supreme Court of British Columbia, in Teck Corporation Ltd. v. Millar (1972) 33 D.L.R. (3d) 288. This was concerned with the affairs of Afton Mines Ltd. in which Teck Corporation Ltd., a resource conglomerate, had acquired a majority shareholding. Teck was indicating an intention to replace the board of directors of Afton with its own nominees with a view to causing Afton to enter into an agreement (called an 'ultimate deal') with itself for the exploitation by Teck of valuable mineral rights owned by Afton. Before this could be done, and in order to prevent it, the directors of Afton concluded an exploitation agreement with another company 'Canex'. One of its provisions, as is apparently common in this type of agreement in Canada, provided for the issue to Canex of a large number of shares in Afton, thus displacing Teck's majority. Berger J. found, at p. 328: *837
'their [sc. the directors'] purpose was to obtain the best agreement they could while ... still in control. Their purpose was in that sense to defeat Teck. But, not to defeat Teck's attempt to obtain control, rather it was to foreclose Teck's opportunity of obtaining for itself the ultimate deal. That was ... no improper purpose.'
His decision upholding the agreement with Canex on this basis appears to be in line with the English and Australian authorities to which reference has been made.
In relation to a different but analogous power, to refuse registration of a transfer, the wide range of considerations open to directors, and to the court upon challenge to an exercise of the power, is set out in the judgment of the High Court of Australia in Australian Metropolitan Life Assurance Co. Ltd. v. Ure (1923) 33 C.L.R. 199.
By contrast to the cases of Harlowe and Teck, the present case, on the evidence, does not, on the findings of the trial judge, involve any considerations of management, within the proper sphere of the directors. The purpose found by the judge is simply and solely to dilute the majority voting power held by Ampol and Bulkships so as to enable a then minority of shareholders to sell their shares more advantageously. So far as authority goes, an issue of shares purely for the purpose of creating voting power has repeatedly been condemned: Fraser v. Whalley, 2 Hem. & M. 10; Punt v. Symons & Co. Ltd. [1903] 2 Ch. 506; Piercy v. S. Mills & Co. Ltd. [1920] 1 Ch. 177 ('merely for the purpose of defeating the wishes of the existing majority of shareholders') and Hogg v. Cramphorn Ltd. [1967] Ch. 254. In the leading Australian case of Mills v. Mills, 60 C.L.R. 150, it was accepted in the High Court that if the purpose of issuing shares was solely to alter the voting power the issue would be invalid. And, though the reported decisions, naturally enough, are expressed in terms of their own facts, there are clear considerations of principle which support the trend they establish. The constitution of a limited company normally provides for directors, with powers of management, and shareholders, with defined voting powers having power to appoint the directors, and to take, in general meeting, by majority vote, decisions on matters not reserved for management. Just as it is established that directors, within their management powers, may take decisions against the wishes of the majority of shareholders, and indeed that the majority of shareholders cannot control them in the exercise of these powers while they remain in office (Automatic Self-Cleansing Filter Syndicate Co. Ltd. v. Cuninghame [1906] 2 Ch. 34), so it must be unconstitutional for directors to use their fiduciary powers over the shares in the company purely for the purpose of destroying an existing majority, or creating a new majority which did not previously exist. To do so is to interfere with that element of the company's constitution which is separate from and set against their powers. If there is added, moreover, to this immediate purpose, an ulterior purpose to enable an offer for shares to proceed which the existing majority was in a position to block, the departure from the legitimate use of the fiduciary power becomes not less, but all the greater. The right to dispose of shares at a given price is essentially an individual right to be exercised on individual decision and on which a majority, in the absence *838 of oppression or similar impropriety, is entitled to prevail. Directors are of course entitled to offer advice, and bound to supply information, relevant to the making of such a decision, but to use their fiduciary power solely for the purpose of shifting the power to decide to whom and at what price shares are to be sold cannot be related to any purpose for which the power over the share capital was conferred upon them. That this is the position in law was in effect recognised by the majority directors themselves when they attempted to justify the issue as made primarily in order to obtain much needed capital for the company. and once this primary purpose was rejected, as it was by Street J., there is nothing legitimate left as a basis for their action, except honest behaviour. That is not, in itself, enough.
Their Lordships therefore agree entirely with the conclusion of Street J. that the power to issue and allot shares was improperly exercised by the issue of shares to Howard Smith. It was not disputed that an action to set aside the allotment and for rectification of the register was properly brought by Ampol as plaintiff.
There remain a few points for brief comment.
1. Reference was made in the judgment of Street J. and in argument to the regulations of the Australian Stock Exchanges as to the listing of shares. It seems quite clear that the issue to Howard Smith was in contravention of these regulations, which moreover have contractual force. The respondent did not rely on this contravention as in itself a ground for setting aside the allotment. But their Lordships are in agreement with Street J. both in his criticism of the directors in this respect and in his opinion that the disregard by the directors of this important matter was evidence that their intentions were directed primarily towards takeover strategies.
2. It was an issue at the trial whether, assuming that the issue to Howard Smith was an improper act on the part of the Millers' directors, Howard Smith had notice of this impropriety. Street J. held that they had such notice, mainly, but not exclusively, because of the terms of their own letter of July 6, 1972, addressed to Millers. Their Lordships need do no more than express their complete concurrence on this point.
3. As has been indicated, an issue was raised at the trial whether the chairman of Millers' directors had acted within his powers in excluding one of the directors, Sir Peter Abeles, from discussion and voting on the proposal to allot the shares to Howard Smith, and if not, what the consequences of his having so acted might be. Street J. did not decide this point, it being unnecessary to do so since he held the allotment invalid on other grounds. Their Lordships take the same course.
4. Various minor issues were raised at the trial other than those dealt with in this judgment, but these were not pursued in the appeal and their Lordships need not refer to them.
Their Lordships will humbly advise Her Majesty that the appeal be dismissed. The appellant must pay the costs of the appeal.

Representation

Solicitors: Linklaters & Paines; Clifford-Turner & Co.

(R. W. L-S. )

(c) Incorporated Council of Law Reporting For England & Wales
[1974] A.C. 821



*407 In Re City Equitable Fire Insurance Company, Limited.

Court of Appeal

CA

Pollock M.R., Warrington, and Sargant L.JJ.

1924 July 3, 4, 7, 8, 9, 10, 11.

Romer J.

1924 Feb. 4, 5, 6, 7, 8, 11, 12, 13, 14, 15, 18, 19, 20, 21, 22, 25, 26, 27,

28, 29; March 3, 4, 5, 6; May 22.


Company--Winding Up--Misfeasance--Directors and Auditors--Duties-- Investments--Loans--Signing Cheques--Inspection and Safe Custody of Securities--Declaration of Dividends--Fraud of Managing Director--Clause in Articles exempting Directors and Auditors from Liability--"Wilful Neglect or Default"--Companies (Consolidation) Act, 1908 (8 Edw. 7, c. 69), ss. 113, 215, 279.

In the winding up by the Court of the above mentioned company an investigation of its affairs disclosed a shortage in the funds, of which the company should have been possessed, of over 1,200,000l., due in part to depreciation of investments, but mainly to the instrumentality of the managing director and largely to his deliberate fraud, for which he had been convicted and sentenced.
Art. 150 of the company's articles of association provided (inter alia) that none of the directors, auditors, secretary or other officers for the time being of the company should be answerable for the acts, receipts, neglects or defaults of the others or other of them, or for any bankers or other persons with whom any moneys or effects belonging to the company should or might be lodged or deposited for safe custody, or for insufficiency or deficiency of any security upon which any moneys of or belonging to the company should be placed out or invested, or for any other loss, misfortune, or damage which might happen in the execution of their respective offices or trusts, or in relation thereto, unless the same should happen by or through their own wilful neglect or default respectively.
On a misfeasance summons under s. 215 of the Companies (Consolidation) Act, 1908, the Official Receiver as liquidator sought to make the respondent directors, all of whom (except the managing director) had admittedly acted honestly throughout, liable for negligence in respect of losses occasioned by investments and loans, and of payment of dividends out of capital.
*408 In determining the questions of the liability of the respondent directors raised by the summons, Romer J. enunciated and adopted the following principles relative to the duties of directors and to the meaning to be attached to the words "wilful neglect or default" in art. 150.
Duties of Directors. - The manner in which the work of a company is to be distributed between the board of directors and the staff is a business matter to be decided on business lines. The larger the business carried on by the company the more numerous and the more important the matters that must of necessity be left to the managers, the accountants, and the rest of the staff.
In ascertaining the duties of a director of a company, it is necessary to consider the nature of the company's business and the manner in which the work of the company is, reasonably in the circumstances and consistently with the articles of association, distributed between the directors and the other officials of the company.
In discharging those duties, a director (a) must act honestly, and (b) must exercise such degree of skill and diligence as would amount to the reasonable care which an ordinary man might be expected to take, in the circumstances, on his own behalf. But, (c) he need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience; in other words, he is not liable for mere errors of judgment; (d) he is not bound to give continuous attention to the affairs of his company; his duties are of an intermittent nature to be performed at periodical board meetings, and at meetings of any committee to which he is appointed, and though not bound to attend all such meetings he ought to attend them when reasonably able to do so; and (e) in respect of all duties which, having regard to the exigencies of business and the articles of association, may properly be left to some other official, he is, in the absence of grounds for suspicion, justified in trusting that official to perform such duties honestly.
Overend & Gurney Co. v. Gibb (1872) L. R. 5 H. L. 480; Lagunas Nitrate Co. v. Lagunas Syndicate [1899] 2 Ch. 392; In re National Bank of Wales [1899] 2 Ch. 629; [1901] A. C. 477 (sub nom. Dovey v. Cory); and In re Brazilian Rubber Plantations and Estates, Ld. [1911] 1 Ch. 425, applied.
A director who signs a cheque that appears to be drawn for a legitimate purpose is not responsible for seeing that the money is in fact required for that purpose, or that it is subsequently applied for that purpose, assuming, of course, that the cheque comes before him for signature in the regular way, having regard to the usual practice of the company. A director must of necessity trust to the officials of the company to perform properly and honestly the duties allocated to them.
Before any director signs a cheque, or parts with a cheque signed by him, he should satisfy himself that a resolution has been passed by the board, or committee of the board (as the case may be), authorizing the signature of the cheque; and where a cheque has to be signed between meetings, he should obtain the confirmation of the board subsequently to his signature.
The authority given by the board or committee should not be for the signing of numerous cheques to an aggregate amount, but a proper *409 list of the individual cheques, mentioning the payee and the amount of each, should be read out at the board or committee meeting and subsequently transcribed into the minutes of the meeting.
Joint Stock Discount Co. v. Brown (1869) L. R. 8 Eq. 381 distinguished.
It is the duty of each director to see that the company's moneys are from time to time in a proper state of investment, except so far as the articles of association may justify him in delegating that duty to others.
Before presenting their annual report and balance sheet to their shareholders, and before recommending a dividend, directors should have a complete and detailed list of the company's assets and investments prepared for their own use and information, and ought not to be satisfied as to the value of their company's assets merely by the assurance of their chairman, however apparently distinguished and honourable, nor with the expression of the belief of their auditors, however competent and trustworthy.
It is not the duty of a director of a big insurance company to supervise personally the safe custody of the securities of the company. It would be impracticable, on every purchase of securities, for actual delivery thereof to be made to the directors, or, on every sale, for the delivery to the brokers of the securities sold to await a meeting of the board or of a committee of directors. The duty of seeing that the securities are in safe custody must of necessity be left to some official of the company in daily attendance at the office of the company, such as the manager, accountant, or secretary.
A director is not responsible for declaring a dividend unwisely. He is liable if he pays it out of capital, but the onus of proving that he has done so lies upon the liquidator who alleges it.
Wilful Neglect or Default. - An act, or an omission to do an act, is wilful where the person who acts, or omits to act, knows what he is doing and intends to do what he is doing, but if that act or omission amounts to a breach of that person's duty, and therefore to negligence, he is not guilty of wilful neglect or default unless he knows that he is committing, and intends to commit, a breach of his duty, or is recklessly careless in the sense of not caring whether his act or omission is or is not a breach of his duty.
Lewis v. Great Western Ry. Co. (1877) 3 Q. B. D. 195; Forder v. Great Western Ry. Co. [1905] 2 K. B. 532; and Leeds City Brewery, Ld. v. Platts, post, p. 532n., applied.
This statement of the meaning of "wilful neglect or default" was subsequently approved by Warrington and Sargant L.JJ. in the Court of Appeal on the Official Receiver's appeal against Romer J.'s decision exonerating the auditors:-

Held:

(1.) Following In re Brazilian Rubber Plantations and Estates, Ld. [1911] 1 Ch. 425, that the immunity afforded by art. 150 was one of the terms upon which the directors held office in the company, and availed them as much on a misfeasance summons by the Official Receiver under s. 215, as it would have done in an action by the company against them for negligence; and
(2.) Upon the evidence and in accordance with the principles enunciated above, that none of the respondent directors (other than the managing *410 director) was liable for the losses covered by the points of claim, and that in those instances in which all or some of the directors had been guilty of negligence, such negligence was not wilful and art. 150 applied to exonerate them from liability.
On the same misfeasance summons the Official Receiver sought to make the respondent auditors liable for negligence and breach of duty with respect to the audit by them of the balance sheets for the three years immediately previous to the winding up.
In determining the question of liability of the respondent auditors raised by the summons, Romer J. applied the principles enunciated by Lindley L.J. in In re London and General Bank (No. 2) [1895] 2 Ch. 673 and also the following further principles relative to the duties of auditors.
An auditor is not ever justified in omitting to make personal inspection of securities that are in the custody of a person or company with whom it is not proper that they should be left, whenever such personal inspection is practicable.
A company's stockbrokers, however respectable and responsible they may be, are not proper persons to have the custody of its securities except on such occasions when, for short periods, securities must of necessity be left with them; but immediately such necessity ceases the securities should be lodged in the company's strong room or with its bank, or placed in other proper and usual safe keeping.
Whenever an auditor discovers that securities of the company are not in proper custody, it is his duty to require that the matter be put right at once, or, if his requirement is not complied with, to report the fact to the shareholders, and this whether he can or cannot make a personal inspection:-
Held, on the evidence and in accordance with the principles enunciated above: (1.) that the auditors were not guilty of any breach of duty as auditors -
(a) In describing, after a full investigation in which they were misled and deceived, and their reports to the board suppressed, by the chairman of the company, large sums of money left in the hands of the company's stockbrokers and lent to the general manager of the company as "Loans at call or short notice," "Loans" or "Cash at hand and in bank"; or
(b) In failing to discover that the company's stockbrokers, in order to reduce their indebtedness to the company for the purposes of the audit, made purchases, on behalf of the company, immediately before the close of the company's financial year, of Treasury Bills which in fact never came into the possession of the company and were sold immediately the new financial year had opened.
(2.) That the auditors committed a breach of duty in not personally inspecting the securities of the company in the hands of the stockbrokers of the company, and in accepting from time to time the certificate of the brokers that they held large blocks of such securities, and in not either insisting upon those securities being put in proper custody or in reporting the matter to the shareholders; but that inasmuch as throughout the audit the auditors honestly and carefully discharged what they conceived to be the whole of their duty to the company, *411 such negligence was not wilful, and art. 150 applied to exonerate them from liability.
On the appeal of the Official Receiver from the above decision so far only as it affected the respondent auditors,
The Court (Pollock M.R., Warrington and Sargant L.JJ.), in affirming as a whole the decision of Romer J.:-

Held:

(1.) That s. 215 was a procedure section only and created no new or additional liability.
(2.) That the measure of the auditor's responsibility depends upon the terms of his engagement. There may be a special contract defining the duties and liabilities of the auditors. If there is, then that contract governs the question. The articles will, however, be looked at if there is no special agreement, because the auditors will presumably have taken their duties upon the terms (among others) set out in the articles. That is not to say that auditors can set aside a statutory obligation. No agreement or article of association can remove an imperative or statutory duty. (3.) Sect. 113 does not lay down a rigid code. The duty imposed on the auditors by it is not absolute, but depends upon the information given and explanations furnished to them, so that there is abundant scope for discretion. Art. 150 is not in conflict with the section. The onus lies upon the auditors, who would not be excused for total omission to comply with any of the requirements of the section, or for any consequences of deliberate or reckless indifferent failure to ask for information on matters which call for further explanation.
(4.) Auditors should not be content with a certificate that securities are in the possession of a particular company, firm, or person unless the company, etc., is trustworthy, or, as it is sometimes put, respectable, and further is one that in the ordinary course of business keeps securities for its customers. In all these cases the auditor must use his judgment.
The definition of "wilful misconduct" by Lord Alverstone C.J. in Forder v. Great Western Ry. Co. [1905] 2 K. B. 532, 536, adopted by Pollock M.R.
Quaere, whether in the particular circumstances of the case, apart from art. 150, there was negligence on the part of the auditors (as held by Romer J.) in not personally inspecting the securities which were in the possession of the company's stockbrokers and in accepting their certificate instead.
ADJOURNED SUMMONS.
The City Equitable Fire Insurance Company, Ld. (hereinafter referred to as "the company"), was incorporated on December 17, 1908, under the Companies Acts, 1862 to 1907, and the objects of the company were to carry on every kind of insurance and reinsurance business other than life assurance and employers' liability insurance. The original capital of the company was 50,000l., divided into 10,000 ordinary shares of 5l. each, but this was subsequently increased to *412 375,000l. by the creation of 300,000 preference shares and additional 25,000 ordinary shares of 1l. each respectively.
The objects for which the company was established included also power: (12.) to lend deposit or advance money on securities and property to or with such persons and on such terms as might be expedient; (14.) to amalgamate or enter into partnership or any arrangement for sharing profits, union of interests, joint adventure, reciprocal concessions or co-operation with any person or company carrying on or engaged in or about to carry on or engage in any business or transactions which the company was authorized to carry on or engage in; (15.) generally to purchase, take on lease, or in exchange, hire or otherwise acquire any real or personal property; and (18.) to accumulate capital for the purposes of the company and to invest and deal with the moneys of the company upon such stocks, funds, shares, securities and investments and in such manner as might from time to time be determined.
The articles of association of the company so far as material for the purposes of this report provided as follows:-
Art. 106.
"All moneys, bills and notes belonging to the company shall be paid to or deposited with the company's bankers to an account to be opened in the name of the company. Cheques on the company's bankers, unless and until the directors shall otherwise from time to time resolve, shall be signed by at least two directors and countersigned by the secretary."
Art. 120.
"The directors or any committee of directors may meet together for the despatch of business, adjourn and otherwise regulate their meetings as they think fit, and determine the quorum necessary for the transaction of business. Until otherwise determined two shall be a quorum. Questions arising at any meeting shall be decided by a majority of votes. In case of an equality of votes the chairman shall have a second or casting vote."
Art. 123.
"The directors may delegate any of their powers, other than the powers to borrow and make calls, to committees consisting of such members of their body as they think fit. *413 Any committee so formed shall in the exercise of the power so delegated conform to any regulations that may from time to time be imposed upon them by the Board."
Art. 139. "A balance sheet shall be made out in every year and laid before the company in general meeting. Such balance sheet shall be made up to a date not more than three months before such meeting, and shall be accompanied by a report of the directors as to the state of the company's affairs and the amounts (if any) which they recommend to be paid in dividend or propose to carry to reserve. ...."
Art. 140.
"Once at least in every year the accounts of the company shall be examined, and the correctness of the profit and loss account and balance sheet ascertained by one or more auditor or auditors."
Art. 141.
"The appointment, powers, rights, remuneration and duties of the auditors shall be regulated by ss. 112 and 113 of the Companies (Consolidation) Act, 1908, and any statutory modification, extension or re-enactment thereof for the time being in force."
Art. 150.
"The directors, auditors, secretary and other officers for the time being of the company, and the trustees (if any) for the time being acting in relation to any of the affairs of the company, and every of them, and every of their heirs, executors and administrators, shall be indemnified and secured harmless out of the assets and profits of the company from and against all actions, costs, charges, losses, damages and expenses which they or any of them their or any of their heirs, executors or administrators shall or may incur or sustain by or by reason of any act done, concurred in or omitted in or about the execution of their duty, or supposed duty, in their respective offices or trusts, except such (if any) as they shall incur or sustain by or through their own wilful neglect or default respectively, and none of them shall be answerable for the acts, receipts, neglects or defaults of the other or others of them, or for joining in any receipts for the sake of conformity, or for any bankers or other persons with whom any moneys or effects belonging to the *414 company shall or may be lodged or deposited for safe custody, or for insufficiency or deficiency of any security upon which any moneys of or belonging to the company shall be placed out or invested, or for any other loss, misfortune or damage which may happen in the execution of their respective offices or trusts, or in relation thereto, unless the same shall happen by or through their own wilful neglect or default respectively."
The constitution of the directorate of the company; the appointment of a finance committee with power to make or sell investments on behalf of the company; and the causes which on February 14, 1922, necessitated the making of an order upon the petition of the company for the winding up of the company by the Court, are set out in the following judgment of Romer J.
This was a summons by the liquidator under s. 215 of the Companies (Consolidation) Act, 1908, against the respondent directors and auditors.
The allegations against the respondent directors, were misfeasance, negligence, breach of trust and breach of duty for:-
(1.) The investment of 701,739l. of the company's moneys in certain investments set forth in the points of claim but confined at the hearing to a sum of 228,813l. invested in shares in Claridge's Hotel, Paris, which had, so far as realized, produced 67,557l., the estimated value of those unrealized being 24,000l., and to a sum of 70,970l. invested in shares of the United Brass Founders and Engineers, Ld., the estimated value of which was 1185l.;
(2.) The investment of 445,374l. in a ranch in Brazil;
(3.) Permitting E. G. Mansell, the general manager, and now a bankrupt, to become indebted to the company for 110,000l., the whole of which was lost to the company;
(4.) Lending to or allowing to remain in the hands of Ellis & Co., the company's brokers and now bankrupt, the sum of 350,000l., the greater part of which was lost to the company;
(5.) Lending to G. L. Bevan, the chairman of the company *415 and senior partner in Ellis & Co., who had since been adjudicated bankrupt and had been convicted and sentenced for his frauds on the company, the sum of 9329l., which was lost to the company;
(6.) Lending to the Saskatoon Grain Company a sum of 9329l., which had been wholly lost;
(7.) Paying dividends out of capital in respect of the financial year ending February 28, 1921, and
(8.) Paying an interim dividend out of capital in respect of the financial year ending February 28, 1922.
The allegations against the respondent auditors were that as auditors of the company they were guilty of negligence and breach of duty with respect to the audit by them of the balance sheets of the company for the years ended February 28, 1919; February 29, 1920; and February 28, 1921, in that -
(a) They failed to verify the existence in fact of any of the securities of which the company was therein stated to be possessed;
(b) They failed to see that the balance sheets respectively disclosed the indebtedness of Ellis & Co. to the company;
(c) They included moneys due from Ellis & Co. and from Mansell amongst the loans at call or short notice;
(d) They failed to see that the balance sheets respectively pointed out to the shareholders the fact that Ellis & Co. and Mansell were indebted to the company and the manner in which such indebtedness arose;
(e) They included as cash at the bank and in hand debts due from Ellis & Co. and moneys which were not the moneys of the company alone, and
(f) They failed to call attention to the fact that securities appearing in the balance sheets respectively as the property of the company were in fact hypothecated. This last allegation was withdrawn at an early stage of the hearing.
The Official Receiver claimed compensation from the auditors for the loss sustained by the company through their alleged negligence in respect of the above-mentioned matters.
The summons came on for hearing before Romer J. on February 4, 1924.
*416 Topham K.C., C. A. Bennett K.C. and Harold Christie for the Official Receiver as liquidator. No fraud is alleged against any of the respondents, except Bevan. The allegation against them is purely one of negligence, and the common law principle applies - namely, that where a person undertakes an operation which requires a certain amount of skill, he will be responsible for damaging results from his not exercising the amount of skill which a reasonable person, who is competent to carry out that transaction, would make use of. For example, a person acting as a director of a large insurance company is bound to exercise the skill that a reasonable person, competent to act in that way, would exercise, and he is not entitled to say that he knew nothing about business; that he was not a business man at all, and that he was there for some quite subsidiary purpose.
In the case of an insurance company the investment of the funds of the company is a most important matter, and we submit that the directors ought to ascertain from time to time what the investments are in which the funds under their control are invested, that they should provide some system for the care and custody of the investments which they hold, and that they ought to see that the investments are reasonably proper for the class of company of which they are directors.
Where directors take so little part in the management of the business of the company as to make it perfectly easy, without inquiry, for one of their number to dissipate the funds of the company then they ought to be liable for the consequences.
Directors are always held to be trustees of moneys in their hands or under their control: In re Lands Allotment Co. [FN1], and misapplication of those moneys through mistake or carelessness is a breach of trust for which they are liable quite apart from any question of misfeasance.

FN1 [1894] 1 Ch. 616.

When a director undertakes a certain transaction requiring any special skill, he must exercise the skill ordinarily used by persons who are transacting that particular thing: *417 Jones v. Bird. [FN2] Even if these directors were not expected to exercise special skill, the disastrous result would not have occurred if they had exercised the ordinary care of an ordinary man in his own business. They left the investment of the funds of the company in the hands of one man, Bevan, and in so doing were guilty of negligence: Charitable Corporation v. Sutton. [FN3]

FN2 (1822) 5 B. & Al. 837.

FN3 (1742) 2 Atk. 400.

Where a director signs a cheque under a provision in the articles saying that two directors must sign, he is prima facie liable to see that he has signed for a proper purpose; but if it is signed in pursuance of a resolution of the Board, that would throw the responsibility on to those who passed the resolution; Joint Stock Discount Co. v. Brown. [FN4] Payment of dividends is another specific act which shifts the burden of proof on to the directors of showing that they were in fact paid out of profits: Leeds Estate, Building and Investment Co. v. Shepherd. [FN5]

FN4 L. R. 8 Eq. 381.

FN5 (1887) 36 Ch. D. 787.

The duty of an auditor, as stated by Lindley L.J. in In re London and General Bank (No. 2) [FN6], is to "check the cash, examine vouchers for payments, see that the bills and securities entered in the books were held by the bank, and take reasonable care to ascertain their value." The auditors in this case have fallen far short of that standard.

FN6 [1895] 2 Ch. 673, 684.

Then art. 150 limits the liability of directors except in cases of their own wilful neglect or default. Wilful default was defined by Bowen L.J. in In re Young and Harston's Contract [FN7]; it means, not that a man deliberately refrains from doing anything, but that, being a free agent and knowing what he is doing, he does not do something. It excludes, we submit, such a case as this. The strongest case against the liquidator's contentions is to be found in dicta in In re National Bank of Wales [FN8], which went to the House of Lords sub nomine Dovey v. Cory [FN9], and the result of which appears to be that where a director does not go into matters of detail but *418 delegates details to his subordinates, and they defraud, then he cannot be held liable. Neville J. also in In re Brazilian Rubber Plantations and Estates, Ld. [FN10], stated certain principles relative to a director's duty which, we submit, were merely dicta. The judgments in Lewis v. Great Western Ry. Co. [FN11] do not help in determining whether there is any difference between negligence and wilful negligence.

FN7 (1885) 31 Ch. D. 168, 174.

FN8 [1899] 2 Ch. 629.

FN9 [1901] A. C. 477.

FN10 [1911] 1 Ch. 425.

FN11 3 Q. B. D. 195.

Maugham K.C. and Lionel Cohen for the respondent the Earl of March. On behalf of the respondent directors, we seek to establish five propositions with regard to the liability of directors:-
(1.) Directors are bound to act honestly: Lagunas Nitrate Co. v. Lagunas Syndicate [FN12]; In re National Bank of Wales [FN13]; affirmed in the House of Lords sub nom. Dovey v. Cory [FN14], Prefontaine v. Grenier. [FN15]

FN12 [1899] 2 Ch. 392.

FN13 [1899] 2 Ch. 629.

FN14 [1901] A. C. 477.

FN15 [1907] A. C. 101.

(2.) Directors, subject to certain qualifications hereinafter mentioned, are bound to use fair and reasonable care and diligence in the discharge of their duties, and subject to any special article absolving them, will be liable as for negligence if they substantially fail in this respect. That is in the nature of an admission, but is subject to certain qualifications which appear in the following propositions: In re Cardiff Savings Bank [FN16]; Lagunas Nitrate Co. v. Lagunas Syndicate [FN17]; In re National Bank of Wales [FN18]; Dovey v. Cory. [FN19]

FN16 [1892] 2 Ch. 100.

FN17 [1899] 2 Ch. 392.

FN18 [1899] 2 Ch. 629.

FN19 [1901] A. C. 477.

(3.) Directors' duties, however, are of a somewhat special kind. Their attention to the company's affairs is only of an intermittent nature, namely at periodical board meetings. They are not bound to attend except at board meetings, nor are they bound to attend all board meetings. They are not bound to inquire into matters which are not brought before the board, unless, indeed, they are put upon inquiry by facts being brought to their attention which call for explanation; in other words, directors are not managers and do not contract to manage the affairs of the company: *419 Overend andGurney Co. v. Gibb [FN20]; In re Denham & Co. [FN21]; In re Cardiff Savings Bank [FN22]; In re Lands Allotment Co. [FN23]

FN20 L. R. 5 H. L. 480.

FN21 (1883) 25 Ch. D. 752.

FN22 [1892] 2 Ch. 100.

FN23 [1894] 1 Ch. 616.

Directors who do no more than attend board meetings, act honestly at them, and abstain from probing into matters into which they are able to probe, but to which their attention has not been directed, are relieved from liability in such a case as the present: In re National Bank of Wales [FN24], affirmed in the House of Lords sub nomine Dovey v. Cory [FN25]; Prefontaine v. Grenier [FN26]; Leeds Estate, Building and Investment Co. v. Shepherd [FN27], explained by Lord Davey in Dovey v. Cory. [FN28]

FN24 [1899] 2 Ch. 629.

FN25 [1901] A. C. 477.

FN26 [1907] A. C. 101.

FN27 36 Ch. D. 787.

FN28 [1901] A. C. 477.

(4.) Directors do not in any way warrant that they are skilful or competent, and they may be much the reverse without incurring liability. Accordingly, they are not liable for errors of judgment, and the care and diligence for which they contract are only such as are reasonably to be expected from them having regard to their personal capacity and experience: Turquand v. Marshall [FN29]; Overend & Gurney Co. v. Gibb [FN30]; In re Denham & Co. [FN31]; Lagunas Nitrate Co. v. Lagunas Syndicate [FN32]; In re National Bank of Wales. [FN33]

FN29 (1869) L. R. 4 Ch. 376.

FN30 L. R. 5 H. L. 480.

FN31 (1883) 25 Ch. D. 752.

FN32 [1899] 2 Ch. 392.

FN33 [1899] 2 Ch. 629.

(5.) Directors cannot be held liable for being defrauded, and are not called upon to distrust or to guard against the possibility of fraud being committed by employees of the company, or by any of their co-directors: Land Credit Co. of Ireland v. Lord Fermoy [FN34]; Joint Stock Discount Co. v. Brown [FN35], both cases dealing with the signing of cheques, but in circumstances very different from the present case, and in the former case involving a transaction ultra vires: In re Denham & Co. [FN36]; Dovey v. Cory [FN37]; Prefontaine v. Grenier. [FN38]

FN34 (1869) L. R. 8 Eq. 7; (1870) L. R. 5 Ch. 763.

FN35 L. R. 8 Eq. 381.

FN36 (1883) 25 Ch. D. 752.

FN37 [1901] A. C. 477.

FN38 [1907] A. C. 101.

Those five propositions represent the liability of directors apart from the provisions of s. 279 of the Companies(Consolidation) Act, 1908, *420 and apart from any articles of association. We submit that this respondent cannot be held liable in respect of any of the matters covered by those propositions.
Charitable Corporation v. Sutton [FN39] was the case of a charitable trust managed by persons who although called directors were in fact trustees, and is not any authority upon the duties of directors of a limited liability company.

FN39 2 Atk. 400.

Having regard to art. 150 it is not possible for the applicants to succeed without attacking the good faith of the directors. Except by striking the word "wilful" out of that article, this respondent cannot be held liable. "Wilful " connotes a neglect or default committed by the director of which the director is guilty, but knowing well at the moment that he is guilty of a neglect or default in regard to his duty. He knows what his duty is, and does something short of it. In Dovey v. Cory [FN40] there was no such article as this. Under a somewhat analogous clause, trustees of a debenture deed were held not to have committed a breach of trust wilfully: Leeds City Brewery, Ld. v. Plats. [FN41] In re Young and Harston's Contract [FN42] is very far from this case, which is much nearer to In re Brazilian Rubber Plantations and Estates, Ld. [FN43], where Neville J. decided that directors might well be excused under a similar article.

FN40 [1901] A. C. 477.

FN41 Post, p. 532n.

FN42 31 Ch. D. 168.

FN43 [1911] 1 Ch. 425.

If we are wrong on all our contentions, then we submit that s. 279 of the Companies (Consolidation) Act, 1908, applies with especial force to this respondent, and that he ought fairly to be excused for any negligence or breach of duty.
Barrington-Ward K.C. and H. du Parcq for the respondent Peter Haig Thomas, adopted the preceding argument, and addressed the Court on the evidence.
Sir Walter Schwabe K.C., G. D. Johnston and J. A. Reid for the respondent director, H. R. Grenside.
Upon the true construction of art. 150 this respondent is not liable. He has not been guilty of wilful neglect or default within the meaning of those terms as explained by *421 Leeds City Brewery Ld. v. Platts [FN44]; Lewis v. Great Western Ry. Co. [FN45]; Forder v. Great Western Ry. Co. [FN46]; In re Young and Harston's Contract. [FN47]

FN44 Post, p. 532n.

FN45 3 Q. B. D. 195.

FN46 [1905] 2 K. B. 532.

FN47 31 Ch. D. 168.

In the matter of the cheques drawn to Ellis & Co., the members of the finance committee and the directors were entitled to rely upon the officials of the company to carry out their directions: In re National Bank of Wales [FN48]; Dovey v. Cory [FN49]; and there was nothing ultra vires in handing moneys to the company's brokers for investment in securities.

FN48 [1899] 2 Ch. 629.

FN49 [1901] A. C. 477, 484, 492.

