Scottish Court of Session Decisions

On 11th September 1907 Charles J. Munro, Chartered Accountant, Edinburgh, as liquidator of R. D. Simpson, Limited, presented a note to the Court craving authority to intimate deliverances, approval of accounts, etc.

The Lord Ordinary ( Johnston) remitted the liquidator's accounts to John Scott Tait, C. A., Edinburgh, to report. In his report the reporter drew the Lord Ordinary's attention to a claim for £2000 lodged by Professor Beare, R. B. Mathie, and Andrew Scott, and admitted by the liquidator. The liquidator thereafter lodged answers dealing with the reporter's objections. Thereafter the Lord Ordinary on 4th December pronounced an interlocutor in which he reduced the ranking of the claimants above mentioned to £1000, and directed a deduction of £15, 15s. to be made from the fee to be afterwards allowed to the liquidator.

The facts of the case, briefly stated in the rubric, are fully narrated ( infra) by the Lord Ordinary and by Lord Ardwall.

The Lord Ordinary's note to his interlocutor was as follows—“In the liquidation of R. D. Simpson, Limited, a serious question has been raised by Mr J. Scott Tait, to whom I remitted the liquidator s accounts for audit.

“In the note to his report, in dealing with the deliverances pronounced by the liquidator on the claims lodged in the liquidation, Mr Tait brought specially under the notice of the Court the claim No. 82 in the liquidator's schedule of deliverances.

I must say at once that Mr Tait has not gone beyond his sphere in bringing this matter to my notice, but on the contrary, had he not done so, he would have fallen short of his duty, and would not have justified the trust which the Court places in these professional gentlemen to whom it remits liquidators' accounts for audit. The Court relies upon them for the most confidential assistance in performing the judicial duty of supervising liquidations in the interest of all concerned. On the other hand, I am compelled to characterise the conduct of the liquidator as wanting in that openness which the Court looks for from the gentlemen who occupy this important position, and as conclusively proving the necessity of the Court's supervision.

The claim and deliverance is as follows—

‘82. Professor Beare, R. B. Mathie, and Andrew Scott, Edinburgh.

Claim lodged £2000. Claim admitted £2000.

The liquidator admits this claim.’

This is the whole reference which the liquidator makes to this claim. He treats it as if it were a tradesman's account for goods supplied, and gives no suggestion of the nature of the claim, or of the circumstances

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under which he admits it to a ranking, though he does so in every other case which is not merely a claim for a trade debt.

Having so delivered himself upon this and the other claims, the liquidator, on 11th September 1907, submitted a note in the liquidation for approval of his deliverances on claims, audit of his accounts, and authority to pay dividends. For aught that appeared, or that unaided I could have known, I should have found nothing to do but approve, as in ordinary course, deliverances on claims unobjected to, and it is difficult to see how any creditor should have objected to the deliverance in question, for although intimation was ordered to the creditors, they received from the liquidator no further information, and could have had no further grounds to suspect his deliverance than had the Court. Further, when called upon to reply to the notes issued by Mr Tait with his interim report, the liquidator stated that after careful consideration he had decided that it was in the interest of the ‘general body of creditors' to compromise a certain large claim at the instance of Professor Beare and Messrs Mathie and Scott at £2000,’ subject to the approval of the Court to be taken in the note since lodged on 11th September 1907.’ I take leave to say that, having regard to the terms of the note referred to, and with which I am now dealing, this is a most misleading statement, and I can only regard the liquidator's conduct in not openly applying to the Court for approval of the compromise which he was making in connection with this claim, and in presenting it to the Court as a mere question of approving a deliverance, as a deliberate attempt to smuggle this matter through without the Court being made aware of the circumstances. And I should not be doing my duty in supervision of this liquidation if I passed over the matter without taking notice of the liquidator's conduct.

