Scottish Court of Session Decisions

Lord Salvesen.—The defender was the secretary of a company known as “The Langside Picture House, Limited,”and he is sued by the pursuer for payment of certain plumbing work which the pursuer did for the company under a contract entered into between him and the defender as secretary. The Langside Picture House, Limited, was a private company incorporated on 14th December 1911. The defender appears to have been the chief promoter, as he and his clerk are the only persons who sign the memorandum and articles of association.

The history of the company as disclosed in the minutes of its directors might well afford a warning to investors. Such a company does not require to issue a prospectus although the company in question appears to have issued two, the terms of which are not before us. It may be assumed, however, that there was no condition that the company would not start business unless a considerable proportion of its capital was subscribed. The nominal capital was £4500; but in the course of its brief and inglorious existence only a fraction of the capital was subscribed; and in some cases shares were issued not in respect of money but in respect of services alleged to have been rendered to the company. Of the small capital available £300 was paid away to vendors and £60 for preliminary expenses, leaving the company substantially without capital. Nevertheless contracts were entered into to the amount of £2500 for building a picture house on a site which the company had secured on lease. After these contracts had been partially implemented the company found itself unable to meet its liabilities; and eventually the directors renounced the lease, and the proprietors are now in possession of the ground and the buildings that had been so far erected upon it. The company has no assets; and the pursuer has not received a penny to account of the contract work which he did to an amount which he estimates at the sum of £164, 13s. 8d. It is not surprising that in these circumstances he should have looked about for some person who could be made responsible to him for payment of his account.

The minutes of the directors display an absolute disregard of the articles of association and of the Companies (Consolidation) Act, 1908, which they partially incorporated. Of the four directors named in the articles two obtained an allotment at an early stage, the remaining two—Mr Lucas and Mr Lloyd—did not obtain share certificates in their favour for any shares until 14th May 1912, five months after the company was registered. During the first two months they were entitled to act in respect of their being nominated in the articles; but as they did not then obtain the necessary qualification shares (which in this case amounted only to £25) they both vacated office in terms of section 73 (1) of the 1908 Act; and became incapable, of being reappointed until they had obtained their qualification. Nevertheless these two gentlemen transacted most of the business of the company. On many occasions they were the only persons present at the meetings of directors; and on one occasion the meeting consisted of only one director. The 1908 Act provides that where a quorum is not fixed by the articles of association it shall consist of three directors where there are more than three holding office. This provision was habitually disregarded. The defender as secretary of the company, in my opinion, fully shares the responsibility of the directors in these irregular and reprehensible proceedings.

Unfortunately, however, the liability of the defender for the account sued for does not depend upon the part which he took in the administration of the company's affairs. The case against him is a twofold one, (first) that at a meeting which he had with the pursuer when the price of the work to be executed by him was fixed at £330 he made certain statements by which the pursuer was induced to enter into a contract with the company; and (second) that these statements were false to his knowledge. The statements in question may be thus summarised: (1) that the pursuer's money would be all right; (2) that the company had plenty of money; (3) that £3000 of the capital of the company had been subscribed; and (4) that the directors of the company would provide additional security. In the Court below the defender maintained that these averments were irrelevant to found an action of damages against him. I think they were plainly relevant. Before the Sheriff the defender further argued that the statements, in virtue of section 6 of the Mercantile Law Amendment Act, Scotland, 1856, could only be proved by writing. When the case came before us it was pointed out that there was no plea to this effect, but the defender was allowed to amend his pleadings; and the record therefore now raises the true question which is submitted for our decision.

