Scottish Court of Session Decisions

An action was raised by certain shareholders in the Champdany Jute Company, Limited, against the directors of the company, and against James Finlay & Company, East India merchants, Glasgow, and Finlay, Muir, & Company, merchants, Calcutta, who were respectively the secretaries of the company and the agents in India.

The summons contained the following conclusions:—“Therefore the defenders James Finlay & Company and Finlay, Muir, & Company ought and should be decerned and ordained by decree of the Lords of our Council and Session, conjunctly and severally or severally, to pay or refund and restore to the said Champdany Jute Company, Limited— First, a sum of £16,250 sterling; second, a sum of £8160 sterling; and third, a sum of £8000 sterling, with interest upon each of said sums at the rate of 5 per cent. from the date of citation to follow hereon until payment of the same.”

The defenders against whom the fourth conclusion was directed were the directors of the company, Sir John Muir being chairman. James Finlay & Company had been appointed secretaries of the company at a fixed annual salary of £600, while the remuneration of Finlay, Muir, & Company was to be by percentage, and the 58th article of the articles of association provided that they should “transact all the business of the company in India,” and that “they shall guarantee payment of the price of all goods sold, in so far as these have been delivered by them on behalf of the company. For their services they shall be allowed as remuneration 3 1 2 per cent. on the amount of all goods sold and delivered as aforesaid, which remuneration shall include and be in full of all allowances for rents, salaries, office expenses, and del credere or guarantee commission, and all other claims, but shall not include or cover brokerage, which brokerage shall not exceed 1 per cent.”

The pursuers averred that Sir John Muir was the principal if not the sole partner in the two firms of James Finlay & Company and Finlay, Muir, & Company, “that the whole affairs of the company have from the commencement of its business been controlled by Sir John Muir in this country through his said firm of James Finlay & Company, and in India through his said firm of Finlay, Muir, & Company,” and that he had a control of a majority of the shares of the company, and used his power for the purpose of preventing inquiry.

In support of the first conclusion they averred (cond. 8) that Sir John Muir and his firm Finlay, Muir, & Company, in pursuance of a scheme to work the business of the company to their own profit, “knowingly charged sums in excess of said commission and brokerage, and upon purchases as well as sales, and have appropriated the same to themselves, to the loss, of the said company.” It was stated that the exact amount could not be estimated, as the item did not appear in the balance-sheet, and other information had been withheld, but that it was not less than the sum first concluded for. The second conclusion was supported by averments that James Finlay & Company and Finlay, Muir, & Company had “been in use to charge commission on every advance obtained upon the company's

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account in Glasgow or Calcutta against said company, and have thereby illegally made large profits for themselves at the expense of the shareholders.” The pursuers further averred that, with the object of earning these commissions, Sir John Muir designedly adopted an expensive mode of financing the company at a time when there were large sums lying in the bank at the credit of the company. As regards the third conclusion, the pursuers averred that Sir John Muir and his firms had retained in bank a large amount of money belonging to the company unemployed and unproductive, and that the amounts so “lodged have borne interest, and that said interest, instead of being credited to the company, has been appropriated by” the defenders, and that they were in the habit of “drawing upon the funds of the company lying in the bank for their own business purposes without paying interest for the accommodation.”

The pursuers pleaded—“(1)The defenders Sir John Muir and his firms of James Finlay & Company and Finlay, Muir, & Company, having illegally and fraudulently appropriated to themselves the sums in the first, second, and third places sued for, are liable jointly and severally in repetition thereof to the company as concluded for.”

Answers were lodged by all the various defenders, who denied the pursuers' averments and pleaded, inter alia, that the pursuers had no title to sue, and that the action was irrelevant.

The Lord Ordinary ( Low) on 3rd March 1896 allowed the pursuers a proof of their averments before answer….

“ Opinion.—The pursuers are a small minority of the shareholders of the Champdany Jute Company, Limited, which carries on business as manufacturers of jute at two mills near Calcutta.

The defender Sir John Muir is chairman of the company, his Glasgow firm of James Finlay & Company are secretaries of the company, and his Calcutta firm of Finlay, Muir, & Company are the company's agents in India. The pursuers aver that Sir John Muir is practically the sole partner of both those firms.

By the 58th article of the articles of association of the company it is provided that Finlay, Muir, & Company shall be agents of the company in India until they resign or are removed by a resolution of the shareholders passed at a general meeting. They are to transact all the business of the company in India, and to receive as remuneration a commission of 3 1 2 per cent. on the amount of all goods sold and delivered, and of 1 per cent. for brokerage.