The cheques to Mansell were signed at well regulated intervals, and by different directors, and the evidence shows that they did not know that Mansell was being overpaid. The ultimate agreement with Mansell was obtained by the trickery of Bevan, and by suppressing information which he ought to have disclosed.
Directors who pay dividends, as the respondents did, under an honest and reasonable belief in a state of facts which would justify the payments, are not liable to replace those funds if it turns out that in fact the payments were ultra vires: In re Kingston Cotton Mill Co. (No. 2) [FN50]; In re National Bank of Wales. [FN51]

FN50 [1896] 1 Ch. 331, 347.

FN51 [1899] 2 Ch. 629.

We submit that this respondent has not been guilty of culpable or gross negligence, nor of wilful default.
Gover K.C. and H. J. Wallington for the respondent Lord Ribblesdale referred to In re Denham & Co. [FN52]; Leeds City Brewery, Ld. v. Platts [FN53]; In re Young and Harston's Contract [FN54]; In re Mayor of London and Tubbs' Contract [FN55]; Elliott v. Turner [FN56]; In re Johnson [FN57]; Sheffield and South Yorkshire Permanent Building Society v. Aizlewood [FN58]; Leeds Estate, Building and Investment Co. v. Shepherd. [FN59]

FN52 25 Ch. D. 752, 767, 768.

FN53 Post, p. 532n.

FN54 31 Ch. D. 168.

FN55 [1894] 2 Ch. 524.

FN56 (1843) 13 Sim. 477.

FN57 [1886] W. N. 72.

FN58 (1889) 44 Ch. D. 412, 453.

FN59 36 Ch. D. 787, 798.

Sir John Simon K.C., Sir Malcolm Macnaghten K.C. and *422 R. J. T. Gibson for the respondent Sir Douglas Dawson; and Wilfrid Greene K.C. and W. P. Spens for the respondent Milligan, adopted the previous arguments, and addressed the Court on the evidence on behalf of these respective respondent directors.
Stuart Bevan K.C. and George Phillips for the respondent auditors. We desire to reserve the point that the auditors are not officers of the company within the meaning of s. 215 of the Companies (Consolidation) Act, 1908. It is not open to us to argue that question here, inasmuch as in In re London and General Bank [FN60] it was held by the Court of Appeal that an auditor was an officer within the meaning of the corresponding section in the earlier Act, but in the later case of In re Kingston Cotton Mill Co. [FN61] Lord Herschell expressed no opinion upon the question whether the earlier case was rightly decided but left that question open, although the Court of Appeal in the later case [FN62] felt themselves bound by the decision in In re London and General Bank. [FN63]

FN60 [1895] 2 Ch. 166.

FN61 [1896] 1 Ch. 6, 16.

FN62 [1896] 2 Ch. 279.

FN63 [1895] 2 Ch. 166.

The evidence shows that Mr. Lepine displayed extraordinary care and accuracy in his work and figures. He fully maintained the standard of duty which, apart from agreement, he had to the company - namely, to exhibit the care and skill which an accountant of standing should exercise, but that is not the only standard to be considered, for, by virtue of art. 150, he can only be liable if any neglect or default on his part was of the wilful character dealt with by Lord Sterndale M.R. and Warrington L.J. in Leeds City Brewery Ld. v. Platts. [FN64] There has, we submit, been no wilful neglect or default on the part of Mr. Lepine. With regard to the Treasury Bills, there was nothing in the books to show that there was any window dressing. He obtained verification certificates of the existence of the securities, and we submit that he was not negligent because he did not inspect them, relying, in common with other people of standing in the City of London, upon the word of Ellis & Co. There is no rigid rule with regard to the inspection of documents, *423 and it is purely a matter for the discretion of the auditor in each particular case. If Mr. Lepine had pressed to inspect the securities it is inconceivable in the circumstances that Bevan would not have managed to produce them.

FN64 Post, p. 532n.

The auditors had no duty to disclose in the balance sheets the names of Ellis & Co. or of Mansell as debtors. The reports of the auditors drew attention to these debts, but those reports were suppressed by Bevan and never reached the directors. Further it was no part of the auditors' duty to consider the agreement with Mansell, authorized as it was by the directors. These debts were rightly called "loans at call or short notice"; they were payable on demand, loans terminable within a short period or short loans; De Peyer v. The King. [FN65] Moneys in the hands of Ellis & Co. were moneys held by them as agents for the company and were rightly described as "cash at bank or in hand "; they did not include debts, properly so called, from Ellis & Co. The principles relating to an auditor's duty are clearly laid down in In re London and General Bank (No. 2) [FN66] and in In re Kingston Cotton Mill Co. (No. 2) [FN67] and are applicable to the present case, and if applied to the facts of this case, absolve the respondent auditors from all liability.

FN65 (1909) 100 L. T. 256.

FN66 [1895] 2 Ch. 673.

FN67 [1896] 2 Ch. 279.

Topham K.C. in reply. This is a case in which one unscrupulous person took advantage of the opportunities for fraud which were quite innocently provided by his too trusting colleagues on the board, who misapprehended their duties. They deliberately and intentionally did certain things and omitted certain things, and left things to others, not realizing in most, if not all, cases that it was their duty to look after those things themselves. They allowed vast sums to remain in the hands of Ellis & Co. without any control of any kind with a consequent heavy loss to the company. If directors do not take as much care in looking after the funds of the company as a reasonable and prudent man would in like circumstances take in his own affairs, they are liable for the consequences. If that is the true *424 standard, then for the purposes of this case s. 279 of the Companies (Consolidation) Act, 1908, does not carry the matter any further: Lewis v. Great Western Ry. Co. [FN68]; Forder v. Great Western Ry. Co. [FN69]; and Leeds City Brewery, Ld. v. Platts [FN70], are not relevant to the consideration of art. 150, the latter part of which is really a reproduction of s. 24 of the Trustee Act, 1893, which repeated s. 31 of Lord St. Leonard's Act, and those sections only stated the existing law relative to trustees: In re Brier [FN71]; Dix v. Burford [FN72]; Mucklow v. Fuller. [FN73] The rights given by s. 215 of the Companies (Consolidation) Act, 1908, are independent of and cannot be modified by any such provisions as those of art. 150, and I submit that in this respect In re Brazilian Rubber Plantations and Estates, Ld. [FN74] was wrongly decided.

FN68 3 Q. B. D. 195.

FN69 [1905] 2 K. B. 532.

FN70 Post, p. 532n.

FN71 (1884) 26 Ch. D. 238.

FN72 (1854) 19 Beav. 409.

FN73 (1821) Jac. 198.

FN74 [1911] 1 Ch. 425.

Cur. adv. vult.

May 22. ROMER J.


On June 27, 1916, Gerrard Lee Bevan became a director of the City Equitable Fire Insurance Company, Ld. The company at that time was carrying on successfully the business of reinsurance of fire and marine risks, and was in a sound financial condition. On February 14, 1922, an order was made for the winding up of the company by the Court. A searching investigation of the affairs of the company was then made, and this investigation disclosed a shortage in the funds of which the company should have been possessed of over 1,200,000l. This deplorable state of affairs was in no way due to the company's trading operations as a reinsurance company. From the year 1916 onwards to February 28, 1921, which is the date of the company's last published balance sheet, there was a steady and most remarkable increase in the premium income of the company, due principally to the fact that it had been able to secure a large part of the business of the Munich Reinsurance Company, who, before the outbreak of war, had done most *425 of the reinsurance business in this country. For the year ending February, 1916, the company's premium income from all classes of insurance was 363,000l. For the year ending February, 1919, the premium income on fire and general account was 613,483l., and on marine account was 1,351,000l. For the year ending February, 1920, the corresponding figures were 1,189,759l. and 1,422,471l., and for the year ending February, 1921, they were 2,071,515l. and 1,469,197l. In each of the years 1919, 1920 and 1921 there was a large and progressive trading profit. The collapse of the company was not, therefore, due to its reinsurance business. It was entirely due to the following causes. Various industrial investments of the company, of which the net cost to the company had been 701,739l., have realized or are estimated to realize 202,373l., representing a loss of close upon 500,000l. Over 445,000l. of the company's funds had been applied in acquiring an interest in certain lands in Brazil, and this interest is estimated at the present time to be worth about 100,000l. only. No less a sum than 110,000l. had found its way into the hands of the company's manager in circumstances to be detailed hereafter, and none of that money is recoverable. A sum of 385,000l. odd was due from Ellis & Co., the company's brokers, of which firm Bevan was the senior partner, and against this indebtedness the company held collateral security that has realized under 31,000l. In respect of the balance it is estimated that only about 14,000l. will ultimately be received as dividend in the bankruptcy of that firm. Bevan himself had misappropriated other moneys of the company amounting to nearly 7000l., and some 9000l. had been lent by Bevan or Ellis & Co. to a company known as the Saskatoon Grain Company without any authority whatever. Little, if anything, will ever be recovered in respect of these two sums. Nearly the whole of these enormous losses were brought about through Bevan's instrumentality, and a large part of them by his deliberate fraud. For that fraud he has been tried, and convicted, and is now suffering the just penalty. But the question not unnaturally arises as to whether, during the period *426 covered by Bevan's nefarious activities, the other directors and the auditors of the company were properly discharging the duties that they owed to the company's shareholders. The Official Receiver, as the liquidator of the company, alleges that they were not. He has accordingly included them, or such of them as are still living, as respondents to the summons which he issued against Bevan under s. 215 of the Companies Act; and whilst admitting, and rightly admitting, that they have acted honestly throughout, he claims that they have been guilty of such negligence as to render themselves liable to the company in damages. Whether they are, or are not so liable, is the question that I have to determine. It will be convenient to consider the case of the directors and the case of the auditors separately, and I propose to begin with the directors. But before investigating the facts it will be convenient to consider the law applicable to the case.
It has sometimes been said that directors are trustees. If this means no more than that directors in the performance of their duties stand in a fiduciary relationship to the company, the statement is true enough. But if the statement is meant to be an indication by way of analogy of what those duties are, it appears to me to be wholly misleading. I can see but little resemblance between the duties of a director and the duties of a trustee of a will or of a marriage settlement. It is indeed impossible to describe the duty of directors in general terms, whether by way of analogy or otherwise. The position of a director of a company carrying on a small retail business is very different from that of a director of a railway company. The duties of a bank director may differ widely from those of an insurance director, and the duties of a director of one insurance company may differ from those of a director of another. In one company, for instance, matters may normally be attended to by the manager or other members of the staff that in another company are attended to by the directors themselves. The larger the business carried on by the company the more numerous, and the more important, the matters that must of necessity *427 be left to the managers, the accountants and the rest of the staff. The manner in which the work of the company is to be distributed between the board of directors and the staff is in truth a business matter to be decided on business lines. To use the words of Lord Macnaghten in Dovey v. Cory [FN75]:
"I do not think it desirable for any tribunal to do that which Parliament has abstained from doing - that is, to formulate precise rules for the guidance or embarrassment of business men in the conduct of business affairs. There never has been, and I think there never will be, much difficulty in dealing with any particular case on its own facts and circumstances; and, speaking for myself, I rather doubt the wisdom of attempting to do more."

FN75 [1901] A. C. 477, 488.

In order, therefore, to ascertain the duties that a person appointed to the board of an established company undertakes to perform, it is necessary to consider not only the nature of the company's business, but also the manner in which the work of the company is in fact distributed between the directors and the other officials of the company, provided always that this distribution is a reasonable one in the circumstances, and is not inconsistent with any express provisions of the articles of association. In discharging the duties of his position thus ascertained a director must, of course, act honestly; but he must also exercise some degree of both skill and diligence. To the question of what is the particular degree of skill and diligence required of him, the authorities do not, I think, give any very clear answer. It has been laid down that so long as a director acts honestly he cannot be made responsible in damages unless guilty of gross or culpable negligence in a business sense. But as pointed out by Neville J. in In re Brazilian Rubber Plantations and Estates, Ld. [FN76], one cannot say whether a man has been guilty of negligence, gross or otherwise, unless one can determine what is the extent of the duty which he is alleged to have neglected. For myself, I confess to feeling some difficulty in understanding the difference between negligence and gross negligence, except in so far as the expressions are used for *428 the purpose of drawing a distinction between the duty that is owed in one case and the duty that is owed in another. If two men owe the same duty to a third person, and neglect to perform that duty, they are both guilty of negligence, and it is not altogether easy to understand how one can be guilty of gross negligence and the other of negligence only. But if it be said that of two men one is only liable to a third person for gross negligence, and the other is liable for mere negligence, this, I think, means no more than that the duties of the two men are different. The one owes a duty to take a greater degree of care than does the other: see the observations of Willes J. in Grill v. General Iron Screw Collier Co. [FN77] If, therefore, a director is only liable for gross or culpable negligence, this means that he does not owe a duty to his company, to take all possible care. It is some degree of care less than that. The care that he is bound to take has been described by Neville J. in the case referred to above as "reasonable care" to be measured by the care an ordinary man might be expected to take in the circumstances on his own behalf. In saying this Neville J. was only following what was laid down in Overend & Gurney Co. v. Gibb [FN78] as being the proper test to apply, namely: "Whether or not the directors exceeded the powers entrusted to them, or whether if they did not so exceed their powers they were cognisant of circumstances of such a character, so plain, so manifest, and so simple of appreciation, that no men with any ordinary degree of prudence, acting on their own behalf, would have entered into such a transaction as they entered into?"

FN76 [1911] 1 Ch. 425, 437.

FN77 (1866) L. R. 1 C. P. 600, 612.

FN78 L. R. 5 H. L. 480, 486.

There are, in addition, one or two other general propositions that seem to be warranted by the reported cases: (1.) A director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience. A director of a life insurance company, for instance, does not guarantee that he has the skill of an actuary or of a physician. In the words of Lindley M.R.: "If directors act within their powers, *429 if they act with such care as is reasonably to be expected from them, having regard to their knowledge and experience, and if they act honestly for the benefit of the company they represent, they discharge both their equitable as well as their legal duty to the company": see Lagunas Nitrate Co. v. Lagunas Syndicate. [FN79] It is perhaps only another way of stating the same proposition to say that directors are not liable for mere errors of judgment. (2.) A director is not bound to give continuous attention to the affairs of his company. His duties are of an intermittent nature to be performed at periodical board meetings, and at meetings of any committee of the board upon which he happens to be placed. He is not, however, bound to attend all such meetings, though he ought to attend whenever, in the circumstances, he is reasonably able to do so. (3.) In respect of all duties that, having regard to the exigencies of business, and the articles of association, may properly be left to some other official, a director is, in the absence of grounds for suspicion, justified in trusting that official to perform such duties honestly. In the judgment of the Court of Appeal in In re National Bank of Wales, Ld. [FN80], the following passage occurs in relation to a director who had been deceived by the manager, and managing director, as to matters within their own particular sphere of activity: "Was it his duty to test the accuracy or completeness of what he was told by the general manager and the managing director? This is a question on which opinions may differ, but we are not prepared to say that he failed in his legal duty. Business cannot be carried on upon principles of distrust. Men in responsible positions must be trusted by those above them, as well as by those below them, until there is reason to distrust them. We agree that care and prudence do not involve distrust; but for a director acting honestly himself to be held legally liable for negligence, in trusting the officers under him not to conceal from him what they ought to report to him, appears to us to be laying too heavy a burden on honest business men." That case went to the House of Lords, and is reported there under *430 the name of Dovey v. Cory. [FN81] Lord Davey, in the course of his speech to the House, made the following observations: [FN82]
"I think the respondent was bound to give his attention to and exercise his judgment as a man of business on the matters which were brought before the board at the meetings which he attended, and it is not proved that he did not do so. But I think he was entitled to rely upon the judgment, information and advice, of the chairman and general manager, as to whose integrity, skill and competence he had no reason for suspicion. I agree with what was said by Sir George Jessel in Hallmark's Case [FN83], and by Chitty J. in In re Denham & Co. [FN84], that directors are not bound to examine entries in the company's books. It was the duty of the general manager and (possibly) of the chairman to go carefully through the returns from the branches, and to bring before the board any matter requiring their consideration; but the respondent was not, in my opinion, guilty of negligence in not examining them for himself, notwithstanding that they were laid on the table of the board for reference."

FN79 [1899] 2 Ch. 392, 435.

FN80 [1899] 2 Ch. 629, 673.

FN81 [1901] A. C. 477.

FN82 Ibid. 492.

FN83 (1878) 9 Ch. D. 329.

FN84 25 Ch. D. 752.

These are the general principles that I shall endeavour to apply in considering the question whether the directors of this company have been guilty of negligence. But in order to determine whether any such negligence, if established, renders the directors liable in damages, it is necessary to consider the provisions of art. 150 of the company's articles of association. That article is in these terms. [His Lordship read the article and continued:] The earlier part of this article appears to be concerned with actions and claims against the directors brought or made by persons other than the company itself. The importance of the article for the present purpose is to be found in the later part, which provides that the directors are not to be answerable for insufficiency or deficiency of any security or for any other loss, misfortune, or damage which may happen in the execution of their respective offices or trusts or in relation thereto "unless the same shall happen by or through their own wilful neglect or default *431 respectively." In opening the case for the liquidator, Mr. Topham treated this article as in no way modifying the general law relating to directors. He contented himself with citing a passage from the judgment of Bowen L.J. in In re Young and Harston's Contract. [FN85] That was a case in which the Court of Appeal had to consider whether a vendor of real estate had been guilty of wilful default within the meaning of a condition of sale which imposed upon the purchaser a liability to pay interest on his purchase money from the date fixed for completion until actual payment if the completion were delayed from any cause whatever other than wilful default on the part of the vendor. Bowen L.J. expressed himself as follows:
"Default is a purely relative term, just like negligence. It means nothing more, nothing less, than not doing what is reasonable under the circumstances - not doing something which you ought to do, having regard to the relations which you occupy towards the other persons interested in the transaction. The other word which it is sought to define is 'wilful.' That is a word of familiar use in every branch of law, and although in some branches of the law it may have a special meaning, it generally, as used in Courts of law, implies nothing blameable, but merely that the person of whose action or default the expression is used, is a free agent, and that what has been done arises from the spontaneous action of his will. It amounts to nothing more than this, that he knows what he is doing, and intends to do what he is doing, and is a free agent."

FN85 31 Ch. D. 168, 174.

If these words of Bowen L.J. be read without reference to the facts of the case in which they were used, I should agree that the word "wilful" in art. 150 was superfluous, and qualifies in no way a director's liability for negligence. For a director acting under compulsion, or at a time when his mind was no longer functioning, could hardly be said to be guilty of negligence or default - words that by themselves surely connote free agency and spontaneous action of the will. It is, however, to be observed that in In re Young and Harston's Contract [FN86] the vendor left this country on *432 the very day on which the sale should have been completed without even leaving an address to which the conveyance could be sent to him for execution. Sir James Hannen says this [FN87]:
"The cardinal point in the case appears to be this, whether where a person has entered into a contract to be completed upon a particular day - in this case the 8th September - and he, knowing that, goes away upon the 6th to take his autumn holiday, he has been guilty of wilful default thereby causing the non-completion of the contract. It seems to me a very plain case, and I really can entertain no doubt whatever as to what any jury would have thought, and we, in the position of the jury, come to the conclusion that he made default in not being in the position to complete the contract so far as it lay with him upon the 8th of September; and that was default of an intentional character on his part, and therefore wilful."

FN86 31 Ch. D. 168.

FN87 31 Ch. D. 173.

Then a little lower down:
"Our judgment, therefore, is that where a man knowing that some act has to be done by him on the particular day, goes away in disregard of that obligation, he is guilty of default; and doing it intentionally, it is wilful within the terms of a contract of this kind."
It was a case, therefore, where the vendor's default consisted not merely of an omission to do an act which it was his duty to do, but of an omission to do an act which he knew it was his duty to do. This is the view of the case that was taken in the later decision of the Court of Appeal in In re Mayor of London and Tubbs' Contract. [FN88] That also was a case arising under a contract between vendor and purchaser of real estate, and again the Court had to consider whether the vendor had been guilty of wilful default within the meaning of a condition similar to that in the earlier case. The default of the vendor consisted of an innocent misstatement as to his title contained in the contract. Lindley L.J. in his judgment said [FN89]:
"I am aware that in Elliott v. Turner [FN90] Vice-Chancellor Shadwell expressed the opinion that forgetfulness might amount to wilful default. The case before him was, however, of a very different kind *433 from the present. I confess that I am more disposed to concur with Lord Bramwell's observations on the term 'wilful misconduct' in Lewis v. Great Western Ry. Co. [FN91] They are, in my opinion, quite consistent with Lord Bowen's observations in In re Young and Harston's Contract [FN92], if it be borne in mind that Lord Bowen presupposed knowledge of what was done, and intention to do it, and was not addressing himself to a case of an honest mistake or oversight. No doubt the statements contained in the 4th condition were deliberate, and to that extent 'wilful'; but the misstatement was not ' wilful.'"

FN88 [1894] 2 Ch. 524.

FN89 [1894] 2 Ch. 536.

FN90 13 Sim. 477.

FN91 3 Q. B. D. 195, 206.

FN92 31 Ch. D. 168.

Lopes L.J. said [FN93], in speaking of the judgment of Bowen L.J. in In re Young and Harston's Contract [FN94]:
"I do not think the learned judge was contemplating an honest oversight. He was dealing with a different case, where, two days before the time fixed for completion, the vendor left England without having executed the conveyance which was ready for his execution in the afternoon of the day fixed."

FN93 [1894] 2 Ch. 538.

FN94 31 Ch. D. 168.

Then, after quoting a passage from the judgment of Sir James Hannen, cited above, he added: "What the vendor did there was not regarded as a mistake, much less an honest or unintentional oversight. That case, in my judgment, is distinguishable from the present, and expressions applicable to that case are inapplicable here. In Lewis v. Great Western Ry. Co. [FN95] Lord Justice Bramwell says - defining 'wilful' in connection with misconduct - "wilful misconduct" means misconduct to which the will is a party, something opposed to accident or negligence; the misconduct, not the conduct, must be wilful.' This, to my mind, is a more accurate definition of 'wilful' than that given by Vice- Chancellor Shadwell in Elliott v. Turner [FN96], where he says, 'In my opinion the word "wilful" can have no other meaning than "spontaneous": and, if the neglect or default in this case arose from the voluntary act of the parties, either awake or asleep with reference to their rights and interests, and did not at all arise from the pressure of external circumstances over which they could have no control, *434 I apprehend that the neglect or default was wilful.' It is difficult to lay down any general definition of 'wilful.' The word is relative, and each case must depend on its own particular circumstances."

FN95 3 Q. B. D. 195, 206.

FN96 13 Sim. 485.

If I may say so with respect, the difficulty is not so much in ascertaining the meaning of the adjective "wilful," as in ascertaining precisely what is the noun to which the adjective is to be applied. An act, or an omission to do an act, is wilful where the person of whom we are speaking knows what he is doing and intends to do what he is doing. But if that act or omission amounts to a breach of his duty, and therefore to negligence, is the person guilty of wilful negligence? In my opinion that question must be answered in the negative unless he knows that he is committing, and intends to commit, a breach of his duty, or is recklessly careless in the sense of not caring whether his act or omission is or is not a breach of duty. This conclusion appears to me to be warranted by at least three authorities, one of which was referred to in the passage quoted above from the judgment of Lopes L.J. In Lewis v. Great Western Ry. Co. [FN97] the question arose as to the meaning of the phrase "wilful misconduct" in a contract for the carriage by the defendant company of goods of the plaintiff. The goods had admittedly been damaged owing to the conduct of the defendants' servants. Under the terms of the contract, however, the defendants were not liable unless the damage was occasioned by the wilful misconduct of their servants. Bramwell L.J. said [FN98]: "Was this damage caused by the wilful misconduct of the defendants' servants? Mr. Powell's argument, when analysed, is to this effect: 'The conduct of which we complain was their conduct, and that conduct was misconduct, and it was not accidental, therefore it was wilful.' So that, in the result, unless a thing is a pure accident, it is wilful. If a man were walking along and tripped over some goods which he did not happen to see, it would be said that the tripping was the result of his conduct, which was misconduct - not accidental but wilful - and that the *435 wilfulness was in not looking out. I do not, however, think that the question can be thus dealt with. There is such a mass of authorities to show what 'wilful misconduct' is, that we should hardly be justified, as a Court of Appeal, in departing from them, even if we thought them to be wrong. 'Wilful misconduct' means misconduct to which the will is a party, something opposed to accident or negligence; the misconduct, not the conduct, must be wilful." Brett L.J. said [FN99]: "In a contract where the term wilful misconduct is put as something different from and excluding negligence of every kind, it seems to me that it must mean the doing of something, or the omitting to do something, which it is wrong to do or to omit, where the person who is guilty of the act or the omission knows that the act which he is doing, or that which he is omitting to do, is a wrong thing to do or to omit; and it involves the knowledge of the person that the thing which he is doing is wrong; I think that if he knows that what he is doing will seriously damage the goods of a consignor, then he knows that what he is doing is a wrong thing to do; and also, as my Lord has put it, if it is brought to his notice that what he is doing or omitting to do, may seriously endanger the things which are to be sent, and he wilfully persists in doing that against which he is warned, careless whether he may be doing damage or not, then I think he is doing a wrong thing, and that that is misconduct, and that, as he does it intentionally, he is guilty of wilful misconduct; or if he does, or omits to do something which everybody must know is likely to endanger or damage the goods, then it follows that he is doing that which he knows to be a wrong thing to do. Care must be taken to ascertain that it is not only misconduct but wilful misconduct, and I think that those two terms together import a knowledge of wrong on the part of the person who is supposed to be guilty of the act or omission." Cotton L.J. delivered judgment to the same effect. Both Brett L.J. in the passage I have just read, and Cotton L.J. in his judgment, draw, no doubt, a distinction between wilful misconduct and negligence of every kind. But I cannot *436 assent to the argument of Mr. Topham that these judgments afford no assistance in determining whether or not there be any difference between negligence and wilful negligence. The case seems to me to be an authority for the proposition that a wilful act, which act amounts to negligence, is not wilful negligence unless there be a will to be negligent.

FN97 3 Q. B. D. 195, 206.

FN98 3 Q. B. D. 195, 206.

FN99 3 Q. B. D. 210.

In Forder v. Great Western Ry. Co. [FN100], the question of the meaning of wilful misconduct again came up for consideration before a Divisional Court. Lord Alverstone C.J. in giving judgment said [FN101]:
"I am quite prepared to adopt, with one slight addition, the definition of wilful misconduct given by Johnson J. in Graham v. Belfast and Northern Counties Ry. Co. [FN102], where he says: 'Wilful misconduct in such a special condition means misconduct to which the will is party as contradistinguished from accident, and is far beyond any negligence, even gross or culpable negligence, and involves that a person wilfully misconducts himself who knows and appreciates that it is wrong conduct on his part in the existing circumstances to do, or to fail or omit to do (as the case may be), a particular thing, and yet intentionally does, or fails or omits to do it, or persists in the act, failure, or omission regardless of consequences.' The addition which I would suggest is, 'or acts with reckless carelessness, not caring what the results of his carelessness may be.'"

FN100 [1905] 2 K. B. 532.

FN101 Ibid. 535.

FN102 [1901] 2 I. R. 13.

The third of the authorities to which I have referred is a recent decision of the Court of Appeal in Leeds City Brewery, Ld. v. Platts. [FN103] The case does not appear to be reported [FN104], but I have been furnished with a transcript of the judgments of the members of the Court, consisting of Lord Sterndale M.R. and Warrington and Younger L.JJ. The question that had to be decided was as to the liability of a trustee of a debenture trust deed for the loss occasioned by an investment that had been made by him. The investment was an unauthorized one, and, in making it, the trustee was admittedly guilty of a breach of trust. It was, however, *437 held by the Court of Appeal that the trustee was absolved from liability by virtue of two clauses in the trust deed. Those two clauses when read together went a good deal further than the 150th article of association of the City Equitable Fire Insurance Company, and the actual decision has little, if any, bearing upon the question of the liability of the respondents in the present case. But both Lord Sterndale and Warrington L.J. in delivering judgment made certain observations that are of general application. By one of the clauses it was provided that the trustees of the deed and each of them should be kept indemnified from and against all actions, proceedings, costs, charges, claims and demands whatsoever that might arise or be brought or made against them or him in respect of any matter or thing done or omitted without their or his own wilful default. In referring to this clause, Lord Sterndale said: "With regard to those words about their or his own wilful default, I think Mr. Maugham is right in saying that they are not used in the technical way when you are speaking of taking an account on the basis of wilful default, but I think they are used as meaning - unless they have failed to do their duty purposely and wilfully, unless there is some wilful misconduct. " Then, after stating that the other clause relied upon by the trustee was not meant to protect him against a wilful doing wrong, he added: "Therefore the question to my mind which has to be decided to settle this appeal is whether Mr. Beevers was to be held to have done this wilfully and intentionally knowing that what he was doing was wrong. The learned judge has found that he did. It was wilful neglect, as he calls it, which I take to mean wilfully doing what was wrong, and wilfully doing what he knew it was his duty not to do, or not doing what he knew it was his duty to do." Warrington L.J., after referring to one of the clauses in question, said: "The learned judge, and here I agree with his view, has held that assuming that the trustee was guilty of wilful breach of trust, he would not be protected by that clause. I am inclined to agree with him there. But then it becomes important to consider what is meant by a wilful breach of trust, or wilful *438 negligence or wilful failure to perform his duty. I think it means this. I think it means deliberately and purposely doing something which he knows, when he does it, is a breach of trust, consisting in a failure to perform his duty as trustee."

FN103 Now reported post, p. 532n.

FN104 Now reported post, p. 532n.

Mr. Topham, in his reply, urged that these authorities were not relevant to the consideration of art. 150. The later part of that article, he said, was substantially a reproduction of s. 24 of the Trustee Act, 1893, which in turn was a repetition of s. 31 of Lord St. Leonard's Act, and he contended that these sections had always been regarded as doing little more than stating the existing law in relation to trustees. In support of this contention he cited In re Brier [FN105]; Dix v. Burford [FN106]; and Mucklow v. Fuller. [FN107] In In re Brier [FN108] the question to be decided was whether or not certain trustees should be charged with a sum of money collected by their agent, which sum had been lost, owing to the agent's subsequent insolvency. The passage in Lord Selborne's judgment relied upon by Mr. Topham is as follows: "I think that in this case the burden of proof is upon the respondents who seek to charge the executors with this money. The statute 22 & 23 Vict. c. 35, s. 31, provides, in effect, that trustees shall not be responsible for any banker, broker, or other person with whom trust moneys have been deposited (which I understand to mean properly deposited) unless it can be shown that that loss happened through their own wilful fault. The statute incorporated, generally, into instruments creating trusts the common indemnity clause which was usually inserted in such instruments. It does not substantially alter the law as it was administered by Courts of equity, but gives it the authority and force of statute law, and appears to me to throw the onus probandi on those who seek to charge an executor or trustee with a loss arising from the default of an agent, when the propriety of employing an agent has been established. In the present case, the learned judge in the Court below has virtually decided that this was a case of proper employment of an agent for a proper purpose, *439 and, as far as I can judge, the nature of the case justifies that view." But when the whole of the judgment is read, it is, I think, reasonably clear that Lord Selborne, when referring to the law as it was administered by Courts of equity, was referring to the law as to the employment of agents by trustees. He had not to consider, and he expressed no opinion as to, the meaning of the expression "wilful default." This sufficiently appears from a later part of his judgment, which is in these words:
"Then if a person seeks to charge the executors with a loss arising from the default of an agent whom it is admitted to have been reasonable to employ, does it not lie on him to inform the Court of the circumstances under which the loss arose, the time during which the money was in the agent's hands, the time at which the insolvency took place? This having been done, the executors, on the other hand, would have an opportunity of shewing what efforts they had made and what means they had used for getting in the money and what, if any, were the difficulties in their way. Now, it appears to me here, that the person on whom the onus probandi lies has failed to inform the Court of the circumstances which it was absolutely necessary for the Court to know, before it could come to the conclusion that the loss by the agent's insolvency was due to some wilful default on the part of the executors."

FN105 26 Ch. D. 238, 243, 244.

FN106 19 Beav. 409.

FN107 Jac. 198.

FN108 26 Ch. D. 238, 243, 244.

In Dix v. Burford [FN109] a trustee was held liable for the loss occasioned by reason of his omission to procure himself to be admitted tenant to certain copyholds upon the security of which the trust fund of 400l. was invested. In consequence of this omission his co-trustee had been enabled to obtain possession of the trust fund and convert it to his own use. The will creating the trust contained a direction that the trustees should not be chargeable, but only for their respective receipts, payments, acts and wilful defaults and not otherwise, nor with any sum or sums of money other than such as should come to their or his own hands respectively by virtue of the will, nor with any loss or damage which might happen to the said sum of 400l. in consequence of its remaining on security *440 as therein directed, unless the same should happen by or through his or their respective wilful default. Sir John Romilly, in holding the trustee liable, said:
"I think Yells is not exonerated by the indemnity clause. All the testator has said is, that if by remaining on the security any loss or damage should arise, the trustees shall not be liable, unless it should happen by their default. Thus, if the estate had become of less value, or the mortgagor had become unable to pay, the trustees were to incur no liability. The ordinary trustee indemnity clause affords no security to a trustee who neglects to take the steps necessary to secure the fund."

FN109 19 Beav. 409, 413.

The decision therefore was that the trustee was not exonerated by the particular indemnity clause in that case. The construction which Sir John Romilly put upon the clause did not necessitate a determination of the meaning of the words "wilful default." He did no doubt make a general observation as to the ordinary trustee indemnity clause, but it would, I think, be wrong to infer from what he said that he considered every trustee who neglected to secure the trust fund to be necessarily guilty of "wilful default."
In Mucklow v. Fuller [FN110] a testatrix by her will, reciting that one Mucklow was indebted to her in a sum of 500l., directed her executors and trustees to get in and place the 500l. on Government stock or security at interest within three years after her decease and appointed Mucklow and the defendant Fuller to be her executors. The 500l. was never got in or invested, as directed by the will, and was ultimately lost owing to Mucklow's insolvency. The question to be decided was whether Fuller was liable for the loss. The will contained a clause declaring that Mucklow and Fuller were to be chargeable with or accountable for such moneys only as they should actually receive, and not to be answerable or accountable for each other, but each for his own acts, receipts, payments, neglects, or defaults only, and not for any moneys for which they should join in any transfer or sign any receipt for conformity; and they were not to be answerable for any banker with whom they might deposit *441 the trust moneys, or for any other loss, unless it should happen through their wilful default. It seems that Fuller, although he had proved the will, had, except for two small transactions, entirely neglected his duties. Lord Eldon, in holding him to be liable, said, in reference to the indemnity clause, "I cannot but think it most dangerous to lay it down, that with such a clause as this, he can prove the will, and then say that some one else may perform the trusts." Lord Eldon had treated the defendant as acting bona fide and as holding the opinion that he had nothing to do with the trusts. But I do not think that Lord Eldon was in any way considering what was the meaning of the expression "wilful default" as applied to a person acting in a trust. His decision appears to have merely been that the ordinary indemnity clause has no application at all to a man who neglects the trust altogether. It only applies to an acting trustee; it never begins to apply to one who does not act at all.

