Scottish Court of Session Decisions

This was an action by The Struthers Patent Diamond Rock Pulveriser Company, Limited, and James Charles Park, liquidator thereof, against the Clydesdale Bank, for decree against the bank for £1165, 5s. 9d. (with interest at five per cent, from the 27th December 1884), as being money of the company paid away by the bank without sufficient authority, and for which therefore they had no sufficient discharge.

The pursuers' allegation was that the company kept an account with the bank into which £1153, 13s. 9d. was paid from time to time, and that the payments out of the account founded on in defence were not authorised by or binding on pursuers.

The defenders denied liability on the grounds fully stated infra.

It appeared that on 9th October 1883 A. J. Struthers opened an account with the defenders in name of the “Struthers Patent Diamond Rock Pulverising Company, Limited.” The purpose of this company, which was then only projected, and not incorporated, was to send out machines to South Africa for the purpose of crushing the diamondiferons rock there, as in the course of breaking it by the ordinary method there was a great deal of theft by the workers. The profit to the company was to be got from the money paid for the hire of machines made under Struthers' patent. Struthers had previously attempted to start a company in London for the same purpose, but had failed to do so. He raised some funds there, however, for the purpose, and some in Glasgow.

The first money paid into the Clydesdale Bank on this account was a cheque for £76, 8s., dated 3d September 1883, on the “Capital and Counties Bank, Limited,” London drawn by A. J. Struthers and D. Cowan, on account of the “Struthers Patent Diamond Rock Pulverising Company, Limited.” Cowan was one of the proposed directors of the company which Struthers tried to float in London. This cheque was sent for collection, but was returned to the Clydesdale Bank with the words “authority incomplete” across it. Struthers' attention was drawn to this, and he procured another signature to the cheque, “Peter Stewart.” Mr Stewart was a merchant in Glasgow, and was another of the proposed directors of the proposed London company. He had nothing to do with the Glasgow company. The cheque was then paid.

A few days after opening the account, viz., on 13th October, Struthers handed to the bank this letter bearing to be stamped with a stamp of the Struthers Diamond Rock Pulverising Company—“We have pleasure in handing you extract from the minutes of meeting of Tuesday, 9th October.

“‘It was resolved that the following gentlemen constitute the board of directors in Glasgow, viz.:—‘A. J. Struthers, 28 Norfolk Street, London, and 5 Oswald Street, Glasgow.

[ Here followed certain other names.]

‘ 2d, To send out allotment letters to the various shareholders in Scotland.

‘3 d, To entitle A. J. Struthers and W. L. Gardner to sign all cheques and receipts for and on behoof of the Coy.’

All cheques signed by the undernoted.

A. J. Struthers.

W. L. Gardner, Secretary.

A true extract. A.J.S.

A. J. Struthers, Chairman.”

After the bank received the letter above quoted money was paid in from time to time by W. L. Gardner as secretary, and drawn out from time to time on cheques signed by Struthers as managing director, and W. L. Gardner as secretary. Cheques paid in were indorsed by W. L. Gardner, secretary, and A. J. Struthers.”

A minute book of the company was kept, and under date 9th October 1883 was a minute which bore that Struthers and certain other gentlemen were appointed directors of the company, that it had been agreed that allotment letters should be sent out to the various shareholders, and that A. J. Struthers and W. L. Gardner were authorised to sign all cheques and receipts for and on behoof of the company.

On 4th December 1883 the company was registered under the Companies Act 1862 to 1880 as the Struthers Patent Diamond Rock Pulveriser Company, Limited. No notice of the registration was given to the bank. At that time about £437 had been paid in and about £316 drawn out. The articles of association provided that cheques should be signed by two directors, and countersigned by the secretary, or other officer appointed for that purpose.

After registration operations on the account continued to be dealt with in the same way as before it. In October 1884 a communication bearing to be a note of what passed at a meeting of directors was sent to the bank. It bore that the managing director (Struthers) was given power on behalf of the company to sign all cheques on English and Scotch banks. After

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that at least one cheque was honoured which was signed by Struthers alone. There were no minutes after registration.

In November 1884 it was determined that the company should be wound up voluntarily, and that James Charles Park, accountant, should be appointed liquidator. This was agreed to at an extraordinary general meeting of the company on 4th December 1884. At this time all the £1153, 13s. 9d., which had from time to time been paid in on the company's account in the Clydesdale Bank had been drawn out on cheques signed by Struthers and Gardner except £1, 19s. 3d.

The liquidator applied to the bank for payment of the £1153, 13s. 9d., as money of the company paid into their account, and for which there was no proper discharge. This was refused, and this action was then brought.

The case stated by the defenders is contained in the following statement from their defences—“In October 1883 A. J. Struthers opened an account with the defenders' head office in Glasgow in name of ‘Struthers’ Patent Diamond Rock Pulverising Company, Limited,’ into which he and W. L. Gardner paid from time to time sums amounting in cumulo to £1153, 13s. 9d., and upon which he, in conjunction with W. L. Gardner, operated from time to time till 29th October 1884, when there remained a balance at the credit of said account of £1, 19s. 3d. The pursuers' company never opened an account with the defenders. The promoters of the company knew, or ought to have known, of the circumstances above stated, and by their actings led the defenders to believe that the said A. J. Struthers and W. L. Gardner had power to open an account and to operate upon it as they did. The money drawn out of the account was applied for the purposes of the pursuers' company.”

Struthers and W. L. Gardner had both died before the action was raised.