The circumstances under which the claim in question arose appear to be these: I am not exactly informed as to what the proper business of R. D. Simpson, Limited, was, but one of their lines of business was apparently the sale of certain labour-saving machines. Amongst other machines, they were selling in 1905–6 a machine for slicing sausages and the like meat goods. This proved to be a breach of the patent of Mr Van Berkel of Rotterdam, and accordingly the respondents in 1905 were subjected to an interdict at the instance of Van Berkel and the Dutch Company which were working his patent. The suspension and interdict was resisted by R. D. Simpson, Limited, and a trial took place in this Court in which the Van Berkel patent was upheld both by Lord Dundas in the Outer House and by the First Division on reclaiming note, and interdict was granted. The report of the case will be found under date November 20, 1906–1907, S.C. 165. The case was a difficult one, and the trial must have been costly. I can readily believe that the account of judicial expenses of the successful complainers must have been a substantial one, and that of their extrajudicial expenses even larger. On the issue of the suspension and interdict there arose a claim of damages for infringement in addition to the claim for costs under the suspension. The former would have had to be made the subject of a new action, the latter, although not entirely liquid, was capable of being immediately made so by the complainers by having their account of expenses audited and taking decree for the taxed amount. But instead of doing either, the successful complainers entered into negotiation with R. D. Simpson, Limited, and their claim of damages and for expenses of the suspension process was adjusted at £1000, and steps were being taken for reducing the settlement of the claim which had been agreed on to writing, and arranging a guarantee for payment satisfactory to the complainers. This was in December 1906 and January-February 1907. But before final adjustment of the guarantee to be given the company found itself obliged, in March 1907, to go into voluntary liquidation, when Mr C. J. Munro, C.A., was appointed liquidator. On 19th March the liquidation was placed under supervision. Van Berkel and his company at once intimated to Professor Beare and Messrs Mathie, Scott, and Simpson, the directors of R. D. Simpson, Limited, that they held them personally liable for the damages they had Sustained, and the costs, judicial and extra-judicial, which they had incurred in litigating with R. D. Simpson, Limited, and on 17th April 1907 they raised an action against these gentlemen concluding for £4250, made up of £1250 of damages for infringement of patent and £3000 of costs alleged to have been incurred in the previous suit. The record in this action was closed, but it did not proceed further, as the defenders, or at least Professor Beare and Messrs Mathie and Scott, took up the negotiation which had become abortive on the bankruptcy of the company, and paid the £1000 which had been originally agreed upon to Van Berkel & Company. This payment was made in full settlement of all claims of damage competent to Van Berkel and his associates in respect of the infringement of patent and of the expenses in the action of suspension and interdict. But on making the payment the directors took from the payees an assignation in their favour as individuals of all claims of damages and rights of action of whatever kind competent to the payees against the company. This settlement was effected on 30th June 1907, and the directors at once proceeded to formulate a claim in the liquidation. My information is largely obtained from Mr Tait's report, as no other information has been vouchsafed me except a copy of the open record in the action at the instance of Van Berkel & Company against the directors. I have no certain assurance, but I think there is enough to justify the assumption that the liquidator was approached before the claim was lodged, and that the directors ascertained

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what amount he was prepared to pass before lodging their claim. For their claim, lodged on 25th August 1907, is for the exact amount which the liquidator, a few days afterwards, admitted to a ranking.

In the circumstances which I have thus shortly narrated, and which will be found much more fully set out in Mr Tait's report, and in sundry papers in the liquidation, it must, I think, be apparent that questions of some delicacy and difficulty arise, and I should have expected any liquidator to have relieved himself of responsibility by applying to the Court, on a full statement, for directions as to what he should do. I should have expected him to take such an attitude that, though he might have adjusted a provisional figure with the creditors claiming, he would have come to the Court for sanction, and have given the Court all the assistance in his power in the interest of the general liquidation, while leaving the creditors claiming to fight their own battle. This, however, has not been the course taken by the liquidator, and I thought it proper to require the appearance of the directors who are the creditors claiming, for their interest, and having received no assistance from the liquidator, I am now obliged to consider the merits of the claim on an entirely ex parte argument.

In the first place, were the directors under liability to Van Berkel & Company? This is a question which has not been tried, but the liability has been accepted. I think there is much doubt as to the liability. Directors are agents of their company as well as trustees. Now, if by his negligence or even his wanton act in the line of his employment, injury is done by an agent or servant to a third party, the employer is responsible for his servant's wrong, and the servant is liable for his own wrong. They may either be sued separately or both may be sued jointly and severally. But it is not a case of wrongdoers, as in the case of Palmer v. Wick and Pulteneytown Steam Shipping Company, 20 R. 318, and 21 R. (H.L.) 39. The employer is responsible derivately or vicariously only, and would certainly have relief, not merely pro rata, but entirely against his agent or servant, and the agent or servant no relief against his employer. But where injury has been done to a third party by the bona fide error of judgment of the servant, while the employer is no doubt liable for the act of the agent or servant in his business, I think that there is a grave doubt whether the servant is liable to the third party at all. The present is an extreme example. I am not saying too much when I say that the question whether Van Berkel's patent was valid, and the company therefore liable in breach, was a question which the Court found to be one of intricacy and difficulty and worthy of a solemn judgment. The result of that judgment is that it must now be accepted that the directors committed an error in judgment, though a most venial one, in not treating it, if they knew of it, and they must be, I think, presumed to have known of it, as valid. But would the error of judgment thus committed have given Van Berkel & Company a direct action against the directors personally? I think that this is very doubtful. But assume it to be the law that they were personally liable, I am satisfied that there being bona fides and no negligence, they would have been entitled to relief, not pro rata merely, but entirely from the company. For in undertaking the office of director I think a man only undertakes to act honestly, carefully, and to the best of his judgment, and does not warrant the company against the results of his bona fide error of judgment.

