Scottish Court of Session Decisions

In 1883 George V. Mann, S.S.C., and William Hamilton Beattie, along with some other persons, promoted a bill in Parliament for the incorporation of a company to construct and work certain lines of cable tramway in Edinburgh. In that year the bill was thrown out, but another bill was promoted and passed in the ensuing year, and became “The Edinburgh Northern Tramways Act 1884,” the Royal Assent being given on 7th August 1884, and under this bill the Edinburgh Northern Tramways Company was incorporated with an authorised capital of £90,000 in 9000 shares of £10 each. During the progress of the bill through Parliament the interests of the promoters and the projected company was to a large extent entrusted to Messrs Mann and Beattie, and before the bill had passed they opened negotiations with the Cable Corporation, Limited, a company who were in possession of certain patents for the construction of cable tramways, which after the passing of the bill resulted in the following contract and agreement.

By contract between the Cable Corporation and the Northern Tramways Company, dated 24th October 1884, it was agreed, inter alia, (1) that the corporation should, at their own cost, purchase and convey to the company certain heritable property in Edinburgh; (2) that they should construct the tramway lines authorised by the company's Act; (3) that they should pay or provide for the whole costs, charges, and liabilities incurred by the company in obtaining their Act; and (4) that in consideration of these obligations the Cable Corporation would receive the sum of £3000 from the Tramways Company by monthly instalments, and in shares and mortgages of the Tramways Company if that company did not have cash in hand.

By agreement, dated 25th October 1884, between the Cable Corporation and Messrs Mann and Beattie, on the narrative that the corporation had by the foresaid contract undertaken to pay the costs and liabilities incurred in obtaining the company's Act, and “with a view to fixing the amount they may be called upon to pay under the said contract,” it was agreed (1) that Messrs Mann and Beattie should relieve the corporation of the liability it had undertaken as aforesaid for the expenses of the Act; and (2) that in respect thereof the corporation should pay to Messrs Mann and Beattie the sum of £17,000 (£5000 in cash, £8500 in debentures by the corporation, and £3500 in fully paid-up shares of the company).

These two agreements were in reality part of the same arrangement. At the time when they were entered into, Messrs Mann and Beattie were respectively the agent and the engineer of the Tramways Company, and were especially charged with the duty of arranging the contract for the construction of the company's works.

In February 1889 the Edinburgh Northern Tramways Company brought an action against Mann and Beattie, concluding in the second place for decree ordaining them to render account of all moneys, shares, or debentures received by them in virtue of the agreement of October 25, 1884, on the ground that when occupying a fiduciary relation towards the company they had entered into an agreement to their own advantage and the company's prejudice, and were bound to communicate to the company the benefit received by them at its expense.

The defenders denied that they had received under the agreement of 25th October 1884 more than the costs of the Act, and the legitimate expenses of the promotion of the company, and further averred that the pursuers' company had never truly become a public company, but that its shares had all along been held by nominees of, or persons who represented the defenders, their co-promoters, and the Cable Corporation; and that all the parties who had even had any interest in the pursuers' company had either been parties to the agreement challenged, or had subsequently confirmed the same, or had acquired their shares in the knowledge thereof.

They pleaded—(3) The pursuers' company are barred by their actings and acquiescence, as condescended on, from pursuing the present action. (5) The second and remaining conclusions of the summons being based on the ground that the defenders Mann and Beattie occupied a fiduciary relation to the company when they entered into the agreement of 25th October 1884 and compromise of 31st May 1886, and the whole persons who have at any time been interested, either directly or indirectly, in the shares of the pursuer's company, having been parties to, or being bound by said agreement, these defenders should be assoilzied from these conclusions.

A proof was allowed from which the following facts appeared—Following on the agreement of 24th October 1884, 500 shares of the pursuers' company were transferred to the Cable Corporation, and in part implement of the agreement of 25th October the Cable Corporation paid the defenders the sum of £5000 in cash.

The Cable Corporation, however, delayed

Page: 830↓

to proceed with the execution of their contract for the construction of the lines, and in consequence, as the time allowed for the execution of the works had not expired, and the Tramways Company could therefore not sue on their contract, it was resolved, at a meeting of the directors of the Tramways Company on 28th September 1885, “that Messrs Mann and Beattie be requested to sue the corporation for the expenses of and incidental to the formation of the company, and which the corporation had undertaken to pay.”

