Scottish Court of Session Decisions

The petitioner in this case, Mr Hugh Tennent, was the registered owner of £6000 stock of the City of Glasgow Bank, which he acquired at three different times. In December 1872 he purchased £2500 worth from a Mr Thomas Matthew; in July 1873 he purchased a like amount from a Mr Dugald Bell; and lastly, when the company issued additional stock later in the same year, he took his share of it to the extent of £1000.

The stoppage of the bank occurred on the 2d October 1878, and on and after that date was notorious throughout the United Kingdom. It was caused by the insolvency of the bank, which it was admitted the directors knew at the time to be irretrievable. On the same day a special meeting of the directors was held, of which the following was the minute:—“The directors having taken into consideration the present position of the bank, resolved to ask the attendance at the meeting of Mr William Anderson, C.A., and of Mr A. B. M'Grigor, writer, Glasgow. These gentlemen were accordingly sent for, and attended. It was then resolved, in terms of the contract of copartnery, to call a special meeting of the shareholders on the earliest possible day, for the purpose of submitting to them a balance of the books of the bank as at 1st instant, and with this view to instruct Messrs Kerr, Anderson, Muir, & Main, C.A., and Messrs M'Grigor, Donald, & Company, writers, Glasgow, to examine the books, securities, &c., of the bank, and to make up a balance as at the 1st inst.” The appointment of these gentlemen was published in the newspapers, and was notorious throughout the United Kingdom on and after 3d October 1878. The general result of their investigations was communicated orally by Mr M'Grigor to the directors about three o'clock on the afternoon of 18th October 1878, and a printed copy of the report and balance-sheet was handed to Mr Leresche, the secretary of the bank, about half-past seven o'clock in the evening of the same day. Printed copies were on the same day despatched by post to all the shareholders of the bank, including the petitioner, and were also inserted on 19th October 1878 in most of the newspapers in Scotland published on that day. The report and balance-sheet disclosed that the bank as a corporation was hopelessly insolvent, its debts being so large and its assets so small that after exhausting the capital and rest it appeared that upwards of five millions sterling would require to be made up by the shareholders. On 5th October 1878 the directors of the bank convened an extraordinary general meeting of the shareholders by advertisement in the following terms:—

( City of Glasgow Bank.)

Notice is hereby given, that an extraordinary general meeting of the City of Glasgow Bank will be held within the City Hall, No. 90 Candleriggs, Glasgow, on Tuesday, the 22d inst., at two o'clock in the afternoon, for the purpose of considering, and, if thought fit, passing as extraordinary resolutions, pursuant to sub-section three of section one hundred and twenty-nine of ‘The Companies Act 1862,’ the subjoined resolutions, and of appointing liquidators, and fixing their remuneration.

Resolutions.

That it has been proved to the satisfaction of this meeting that the City of Glasgow Bank cannot by reason of its liabilities continue its business, and that it is advisable to wind up the same.

That the City of Glasgow Bank be wound up voluntarily. “R. S. Stronach, Manager.

Dated Glasgow, 5th October 1878.”

At this meeting on the 22d October the resolution to wind-up voluntarily was carried, and four liquidators were appointed. The voluntary liquidation was subsequently on 27th November continued, subject to the supervision of the Court.

On the 21st October, the day before that on which it was resolved to wind-up voluntarily, the petitioner raised an action in the Court of Session against the City of Glasgow Bank, and also against Matthew and Bell, concluding for reduction of the various transfers, entries in the bank books, and stock certificates in his favour as a holder of bank stock. The summons in this action was served on the bank prior to the passing of the resolution to go into liquidation.

In this action the petitioner averred that he had been induced to enter into these contracts for the acquisition of stock by the fraud of the bank. He alleged that not only the £1000 stock allotted to him in 1873, but also the two larger parcels, had in reality been acquired from the bank, and

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not from the nominal sellers—Matthew and Bell — who were truly trustees for the bank, and were in the habit of allowing their names to be so used for the fraudulent purpose of concealing the fact that the bank was a large holder of its own stock. He averred further that he had purchased on the faith of the false and fraudulent balance-sheets issued by the directors, and also in consequence of the direct misrepresentations to himself personally made by Mr Alexander Stronach, the late manager of the bank.

This petition was for the removal of Mr Tennent's name from the register and the list of contributories, and also to stay calls. The liquidators contended that although the action of reduction was served on the bank prior to the resolution to wind up voluntarily, it nevertheless came too late to entitle the petitioner to reduction on the ground of fraud, seeing that it was raised after the stoppage of the bank through irretrievable insolvency.

