Scottish Court of Session Decisions

This was an action of reduction at the instance of William Howe against the City of Glasgow Bank and liquidators, and also against Alexander M'Ewen, raised on the 23d November 1878, with a relative petition for the rectification of the register of members and removal from the list of contributories to the bank. The Lord Ordinary ( Young) dismissed the action as irrelevant, but the Court allowed the record to be amended, and thereafter granted a proof before answer. The following were the material averments of the pursuer as amended:—“(Cond. 2) On or about 7th August 1878 the pursuer purchased from the said defenders stock in the bank to the nominal amount of £500, for which he paid to the defenders a price at the rate of £236 per cent., amounting with stamp and other charges to the sum of £1186, 8s. 3d. (Cond. 3) The pursuer made the said purchase through the defenders the City of Glasgow Bank. Upon the said defenders' representations after mentioned, the pursuer communicated directly to the said defenders, acting by their authorised officials after named, in the bank's offices in

Glasgow, his order or offer for stock to the amount of £500. By virtue of various provisions in the bank's contract of copartnery, and in pursuance of an established and recognised course of dealing, the said defenders, acting as aforesaid, had frequently quantities of stock at their own disposal, and portions thereof were from time to time sold and transferred by the said defenders as sellers to suitable persons in the pursuer's position; or the said defenders, when they had an order or offer for stock from a suitable person, purchased or acquired the stock required, and on payment by him caused the transfer to be executed in his favour. In the latter case, which also was authorised by the contract of copartnery and the said course of dealing, the said defenders acted in the purchase as agents for the transferee, and undertook to him, as in this transaction with the pursuer, the duties and responsibilities of agents. The said defenders, acting as aforesaid, having received the pursuer's said offer or order for stock, demanded £236 per cent, on behalf of the then undisclosed seller for whom they were acting, and having induced the pursuer to agree to this price, they thereafter, on or about 7th August 1878, intimated to the pursuer that they had procured stock to the amount wanted by him, and that they had advanced the price to the seller. The pursuer upon the same day, at the request of the said defenders, paid to them the price, as intimated by them, amounting in all, as aforesaid, to £1186, 8s. 3d. The said purchase and payment by the pursuer were induced by the frauds of the said defenders hereinafter libelled on. The said defenders, acting as aforesaid, in violation of their duties to him as his agents in the purchase, thereby betrayed him into what they then knew to be a ruinous purchase. (Cond. 4) The transfer of the said stock, executed by the defender the said Alexander M'Ewen on or about said 7th August 1878, and also executed on the same day by the pursuer, disclosed for the first time to the pursuer the name of the said Alexander M'Ewen as the seller for whom the said bank had negotiated the sale to the pursuer. It now appears that the said Alexander M'Ewen, who had been a shareholder from 1875, bad, previous to the pursuer's application, employed the bank, acting as aforesaid, to procure a purchaser and to sell the stock on his behalf. Messrs John Turnbull and Robert Murdoch, respectively the cashier and assistant cashier of the bank, were the officials who personally accepted and acted upon the said Alexander M'Ewen's order to sell; and they both, or one or other of them, were also the officials with whom the pursuer personally communicated, and who negotiated the sale to him. They so acted in accordance with a course of dealing recognised by the bank, and known to the public and the shareholders, under which the bank through them negotiated between shareholders wishing to sell their stock and intending purchasers, and their actings in such negotiations were authorised and sanctioned by the directors and manager. In this case the said John Turnbull and Robert Murdoch negotiated the sale only after submitting the order from the said Alexander M'Ewen to Robert Summers Stronach, the manager of the bank, and only after he personally, by authority of the directors, had given instructions that the sale to the pursuer