FN110 Jac. 198, 201.

There is not, so far as I know, an authority in which the meaning of "wilful default" in the ordinary trustee indemnity clause has been determined or even considered. I am therefore at liberty to place upon art. 150 the construction which appears to me to be warranted by the authorities in which the meaning of "wilful default," "wilful neglect" and "wilful misconduct" has been determined in other connections. Before leaving this article, however, there is another matter to which I ought to refer. In the case of In re Brazilian Rubber Plantations and Estates, Ld. [FN111], to which reference has already been made, it was sought to make directors liable for negligence. The articles of association contained a clause exonerating a director from liability for loss or damage unless the same happened through his own dishonesty. Neville J. acquitted the directors of negligence, but he also held that this clause in the articles of association was also a fatal objection to the application of the liquidator which was made, as is the present application, under s. 215 of the Companies (Consolidation) Act, 1908. Referring to the clause in question he said: "I do not see how to escape *442 from the conclusion that this immunity was one of the terms upon which the directors held office in this company. I do not think that it is illegal for a company to engage its directors upon such terms. I do not think, therefore, that an action by this company against its directors for negligence, where no dishonesty was alleged, could have succeeded. It appears to me that an application under s. 215 of the Companies (Consolidation) Act, 1908, stands on the same footing." He then referred to certain observations of Lord Macnaghten and Lord Herschell in Cavendish Bentinck v. Fenn [FN112] as warranting this conclusion. Mr. Topham did not feel justified in asking me to decline to follow this decision, but he reserved to himself the right to question it in the Court of Appeal, and to ask that Court to hold that the rights given by s. 215 of the Act are independent of and cannot be modified by any provision contained in the articles of association. In these circumstances I propose to follow the decision of Neville J. upon this point without expressing any opinion of my own.

FN111 [1911] 1 Ch. 425, 440.

FN112 (1887) 12 App. Cas. 652, 669.

I must now turn to the facts of the case for the purpose of ascertaining first, whether in any of the matters charged against them the respondents have been guilty of negligence, and secondly, whether any such negligence was wilful, negligence and default meaning for all practical purposes one and the same thing. That Bevan was guilty not merely of wilful negligence but also of fraud will appear quite clearly. The real question that I have to decide is with reference to his co-directors. These co-directors are Mr. Peter Haig Thomas, Mr. Henry Ralph Grenside, the Earl of March, Lord Ribblesdale, Sir Douglas Dawson, Mr. David Macbeth Moir Milligan, and Sir Henry Grayson. Of these gentlemen Mr. Grenside became a director on March 31, 1915, Lord March, Lord Ribblesdale, and Sir Douglas Dawson on April 21, 1915, Mr. Haig Thomas on June 27, 1916, Mr. Milligan on August 27, 1916, and Sir Henry Grayson on December 4, 1917. They all continued to be directors down to the date of the liquidation of the company, with the exception of Lord March, who retired *443 from the board on January 3, 1922. A Mr. C. T. Barclay was also a director of the board during part of Bevan's directorship, but he resigned on October 5, 1920, and died soon afterwards, and his position need not be further considered except in so far as it affected his co-directors. All the others that I have mentioned were made respondents to the summons. By arrangement between the Official Receiver and Sir Henry Grayson, however, all further proceedings against him have been stayed. I am accordingly relieved of the task of considering any question as to his liability. In these circumstances, whenever in this judgment I refer to the respondent directors, I intend to exclude the respondents Bevan and Sir Henry Grayson, and, of course, Mr. C. T. Barclay. The Official Receiver in these proceedings sought to make the respondent directors liable for the losses occasioned to the company by (1.) Investing or permitting to be invested moneys of the company amounting to 701,739l. in the investments set forth in para. 12 of the points of claim. (2.) Investing or permitting to be invested 445,374l. in a ranch in Brazil. (3.) Authorizing or permitting the manager Mansell to become indebted to the company in the sum of 110,000l. (4.) Lending or allowing to remain in the hands of Ellis & Co., the company's brokers, large sums of money amounting at the date of the winding up to some 350,000l. (5.) Making or permitting to be made a loan to Bevan of 6952l. (6.) Lending to a company called the Saskatoon Grain Company a sum of 9329l. (7.) Paying dividends in respect of the financial year ending February 28, 1921, and (8.) Paying an interim dividend in respect of the financial year ending February 28, 1922. The claims in respect of these dividends, alleged by the Official Receiver to have been paid out of capital, are, however, in the nature of alternative claims. There are one or two other matters referred to in the points of claim, in respect of which the Official Receiver sought to make the respondent directors liable, but they were abandoned by his counsel during the hearing before me and need not be mentioned further.
I propose, so far as is possible, to consider each of these *444 matters separately, and in the order in which I have mentioned them; and to consider, wherever it becomes necessary to do so, the position of each of the respondent directors individually in relation to the particular matter in question. Before doing so, however, I desire to make one general observation. Cases have not been unknown in which a director has lent his name to a company for what may be called window dressing purposes, and has treated himself as having thereby given ample consideration for his remuneration and as being absolved from any further effort towards promoting the welfare of the company. This cannot be said of any one of the respondent directors. It was not possible for them all to attend to the company's affairs with equal regularity. Lord March, for instance, owing to serious illness resulting in grave physical incapacity, was unable, except for two occasions in 1918, to attend any board meetings until the summer of 1920. He offered indeed to resign his directorship in the year 1917, but he was persuaded by his colleagues to remain. Mr. Milligan, who resides and carries on business in Aberdeen, was for that reason unable to attend at meetings of the board as often as he could have wished. But I am satisfied from the evidence adduced before me that each one of the respondent directors was willing and anxious to give of his best to the company and at all times took as active a part in the work of the board as circumstances would reasonably permit.
Turning now to the claims made by the Official Receiver, I come first to that in respect of the investments mentioned in para. 12 of the points of claim. During the hearing before me, the claim of the Official Receiver under this heading was ultimately confined to two investments - namely, the investment of a sum of 228,813l. in shares in Claridge's Hotel, Paris, and the investment of a sum of 70,970l. in shares in the United Brass Founders and Engineers, Ld. In so limiting his claim, the Official Receiver in no way admitted that the remainder of the investments specified in para. 12 of the points of claim were proper investments for the funds of an insurance company. It was, however, reasonably clear that *445 if he could not succeed in respect of the two particular investments mentioned he was not likely to succeed in respect of the remainder; while if he did succeed in respect of these two investments and the other matters included in the other heads of claim to which reference has been made, the combined wealth of the respondent directors would not be sufficient to make good the losses that had been thereby occasioned to the company.
Before considering the circumstances of the two investments thus selected by the Official Receiver for attack, it is necessary to refer to the setting up of the finance committee of the board. This was done by a resolution passed at a board meeting held on July 25, 1916, at which Bevan, Haig Thomas, Lord Ribblesdale, Grenside and Sir Douglas Dawson were present. The minute recording this resolution is in these terms: "Mr. Bevan, Mr. Thomas and Mr. Grenside were appointed a finance committee with power to make or sell investments on behalf of the company not exceeding 5000l. in any one security." In passing this resolution the directors were exercising the power of delegation conferred upon them by art. 123 of the company's articles of association. That article is in these terms:
"The directors may delegate any of their powers, other than the powers to borrow and make calls, to committees consisting of such members of their body as they think fit. Any committee formed shall in the exercise of the power so delegated conform to any regulations that may from time to time be imposed upon them by the Board."
But not only was it within the powers of the directors to set up the finance committee. It was, judged in the light of what was then known to the directors, a most reasonable thing to do. Bevan, who had been elected chairman of the board on July 11, 1916, was one of the greatest authorities on finance in the City of London. In reputation and in credit he stood second to none. His advice on questions of investment was eagerly sought and readily followed. Later events have indeed proved him to be a rogue. But it is, I think, impossible to form a just estimate of the conduct of the respondent directors, not only in respect of the finance *446 committee and its doings, but also in respect of all the matters with which I have to deal, unless a clear picture can be formed of Bevan as he must have appeared to his colleagues at the time. Mr. Haig Thomas was also a man of great business experience. He had, before joining the board of the City Equitable, been chairman and managing director respectively of two of the largest colliery companies in South Wales, whose combined capitals amounted to about three million pounds. Mr. Grenside for his part brought into the finance committee the legal knowledge and the more general business experience of a solicitor. In October, 1916, Mr. C. T. Barclay became an additional member of the board and of the finance committee, and remained so until he retired in October, 1920. He was the senior partner in the firm of Messrs. Sheppard, Pelley & Co., a firm of stockbrokers of the highest reputation. To a committee thus constituted the other respondent directors might well delegate the duties of investing the funds of the company. I cannot help regretting that Mr. Milligan was not added to the committee, as he had had a greater practical experience of the business of an insurance company than the remainder of the board. I feel sure that he would have prevented one or two investments made by the finance committee which, whatever else may be said of them, were not prudent investments for an insurance company to make. Mr. Milligan, however, was, as already stated, resident in Aberdeen.
It will have been observed that, according to the minute recording the appointment of the finance committee, their powers of investment in any one security were limited to 5000l. Strangely enough, no director who gave evidence before me retains any recollection of this restriction having been imposed. Certainly it was never observed by the finance committee, and this must have been known to the board from an early date. At a board meeting held on November 14, 1916, a report of the finance committee of that date was read and approved, and such report informed the board of the purchase of 7000 Commercial Bank of London shares at a price of 3l. each, and of 25,000l. British Government three *447 months' Treasury Bills. At this board meeting the only director present who was not a member of the finance committee was Sir Douglas Dawson. It was, however, the practice of the secretary to forward to each director a copy of the minutes of the board meetings. The other directors were, therefore, made aware about this time of the fact that the 5000l. limit was being disregarded by the committee. The truth is that the restriction was forgotten both by the finance committee and by the board. It was not until May 4, 1920, that the attention of the board was called to it by Mansell, the general manager, who said that he had found in an old minute that there was a limit of 5000l. At a board meeting of that date it was accordingly resolved, on the proposal of Lord Ribblesdale, seconded by Sir Douglas Dawson: "That the finance committee be authorised to deal with securities to an unlimited amount, this resolution superseding that passed on the 25th July, 1916." I think that, in the circumstances, it must be taken that at all material times the limit imposed by the resolution of July 25, 1916, had been at first tacitly, and afterwards expressly, revoked by the board. It has been necessary to deal at this length with the constitution and authority of the finance committee, because it was the finance committee that resolved upon the investment of moneys of the company in Claridge's Hotel, Paris, and in the United Brass Founders. [His Lordship then dealt in detail with the facts and evidence concerning these investments and the investment of 150,000l. in the Brazilian ranch authorized by the finance committee, and although he considered that as members of the finance committee Mr. Grenside and Mr. Haig Thomas had been guilty of negligence in connection with the investment in the Brazilian ranch, yet he was of opinion that their negligence was not wilful and that art. 150 afforded an answer to any claim against either of them in that respect, and his Lordship came to the conclusion that he was not prepared to find them, either as members of the finance committee or as directors, or any other of the respondent directors, liable in respect of any of the three investments above mentioned. His Lordship continued:] *448 I must now deal with the claim of the liquidator in respect of the loan of 110,000l. to Mansell. As already stated, Mansell was the general manager of the company. He had held that post from the date of the formation of the company in the year 1908, and appears to have been a man of great ability and experience in all matters connected with insurance. The respondent directors put the greatest trust in him, and, for all that they knew to the contrary, were at all material times justified in so doing. Subsequently to the liquidation of the company, Mansell was put upon his trial for fraud in connection with the affairs of the company and was acquitted. So far, therefore, as he was concerned in the matters now to be related, he is entitled to be absolved from all suspicion of fraud. But unquestionably he betrayed the trust and confidence reposed in him by the respondent directors. He was remunerated by a salary of 2000l. a year and a commission on profits, the commission amounting to something between 6000l. and 7000l. a year. His salary was paid by regular instalments, and need not be further mentioned. The trouble has arisen out of the payments made to him on account of, or in anticipation of, his commission. By January 3, 1919, Mansell had received 6100l. on account of his commission for the year ending February 28, 1919, and he was paid two further sums of 2000l. and 3000l. on January 7 and 21, 1919, respectively. The sum due to Mansell for commission and expenses for the whole year ending February 28, 1919, was 4875l. It was therefore obvious by January 3 that Mansell's commission account would be considerably overdrawn by the end of the financial year, especially if, as I cannot doubt was the case, Mansell knew that he would obtain the two further sums to which I have referred. In those circumstances, at a meeting of the finance committee held on January 3, 1919, at which Bevan, Barclay, Grenside and Mansell were present, the chairman, according to the minute of that meeting, stated "that he had received an application from the general manager for an advance of 15,000l. at 5 per cent. interest for the purchase of a freehold residential farm property repayable by instalments and *449 the same was approved." On March 13 a further sum of 9000l. was paid to Mansell, making, with the 6225l. then due from Mansell on his overdrawn commission account, a sum of 15,225l. There was nothing wrong in making a loan to Mansell on proper security. As a matter of fact, however, the company never obtained any security for the loan on his "freehold residential farm." From what happened afterwards, it would appear that the approval of the advance was obtained by Bevan from the finance committee for the purpose of concealing from his co-directors the fact that Mansell was being overpaid on his commission account. Nothing was said to the finance committee about these overpayments at the time, for Grenside was unaware of the fact that Mansell was ever overpaid until the month of March, 1921. The other respondent directors were also in ignorance of this fact, Mr. Haig Thomas down to February, 1921, and the others down to shortly before the liquidation of the company. Whether this ignorance of the respondent directors as to the Mansell overpayments was consistent with the proper discharge of their duties to the company I shall have to consider. For the moment I merely state as a finding of fact that this ignorance existed. Down to March 13 then, Mansell had received some 15,000l. in excess of what was due to him for commission, and if the attention of any director had been called to this indebtedness of his to the company, the minute of the finance committee of January 3, 1919, could be referred to as affording a satisfactory explanation. The overpayments however continued. During the year ending February, 1920, Mansell received from the company further sums amounting in all to 44,000l., his commission for that year amounting only to 6797l. His indebtedness to the company was thus increased to 54,427l. by February 20, 1920, this sum including, of course, the 15,000l. sanctioned by the finance committee. In this state of affairs, Mr. Lepine, of the firm of Messrs. Langton & Lepine, the auditors of the company, when conducting the audit for the year ending in February, 1920, sent a report to Mr. Bevan dealing with various questions that remained to be settled *450 before the audit could be completed. One of these questions concerned the indebtedness of Mansell, and, as to this, Mr. Lepine wrote in his report as follows: "With regard to the loan to Mr. Mansell we would remind you that the only minute is one dated the 3rd January, 1919, authorising a sum of 15,000l. We understand that a further minute is to be recorded at the next board meeting. We would also draw your attention to the fact that no interest has yet been charged in respect of this loan. We, however, are informed that a formal agreement is to be prepared with reference to the loan generally." I shall have to deal with this report more fully, and with certain letters addressed both by Bevan and Mansell to Mr. Lepine in connection with the loan when I have to deal with the claims made by the Official Receiver against the auditors. For the moment I shall confine myself to such facts as affect the respondent directors. It is perhaps needless to say that this report was never communicated by Bevan to any of his co- directors, and that when once Mr. Lepine had closed his audit, relying upon the assurance of Bevan as to the recording of a further minute, and the preparation of a formal agreement, Bevan, for the time being, took no further steps in the matter. The overpayments, however, continued, and by the end of February, 1921, Mansell's indebtedness had increased to 96,233l. Now another audit was approaching, and something would have to be done to satisfy Mr. Lepine. Some minute must be recorded and some agreement must be prepared. What followed affords a striking example of Bevan's methods. [His Lordship then dealt with the minute, the entry of which in the minute book, he found on the facts, was fraudulently made by Bevan, and with the agreement which was subsequently made with Mansell for a loan to him of 110,000l. (inclusive of the 96,233l.), the board's sanction to which his Lordship also found was fraudulently obtained by Bevan, and he came to the conclusion that he could not hold the respondent directors liable for any loss occasioned by the agreement, although, in his Lordship's opinion, it was impossible to acquit Mr. Grenside of carelessness of such a degree as might well have constituted *451 negligence; but as he had acted in complete good faith, he could not be held guilty of wilful negligence, and having regard to art. 150, his Lordship could not hold him liable for any loss occasioned by the agreement. His Lordship then continued:] I must now consider the question of the responsibility of the respondent directors for the overpayments to Mansell. Every payment made to him on account or in anticipation of commission was made by a cheque drawn in his favour signed, as required by the articles of association, by two directors and also by Mansell himself, or, in I think four instances, by the accountant Mr. Lock. The dates and amounts of the cheques so drawn in favour of Mansell between April 2, 1918, and November 17, 1921, which, after deducting the sums due to him in respect of commission and expenses during that period, amounted to the 110,000l., are set out in certain particulars delivered by the liquidator on March 29, 1923, and are bound up with the pleadings. These cheques are fifty-four in number. A document handed up to me during the trial and numbered 19a gives in each case, with the exception of the cheque on December 9, 1919, for 3000l., the names of the directors by whom the cheque was signed. This document includes, however, by mistake a cheque for 5000l. dated September 27, 1921, which has nothing to do with the matter. The Official Receiver contends that each respondent director is at all events liable for the sums received by Mansell by means of the cheques signed by that director. In support of this contention Mr. Topham relied upon the decision of James V.-C. in Joint Stock Discount Co. v. Brown. [FN113] In that case directors had expended money of their company in payment for certain shares which the company had no power to acquire. One of the directors named Bravo only joined the board after the transaction had been resolved upon by the board, but he had subsequently signed a cheque for 5000l., part of the moneys in question. In holding him liable James V.-C. said: "Mr. Bravo's case is somewhat different in this respect, that Mr. Bravo was not a party to the original resolution. Mr. Bravo, however, *452 signed a cheque for 5000l., part of the moneys in question. He says he signed that cheque as a matter of form. It has been repeated with reference to him and some other of the defendants here that signing cheques in that way is a mere ministerial act. I am startled at hearing any such statement. A company for its own protection against the misapplication of its funds requires that cheques should be signed by certain persons. Of course it is quite clear that no company of this kind could be carried on if every director were obliged to sign every cheque, and it is therefore required that the cheques should be signed by a certain number of persons for the safety of the company. That implies, of course, that every one of those persons takes care to inform himself, or if he does not take care to inform himself is willing to take the risk of not doing so, of the purpose for which and the authority under which the cheque is signed; and I cannot allow it to be said for a moment that a man signing a cheque can say: 'I signed that cheque as a mere matter of form; the secretary brought it to me; a director signed it before me; two clerks have countersigned it; I merely put my name to it.' Most of us have been obliged to trust in the course of our lives to a great number of persons when we have had to sign deeds and things of that kind; but if we trust, of course we must take the consequences of our so trusting. Mr. Bravo in this instance signed the 5000l. cheque probably relying that it was all right; but, of course, relying that it was all right, he must be responsible for so trusting that it was all right." In that particular case, if the director had inquired as to the purpose for which the cheque was required, he would have ascertained that it was for a purpose which he must have known or be deemed to know was ultra vires. But a director who signs a cheque that appears to be drawn for a legitimate purpose is not responsible for seeing that the money is in fact required for that purpose or that it is subsequently applied for that purpose, assuming, of course, that the cheque comes before him for signature in the regular way having regard to the usual practice of the company. If this were not so, the business of a large company *453 could not be carried on. In the case of an insurance company, for instance, the cheques to be signed at the board meeting would often include cheques in payment of insurance claims. If a claim appears to have been examined into and passed by the manager or other proper official for the purpose, a director who signs the necessary cheque in payment of the claim (the cheque being brought before him in the customary way) cannot be expected to investigate the whole matter over again, for the purpose of satisfying himself that the claim is well founded. A director must of necessity trust to the officials of the company to perform properly and honestly the duties allocated to those officials. In many large companies - it was so in the case of the City Equitable - it is the duty of the manager to pay the salaries and wages of the staff. For that purpose cheques are drawn by the directors in his favour, the exact amounts required being calculated by him. So long as there is nothing suspicious about the amount, the directors are justified in trusting him to calculate it correctly, and to use the proceeds of the cheque for the purpose for which it was drawn. The fact, therefore, that a respondent director signed cheques in favour of Mansell for or on account of commission does not necessarily make him responsible to the company for any payments so made to Mansell in excess of what was really due to him. In order to determine whether any respondent director can be made so liable, I must consider the circumstances in which he signed the cheques in question for the purpose of seeing whether there was anything that should have put him on inquiry, either by reason of the amounts for which the cheques were drawn, or of any irregularity in the method in which they were presented to him for payment.

FN113 L. R. 8 Eq. 381, 404.

The practice as to the drawing, authorizing, and signing of cheques in the City Equitable was as follows: the cheque books were normally in the custody of Mr. Lock, the accountant, and it was in his department and under his supervision that the cheques for signature by the directors were, or ought to have been, filled up. The request for the drawing of any particular cheque would come from Mr. Mansell or *454 Mr. Bevan. Mr. Lock himself drew up about 5 per cent. of the company's cheques, the balance being drawn by members of his staff. The counterfoil was filled up by the person who drew the cheque. Any cheque placed before the board ought, therefore, in the ordinary course, to have passed the scrutiny of the company's accountant. It turns out in fact that in some cases Mr. Mansell got cheques filled up by a member of Mr. Lock's staff without in any way communicating with Mr. Lock. But this could not be known to the directors. In respect of each cheque drawn, except in respect of insurance losses, there was also prepared in the accountant's office a slip, on which was stated the amount of the cheque and the purpose for which it was drawn, and this slip was stamped "Authorised for payment at Board Meeting" - a space being left for the date of the meeting. Before the meeting of the board, or committee of the board, at which cheques were to be signed, a list of them was prepared in the accountant's department. Up to the end of the year 1918 this list stated, in respect of each cheque, the name of the payee, the amount of the cheque, and the purpose for which it was required. But early in the year 1919 the practice was altered without the knowledge of any director, except possibly Mr. Bevan, and for the future the list merely gave the amount of the cheque without disclosing the name of the payee or the purpose for which the money was required. Neither Mr. Lock nor Mr. Witts, the secretary of the company, could state upon whose authority the change was made. But it seems probable that it was made upon the instructions of Mr. Mansell. The list, both before and after this change in practice, was sent from the accountant's department to that of the secretary to enable him to prepare the agenda for the directors' meeting. The list was not however transcribed in the agenda book, but merely the total amount for which cheques were required. The list itself never came before the directors. At the directors' meeting the cheque books were on the table together with the slips to which I have referred, and, in the case where insurance losses were to be paid, the papers relating to the claim. The meeting *455 would resolve that cheques be drawn to the amount stated in the agenda book, and each cheque would be signed by any two directors that happened to be present. In the case of the cheques with which I have particularly to deal, and also no doubt in other cases, the cheque had as a rule been previously signed by Mr. Mansell or Mr. Lock, and the counterfoils initialled by the latter. When the directors had signed a cheque they initialled the relevant slip and the cheque was complete. Except in one respect, to which I will call attention later, this practice in relation to the company's cheques is not open to criticism. Every director who signed a cheque at a directors' meeting would see from the slip and the counterfoil the purpose for which the cheque was required. He was, moreover, entitled to assume that the cheque had been passed by the general manager, the accountant and the secretary. He would therefore have done all that could reasonably be required of him as to satisfying himself both as to the purpose and as to the authority for signing the cheque. There were certain occasions upon which a cheque had to be signed between the directors' meetings, but inasmuch as none of the Mansell cheques were signed in this way I need not investigate that matter further. All the Mansell cheques were signed by meetings of the board or a committee of directors in the manner which I have described. So far as procedure was concerned, there was no irregularity of which any respondent director had notice, nor was there anything about the amount for which any cheque was drawn that ought to have excited suspicion. No single cheque in favour of Mr. Mansell exceeded 3000l. with the exception of one for 9000l. drawn on March 13, 1919. This cheque, however, which was drawn in consequence of the resolution of the finance committee of January 3, 1919, was not signed by any respondent director other than Mr. Grenside, and he had been a party to, and therefore knew of, the resolution. No single cheque, therefore, with the exception that I have mentioned, exceeded what a director might reasonably consider to be properly payable to Mansell on account of or in anticipation of his commission.
*456 The real difficulty arises by reason of the frequency and the total amount of such cheques signed by some of the respondent directors. In the cases of Lord March and Mr. Milligan there can be no criticism in this respect. The former only signed three Mansell cheques in the year 1920, totalling 7000l., and two in 1921, totalling 4000l. The latter only signed two in 1919 and two in 1920, the total amounts being 4000l. and 6000l. respectively. Having regard to the large sums being earned by Mansell in commission, there was nothing in these figures that ought to have excited suspicion. The two cheques signed by Mr. Milligan in 1919 were indeed signed upon the same day - namely, August 5. But they were drawn upon different banks and would, therefore, be in different books, and Mr. Milligan did not realize when signing the second that he had already signed one for a similar amount. The same thing happened upon two other occasions in the case of others of the respondent directors. It would appear that the device of drawing two cheques in Mansell's favour on the same day was resorted to whenever it was desired that he should be paid at one time more than 3000l. on account of his commission. It will be observed by a reference to the particulars of the points of claim that with the exception of the cheque for 9000l. already mentioned the Mansell cheques during 1919 were usually for 2000l. and in 1920 were usually for 3000l. This increase would not arouse any suspicion, for the profits of the company were steadily increasing. But if Mansell required at one time 4000l., as he did on August 5, 1919, and September 16, 1919, or 5000l., as he did on November 4, 1919, two cheques were prepared in the accountant's office, each of which was drawn for half the amount required and upon different banks. Seeing that the number of cheques drawn at the directors' meetings was usually anything between 60 and 100, it might well happen that a director would fail to notice that he was signing two cheques for Mansell on the same day, and this indeed happened on each of the occasions referred to. But had any director when signing the cheques in one book recollected that he had already *457 signed one in Mansell's favour in the other, I cannot help thinking that, as was suggested by Sir John Simon, the existence of two cheques would have been readily explained as being due to the carelessness of some official in the accountant's office. It is impossible not to feel some sympathy for the respondent directors, hoodwinked as they were by a fraudulent chairman and not receiving proper protection from the officials in whom they placed their trust.
To return, however, to the particular cases of Lord March and Mr. Milligan, I cannot find them guilty of any breach of duty merely because the amounts for which they signed cheques in Mansell's favour did not make them suspect that he was being overpaid. In the case of all the other respondent directors, however, there is to be found a circumstance that is absent from the cases of Lord March and Mr. Milligan. For each one of them signed in the course of one or both of the financial years 1919 and 1920 cheques for more than it was reasonable to suppose could be due or accruing due to Mansell in respect of his commission. This was more particularly so in the case of Mr. Grenside. For the financial year ending February, 1920, he signed cheques in Mansell's favour for no less than 21,000l. exclusive of the 9000l. cheque on March 31, 1919, given to complete the loan to Mansell of 15,000l. For the financial year ending February, 1921, the cheques so signed by him amounted to 26,000l. That he did not in fact realize what was the aggregate amount of cheques signed by him in each of those years is, in my judgment, perfectly clear. But was this ignorance on his part consistent with a proper discharge of his duty to the company? This question must, I think, be answered in the affirmative unless it was his duty to the company to keep, and from time to time to check, a list of all the cheques he signed, or unless it was his duty to the company to possess a better memory than that with which nature had endowed him. Let me take the financial year ending in February, 1921. During this year he signed cheques for the following amounts: 2000l. on March 2, and another 2000l. on March 16 - 3000l. on May 4, a like sum on June 15, July 6, July 20, *458 September 17, November 2 - 1000l. on December 7 and 3000l. on February 1. Now, although it was his duty to satisfy himself as to each Mansell cheque as to the purpose for which and the authority under which he was signing it, when once he had done this, there was nothing in the amount of any individual cheque to impress upon his mind the fact of his having signed it. It would appear to him to be a perfectly proper thing to sign a cheque for 2000l. on March 16 in respect of, or on account of, commission, and the fact that he had signed this cheque among a hundred others might not unreasonably escape his memory when signing another equally innocent looking and apparently regular cheque a fortnight later. Even more excusable might be his failure to remember the signing of both these cheques when he signed the cheque for 3000l. on May 4. Wisdom after the event shows that he could have detected the fraud that was being practised upon him by somebody by keeping a list of all the cheques that he signed in Mansell's favour. But there was no ostensible reason for doing this in the case of these cheques in particular, and to keep a list of all cheques that he signed would have been quite impracticable and far outside any duty that a director owes his company. Nor can I think that a director fails in his duty by reason of lapses of memory that are in the circumstances reasonably excusable. He only undertakes to bring to the service of the company a memory of the normally imperfect nature, and Mr. Grenside's memory would appear to have been of this order. His greatest lapse in this respect occurred on January 20, 1920, when he was the victim of the two cheque trick. But I am not prepared to treat his failure to realize that he was signing two cheques for Mansell on the same day as inexcusable. I think that Sir John Simon was justified in saying that even now we do not know all that took place in connection with the obtaining of the signatures of the directors to the Mansell cheques. There are one or two incidents, such as the alteration in one case of the entry on the counterfoil from "Loan Account" to "Contingent Commission," and the discrepancy in two other cases between the date borne by the cheque *459 and that inserted in the counterfoil which gives rise to the suspicion that Mr. Bevan and any accomplice he may have had were possibly employing artifices more intricate than those we know of for the purpose of deceiving his co-directors. Most assuredly his colleagues were deceived, and I can find nothing to suggest that they were more gullible than the majority of mankind.
What I have said about Mr. Grenside applies with even greater force to Mr. Haig Thomas, Sir Douglas Dawson, and Lord Ribblesdale. The last named was not himself in a position to give evidence in explanation of his conduct. As a matter of fact he only signed cheques to the aggregate amount of 11,000l. in the year 1919, and 9000l. in the year 1920 - figures that would not of themselves call for much explanation on his behalf. On two occasions, however, in 1919 he was a party to signing two Mansell cheques on the same day. But in view of the evidence given by his co-directors as to the diligence and interest that he ordinarily displayed in the discharge of his duties I cannot doubt his complete innocence. He was successfully tricked, but cannot, in the circumstances, be blamed on this account. But while freeing all the respondent directors from liability for their individual signing of the Mansell cheques, there is one matter connected with their general practice in relation to cheques that provokes adverse criticism. Before any director actually signs, or at any rate parts with a cheque signed by him, he should satisfy himself that a resolution has been passed by the board, or committee of the board, as the case may be, authorizing the signature of the cheque. In the case where a cheque has to be signed between meetings, he must, of course, obtain the confirmation of the board subsequently to his signature. Such cases are, however, exceptional, and need not be further considered. But, in the ordinary case, the precedent authority of the board or committee ought always to be obtained, and, in the case of the City Equitable, this authority was in truth always obtained, but it was obtained in a way that rendered the precaution practically useless. For, as already pointed out, the authority given *460 was merely one for the signing of cheques to an aggregate amount, neither the payee nor the amount of the individual cheques being mentioned. In my opinion this practice was wrong in principle, and, in its result, rendered possible the over-payments to Mansell. For if a proper list of the cheques were read out at the meeting, and were subsequently transcribed into the minutes of the meeting (copies of which were circulated, at any rate, in the case of board meetings), every director would have had brought to his attention, not merely the Mansell cheques that he himself had to sign, but all the Mansell cheques that were being authorized by the directors, and it seems almost certain that one or more of the directors would in that case have been struck by the frequency with which Mansell's name appeared in the list as a payee of large sums, and his overpayments would have been summarily stopped. Whether the omission of the respondent directors to follow the proper practice in giving authority for the signing of cheques constituted negligence on their part may be a question of some difficulty. But if it was negligence it was not wilful negligence as I understand that phrase, so that I need not pursue that matter further. There is, however, one more matter to be mentioned before parting with the question of the Mansell overpayments. In each of the balance sheets for the year ending the last day of February, 1919, 1920 and 1921, the sums then due from Mansell were in fact included. On February 28, 1919, the sum due from him was 6255l., on February 29, 1920, 52,427l., and on February 28, 1921, 96,233l. His name, however, did not appear in these balance sheets, nor did these particular sums. They were merely included in the total sum appearing in the balance sheets for 1919 and 1920 as loans at call or short notice, and as loans in that for 1921. Any director, therefore, who inquired, or whose duty it was to inquire as to the loans owing to the company would have discovered, or must be deemed to have discovered, the existence of Mansell's indebtedness. I shall, however, have to consider the whole position of the respondent directors in the matter *461 of loans when I deal with the question of their liability for the much larger sums that were extracted from the company by Bevan for his own benefit. My conclusions upon that question will govern the question of their liability for the smaller sums extracted for the benefit of Mansell, so far as that liability depends upon the knowledge that they ought to have obtained by inquiring into the state of the company's loans, whether at call, short notice, or otherwise.
I must now turn to the claim made by the Official Receiver in respect of moneys lent to, or left in the hands of, Ellis & Co., the company's brokers. The story of these moneys begins with a resolution of the finance committee of January 30, 1917: "To grant to Messrs. Ellis & Co. a loan of 30,000l. against securities with a 10 per cent. margin to be lodged by that firm with the company." There were present at this meeting Messrs. Bevan, Haig Thomas, and Grenside, and the secretary. According to Mr. Haig Thomas, the finance committee subsequently sanctioned an increase of this loan to 100,000l., though, according to Mr. Grenside's recollection, the total amount of the loan ultimately sanctioned by the finance committee was 200,000l. There was nothing inherently wrong in such loan, whether it was for the larger or the smaller amount, so long as the security lodged with the company by Ellis & Co. was ample, as it, in fact, was at all times material to the consideration of the present question. At the dates of the balance sheets for 1919, 1920 and 1921 the estimated value of the collateral security held by the company was always largely in excess of 220,000l. This security, after the liquidation of the company, realized under 31,000l., but there is no evidence before me that the estimates of the value at the dates mentioned were in any way too large. The amount of the loan was, however, largely increased by Ellis & Co. without the authority or knowledge of either Mr. Thomas or Mr. Grenside. This was rendered possible by the fact that Ellis & Co. had from time to time enormous sums of the company's money in their hands over which, so far as I have been able to ascertain, no one of the respondent directors exercised any control, and *462 in respect of which no account was ever asked for or seen by him. These moneys were derived from the sale of investments carried out by Messrs. Ellis & Co. as the brokers of the company, and by cheques drawn on the company's banking accounts in their favour. What purported to be accounts of the dealings of Ellis & Co. with moneys and securities of the company were indeed sent by them to the company, but these accounts never seem to have got further than the accountants' department, and were never seen by any respondent director. Out of the moneys so received by them, Messrs. Ellis & Co. from time to time paid for the more permanent investments that were authorized by the finance committee. This committee, however, except on rare occasions, never concerned itself with the short-dated securities, or with temporary investments such as loans at call on the Stock Exchange or elsewhere. In consequence of this, Mr. Bevan, through his firm, was enabled to deal practically as he thought fit with the available cash of the company that was not required for the investments decided upon by the finance committee. There were two accounts kept by Mr. Lock, the accountant, in the investment ledger in the name of Messrs. Ellis & Co. - namely, a loan account and an investment account, and the entries in these accounts were made by Mr. Lock in accordance with the instructions of Bevan given by him verbally, or through the medium of the monthly accounts. If Bevan required, for his own purposes, a few more thousands of pounds of the company's money reposing in the hands of Messrs. Ellis & Co. he had only to direct Mr. Lock to debit his firm's loan account with the sum required, and the thing was done. In these circumstances it is not surprising that the debit to Messrs. Ellis& Co. on loan account was increased at first to 250,000l., and in February, 1921, to 350,000l. The balances in their hands on investment account continued to grow meanwhile, and at times were enormous. It will be sufficient to take the year 1921. On January 14 there was due from Ellis& Co. the sum of 123,055l. on investment account. At a meeting of the finance committee held on January 18 at *463 which Messrs. Bevan, Thomas, and Grenside were present, in addition to the general manager, it was agreed to reduce the company's aggregate holding in industrial securities, and Bevan was authorized to sell certain holdings at his discretion, the proceeds to be invested in Government Bills in due course. Various sales were accordingly carried out by Ellis & Co. during the month of January, with the result that at the end of that month the balance of cash in their hands on investment account was over 550,000l. By means of the entry of a perfectly fictitious purchase of Treasury Bills and National War Bonds, purporting to have been made on February 25, and by an unauthorized transfer to loan account of 100,000l. on February 28, the balance shown by the books of the company was reduced as at that date to 73,650l. But in point of fact this sum of 550,000l. in substance remained uninvested in their hands down to the date of liquidation. The National War Bonds and Treasury Bills purporting to have been bought on February 25 were never delivered or intended to be delivered, as will appear later on in this judgment. The pretended purchase was entered in the accounts merely for the purpose of misleading the auditors and the respondent directors and others who might be concerned with the balance sheet of February 28. When, therefore, this date was passed Bevan pretended to sell the bonds and bills, and the balance shown in the books to the debit of Ellis & Co. on investment account would once more have been swollen by the amount supposed to have been realized by this fictitious sale had not Bevan taken steps to avoid it. The steps he took were simple. Of the securities sold by Ellis & Co. in pursuance of the resolution of the finance committee of January 18, 1921, nearly 320,000l. worth had been sold to a syndicate of which Bevan was certainly a member, and possibly the sole member. It was, at any rate, clearly under his control. So in the first few days of March Messrs. Ellis & Co., without any authority whatsoever from anyone but Bevan, purported to resell these securities to the company, thus purporting to reduce their debit balance by 319,517l. As a matter of fact the proceeds *464 of this pretended resale were not actually credited to Ellis& Co. in the company's books until December 31, 1921, that being the date of the first monthly account of Ellis& Co. in which the resale was recorded. It would seem as if the resale were something that Bevan only intended to put forward in case any of his co-directors should discover the amount of the balance due from Ellis & Co. In the meantime further moneys continued to come in by reason of sales of investments and an occasional cheque from the company, and the balance due from Ellis & Co., even if they were credited with the proceeds of the resale, remained during the months of April, May and June at about the sum of 50,000l. It was only kept down to this comparatively moderate sum by Bevan taking 190,000l. and more for the purposes of the Brazilian ranch, and investing some 40,000l. in shares of the United Brass Founders, in both cases without the knowledge or authority of any of his co-directors, as mentioned in an earlier part of this judgment. Finally, when in December, 1921, it had become obvious to Bevan that the amount of his firm's indebtedness could no longer be concealed, Messrs. Ellis & Co. proceeded to unload upon the company a number of doubtful securities, and to debit the company with a further large contribution to the Brazilian ranch. By these means, and by certain cash payments to the company obtained, I know not how, from Ellis & Co. in October, November and December the balance due from them to the company had, according to the company's books, disappeared both on loan and investment account, and a balance was actually shown due to them of 13,950l. This balance was, of course, wholly fictitious. If Ellis & Co. were debited, as they should be, with the sale price of the securities purporting to be resold to the company in March, 1921, and the cost at which they had unloaded other securities on the company in the month of December, 1921, the balance due from them on December 31, 1921, amounted with interest to 385,469l., as shown by exhibit "F.G.L. 1" prepared by the late Mr. Van de Linde. To this, however, must be added the cost price of certain securities, referred to in the *465 exhibits, which were bought by Ellis & Co., but were never delivered by them to the company, amounting to 47,890l., and for the purpose of estimating the loss occasioned by moneys of the company being left in Ellis & Co.'s hands there should also be added the sums expended by Mr. Bevan without any authority upon the Brazilian ranch and the United Brass Founders, amounting together to another 318,375l. The collateral security held by the company as against Ellis & Co.'s loan realized 30,859l. The total loss to the company in respect of the loan to Ellis & Co. and by reason of the company's moneys being left in their hands amounted, therefore, to over 720,000l., and I must now consider whether this loss has been occasioned by the wilful negligence or default of any of the respondent directors.
So far as it was due to the loan sanctioned by the finance committee, little remains to be said. The advancing to members of the Stock Exchange of moneys of the company not immediately required for current business purposes, or for permanent investment, if made upon adequate security, was a legitimate method of employing the company's funds, and there was no reason why such an advance should not be made to Messrs. Ellis & Co. merely because Mr. Bevan was a member of that firm. Owing to a serious fall in the value of the securities deposited with the company as cover for the loan, it was, in the end, inadequately secured. But there is no evidence before me to show that any of the respondent directors was aware, or should have been aware, that there was insufficient cover for the loan at any time when intervention on his part could have served any useful purpose. I cannot find that any respondent director was guilty of any negligence in the matter of the loan sanctioned by the finance committee. But the loss that was due to the unfettered control that Ellis & Co. were permitted to exercise over moneys of the company left in their hands gives rise to more difficult questions. The undoubted fact that Ellis & Co. did have this unfettered control was due to the following circumstances. The respondent directors, other than Mr. Haig Thomas and Mr. Grenside, were under the impression *466 that it was the duty of the finance committee to see to the proper investment of all the funds of the company not immediately required for the purpose of the company's business. Mr. Thomas and Mr. Grenside, however, thought that the finance committee were only concerned with the permanent investments, and that the temporary investment of the company's funds on loans at call or in short-dated securities was a matter that had been left to the chairman and general manager to arrange. [His Lordship then referred in detail to the evidence of Lord March, Sir Douglas Dawson and Mr. Milligan on this question, and continued:] Now these passages that I have read from the evidence of Lord March, Sir Douglas Dawson and Mr. Milligan certainly seem to indicate that they did not ever seriously bring their minds to bear upon the question as to how and by whom the temporary investments were being made. They appear to have assumed that such matters were being attended to by the finance committee. But such assumption was justified in the case of Sir Douglas Dawson and Mr. Milligan by the terms of the resolution of July 25, 1916; for, in my opinion, the duty delegated to the finance committee by that resolution was to act as a finance committee generally in relation to temporary as well as to permanent investments. There is no evidence as to Lord Ribblesdale's views upon the matter. He was, however, present at the board meeting of July 25, 1916, and I cannot doubt that he too must have been under the impression that the finance committee was attending to the investments generally. Any other conclusion would be inconsistent with the evidence given by his co-directors as to his general conduct in discharging his duties as a director. It is also to be observed that in the early days of the finance committee's existence, the board of directors themselves approved certain transactions of the finance committee, which included temporary as well as permanent investments. On November 14, 1916, the board approved the purchase by the finance committee of Treasury Bills; on February 6, 1917, it approved the loan of 30,000l. to Ellis & Co.; on April 3, 1917, a loan up to 50,000l. to Messrs. Sheppard, *467 Pelley & Co. Lord March did not know the terms of the resolution appointing the finance committee, but he knew, of course, of the existence of this committee, and it