Argued for the petitioner—The only point of time to be regarded in a question of this sort was the commencement of the winding-up. That was clear in principle and on the authorities. If this had been a question between the petitioner and the company only—had no interests of creditors intervened—it would have been immaterial when the action was brought. It might have been brought even after the winding-up had commenced. That was the inference to be drawn from Addie v. The Western Bank, March 4, 1864, 2 Macph. 809; June 9, 1865, 3 Macph. 899; rev. May 20, 1867, 5 Macph. (H. of L.) 80, and L.R. 1 Sc. App. 145. For there, but for special circumstances which did not occur here, the pursuer would have been entitled to his remedy. At common law a trustee in bankruptcy had no higher right in a question with creditors than the bankrupt himself had— Ewart v. Latta, May 5, 1865, 4 Macq. 983; Fleeming v. Howden, July 16, 1868, L.R. 1 Sc. App. 372. What, then, was the principle upon which creditors had in this matter higher rights than the company itself? It was to be found in sections 18 and 38 of the Companies Act of 1862 (25 and 26 Vict. c. 89). Under these sections the creditors' rights attached whenever the winding-up commenced, not sooner. Now, by section 130 a voluntary winding-up was to “be deemed to commence at the time of the passing of the resolution authorising such winding-up.” In the present case the resolution authorising the voluntary winding-up was passed on the 22d October, and Mr Tennent's action of reduction was brought on the previous day, the 21st. He was thus outside section 18 of the statute, and his name ought therefore to be removed from the register of members and the list of contributories. As regarded the decisions, there was at one time a tendency to hold that even after the winding-up had commenced creditors had no higher rights than the company. That appeared to be Lord Cairns' view in Smith v. The Reese River Company, June 6, 1867, L.R. 2 Ch. App. 604; March 18, 1869, L.R. 4 Eng. and Ir. App. (H. of L.) 64. But Oakes v. Turquand corrected this—Feb. 9, 1867, L.R. 3 Eq. 576, and (H. of L.) L.R. 2 Eng. and Ir. App. 325. Oakes was followed by Kent v. The Freehold Land and Brickmaking Company, June 3, 1868, L.R. 3 Ch. App. 493; but there was no case in which an earlier date than the commencement of the winding-up had been fixed on. Nelson Mitchell's case, supra, p. 155; and Alexander Mitchell's case, supra, p. 165, no doubt appeared contrary. The petitioners there, however, were admitted by shareholders, and they sought to transfer their shares. It was held that they were too late after the 2d, or at least after the 5th, October. Here, on the other hand, there was no proper contract, owing to fraud. The cases were therefore quite distinct.

Argued for the liquidators—The application of the petitioner to have his name removed from the register was made under the 35th section of the Act of 1862, on the ground that he was a person whose name had without sufficient cause been entered on the register. But that form of procedure was inapplicable here. To bring a case within that section there must be something in the facts by which the petitioner could readily show either that his name was put on without sufficient cause, or that there had been default or delay in taking it off. Here the petitioner's name was put on at his own request as regarded part of the shares six years, and as regarded the remainder five years, before the bank failed; and he did not aver delay or default in taking it off. This, therefore, was not a case which section 35 contemplated. But apart altogether from that, the question came to be—Was Mr Tennant, in the admitted state of matters which existed on the 21st October, when he raised this action, entitled on the ground of fraud to rescind the contracts by which he took these shares? The liquidators' position was that the action was too late. They contended that the winding-up was not the first period at which the right to rescind a contract entered into through fraud was barred, but that it was equally barred when the company had stopped its business, proclaimed its insolvency, and declared that it could no longer go on. This action was not brought until the 21st October—after the investigator's report had shown that there was £5,200,000 to be made up — so that not only had insolvency been declared, but unhappily it had been made too clear and undoubted. The petitioner's argument assumed that but for section 18 of the Act of 1862 creditors would not have been in a better position than the company or the members of the company. But it was not because of the provisions of section 18, or because of any statutory provisions, that the right of rescision was barred by the winding-up; for it was a matter of general law and equity that after a trading body had declared itself to be insolvent it was not entitled to put away any of its assets or to permit any of its assets to be withdrawn. If they let out a partner from the liability to contribute, they would let away so much of its assets, and if they gave him back the purchase price, that would be directly giving away part of its assets. The period of the commencement of the winding-up was important only because it was a conclusive declaration of insolvency—it was not the only period. If the contention on the other side was correct, there could not have been a judgment on the point prior to the Act of 1862, but there were such judgments. The leading case was Henderson v. Royal British Bank, January 30, 1857, 7 Ellis and Blackburn, 356, 26 L.J. (Ch.) 112; and there were also Mixer's case, July 16, 1859, 4 De Gex and Jones, 575, 28 L.J. (Ch.) 879; Clarke v. Dickson, April 26, 1858, Ellis,