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should be negotiated by the bank. The said Robert Summers Stronach personally knew, approved of, and concurred in the whole proceedings of the said John Turnbull and Robert Murdoch in the matter of the said sale. A certificate, signed by the said John Turnbull for the manager, was issued in name of the pursuer, as alleged holder of the said £500 stock, dated 12th August 1878, which is herewith produced, but the said stock was never duly entered in his name in the stock ledger or register of the bank.” And in the petition the pursuer explained that, owing to the circumstances already mentioned— Macdonald Hume's case, supra, p. 291—his name had not been substituted for M'Ewen's until after the bank had closed its doors. “(Cond. 5) By the terms of the transfer granted by the defender the said Alexander M'Ewen in the pursuer's favour as aforesaid, the said Alexander M'Ewen, in consideration of the. said price paid to him, professed to ‘sell, assign, transfer, and make over’ to the pursuer ‘£500 sterling of the consolidated capital stock of the City of Glasgow Bank Company, with the whole interests, profits, and dividends that may arise and become due thereon.’ The subject of the pretended sale did not exist at the date of the said transfer, the whole capital stock of the said bank having been irretrievably lost prior to the said date. The pursuer never had made over to him any part of an actually existing capital stock or fund answering to the description and the warranty expressed or implied in the sale to him. Any partnership in the bank to which the pursuer agreed as for the said stock was a mere consequent of the alleged sale of stock above mentioned, and such sale was a mere simulate transaction in the form of a sale brought about by the defenders, in which there was no object. The sum taken by the defenders from the pursuer in name of price was so taken by the defenders without their giving in exchange the stipulated consideration, or any consideration whatever. (Cond. 6) The pursuer was induced to purchase the said £500 stock at the date above mentioned by false and fraudulent representations made by the defenders the said City of Glasgow Bank as to the state of their affairs. Such representations were made in the annual reports and abstract balance-sheets as at the first Wednesday of June in each year, and these reports and balance-sheets were made public at general meetings of defenders' company held in terms of articles 12 and 44 of the def enders contract of copartnery, and particularly in July 1878. These reports and balance-sheets were by authority of the said defenders published in the newspapers, and they were communicated to the pursuer as a member of the public and an actual or possible purchaser of stock. The representations contained in the said reports and abstract balancesheets, and to the effect thereof, were specially held out, continued, and confirmed to the pursuer by the said defenders, on the occasion of the sale to him, as inducements to purchase the said stock at the date above mentioned; and the pursuer, as the said defenders well knew, purchased in the belief that the said reports and representations were true. Special representations apart from the reports of the directors, approved of by the company, were made by the said John Turnbull and Robert Murdoch, with concurrence of the said Robert Summers Stronach. They did so acting within the powers conferred on them by the directors. They, in order to induce the pursuer to purchase, and with the effect of inducing him to purchase on the terms demanded by them for the seller's behoof, specially directed his attention at the time of the sale to the market price of the bank stock following upon its last published report and balance-sheet of July 1878, and represented to the pursuer that the £500 stock now in question was worth the said £236 per cent., while at the same time they fraudulently concealed from the pursuer the facts then known to them and the said Robert Summers Stronach—that the bank was insolvent — that the last published report and balance-sheet gave an untrue account of the state of its affairs—that the market price of the stock following thereon was fictitious and misleading — that the stock was really worthless—and that the capital had been lost. If in the present case the said Robert Summers Stronach, John Turnbull, and Robert Murdoch be held to have acted, not as the representatives of the bank, but merely as individuals, the pursuer was induced to purchase by the fraudulent misrepresentations and concealments on their part as individuals, and as agents for the seller, which are above mentioned. The pursuer produces herewith and refers to the annual report and abstract balance-sheet in his possession for the year ending June 1878, published and communicated to the pursuer before his purchase. (Cond. 7) The said defenders' reports and abstract balance-sheets, and specially those of 1878, when the pursuer purchased the said £500 stock as above mentioned, were vitiated by mis-statements and misrepresentations to such an extent as to be wholly false and fraudulent, and to present an entirely untrue account of the state of the defenders' affairs. More especially, the pursuer complains of the representations contained in the said reports, and held out and continued to him as inducements to purchase, to the effect that the capital was intact, that the assets were not only equal to but much exceeded the liabilities, that the profits were such as to yield dividends averaging from 10 to 12 per cent., and to afford the accumulation of a large reserve fund, and that the stock was well worth the price which the pursuer paid to the defenders therefor. (Cond. 8) All the representations upon the faith of which the pursuer purchased the said £500 stock on the date above mentioned were false. The capital had been lost before the pursuer purchased; there was no reserve fund; and the assets were not equal to, but less by a very large amount than the liabilities; no profits were really being made from the business, taken as a whole, and the pretended stock which the pursuer was induced to purchase as aforesaid, was, at the date of purchase as above mentioned, worthless, and was, on a true state of the bank's affairs, merely then, as now, a share in a hopelessly insolvent concern, necessarily involving the holder in ruinous liabilities. (Cond. 9) All the representations by the defenders hereto other than the liquidators, on the faith of which he purchased the said £500 stock on or about the said 7th August 1878, were fraudulent. They were made, held out, and continued to the pursuer on the occasion of the sale to him by the said defenders acting by the directors, and by the