*663 Guinness Plc. Respondents v. Saunders Appellant

House of Lords

HL

Lord Keith of Kinkel, Lord Brandon of Oakbrook, Lord Templeman, Lord Griffiths

and Lord Goff of Chieveley

1989 Oct. 30, 31; Nov. 1, 2, 6, 7; 1990 Feb. 8


Company--Director--Fiduciary duty--Accounting for profits to company-- Committee of board of directors agreeing to pay director sum in connection with company's take--over bid--Whether power in committee to grant special remuneration--Whether director entitled to retain sum paid or part on quantum meruit basis or as equitable allowance--Conflict of personal interest and duty--Whether company entitled to repayment of sum paid--Companies Act 1985 (c. 6), ss. 317(1), 727(1)

The two defendants and another director of the plaintiff company, as a committee of the board of directors, agreed to pay the second defendant £5.2m. for his services in connection with a take-over bid being made by the plaintiffs. Following the successful completion of the bid, the plaintiffs paid the money. They claimed recovery of the money on the ground that the second defendant had received the payment in breach of his fiduciary duty as a director in that he had not disclosed his interest in the agreement to the plaintiffs' directors as required *664 by section 317(1) of the Companies Act 1985 [FN1]. On the plaintiffs' application, the Vice-Chancellor found that the second defendant had not disclosed his interest and ordered him to repay the money to the plaintiffs. The Court of Appeal dismissed an appeal by the second defendant.

FN1 Companies Act 1985, s. 317(1): see post, p. 694D. S. 727(1): see post, p. 695E-F.

On appeal by the second defendant: -
Held, dismissing the appeal,
(1) that by article 91 of the plaintiffs' articles of association special remuneration could be awarded to a director serving on a committee only by the board of directors, not by the committee, notwithstanding the definition of 'the board' by article 2 as 'any committee'; that article 110 did not enable the board to delegate its powers under article 91 to a committee, nor to a member of the committee so as to give rise to any implied actual authority or ostensible authority on the part of such member to agree remuneration, the power of deciding directors' remuneration being vested in the board alone under articles 90 and 91; that the second defendant had not been entitled to receive the £5.2m., or any part of it, under article 100(D) as remuneration for professional services since his services had not been professional services provided in a professional capacity but had been services as a member of the committee; and that, accordingly, the second defendant was not entitled to retain the £5.2m. pursuant to any articles of the plaintiffs (post, pp. 686E-H, 687E, H, 688G - 689D, 696B, 698H, 699G-H).
(2) That the second defendant was not entitled to recover any part of that sum by way of quantum meruit based on an implied contract by the plaintiffs to pay reasonable remuneration for his services since no contract could have been entered into on behalf of the plaintiffs, whether voidably or otherwise, save by the board pursuant to article 91; that he was not entitled to recover by way of equitable allowance since in equity as a trustee he had not been entitled to profit from his trust save in so far as the plaintiffs' articles provided, and the court would not usurp the functions of the board in that regard, especially in view of the importance that the legislature, by section 317 of the Companies Act 1985 (which, since there had been no contract between the company and the second defendant, was not directly applicable), attached to the principle that a company should be protected against a director who had a conflict of personal interest and duty; that application of section 727 of the Act of 1985 to relieve the second defendant from his liability to repay the £5.2m. would equally, in remunerating him without the authority of the board, be contrary to the plaintiffs' articles protecting shareholders and a breach of the principles of equity; and that, accordingly, the second defendant had no answer to the plaintiffs' claim for recovery of the £ 5.2m. and must repay it (post, pp. 684B-C, 689G-H, 692C-D, G - 693C, 694C-D, F, 695D-E, H - 696B, 700C-D, 702B-C).
Aberdeen Railway Co. v. Blaikie Bros. (1854) 1 Macq. H.L. 461, H.L. (Sc.) and Bray v. Ford [1896] A.C. 44, H.L.(E.) applied.
Craven-Ellis v. Canons Ltd. [1936] 2 K.B. 403, C.A.; Phipps v. Boardman [1964] 1 W.L.R. 993; [1967] 2 A.C. 46, H.L.(E.); and In re Duomatic Ltd. [1969] 2 Ch. 365 distinguished.
*665 Hely-Hutchinson v. Brayhead Ltd. [1968] 1 Q.B. 549, C.A. considered.
Decision of the Court of Appeal [1988] 1 W.L.R. 863; [1988] 2 All E.R. 940 affirmed on different grounds.

The following cases are referred to in the opinions of Lord Templeman and Lord Goff of Chieveley:
Aberdeen Railway Co. v. Blaikie Bros. (1854) 1 Macq. H.L. 461, H.L.(Sc.)
Barrett v. Hartley (1866) L.R. 2 Eq. 789
Bray v. Ford [1896] A.C. 44, H.L.(E.)
Craven-Ellis v. Canons Ltd. [1936] 2 K.B. 403; [1936] 2 All E.R. 1066, C.A.
Duomatic Ltd., In re [1969] 2 Ch. 365; [1969] 2 W.L.R. 114; [1969] 1 All E.R. 161
Erlanger v. New Sombrero Phosphate Co. (1878) 3 App.Cas. 1218, H.L.(E.)
Hely-Hutchinson v. Brayhead Ltd. [1968] 1 Q.B. 549; [1967] 3 W.L.R. 1408; [1967] 3 All E.R. 70, C.A.
Phipps v. Boardman [1964] 1 W.L.R. 993; [1964] 2 All E.R. 187; [1965] Ch. 992; [1965] 2 W.L.R. 839; [1965] 1 All E.R. 849, C.A.; [1967] 2 A.C. 46; [1966] 3 W.L.R. 1009; [1966] 3 All E.R. 721, H.L.(E.)
The following additional cases were cited in argument:
Anglo-French Co-operative Society, In re, Ex parte Pelly (1882) 21 Ch.D. 492, C.A.
Bolton (H. L.) (Engineering) Co. Ltd. v. T. J. Graham & Sons Ltd. [1957] 1 Q.B. 159; [1956] 3 W.L.R. 804; [1956] 3 All E.R. 624, C.A.
Clark, In re; Clark v. Moore and Moores (Chemists) Ltd. (1920) 150 L.T.Jo. 94
Federal Commerce & Navigation Co. Ltd. v. Molena Alpha Inc. [1978] Q.B. 927; [1978] 3 W.L.R. 309; [1978] 3 All E.R. 1066, C.A.
Foster v. Foster [1916] 1 Ch. 532
Foster v. Oxford, etc., Railway Co. (1853) 13 C.B. 200
Great Northern Salt and Chemical Works, In re, Ex parte Kennedy (1890) 44 Ch.D. 472
Halesowen Presswork & Assemblies Ltd. v. National Westminster Bank Ltd. [1972] A.C. 785; [1972] 2 W.L.R. 455; [1972] 1 All E.R. 641, H.L.(E.)
Imperial Mercantile Credit Association (Liquidators) v. Coleman (1873) L.R. 6 H.L. 189, H.L.(E.)
Lister & Co. v. Stubbs (1890) 45 Ch.D. 1, C.A.
Movitex Ltd. v. Bulfield [1986] 2 B.C.C. 99,403
O'Sullivan v. Management Agency and Music Ltd. [1985] Q.B. 428; [1984] 3 W.L.R. 448, C.A.
Phillips v. Brooks Ltd. [1919] 2 K.B. 243
Spence v. Crawford [1939] 3 All E.R. 271, H.L.(Sc.)
Stuart, In re; Smith v. Stuart [1897] 2 Ch. 583
Tito v. Waddell (No. 2) [1977] Ch. 106; [1977] 2 W.L.R. 496; [1977] 3 All E.R. 129
Transvaal Lands Co. v. New Belgium (Transvaal) Land and Development Co. [1914] 2 Ch. 488, C.A.
Trevelyan v. Charter (1846) 9 Beav. 140