An action was accordingly raised by Mann and Beattie in England against the Cable Corporation, the main conclusions of which were for specific performance of the agreement of 25th October 1884, so far as it remained unfulfilled, and for an injunction to restrain the corporation from dealing with the 500 shares in the Tramways Company which had been issued to them in such a way as to prejudice the plaintiff's security under the agreement of 25th October 1884. The Cable Corporation by way of defence stated a counter claim to have the agreement set aside, and the £5000 which had been paid under it repaid. The Cable Corporation further raised an action in the Court of Session against the Tramway Company and Messrs Mann and Beattie for reduction of the contract of 24th, and the agreement of 25th October 1884. The parties thereafter entered into negotiations with each other, and these negotiations resulted in agreements being come to, which were embodied in two documents called heads of compromise, and formed a settlement under which the actions were taken out of Court. These documents were both dated 31st May 1886, and were entered into at the same time. By the agreement between the Cable Corporation and Messrs Mann and Beattie the former agreed to transfer to the latter, “in further part payment under agreement of 25th October 1884,” 350 fully paid shares of the Tramways Company; to pay the interest due on the £8500, for which the corporation were bound to issue them their debentures, and in security of said £8500 debentures to transfer to trustees 150 shares of the Tramways Company and 20 per cent of the shares, debentures, bonds, or cash, which they should receive under their contract with the Tramways Company. By the compromise between the Tramways Company and the Cable Corporation the contract of 24th October 1884 was modified, the price to be paid by the Tramways Company being increased to £98,000, and this compromise was also embodied in an agreement between the Cable Corporation and the Tramways Company dated July 22, 1886, supplementary to the agreement of 24th October 1884.

Prior to this settlement the Cable Corporation had been in difficulties, but about the time of the compromise the Debenture Corporation, Limited, agreed to advance them £40,000, for which the Cable Corporation granted mortgage debentures, and to secure repayment of the £40,000 the Cable Corporation executed an assignment to the Debenture Corporation of, inter alia, the benefit of their contracts with the pursuers' company and their interest in all moneys, shares, and debentures issuable thereunder, subject to the agreement of 25th October 1884 as modified by the terms of compromise. Thereafter by deed dated 4th January 1888 the Debenture Corporation assigned the debentures they held of the Cable Corporation and all rights effeiring thereto to the Assets Realisation Company, but subject to the agreement of 25th October 1884 as subsequently varied.

After the execution of the agreement of July 1886, part of the works which the Cable Corporation had thereby and by the contract of 24th October 1884 agreed to execute, were carried out on their behalf by their sub-contractors, Dick, Kerr, & Company, of London, and part of the line was opened in January 1888. From time to time during the progress of the works the Cable Corporation became entitled to certain payments, and the Tramways Company in satisfaction thereof elected in terms of their contracts to issue them shares and mortgages of the company to the amount thereof. In February 1888 4500 shares had been issued, and of these 3190 were held for behoof of the Assets Realisation Company in security and the Cable Corporation in reversion. The remaining 1310 were held as follows 255 by the defenders and their nominees; 923 in trust for the defenders under their agreement with the Cable Corporation; 120 by the first directors of the company who had been promoters, and whose qualifications had been in part paid by the defenders; 2 by the first auditors of the company; 5 by the agent in London who had acted for the defenders at the time of the contract and agreement of 24th and 25th October 1889 in the action against them at the instance of the Cable Corporation; and 5 by a director of the Cable Corporation.

In January 1888 the Cable Corporation was by order of the Court of Chancery appointed to be wound up, and thereafter Dick, Kerr, & Company, who were creditors of the corporation to a large amount, with the approval of the Court purchased the whole assets of the Cable Corporation, including the shares and mortgages of the pursuers' company held in trust for the Assets Realisation Company. This arrangement was embodied in an agreement dated 22nd May 1888 between the liquidator of the Cable Corporation, the Assets Company, and Dick, Kerr, & Company, in which it was declared that the said assets were sold subject to all incumbrances, if any, having priority over the said mortgage debentures, and to all agreements affecting the same, and that the purchasers should accept such title as the Cable Corporation and the Assets Company had to the property to be sold. In a schedule to the agreement, the agreements between Mann and Beattie and the Cable Corporation were, inter alia, set forth.

On 15th June 1888 an agreement was concluded between Dick, Kerr, & Company, the Cable Corporation and its liquidator,

Page: 831↓

and the Tramways Company, whereby Dick, Kerr, & Company undertook to complete the unfinished portion of the Tramways Company's lines for a sum of £75,000 (60,000 in fully paid shares and £15,000 in mortgage debentures), and that agreement was afterwards sanctioned by the Court of Chancery.