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said Robert Summers Stronach the manager, the said John Turnbull the cashier, and Robert Murdoch the assistant cashier of the bank, all, or one or more of them, in the knowledge that they were false. It now appears that the bank's funds, to the amount of several millions, had been recklessly put into the hands and at the disposal of a few persons, consisting of the Glasgow directors individually and their friends, or the firms with which they were connected, and that without any security, or on grossly inadequate security. In 1873 four of these firms alone, viz., Morton & Co., Smith, Fleming & Co., James Nicol Fleming, and Innes Wright & Co., had received such advances to the amount of about four millions sterling, and these advances, along with others subsequently made, practically constituted the deficit of about six millions ‘sterling which was disclosed at the stoppage of the bank in October 1878. The funds were thus thrown into the hands of a few speculators, contrary to all the rules of banking business, and the annual reports were framed for the purpose of concealing the true state of affairs. A heavy loss had accrued prior to pursuer's purchase, but in the reports and balance-sheets, and specially those for the year ending June 1878, the amount of liabilities was understated, and their nature was mis-stated. On the other side, the assets are overstated by including debts known to be bad to the amount of several millions, and by stating securities at amounts beyond their known value. In order still more completely to ensure the credit of the bank, the directors and manager thereof kept the bank stock up to a fictitious price, by employing brokers on the Glasgow Stock Exchange, with instructions to buy when necessary any stock offered for sale in public market, and for the same end the directors and manager of the bank encouraged in every possible way the negotiation, under their supervision and authority, of sales of stock privately through the agency of the officials in the head office of the bank in Glasgow. In this way, in the case of the pursuer's purchase, the bank, as agent for the shareholder wishing to sell out, procured for him by deliberate fraud a purchaser at a large premium—the bank, through its directors and manager and the other officials personally concerned in negotiating the sale, being aware of, but misrepresenting and concealing from the purchaser, the true state of the bank's affairs. During the year 1878, before the pursuer's purchase, the bank's affairs were rapidly approaching the final crisis. In the beginning of 1878 renewals of the bank's bills were being refused in London, and the reserve gold, which should have been held against the note issue, was being secretly sent by the directors and manager to London to meet the bank's obligations there. This operation was concealed by the falsification of the official weekly returns of reserve gold, which falsification was effected by the said John Turnbull and the said Robert Summers Stronach, acting by authority of the directors, and with the knowledge of the said Robert Murdoch. The pursuer was deceived, and acted in essential error under the influence of the fraudulent misrepresentations and concealments of the bank, acting on behalf of the said Alexander M'Ewen by its directors, and by the said Robert Summers Stronach, John Turnbull, and Robert Murdoch, in the matter of the sale to the pursuer, and he had no means of discovering, and did not discover, the frauds by which he was induced to purchase until shortly before the raising of this action.”