APPEAL from the Court of Appeal.
This was an appeal by the second defendant, Thomas Joseph Ward, by leave of the House of Lords from the decision of the Court of *666 Appeal (Fox and Glidewell L.JJ. and Sir Frederick Lawton) [1988] 1 W.L.R. 863 on 10 May 1988 dismissing his appeal from Sir Nicolas Browne-Wilkinson V.-C. The Vice- Chancellor had ordered, on a motion by the plaintiffs, Guinness Plc., for judgment on admissions, that, inter alia, the second defendant pay to the plaintiffs £5.2m.
The Court of Appeal refused the second defendant leave to appeal. On 19 October 1988, the Appeal Committee of the House of Lords (Lord Bridge of Harwich, Lord Oliver of Aylmerton and Lord Jauncey of Tullichettle) [1988] 1 W.L.R. 1271 allowed a petition by him for leave.
The facts are set out in the opinion of Lord Templeman.
Jonathan Crow for the second defendant. To summarise the second defendant's case: I. Disclosure is not an issue: (a) There has been a valid exercise of article 91. (b) Alternatively, section 317 (and therefore article 100(A)) does not apply to contracts that do not have to come before the full board: Report of the Company Law Committee ('the Jenkins Report') (1962) (Cmnd. 1749). (c) Alternatively, section 317 (and therefore article 100(A)) do not apply to contracts with a director personally in his own name.
If all the arguments above are rejected, then: II. There has been no breach of section 317: (a) disclosure to a committee competent to enter into the contract under consideration is adequate disclosure under section 317; (b) any other construction of section 317 would leave a company in the intolerable position of being unable to make a contract (however trivial) in which a director was interested otherwise than through the full board; (c) that substantive effect of section 317 is not contemplated by its heading or its terms, which are concerned solely with disclosure.
III. There has been no breach of the articles: (a) if section II is accepted, there has been no breach of article 100(A), which tracks the requirements of section 317; (b) alternatively, even if there has been a breach of article 100(A), the operation of article 100(C) and/or 100(D) is not expressed to be contingent on compliance with article 100(A) (unlike the articles in Hely-Hutchinson v. Brayhead Ltd. [1968] 1 Q.B. 549); (c) alternatively, article 100(D) excludes the requirement of disclosure by the addition of the words 'as if he were not a director,' which would otherwise be meaningless.
IV. Effect of a breach of section 317 and/or the articles: (a) a breach of section 317 of itself has no effect on the validity of a contract: Foster v. Oxford, etc., Railway Co. (1853) 13 C.B. 200; Aberdeen Railway Co. v. Blaikie Bros. (1854) 1 Macq. H.L. 461 and Hely-Hutchinson v. Brayhead Ltd.; (b) a breach of the disclosure provisions in the articles renders the contract voidable at the instance of the company: Hely-Hutchinson v. Brayhead Ltd.; (c) under a voidable contract the property passes unless the contract is avoided: Phillips v. Brooks Ltd. [1919] 2 K.B. 243; (d) a contract, e.g. for services, that has been fully performed can only be set aside on equitable terms by a court hearing the evidence at trial in order to resolve what the equitable terms should be: Erlanger v. New Sombrero Phosphate Co. (1878) 3 App.Cas. 1218; (e) to say that *667 the second defendant became a constructive trustee from the moment of receipt of the £5.2m. is to commit two errors: (i) it ignores the true meaning of 'voidable,' i.e. valid until avoided, and substitutes a concept of 'void,' i.e. invalid ab initio; (ii) it confuses the cases of secret profit relied on by Guinness, with the receipt of remuneration pursuant to a valid contract that is flawed only by a procedural defect.
V. Defences. If the plaintiffs are prima facie entitled to judgment, the second defendant has three lines of defence that disentitle them to summary judgment: (a) equitable allowance (set-off) on the principles outlined in Phipps v. Boardman [1964] 1 W.L.R. 993 and O'Sullivan v. Management Agency and Music Ltd. [1985] Q.B. 428; (b) counterclaim (quantum meruit) and set-off: set-off was only refused in the courts below on the ground that the plaintiffs' claim was founded on a constructive trust, which it is not; (c) section 727 relief, which is a defence, not a counterclaim; it is not co- extensive with the counterclaim and should not be prejudged on a summary application.
VI. Discretion. Neither of the courts below exercised any discretion before entering judgment; even if there is a fatal admission the second defendant is entitled to a trial, bearing in mind: (a) the allegations of bad faith against him, where (b) he is a professional man, (c) he is involved in a case suffering from enormous publicity and (d) he is now facing extradition proceedings based on criminal charges in relation to this payment.
The starting-point in general law is that a director, as a fiduciary, is not entitled to profit from his position. This rule can be mitigated by the consent of the company. That consent can be given in a number of different ways: either ad hoc in a general meeting or, more conveniently, by providing a mechanism under the articles by which directors can contract with the company and receive remuneration. The question whether the second defendant was entitled to retain the money that he received is therefore to be decided primarily on the basis of the plaintiffs' articles of association. Nothing in a company's articles, of course, can relieve a director of his duty to act honestly and in good faith in the interests of the company, but honesty and good faith are not in question at this stage. [Reference was made to section 307 of the Act of 1985.]
The contract with and payment to the second defendant were duly authorised by the articles. (It is accepted that there is (the Acts impose) a general disability from contracting unless the articles permit the director to do so: see article 100(A).) (i) Article 110 permits the constitution of committees of the board. (For definition of 'the board,' see article 2: it includes a committee. See also article 90. Nothing in article 91 is inconsistent with the board including a committee. One must read it in the context of article 110, which is in broad terms.) (ii) The board's resolution of 19 January 1986 constituted any three directors as a committee for the purposes of doing all things necessary for the implementation of the bid. (iii) Mr. Saunders, the second defendant and Mr. Roux in agreeing to the fee constituted such a committee because under article 100(B)(v) the second defendant was entitled to be counted towards the quorum of such a committee. (iv) The plaintiffs, by their *668 duly authorised committee of the board, exercised their power to (a) vote extra remuneration to a director under article 91, and/or (b) contract with a director under article 100(C), and/or (c) remunerate a director acting in a professional capacity under article 100(D). As a matter of construction of the articles, no question of disclosure arises to anybody at all in connection with the exercise of those powers. (i) The power in article 91 does not require a pre-existing contract and accordingly disclosure is not an issue. There has been a valid payment under (exercise of) article 91, in which case one does not get to article 100(A) at all. The second defendant is entitled to retain the payment unless the court finds that it was paid in bad faith. It is not a Hely-Hutchinson v. Brayhead Ltd. [1968] 1 Q.B. 549 situation. (ii) Articles 100(C) and (D) are not expressed to be contingent on compliance with article 100(A): nothing would have been simpler than to have inserted words to that effect, as there were in Hely-Hutchinson v. Brayhead Ltd. [1968] 1 Q.B. 549. In the absence of such wording, the disclosure required by article 100(A) is not a precondition to the validity of a contract under article 100(C) or (D). Article 100(A) by its terms only requires disclosure in accordance with the Companies Act 1985. It and section 317 are only concerned with contracts and proposed contracts. (iii) If article 100(A) did impose a requirement of disclosure as a precondition to a valid contract under article 100(D), no meaning could be given to the extra words added in that article: 'Any director may act . . . and . . . shall be entitled to remuneration . . . as if he were not a director . . .' The words emphasised must be taken expressly to exclude any obligation of disclosure that might otherwise be imposed on a director by reason of his directorship.
The second defendant thus has three routes: article 91; article 100(D); and the difference between the plaintiffs' articles and those in Hely-Hutchinson v. Brayhead Ltd.: nothing in the plaintiffs' articles says 'provided that there is compliance with article 100(A);' that is the distinction.
Section 317 of the Act of 1985 does not, and was not intended to, have any effect on the validity of contracts entered into by a company. (i) The normal validity of contracts between a director and his company is adequately covered by the general law and companies' articles; as a matter of public policy there is, therefore, no reason for the legislature to seek to intervene. (ii) The section expressly provides for a criminal penalty (section 317(7)) and leaves unaffected the general law restricting directors from entering contracts with their companies (section 317(9)). The outcome of contracts is to be determined by the general law, not by compliance or non-compliance with the Act itself. Where the Act of 1985 intends to avoid contracts between directors and their companies, or to impose any civil remedies in respect of any such contracts, it expressly says so: see, e.g., sections 319(6) and 322(3); see also sections 320, 322(1) and 330. As a matter of public policy, there is no reason why the Act should have any civil consequences. The general law, with the articles, is quite sufficient. The articles represent the general will of the shareholders. There is no reason why the Act should impose different consequences. (iii) The decision of the Court of Appeal in *669 Hely- Hutchinson is authority, binding on the courts below, for the proposition that the statutory duty of disclosure does not of itself affect the validity of a contract: see per Lord Wilberforce, at p. 589D-E, and Lord Pearson, at p. 594C- G. Only Lord Denning M.R. was equivocal on this issue (at p. 585D), and it is only Lord Denning's words that were quoted in the decisions in the courts below. Hely-Hutchinson was said by the courts below to be authority for the proposition that a failure to comply with the statutory duty of disclosure rendered any contract entered into between a director and his company voidable (though not void). That is a misconstruction of that authority; alternatively, the decision in Hely-Hutchinson is wrong and ought to be overruled.
As to the authorities, the second defendant relies on a useful analogy in Foster v. Oxford, etc., Railway Co., 13 C.B. 200. Aberdeen Railway Co. v. Blaikie Bros., 1 Macq. H.L. 461, draws a distinction, on which the second defendant relies, between the fiduciary duty of a director to act in the best interests of the company and the disability (i.e. inability to contract) arising from that fiduciary duty. It is not a fiduciary duty not to contract: the director is disabled from contracting as a result of his fiduciary position. It is not a duty in itself: it is an inability to contract, not a duty not to. The distinction between disability and fiduciary duty has two important consequences: limitation of action and section 310 of the Act of 1985: see Tito v. Waddell (No. 2) [1977] Ch. 106, 247 and Movitex Ltd. v. Bulfield [1986] 2 B.C.C. 99, 403, 99, 429 et seq. The second defendant accepts that the Aberdeen case establishes the basic equitable rule that a director cannot contract with himself. He merely cites it to show what the effect of the statute is, apart from the articles. In Hely-Hutchinson, a breach of section 199 of the Companies Act 1948 would not have had any consequences in itself. The cases show that the articles can waive any requirement of disclosure but cannot relieve the director of his duty to act in the interests of the company. The second defendant does not contend that he can escape that, but whether disclosure is required is a question of construction of the articles.
As to the textbooks, see Gower's Principles of Modern Company Law, 4th ed. (1979), p. 856; Buckley on the Companies Acts, 14th ed. (1981), vol. 1, p. 1010, notes 6, citing three authorities, and 10 (to para. (1) of article (regulation) 84 of Table A (Act of 1948, Sch. 1; see now Companies (Tables A to F) Regulations 1985, Sch.)); Gore-Browne on Companies, 44th ed., vol. 2, para. 27.10.1 (Supplement 2, October 1988); Palmer's Company Law, 24th ed. (1987), where the correct view is taken that the statute itself has no civil consequences: vol. 1, para. 63-16, pp. 946-947; and Pennington, Company Law, 5th ed. (1985), p. 672, which correctly states that there are no civil consequences of a breach of the Act. [Reference was made to Imperial Mercantile Credit Association (Liquidators) v. Coleman (1873) L.R. 6 H.L. 189 and Transvaal Lands Co. v. New Belgium (Transvaal) Land and Development Co. [1914] 2 Ch. 488.]
If, contrary to the second defendant's main case, disclosure in accordance with section 317 is necessary (either by reason of article 100(A) or because of the terms of section 317 itself), there has (on the relevant facts) been no breach of the section. (It does not necessarily *670 follow that if there has been a breach of section 317 there has been a breach of the articles.) (i) The disclosure required by the section is satisfied by disclosure to a committee of the full board where that committee is competent to enter into the contract with the director, or in which he is interested. Simply as a matter of statutory construction, the section does not require disclosure to a full meeting of the board of directors. There is no statutory definition of what 'a meeting of the directors' (article 100(A)) means and accordingly nothing that expressly prevents it from applying to a meeting of a duly appointed committee that has the legal capacity to act as and on behalf of the full board. It is capable of comprehending the committee. Section 317 must be construed in the context of the particular company. The way in which the company allows delegation is determined by the articles, not by the Act. The meaning to be attached to the phrase'a meeting of the directors' must be derived from the context. In section 317 the context includes subsection (2). Where a contract can, under a company's articles, validly be entered into by a committee, no occasion or time for disclosure is prescribed by subsection (2), unless 'the meeting of the directors' is taken to comprehend a meeting of the committee. In the context of the section as a whole, therefore, 'the meeting of the directors' must be taken to include a meeting of a competent committee, otherwise subsection (1) imposes a duty without subsection (2) specifying a time at or within which it must be performed. A requirement of disclosure in that case would be a perverse construction of subsection (2). The whole of section 317 has to be read together consistently. Subsection (1) can only properly be read in the light of subsection (2), which provides no time limit at all for disclosure. 'A meeting of the directors' cannot mean all the directors for the time being, because some may be absent: see article 102. It means a meeting of so many directors as are competent to deal with the situation, as many as are necessary to enter into the appropriate contract (i.e. the appropriate quorum or committee).
(ii) Alternatively, if a 'meeting of the directors' in section 317(1) does mean a meeting of the full board, the section is not designed on its true construction to require disclosure: (a) where the contract is made in terms between the company and the director himself personally, because in such circumstances 'the nature of his interest' (which is all that has to be disclosed under section 317(1)) is self-evident; and/or (b) where the contract can, under the company's constitution, validly be entered into by a committee without reference to the full board, as was the case here. Subsection (2)(a) never arises in that case. Subsection (2)(b) must be read consistently with (a); it would be strange if (b) required disclosure to the full board when (a) did not. This is supported by the comments of the Report of the Company Law Committee ('the Jenkins Committee Report') (1962) (Cmnd. 1749) on section 199 of the Act of 1948: see paras. 94, 95, p. 33.
The Court of Appeal's decision did not address either of these arguments ((i) and (ii)). If they are wrong, and section 317(1) does require a director to disclose to a meeting of the full board the nature of his interest in a contract that can validly be made by a committee of the board, then the section does not specify any time at or within which *671 such disclosure must be made. At what stage, therefore, is the director in breach of the duty imposed by the Act? Assume that a contract is validly made by a committee with a director and he performs his part of the contract and receives remuneration from the company before any board meeting is held at which he could disclose the nature of his interest in the contract: to hold, as the Court of Appeal did, that the contract can only be valid if the director makes disclosure at a meeting of the full board, and that a director who receives money from the company prior to making such disclosure holds it (from the moment of receipt) as a constructive trustee means that: (a) the director is being held liable for a breach of duty in circumstances where no time is prescribed for the performance of that duty, and/or when an occasion for performance of the duty has not arisen. (b) The director is being made liable as a constructive trustee before the time at which he could first perform his duty, i.e. before the first meeting of the full board at which the disclosure must (according to the Court of Appeal) be made. These results are arbitrary and cannot have been intended by the legislature. (c) As a purely practical consequence, no contract between a company and a director, or in which a director is interested, can safely be made otherwise than at a meeting of the full board of directors, whatever the company's articles may say (see also sections 314 and 315 and article 100). This alters and extends the effect of section 317 from being purely regulatory or procedural (requiring a process of disclosure) to being substantive (affecting the means by which a company is able to enter a contract). The practical consequences, in particular for large companies accustomed to acting by committees and that hold full board meetings infrequently, will be seriously inconvenient, and many contracts may on such an interpretation be liable to be avoided if they were agreed to or varied by a committee. It would be intolerable that contracts could only be entered into by the board of directors if a director had any interest, however trivial. The mechanism of disclosure does not provide protection to the company.
The resolution in the present case was authorised. 'Authorised' includes implied authority as well as express. This committee had implied authority. Implied authority does not depend on precise chronological dating. 'Delegation' in article 110 does not necessarily mean by resolution of the full board. In this case, one has to take into account the subsequent conduct of the full board and its acquiescence in the activities of Mr. Saunders and Mr. Roux (not acquiescence in any particular act but in a line of activity). They had the conduct of the company's affairs pursuant to the resolution. A member of a board can rely on the ostensible authority of another member, as in Hely- Hutchinson v. Brayhead Ltd. [1968] 1 Q.B. 549.
The question of authority evidenced by the resolution is not to be derived from a strict Chancery construction of the resolution, which is not a deed but a written reduction of the intention of the board. It is not to be treated as a matter of pure construction. It is inappropriate to apply rules designed for deeds and contracts: see article 106, section 145 of the Act and Buckley, p. 395. If it is thought that there is an ambiguity in the resolution, the question is to be determined by *672 evidence, not construction: In re Great Northern Salt and Chemical Works, Ex parte Kennedy (1890) 44 Ch.D. 472 and H. L. Bolton (Engineering) Co. Ltd. v. T. J. Graham & Sons Ltd. [1957] 1 Q.B. 159. The members of the board should be heard as to what their intentions were. Factual evidence is admissible to show that authority was conferred either expressly or by implication from the activities of the board of directors. It is inappropriate that this question should be resolved on a summary application. If the board had authorised the committee, the wording of their resolution does not detract from that authority: the resolution is not the source of the authority.
The inclusion of the exception under article 100(B)(v) is broad enough to cover the power of the company under article 100(C) or 100(D) to contract with a director and allow him to take a benefit or (under article 100(D)) receive a remuneration. This was (as one way in which the second defendant puts his case) a payment under article 100(D).
Alternatively to the above submissions, if the contract and/or payment to the second defendant were not authorised under the articles, then: (i) Mr. Saunders alone had the implied actual or ostensible authority of the plaintiffs to make the agreement and authorise the payment on their behalf, and (ii) in such circumstances section 317 does not require disclosure to a meeting of the full board of directors for the like reasons, mutatis mutandis, as given above. This argument, although pleaded in the amended defence, was not argued in the Court of Appeal, and the second defendant seeks leave to rely on it in the House of Lords.
In any event, on the evidence in this case, the plaintiffs did not identify any time at which it is alleged that disclosure should have been made, and they did not adduce any evidence to show that a full board meeting was held (at which the second defendant could have disclosed his interest) before they demanded repayment of the £5,200,000; this latter observation was not made in the court below and to the extent necessary the second defendant will seek leave to rely on it in the House of Lords.
A failure to comply with the disclosure requirements in the articles (and, if the Court of Appeal is right in this case, a failure to comply with the statutory disclosure requirements) merely renders a contract voidable, not void. If the second defendant was in breach of those disclosure requirements, he nevertheless acquired and retained good title to the £5,200,000 unless and until the plaintiffs could validly set the contract aside. The Court of Appeal was, therefore, wrong in holding that he had received the money 'improperly' and held it as constructive trustee from the moment of receipt: such a conclusion reverses the true meaning of 'voidable,' i.e. valid until avoided, and turns it into 'ratifiable,' i.e. invalid until ratified. Neither of the courts below attempted to reconcile their inconsistent findings that, on the one hand, a breach of section 317 made the agreement merely voidable, not void ab initio, and that, on the other, the second defendant had been a constructive trustee of the money from the moment when he had received it. There is a logical lacuna in the Court of Appeal's argument. Under a voidable contract, however, the contract is valid, and the *673 property passes, unless and until the contract is set aside: Phillips v. Brooks Ltd. [1919] 2 K.B. 243; Erlanger v. New Sombrero Phosphate Co., 3 App.Cas. 1218; O'Sullivan v. Management Agency and Music Ltd. [1985] Q.B. 428. A constructive trust does not automatically arise: it is a voidable contract and a question of the result of that. Where there has been a voidable contract for services that has been fully performed on both sides, there cannot be restitutio in integrum because the services rendered cannot be undone; accordingly, such a contract cannot be avoided by the innocent party simply asking for its money back. The Court of Appeal were, therefore, wrong in holding that the agreement with the second defendant had been avoided by the plaintiffs. They held [1988] 1 W.L.R. 863, 869 that it was not in doubt that, if the agreement had ever existed, the plaintiffs had exercised their right to avoid it, but no explanation was given as to the origins of one party's right unilaterally to avoid a contract that had been fully performed by both sides, nor was the alleged act of avoidance identified. If a contract has been fully performed, equity may order it to be set aside, but as a matter of discretion and, maybe, on terms. The correct analysis is that made in Hely-Hutchinson v. Brayhead Ltd. [1968] 1 Q.B. 549: a voidable contract, if it is too late to avoid it, is enforceable. Lister v. Stubbs (1890) 45 Ch.D. 1 and Phipps v. Boardman [1967] 2 A.C. 46 are secret profit cases; it is wrong to blur the distinction between those and the Hely-Hutchinson line of cases.
If the court is going to exercise its equitable jurisdiction to set aside a fully performed contract, it can only do so on equitable terms; without hearing evidence, tested by cross-examination, the court cannot determine what those terms should be. In this case, the court could not decide how valuable the second defendant's services had been, and, accordingly, whether he ought to repay any, and, if so, how much, money to the plaintiffs without hearing his claim to an equitable allowance on the merits. The Court of Appeal misdirected itself in disregarding its own discretion; it proceeded on the basis that the plaintiffs had effectively avoided the agreement with the second defendant instead of holding, as it should have done, that it had a discretion to grant or not to grant rescission of the agreement with the second defendant and to impose terms on any such rescission.
If the second defendant is liable to the plaintiffs, and if his claim to receive good value for the services he rendered is rightly to be regarded as a counterclaim in quantum meruit, then such a counterclaim can be set off against the plaintiffs' claim against him. The Court of Appeal's rejection of this contention was based solely on its conclusion that he held the £5.2m. as a constructive trustee; that conclusion is wrong for the reasons set out above. If he is entitled to set-off his counterclaim, then the plaintiffs are not entitled to any judgment until that counterclaim has been quantified. The Court of Appeal held, at pp. 870-871, that his claim to an equitable allowance or quantum meruit could not be set off against the plaintiffs' claim to the £5.2m. because that claim was proprietary and, therefore, neither the claim to an equitable allowance nor to a quantum meruit could impeach the plaintiffs' claim to their own *674 money. The correctness of that finding is, again, wholly dependent on the untenable finding that the plaintiffs' claim was proprietary.
Again, if the second defendant is liable to the plaintiffs, he is entitled to have his claim for relief under section 727 of the Act of 1985 heard on the merits. Relief under section 727 provides a ground of relief to a claim against a director that can be granted by the court 'hearing the case,' and, accordingly, judgment should not be entered until the claim for relief has been heard at trial and the court has made a decision regarding it. When the plaintiffs commenced proceedings against the second defendant he no longer had the full amount of £5.2m. The bulk had been converted into U.S. dollars, and considerable sums had been spent by him before he was aware of any challenge to his title to the money. The trial judge could easily relieve him from liability under section 727 to the extent that innocent expenditure and/or exchange rate fluctuations have depleted the original fund of £5.2m. The courts below disregarded this argument. The Court of Appeal held that the second defendant's claim to relief under section 727 was coextensive with his counterclaim in quantum meruit for services rendered and that, therefore, there was no objection to giving judgment without hearing a full trial. That finding wholly ignores the fact that Guinness first sought to recover the £5,200,000 some 10 months after it had been paid to the second defendant, who had converted almost all of it into U.S. dollars and spent considerable sums long before he knew of any challenge to his entitlement to the money. In addition, the finding was wrong in law. The second defendant relies on In re Duomatic Ltd. [1969] 2 Ch. 365 not as authority but to show that the court has done this under section 727 (then section 448 of the Act of 1948). The decision at which the Court of Appeal arrived cannot be made on an application for summary judgment. The wording of section 727 is clear: 'the court hearing the case.' The Act limits the liability: it was wrong of the Court of Appeal to prejudge whether discretion would be exercised at trial. The claim under section 727 is not coextensive with, and indeed may be greater than, the claim for quantum meruit.
The second defendant is a practising lawyer in Washington D.C. against whom allegations of dishonesty and bad faith have been made. The bringing of this action and the entering of judgment against him have been attended by an enormous amount of publicity. Although the summary judgment is based on the legal consequences of non-disclosure to the full board, the public perception is inevitably that he has been found guilty of dishonesty and bad faith. This perception is encouraged by the remarks made in the judgment of Sir Nicolas Browne-Wilkinson V.-C. to the effect that he had 'secretly received remuneration without proper authority' and that the payment had 'wrongfully been abstracted' from Guinness and by further remarks made in the Court of Appeal [1988] 1 W.L.R. 863, 869, 870 that Mr. Ward had 'plainly acted in breach of duty' and 'has improperly received the company's money.' Such a public perception is obviously very damaging to a professional man, and the second defendant ought to be given the chance to clear his name at a full trial on the merits.
*675 David Oliver Q.C., Richard Field Q.C. and Philip Sales for the plaintiffs. The questions at issue are: (1) whether article 100(C) and (D) of the plaintiffs' articles of association, which permit a director in limited circumstances to take the benefit of contracts with the company in which he is interested, should be construed as subject to the requirement of disclosure of such contracts or proposed contracts at a meeting of the directors in accordance with the companies legislation, as set out in article 100(A), with the consequence that the payment of £5.2m. made by the plaintiffs to the second defendant on 23 May 1986 should be recoverable by them by reason of his failure to disclose the agreement at a meeting of their directors in accordance with article 100(A); (2) whether section 317 of the Companies Act 1985 imposes a fiduciary obligation on a director to disclose his interest in any contract that he has entered into or proposes to enter into with the company at a meeting of the directors of that company, with the consequence that the payment of £5.2m. should be recoverable by the plaintiffs by reason of the second defendant's failure to disclose the agreement at a meeting of their directors in accordance with that section; (3) whether the plaintiffs need to set the agreement aside in order to establish a right to recover the payment, and, if so, whether they may set it aside for non-disclosure despite the fact that the second defendant has provided services to them under it; (4) whether the plaintiffs may recover their money paid to the second defendant without deduction for equitable compensation, leaving him to bring a claim for a quantum meruit for reasonable payment for any services rendered by him and not yet paid for by the plaintiffs; (5) whether the second defendant is entitled to set off any claim that he may have for a reasonable payment by way of quantum meruit as a defence to the plaintiffs' claim; (6) whether there is any prospect of the second defendant being able to show that he should be relieved from liability by virtue of section 727 of the Act of 1985 should the action proceed to a full hearing.
On issue (1), the general position in equity is that a director may only take the benefit of an agreement between himself and his company where his interest in the transaction has been disclosed to and approved by the company in general meeting: Aberdeen Railway Co. v. Blaikie Bros., 1 Macq. H.L. 461. The general position may be modified by provision in the company's articles of association, reducing the extent of disclosure required from the director. In the Court of Appeal, the second defendant sought to rely on article 100(D) as validating the agreement. Paragraphs (A) to (D) of article 100 must be construed together. They constitute a self-contained code. Article 100(C) and (D) should be construed as subject to the overriding duty of disclosure of interests in contracts contained in article 100(A) and to the statutory duty of disclosure in section 317 of the Act of 1985. Article 100 was construed in this way by Sir Nicolas Browne-Wilkinson V.-C. and the Court of Appeal. Any other construction would undermine the protection for the company that it was intended that article 100(A) and section 317 should provide. Thus, the second defendant owed a fiduciary duty to the plaintiffs to disclose his interest in the agreement at a meeting of the directors, which duty he has breached.
*676 On issue (2), section 317(1) imposes a clear mandatory duty of disclosure to the board on a director in relation to contracts or proposed contracts with the company in which he has an interest. The imposition of an express duty would be unnecessary if the section were intended merely to create a criminal offence. Therefore, it is clear that it is intended to create a civil duty of disclosure binding on a director. (ii) The general position in equity is, as stated above, that a director may not take the benefit of a contract with the company unless full disclosure is made to the company in general meeting. The general position may be altered by provision in the company's articles of association, but the articles cannot validly derogate from the statutory duty of disclosure contained in section 317. Thus, in a case in which the articles of association provide for extensive reduction in the usual duty of a disclosure in relation to a director, the duty of disclosure in section 317 becomes a minimum civil duty of disclosure binding on the director. (iii) Section 317 imposes a duty of disclosure on a director in order to provide a minimum level of protection for the company through the mechanism of disclosure to the board. Given that the provision is designed to protect a particular person (the company) or class of persons (the shareholders), it imposes a civil duty of disclosure on a director that should be assimilated to the other fiduciary duties to which the director is subject by virtue of his position. (iv) The view that section 317 creates a civil duty of disclosure is supported by authority: Hely-Hutchinson v. Brayhead Ltd. [1968] 1 Q.B. 549, 585C-586A, 589. (The case concerned section 199 of the Act of 1948, the predecessor of section 317.) It was the view adopted by the courts below in the Vice-Chancellor's judgment and in the Court of Appeal, per Fox L.J., and should be affirmed by the House of Lords. The usual civil consequences of non- disclosure as required under the civil law would then apply. (v) The disclosure required under section 317(1) is to a duly convened meeting of the directors of the company. Disclosure to a committee of the board will not suffice. To construe the provision in any other way would require reading words into it for which there is no warrant and would undermine the valuable protection afforded by the section. (vi) The time for making the disclosure required by section 317 is at the first duly convened board meeting after the contract is first proposed, and it should usually be made before the contract is entered into unless there are compelling reasons why that is not possible in any case. Where a contract is entered into prior to proper disclosure being made to the directors of the company, the director who is under a duty to disclose his interest relies on the contract at his own risk, as it is subject to approval being given by the board.
On issues (1) and (2) generally, the basic principle is that a trustee may not receive trust property for his own benefit save under the authority of the trust instrument or with the full, free and informed consent of his beneficiaries, they being of full age and sui juris. ('Trustee' in this context means the director; 'beneficiaries' means the shareholders in general meeting; and 'trust deed' means the articles of association.) If he does, he must return it. Nor is he entitled to receive remuneration unless authorised to do so by the trust instrument. *677 ('Authority' means, here, the authority of the articles or the free and informed consent of the company acting by a majority of the shareholders in general meeting.)
It is a manifestly inconvenient rule in the modern age in the context of a large company that all decisions have to be made by the shareholders in general meeting, so they are delegated to the board of directors and, generally, there is power in them to subdelegate. The common form is article 100(C) here, which on its face gives the directors wide powers to contract without convening a general meeting each time. It was because that form of article got wider and wider, and a derogation from the basic rule, that in 1929 (by the Companies Act of that year) the old rules about directors' disqualification were replaced by the requirement that a director disclose contracts in which he was interested to the board. That was followed through in section 199 of the Act of 1948 and section 317 of the Act of 1985: see Palmer's Company Law, 24th ed., vol. 1, para. 63-13, pp. 943-945, and per Lord Wilberforce in Hely-Hutchinson v. Brayhead Ltd. [1968] 1 Q.B. 549, 589. The plaintiff's primary case has always been that this payment was in breach of their articles. Unless the second defendant can find some authority for retaining it, he must give it back.
The second defendant says that the committee's resolution amounted to a grant of remuneration within article 91, but there are difficulties on that construction. Article 91 applies to 'the board.' That could only mean a committee of the board where that was not inconsistent with the subject matter or the context. Here, it is inconsistent with both: cf. article 92(A) and (C). If 'the board' in 92(A) is the board of directors, it would be strange if it were not the board of directors but a committee of the board in (C). Questions of disability under article 110 and of remuneration under article 91 are both irrelevant in this case. Referring to article 2, if there are places in the articles where 'board' means a committee and others where it does not, the only way to read it in article 110 is coextensively with those places where the board can authorise a committee to act on its behalf. Thus in article 91, where 'board' is used in contradistinction to 'any director who serves on any committee,' it is not apt to extend to a committee. One then approaches article 110 with the presumption that that power of delegation in article 110 does not extend to the voting of special remuneration under article 91. A proper interpretation of article 110 suggests that the power of delegation there contained is a power of delegation of the management powers of the board contained in article 109, and the structure of these articles is such as to indicate that remuneration of directors is not to be treated as business of the company for this purpose, whether under article 90 or under article 91. This proposition is strongly reinforced by Foster v. Foster [1916] 1 Ch. 532 (the equivalent of section 317 of the Act of 1985 was not introduced until 1929).
Section 317 and articles 91 and 100(A) taken together make it plain that a contract in which a director is interested has to be disclosed to the full body of directors. The second defendant is wrongly trying to divorce the contract from the grant of remuneration.
*678 Articles 100(B), (C) and (D) are all designed as derogations, in a not untraditional form, from the standard duty in equity of a fiduciary. That is the purpose of the Act, and it is incorporated into the articles, including those of the plaintiffs. It follows that, as a construction of article 100 as a whole, or of (B), (C) and (D) in conjunction with section 317, it is not conceivable, if one is going to give efficacy to the statutory prohibition, that (B), (C) and (D) are conditional on anything other than compliance with section 317 and article 100(A). Article 100(A) introduces a condition with which a director has to comply before he can take any benefit under a contract. Unless there is compliance with the provision of the act, section 317, as incorporated in the articles regarding the requirement of disclosure to the full board, there is no valid contract. Article 100(A) reflects section 317, which itself fits into the established structure of fiduciary duty. [Reference was made to Trevelyan v. Charter (1846) 9 Beav. 140.]
Section 317 is cast in the widest terms. It is impossible to construe a contract between a director himself and the company as anything other than a contract in which the director is interested. It is almost inevitable, in the way that section 317(1) is drafted, that it should have civil consequences. One can get this from article 100(A), but it derives from section 317 itself. Nothing in the wording of section 317(1) suggests that it depends on whether the director's interest is obvious or not. There is no reason to read it so as to read in that qualification. Section 317 was designed to prevent precisely what happened in this case. To construe it from a minimalist viewpoint is to derogate from the intended protection in much the same way that articles did before the Act of 1929 was passed. There is no justification for cutting down the plain language of section 317(1). The intention of Parliament was to give a minimum protection to companies; control by companies had been emasculated by the articles.
The second defendant says that restitutio in integrum is not possible. The answer to this is that a trustee is not entitled to remuneration absent some authorisation or agreement that he shall be remunerated. [Reference was made to section 317(6) and Hely-Hutchinson v. Brayhead Ltd. [1968] 1 Q.B. 549.]
On issue (3): (i) this issue was raised for the first time by the second defendant in the Court of Appeal. The plaintiffs' primary case is that in the circumstances of this case there is no requirement that the agreement be set aside before the plaintiffs are entitled to recover their money. Their claim against the second defendant is for recovery of a payment that was at all times held by him under a constructive trust by reason of the flawed title that he received on payment of the £5.2m. because of the non-disclosure of his interest in the agreement under which he received the payment and his knowledge of that fact. The plaintiffs' claim is thus for knowing receipt of trust funds paid in breach of the second defendant's own fiduciary duty owed to the company to disclose his interest in the agreement, which does not require that the agreement be set aside before it can be made out. (ii) Where a fiduciary receives property from his beneficiary which prior to the fiduciary's own wrongdoing (in this case the second defendant's failure to disclose his *679 interest in the agreement at a meeting of the directors of the plaintiffs) was the property of the beneficiary, the beneficiary has a claim founded on his title to the property to recover that property and any property deriving from it in the hands of the fiduciary: Lister & Co. v. Stubbs, 45 Ch.D. 1, 9-10, per Stirling J., approved in the Court of Appeal. Where a fiduciary exploits his position as such and derives a profit therefrom without proper disclosure to and approval from his beneficiary, the fiduciary will hold the profits so derived on a constructive trust for the benefit of his beneficiary: Phipps v. Boardman [1967] 2 A.C. 46 (see, in particular, the order made at first instance [1964] 1 W.L.R. 993, 1018, affirmed by the House of Lords, and [1965] Ch. 992, 1022, 1031) and the commentary on it in Goff and Jones, The Law of Restitution, 3rd ed. (1986), pp. 653, 657. The beneficiary's right of recovery in such circumstances does not depend on the setting aside of any arrangement that may exist between the beneficiary and the fiduciary. (iii) In the circumstances of the present case, the second defendant was a constructive trustee of the plaintiffs' money on his receipt thereof without proper disclosure of his interest in the agreement to the plaintiff, and the Court of Appeal so held. There is thus no requirement for the plaintiffs to set the agreement aside prior to seeking recovery of their property from the second defendant. Once they have recovered the £5.2m. paid to him, he may have rights arising against them for a quantum meruit for services rendered on the basis of a total failure of consideration under the agreement brought about by the plaintiffs' recovery of their money. Such rights, if they exist, cannot impede the plaintiffs' right to immediate recovery of their money: see under issue (5) below. (iv) In the alternative, if, contrary to the plaintiffs' primary case, there is a requirement that the agreement be set aside before the plaintiffs may proceed to recovery in respect of the payment, the agreement has been validly set aside in this case. A court will permit a party to avoid an agreement in equity by reason of any equitable wrongdoing (including non-disclosure by a director to his company of his interest in a contract with that company) provided that it is possible to put the parties back into the position in which they would have been had there been no agreement. The question is whether it is practically just for the court to permit the contract to be rescinded: Erlanger v. New Sombrero Phosphate Co., 3 App.Cas. 1218, 1278-1279. In the present case, the second defendant performed services for the plaintiffs at their request and so is entitled to claim a quantum meruit for the reasonable value of those services (to the extent that they have not otherwise been paid for by the plaintiffs). Thus practical justice may be achieved in this case if the plaintiffs are permitted to rescind the agreement, since the second defendant is able to recover the true value of his services from them by an independent claim.
On issue (4): (i) in certain cases where a fiduciary makes a profit from his position, the beneficiary to whom the fiduciary duties are owed is only permitted to recover the profit made by the fiduciary on making an allowance by way of fair equitable compensation for any services that the fiduciary may have rendered in realising that profit: Phipps v. Boardman; O'Sullivan v. Management Agency and Music Ltd. [1985]Q.B. 428 *680 . Such cases are distinguishable from the present because in them the fiduciary's efforts result in obtaining a benefit from third parties (typically through exploitation of a business opportunity), so that the benefit due to the beneficiary only accrues through the efforts of the fiduciary. In contrast, where, as here, the property that the fiduciary obtains for himself derives directly from the beneficiary, the efforts of the fiduciary have done nothing to increase the fund available for the beneficiary but have only reduced it. In such circumstances, there is no basis for allowing the deduction of equitable compensation out of the property that derived from the beneficiary. (ii) To the extent that the second defendant has a claim in equity for compensation for services rendered to the plaintiffs under the agreement, the issue of whether that claim should operate as a defence to the plaintiffs' claim is identical to the question of the availability of the equitable defence of set-off in respect of an independent quantum meruit claim: see under issue (5) below.
On issue (5), (i) the second defendant's counterclaim for a quantum meruit is an unquantified claim, so the only type of set-off that could be available to him as a defence is equitable set-off. Set-off in equity will only be allowed where the defendant's cross-claim arises out of the same transaction as the plaintiff's claim or is closely connected with it and the cross-claim impeaches the plaintiff's demand so that it would be unjust to allow the plaintiff to recover without taking the cross-claim into account: Federal Commerce & Navigation Co. Ltd. v. Molena Alpha Inc. [1978] Q.B. 927, 974-975 (ii) The plaintiffs' claim for the return of their money does not depend on the agreement. It is a claim for the return of their own money improperly received by the second defendant. Thus the second defendant's cross-claim, which relates to services rendered by him to the plaintiffs and is logically unconnected with the payment of £5.2m., does not arise out of the plaintiffs' claim and so is not a candidate for equitable set-off. The Court of Appeal so held. (iii) Further, and alternatively, the £5.2m. remained the plaintiffs' property in equity at all times pending approval of the agreement under which it was paid by them after proper disclosure of his interest by the second defendant. The second defendant was a constructive trustee of that sum pending the giving of such approval. The Court of Appeal so held, and see submissions (i) to (iii) under issue (3) above. Any dealings by the second defendant with the fund prior to his obtaining the properly informed approval of the plaintiffs were at his own risk. As a constructive trustee of the sum which he improperly received from the plaintiffs without disclosure of his interest, there is no mutuality between the capacities in which the plaintiffs make their claim and that in which the second defendant makes his. The second defendant is in the position of trustee in relation to the fund, whereas the cross-claim is made in his personal capacity. In such circumstances, set-off is not permitted. (iv) Further, and alternatively, the second defendant should not be permitted by a doctrine of equity to rely on his own wrongful receipt of the £5.2m., and his failure to return that fund forthwith, in order to convert himself into a secured creditor of the plaintiffs in respect of his cross-claim through equitable set-off. Such a set-off would permit the second *681 defendant to profit from his wrong (indeed, from his crime in obtaining payment under the agreement without disclosure to the plaintiffs' board, contrary to section 317 of the Act of 1985). There is no doctrine of equity that actively requires that a wrongdoer should be allowed to benefit from his own wrong. Support for this policy is derived from the related area of set-off in the law of insolvency. (v) Alternatively, even if the second defendant did not hold the £5.2m. as a constructive trustee from the moment of its receipt (which is the plaintiffs' primary case), once the agreement had been disaffirmed by the plaintiffs the equitable ownership in all sums and property representing the £5.2m. vested in them. The plaintiffs could in law have disaffirmed the agreement at any time from its inception. The reason that they could not do so in fact was that the agreement and the second defendant's interest it was not brought to the attention of the relevant body of the plaintiffs by reason of the second defendant's continuing breach of duty to disclose his interest. Thus no equitable set-off exists in favour of the second defendant, since to allow set- off by reason of the absence of a proprietary claim vested in the plaintiffs from the moment of receipt of the payment by the second defendant would permit him to benefit from his own wrong in not disclosing his interest to the plaintiffs' board at the first opportunity. In any event, the plaintiffs at all times had at least a potential proprietary claim against him, so that set-off is inappropriate in all the circumstances of the case.
On issues (3) to (5) generally, the fact that services are rendered pursuant to a contract is not a bar to recovery by the company by reason of the principle of restitutio in circumstances where the director has in any event available to him claims for quantum meruit or compensation. The equitable rule is more flexible and less strictly enforced than the rule at common law: Snell's Principles of Equity, 28th ed. (1982), pp. 247, 605; see also article (regulation) 85 of Table A. [Reference was made to Trevelyan v. Charter, 9 Beav. 140, and Erlanger v. New Sombrero Phosphate Co., 3 App.Cas. 1218, 1277.] The act of avoidance is the election of the parties themselves (here, of the plaintiffs), and the question is whether the court will give effect to that election and do practical justice: see Goff & Jones, The Law of Restitution, 3rd ed., pp. 169-171. Spence v. Crawford [1939] 3 All E.R. 271 makes it clear that it is a matter of discretion in the court. It is unarguable that the courts below here did not exercise their discretion properly. They, and the plaintiffs, have never denied the possibility of a cross-claim by the second defendant.
Hely-Hutchinson v. Brayhead Ltd. (see per Lord Denning M.R., at p. 585, and Lord Wilberforce, at pp. 588-589) is authority that section 317 does have civil consequences.
It would be wrong to deny the plaintiffs judgment at this stage by reason of the second defendant's counterclaims: that would be in effect making him a secured creditor.
The second defendant is not entitled to a set-off: the claims are not in the same right: see In re Anglo-French Co-operative Society Ex parte Pelly (1882) 21 Ch.D. 492. In any event, it is a discretionary matter; there are dicta, including dicta in the House of Lords, to that effect: see *682 Halesowen Presswork & Assemblies Ltd. v. National Westminster Bank Ltd. [1972] A.C. 785; Craven-Ellis v. Canons Ltd. [1936] 2 K.B. 403; Barrett v. Hartley (1866) L.R. 2 Eq. 789; Snell's Principles of Equity, 28th ed., p. 252 and Phipps v. Boardman [1964] 1 W.L.R. 993; [1965] Ch. 992; [1967] 2 A.C. 46. (R.S.C., Ord. 15, r. 2 simply enables the court to give judgment on a counterclaim where the case is clear. It is a purely procedural, convenient rule.)
Equity is not so uninventive as not to be able to allow an application for equitable compensation in an appropriate case.
On issue (6): (i) section 727 of the Act of 1985 only applies to 'proceedings for negligence, default, breach of duty or breach of trust against an officer of a company. . . .' The plaintiffs' claim to recover their £5.2m. in this case is not a claim to recover compensation for a breach of duty or default on the part of the second defendant. It is a claim based on the wrongful receipt of trust property, seeking the return of such property or its value to the plaintiffs. Such a claim is not founded on a breach of duty but arises out of the absence of proper informed consent on the part of the plaintiffs in making the payment. Therefore, section 727 has no application in this case. (ii) Further, and alternatively, there is a strong presumption in the law that, if a trustee or fiduciary obtains trust property for himself, the beneficiaries may set aside the transaction, however fair it may have been ('the self-dealing rule': Tito v. Waddell (No. 2) [1977] Ch. 106. 241A). That presumption could only be displaced by clear express words in a statute. The language of section 727 is not so clear that it should be construed as having any effect on the operation of the self-dealing rule. This proposition is supported by the absence of any authority in which section 727 or any of its predecessors has been held to apply in a case in which a fiduciary has received property directly from his beneficiary and by In re Clark; Clark v. Moore and Moores (Chemists) Ltd. (1920) 150 L.T.Jo. 94 (concerning section 3 of the Judicial Trustees Act 1896, now section 61 of the Trustees Act 1925, a predecessor of section 727). (iii) Section 727 should be construed as having no application to a case in which a fiduciary receives property from his beneficiary on the further ground that the mischief against which that provision and its predecessors were aimed was the excessive liability of trustees for dealings with trust property (e.g., by way of investment) resulting in a loss to the trust. The receipt by a trustee of trust property does not fall within that mischief. The plaintiffs will rely on the Report of the Select Committee published in (1895) 99 L.T.Jo. 67-69 (regarding the introduction of section 3 of the Act of 1896). (iv) Alternatively, even if section 727 can apply in the case of the wrongful receipt of company property, the onus is on the second defendant to show that he ought fairly to be relieved from liability: In re Stuart; Smith v. Stuart [1897] 2 Ch. 583 (a case on section 3 of the Act of 1896). The only relief under section 727 to which the second defendant could be entitled in the circumstances of this case could not exceed the value of his services rendered to the plaintiffs, in respect of which he has a separate claim for a quantum meruit. It was only in the Court of Appeal that he contended that the relief that he claimed under section 727 could be wider than the amount of any *683 recovery that he might make under his counterclaim. Section 727 should not confer on him any right of set-off that is not available to him in equity (see above). Any loss caused by his dealings with the fund after it reached his hands was at his risk and may not found a claim for relief under section 727 given that he could at any time readily have protected himself by ensuring that his interest in the agreement was disclosed to the Board of the plaintiffs in accordance with his duty. In all the circumstances of the case, relief should not be granted under section 727. If the court finds, on a claim for equitable compensation, that the second defendant is entitled to anything, his prospect of being entitled to anything less than he would get under section 727 is unthinkable. If he were not entitled, the prospect of his getting anything under section 727 is equally unthinkable.
Crow in reply. As to Foster v. Foster [1916] 1 Ch. 532, the word ' business' is not used in the plaintiffs' articles. Article 110 expressly uses different wording: 'the affairs of the company.' There cannot be a wider word than 'affairs.' The power to vote remuneration is clearly delegable.
Express mens rea appears in section 730 of the Act of 1985. Those are not the words used in section 317. Section 318 (see subsection (8)) makes it plain that the legislature in section 317(5) was not contemplating any element of mens rea.
It is accepted that article 100(D) adds something to article 91, but it does not add anything to article 100(C).
Even if only the board can fix remuneration under article 91, there can be a contract with a committee under articles 109 and 110.
Hely-Hutchinson v. Brayhead Ltd. [1968] 1 Q.B. 549, on a proper analysis, concludes that a breach of the statute by itself has no civil effect. Lord Denning M.R. was the only member of the court who was equivocal on the point. The plaintiffs are effectively asking the House to overrule Hely-Hutchinson.
The plaintiffs have sought to raise a precondition to a contract: they say that the intention of the Act was to provide a minimum level of protection for companies. They did not, however, really explain how this was to be achieved in practice. Section 317 has to be construed within the four corners of the section itself. It is not a precondition to the validity of a contract, and contracts under article 100 are not dependent on compliance with section 317. To say that section 317 provides minimum protection by making the contract voidable simply does not stand up in the light of the facts contemplated by section 317 itself.
Where a contract has been performed and the parties have taken benefits from it, it is not voidable except by the court, which will consider whether restitution is possible. The contract is not avoided until the court says so. [Reference was made to Barrett v. Hartley, L.R. 2 Eq. 789; Craven-Ellis v. Canons Ltd. [1936] 2 K.B. 403; and In re Duomatic Ltd. [1969] 2 Ch. 365.]
The second defendant, on reconsideration, does not accept that there is some limitation on the power of delegation under article 110. One starts with article 91 and the presumption in article 2; if the second *684 defendant does not succeed by that route he probably will not do so under article 110, but in construing article 91 one should have article 110 in mind.
Their Lordships took time for consideration.

8 February 1990.

LORD KEITH OF KINKEL.
My Lords, I have had the opportunity of considering in draft the speech to be delivered by my noble and learned friend Lord Templeman. I agree with it, and for the reasons that he gives I would dismiss the appeal.

LORD BRANDON OF OAKBROOK.

My Lords, for the reasons given in the speech of my noble and learned friend, Lord Templeman, I would dismiss the appeal.

LORD TEMPLEMAN.