It was provided in the 64th article that no shareholder, not being a director or auditor of the company, should be entitled to inspect the books, accounts, documents, or writings of the company, except such as might be produced for inspection at any meeting of the company.

The summons concludes in the first place for decree against James Finlay & Company, and Finlay, Muir, & Company, to pay and restore to the Champdany Company three separate sums of money.

The first sum is £16,250, being the amount which the pursuers allege that Sir John Muir and his firms have fraudulently charged the company in excess of the commissions to which they were entitled under the articles of association.

The second sum is £8160, which the pursuers aver that Sir John Muir and his firms have improperly charged the company as commission upon advances obtained tor the company. The pursuers aver not only that the services for which these commissions were charged were covered by the commission allowed by the articles of association, but that, with the object of earning the commissions, Sir John Muir designedly adopted an expensive mode of financing the company, and did so at a time when there were large sums belonging to the company lying idle in bank.

The third sum is one of £8000. The pursuers aver that Sir John Muir and his firms, instead of crediting the company with the interest upon the moneys lying in bank, appropriated the interest to their own purposes, and that they were in the habit of drawing upon the funds of the company lying in bank for their own business purposes without paying interest for the accommodation.

The pursuers aver that the accounts of the company have been falsified and manipulated so as to conceal the fraudulent charges complained of, and that the auditors of the company, who are in Glasgow, have never had access to the books of the company in India, where the business is carried on.

The pursuers further aver that Sir John Muir has control of a majority of the shares of the company, and has used his power for the purpose of preventing inquiry. The pursuers allege that their efforts within the company to have an inquiry into the matter of which they complain have thus been frustrated, and they have been compelled to bring the present action.

The defenders state a variety of preliminary pleas, but ultimately the argument was practically confined to the plea of no title to sue.

It was argued that as this was a complaint of the conduct of those who were managing the affairs of the company, it could only be insisted in by the company and not by individual shareholders. If the pursuers had been a majority of the shareholders they might have sued in the company's name, because a majority was competent to decide upon all matters relating to the internal management of the company, but being a minority they could not do so.

There is no doubt that the general rule is that for which the defenders contend. Directors and managers are servants of the company, and it is the company who has the title to call them to account— Orr v. Glasgow, &c., Railway Company, 3 Macq. 799. Further, if the complaint relates to a matter of internal management which it is competent for a majority to sanction, an

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action by individual shareholders will not be sustained — Macdougall v. Gardiner, 1 Ch D 13; Foss v. Harbottle, 2 Ha. 461.

But to these general rules there are exceptions. Thus if a company is defrauded by a person who can command a majority of votes, and who thereby stifles inquiry, a minority of the shareholders, or even a single shareholder, can sue — Mason v. Harris, 11 Ch. D. 97; Atwool v. Merry-weather, 5 E. 464.

That is the case which is alleged here. The pursuers aver that Sir John Muir has defrauded the company, and has used the voting power under his control to prevent the pursuers obtaining redress through the company. I am therefore of opinion that, assuming these averments to be true, the pursuers have a good title to sue.

It was also contended that the pursuers' averments are not sufficiently specific. It is plain that the pursuers are necessarily under some disadvantage in stating their case, because under the articles of association they are unable to obtain access to the books. The defenders on the other hand have the books at their command, and as the nature of the charges which the pursuers make are stated distinctly enough, I do not think that the defenders can be prejudiced by want of specification of details. If the charges are not well founded the defenders can have no difficulty in meeting them.” …

The pursuers reclaimed.

In respect of a minute lodged by the defenders, in which they offered to give the pursuers access to the books of the company, process was sisted by the Court on March 11th 1896.

Thereafter the pursuers proposed to amend their record as follows:— They restricted the conclusions of the summons, the first to the sum of £1306, 17s. 6d., the second to the sum of £5300, and the third to the sum of £3544, 11s. Id. For the averment in cond. 8, quoted supra, relative to the first conclusion, they substituted the averment that Finlay, Muir, & Company “frequently received from jute merchants and others, on purchases which they had made as agents for and on behalf of the company, commissions, rebates, discounts, or other allowances, which they wrongfully and in breach of their agreement with the company, and their duty as the company's agents, appropriated to themselves in place of crediting to the company as they were bound to do.” The amount thus appropriated was averred to be that claimed in the restricted conclusion. The averments relating to the second conclusion were not materially altered except as regards the amount concluded for. As regards the third conclusion, the pursuers for their previous averments substituted statements that a large and unproductive balance lying in bank at the company's credit had been created by the defenders' practice of obtaining advances on behalf of the company in excess of its requirements, and that the loss to the firm was not only the commissions illegally charged by the defenders, “but the interest and discount paid to banks or others on said advances in excess of the company's requirements.” The pursuers further averred that the interest upon the surplus funds used by the defenders for their own purposes without paying interest amounted to £211, which was included in the restricted sum concluded for.