The pursuer pleaded—“(1) The pretended sale to the pursuer being void and of no effect in law, the pursuer is not a member of the City of Glasgow Bank. (2) The pursuer's purchase of stock, and his consequent agreement to become a member of the said company, having been induced by false and fraudulent representations of the bank defenders, as above libelled, he is entitled to be restored against the said frauds. (3) As against the City of Glasgow Bank, by reason of the nullity of the sale, as well as of the frauds practised by the bank upon the pursuer, as above libelled, the pursuer is entitled to total relief, by reduction, removal of his name from the register, interdict against calls, and repayment of the price. (4) As against the defender Alexander M'Ewen, the pursuer is entitled to total relief, by reduction, removal of his name from the register, and the substitution therefor of that of the said defender, and to repayment of the price, in respect (1) of the nullity of the sale, and (2) that the said defender is not entitled to retain any benefit obtained for him by the frauds of the bank, or of the said Robert Summers Stronach, John Turnbull, and Robert Murdoch, all or one or more of them. (5) Alternatively, as against the City of Glasgow Bank, the pursuer is entitled to decree for damages to the amount concluded for, in reparation of the loss, injury, and damage caused to him by and through the frauds of the said defenders above libelled on. (6) Further, and in the event of the pursuer not obtaining removal of his name from the register, and interdict against calls, the pursuer is entitled, inter socios of the City of Glasgow Bank, and in a question with the said Alexander M'Ewen, to decrees of reduction and repayment of the price, and to relief against calls. (7) The pursuer, upon the facts and circumstances set forth in the condescendence, is entitled to decree or decrees in terms of the conclusions of the summons, with his expenses of process.”

The pursuer therefore concluded for reduction of the various documents by which it was sought to make him a shareholder and contributory, for declarator that he was not a member of the company, and for repayment from all the defenders jointly and severally of the sum of £1186, 8s. 3d.; and in any event for such reduction, declarator, and repayment as in a question inter socios of the bank and with the defender M'Ewen, with relief against the defenders from his liabilities as a member of the company, or otherwise for £10,000 damages from the defenders the bank.

The purport of the proof will be found in the opinions of the Court infra.

Argued for the pursuer—The fraudulent misrepresentation consisted mainly in the issue of the false report and balance-sheet. It was that, together with the silence if not positive misrepresentation of the officials who actually transacted with the pursuer, which induced him to purchase the stock. Now, that being so, the defender M'Ewen at any rate was liable for the fraud of his agents; for that the bank or its officials were his agents did not admit of doubt. The practice of the bank to act as it did here was amply proved,

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and in this case there must hare been an agent, for the seller and purchaser never met, and the seller's name was not disclosed to the purchaser until the time of signing the transfer. Lastly, in a question with the defender M'Ewen, it was enough if the fact of agency was proved; the question of the power of the bank to become a stockbroker did not enter here. At all events, the bank officials personally acted as the defender M'Ewen's agents. M'Ewen was therefore liable. But (2) the bank was also liable. The fraud was the fraud of the bank, and it was not ultra vires for its officials to embark the bank in the business of brokers of its own stock. Such a business was not prohibited by the contract of copartnery, which permitted the bank to purchase its stock on its own behoof. Then it was shown to be the practice of the bank to act as it had done here, and this plus the benefit of manipulating the stock market brought the case within The National Exchange Company v. Drew and Dick. The bank therefore was also liable.

Authorities — National Exchange Company v. Drew and Dick, May 31, 1850, 12 D. 950—March 9, 1055, 2 Macq 103; Traill v. Smith's Trustees, June 3, 1876, 3 R. 770; Clydesdale Banking Company v. Paul, March 8, 1877, 4 R. 626; Barwick v. English Joint-Stock Bank, May 18, 1867, L.R., 2 Excheq. 259; Mackay v. Commercial Bank of New Brunswick, March 14, 1874, L.R., 5 P.C. 394.

Argued for the defenders—(1) The evidence of misrepresentation had entirely broken down. The false report and balance-sheet proved nothing, for these had not by reference at the time been made part of the contract. The officials alleged to have bound the bank made no representations, and besides they were mere subordinates, who were ignorant of the insolvent condition of the bank. (2) It was ultra vires of the officials of this bank, and certainly of its assistant cashier, to engage it in the business of broker in the sale of its own stock; and therefore the fraud of the officials in such a business, however clearly proved, could not bind the bank.

Authorities— Allan v. Wright, June 7, 1853, 15 D. 725; Inglis v. Lumsden, January 4, 1859, 21 D. 192; Addie v. Western Bank, March 4, 1864, 2 M. 809—June 9, 1865, 3 M. 899—May 20, 1867, 5 M. (H.L.) 80, and 1 L.R., Sc. Ap. 145; Royal British Bank ex parte Nicol, January 22, 1859, L.J., 28 Ch. 257; Weir v. Bell, May 18, 1878, L.R., 3 Excheq. Div. 238 (Lord Justice Bramwell.)

At advising—