My Lords, the appellant, Mr. Ward, admits receiving £5.2m., the money of the respondent company, Guinness, at a time when Mr. Ward was a director of Guinness. Payment of this sum to Mr. Ward was, he says, remuneration authorised by Mr. Saunders, Mr. Roux and Mr. Ward, who formed a committee of the board of directors of Guinness. It is admitted by Mr. Ward that payment was not authorised by the board of directors. In these proceedings Guinness claim £ 5.2m. from Mr. Ward and in this application Guinness seek an order for immediate payment on the grounds that the articles of association of Guinness and the facts admitted by Mr. Ward show that the payment to Mr. Ward was unauthorised and must be repaid. The Vice-Chancellor, Sir Nicolas Browne- Wilkinson, made the order sought by Guinness and his decision was affirmed by the Court of Appeal (Fox and Glidewell L.JJ. and Sir Frederick Lawton) [1988] 1 W.L.R. 863. Mr. Ward now appeals.
On 19 January 1986 a meeting of the board of directors of Guinness attended by a quorum passed several resolutions. There were 10 directors present; they included the chief executive, Mr. Saunders, and two non-executive directors, Mr. Roux and Mr. Ward. Legal and investment advisers of Guinness were in attendance. The minutes of the meeting record that Mr. Saunders and Mr. Roux explained the background to a proposed recommended offer by Guinness for the issued share capital of The Distillers Company Plc. The board considered drafts of an underwriting agreement, a letter of authority to be signed by each of the directors of Guinness, two commitment letters by banks, and a merger agreement between Guinness and Distillers. Mr. Roux reported on the fees and commissions payable by Guinness pursuant to the underwriting agreement. There is no record of the possibility of any fees, commission or remuneration being payable to a director. The draft merger agreement contained an agreement by Distillers to pay the costs incurred by Guinness if the offer should not prove successful and an agreement by Guinness to indemnify the directors of Distillers should the court determine that it had not been appropriate for the directors of Distillers to enter into the merger agreement and to pay the expenses of Guinness. The board of Guinness *685 resolved that an offer be made and approved the draft documents which had been considered. The board also resolved that 'any three directors of the company be and they are hereby appointed a committee of the board with full power and authority' to settle the terms of the offer, to approve any revisions of the offer which the committee might consider it desirable to make and:
'(vi) to authorise and approve, execute and do, or procure to be executed and done, all such documents, deeds, acts and things as they may consider necessary or desirable in connection with the making or implementation of the offer and/or the proposals referred to above and any revision thereof. . . .'
It is common ground that Mr. Saunders, Mr. Roux and Mr. Ward established and constituted themselves a committee of the board for the purposes of the resolutions passed on 19 January 1986, that the committee carried the resolutions into effect and that a revised offer resulted in Guinness acquiring all the share capital of Distillers.
In these present proceedings, Mr. Ward pleads that in consideration of Mr. Ward 'providing advice and services' to Guinness during the currency of the offer (which he refers to as 'the bid') Guinness agreed, in the event of the success of the bid, to pay to Mr. Ward a sum equivalent to 0.2 per cent. of the ultimate value of the bid. The agreement is said to have been entered into by Mr. Saunders, Mr. Ward and Mr. Roux on behalf of Guinness and Mr. Ward on his own behalf. It is said that Mr. Saunders orally agreed about 19 February 1986, and that Mr. Roux orally agreed about the beginning of May 1986, and that the agreement was made or evidenced by an invoice delivered to Guinness by a company now admitted to be controlled by Mr. Ward. The invoice claimed £5.2m. for advice in respect of the successful acquisition of Distillers. The invoice was approved by Mr. Roux and the sum of £5.2m. was paid. Mr. Ward pleads in the alternative that an agreement by Guinness to pay Mr. Ward for his advice and services was made by Mr. Saunders who had implied actual authority, or ostensible authority, to do so. Mr. Ward pleads that he performed valuable services for the benefit of Guinness in connection with the bid. These services were rendered between 8 January 1986 (a day prior to the board meeting on 19 January) and 20 April 1986. These services as set out in particulars furnished by Mr. Ward were, in summary: (1) negotiations on behalf of Guinness at meetings and in the course of telephone conversations with directors and representatives of Distillers; (2) negotiations on behalf of Guinness at meetings and in the course of telephone conversations with officials of the Monopolies and Mergers Commission; and (3) discussions from time to time of the bid, the revised bid and the desirability of and implementation of the bid at meetings (including the board meeting held on 19 January 1986) and in the course of telephone conversations with members of the board of Guinness and professional advisers of Guinness.
Mr. Ward claims particular credit for persuading the Monopolies and Mergers Commission to allow Guinness to bid for Distillers, for persuading some reluctant directors of Guinness to persevere with the *686 bid and for persuading Distillers to pay the costs of Guinness in connection with the bid should it prove unsuccessful.
Thus Mr. Ward admits receipt of £5.2m. from Guinness and pleads an agreement by Guinness that he should be paid this sum for his advice and services in connection with the bid. Mr. Ward admits that payment was not authorised by the board of directors of Guinness.
The articles of association of Guinness provide:
'Remuneration of directors. 90. The board shall fix the annual remuneration of the directors provided that without the consent of the company in general meeting such remuneration (excluding any special remuneration payable under article 91 and article 92) shall not exceed the sum of £100,000 per annum. . . . 91. The board may, in addition to the remuneration authorised in article 90, grant special remuneration to any director who serves on any committee or who devotes special attention to the business of the company or who otherwise performs services which in the opinion of the board are outside the scope of the ordinary duties of a director. Such special remuneration may be made payable to such director in addition to or in substitution for his ordinary remuneration as a director, and may be made payable by a lump sum or by way of salary, or commission or participation in profits, or by any or all of those modes or otherwise as the board may determine.'
Articles 90 and 91 of the articles of association of Guinness depart from the Table A articles recommended by statute, which reserve to a company in general meeting the right to determine the remuneration of the directors of the company. But by article 90 the annual remuneration which the directors may award themselves is limited and by article 91 special remuneration for an individual director can only be authorised by the board. A committee, which may consist of only two or, as in the present case, three members, however honest and conscientious, cannot assess impartially the value of its work or the value of the contribution of its individual members. A director may, as a condition of accepting appointment to a committee, or after he has accepted appointment, seek the agreement of the board to authorise payment for special work envisaged or carried out. The shareholders of Guinness run the risk that the board may be too generous to an individual director at the expense of the shareholders but the shareholders have, by article 91, chosen to run this risk and can protect themselves by the number, quality and impartiality of the members of the board who will consider whether an individual director deserves special reward. Under article 91 the shareholders of Guinness do not run the risk that a committee may value its own work and the contribution of its own members. Article 91 authorises the board, and only the board, to grant special remuneration to a director who serves on a committee.
It was submitted that article 2 alters the plain meaning of article 91. In article 2 there are a number of definitions each of which is expressed to apply 'if not inconsistent with the subject or context.' The expression 'the board' is defined as *687
'The directors of the company for the time being (or a quorum of such directors assembled at a meeting of directors duly convened) or any committee authorised by the board to act on its behalf.'
The result of applying the article 2 definition to article 91, it is said, is that a committee may grant special remuneration to any director who serves on a committee or devotes special attention to the business of the company or who otherwise performs services which in the opinion of the committee are outside the scope of the ordinary duties of a director. In my opinion the subject and context of article 91 are inconsistent with the expression 'the board' in article 91 meaning anything except the board. Article 91 draws a contrast between the board and a committee of the board. The board is expressly authorised to grant special remuneration to any director who serves on any committee. It cannot have been intended that any committee should be able to grant special remuneration to any director, whether a member of the committee or not. The board must compare the work of an individual director with the ordinary duties of a director. The board must decide whether special remuneration shall be paid in addition to or in substitution for the annual remuneration determined by the board under article 90. These decisions could only be made by the board surveying the work and remuneration of each and every director. Article 91 also provides for the board to decide whether special remuneration should take the form of participation in profits; the article could not intend that a committee should be able to determine whether profits should accrue to the shareholders' funds or be paid out to an individual director. The remuneration of directors concerns all the members of the board and all the shareholders of Guinness. Article 2 does not operate to produce a result which is inconsistent with the language, the subject and the context of article 91. Only the board possessed power to award £5.2m. to Mr. Ward.
Reliance was next placed on article 110 which provides:
'The directors may establish any committees, local boards or agencies for managing any of the affairs of the company, either in the United Kingdom, or elsewhere, and may appoint any persons to be members of such local boards, or as managers or agents, and fix their remuneration, and may delegate to any committee, local board, managers or agent any of the powers, authorities and discretions vested in the board, with power to sub-delegate, and may authorise the members of any local board, or any of them to fill any vacancies therein, and to act notwithstanding vacancies, and any such appointment or delegation may be made upon such terms and subject to such conditions as the directors may think fit . . .'
Therefore, it is said, the board may delegate to a committee the power conferred on the board by article 91 to grant special remuneration to a director. But article 110 could not have been intended to allow a local board or agency or manager to fix the remuneration of a director and article 110 expressly provides that remuneration shall be fixed by the board. Article 110 does not enable the board to delegate the power of deciding directors' remuneration which by articles 90 and 91 is vested in the board alone.
*688 Next, reliance was placed on article 100(D) which is in the following terms:
'Any director may act by himself or his firm in a professional capacity for the company and any company in which the company is interested, and he or his firm shall be entitled to remuneration for professional services as if he were not a director; provided that nothing herein contained shall authorise a director or his firm to act as auditor to the company or any subsidiary.'
Article 91 deals with directors' remuneration; article 100(D) deals with directors' charges for professional services. There is a distinction between remuneration and professional charges. Remuneration depends on an assessment of the value of the individual and the perceived quality of his work. Professional charges can be checked by taxation in the case of lawyers and in other instances by professional recommendations and standards of comparison. Mr. Ward nowhere alleges in his pleadings that he provided professional services. Counsel on his behalf stated that Mr. Ward was a member of a New York firm of attorneys. The professional charges of that firm in connection with the bid were paid to the firm pursuant to article 100(D). If Mr. Ward had performed legal professional services separately from the services rendered by his firm, then article 100(D) would apply. The advice and services upon which Mr. Ward relies in these proceedings were not legal professional services. Counsel informed the House that Mr. Ward was one of a number of experts who advise and negotiate, implement or frustrate take-over bids. Counsel did not suggest that these experts are all lawyers or that they constitute a profession or that they possessed the indicia of a profession, namely, an organisation which controls entry and membership, provides educational and training qualifications, insists upon a standard of work and behaviour, imposes disciplinary sanctions for misconduct and, above all, acknowledges and enforces a duty to the public over and above the duty common to all of obeying the law. The services pleaded by Mr. Ward were the services he was bound to carry out and which any member of the board is entitled and bound to carry out as a member of a committee established by the board. Guinness admit for the purposes of this application that Mr. Ward performed services which were of value to Guinness, although if it were necessary to do so Guinness would attempt to prove, and Mr. Ward would deny, that Mr. Ward has exaggerated the value of his services and that some of his activities were improper and caused damage to Guinness. For present purposes it suffices that Mr. Ward seeks remuneration for his services as a member of a committee; he is not seeking remuneration for professional services provided in a professional capacity. Failure to comply with article 91 cannot be disguised as an application of article 100(D).
Mr. Ward also pleads that Mr. Saunders possessed implied actual authority or ostensible authority to agree on behalf of Guinness that Mr. Ward should be paid for his services. This allegation is inconsistent with the express terms of the resolution dated 19 January 1986 whereby the board conferred power in relation to the bid on the committee and not on Mr. Saunders. The board could not confer on the committee the *689 right to agree or to award special remuneration to a director. The board could not confer such a right on Mr. Saunders. The resolution dated 19 January 1986 does not purport to confer on anybody a power which the board could not confer. The articles of Guinness are binding on the board, on the committee, on Mr. Saunders and on Mr. Ward. Mr. Ward was not entitled to assume that Mr. Saunders possessed an authority inconsistent with the articles of Guinness, inconsistent with the appointment of the committee and inconsistent with the terms of the appointment of the committee. If before or at the board meeting on 19 January 1986 the board had been requested to agree to grant special remuneration to Mr. Ward, such a request might well have met with a favourable response. If the bid for Distillers had not led to allegations of misconduct by Guinness it is possible that the payment of £5.2m. to Mr. Ward's company, apparently for services rendered by his company, would not have been questioned or, at any event, that Mr. Ward would not have been required to repay that sum. But there never was any contract by Guinness to pay special remuneration to Mr. Ward for services rendered in connection with the bid for Distillers.
Since, for the purposes of this application, Guinness concede that Mr. Ward performed valuable services for Guinness in connection with the bid, counsel on behalf of Mr. Ward submits that Mr. Ward, if not entitled to remuneration pursuant to the articles, is, nevertheless, entitled to be awarded by the court a sum by way of quantum meruit or equitable allowance for his services. Counsel submits that the sum awarded by the court might amount to £5.2m. or a substantial proportion of that sum; therefore Mr. Ward should be allowed to retain the sum of £5.2m. which he has received until, at the trial of the action, the court determines whether he acted with propriety and, if so, how much of the sum of £5.2m. he should be permitted to retain; Mr. Ward is anxious for an opportunity to prove at a trial that he acted with propriety throughout the bid. It is common ground that, for the purposes of this appeal, it must be assumed that Mr. Ward and the other members of the committee acted in good faith and that the sum of £5.2m. was a proper reward for the services rendered by Mr. Ward to Guinness.
My Lords, the short answer to a quantum meruit claim based on an implied contract by Guinness to pay reasonable remuneration for services rendered is that there can be no contract by Guinness to pay special remuneration for the services of a director unless that contract is entered into by the board pursuant to article 91. The short answer to the claim for an equitable allowance is the equitable principle which forbids a trustee to make a profit out of his trust unless the trust instrument, in this case the articles of association of Guinness, so provides. The law cannot and equity will not amend the articles of Guinness. The court is not entitled to usurp the functions conferred on the board by the articles.
The 28th edition (1982) of Snell's Principles of Equity, first published in 1868, contains the distilled wisdom of the author and subsequent editors, including Sir Robert Megarry, on the law applicable to trusts and trustees. It is said, at p. 244, that: *690
'With certain exceptions, neither directly nor indirectly may a trustee make a profit from his trust. . . . The rule depends not on fraud or mala fides, but on the mere fact of a profit made.'
The 24th edition (1987) of Palmer's Company Law, first published in 1898, contains the distilled wisdom of the author and subsequent editors concerning the law applicable to companies and directors. It is said, in volume 1, at pp. 943-944, that:
'Like other fiduciaries directors are required not to put themselves in a position where there is a conflict (actual or potential) between their personal interests and their duties to the company. . . . the position of a director, vis-à-vis the company, is that of an agent who may not himself contract with his principal, and . . . is similar to that of a trustee who, however fair a proposal may be, is not allowed to let the position arise where his interest and that of the trust may conflict. . . . he is, like a trustee, disqualified from contracting with the company and for a good reason: the company is entitled to the collective wisdom of its directors, and if any director is interested in a contract, his interest may conflict with his duty, and the law always strives to prevent such a conflict from arising.'
The application of these principles to remuneration in the case of a trustee is described by Snell, 28th ed., at p. 252:
'As a result of the rule that a trustee cannot make a profit from his trust, trustees and executors are generally entitled to no allowance for their care and trouble. This rule is so strict that even if a trustee or executor has sacrificed much time to carrying on a business as directed by the trust, he will usually be allowed nothing as compensation for his personal trouble or loss of time.'
The application of these principles to remuneration in the case of a director is described by Palmer, 24th ed., at p. 902:
'Prima facie, directors of a company cannot claim remuneration, but the articles usually provide expressly for payment of it . . . and, where this is the case, the provision operates as an authority to the directors to pay remuneration out of the funds of the company; such remuneration is not restricted to payment out of profits.'
The following also appears, at p. 903:
'The articles will also usually authorise the payment by the directors to one of their number of extra remuneration for special services. Where such provision is made, it is a condition precedent to a director's claim for additional remuneration that the board of directors shall determine the method and amount of the extra payment; it is irrelevant that the director has performed substantial extra services and the payment of additional remuneration would be reasonable.'
So far as contract is concerned, Lord Cranworth L.C., in Aberdeen Railway Co. v. Blaikie Bros. (1854) 1 Macq. H.L. 461, considered, at pp. 471-472: *691
'the general question, whether a director of a railway company is or is not precluded from dealing on behalf of the company with himself, or with a firm in which he is a partner. The directors are a body to whom is delegated the duty of managing the general affairs of the company. A corporate body can only act by agents, and it is of course the duty of those agents so to act as best to promote the interests of the corporation whose affairs they are conducting. Such agents have duties to discharge of a fiduciary nature towards their principal. and it is a rule of universal application, that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound to protect. So strictly is this principle adhered to, that no question is allowed to be raised as to the fairness or unfairness of a contract so entered into. It obviously is, or may be, impossible to demonstrate how far in any particular case the terms of such a contract have been the best for the interest of the cestui que trust, which it was possible to obtain. It may sometimes happen that the terms on which a trustee has dealt or attempted to deal with the estate or interests of those for whom he is a trustee, have been as good as could have been obtained from any other person - they may even at the time have been better. But still so inflexible is the rule that no inquiry on that subject is permitted.'
So far as equity is concerned, Sir John Stuart V.-C. in Barrett v. Hartley (1866) L.R. 2 Eq. 789, 796, said that there was a
'very well established principle of this court, that a trustee is not to exact anything for his services. For the defendant it was contended, that although the payment was called a bonus, it was for important services rendered. No doubt the importance and benefit of the services can hardly be exaggerated. But a trustee who greatly benefits his cestui que trust by performing his duties, is not entitled to say to him that he will not give him his property, or proceed to execute the trust, unless he be paid a bonus.'
In Bray v. Ford [1896] A.C. 44 a solicitor who was a governor of a charitable college charged profit costs for his professional services under the mistaken belief that the memorandum of association allowed him to do so. Lord Watson said, at p. 48, that the respondent was not
'legally justified in charging and accepting payment of full professional remuneration in respect of services rendered by him to the college in his capacity of solicitor . . . . the respondent was neither entitled to charge profit costs in respect of these services, nor to retain them when received by him. Such a breach of the law may be attended with perfect good faith, and it is, in my opinion, insufficient to justify a charge of moral obliquity, unless it is shown to have been committed knowingly or with an improper motive.'
Lord Herschell said, at pp. 51-52: *692
'It is an inflexible rule of a court of equity that a person in a fiduciary position, such as the respondent's, is not, unless otherwise expressly provided, entitled to make a profit; he is not allowed to put himself in a position where his interest and duty conflict. It does not appear to me that this rule is, as has been said, founded upon principles of morality. I regard it rather as based on the consideration that, human nature being what it is, there is danger, in such circumstances, of the person holding a fiduciary position being swayed by interest rather than by duty, and thus prejudicing those whom he was bound to protect. It has, therefore, been deemed expedient to lay down this positive rule. But I am satisfied that it might be departed from in many cases, without any breach of morality, without any wrong being inflicted, and without any consciousness of wrongdoing.'
Equity forbids a trustee to make a profit out of his trust. The articles of association of Guinness relax the strict rule of equity to the extent of enabling a director to make a profit provided that the board of directors contracts on behalf of Guinness for the payment of special remuneration or decides to award special remuneration. Mr. Ward did not obtain a contract or a grant from the board of directors. Equity has no power to relax its own strict rule further than and inconsistently with the express relaxation contained in the articles of association. A shareholder is entitled to compliance with the articles. A director accepts office subject to and with the benefit of the provisions of the articles relating to directors. No one is obliged to accept appointment as a director. No director can be obliged to serve on a committee. A director of Guinness who contemplates or accepts service on a committee or has performed outstanding services for the company as a member of a committee may apply to the board of directors for a contract or an award of special remuneration. A director who does not read the articles or a director who misconstrues the articles is nevertheless bound by the articles. Article 91 provides clearly enough for the authority of the board of directors to be obtained for the payment of special remuneration and the submissions made on behalf of Mr. Ward, based on articles 2, 100(D) and 110, are more ingenious than plausible and more legalistic than convincing. At the board meeting held on 19 January 1986, Mr. Ward was present but he did not seek then or thereafter to obtain the necessary authority of the board of directors for payment of special remuneration. In these circumstances there are no grounds for equity to relax its rules further than the articles of association provide. Similarly, the law will not imply a contract between Guinness and Mr. Ward for remuneration on a quantum meruit basis awarded by the court when the articles of association of Guinness stipulate that special remuneration for a director can only be awarded by the board.
It was submitted on behalf of Mr. Ward that Guinness, by the committee consisting of Mr. Saunders, Mr. Ward and Mr. Roux, entered into a voidable contract to pay remuneration to Mr. Ward and that since Mr. Ward performed the services he agreed to perform under this voidable contract there could be no restitutio integrum and the contract *693 cannot be avoided. This submission would enable a director to claim and retain remuneration under a contract which a committee purported to conclude with him, notwithstanding that the committee had no power to enter into the contract. The fact is that Guinness never did contract to pay anything to Mr. Ward. The contract on which Mr. Ward relies is not voidable but non-existent. In support of a quantum meruit claim, counsel for Mr. Ward relied on the decision of Buckley J. in In re Duomatic Ltd. [1969] 2 Ch. 365. In that case a company sought and failed to recover remuneration received by a director when the shareholders or a voting majority of the shareholders had sanctioned or ratified the payment. In the present case there has been no such sanction or ratification either by the board of directors or by the shareholders. Mr. Ward also relied on the decision in Craven-Ellis v. Canons Ltd. [1936] 2 K.B. 403. In that case the plaintiff was appointed managing director of a company by an agreement under the company's seal which also provided for his remuneration. By the articles of association each director was required to obtain qualification shares within two months of his appointment. Neither the plaintiff nor the other directors obtained their qualification shares within two months or at all and the agreement with the managing director was entered into after they had ceased to be directors. The plaintiff having done work for the company pursuant to the terms of the agreement was held to be entitled to the remuneration provided for in the agreement on the basis of a quantum meruit. In Craven-Ellis the plaintiff was not a director, there was no conflict between his claim to remuneration and the equitable doctrine which debars a director from profiting from his fiduciary duty, and there was no obstacle to the implication of a contract between the company and the plaintiff entitling the plaintiff to claim reasonable remuneration as of right by an action in law. Moreover, as in In re Duomatic Ltd., the agreement was sanctioned by all the directors, two of whom were beneficially entitled to the share capital of the company. In the present case Mr. Ward was a director, there was a conflict between his interest and his duties, there could be no contract by Guinness for the payment of remuneration pursuant to article 91 unless the board made the contract on behalf of Guinness and there was no question of approval by directors or shareholders.
In support of a claim for an equitable allowance, reference was made to the decision of Wilberforce J. in Phipps v. Boardman [1964] 1 W.L.R. 993. His decision was upheld by the Court of Appeal [1965] Ch. 992 and ultimately by this House under the name of Boardman v. Phipps [1967] 2 A.C. 46. In that case a trust estate included a minority holding in a private company which fell on lean times. The trustees declined to attempt to acquire a controlling interest in the company in order to improve its performance. The solicitor to the trust and one of the beneficiaries, with the knowledge and approval of the trustees, purchased the controlling interest from outside shareholders for themselves with the help of information about the shareholders acquired by the solicitor in the course of acting for the trust. The company's position was improved and the shares bought by the solicitor and the purchasing beneficiary were ultimately sold at a profit. A complaining *694 beneficiary was held to be entitled to a share of the profits on the resale on the grounds that the solicitor and the purchasing beneficiary were assisted in the original purchase by the information derived from the trust. The purchase of a controlling interest might have turned out badly and in that case the solicitor and the purchasing beneficiary would have made irrecoverable personal losses. In these circumstances it is not surprising that Wilberforce J. decided that in calculating the undeserved profit which accrued to the trust estate there should be deducted a generous allowance for the work and trouble of the solicitor and purchasing beneficiary in acquiring the controlling shares and restoring the company to prosperity. Phipps v. Boardman decides that in exceptional circumstances a court of equity may award remuneration to the trustee. Therefore, it is argued, a court of equity may award remuneration to a director. As at present advised, I am unable to envisage circumstances in which a court of equity would exercise a power to award remuneration to a director when the relevant articles of association confided that power to the board of directors. Certainly, the circumstances do not exist in the present case. It is in this respect that section 317 of the Companies Act 1985 is relevant. By that section:
'(1) It is the duty of a director of a company who is in any way, whether directly or indirectly, interested in a contract or proposed contract with the company to declare the nature of his interest at a meeting of the directors of the company . . . . (7) A director who fails to comply with this section is liable to a fine. . . .'
In Hely-Hutchinson v. Brayhead Ltd. [1968] 1 Q.B. 549, the Court of Appeal held that section 317 renders a contract voidable by a company if the director does not declare his interest. Section 317 does not apply directly to the present case because there was no contract between Guinness and Mr. Ward. But section 317 shows the importance which the legislature attaches to the principle that a company should be protected against a director who has a conflict of interest and duty. There is a fundamental objection to the admission of any claim by Mr. Ward whether that claim be based on article 100(D), a quantum meruit, section 727 of the Act of 1985 or the powers of a court of equity. The objection is that by the agreement with the committee, which is the foundation of Mr. Ward's claim to any relief, he voluntarily involved himself in an irreconcilable conflict between his duty as a director and his personal interests. Both before and after 19 January 1986, Mr. Ward owed a duty to tender to Guinness impartial and independent advice untainted by any possibility of personal gain. Yet by the agreement, which Mr. Ward claims to have concluded with the committee and which may have been in contemplation by Mr. Ward even before 19 January 1986, Mr. Ward became entitled to a negotiating fee payable by Guinness if, and only if, Guinness acquired Distillers and, by the agreement, the amount of the negotiating fee depended on the price which Guinness ultimately offered to the shareholders of Distillers. If such an agreement had been concluded by the board of directors, it would have been binding on Guinness under article 91 but foolish in that the agreement perforce made Mr. Ward's advice to Guinness *695 suspect and biased. But at least the conflict would have been revealed to the board. As it was, the agreement was not made by the board and was not binding on Guinness. The agreement was made by the committee and ought not to have been made at all. By the agreement Mr. Ward debarred himself from giving impartial and independent advice to Guinness. Mr. Ward was a director of Guinness and in that capacity was able to negotiate his own agreement with the committee of which he was a member, and was able to discuss the bid by Guinness for Distillers with the other directors, to advise and participate in decisions on behalf of Guinness relevant to the bid (including a decision to increase the amount of the offer) and to procure the acquisition by Guinness of Distillers and thus to claim£5.2m. from Guinness. I agree with my noble and learned friend Lord Goff of Chieveley (post, p. 696D-E) that for the purposes of this appeal it must be assumed that Mr. Ward acted in good faith, believing that his services were rendered under contract binding on the company, and that in that mistaken belief Mr. Ward may have rendered services to Guinness of great value and contributed substantially to the enrichment of the shareholders of Guinness. Nevertheless, the failure of Mr. Ward to realise that he could not properly use his position as director of Guinness to obtain a contingent negotiating fee of £5.2m. from Guinness does not excuse him or enable him to defeat the rules of equity which prohibit a trustee from putting himself in a position in which his interests and duty conflict and which insist that a trustee or any other fiduciary shall not make a profit out of his trust.
Finally, judgment against Mr. Ward on this application was resisted in reliance on section 727 of the Act of 1985. That section provides:
'(1) If in any proceedings for negligence, default, breach of duty or breach of trust against an officer of a company or a person employed by a company as auditor . . . it appears to the court hearing the case that that officer or person is or may be liable in respect of the negligence, default, breach of duty or breach of trust, but that he has acted honestly and reasonably, and that having regard to all the circumstances of the case (including those connected with his appointment) he ought fairly to be excused for the negligence, default, breach of duty or breach of trust, that court may relieve him, either wholly or partly, from his liability on such terms as it thinks fit. . . .'
Mr. Ward requested the committee to pay him and received from the committee out of moneys belonging to Guinness the sum of £5.2m. as a reward for his advice and services as a director. Mr. Ward had no right to remuneration without the authority of the board. Thus the claim by Guinness for repayment is unanswerable. If Mr. Ward acted honestly and reasonably and ought fairly to be excused for receiving £5.2m. without the authority of the board, he cannot be excused from paying it back. By invoking section 727 as a defence to the claim by Guinness for repayment, Mr. Ward seeks an order of the court which would entitle him to remuneration without the authority of the board. The order would be a breach of the articles which protect shareholders and govern *696 directors and would be a breach of the principles of equity to which I have already referred.
I would dismiss this appeal.

LORD GRIFFITHS.

My Lords, I have had the advantage of reading in draft the speeches to be delivered by my noble and learned friends Lord Templeman and Lord Goff of Chieveley. I agree with them, and for the reasons that they give I too would dismiss the appeal.

LORD GOFF OF CHIEVELEY.

My Lords, in this case, Guinness seeks judgment for the recovery of a sum of £5.2m. paid to the appellant, Mr. Ward, without a trial. Before Sir Nicolas Browne-Wilkinson V.-C. it obtained a judgment on admissions; the Vice- Chancellor's decision was affirmed by the Court of Appeal, from whose decision Mr. Ward now appeals to your Lordships' House.
I believe that I am not the only person concerned with these proceedings who has been startled by the size of that sum, which Mr. Ward has claimed to have been paid to him under a contract binding on Guinness. But, for present purposes, the amount is irrelevant. For since Guinness is seeking a judgment without a trial in proceedings in which Mr. Ward is protesting his good faith, he must be treated as, ex hypothesi, an innocent man, who has acted throughout in complete good faith, under what he believed to be a contract binding on Guinness, and indeed as one who claims to have rendered valuable services to Guinness, performed with great skill, which have contributed significantly, perhaps crucially, to the success of Guinness's bid for the shares in Distillers, thereby very substantially enriching the shareholders of Guinness. It is on this basis that Guinness's claim to be entitled to judgment against Mr. Ward has to be considered. It has also to be borne in mind that Mr. Ward claims that, if by any chance he is not entitled to the sum of £5.2m. under a contract binding on Guinness, then he is entitled to some recompense for the services which ex hypothesi he has rendered to Guinness, either by way of an equitable allowance, or on a quantum meruit, or under section 727 of the Act of 1985.
What course has the action taken? Before the Vice-Chancellor, judgment was given against Mr. Ward on admissions, on the basis that he had received the money in breach of his fiduciary duty as a director of Guinness, by reason of his failure to disclose his interest in the agreement under which he performed the services, as required by section 317(1) of the Companies Act 1985. In the Court of Appeal [1988] 1 W.L.R. 863, Mr. Ward's appeal against that decision was dismissed. It was said of him, at pp. 870-871, that he had ' succeeded in getting his hands on the company's money,' and that the company had never ceased to own the money which he had been paid. Accordingly Mr. Ward was constructive trustee of the money which he had received, and must pay it back. If he wished to make a claim for remuneration in respect of the services which he claimed to have rendered to Guinness, he must bring a separate action.
*697 The matter then came before your Lordships' House, by leave of the House. Mr. Ward's submissions were presented to the Appellate Committee, in an argument conspicuous for its moderation as well as for its skill, by junior counsel, Mr. Crow. It gradually became clear that Mr. Crow's criticisms of the decisions of the courts below were well founded, and that (quite apart from very serious difficulties arising upon the construction of section 317) they were inconsistent with Hely-Hutchinson v. Brayhead Ltd. [1968] 1 Q.B. 549, a decision of an exceptional Court of Appeal consisting of Lord Denning M.R., Lord Wilberforce and Lord Pearson. The decision in that case proceeded on the basis that the statutory duty of disclosure (then embodied in section 199 of the Companies Act 1948) did not of itself affect the validity of a contract. The section had however to be read with provisions in the articles imposing a duty of disclosure upon directors of the company. If a director enters into, or is interested in, a contract with the company, but fails to declare his interest, the effect is that, under the ordinary principles of law and equity, the contract may be voidable at the instance of the company, and in certain cases a director may be called upon to account for profits made from the transaction: see per Lord Wilberforce, at p. 589, and Lord Pearson, at p. 594. Perhaps the matter is put most clearly by Lord Pearson, who said:
'It is not contended that section 199 in itself affects the contract. The section merely creates a statutory duty of disclosure and imposes a fine for non-compliance. But it has to be read in conjunction with article 99. The first sentence of that article is obscure. If a director makes or is interested in a contract with the company, but fails duly to declare his interest, what happens to the contract? Is it void, or is it voidable at the option of the company, or is it still binding on both parties, or what? The article supplies no answer to these questions. I think the answer must be supplied by the general law, and the answer is that the contract is voidable at the option of the company, so that the company has a choice whether to affirm or avoid the contract, but the contract must be either totally affirmed or totally avoided and the right of avoidance will be lost if such time elapses or such events occur as to prevent rescission of the contract . . .'
On this basis I cannot see that a breach of section 317, which is not for present purposes significantly different from section 199 of the Act of 1948, had itself any effect upon the contract between Mr. Ward and Guinness. As a matter of general law, to the extent that there was failure by Mr. Ward to comply with his duty of disclosure under the relevant article of Guinness (article 100(A)), the contract (if any) between him and Guinness was no doubt voidable under the ordinary principles of the general law to which Lord Pearson refers. But it has long been the law that, as a condition of rescission of a voidable contract, the parties must be put in statu quo; for this purpose a court of equity can do what is practically just, even though it cannot restore the parties precisely to the state they were in before the contract. The most familiar statement of the law is perhaps that of Lord Blackburn in *698 Erlanger v. New Sombrero Phosphate Co. (1878) 3 App.Cas. 1218, when he said, at p. 1278:
'It is, I think, clear on principles of general justice, that as a condition to a rescission there must be a restitutio in integrum. The parties must be put in statu quo. . . . It is a doctrine which has often been acted upon both at law and in equity.'
However on that basis Guinness could not simply claim to be entitled to the £ 5.2m. received by Mr. Ward. The contract had to be rescinded, and as a condition of the rescission Mr. Ward had to be placed in statu quo. No doubt this could be done by a court of equity making a just allowance for the services he had rendered; but no such allowance has been considered, let alone made, in the present case.
Faced with these problems, Mr. Oliver was driven, in the last resort, to submit that Hely-Hutchinson v. Brayhead Ltd. was wrongly decided. I have to confess that I would hesitate long before holding that a decision of such a court was erroneous. Careful study of the decision, with the assistance of counsel, merely served to reinforce my natural expectation that the case was rightly decided.
This being so, it followed that the decisions of the courts below in the present case, founded as they were upon a breach of section 317 by Mr. Ward, were erroneous. In ordinary circumstances, this conclusion would have led to the appeal being allowed. But Mr. Oliver then sought to justify the judgment on other grounds. It was first suggested by him quite simply that Mr. Ward, having received the money as constructive trustee, must pay it back. This appears to have formed, in part at least, the basis of the decision of the Court of Appeal. But the insuperable difficulty in the way of this proposition is again that the money was on this approach paid not under a void, but under a voidable, contract. Under such a contract, the property in the money would have vested in Mr. Ward (who, I repeat, was ex hypothesi acting in good faith); and Guinness cannot short circuit an unrescinded contract simply by alleging a constructive trust.
The next suggestion was that it was unnecessary to have regard to section 317 at all. There was a simpler solution to the problem. The committee which Mr. Ward claimed to have agreed to his remuneration, thereby binding the company, had no power to do so, either under article 91 or under article 100(D) of the articles of association. It followed that the contract upon which Mr. Ward relied was void for want of authority, and that Guinness was therefore entitled to recover from Mr. Ward the money paid under it on the ground of total failure of consideration, or alternatively on the basis that he had received the money as constructive trustee. On this basis, it was suggested, summary judgment should be entered against Mr. Ward for the full sum.
Having had the benefit of the assistance of counsel, I have reached the conclusion that article 91 does not empower a committee of the board of Guinness to authorise special remuneration for services rendered by directors of the company. It is true that the articles of Guinness are conspicuous neither for their clarity nor for their consistency. In particular there is no sensible basis upon which it is *699 possible to reconcile article 91 with article 110 without doing violence to the language of one or other article. But I am satisfied that I should accept Guinness's argument on this point.
But what about article 100(D)? Plainly, on its express words, it is outside the ambit of article 91. For under it a director who acts for the company in a professional capacity is to be remunerated as if he were not a director.
Mr. Crow told your Lordships that Mr. Ward claims that he was acting in a professional capacity, in that he was acting as a business consultant. Your Lordships' House has to consider whether that submission should be rejected without hearing any evidence upon it. I have been troubled whether it would be proper to do so. There is a tendency among elderly professional men to restrict the meaning of the word 'profession' to the older professions, such as the church, medicine and the law. But, in the course of this century, the meaning of the word has expanded, and I suspect that it is still expanding at an accelerating rate. For my part, I would be unwilling to hold, without evidence, what are the modern professions today. Even so, as is demonstrated in the speech of my noble and learned friend, Lord Templeman, there are the most formidable difficulties which would in any event have to be surmounted if business consultancy as such were to be recognised as a profession; and, especially as the expression 'business consultant' is capable of more than one meaning, I am satisfied that a bare assertion of the proposition cannot of itself be enough to justify a trial on this point in the present case.
The matter may be more appropriately approached in another way. Mr. Ward's profession was undoubtedly that of an American attorney, he being the senior partner in a law firm in Washington D.C.; and I can find no allegation in the pleadings that he was acting as a professional business consultant. Let it be supposed that he was not an American attorney but an English solicitor. It is well known that English solicitors may develop the most formidable negotiating skills, which they may deploy in the course of their profession as solicitors. No doubt the same is true of many experienced American attorneys. Had an English solicitor, who was also a non-executive director of Guinness, acted as Mr. Ward claims to have done, there might be circumstances in which he could claim to have acted in his professional capacity as a solicitor in this country. But it appears that Mr. Ward was not acting, in the context of a purely English take-over bid, in the course of his profession as an American attorney. He appears to have been simply deploying, as a non-executive director of Guinness, an incidental (though no doubt important) skill which he had acquired in the exercise of his profession. On this basis, on his pleaded case, Mr. Ward could not have been acting in the course of his profession and article 100(D) has no application in the present case.
But the matter does not stop there. Let it be accepted that the contract under which Mr. Ward claims to have rendered valuable services to Guinness was for the above reasons void for want of authority. I understand it to be suggested that articles 90 and 91 provide (article 100 apart) not only a code of the circumstances in which *700 a director of Guinness may receive recompense for services to the company, but an exclusive code. This is said to derive from the equitable doctrine whereby directors, though not trustees, are held to act in a fiduciary capacity, and as such are not entitled to receive remuneration for services rendered to the company except as provided under the articles of assocation, which are treated as equivalent to a trust deed constituting a trust. It was suggested that, if Mr. Ward wishes to receive remuneration for the services he has rendered, his proper course is now to approach the board of directors and invite them to award him remuneration by the exercise of the power vested in them by article 91.
The leading authorities on the doctrine have been rehearsed in the opinion of my noble and learned friend, Lord Templeman. These indeed demonstrate that the directors of a company, like other fiduciaries, must not put themselves in a position where there is a conflict between their personal interests and their duties as fiduciaries, and are for that reason precluded from contracting with the company for their services except in circumstances authorised by the articles of association. Similarly, just as trustees are not entitled, in the absence of an appropriate provision in the trust deed, to remuneration for their services as trustees, so directors are not entitled to remuneration for their services as directors except as provided by the articles of association.
Plainly, it would be inconsistent with this long-established principle to award remuneration in such circumstances as of right on the basis of a quantum meruit claim. But the principle does not altogether exclude the possibility that an equitable allowance might be made in respect of services rendered. That such an allowance may be made to a trustee for work performed by him for the benefit of the trust, even though he was not in the circumstances entitled to remuneration under the terms of the trust deed, is now well established. In Phipps v. Boardman [1964] 1 W.L.R. 993, the solicitor to a trust and one of the beneficiaries were held accountable to another beneficiary for a proportion of the profits made by them from the sale of shares bought by them with the aid of information gained by the solicitor when acting for the trust. Wilberforce J. directed that, when accounting for such profits, not merely should a deduction be made for expenditure which was necessary to enable the profit to be realised, but also a liberal allowance or credit should be made for their work and skill. His reasoning was, at p. 1018:
'Moreover, account must naturally be taken of the expenditure which was necessary to enable the profit to be realised. But, in addition to expenditure, should not the defendants be given an allowance or credit for their work and skill? This is a subject on which authority is scanty; but Cohen J., in In re Macadam [1946] Ch. 73, 82, gave his support to an allowance of this kind to trustees for their services in acting as directors of a company. It seems to me that this transaction, i.e., the acquisition of a controlling interest in the company, was one of a special character calling for the exercise of a particular kind of professional skill. If Boardman had not assumed the role of seeing it through, the beneficiaries would have had to employ (and would, had they been well advised, have *701 employed) an expert to do it for them. If the trustees had come to the court asking for liberty to employ such a person, they would in all probability have been authorised to do so, and to remunerate the person in question. It seems to me that it would be inequitable now for the beneficiaries to step in and take the profit without paying for the skill and labour which has produced it.'
Wilberforce J.'s decision, including his decision to make such an allowance, was later to be affirmed by the House of Lords: sub nom. Boardman v. Phipps [1967] 2 A.C. 46.
It will be observed that the decision to make the allowance was founded upon the simple proposition that 'it would be inequitable now for the beneficiaries to step in and take the profit without paying for the skill and labour which has produced it.' Ex hypothesi, such an allowance was not in the circumstances authorised by the terms of the trust deed; furthermore it was held that there had not been full and proper disclosure by the two defendants to the successful plaintiff beneficiary. The inequity was found in the simple proposition that the beneficiaries were taking the profit although, if Mr. Boardman (the solicitor) had not done the work, they would have had to employ an expert to do the work for them in order to earn that profit.
The decision has to be reconciled with the fundamental principle that a trustee is not entitled to remuneration for services rendered by him to the trust except as expressly provided in the trust deed. Strictly speaking, it is irreconcilable with the rule as so stated. It seems to me therefore that it can only be reconciled with it to the extent that the exercise of the equitable jurisdiction does not conflict with the policy underlying the rule. And, as I see it, such a conflict will only be avoided if the exercise of the jurisdiction is restricted to those cases where it cannot have the effect of encouraging trustees in any way to put themselves in a position where their interests conflict with their duties as trustees.
Not only was the equity underlying Mr. Boardman's claim in Phipps v. Boardman clear and, indeed, overwhelming; but the exercise of the jurisdiction to award an allowance in the unusual circumstances of that case could not provide any encouragement to trustees to put themselves in a position where their duties as trustees conflicted with their interests. The present case is, however, very different. Whether any such an allowance might ever be granted by a court of equity in the case of a director of a company, as opposed to a trustee, is a point which has yet to be decided; and I must reserve the question whether the jurisdiction could be exercised in such a case, which may be said to involve interference by the court in the administration of a company's affairs when the company is not being wound up. In any event, however, like my noble and learned friend, Lord Templeman, I cannot see any possibility of such jurisdiction being exercised in the present case. I proceed, of course, on the basis that Mr. Ward acted throughout in complete good faith. But the simple fact remains that, by agreeing to provide his services in return for a substantial fee the size of which was dependent upon the amount of a successful bid by Guinness, Mr. Ward *702 was most plainly putting himself in a position in which his interests were in stark conflict with his duty as a director. Furthermore, for such services as he rendered, it is still open to the board of Guinness (if it thinks fit, having had a full opportunity to investigate the circumstances of the case) to award Mr. Ward appropriate remuneration. In all the circumstances of the case, I cannot think that this is a case in which a court of equity (assuming that it has jurisdiction to do so in the case of a director of a company) would order the repayment of the £5.2m. by Mr. Ward to Guinness subject to a condition that an equitable allowance be made to Mr. Ward for his services.
Finally, I cannot see any prospect of success in a claim by Mr. Ward to relief under section 727 of the Act of 1985. Given that Guinness's claim must be one for the recovery of money paid to Mr. Ward under a void contract and received by him as a constructive trustee, there is no question of his being able to claim relief from liability for breach of duty, as might have been the case if Guinness's claim had been founded upon breach by Mr. Ward of his duty of disclosure.
I have been very conscious, throughout this case, that Guinness is seeking summary judgment for the sum claimed by it, without any trial on the merits. Even so, I have come to the conclusion that Mr. Ward has no arguable defence to Guinness's claim. The simple fact emerges, at the end of the day, that there was, in law, no binding contract under which Mr. Ward was entitled to receive the money and that, as a fiduciary, he must now restore that money to Guinness. For these reasons, I would dismiss the appeal.