The directors have elected to assume their liability, and have made terms with Van Berkel & Company. But having done so, while I agree that they are entitled to relief, I am at a loss to see how they can claim from the company in liquidation more than they could have claimed from the company as a going concern, that is, exactly what they have paid to Van Berkel & Company. The only measure we have of the latter's claim is the sum they were willing to accept. No doubt that sum was arrived at as a compromise, first with the company and afterwards with the directors, but I can see no reason to assume that it was not a just estimate of the claim. And even if I thought that Van Berkel & Company could by pressing their claim to the bitter end have made more of it, in the first place I have, and the liquidator had, no other measure by which to gauge it. I have no more reason for taking it at £2000 than at £3000, or at the full sum of £4250. And, in the second place, whatever it was adjusted at, whether by litigation or by compromise, that sum alone could be claimed from the company.

Suppose that the company had remained solvent, and the directors had intervened and settled with Van Berkel & Company, could they have, in the highest view of their right of relief, claimed more from the company than they had paid? I think not, because the fiduciary capacity of the directors would have precluded them recovering more than the sum which they were out of pocket. They could not have bought up the claim as a compromise, and then have enforced it to the extreme point against their company. I do not find that liquidation makes any difference. Liquidation does not sever the tie between directors and the company. Their functions are only suspended while their office is, so to speak, put in commission. If the liquidation proves unnecessary, and is recalled. they resume their duties ipso facto without reappointment. Pending liquidation I do not think that they are free to buy up debts against the company, so as to state them against the company at a higher figure, any more than they were when the company was a going concern under their management. For both these reasons then, first, that the sum paid by them is the only measure of the value of the claim that the Court and the liquidator can look at, and, second, that the directors are barred from putting a higher value upon it as against the company, I think that the

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directors must be, in their own interest, content to treat their claim as one for £1000 only. For that sum they have, I think, made the company in liquidation their debtors, and for that sum, like other creditors, they can only get a ranking.

And I see no hardship in the result. They have accepted personal liability, and this they have made the law of the situation. I am prepared to give them the benefit of holding that they were not correi debendi jointly and severally liable, but only joint-obligants, with a right of relief, or exactly in the position of cautioners. But, unfortunately for them, they are joint-obligants with a right of relief along with an insolvent principal, and they must therefore face a loss. They have, I assume, wisely minimised that loss, but there is no ground for enabling them to escape that loss, either in whole or in part, by allowing them to rank for some vaguely estimated sum different from and higher than the sum they have actually paid. I confess I have even some doubt whether I am entitled, without further inquiry, to assume that the claim against the company was properly estimated at £1000. I know from the papers that the extra-judicial expenses in the action of suspension and interdict bulked very largely in Van Berkel and his company's claim, and I think there is authority for doubting whether such extrajudicial expenses are a relevant item in a claim for damages. Here, as at other points, I should have had the liquidator's assistance. On the information I have, I think, even discounting their extra-judicial expenses, there is good ground for assuming £1000 was a fair settlement, and I shall accept it as such.

I shall therefore reduce the claimants' Professor Beare and Messrs Mathie and Scott, ranking to £1000, and I feel it my duty to direct that a deduction be made from the fee to be allowed to the liquidator, which I shall modify to 15 guineas, to mark my estimation of his conduct, and cover the expense to the liquidation which his method of dealing with this question has caused.”

The claimants Beare, Mathie, and Scott, and the liquidator Munro, reclaimed.

The claimants argued—At the date of the appointment of the liquidator the directors ipso facto ceased to be directors—Companies Act 1862, section 133 (5). In their transaction with Van Berkel & Company they were simply third parties settling the debt due by R. D. Simpson, Limited, to Van Berkel & Company, and obtaining in return an assignation of that debt from Van Berkel & Company. The debt admittedly amounted to at least £2000, and for that they were entitled to rank. Even if they had acted as directors, or as trustees for the company, the company were bound to keep them indemnis. All their actions had been open and above-board—see Imperial Land Company of Marseilles, 4 Ch. D. 566.

Argued for the liquidator—Probably the liquidator would have been wiser to have drawn the Lord Ordinary's attention specially to this particular claim. But the procedure he had adopted was normal, and there was nothing in his conduct to justify either the language used or the penalty imposed by the Lord Ordinary. This was not an ordinary case of compromise. The following were cited—On procedure, Companies Act 1862, sections 89, 138, 158; on the fiduciary relation of directors to their company, Buckley, Companies Acts, p. 403; on the personal liability of directors in action for infringement of patent rights, Frost's Patent Law and Practice, 3rd ed., vol i, p. 389; Van Berkel v. R. D. Simpson, Limited, 1907 S.C. 165, 44 S.L.R. 87.

At advising—