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Blackburn, and Ellis, 148. The principle of these cases was that when a trading body had stopped payment and become insolvent it was too late for persons who had been defrauded into taking shares to set aside their contracts and get out, because they had been relied on and trusted by the creditors in dealing with the company. The Act of 1862 made no difference in that principle. It assumed and did not supersede the existing law of partnership. The general rights and liabilities of companies and their partners remained although the means of getting at the partners were restricted. Oakes v. Turquand, supra, proceeded on and adopted Henderson (Lord Chancellor's observations) L.R. 2 Eng. and Ir. Ap. (H. of L.) 348; and Oakes was followed by Kent, supra, and in the case of companies being wound up voluntarily, by Stone and Collins v. The City and County Bank, Nov. 27, 1877, L.R. 3 Com. Pleas, 282. There was but one case in which the action was raised timeously, and that was Smith v. Reese River Company, supra. But there the plaintiff filed his bill on the 6th February 1866, while the petition for the winding up of the company was not presented till 27th April, and the winding-up order was not made until 21st May. The real controversy in that case was—At what point of time was the contract to be regarded as having been voided? Not till the petitioner got decree? Then Smith was too late, because he did not get decree till after the winding-up began. Or were they to look to the 6th of February, when he said, by a judicial proceeding, that he wanted to be free? The Court decided that the point of time was not when he got decree, but when he commenced proceedings. But if at that date the company had been in a state of declared insolvency, there was no suggestion of a doubt that he would have been bound. The test was, Whether the action was raised or the claim made at such a time that the directors, being satisfied that the allegation was good, would have been entitled and bound to remove the petitioner's name from the list. In Smith it was held that they would have been so entitled and bound, whereas in this liquidation it has already been decided, in Nelson Mitchell's case, supra, p. 155, that they were neither entitled nor bound to alter the register after the 2d, or at least after the 5th October, to the effect of diminishing the assets of the company. That case ruled the present.

On a subsequent day the Court intimated that they desired further argument on the question, How far rescission of the contract had been made impossible by the petitioner's inability to give restititutio in integrum? The liquidators were called on to lead.

Argued for the liquidators—The general doctrine was that a purchase of shares induced by fraud was not in itself void and null, but that it was voidable at the option of the defrauded person. It followed from this that the defrauded person might be deprived of his right to rescind if the position of matters was so altered, while the contract was still standing, as to make it impossible to restore them to the state in which they were when the contract was executed. That might happen in various ways, and one of the ways—that on which they founded in the first part of the argument in this case—was that where the rights of third parties had intervened there was no rescision at the instance of the defrauded person. Another case was where the interests which the person defrauded took under the contract had been so dealt with as to make it impossible for him to restore what he received. In that case he could not have rescission, because he could not give restitution. That was the position of the petitioner here. When he became a shareholder there was still three-fourths of the capital intact, although the whole of the reserve fund was gone. Now the entire capital was lost, and in its place there was a debt of over five millions. This change was the result of the mismanagement of those for whom the petitioner, equally with the other shareholders, was responsible. He was therefore not entitled to rescind, because he could not restore what he had received— Addie v. Western Bank, supra; Clarke v. Dickson, supra. Mackay v. Commercial Bank of New Brunswick, March 14, 1874, L.R., 5 P.C. 394, was not a case of partnership.

Argued for the petitioner—When the shares were bought the bank had already lost one-fourth of its capital and its entire reserve fund. Had this been publicly known the shares would have been worthless, and they could not be worse than that now. There was nothing to give back, because in fact nothing had been received. That, however, was taking the law as the other side stated it. The question did not turn upon the market value of the shares, but upon their identity from a legal point of view. If the petitioner could give back the same thing in legal estimation as he had received, and did not in addition gain some unwarranted advantage, he was entitled to be free, provided there was no laches on his part. Now it could not be said that there had been any laches here—that was one difference between this case and Addie's. Again, he had not reaped any advantage which he was not willing and able to restore, e.g., the dividends. And lastly, he could give back the very shares which he had received. They were worthless, no doubt, but still they were legally the same shares. Here again there was a difference between this case and that of Addie. There the Judges in the House of Lords, especially Lord Cranworth, repudiated the principle of mere deterioration in value, and they went on this ground, that the shares had become different in kind owing to the Western Bank having been converted, for purposes of winding-up, from an unincorporated into an incorporated company; and further, that this change was carried out with the assent of Mr Addie. But there was nothing of that sort here. The English cases, at least in equity, proceeded on the same grounds, that exact restoration in value was not necessary, provided the thing itself was given back without laches or any undue advantage on the part of the person defrauded— Maturin v. Tredinnich, 2 New Reports 514, and 4 ib. 15; Rawsen v. Estate Investment Company, Nov. 20, 1866, L.R. 3 Eq. 122; Blake v. Mowatt, 21 Beavan 603; Rawlins v. Wickham, 3 De Gex and Jones, 304; Venezuela Railway Company v. Kisch, L.R. 2 H.L. Eng. and Ir. App. 99; Baker v. Lever, 23 American Reports 117.

At advising—