Representation

Solicitors: Calow Easton; Herbert Smith.

Appeal dismissed with costs. (M. G. )

(c) Incorporated Council of Law Reporting For England & Wales
[1990] 2 A.C. 663

*134 Regal (Hastings) Ltd. v. Gulliver and Others

House of Lords

HL

Lord Russell of Killowen, Lord Macmillan, Lord Wright, Lord Porter.

1942 Feb. 20.

Viscount Sankey,

1941 Nov. 14, 17, 18, 20, 21, 24.

[Note]


Company--Director--Fiduciary duty to company--Accounting for profits to company--Dealings with company and subsidiary company.

APPEAL from the Court of Appeal.
The appellants, Regal (Hastings) Ltd. ("Regal") were plaintiffs in the action and the respondents Charles Gulliver, Arthur Frank Bibby, David Edward Griffiths, Henry Charles Bassett, Harry Bentley and Peter Garton were the defendants.
The action was brought by Regal against the first five respondents who were former directors of Regal, to recover from them sums of money amounting to £ 7,018 8s. 4d., being profits made by them upon the acquisition and sale by them of shares in a subsidiary company formed by Regal and known as Hastings Amalgamated Cinemas Ltd. The action was brought against the respondent Garton, who was Regal's former solicitor, to recover a sum of £1,402 1s. 8d. and also a sum of £233 15s. in respect of a solicitor's bill of costs, the former sum being profit made by him in a similar dealing in the said shares and the latter sum being a sum paid to him by Regal in respect of work purported to have been done on their behalf. There were alternative claims for damages and misfeasance and for negligence.
The action was based upon the allegation that the directors and the solicitor had used their position as such to acquire the shares in Amalgamated for themselves with a view to enabling them at once to sell them at a very substantial profit, that they had obtained that profit by using their offices as directors and solicitor and were therefore accountable for it to Regal, and also that in so acting they had placed *135 themselves in a position in which their private interests were likely to be in conflict with their duty to Regal.
The action came for trial before Wrottesley J., who found for the respondents. That decision was upheld, on appeal, by the Court of Appeal (Lord Greene M.R., Mackinnon and du Parcq L.JJ.).
The facts are fully set out in the opinion of Lord Russell of Killowen.

Representation

A. T. Miller K.C. and F. W. Beney for the appellants.
Cartwright Sharp K.C. and C.B. Guthrie for the respondent Garton.
H. Wynn Parry K.C. and P. B. Morle for the other respondents.
The House took time for consideration.

February 20, 1942. VISCOUNT SANKEY.
My Lords, this is an appeal by Regal (Hastings) Ltd. from an order of His Majesty's Court of Appeal dated February 15, 1941. That court dismissed the appeal of the appellants from a judgment of Wrottesley J., dated August 30, 1940. The appeal was brought by special leave granted by this House on April 2, 1941.
The appellants were the plaintiffs in the action and are referred to as Regal; the respondents were the defendants. The action was brought by Regal against the first five respondents, who were former directors of Regal, to recover from them sums of money amounting to £7,010 8s. 4d., being profits made by them upon the acquisition and sale by them of shares in the subsidiary company formed by Regal and known as Hastings Amalgamated Cinemas Ltd. This company is referred to as Amalgamated. The action was brought against the defendant, Garton, who was Regal's former solicitor, to recover the sum of £ 1,402 1s. 8d., being profits made by him in similar dealing in the said shares. There were alternative claims for damages and misfeasance and for negligence. The action was based on the allegation that the directors and the solicitor had used their position as such to acquire the shares in Amalgamated for themselves, with a view to enabling them at once to sell them at a very substantial profit, that they had obtained that profit by using their offices as directors and solicitor and were, therefore, accountable for it to Regal, and also that in so acting they had placed themselves in a position in which their private interests were likely to be in conflict with their duty to Regal. The facts were of a complicated and unusual character. I have had the advantage of reading and I agree with the statement as to them prepared by my noble and learned friend, Lord Russell of Killowen. It will be sufficient for my purpose to set them out very briefly.
In the summer of 1935 the directors of Regal, with a view to the future development or sale of their company, were anxious to extend the sphere of its operations by the acquisition of other cinemas. In Hastings and St. Lanyards there were two small ones called the Elite and the De Luxe. Negotiations began both for their acquisition or control by lease or otherwise and for the disposal of Regal itself. Part of the machinery for the purpose was the creation by Regal of a subsidiary company, the Amalgamated. It was registered on September 26, 1935, with a capital of £5,000 in £1 shares. The directors *136 were the same as those of Regal with the addition of Garton. It was thought that only £2,000 of the capital was to be issued and that it would be subscribed by Regal, who would control it. Then difficulties began with the Elite and the De Luxe as to a lease, amongst others whether the directors of Amalgamated would guarantee the rent. The directors were not willing to do so. At last all difficulties were surmounted at a crucial meeting of October 2, 1935. It was a peculiar meeting. The directors both of Regal and Amalgamated were summoned to attend at the same place and at the same time. They did so, but, although separate minutes were subsequently attributed to each company, it is not easy to say from the evidence at any particular moment for which company a particular director was appearing. It was resolved that Regal should apply for 2,000 shares in Amalgamated. It was agreed that £2,000 was the total sum which Regal could find. The value of the leases of the two cinemas was taken at £15,000. The draft lease was approved. Each of the Regal directors, except Gulliver, the chairman, agreed to apply for 500 shares, Gulliver saying he would find people to take up 500. The Regal directors requested Garton to take up 500. I will deal later with particular evidence applying to Gulliver and Garton, who delivered separate defences. Thus, the capital of Amalgamated was fully subscribed, Regal taking 2,000 shares, the five respondents taking 500 shares each, and the persons found by Gulliver the remaining 500. The shares were duly paid for and allotted. In the final transaction shortly afterwards these shares were sold at substantial profit, and it is this profit which Regal asks to recover in this action.
The directors gave evidence and were severely cross-examined as to their good faith. The trial judge said:
"All this subsequent history does not help me to decide whether the action of the directors of the plaintiff company and their solicitor on October 2 was bona fide in the interests of the company and not mala fide and in breach of their duty to the company ... I must take it that, in the realisation of those facts, it means that I cannot accept what has to be established by the plaintiff, and that is that the defendants here acted in ill faith ... Finally, I have to remind myself, were it necessary, that the burden of proof, as in a criminal case, is the plaintiffs', who must establish the fraud they allege. On the whole. I do not think the plaintiff company succeeds in doing that and, therefore, there must be judgment for the defendants."
This latter statement was criticised in the Court of Appeal by du Parcq L.J., who said:
"To anyone who has read the pleadings, but not followed the course of the trial, that would seem a remarkable statement, because it is common ground that there is no allegation of fraud in the pleadings whatever ... but the course which the case has taken makes the learned judge's statement quite apprehensible, because it does appear to have been put before him as, in the main at any rate, a case of fraud. It must be taken, therefore, that the respondents acted bona fide and without fraud."
*137 In the Court of Appeal, Lord Greene M.R. said:
"If the directors in coming to the conclusion that they could not put up more than £2,000 of the company's money had been acting in bad faith, and if that restriction of the company's investment had been done for the dishonest purpose of securing for themselves profit which not only could but which ought to have been procured for their company, I apprehend that not only could they not hold that profit for themselves if the contemplated transaction had been carried out, but they could not have held that profit for themselves even if that transaction was abandoned and another profitable transaction was carried through in which they did in fact realise a profit through the shares ... but once they have admittedly bona fide come to the decision to which they came in this case, it seems to me that their obligation to refrain from acquiring these shares came to an end. In fact, looking at it as a matter of business, if that was the conclusion they came to, a conclusion which, in my judgment, was amply justified by the evidence from a business point of view, then there was only one way left of raising the money, and that was putting it up themselves ... That being so, the only way in which these directors could secure that benefit for the company was by putting up the money themselves. Once that decision is held to be a bona fide one and fraud drops out of the case, it seems to me there is only one conclusion, namely, that the appeal must be dismissed with costs."
It seems therefore that the absence of fraud was the reason of the decision. In the result, the Court of Appeal dismissed the appeal and from their decision the present appeal is brought.
The appellants say they are entitled to succeed: (i) because the respondents secured for themselves the profits upon the acquisition and sale of the shares in Amalgamated by using the knowledge acquired as directors and solicitors respectively of Regal and by using their said respective positions and without the knowledge or consent of Regal; (ii) because the doctrine laid down with regard to trustees is equally applicable to directors and solicitors. Although both in the court of first instance and the Court of Appeal the question of fraud was the prominent feature, the appellants' counsel in this House at once stated that it was no part of his case and quite irrelevant to his arguments. His contention was that the respondents were in a fiduciary capacity in relation to the appellants and, as such, accountable in the circumstances for the profit which they made on the sale of the shares.
As to the duties and liabilities of those occupying such a fiduciary position, a number of cases were cited to us which were not brought to the attention of the trial judge. In my view, the respondents were in a fiduciary position and their liability to account does not depend upon proof of mala fides. The general rule of equity is that no one who has duties of a fiduciary nature to perform is allowed to enter into engagements in which he has or can have a personal interest conflicting with the interests of those whom he is bound to protect. If he holds any property so acquired as trustee, he is bound to account for it to his cestui que trust. The earlier cases are concerned with *138 trusts of specific property: Keech v. Sandford [FN1] per Lord King The rule, however, applies to agents, as, for example, solicitors and directors, when acting in a fiduciary capacity. The headnote to Ex parte James [FN2] reads as follows:
"Purchase of a bankrupt's estate by the solicitor to the commission set aside. The Lord Chancellor would not permit him to bid upon the resale, discharging himself from the character of solicitor without the previous consent of the persons interested, freely given, upon full information."

FN1 (1726) Sel.Cas.Ch. 61.

FN2 (1803) 8 Ves. 337.

In that case Lord Eldon L.C. said [FN3]:
"The doctrine as to purchase by trustees, assignees, and persons having a confidential character, stands much more upon general principle than upon the circumstances of any individual case. It rests upon this; that the purchase is not permitted in any case, however honest the circumstances; the general interests of justice requiring it to be destroyed in every instance; as no court is equal to the examination and ascertainment of the truth in much the greater number of cases."

FN3 Ibid. 345.

In Hamilton v. Wright [FN4] the headnote reads:
"A trustee is bound not to do anything which can place him in a position inconsistent with the interests of his trust, or which can have a tendency to interfere with his duty in discharging it. Neither the trustee nor his representative can be allowed to retain an advantage acquired in violation of this rule."

FN4 (1842) 9 Cl. & F. 111.

Lord Brougham said [FN5]:
"The knowledge which he acquires as trustee is of itself sufficient ground of disqualification, and of requiring that such knowledge would not be capable of being used for his own benefit to injure the trust. The ground of disqualification is not merely because such knowledge may enable him actually to obtain an undue advantage over others."

FN5 Ibid. 124.

In Aberdeen Ry. Co. v. Blocky Brothers, [FN6] the headnote reads:
"The director of a railway company is a trustee, and, as such, is precluded from dealing, on behalf of the company, with himself, or with a firm of which he is a partner."

FN6 (1854) 1 Macq. 461.

Lord Cranworth L.C. said [FN7]:
"A corporate body can only act by agents, and it is of course the duty of those agents so to act as best to promote the interests of the corporation whose affairs they are conducting. Such agents have duties to discharge of a fiduciary nature towards their principal. and it is a rule of universal application that no one having such duties to discharge shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound to protect."

FN7 Ibid. 471.

*139 It is not, however, necessary to discuss all the cases cited, because the respondents admitted the generality of the rule as contended for by the appellants, but were concerned rather to confess and avoid it. Their contention was that, in this case, upon a true perspective of the facts, they were under no equity to account for the profits which they made. I will deal first with the respondents, other than Gulliver and Garton. We were referred to Imperial Hydropathic Hotel Co., Blackpool v. Hampson, [FN8] where Bowen L.J., drew attention to the difference between directors and trustees, but the case is not an authority for contending that a director cannot come within the general rule. No doubt there may be exceptions to the general rule, as, for example, where a purchase is entered into after the trustee has divested himself of his trust sufficiently long before the purchase to avoid the possibility of his making use of special information acquired by him as trustee (see the remarks of Lord Eldon in Ex parte James [FN9] or where he purchases with full knowledge and consent of his cestui que trust. Imperial Hydropathic Hotel Co., Blackpool v. Hampson [FN10] makes no exception to the general rule that a solicitor or director, if acting in a fiduciary capacity, is liable to account for the profits made by him from knowledge acquired when so acting.

FN8 (1882) 23 Ch.D. 1, 12.

FN9 8 ves. 337, 352.

FN10 23 Ch.D. 1.

It was then argued that it would have been a breach of trust for the respondents as directors of Regal, to have invested more than £2,000 of Rogues money in Amalgamated, and that the transaction would never have been carried through if they had not themselves put up the other £3,000. Be it so, but it is impossible to maintain that, because it would have been a breach of trust to advance more than £2,000 from Regal and that the only way to finance the matter was for the directors to advance the balance themselves, a situation arose which brought the respondents outside the general rule and permitted them to retain the profits which accrued to them from the action they took. At all material times they were directors and in a fiduciary position, and they used and acted upon their exclusive knowledge acquired as such directors. They framed resolutions by which they made a profit for themselves. They sought no authority from the company to do so, and, by reason of their position and actions, they made large profits for which, in my view, they are liable to account to the company.
I now pass to the cases of Gulliver and Garton. Their liability depends upon a careful examination of the evidence. Gulliver's case is that he did not take any shares and did not make any profit by selling them. His evidence, which is substantiated by the documents, is as follows. At the board meeting of October 2 he was not anxious to put any money of his own into Amalgamated. He thought he could find subscribers for £500 but was not anxious to do so. He did, however, find subscribers by South Down Land Company, £100 by a Miss Geering and £200 by Seguliva A.G., a Swiss company. The purchase price was paid by these three, either by cheque or in account, and the shares were duly allotted to them. The shares were *140 held by them on their own account. When the shares were sold, the moneys went to them, and no part of the moneys went into Gulliver's pocket or into his account. In these circumstances, and bearing in mind that Gulliver's evidence was accepted, it is clear that he made no profits for which he is liable to account. The case made against him rightly fails, and the appeal against the decision in his favour should be dismissed.
Garton's case is that in taking the shares he acted with the knowledge and consent of Regal, and that consequently he comes within the exception to the general rule as to the liability of the person acting in a fiduciary position to account for profits. At the meeting of October 2, Gulliver, the chairman of Regal, and his co-directors were present. He was asked in cross-examination about what happened as to the purchase of the shares by the directors. The question was:
"Did you say to Mr. Garton, 'Well, Garton, you have been connected with Bentley's for a long time, will you not put up £500?'"
His answer was:
"I think I can put it higher. I invited Mr. Garton to put the £500 and to make up the £3,000."
This was confirmed by Garton in examination in chief. In these circumstances, and bearing in mind that this evidence was accepted, it is clear that he took the shares with the full knowledge and consent of Regal and that he is not liable to account for profits made on their sale. The appeal against the decision in his favour should be dismissed.
The appeal against the decision in favour of the respondents other than Gulliver and Garton should be allowed, and I agree with the order to be proposed by my noble and learned friend Lord Russell of Killowen as to amounts and costs. The appeal against the decision in favour of Gulliver and Garton should be dismissed with costs.

LORD RUSSELL OF KILLOWEN:

My Lords, the very special facts which have led up to this litigation require to be stated in some detail, in order to make plain the point which arises for decision on this appeal.
The appellant is a limited company called Regal (Hastings), Ltd., and may conveniently be referred to as Regal. Regal was incorporated in the year 1933 with an authorised capital of £20,000 divided into 17,500 preference shares of £1 each and 50,000 ordinary shares of one shilling each. Its issued capital consisted of 8,950 preference shares and 50,000 ordinary shares. It owned, and managed very successfully, a freehold cinema theater at Hastings called the Regal. In July, 1935, its board of directors consisted of one Walter Bentley and the respondents Gulliver, Bobby, Griffiths and Bassett. Its shareholders were twenty in number. The respondent Garton acted as its solicitor.
In or about that month, the board of Regal formed a scheme for acquiring a lease of two other cinemas (viz., the Elite at Hastings, and the Cinema de Luxe at St. Lanyards), which were owned and managed by a company called Elite Picture Theatres (Hastings & Bristol), Ltd. The scheme was to be carried out by obtaining the grant of a lease to *141 a subsidiary limited Company, which was to be formed by Regal, with a capital of 5,000 £1 shares, of which Regal was to subscribe for 2,000 in cash, the remainder being allotted to Regal or its nominees as fully paid for services rendered. The whole beneficial interest in the lease would, if this scheme were carried out, enure solely to the benefit of Regal and its shareholders, through the share holding of Regal in the subsidiary company. The respondent Garton, on the instructions of Regal, negotiated for the acquisition of the lease, with the result that an offer to take a lease for 35 or 42 years at a rent of £4,600 for the first year, rising in the second and third years up to £5,000 in the fourth and subsequent years, was accepted on behalf of the owners on August 21, 1935, subject to mutual approval of the form of the lease. Subsequently, the owners of the two cinemas required the rent under the proposed lease to be guaranteed.
On September 11, 1935, Walter Bentley died; and on September 18, 1935, his son, the respondent Bentley, who was one of his executors, was appointed a director of Regal. It should now be stated that, concurrently with the negotiations for the acquisition of a lease of the two cinemas, Regal was contemplating a sale of its own cinema, together with the leasehold interest in the two cinemas which it was proposing to acquire. On September 18, 1935, at a board meeting of Regal, the respondent Garton was instructed that the directors were prepared to give a joint guarantee of the rent of the two cinemas, until the subscribed capital of the proposed subsidiary company amounted to £5,000. He was further instructed to deal with all offers received for the purchase of Regal's own assets. On September 26, 1935, the proposed subsidiary company was registered under the name Hastings Amalgamated Cinemas, Ltd., which may, for brevity, be referred to as Amalgamated. Its directors were the five directors of Regal, and in addition the respondent Garton.
Harry Bentley, who had been appointed a director of Regal only on September 18, at the end of the board meeting of that date, inquired from Garton the position as regards the new company, Amalgamated. In reply, he received a letter dated September 26, 1935, in which the position, as at that date, is set out by Garton. After stating that the capital of Amalgamated is £5,000, of which £2,000 is being subscribed by Regal, "which sum will form virtually the whole of the present paid up capital" of Amalgamated, and that the rent is to be guaranteed by the directors so long as the issued capital of Amalgamated is under £5,000, he concludes as follows:
"Inasmuch as it is the intention of all the parties that the Regal (Hastings), Ltd. will not only control the Hastings (Amalgamated) Cinemas, Ltd., but will continue to hold virtually the whole of the capital, the position of a shareholder of Regal (Hastings), Ltd., is merely that he has the advantage of a possible asset of the two new cinemas on sale by the Regal (Hastings), Ltd., of its undertaking, so that the price realised to the shareholders of the Regal (Hastings), Ltd., will be the amount that he would normally have received for his interest in such company, plus his proportion of the sale price of such two new cinemas."
*142 On October 2, 1935, an offer was received from would-be purchasers offering a net sum of £92,500 for the Regal cinema and the lease of the two cinemas. Of this sum £77,500 was allotted as the price of Regal's cinema, and £ 15,000 as the price of the two leasehold cinemas. This splitting of the price seems to have been done by the purchasers at the request of the respondent Garton; but it must be assumed in favour of the Regal directors that they were satisfied that £77,500 was not too low a price to be paid for their company's cinema, with the result that £15,000 cannot be taken to have been in excess of the value of the lease which Amalgamated was about to acquire. On the afternoon of October 2, the six respondents met at 62, Shaftesbury Avenue, London, the registered offices of Regal. Various matters were mentioned and discussed between them, and they came to certain decisions. Subsequently, minutes were prepared which record the different matters as having been transacted at two separate and distinct board meetings, viz., a meeting of the board of Regal, and a meeting of the board of Amalgamated. The respondent Gulliver stated in his evidence that two separate meetings were held, that of the Amalgamated board being held and concluded before that of the Regal board was begun. On the other hand, the respondent Bentley says:
"It was more or less held in one lump, because we were talking about selling the three properties."
The respondent, Garton, states that, after it was decided that Regal could only afford to put up £2,000 in Amalgamated, which was purely a matter for the consideration of the Regal board, the next matter discussed was one which figures in the minutes of the Amalgamated board meeting. Moreover, both meetings are recorded in the minutes as having been held at 3 p.m.
Whatever may be the truth as to this, the matters discussed and decided included the following: (i) Regal was to apply for 2,000 shares in Amalgamated; (ii) the offer of £77,500 for the Regal cinema and £15,000 for the two leasehold cinemas was accepted; (iii) the solicitor reporting that completion of the lease was expected to take place on October 7, it was resolved that the seal of Amalgamated be affixed to the engrossment when available; and (iv) the respondent, Gulliver, having objected to guaranteeing the rent, it was resolved
"... that the directors be invited to subscribe for 500 shares each and that such shares be allotted accordingly."
On October 7, 1935, a lease of the two cinemas was executed in favour of Amalgamated, for the term of 35 years from September 29, 1935, in accordance with the agreement previously come to. The shares of Amalgamated were all issued, and were allotted as follows: 2,000 to Regal, 500 to each of the respondents, Bobby, Griffiths, Bassett, Bentley and Garton, and (by the direction of the respondent, Gulliver) 200 to a Swiss company called Seguliva A.G., 200 to a company called South Downs Land Co. Ltd., and 100 to a Miss Geering.
In fact, the proposed sale and purchase of the Regal cinema and *143 the two leasehold cinemas fell through. Another proposition, however, took its place, viz., a proposal for the purchase from the individual shareholders of their shares in Regal and Amalgamated. This proposal came to maturity by agreements dated October 24, 1935, as a result of which the 3,000 shares in Amalgamated held otherwise than by Regal were sold for a sum of £3 16s. 1d. per share, or in other words at a profit of £2 16s. 1d. per share over the issue price of par.
As a sequel to the sale of the shares in Regal, that company came under the management of a new board of directors, who caused to be issued the writ which initiated the present litigation. By this action Regal seek to recover from its five former directors and its former solicitor a sum of £8,142 10s. either as dirges or as money had and received to the plaintiffs' use. The action was tried by Wrottesley J., who entered judgment for all the defendants with costs. An appeal by the plaintiffs to the Court of Appeal was dismissed with costs.
My Lords, those are the relevant facts which have led up to the debate in your Lordships' House, and I now proceed to consider whether the appellants are entitled to succeed against any and which of the respondents. The case has, I think, been complicated and obscured by the presentation of it before the trial judge. If a case of wilful misconduct or fraud on the part of the respondents had been made out, liability to make good to Regal any damage which it had thereby suffered could, no doubt, have been established; and efforts were apparently made at the trial, by cross-examination and otherwise, to found such a case. It is, however, due to the respondents to make it clear at the outset that this attempt failed. The case was not so presented to us here. We have to consider the question of the respendants' liability on the footing that, in taking up these shares in Amalgamated, they acted with bona fides, intending to act in the interest of Regal.
Nevertheless, they may be liable to account for the profits which they have made, if, while standing in a fiduciary relationship to Regal, they have by reason and in course of that fiduciary relationship made a profit. This aspect of the case was undoubtedly raised before the trial judge, but, in so far as he deals with it in his judgment, he deals with it on a wrong basis. Having stated at the outset quite truly that what he calls "this stroke of fortune" only came the way of the respondents because they were the directors and solicitor of the Regal, he continues thus:
"But in order to succeed the plaintiff company must show that the defendants both ought to have caused and could have caused the plaintiff company to subscribe for these shares, and that the neglect to do so caused a loss to the plaintiff company. Short of this, if the plaintiffs can establish that, though no loss was made by the company, yet a profit was corruptly made by the directors and the solicitor, then the company can claim to have that profit handed over to the company, framing the action in such a case for money had and received by the defendants for the plaintiffs' use."
Other passages in his judgment indicate that, in addition to this *144 "corrupt" action by the directors, or, perhaps, alternatively, the plaintiffs in order to succeed must prove that the defendants acted mala fide, and not bona fide in the interests of the company, or that there was a plot or arrangement between them to. divert from the company to themselves a valuable investment. However relevant such considerations may be in regard to a claim for damages resulting from misconduct, they are irrelevant to a claim against a person occupying a fiduciary relationship towards the plaintiff for an account of the profits made by that person by reason and in course of that relationship.
In the Court of Appeal, upon this claim to profits, the view was taken that in order to succeed the plaintiff had to establish that there was a duty on the Regal directors to obtain the shares for Regal. Two extracts from the judgment of Lord Greene M.R., show this. After mentioning the claim for damages, he says:
"The case is put on an alternative ground. It is said that, in the circumstances of the case, the directors must be taken to have been acting in the matter of their office when they took those shares; and that accordingly they are accountable for the profits which they have made ... There is one matter which is common to both these claims which, unless it is established, appears to me to be fatal. It must be shown that in the circumstances of the case it was the duty of the directors to obtain these shares for their company."
Later in his judgment he uses this language:
"But it is said that the profit realised by the directors on the sale of the shares must be accounted for by them. That proposition involves that on October 2, when it was decided to acquire these shares, and at the moment when they were acquired by the directors, the directors were taking to themselves something which properly belonged to their company." Other portions of the judgment appear to indicate that upon this claim to profits, it is a good defence to show bona fides or absence of fraud on the part of the directors in the action which they took, or that their action was beneficial to the company, and the judgment ends thus:
"That being so, the only way in which these directors could secure that benefit for their company was by putting up the money themselves. Once that decision is held to be a bona fide one, and fraud drops out of the case, it seems to me that there is only one conclusion, namely, that the appeal must be dismissed with costs."
My Lords, with all respect I think there is a misapprehension here. The rule of equity which insists on those, who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fides; or upon such questions or considerations as whether the profit would or should otherwise have gone to the plaintiff, or whether the profiteer was under a duty to obtain the source of the profit for the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action. *145 The liability arises from the mere fact of a profit having, in the stated circumstances, been made. The profiteer, however honest and well- intentioned, cannot escape the risk of being called upon to account.
The leading case of Keech v. Sandford [FN11] is an illustration of the strictness of this rule of equity in this regard, and of how far the rule is independent of these outside considerations. A lease of the profits of a market had been devised to a trustee for the benefit of an infant. A renewal on behalf of the infant was refused. It was absolutely unobtainable. The trustee, finding that it was impossible to get a renewal for the benefit of the infant, took a lease for his own benefit. Though his duty to obtain it for the infant was incapable of performance, nevertheless he was ordered to assign the lease to the infant, upon the bare ground that, if a trustee on the refusal to renew might have a lease for himself, few renewals would be made for the benefit of cestuis que trust. Lord King L.C. said [FN12]:
"This may seem hard, that the trustee is the only person of all mankind who might not have the lease: but it is very proper that the rule should be strictly pursued, and not in the least relaxed ..."

FN11 Sel.Cas.Ch. 61.

FN12 Ibid. 62.
One other case in equity may be referred to in this connection, viz., Ex parte James [FN13] decided by Lord Eldon L.C. That was a case of a purchase of a bankrupt's estate by the solicitor to the commission, and Lord Eldon L.C. [FN14] refers to the doctrine thus:
"This doctrine as to purchases by trustees, assignees, and persons having a confidential character, stands much more upon general principles than upon the circumstances of any individual case. It rests upon this: that the purchase is not permitted in any case however honest the circumstances; the general interests of justice requiring it to be destroyed in every instance; as no court is equal to the examination and ascertainment of the truth in much the greater number of cases."

FN13 8 Ves. 337.