By section 6 of the Act referred to, “representations and assurances as to the character, conduct, credit, ability, trade, or dealings of any person, made or granted to the effect or for the purpose of enabling such person to obtain credit, money, goods … shall be in writing and shall be subscribed by the person … making such representations and assurances, or by some person duly authorised by him or them, otherwise the same shall have no effect.” Do the representations I have already summarised fall under this clause? In my opinion the first three of them undoubtedly do. The pursuer maintained that the third statement was a representation of a fact, and that while it might have a bearing on the question of the ability of the company to meet its debts, the word “ability” ought to be construed as meaning business capacity or skill; and had no more necessary relation to finance than the word “character” used in the early part of the clause. In this connection we were specially referred to the case of Lyde, where the construction of the corresponding English Act was discussed. In that case a lender was induced by the defendant to lend money on a life interest of a certain Lord Edward Thynne by a statement that the annual income was charged only with three annuities, whereas the defendant well knew that the funds were also charged with a mortgage of a large amount. There was a division of opinion on the bench, Lord Abinger, C.B., and Gurney, B., holding that this was a representation concerning or relating to the credit and ability of the debtor, whereas Parke, B., and Alderson, B., were of opinion that it was not. The difference of opinion however turned on the special circumstances, for the two last-named Judges thought that the assurance did not relate to the debtor's trustworthiness, but only to the value of the particular fund about to be assigned. Alderson, B., in this connection says, “although the personal responsibility of Lord Edward Thynne was also to be taken, and therefore a representation as to the value of a portion of his property might, if unexplained, have referred to that also, yet I think the peculiar circumstances of this case, so far as it had gone when the non-suit took place, negatives that supposition here”; and Parke, B., at the close of his opinion says, “I do not by any means intend to say that a representation as to the condition or value of a particular part of a man's property may not relate to or concern his ‘character, credit,’ &c., within the meaning of these words; it would do so where the declared object of the inquirer should be to give credit to a third person upon his personal responsibility, and he is seeking information as to part of the means which constitute its value.” In the view therefore of even the dissenting Judges—for the Court being equally divided the non-suit stood—the representation here would I think clearly have come within the terms of the Act. None of them suggests that “ability” is to be construed as referring to business capacity and not to financial ability; and I cannot imagine any statement more likely to induce credit to be given to a company which has just commenced business than that the bulk of the capital had been subscribed. The fourth representation does not fall within the scope of section 6; but there is no statement that the defender knew that the directors of the company would not provide security, and no action lies at common law for a statement honestly made although mistaken. At best this was a statement of expectation, and it appears from the minutes that the directors did contemplate at one time giving their personal security for at least part of the obligations that the company incurred. In order to make this a relevant ground of action the pursuer would require to state that the directors never intended to provide security, and that the defender was well aware of this. Condescendence 12 contains some very pertinent statements with regard to the first three representations and the defender's knowledge of their falsity, but the record is silent as regards the fourth.

It may at first sight seem strange that the Legislature by the enactment in question has protected all verbal assurances by means of which money or credit has been in fact induced however fraudulent such assurances may have been. The point has, however, been authoritatively settled by the House of Lords in the case of The Clydesdale Bank v. Paton . The object of the Act was apparently to prevent reliance being placed upon mere verbal representations which might be honestly misunderstood, and which might result in injustice to the person who was alleged to have made them. Just as a verbal guarantee is ineffectual, so verbal representations which may have the same effect as a guarantee are also of no avail unless committed to writing. I am therefore of opinion that we must sustain the new plea which the defender has added to the record.

Before leaving this part of the case I ought to mention an argument which apparently found favour with the Sheriff, and which is to the effect “that the false and fraudulent representations were made by the company itself through their servant, the defender, and are not of the class referred to in the statute.” I confess I do not appreciate this view, for it is entirely inconsistent with the pursuer's own record. His case is that the defender had no authority from the company or the directors to contract with the pursuer, and his position as secretary certainly did not include the right of making contracts on behalf of the company. A verbal guarantee by a servant of his master's solvency would bind neither the servant nor the master; and I confess that I am entirely unable to understand how verbal assurances to the like effect can be the foundation of an action because the person making them happens to do so with regard to a company with which he is employed. It is true that in the case of Cullen it was held that the manager and secretary of a bank were liable along with the directors to the shareholders; but the present plea does not raise the question of liability, which I think clear enough if the pursuer's averments are well founded, but raises the question whether the representations relied on can be proved otherwise than by writ.