No prospectus of the pursuers' company was ever issued, nor was the company ever advertised. The defenders failed to show that the pursuers' company had ever directly confirmed or adopted the agreement in question.

On 18th July the Lord Ordinary ( Trayner) pronounced this interlocutor:—“Finds that the defenders George Villiers Mann and William Hamilton Beattie are bound to account to the pursuers for the whole sums of money, debentures, shares, or other considerations received by them under and in virtue of the agreement entered into between them and the Patent Cable Tramways Corporation, Limited, dated 25th October 1884: Appoints the said defenders to lodge in process by the first sederunt day of next session an account of all sums of money, debentures, shares, or other considerations received by them under said agreement, as also an account or accounts of all sums which they claim respectively to be entitled to set against the before-mentioned sums of money, debentures, shares, or other considerations, with the vouchers of such account or accounts: Quoad ultra continues the cause: Grants leave to reclaim.”

“ Opinion.—… . These two documents—the contract and the agreement [of 24th and 25th October 1884]—although bearing to be executed of different dates, were in reality parts of one transaction arranged and agreed upon by the corporation and the said defenders, the purposes of which were, on the one hand, to secure to the corporation the contract for constructing the authorised tramway lines in Edinburgh, and, on the other, to secure to the said defenders payment of the sum of £17,000. This transaction presents several objectionable features. In the first place, it was in violation of the stipulations made by the corporations of Edinburgh and Leith in giving their consent to the construction of the tramways (consents without which the Act obtained by the company would not have passed), to the effect that the contract for the construction of the lines should be offered for public competition. These stipulations—stated as plainly as language could state them in the agreements which were scheduled to the Act—were stipulations which the corporations who made them had an undoubted interest to enforce. The transaction between the Cable Corporation and the defenders Beattie and Mann was entered into with these stipulations fully in view, and the pretence they made—for it was only pretence—of advertising the contract as one open for competition, only shews that the violation of the foresaid stipulations was deliberate and intentional. Secondly. The transaction was in violation of the duty which the defenders owed to the pursuers' company. The defender Mann was the solicitor of the company, and Beattie was its engineer; and they were charged with the interests of the company, whom (and at whose expense) they were in London representing. The interest of the company clearly was to have the construction contract given to the contractor who would undertake it at the lowest price. Instead of this, however, without competition, and indeed without any honest inquiry as to the amount for which any other contractor would undertake the construction of the line, the defenders agreed to give, and did give, the construction contract to the Cable Corporation at a price agreed upon between themselves, that price including a sum of £17,000 to be paid to the defenders. Thirdly, If the defenders had claimed from the company, for whom they were acting, the amount due to them for work done and disbursements made in connection with obtaining the company's Act, it is plain that they would have required to have given a detailed and, to some extent, a vouched account of such work and disbursements. By including the £17,000, however, in the contract price of £93,000 the defenders were adopting a course by which the rendering of any such account would be made unnecessary, and all examination of such account avoided. That this was the purpose and intention of the defenders in entering into this transaction becomes to my mind clear enough from the attitude which the defender Mann assumed towards Mr Turnbull, one of the company's directors, when he demanded from Mr Mann ‘particulars of the amounts which had been paid towards expenses.’ I think this purpose and intention is further evidenced by the mode in which the transaction was carried out. It being one transaction, it could easily, and would naturally, have been embodied in one deed, if nothing more was intended to be done than to give expression to the agreement which had been concluded. It would have been as easy in the construction contract to have said that the Cable Corporation had undertaken out of the contract price to pay Mann and Beattie £17,000 in full payment of the expenses incurred in connection with the obtaining of the company's Act, as to say that they, the corporation, undertook to relieve the company of liability for such expenses. To have done so, however, would have brought the bargain between Mann and Beattie before the consideration of the company, and would probably have led to the inquiry which the defenders, I think, desired to avoid. Accordingly the second deed, in the form of an agreement between the Cable Corporation and the defenders, was executed, as a deed embodying a bargain with which, as Mr Mann expresses it ‘the directors had nothing to do.’ Lastly, The sum of £17,000 to be paid to the defenders was not fixed upon a consideration of any account of what charges were due to them, or of what disbursements they had made—it was a mere guess.

