Scottish Court of Session Decisions

The Sunnyside Rivet Company, Limited, was a small limited liability company which carried on business from 1897 to March 1901. David Laughland, residing at 11 Newton Terrace, Glasgow, was a shareholder and a director of it, and Millar, Laughland, & Co., 65 West Regent Street, Glasgow, whose partners—Edward Millar and William Laughland—were also shareholders and directors, acted as managers.

In 1900 proposals were made for the sale of the company to a larger company about to be formed for the purpose of amalgamating several businesses of the same kind; and eventually the new company was constituted and the terms of the sale arranged, and at meetings of the shareholders of the Sunnyside Rivet Company, Limited, resolutions were passed for the winding-up of the company voluntarily and appointing a liquidator. The sale of the company was then carried through on terms which, after paying all debts and expenses and returning to the shareholders the paid-up cash capital, left a balance of about £1200. This sum was available for division amongst the shareholders, or as they might see fit. At a meeting of the shareholders, held on March 12, 1901, a resolution was passed, on the motion of David Laughland, who did not disclose any personal interest in the motion, that out of the balance there should be paid to the managers a bonus of £700 in cash or shares, in the same proportions as the balance distributed to the shareholders. This resolution was confirmed upon March 27, 1901, and was afterwards carried out.

David Laughland then claimed from Millar, Laughland, & Co., a share of this commission, based upon an alleged contract, and having been met with the plea that the transaction was illegal, he wrote to the liquidator calling his attention to the proceedings upon which he based his claim. The liquidator summoned a meeting of the shareholders to consider the matter, and at that meeting, held on April 3, 1903, the shareholders decided to take no action.

David Laughland now presented a petition in the Sheriff Court at Glasgow for £200 against Miller, Laughland, & Company, and Edward Millar and William Laughland, the individual members of that firm. In it he made the following averments:—“(Cond. 6) The defenders maintained at meetings with the directors and shareholders that they were entitled to have the balance of the price handed over to them in consideration of the services they had rendered to the Sunnyside Rivet Company, Limited, and also as compensation for their giving assistance in the disposal of the business to their own detriment; and the pursuer claimed that he was entitled to participate in the division in respect of valuable services he had rendered to the company in raising capital and in guaranteeing the company's overdraft when it was in financial difficulties. (Cond. 7) On the 11th of March 1901 the defender Edward Millar had a meeting with the pursuer, when the matter of the destination of the balance of the price was discussed, and the respective claims of the pursuer and defenders were debated. There had been certain meetings prior to this at which the same matter had been discussed and resolutions come to, but subsequent investigations having shown that the state of affairs of The Sunnyside Rivet Company, Limited, on which the amalgamation had been arranged and the sale negotiated, had not been correctly made up, and that consequently the company had been obliged to accept a reduction of price, these resolutions were no longer applicable or binding. The defender Millar was acting for himself, and also for the other defenders, William Laughland and Millar, Laughland, & Company, when an arrangement was come to with the pursuer which was embodied in a memorandum in the following terms:—

‘11 Newton Terrace, Glasgow, W., 11/3/01.

1st. If £1600 or thereabouts is divisible, D. L. gets £225 in cash from M. L. & Co.

2nd. If £1200 or thereabouts is divisible, D. L. gets £200 in cash from M. L. & Co.

The above in addition to what D. L. is entitled to in respect of his holding. If the first is moved, M. L. & Co. get 1000 shares or cash, less £225. If the second, M. L. & Co. get 700 shares, or cash less £200.

E. Millar.

To Messrs Millar, Laughland & Co., 65 West Regent Street, Glasgow.’

Page: 326↓

This memorandum was written by the pursuer and addressed to Messrs Millar, Laughland, & Company, the defenders, and was signed by the defender Millar with his own signature. The D. L. mentioned in the memo. is the pursuer, and the M. L. & Co. are the defenders. (Cond. 9) The conditions of the arrangements between the pursuer and the defenders under which the pursuer became entitled to payment of the sum of £200 from the defenders as embodied in the said memorandum, videlicet, that £1200 or thereabouts had become divisible among the shareholders of The Sunnyside Rivet Company, Limited, and that the defenders got 700 shares or cash, having been purified, the pursuer claimed payment, and was met with the objection that the arrangement was null and void in consequence of its having been concealed from the shareholders of the company, whereupon the pursuer brought the matter under the notice of the liquidator, who convened a special general meeting of the shareholders on 3rd April 1902 to consider the agreement between the pursuer and the defenders, and the shareholders, in the full knowledge of all the circumstances and of the pursuer's claim, ratified and confirmed the proceedings at the meetings held on 12th and 27th March 1901. Copies of the minutes of these meetings are produced. (Cond. 10) If the whole balance of £1200 had been distributed among the shareholders (and the pursuer could have insisted on that being done), the share falling to the pursuer in proportion to his holding in the company would have been £120 or thereby, and but for the arrangement narrated in article 7th he would have insisted on the distribution of the entire balance among the shareholders.”

Millar, Laughland, & Co. lodged answers, and pleaded:—“(1) The agreement founded on having been concealed from the shareholders, was an immoral contract and not binding in law.”

On 8th December 1902 the Sheriff-Substitute ( Strachan) found that no relevant defence had been stated, and that the defenders were bound to make payment as craved.

