Scottish Court of Session Decisions

The question is, what is the effect of this memorandum, in the first place, as between the parties who subscribed it? I think it is no more than that they are liable for the sums opposite their names with a view to provide the funds requisite to vest them in the property of the foundry works, and to entitle them to deal with them as their own. The memorandum does not explain, and I do not think it at all follows from it, that in the event of a company being formed the subscribers will take shares in it. That is not implied as a matter of contract or of undertaking between the parties, although at the same time I do not doubt that it was agreed that if the money was subscribed the subscribers would take shares. It was not certain that a company would be started. There was obviously this alternative present to the minds of the subscribers, viz., that the foundry works might sell at a greater price than had been paid for them. At the meeting which took place in November 1876 after the purchase of the foundry, that was adopted as the view of the meeting; that course recommended itself, not merely because it might be found difficult to subscribe the capital, as indeed was actually the case, but also because the owners thought they would be able to sell at a larger profit than they could otherwise make. The case of the petitioners, in so far as it is rested upon the minute, cannot be advanced further than this, that there was a general understanding that the parties named had entered into a speculation to the extent of the funds opposite their names, but they were not bound by any mutual contract beyond that.

The company was thereafter formed, not without difficulty, but the capital was subscribed by persons outside, though judging from the allocation of the shares only a very small amount of it was got from the general public. The company did not start under the most favourable auspices, but Fraser had got so much encouragement that it was resolved to launch it, and accordingly a memorandum of association was subscribed and registered. It was subscribed by seven persons, of whom Fraser was one, and the other six were all parties to the original memorandum of October 1876. They were each subscribers for one share, which was all that was necessary under the Act of Parliament. The effect was to make these seven persons, representing £70 of stock, the joint-stock company. The memorandum of association bears that—“We, the several persons whose names and addresses are subscribed, are desirous of being formed into a company, in pursuance of this memorandum of association, and we respectively agree to take the number of shares in the capital of the company set opposite our respective names.”

The company was registered on 3d March 1877. Mr Fraser died the next day, and it certainly cannot be assumed, and it was not the case, that anything happened after the registration of the memorandum of association which could in any way affect Mr Fraser's position. The company so formed had also articles of association drawn up which (art. 83) provided that—“The first directors shall be—Douglas Donald Cameron Menzies, Inverkeithing; James Ross, shipowner, Inverkeithing; Thomas Law, farmer, Boreland, Inverkeithing; Peter M. Thomson, Inverkeithing; Daniel Duncan, shipowner, Rothesay; Robert Slimon, merchant, Leith; with power to add to their number;” and it was further provided that each of these parties, in order to qualify him, should hold ten shares in the company. So soon as they began to act in the capacity of directors, they thereby undertook to take ten shares in the company. That was in addition to the £70 in the memorandum of association. They had an important duty to perform upon coming into office. It fell to them to allot the shares at the meeting held upon 4th June 1877. The secretary intimated that he had received applications for shares from certain parties, and forty-four shares were thereupon allotted to these parties by the directors. They then proceeded to allot to those who had subscribed the memorandum of association of October 1876. But the list of those to whom allotments were made does not contain the whole of the names appended to the memorandum of association. Some had withdrawn, and no shares were allotted to them. But shares were allotted to William Fraser. That seems to have been a blunder. It is impossible to regard Mr Fraser as upon the register of shareholders. Still that is hardly of importance as affecting the question raised in the present case.

The question is, whether the circumstances which happened during Mr Fraser's lifetime constituted him a member of the company and subject to liabilities as such. In order to that result, it seems to me that it will be necessary for the company to show that he had contracted with them so as to make him a member. Even supposing he were bound by the contract into which he entered, under the memorandum of October 1876, that would not have been a contract with the company. I do not think the company would have been bound to give him shares. Still less was he bound to the company to make an application for shares. His brother promoters who signed the memorandum might have a claim against him. I do not think so, but assuming that he was bound to them, they might enforce it against him so as to make good the terms of stipulations of the memorandum. But the binding character of that contract would not regulate in any way his position as regards the company.

I think it is unnecessary to go over more in detail the circumstances of this case. I do not find that there exists what I hold to be indispensable in order to make Mr Fraser's representatives liable to be placed upon the list of contributories, viz., an undertaking by Mr Fraser, their constituent, during his lifetime to take shares in this company.

Lord Deas—I think we must all be agreed that your Lordship has stated all the circumstances which have to be taken into account in this case. It raises a question of law, whether Mr Fraser, and consequently his representatives, are bound to the company? Equitable considerations are not enough in such a case. We most consider whether there was a binding contract made with the company during the lifetime of Mr Fraser. It is clear that there was no mutual contract between Mr Fraser and the company, and that being so, I am humbly of opinion that nothing more is needed to entitle us to hold that Mr Fraser's representatives ought not to be placed upon the list of contributories by the petitioners.

Lord Mure concurred.

Lord Shand—It is impossible to read the evidence in this case without coming to the conclusion that must of the shareholders were induced to take shares in the company by Mr Fraser, and that too upon the footing that he was to take £1000 of stock, for which amount the liquidators now seek to make his representatives liable. It is quite true that in the original memorandum the parties to it were not committed to any particular form of joint-stock company. But the proposal was made which ultimately led to the formation and registration of the company. Between the date of the original memorandum and the date when Fraser endorsed the printed private prospectus of the company there were several meetings of the promoters, which show distinctly that Fraser was to hold £1000 of stock. No doubt he was registered for one share only; but we have Mr Cruickshank's evidence in regard to that, that when Mr Fraser's attention was drawn to it, and he was asked what was meant by one share, he (Mr Fraser) replied—“Oh, that is a mere form. You know I have £1000, and you have £500. That putting one share is a mere form. It makes no difference. It is known what you have and what I have.” So that, if I had seen legal grounds upon which I could have proceeded, I would have held Mr Fraser's representatives liable to be put upon the list of contributories.

But upon consideration of the evidence I cannot see any good grounds for holding that Mr Fraser agreed to become a partner of this company. It was maintained for the petitioner that the company were bound to give Mr Fraser shares, because the incorporators had arranged amongst themselves that he should take shares. But that contention is unsound, because the company were not bound by any such agreement which was not part of the articles of association. Besides, as was pointed out by the respondent's counsel, there is a clause in the articles of association to the effect that the directors shall have an unfettered discretion in the allocation of the shares. On the other hand, there was an agreement between the promoters binding Mr Fraser to take shares as between themselves. But the point in which the case of the liquidators fails is, that if there was an agreement between the promoters themselves there never was any with the company. I do not think that Mr Fraser ever undertook such an obligation to the company itself after it was registered. Such an undertaking would have required writing as between him and the company, or at least an unequivocal mandate entitling the other promoters to take shares upon his behalf. But Fraser having died immediately after the registration of the company, and nothing having been done to allocate the shares before that time, I do not think the company were entitled to allocate any to him as they subsequently did. And therefore I do not think the liquidators of the company are now entitled to place his representatives upon the list of contributories in the liquidation.