The pursuer's second ground of action is embodied in his second plea in law, and is to the effect that “the defender having falsely professed to have the authority of the directors of the company to contract with the pursuer and to accept the pursuer's offer, and having thus induced the pursuer to believe he had such authority, the defender is personally responsible for the loss suffered by the pursuer.” The averments upon which this plea is founded are contained in cond. 8, and are amplified in an appendix to the record. Briefly they amount to this, that—while on 15th December 1911 at a duly constituted meeting of directors, when the defender was appointed secretary, it was decided that the company proceed with the erection of the buildings as soon as possible, and it was agreed that this matter be left in the hands of Mr Lloyd, the architect, and the secretary—at a meeting subsequently held on 25th

March, when the only two qualified directors were present, this authority was recalled, and it was agreed, on the secretary re-submitting the estimates, that nothing could be done in the meantime in the matter of accepting them. Notwithstanding this the defender on 27th March had a meeting with the pursuer at which he arranged the price of the work to be executed by him, and on the same day wrote to the architect: “I have received instructions from Mr Lloyd to accept the following contracts in connection with the building of this Company's theatre.” The list includes the pursuer for plumber work, £330. The architect on receipt of this letter appears to have closed the contract. These actings of the defender are relevantly averred to have been wholly without authority, and it is undoubtedly the case that an agent warrants the authority of the principal on whose behalf he professes to contract. But the minutes of a subsequent meeting on 15th April under the head of “erection of buildings,” contain the following: “The directors approved of what had been done by Mr Lloyd, the architect, and secretary.” It is true that this meeting was attended only by Mr Lucas and Mr Lloyd, who had not yet got their qualifications and had no right to act as directors at all; but at the following meeting on 29th April which was attended by Mr Lucas, Mr Lloyd, and Mr Clark, who had been elected in room of Mr Richardson, the minutes were read and approved. The erection of the buildings proceeded, and at no time did the directors ever depart from the position that had been taken up regarding the contracts under which the work was being done. I do not see, therefore, if the company had been solvent how it could have resisted liability for payment of the price due to the pursuer. The majority of the de facto directors, and the only ones present at the meeting of 15th April, were not qualified, but the company had no others; and I presume that the shareholders must suffer for the confidence they so rashly reposed in the persons nominated by the articles of association. If, therefore, the company was bound by the contract made on their behalf by the defender or on his instructions, no claim can arise on the breach of warranty. Even if it were otherwise I cannot see what claim the pursuer can have against the defender. The import of the numerous cases cited to us on this subject is that the agent who acts without authority on behalf of his principal does not become liable on the contract which he professes to make, but only warrants his authority. Now, it is part of the pursuer's case that if he had had a good contract with the company he could have recovered nothing, as the company has no assets. In the case of Firbank, in dealing with the liability of directors who issued debenture stock on the implied representation that they had authority to do so whereas they had none, Lindley, L.J., said, “if genuine debenture stock of the company had been worthless, the measure of damages would have been nil.” The defender, no doubt, warranted his authority to contract on behalf of the company. If he had in fact had authority the company would have been bound; but as it has no assets the damage arising from a breach of the warranty is nil. On both grounds, therefore, I hold that the pursuer has no relevant averments to support his second plea. I indicate no opinion as to whether he may have a remedy against the defender on other grounds, or against the directors through whose reckless administration of the company he finds himself in is present position. I am clear, however, that he has none against the defender under this head.

The result of my opinion is that we should find that the representations alleged to have been made by the defender at the meeting on 27 th March “that the pursuer's money would be all right; that the company had plenty of money, and that £3000 of the capital of the company had been subscribed,” are, in terms of section 6 of the Act 19 and 20 Vict. cap. 60, of no effect unless the same were made in writing and subscribed by the defender; that quoad ultra the averments with regard to the alleged representation that the “directors of the company would provide security” are irrelevant, and that the statements in support of the pursuer's second plea in law are not relevant to infer personal responsibility against the defender for the sum sued for or any part thereof. If the pursuer is now in a position to say that he holds no writing I would be prepared to dispose of the action altogether; but if not I am afraid it must be remitted back to the Sheriff for further procedure.

On the question of expenses, as the plea which we have sustained was only added at the debate, I think there can be no expenses to either party in this Court.

Lord Guthrie concurred.

The Lord Justice-Clerk, who was present at the advising but did not hear the case, intimated that Lord Anderson also concurred in Lord Salvesen's opinion.