It is not enough, however, to entitle

Page: 832↓

the pursuers to the accounting which they seek that the transaction I have been dealing with presents features which are objectionable, or that the circumstances surrounding it throw some discredit upon its character. It may still be a transaction of which the defenders are entitled to take any benefit which it confers, and one which the Pursuers cannot now effectually challenge. This is the position which the defenders now maintain, and I proceed to notice the grounds on which they maintain it.

First, It is said that the £17,000 is not ‘promotion money,’ in the usual sense of that term, which the defenders are bound to refund. This may be so, but it does not seem to me to be material by what name the £17,000 may be called. The defenders may be bound to account for the £17,000 although it was not in the ordinary sense promotion money.

Second, The defenders plead that the pursuers are barred from insisting in the present action by reason of their actings and acquiescence. So far as I can gather from the proof, there have been no ‘actings’ on the part of the pursuers which would bar their present demand. As regards acquiescence, it is plain enough that the pursuers could not acquiesce in a matter of which they had no knowledge, and therefore it has to be considered, first, what knowledge they had of the agreement in question, and when they obtained it.

There is evidence given by Mann and Beattie to the effect that the construction contract and the agreement were both submitted in draft to a meeting of the directors of the pursuers' company held on 19th August 1884, and this is corroborated by Major Boulton, one of the directors, who was present. I am of opinion that this evidence does not prove the fact. (1) The evidence of Mr Mann and Mr Beattie is open to the observation that it is the evidence of interested parties, and I say no more about it than this, that it is insufficient to satisfy me if not supported. (2) While I say nothing against the truthfulness of Major Boulton, it is plain that his recollection is not good. He admits that in another action he gave evidence recently to an effect quite different from and contradictory of that which he now gives. (3) There are other two persons who were present as directors at the meeting referred to, available as witnesses for the defenders, who were not called. (4) The minutes of that meeting made no reference whatever to the construction contract or the agreement having been produced, read, or exhibited at the meeting. On the contrary, the minutes contained an authority to certain persons (including the defenders) ‘to solicit offers from persons likely to enter into suitable arrangements, both as regards construction and capital, advertise for tenders,’ &c., which could scarcely have been done if the deeds I have mentioned had been before the meeting showing that the construction’ had already been arranged for, and that further advertisement ‘for tenders’ was consequently unnecessary. (5) Mr Turnbull was present at this meeting, and if the agreement had been read and explained then he would not have made the demand which he subsequently made on Mr Mann for information regarding the amount paid as the expenses of obtaining the Act—information which Mr Mann refused to give. And (6) it is difficult to understand why Mr Mann should have refused the information sought by Mr Turnbull on the ground that it was a matter with which the directors had nothing to do, if that information had already been given, even partially, to a meeting of directors as now stated. I am of opinion, for the reasons I have given, that it is not proved (not to put it higher) that the agreement between the Cable Corporation and the defenders was submitted or brought to the knowledge of the directors of the pursuers' company at their meeting of 19th August 1884. If not brought to their knowledge then it is not proved that it was brought to their knowledge until long after it was concluded and partly implemented by the payment of £5000 in cash. Even when brought to the knowledge of the pursuers' directors it was never approved or adopted, and it is certain that the directors never had before them, and never asked, the necessary information to enable them to determine whether they should approve of the agreement or not. If the directors had approved of the transaction embodied in the agreement as one which authorised the defenders to charge the company, or take payment out of its funds of a sum of £17,000 in name of expenses for obtaining the Act, without the production of an account or a single voucher showing how that expense had been incurred, I should have held any such approval or adoption of the agreement in such circumstances as ultra vires of the directors, and in no way binding on the company. I do not take into account in this connection the question whether the then directors were independent of the defenders, or whether the defenders furnished the directors with their qualification. But there is enough proved to show that the directors were at least to a large extent indebted to the defenders for their qualification, and the pursuers' suggestion that the defenders' generosity to the directors was not quite disinterested does not strike me as being improbable.” …

The fifth plea brings me to what I think is the real point in the case. It appears to me to be established that the defenders, while occupying a fiduciary relation to the pursuers' company, entered into an agreement to their own advantage and to the detriment of the company to which effect should not be given. As I have already stated, the defenders at the date of the agreement in question were, the one the solicitor and the other the engineer of the company. Not only so, but they were, when the agreement was made, in London specially charged with watching over the interests of the company. They took advantage of their position to arrange that they should be paid out of the company's funds (the amount which the company were to pay for the construction of their lines)

Page: 833↓

a sum for their expenses in promoting and carrying the company's Act through Parliament, which included, as is now admitted, expenses not incurred with reference to that Act. So far as the advantage thus obtained by the defenders was gratuitous, they were bound to communicate it to the pursuers. I think the defenders must now account for the £17,000 which they received under that agreement in cash or securities. Whatever they can show was really due to them in connection with the passing of the company's Act of 1884 they will be entitled to retain. But I think they cannot charge against the pursuers' company any expense incurred in connection with the bill of 1883 which did not pass.”