FN14 Ibid. 345.
Let me now consider whether the essential matters, which the plaintiff must prove, have been established in the present case. As to the profit being in fact made there can be no doubt. The shares were acquired at par and were sold three weeks later at a profit of £2 16s. 1d. per share. Did such of the first five respondents as acquired these very profitable shares acquire them by reason and in course of their office of directors of Regal? In my opinion, when the facts are examined and appreciated, the answer can only be that they did. The actual allotment no doubt had to be made by themselves and Garton (or some of them) in their capacity as directors of Amalgamated: but this was merely an executive act, necessitated by the alteration of the scheme for the acquisition of the lease of the two cinemas for the sole benefit of Regal and its shareholders through Regal's share-holding in Amalgamated. That scheme could only be altered by or with the consent of the Regal board. Consider what in fact took place on October 2, 1935. The position immediately before that day is stated in Garton's letter of September 26, 1935. The directors were *146 willing to guarantee the rent until the subscribed capital of Amalgamated reached £5,000. Regal was to control Amalgamated and own the whole of its share capital, with the consequence that the Regal shareholders would receive their proportion of the sale price of the two new cinemas. The respondents then meet on October 2, 1935. They have before them an offer to purchase the Regal cinema for£77,500, and the lease of the two cinemas for £ 15,000. The offer is accepted. The draft lease is approved and a resolution for its sealing is passed in anticipation of completion in five days. Some of those present, however, shy at giving guarantees, and accordingly the scheme is changed by the Regal directors in a vital respect. It is agreed that a guarantee shall be avoided by the six respondents bringing the subscribed capital up to £5,100. I will consider the evidence and the minute in a moment. The result of this change of scheme which only the Regal directors could bring about may not have been appreciated by them at the time; but its effect upon their company and its shareholders was striking. In the first place, Regal would no longer control Amalgamated, or own the whole of its share capital. The action of its directors had deprived it (acting through its shareholders in general meeting) of the power to acquire the shares. In the second place, the Regal shareholders would only receive a large reduced proportion of the sale price of the two cinemas. The Regal directors and Garton would receive the moneys of which the Regal shareholders were thus deprived. This vital alteration was brought about in the following circumstances - I refer to the evidence of the respondent Garton. He was asked what was suggested when the guarantees were refused, and this is his answer:
"Mr. Gulliver said 'We must find it somehow. I am willing to find £500. Are you willing,' turning to the other four directors of Regal, 'to do the same?' They expressed themselves as willing. He said, 'That makes £2,500,' and he turned to me and said 'Garton, you have been interested in Mr. Bentley's companies; will you come in to take £500?' I agreed to do so."
Although this matter is recorded in the Amalgamated minutes, this was in fact a decision come to by the directors of Regal, and the subsequent allotment by the directors of Amalgamated was a mere carrying into effect of this decision of the Regal board. The resolution recorded in the Amalgamated minute runs thus:
"After discussion it was resolved that the directors be invited to subscribe for 500 shares each, and that such shares be allotted accordingly."
As I read that resolution, and my reading agrees with Garton's evidence, the invitation is to the directors of Regal, and is made for the purpose of effectuating the decision which the five directors of Regal had made, that each should take up 500 shares in the Amalgamated. The directors of Amalgamated were not conveying an "invitation" to themselves. That would be ridiculous. They were merely giving effect to the Regal directors' decision to provide £2,500 cash capital themselves, a decision which had been followed by a successful appeal by Gulliver to Garton to provide the balance.
My Lords, I have no hesitation in coming to the conclusion, upon *147 the facts of this case, that these shares, when acquired by the directors, were acquired by reason. and only by reason of the fact that they were directors of Regal, and in the course of their execution of that office.
It now remains to consider whether in acting as directors of Regal they stood in a fiduciary relationship to that company. Directors of a limited company are the creatures of statute and occupy a position peculiar to themselves. In some respects they resemble trustees, in others they do not. In some respects they resemble agents, in others they do not. In some respects they resemble managing partners, in others they do not. In In re Forest of Dean Coal Mining Co. [FN15] a director was held not liable for omitting to recover promotion money which had been improperly paid on the formation of the company. He knew of the improper payment, but he was not appointed a director until a later date. It was held that, although a trustee of settled property which included a debt would be liable for neglecting to sue for it, a director of a company was not a trustee of debts due to the company and was not liable. I cite two passages from the judgment of Sir George Jessel M.R. [FN16]:
"Directors have sometimes been called trustees, or commercial trustees, and sometimes they have been called managing partners, it does not matter what you call them so long as you understand what their true position is, which is that they are really commercial men managing a trading concern for the benefit of themselves and all other shareholders in it."

FN15 (1878) 10 Ch.D. 450.

FN16 Ibid. 451, 452.
Later, after pointing out that traders have a discretion whether they shall sue for a debt, which discretion is not vested in trustees of a debt under a settlement, he said [FN17]:
"Again directors are called trustees. They are no doubt trustees of assets which have come to their hands, or which are under their control, but they are not trustees of a debt due to the company ... A director is the managing partner of the concern, and although a debt is due to the concern I do not think it 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."

FN17 Ibid. 453.
The position of directors was considered by Kay J., in In re Faure Electric Accumulator Co. [FN18] That was a case where directors had applied the company's money in payment of an improper commission, and a claim was made for the loss thereby occasioned to the company. In referring to the liability of directors, the judge pointed out that directors were not trustees in the sense of trustees of a settlement, that the nearest analogy to their position would be that of a managing agent of a mercantile house with large Powers, but that there was no analogy which was absolutely perfect; and he added [FN19]:
"However, it is quite obvious that to apply to directors the strict rules of the Court of Chancery with respect to ordinary trustees might fetter their action to an extent which would be exceedingly disadvantageous to the companies they represent."

FN18 (1888) 40 Ch.D. 141.

FN19 Ibid. 151.
*148 In addition a passage from the judgment of Bowen L.J. in Imperial Hydropathic Hotel Co., Blackpool v. Hampson [FN20] may be usefully recalled. He side [FN21]:
"I should wish ... to begin by remarking this, that when persons who are directors of a company are from time to time spoken of by judges as agents trustees, or managing partners of the company, it is essential to recollect that such expressions are not used as exhaustive of the powers and responsibilities of those persons but only as indicating useful points of view from which they may for the moment and for the particular purpose be considered - points of view at which for the moment they seem to be either cutting the circle, or falling within the category of the suggested kind. It is not meant that they belong to the category, but that it is useful for the purpose of the moment to observe that they fall pro tanto within the principles which govern that particular class."

FN20 23 Ch.D. 1, 12.

FN21 23 Ch.D. 1, 12.
These three cases, however, were not concerned with the question of directors making a profit; but that the equitable principle in this regard applies to directors is beyond doubt. In Parker v. McKenna, [FN22] a new issue of shares of a joint stock bank was offered to the existing shareholders at a premium. The directors arranged with one Stock to take, at a larger premium, the shares not taken up by the existing shareholders. Stock, being unable to fulfill his contract, requested the directors to relieve him of some. They did so, and made a profit. They were held accountable for the profit so made. Lord Cairns L.C. said [FN23]:
"The court will not enquire and is not in a position to ascertain, whether the bank has or has not lost by the acts of the directors. All the court has to do is to examine whether a profit has been made by an agent, without the knowledge of his principal, in the course and execution of his agency, and the court finds, in my opinion, that these agents in the course of their agency have made a profit, and for that profit they must, in my opinion account to their principal."

FN22 (1874) 10 Ch.App. 96.

FN23 Ibid. 118.
In the same case James L.J. stated his view in the following terms [FN24]:
"... it appears to me very important that we should concur in laying down again and again the general principle that in this court no agent in the course of his agency, in the matter of his agency, can be allowed to make any profit without the knowledge of his principal; that the rule is an inflexible rule, and must be applied inexorably by this court, which is not entitled, in my judgment, to receive evidence, or suggestion, or argument, as to whether the principal did or did not suffer any injury in fact, by reason of the dealing of the agent; for the safety of mankind requires that no agent shall be able to put his principal to the danger of such an inquiry as that."

FN24 Ibid. 124, 125.
In Imperial Mercantile Credit Association (Liquidators) v. Coleman [FN25] one Coleman, a stockbroker and a director of a financial *149 company, had contracted to place a large amount of railway debentures for a commission of 5 per cent. He proposed that his company should undertake to place them for a commission of 1 1/2 per cent. The 5 per cent. commission was in due course paid to the director, who paid over the 1 1/2 per cent. to the company. He was held liable to account for the 3 1/2 per cent., by Malins V.-C., [FN26] who said:
"It is of the highest importance that it should be distinctly understood that it is the duty of directors of companies to use their best exertions for the benefit of those whose interests are committed to their charge, and that they are bound to disregard their own private interests whenever a regard to them conflicts with the proper discharge of such duty."

FN25 (1873) L.R. 6 H.L. 189.

FN26 (1870) 6 Ch.App. 563.
His decree was reversed by Lord Hatherley [FN27] on the ground that the transaction was protected under the company's articles of association. Your Lordships' House, [FN28] however, thought that in the circumstances of the case the articles of association gave no protection, and restored the decree with unimportant variations. The liability was based on the view, which was not disputed by Lord Hatherley, that the director stood in a fiduciary relationship to the company. That relationship being established, he could not keep the profit which had been earned by the funds of the company being employed in taking up the debentures. The courts in Scotland have treated directors as standing in a fiduciary relationship towards their company and, applying the equitable principle, have made them accountable for profits accruing to them in the course and by reason of their directorships. It will be sufficient to refer to Huntington Copper Co. v. Henderson, [FN29] in which the Lord President cites with approval the following passage from the judgment of the Lord Ordinary:
"Whenever it can be shown that the trustee has so arranged matters as to obtain an advantage whether in money or money's worth to himself personally through the execution of his trust, he will not be permitted to retain, but be compelled to make it over to his constituent."

FN27 (1871) 6 Ch.App. 558, 566 et seq.

FN28 L.R. 6 H.L. 189.

FN29 1877 4 R. 294, 308.
In the result, I am of opinion that the directors standing in a fiduciary relationship to Regal in regard to the exercise of their powers as directors, and having obtained these shares by reason and only by reason of the fact that they were directors of Regal and in the course of the execution of that office, are accountable for the profits which they have made out of them. The equitable rule laid down in Keech v. Sandford [FN30] and Ex parte James [FN31] and similar authorities applies to them in full force. It was contended that these cases were distinguishable by reason of the fact that it was impossible for Regal to get the shares owing to lack of funds, and that the directors in taking the shares were really acting as members of the public. I cannot accept this argument. It was impossible for the cestui que trust in Keech v. Sandford [FN32] to obtain the lease. nevertheless the trustee was *150 accountable. The suggestion that the directors were applying simply as members of the public is a travesty of the facts. They could, had they wished, have protected themselves by a resolution (either antecedent or subsequent) of the Regal shareholders in general meeting. In default of such approval, the liability to account must remain. The result is that, in my opinion, each of the respondents Bobby, Griffiths, Bassett and Bentley is liable to account for the profit which he made on the sale of his 500 shares in Amalgamated.

FN30 Sel.Cas.Ch. 61.

FN31 8 Ves. 337.

FN32 Sel.Cas.Ch. 61.
The case of the respondent Gulliver, however, requires some further consideration, for he has raised a separate and distinct answer to the claim. He says: "I never promised to subscribe for shares in Amalgamated. I never did so subscribe. I only promised to find others who would be willing to subscribe. I only found others who did subscribe. The shares were theirs. They were never mine. They received the profit. I received none of it." If these are the true facts, his answer seems complete. The evidence in my opinion establishes his contention. Throughout his evidence Gulliver insisted that he only promised to find £500, not to subscribe it himself. The £500 was paid by two cheques in favour of Amalgamated, one a cheque for £200 signed by Gulliver as director and on behalf of the Swiss company Seguliva, the other a cheque for £300 signed by Gulliver as managing director of South Downs Land Co., Ltd. They were enclosed in a letter of October 3, 1935, from Gulliver to Garton, in which Gulliver asks that the share certificates be issued as follows, 200 shares in the name of himself, Charles Gulliver, 200 shares in the name of South Downs Land Co., Ltd., and 100 shares in the name of Miss S. Geering. The money for Miss Gee ring's shares was apparently included in South Downs Land Co.'s cheque. The certificates were made out accordingly, the 200 shares in Gulliver's name being, he says, the shares subscribed for by the Swiss company.
When the sale and purchase of the Amalgamated shares was arranged, the agreement for the sale and purchase was signed on behalf of the vendor shareholders (other than the respondent Bentley) by Garton & Co.; and in a letter of October 17, 1935, Gulliver sent to Garton (who held the three certificates) three transfers, viz. (1) a transfer of 200 shares executed by South Downs Land Co. Ltd. (2) a transfer of 200 shares executed by himself, and (3) a transfer of 100 shares executed by Miss Geering. When the purchase money was paid cheques were drawn as follows: a cheque for £360 in favour of Miss Geering, a cheque for £720 in favour of South Downs Land Co. Ltd., and a cheque for the same amount in favour of Gulliver. By letter of October 24, 1935, written by Gulliver to the National Provincial Bank, these cheques were paid into the respective accounts of Miss Geering, South Downs Land Co. Ltd., and Seguliva, A.G.
From the evidence of Gulliver it appeared that Miss Geering is a friend who from time to time makes investments on his advice; that the issued capital of South Downs and Co. Ltd., is £1,000 in £1 shares, held by some 11 or 12 shareholders, of whom Gulliver is one and holds 100 shares; and that in the Swiss company Gulliver holds 85 out of 500 shares.
It is of the first importance on this part of the case to bear in *151 mind that these directors have been acquitted of all suggestion of mala fides in regard to the acquisition of these shares. They had no reason to believe that they could be called to account. Why then should Gulliver go to the elaborate pains of having the shares put into the names of South Downs Land Co. and Miss Geering, and of having the proceeds of sale paid into the respective accounts before mentioned, if the shares and proceeds really belonged to him? Ex hypothesi he had no reason for concealment; and no question was raised against the transaction until months after the proceeds of sale had been paid into the banking accounts of those whom Gulliver asserts to have been the owners of the shares. I can see no reason for doubting that the shares never belonged to Gulliver, and that he made no profit on the sale thereof.
Counsel for the appellant, however, contended that the trial judge had found as a fact that Gulliver was the owner of the shares; and he relied on certain scattered passages in the judgment, the strongest of which seems to me to be the one in which the judge said:
"I may say this with regard to Mr. Gulliver, that I have not been misled in any way or led to decide in his favour by the fact that he handed over his shares to his nominees but rather the reverse."
I cannot regard that as a finding by the judge that the shares were subscribed for by Gulliver under aliases, and that the shares and the proceeds of sale in fact belonged to him. It is equally susceptible of the meaning that he allowed others to subscribe for the shares which he could have obtained for himself had he so wished. If it be claimed as a finding of fact in the former sense, all I can say is that there is no evidence which in my opinion would justify such a finding.
It was further argued that, even if the shares and the proceeds of sale did not belong to Gulliver, he is nevertheless liable to account to Regal for the profit made by the owners of the shares, and that upon the authority of Imperial Mercantile Credit Association (Liquidators) v. Coleman, [FN33] to which I have already referred. One of the contentions put forward there by Coleman was that his transaction was a transaction for the benefit of a partnership in the profits of which he was only interested to the extent of a half, and that accordingly he could only be made accountable to that extent. That contention was disposed of by Lord Cairns in the following terms [FN34]:
"My Lords, I think there is no foundation for this argument. The profit on the transaction was obtained by Mr. Coleman, and in the view that I take, was obtained by him as a director of the association. Whether he desired or whether he determined to reserve it all to himself or to share it with his firm appears to me to be perfectly immaterial. The source from which the profit is derived is Mr. Coleman. It is only through him that his firm can claim. He is liable for the whole of the profits which were obtained; and it is not the course for a Court of Equity to enter into the consideration of what afterwards would have become of those profits.

FN33 L.R. 6 H.L. 189.

FN34 Ibid. 208.
*152 I am unable to see how this authority helps Regal if it be assumed that neither the shares nor the profit ever belonged to Gulliver.
It was further said that Gulliver must account for whatever profits he may have made indirectly through his share holding in the two companies, and that an inquiry should be directed for this purpose. As to this, it is sufficient to say that there is no evidence upon which to ground such an inquiry. Indeed, the evidence so far as it goes, shows that neither company has distributed any part of the profit. Finally, it was said that Gulliver must account for the profit on the 200 shares as to which the certificate was in his name. If in fact the shares belonged beneficially to the Swiss company (and that is the assumption for this purpose), the proceeds of sale did not belong to Gulliver, and were rightly paid into the Swiss company's banking account. Gulliver accordingly made no profit for which he is accountable. As regards Gulliver, this appeal should, in my opinion, be dismissed.
There remains to consider the case of Garton. He stands on a different footing from the other respondents in that he was not a director of Regal. He was Regal's legal adviser; but, in my opinion, he has a short but effective answer to the plaintiffs' claim. He was requested by the Regal directors to apply for 500 shares. They arranged that they themselves should each be responsible for £500 of the Amalgamated capital, and they appealed, by their chairman, to Garton to subscribe the balance of £500 which was required to make up the £3,000. In law his action, which has resulted in a profit, was taken at the request of Regal, and I know of no principle or authority which would justify a decision that a solicitor must account for profit resulting from a transaction which he has entered into on his own behalf, not merely with the consent, but at the request of his client.
My Lords, in my opinion the right way in which to deal with this appeal is (i) to dismiss the appeal as against the respondents Gulliver and Garton with costs, (ii) to allow it with costs as against the other four respondents, and (iii) to enter judgment as against each of these four respondents for a sum of £1,402 1s. 8d. with interest at 4 per cent. from October 25, 1935, as to £ 1,300 part thereof and from December 5, 1935, as to the balance. As regards the liability of these four respondents for costs, I have read the shorthand notes of the evidence at the trial, and it is clear to me that the costs were substantially increased by the suggestions of mala fides and fraud with which the cross-examination abounds, and from which they have been exonerated. In my opinion a proper order to make would be to order these four respondents to pay only three-quarters of the appellants' taxed costs of the action. The taxed costs of the appellants in the Court of Appeal and in this House they must pay in full.
One final observation I desire to make. In his judgment Lord Greene M.R., stated that a decision adverse to the directors in the present case involved the proposition that, if directors bona fide decide not to invest their company's funds in some proposed investment, a director who thereafter embarks his own money therein is accountable for any profits which he may derive therefrom. As to this, I *153 can only say that to my mind the facts of this hypothetical case bear but little resemblance to the story with which we have had to deal.

LORD MACMILLAN:

My Lords, the real question for decision in this appeal seems unfortunately to have been somewhat obscured by the course of the arguments before the trial judge and to some extent also in the Court of Appeal. The issue, as it was formulated before your Lordships, was not whether the directors of Regal (Hastings), Ltd., had acted in bad faith. Their bona fides was not questioned. Nor was it whether they had acted in breach of their duty. They were not said to have done anything wrong. The sole ground on which it was sought to render them accountable was that, being directors of the plaintiff company and therefore in a fiduciary relation to it, they entered in the course of their management into a transaction in which they utilised the position and knowledge possessed by them in virtue of their office as directors, and that the transaction resulted in a profit to themselves. The point was not whether the directors had a duty to acquire the shares in question for the company and failed in that duty. They had no such duty. We must take it that they entered into the transaction lawfully, in good faith and indeed avowedly in the interests of the company. However, that does not absolve them from accountability for any profit which they made, if it was by reason and in virtue of their fiduciary office as directors that they entered into the transaction.
The equitable doctrine invoked is one of the most deeply rooted in our law. It is amply illustrated in the authoritative decisions which my noble and learned friend Lord Russell of Killowen has cited. I should like only to add a passage from Principles of Equity by Lord Kames, 3rd ed. (1778) vol. 2, p. 87, which puts the whole matter in a sentence: "Equity," he says, "prohibits a trustee tram making any profit by his management, directly or indirectly."
The issue thus becomes one of fact. The plaintiff company has to establish two things: (i) that what the directors did was so related to the affairs of the company that it can properly be said to have been done in the course of their management and in utilisation of their opportunities and special knowledge as directors; and (ii) that what they did resulted in a profit to themselves. The first of these propositions is clearly established by the analysis of the whole complicated circumstances for which the House is indebted to my noble and learned friend who has preceded me. The second proposition is admitted, except in the case of Gulliver, in whose case I agree that, on the evidence, he is not proved to have made any profit personally. The conditions are, therefore, in my opinion, present which preclude the four directors who made a personal profit by the transaction from retaining such profit.
The position of the respondent Garton is quite different. He was the solicitor of the plaintiff company and in no sense a trustee for it. True, he made a profit, as did the four directors, but he subscribed for his shares not only with the knowledge, but at the express request, of his clients, and I know of no principle on which he could be held accountable to them for any resultant profit to himself.
*154 I should have been content simply to express my concurrence with the views expounded by my noble and learned friend Lord Russell of Killowen, with which I wholly agree, but for the fact that we are differing from the Court of Appeal. For that reason I have thought it proper to state briefly the grounds of my concurrence.

LORD WRIGHT:

My Lords, of the six respondents, two, Gulliver and Garton, stand on a different footing from the other four. It is in regard to the latter that the important question of principle brought into issue by the decisions of Wrottesley J., and the Court of Appeal call for determination. That question can be briefly stated to be whether an agent, a director, a trustee or other person in an analogous fiduciary position, when a demand is made upon him by the person to whom he stands in the fiduciary relationship to account for profits acquired by him by reason of his fiduciary position, and by reason of the opportunity and the knowledge, or either, resulting from it, is entitled to defeat the claim upon any ground save that he made profits with the knowledge and assent of the other person. The most usual and typical case of this nature is that of principal and agent. The rule in such case is compendiously expressed to be that an agent must account for net profit secretly (that is, without the knowledge of his principal) acquired by him in the course of his agency. The authorities show how manifold and various are the applications of the rule. It does not depend on fraud or corruption.
The courts below have held that it does not apply in the present case, for the reason that the purchase of the shares by the respondents, though made for their own advantage, and though the knowledge and opportunity which enabled them to take the advantage came to them solely by reason of their being directors of the appellant company, was a purchase which, in the circumstances, the respondents were under no duty to the appellant to make, and was a purchase which it was beyond the appellant's ability to make, so that, if the respondents had not made it, the appellant would have been no better off by reason of the respondents abstaining from reaping the advantage for themselves. With the question so stated, it was said that any other decision than that of the courts below would involve a dog-in-the-manger policy. What the respondents did, it was said, caused no damage to the appellant and involved no neglect of the appellant's interests or similar breach of duty. However, I think the answer to this reasoning is that, both in law and equity, it has been held that, if a person in a fiduciary relationship makes a secret profit out of the relationship, the court will not inquire whether the other person is damnified or has lost a profit which otherwise he would have got. The fact is in itself a fundamental breach of the fiduciary relationship. Nor can the court adequately investigate the matter in most cases. The facts are generally difficult to ascertain or are solely in the knowledge of the person who is being charged. They are matters of surmise; they are hypothetical because the inquiry is as to what would have been the position if that party had not acted as he did, or what he might have done if there had not been the temptation to seek his own advantage, if, in short, interest had not conflicted with duty. *155 Thus, in Keech v. Sandford, [FN35] a case in which the fiduciary relationship was that of trustee and cestui que trust, the trustee was held liable to assign a lease to the infant cestui que trust, though the lessor had refused to renew to the infant. Lord King L.C. [FN36] said:
"This may seem hard, that the trustee is the only person of all mankind who might not have the lease ..."

FN35 Sel.Cas.Ch. 61.

FN36 Ibid. 62.
It did not matter that the infant could not himself have got it and that he was not damaged by the trustee taking it for himself. One reason why the rule is strictly pursued is given by Lord Eldon in Ex parte lames [FN37]:
"no court is equal to the examination and ascertainment of the truth in much the greater number of cases."

FN37 8 Ves. 337, 345. In Parker v. McKenna, [FN38] a most instructive case, the rule is so admirably stated by James L.J., that I cannot resist repeating his language, though my noble and learned friend Lord Russell of Killowen, in his speech just delivered, which I have had the opportunity of reading in print, and with which I agree completely, has already quoted it to your Lordships. The words of James L.J., [FN39] which I emphasise, are:
"... that the rule is an inflexible rule and must be applied inexorably by this court which is not entitled, in my judgment, to receive evidence, or suggestion, or argument as to whether the principal did or did not suffer any injury in fact by reason of the dealing of the agent; for the safety of mankind requires that no agent shall be able to put his principal to the danger of such an inquiry as that."

FN38 10 Ch.App. 96.

FN39 Ibid. 124, 125.
The italics are mine. I need not multiply citations to the same effect, or illustrations of the different circumstances in which the rule has been applied.
In the present case the four respondents were acting in the matter as agents for the appellant company in their capacity of directors, that is, "as commercial men managing a trading concern for the benefit of themselves and all other shareholders in it," if I may borrow that part of the description applied to directors by Sir George Jessel, M.R., in In re Forest of Dean Coal Mining Co. [FN40] In the numerous actions, or most of them, which have been brought against directors of companies for profits secretly (that is, without the assent of the shareholders) secured in the course of their dealings as directors, the claims have been against them in their capacity as agents. Thus to take a familiar instance, in Boston Deep Sea Fishing & Ice Co. v. Ansell, [FN41] the defendant was held liable to account to the plaintiff company of which he was director for secret bribes or bonuses which he had received from persons making contracts with the company. The defendant's liability flowed from the fiduciary relationship in which he stood to the company as its agent. Bowen L.J. [FN42] said: *156
"... the law implies a use, that is to say, there is an implied contract, if you put it as a legal proposition - there is an equitable right, if you treat it as a matter of equity - as between the principal and agent that the agent should pay it over, which renders the agent liable to be sued for money had and received, and there is an equitable right in the master to receive it, and to take it out of the hands of the agent, which gives the principal a right to relief in equity."

FN40 10 Ch.D. 450, 452.

FN41 (1888) 39 Ch.D. 339.

FN42 Ibid. 367, 368.
As it was held in Lister & Co. v. Stubbs, [FN43] the relationship in such a case is that of debtor and creditor, not trustee and cestui que trust. Many instances can be quoted from the books of the stringency with which the courts have enforced the rule that a director must account to his company for any benefit which he obtains in the course of and owing to his directorship, even though the benefit comes from a third person and involves no loss to the company. I cite as one example In re North Australian Territory Co., Archer's Case, [FN44] where a director was held liable to account to the company for the sum paid to him by the promoter of the company by way of indemnity against the money which the director had to pay for his qualification shares.

FN43 (1890) 45 Ch.D. 1.

FN44 [1892] 1 Ch. 322.
The analysis of the facts in the present case which has been made by Lord Russell of Killowen shows clearly enough that the opportunity and the knowledge which enabled the four respondents to purchase the shares came to them simply in their position as directors of the appellant company. Wrottesley J., clearly so held. He said at the outset of his judgment:
"There is no doubt they (the respondents) did take up in their own names shares which only a few days and certainly only after a week or two they were able to sell at a very large profit indeed. There is no doubt that it was only because they were directors and solicitor respectively of the plaintiff company that this stroke of fortune came in their way."
He decided against the appellant company because he fixed his attention on his view that the appellant suffered no loss by the respondents' conduct, instead of fixing attention on the crucial fact that the respondents made a secret profit out of their agency. I do not think that any different view was taken on this aspect of the case by the Court of Appeal, or that it was questioned by that court that the opportunity of making the profits came to the four respondents by reason of their fiduciary position as directors. The Court of Appeal held that, in the absence of any dishonest intention, or negligence, or breach of a specific duty to acquire the shares for the appellant company, the respondents as directors were entitled to buy the shares themselves. Once, it was said, they came to a bona fide decision that the appellant company could not provide the money to take up the shares, their obligation to refrain from acquiring those shares for themselves came to an end. With the greatest respect, I feel bound to regard such a conclusion as dead in the teeth of the wise and salutary rule so stringently enforced in the authorities. It is suggested that it would have been mere quixotic folly for the four respondents to let such an occasion pass when the appellant company *157 could not avail itself of it; Lord King, L.C., faced that very position when he accepted that the person in the fiduciary position might be the only person in the world who could not avail himself of the opportunity. It is, however, not true that such a person is absolutely barred, because he could by obtaining the assent of the shareholders have secured his freedom to make the profit for himself. Failing that, the only course open is to let the opportunity pass. To admit of any other alternative would be to expose the principal to the dangers against which James L.J., [FN45] in the passage I have quoted uttered his solemn warning. The rule is stringent and absolute, because "the safety of mankind" requires it to be absolutely observed in the fiduciary relationship. In my opinion, the appeal should be allowed in the case of the four respondents.

FN45 10 Ch.App. 96, 124, 125.
In the case of the other two respondents, I agree with Lord Russell of Killowen that the appeal should be dismissed for the several reasons which he has given in regard to each of them. These appeals turn on issues of evidence and fact, and I do not desire to add to what has fallen from my noble and learned friend.

LORD PORTER:

My Lords, I have had an opportunity of reading the speech which has been delivered by my noble and learned friend, Lord Russell of Killowen, and had we not been differing from the view of the Court of Appeal I should not desire to add to what he has said. As we are reversing the judgment of both the court of first instance and the Court of Appeal I desire, out of respect for the opinions expressed in them, to state in the briefest possible compass the grounds for the view which I hold.
My Lords, I am conscious of certain possibilities which are involved in the conclusion which all your Lordships have reached. The action is brought by the Regal company. Technically, of course, the fact that an unlooked for advantage may be gained by the shareholders of that company is immaterial to the question at issue. The company and its shareholders are separate entities. One cannot help remembering, however, that in fact the shares have been purchased by a financial group who were willing to acquire those of the Regal and the Amalgamated at a certain price. As a result of your Lordships' decision that group will, I think, receive in one hand part of the sum which has been paid by the other. For the shares in Amalgamated they paid £3 16s. 1d. per share, yet part of that sum may be returned to the group, though not necessarily to the individual shareholders by reason of the enhancement in value of the shares in Regal - an enhancement brought about as a result of the receipt by the company of the profit made by some of its former directors on the sale of Amalgamated shares. This, it seems, may be an unexpected windfall, but whether it be so or not, the principle that a person occupying a fiduciary relationship shall not make a profit by reason thereof is of such vital importance that the possible consequence in the present case is in fact as it is in law an immaterial consideration.
The plaintiff, the Regal company, by its pleadings, claimed (i) damages for negligence, (ii) alternatively, the profit obtained on the *158 sale of the shares in Amalgamated as money had and received by the defendants to the plaintiffs' use, and (iii) in the further alternative damages for misfeasance. No claim for fraud was suggested, and the trial judge expressly exonerated the defendants from any liability for negligence or Misfeasance. Before your Lordships' House the claim for money had and received was alone persisted in. The alternative claim for misfeasance, however, seems also to have been presented to the Court of Appeal, but to have been rejected by them, and in common with the rest of your Lordships I unreservedly accept the findings of both courts.
It remains, therefore, to consider the claim that (in the words of Lord Greene M.R.):
"... in the circumstances of the case the directors must be taken to have been acting in the matter of their office when they took those shares and that, accordingly, they are accountable for the profits. which they have made."
That the shares were obtained by the defendants by reason of their position as directors of Regal is, I think, plain. The original proposition, when the formation of the subsidiary company was suggested, was that the whole of the shares should be issued to the Regal company, partly for cash and partly for services rendered, and this proposition was discussed and accepted at board meetings of that company. It was only afterwards, when the necessity for finding £5,000 cash arose, that the issue to any one other than the company was considered, and then the directors turned to themselves. "There is no doubt it was only because they were directors and solicitor respectively of the plaintiff company that this stroke of fortune came their way," says Wrottesley J., and I agree with his observation.
In these circumstances, it is to my mind immaterial that the directors saw no way of raising the money save from amongst themselves and from the solicitor to the company, or, indeed, that the money could in fact have been raised in no other way. The legal proposition may, I think, be broadly stated by saying that one occupying a position of trust must not make a profit which he can acquire only by use of his fiduciary position, or, if he does, he must account for the profit so made. For this proposition the cases of Keech v. Sandford [FN46] and Ex parte James [FN47] are sufficient authority. Wrottesley J. and the members of the Court of Appeal appear to have adopted a narrower outlook with which, with all respect, I find myself unable to agree. Wrottesley J. said:
"In order to succeed the plaintiff company must show that the defendants both ought to have caused and could have caused the plaintiff company to subscribe for these shares and that the neglect to do so caused a loss to the plaintiff company."

FN46 Sel.Cas.Ch. 61.

FN47 8 Ves. 337.
In the Court of Appeal, Lord Greene M.R. said:
"It must be shown that in the circumstances of the case it was the duty of the directors to obtain these shares for their company ... The position of the Regal company would have been very *159 much strengthened by having all these shares in the two companies in the same hands with the possibility of one control. That being so, the only way in which these directors could secure that benefit for their company was by putting up the money themselves. Once that decision is held to be a bona fide one, and fraud drops out of the case, it seems to me there is only one conclusion, namely, that the appeal must be dismissed with costs."
To treat the problem in this way is, in my view, to look at it as involving a claim for negligence or misfeasance and to neglect the wider aspect. Directors, no doubt, are not trustees, but they occupy a fiduciary position towards the company whose board they form. Their liability in this respect does not depend upon breach of duty but upon the proposition that a director must not make a profit out of property acquired by reason of his relationship to the company of which he is director. It matters not that he could not have acquired the property for the company itself - the profit which he makes is the company's, even though the property by means of which he made it was not and could not have been acquired on its behalf. Adopting the words of Lord Eldon L.C., in Ex parte James [FN48]:
"... the general interests of justice require it to be destroyed in every instance; as no court is equal to the examination and ascertainment of the truth in much the greater number of cases."

FN48 8 Ves. 337, 345.
My Lords, these observations apply generally to the action, but the cases of Gulliver and Garton stand on a somewhat different footing. As to them, there are additional and special considerations to be kept in mind. I need not set them out or refer to them further than by saying that I find myself in agreement with the reasoning and conclusion of my noble and learned friend, Lord Russell of Killowen, and would submit with him that the appeal should be allowed so far as concerns the defendants Bobby, Griffiths, Bassett and Bentley, and should be dismissed in the case of Gulliver and Garton. I also concur in the order as to costs which he suggests.

Representation

Solicitors: H. S. Wright & Webb; Boyce Evans & Sheppard; Tackley, Fall & Read; Hugh V. Harraway & Son; Underwood & Co.

Appeal dismissed as against the respondents Gulliver & Garton. Appeal allowed as against the other respondents. (J.A.G. )

(c) Incorporated Council of Law Reporting For England & Wales
[1967] 2 A.C. 134



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