Note.—“The only difference between this action and the one decided by me on 11th November 1901, and withdrawn by the pursuer when under appeal to the Sheriff, is that the pursuer now avers that on 3rd April 1902 a special general meeting of the shareholders was held to consider the agreement between the pursuer and the defenders, and that the shareholders in the full knowledge of the circumstances of the pursuer's claim ratified and confirmed the proceedings at the meetings held on 12th and 27th March 1901. If this has any bearing on the case it must strengthen the pursuer's claim and confirm the judgment pronounced by me in the previous action. I have heard nothing to lead me to think that the judgment referred to is erroneous, and I see no reason therefore why it should not be repeated in this case. For the ground of judgment I refer of course to the previous note”

The previous note, accompanying an interlocutor of 11th November 1901, was—“It is further maintained by the defenders that the agreement was of an immoral character. The defenders conceded that they were themselves parties to this immorality, but they shelter themselves under the brocard melior est conditio possidentis. But the defenders are doing themselves an injustice. It is not stated in the record wherein the immorality consisted, and I have not been able to discover it. An attempt was made to bring the case within the scope of the decisions in the Edinburgh Tramway Company against Beattie & Mann, 18 R. 1140, and that class of cases, in which it was held that the fiduciary relations in which the parties stood to a company prohibited them from getting any advantage from agreements entered into by them in regard to the affairs of the company, and that they were bound to account to the company for all moneys received by them under such agreement. These agreements were held to be illegal, but not in any sense immoral. But the present case is essentially different from any of those referred to. The company here is not objecting to the agreement between the parties to this action, nor is it seeking to obtain any benefit therefrom. The company has absolutely nothing whatever to do with the question between the parties. By an extraordinary resolution of the shareholders of the company it was resolved to pay £700 of bonus or commission to the defenders for certain services rendered by them. This agreement was made by the defenders directly with the company and individual shareholders—all of whom were bound by it. When the money was paid it became the exclusive property of the defenders, and they were entitled to do with it what they pleased. The company had no interest in it or any right to interfere in any way with its disposal. The fiduciary relationship to the company terminated with the liquidation and could not in any way affect the disposal of the residue after payment of all legal claims. Besides, it can only be pleaded by the company—and no third person has any right or title to do so.

The question is one entirely between the parties to the memorandum, and in which no other person has any interest. By the memorandum the defenders under-took, on getting £700 of commission, to pay the pursuer £200, and I see no reason why I should not give effect to it. The commission was their own, and there was nothing to prevent them disposing of it as they pleased. Sharing a commission is a common, and so far as I can see, a perfectly legitimate transaction. A party may have legitimately aided another in getting a commission, or doing the work on which a commission is being paid. What objection can there be to that party being paid for his services? But it is not for the Court to inquire or determine whether the consideration given for a share of commission is adequate or otherwise. The defenders are business men who are presumably well able

Page: 327↓

to conduct their business. They agreed to share their commission to a limited extent with the pursuer, and it must be presumed that they did so for adequate and sufficient reasons. Having done this they cannot be allowed to repudiate their obligation on any such grounds as are pleaded by the defenders in this action.”

On appeal the Sheriff ( Guthrie) adhered, and in his note said—“With regard to the alleged invalidity of the agreement between pursuers and defenders on the ground that the director of a company cannot benefit by a secret profit or commission made in a transaction between the company and a third party, there is no doubt that such a profit or commission may be retained by the company, and that by the Companies Act 1862 his office of director is vacated by such conduct. No authority however has been adduced for the proposition that a contract with a person who receives a bonus from the company to get a part of that bonus is ipso facto void, or that its illegality can be pleaded for his own interest by the party receiving the bonus, the company having knowledge of the arrangement, or refusing, as it has done here, to make him account for the profit he has made. If the company did not know of the pursuer's bargain with the defenders, the conduct of both parties was no doubt objectionable, even illegal; but it does not appear that any but the company can call the pursuer to account. This the company has explicitly refused to do.”

The defenders appealed and argued—The alleged contract here was for a corrupt consideration. It could therefore not been forced—Bell's Prin., sec. 35; Harrington v. Victoria Graving Dock Company, 1878, 3 Q.B. Div. 549; Shipway v. Broadwood [1899], 1 Q.B. 369; Englefield Colliery Company, 1877, 8 Ch. Div. 388. The defenders were therefore entitled to absolvitor, but if there was any doubt as to the actual meaning of the contract, or the actings of the different parties, they were entitled to a proof.

Argued for the respondent—The contract here was not corrupt. The company had already accepted the view that the managers should have a gratuity, and a much larger sum had been mentioned. There was therefore no bribe in the agreement, for there was no quid pro quo; it was merely an arrangement for sharing the commission, and there could have been no question had it been disclosed to the shareholders at the time—Lindley on Companies, 6th ed., vol. i. 513; Southall v. British Mutual Life Assurance Society, 1871, L.R., 6 Ch. App. 614. But the agreement had been disclosed a month later, and apparently accepted. That closed the matter, but even if wrong in this view, still the contract was not one which was void but only one in which any benefit derived must be contributed to the company. The company, however, did not want it— Costa Rica Railway Company v. Forwood [1901], 1 Ch. 746.