The defenders reclaimed, and argued—The shares of the pursuers' company had never been issued to the public, and when the Lord Ordinary spoke of the company, he was really speaking of the defenders, the Cable Corporation and their nominees. All these parties knew of the agreement now challenged. The Lord Ordinary had found that knowledge on the part of the company or those interested in it had not been proved, and had referred, inter alia, to the late Mr Turnbull's demand for information, and the fact that two of the then directors had not been called, the answer was that the onus lay on the pursuers to show that what was before everyone was not known. Whether or not, it was approved at the time the agreement had been adopted, when the directors requested the defenders to sue the Cable Corporation upon it. There was no objection to the promoters of a company taking a present if they did not do so secretly. If such an agreement were mentioned in the prospectus it would be quite lawful. In the same way if all the then existing shareholders knew of the agreement and consented to it, and if any shareholder who had since acquired shares had acquired them in knowledge of the agreement, the company would be barred from challenging. In the present case there was no shareholder in existence who had become an allottee without notice of this agreement. In particular, Dick, Kerr, & Company knew of it, as it was specially referred to in their agreement with the Assets Company, and must be held to have acquiesced in it. The company were therefore barred from now challenging the agreement— British Seamless Paper Box Company, 17 Ch. Div. 467; Ambrose Lake Company, ex parte Taylor, 14 Ch. Div. 390 Henderson v. Huntington Copper and Sulphur Company, January 12, 1877, 4 R. 294— aff. November 29, 1877, 5 R. (H. of L.) 1; New Sombrero Company v. Eclanger, 5 Ch. Div. 73, per Jessel M. R., 113; Riche v. Ashbury Railway Carriage Company, L.R., Eng. & Ir. App. 653; Spackman v. Evans, L.R., 3 Eng. & Ir. App. 171, see especially pp. 189-90. Where all the existing members of a company had known and consented to an agreement whereby a promoter received some benefit, the company could not challenge that agreement in the interest of transferees— Peek v. Gurney, L.R., 13 Eq. 79, and 6 Eng. & Ir. App. 377.—The defenders should therefore be assoilzied.

Argued for the pursuers—The agreement had never been ratified by the company, though it might be admitted that at the time the agreement was made all the shareholders would have consented to it, because they were nominees of the defender. The company, however, had an existence separate from the existing shareholders in the power to issue shares to subsequent shareholders, and if the interest of future allottees was prejudiced, the company would have a right to set aside the agreement as having been entered into by the defenders to their own advantage and the detriment of the company at a time when they occupied a fiduciary relation towards the company. The plea of bar could not prevail unless it were proved that all present and possible future shareholders had consented to the agreement challenged—Buckley (6th ed.), 577; Society for the Illustration of Practical Knowledge v. Abbott, 2 Beav. 559. The cases quoted by the defenders supported this argument. In the Ambrose Lake Company's case the ground of judgment was that no future allottees were possible. The Seamless Box Company's case was a very special one, and the Court proceeded on the view that all the shareholders had consented to the arrangement challenged, and that there was no intention to issue the shares to the public. Further, the company had a right to call the defenders to account in the interest of the onerous transferees of existing members, for the knowledge of individual allottees did not transmit to their transferees so as to bar the company from challenging the agreement in the interest of the latter. Peek v. Gurney, as decided in the House of Lords, was not an authority against this view. To take the present list of shareholders, Dick, Kerr, & Company had acquired as transferees, the shares originally belonging to the Cable Corporation, and were allottees of a number of shares under their contract of 1888 with the pursuers' company. Assuming it to be held that the knowledge of individual shareholders transmitted to their transferees, that only applied in Dick, Kerr, & Company's case to the shares acquired by them from the Cable Corporation, and left the company unfettered in respect of Dick, Kerr, & Company's interest as allottees. The only thing which could bar the company in respect of these shares would be proof that Dick, Kerr, & Company had assented to the agreement. It was not enough to say they knew of it, it was necessary to prove that they had confirmed it, and this the defenders had failed to do. The mere acceptance of an allotment was not a confirmation.