A proof was led. It appeared that, in point of fact, no directors were appointed after registration, that the persons proposed as directors before incorporation continued to be so styled, but that the affairs of the company had been left almost altogether to Struthers.

The Sheriff-Substitute ( Erskine Murray) found that the payments in question were made through negligence on the defenders' part, but that there was contributory negligence on the company's part, and assoilzied the bank.

“ Note.—.. . The liquidator now sues the bank for repayment of all the money paid away by them, on the ground that they did so without proper authority, and are liable to refund.

Now there can be no doubt that technically, and even more than technically, the defenders were in fault subsequently to the registration of the company in paying away money on cheques which were not signed in the mode provided in the articles of association. See Mahoney, 7 L.R. (H. of L.) 869, and Heiton, 4 R. 830. The defenders were bound to examine these articles of association and see for themselves what the articles required. If everything was ex facie conform to the articles, they were safe, even though in reality meetings were never held, directors never properly appointed, or notices never given. But where a thing was clearly in the teeth of the articles they were not justified in paying. As to the time previous to registration, as the rules of joint stock-companies could not apply, it was more like the case of parties using a fancy firm, and payment by the bank to the parties who lodged the money and used the name was justifiable. If, therefore, there was no more in the case, decree would have fallen to be pronounced for the sums paid out since the registration.

But the Sheriff-Substitute is of opinion that the shareholders who are represented by the pursuer were guilty of contributory negligence. Their negligence was quite as great if not far greater than that of the bank, and it contributed to their ultimate loss in a far greater degree than the negligence of the bank. For if the bank had demurred and required the signature of another director, in terms of the articles, it is manifest that nothing could have been easier for Struthers than to get a co-director to sign with him. They were as wax in his hands. The money would have been lost to the shareholders all the same. Whereas, on the other hand, if the shareholders had taken the most ordinary concern in their own affairs, they would have found at once that there were no directors; that there was a minute-book with no minutes of the registered company, and a cash-book with entries therein which was not exclusively their cash-book at all, and that everything was in confusion. The principal shareholders especially, who would profit most if this case succeeds, were the seven who subscribed the articles. They had plenty facilities for knowing the state of matters had they chosen to inquire. Three of them were even acting as directors without any appointment, and actually are now claiming and expecting to get through the liquidator funds which were paid out by the bank in consequence of the letter No. 39, which they themselves had authorised. Surely for this contention to succeed would be monstrous.”. .

The pursuers appealed to the Court of Session, and argued—The Sheriff-Substitute had made a mistake as to the class of cases that this fell under; the question was, whether there was sufficient authority given to the bank to pay away the money lodged, as they did or not. Money paid into a bank for a company before registration, was held for the company if it came into existence, and was all held to be paid in at the date of registration, and could be only drawn out

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in the manner provided by the articles of association of the company. If, on the other hand, the company prove abortive, the money must be paid only to the individual persons who paid it in, and perhaps only under judicial sanction—Lindley on Partnership, i. 252; Mahoney v. The Liquidator of the East Holyford Mining Co. (Limited), July 12, 1875, 7 L.R., E. and I. App. 869. This company was represented as a going concern; the money was lodged on account of a limited company, and the pass-book bore that heading. The entry in the pass-book was evidence against the bank, and the liquidator need not go beyond that— Rhind v. The Commercial Bank of Scotland, February 24, 1857, 19 D. 519. The statements sent to the bank on 13th October 1883 and 1st September 1884, i.e., both before and after registration, bore that the company was a going concern, and the bank ought to have satisfied itself by inspection of the articles of I association that the money was being drawn out in the proper manner; if it did not do so, then it ran the risk of having to repay any money improperly paid out. There was no obligation on the company to send notice of registration to the bank— The Royal British Bank v. Turquand, May 1, 1856, 25 L.J., Q.B. 317, 6 Ellis and Blackburn 327. The article of association which dealt with the powers of the directors in signing cheques on behalf of the company was not merely directory but imperative. None of the cheques on which the bank paid were signed as there required, and as the bank ought to have known of the fact that cheques for the company could only be properly signed in this way, they were liable in repetition of all sums improperly paid out. The liquidator was not barred by the actings of the shareholders from bringing this action. Negligence of individual shareholders could not be set up against the pursuers.

Argued for the bank—In October 1883 Mr Struthers was the whole company, so far as anyone had notice. If the cheques were agreed to be paid when they were signed in a certain way, that was equivalent to a contract between Struthers and the bank, and it was enough to give authority to the bank to pay money to Struthers on his cheques up till 4th December 1883, the date of registration. No notice of the registration or of any change of circumstances was brought under the notice of the bank, and they continued to pay the money on cheques signed by the only persons whom they knew anything about in regard to this account, viz., Struthers and Gardner. This case differed from that of Mahoney, as in that case the bank was the registered bank of the company, and was bound to know the facts connected with the company. The directors had very wide powers of delegation, and could leave the signing of cheques to Struthers and Gardner, even although the articles of association prescribed a different method of signing cheques on behalf of the company. That clause in the articles was merely directory and not imperative— Smiths and Others v. The Hull Glass Co., January 22, 1852, 11 Scot. Rep., C.B. 897; Mahoney, supra. The liquidator was barred by the personal actings of the shareholders from insisting in this claim of repetition. They knew that money was being paid out both before and after registration, and still they left everything in the hands of Struthers, as was shown by the proof. The bank had paid out the money they did on quite proper authority, and were not liable in repetition.