The defenders lodged answers to the amendments, and also maintained that they were incompetent.

Argued for reclaimers — Even if the amendments were not allowed, they would be entitled to a proof of their original averments, but they were competent, and as amended the record was clearly relevant. Competency—The amendments on the averments supporting the first conclusion were of the very nature contemplated by the Act as being calculated to enable the true issues in the action to be tried. The pursuers' charge was that the defender's had overpaid themselves. The charge still remained, and it was quite legitimate for them to amend their statements as to the modes of overpayment. The only question was the amount of the defender's remuneration, and no new fund was introduced into the case. The amendments certainly fell within the principle as to admissible amendments— Rottenburg v. Duncan, Oct. 23, 1896, 24 R. 35. With regard to the third conclusion, it was true that the basis of the claim was altered, but it was still a claim for interest, only instead of being interest on money lying in bank, it was interest for money unnecessarily borrowed. This was in reality an action of count, reckoning, and payment, and the proposed amendments were entirely consistent with the alterations allowed in such actions. It was maintained by the respondents that these three conclusions were bad, as they were directed against the two firms conjunctly and severally for one and the same sum in each conclusion. That might be the case where there were several distinct defenders involved in a case without any connection, but the averments here were to the effect that there was really only one persona under the various names of the defenders, viz., Sir John Muir, and that these conclusions were directed entirely against him. That being so, the cases of Barr and Taylor did not apply. 4. This turned upon a question of fact, and there must accordingly be a proof. The detailed statement of the reclaimers showed that there had been no balance of profit out of which dividends could be paid. The cases cited by the respondents were decided after the facts had been brought out.

Argued for respondents — The amendments were incompetent, and even as the action now stood it was wholly irrelevant as regards all the conclusions. The three conclusions were all founded on fraudulent acts said to have been committed by the two firms of James Finlay & Company and Finlay, Muir, & Company, agents of the company. All the conclusions were for payment “conjunctly and severally or severally,” and for restoration to the company at the instance of a small section of share-holders.

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To deal with the conclusions separately:—1. Competency—The effect of the amendments was to restrict the pursuers' claim to a very small sum, and the case as now laid was wholly different from the old case. It was no longer a question of breach of the terms as to remuneration, but whether they were bound to communicate to the company all brokerage received by them. The first was a breach of contract, the second a breach of trust—the first a charge of receiving too much from the company, the second of receiving something from somebody else and not handing it over. That was clearly a case of substituting a new dispute and a new set of legal relations, and was accordingly not a competent amendment — Rottenburg v. Duncan; Lcny v. Magistrates of Dunfermline, March 20, 1894, 21 R. 749; Russell, Hope & Company v. Pillans, 1895, 23 R. 256; Gibson's Trustees v. Fraser July 10, 1877, 4 R. 1001; Forbes v. Watt's Trustees, November 9,1870, 9 Macph. 96. It had been said that the liberty of amending was extended by Guiness, Mahon, & Company v. Coats Iron and Steel Company, January 21, 1891, 18 R. 441, but that was a case of a defender stating a new defence, and had no bearing on the present question. Relevancy—It was to be noted that there was no averment whatever made against John Finlay & Company. 2. This conclusion was not quite in the same position as the first, and it could not be maintained that the amendments were incompetent since the averments remained practically the same. They were, however, clearly irrelevant. It was a complaint against two firms for transactions by one in Glasgow and one in Calcutta without any attempt to particularise them. But they could not make each liable for the acts of the other, and could not get a joint and several conclusion. This was just the sort of summons which was held incompetent in Barr v. Neilson, March 20, 1868, 6 Macph. 651; Taylor v. M'Dougall & Sons, July 15, 1885, 12 R. 1304. The pursuers should have made up their minds as to which firm was liable for such advances, or else have made a relevant averment of joint-action as regards the whole. 3. As regards competency, this conclusion was almost in the same position as the first. The pursuers had withdrawn the charge of taking the interest, and substituted for it a claim that the defenders must pay interest on the advances made by the banks. That was a complete substitution of one claim for another and was therefore incompetent. Even as amended the averments were irrelevant, on the same grounds as were those supporting the second conclusion.

At advising—