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United Kingdom House of Lords Decisions
You are here: BAILII >> Databases >> United Kingdom House of Lords Decisions >> Richard Alexander and Others, Appallants1 v. Colonel C. S. Macalister and Others (Caledonian Dairy Company Directors) [1839] UKHL MacRob_353 (7 June 1839)
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SCOTTISH_HoL_JURY_COURT
Page: 353↓
(1839) 1 Mac&Rob 353
REPORTS OF CASES UPON APPEALS AND WRITS OF ERROR, AND QUESTIONS OF PEERAGE, DECIDED BY THE HOUSE OF LORDS, Session of Parliament 1839, 2 & 3 VICTORIA.
(Appeal from the Court of Session, Scotland.)
2d Division.
(No. 10.)
v.
[
Counsel:
Sir F. Pollock—Tinney.
Knight Bruce—Pemberton.
Subject_Partnership — Joint Stock Company — Contract. —
In an action by directors of a joint stock company against the other solvent partners, for relief of advances and obligations by the directors personally in the management of the affairs of the copartnery. Held, upon construing the contract of copartnership, (affirming the interlocutors of the Court of Session,) that the following defences ought to be repelled; (1.) that the partners were only liable, inter se, to the amount of the sums severally subscribed by them for and as their shares in the said copartnership; (2.) that the directors had no right to begin business, and no power to bind the partners for any debts or obligations on behalf of the said company, till the whole stipulated capital had been subscribed for and secured; and (3.) that the powers of the directors to borrow money on the responsibility of the company and the partners were restrained.
Subject_Practice. —
Held that the Court may, before exhausting the whole pleas of the parties, lay down certain principles, by declaratory findings, which shall regulate the future proceedings in a cause, and be the foundation of ulterior findings, the consideration of which may be reserved.
_________________ Footnote _________________
1 Reported 15 D., B., & M., 1061.
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Statement.
In the year 1824 the respondents were among the original projectors of a scheme, and issued a prospectus, for the establishment of a joint stock company for supplying the inhabitants of Edinburgh with milk and other dairy produce; the capital stock of the company was to be 50,000 l., to be raised by subscription, and divided into shares of 25 l. each. The committee of management purchased the lands of Wheatfield near Edinburgh for 12,000 l. “A meeting of subscribers” was held on the 2d February 1825, at which directors were named, and resolutions passed, so as to constitute the company, the capital of which it was resolved should be 50,000 l., divided into 2,000 shares of 25 l. each. The directors were authorized to complete the purchase of the land requisite for the undertaking, and to erect suitable accommodations. A report read by the committee set forth, that the whole capital had been subscribed for; and the thanks of the meeting were voted to the committee for the purchase of Wheatfield. The secretary was directed to prepare a deed of copartnery. The lands of Meadowbank and an adjoining piece of land were soon afterwards purchased for 9,700 l.
Thereafter a contract of copartnery was settled and approved of by the directors.
By the first article it was declared, that the copartnership should be held to have commenced from and after the 28th January 1825; and it was further declared, that the subscribers should “have right to the profits, and be liable for the losses, arising from or upon the said business, and should be bound to relieve each other of all the debts and engagements of the company, but that only to the extent of and in proportion to their respective shares therein.”
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By the second article it was provided, that the subscribers should have “right to the profits and be liable for the losses of said business, and should be bound to relieve each other of all the debts and engagements of the company, in the proportion of their respective interests or shares in the capital stock.”
By the fifth article it was declared, that nine ordinary directors should be chosen; and that as certain gentlemen named formed the interim committee of management, and as it would require some time to arrange completely the details of the management, and agreeably to the resolution and minute of the general meeting of shareholders, of date the second day of February last, it was thereby declared, that William Trotter, Esquire, &c. should be nominated and appointed directors of the concern, and should continue in that office from the date of the contract, and for two years from and after the last Monday of May thereafter.
It was provided by the eighth article, “that the whole account books, papers, letters of correspondence, and other writings relative to the business of the company shall at all times be open to the directors and superintending committee and members thereof respectively, but to no other members of the company, unless ordered by the annual general meeting; and also that the directors shall have full power to make the purchase of land, ground, or other premises which they shall deem necessary for the concern, and are hereby authorized to complete and carry into effect the purchases made of the lands of Wheatfield and Meadowbank, and to take all requisite measures for the erection of suitable accommodations
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It was provided by the ninth article, “that the sums effeiring to the number of shares subscribed by the members of the said company respectively shall be advanced and paid in such instalments as the directors shall see proper to call for, and that in such mode, and at such times, and to such amount as they shall think proper, upon premonition of one month before the term of payment being given to the subscribers respectively, by letter addressed to each
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By the eighteenth article it was provided, “that a stated account, made out from the books of the company, and subscribed by the accountant and secretary, shall in all cases be sufficient to ascertain and constitute a balance and charge against a partner of the company, and no suspension shall pass of a charge so constituted, but upon consignation only.”
The twentieth article declared, “that the directors shall not be liable for omissions, nor for the sufficiency or responsibility of securities or property on which they may lend out or otherwise invest the funds of the company, nor for the actions or intromissions of the manager, banker, clerks, or accountant, or any other officers or agents of the company, or any other persons intrusted with the business of the company, nor shall they be liable in solidum nor pro rata for one another, but each only for his own actual intromissions.”
And the twenty-first article requires, “that each of the partners shall assign to the company, and the directors thereof for the time being, his own particular share and profits of the concern, in security of the debts and engagements of the company.”
It is provided by the twenty-third article, “that previous to the last Monday of May eighteen hundred and twenty-six, on which day the general annual
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Thereafter the contract was subscribed by shareholders, to the extent of 20,000 l. The directors. while it was in the course of subscription, took measures for the erection of the necessary buildings, the contract price being about 5,400 l., though they ultimately cost about 9,000 l.
There having been a previous call of five per cent., a call of ten per cent. was made upon the shareholders in June 1825, and another call to the like extent in July following, but the calls were only partially paid; the sum thereby realized was inadequate to meet the engagements of the directors, and they borrowed money to pay the price of the lands purchased and for the
Page: 359↓
The first general annual meeting of the proprietors of the company took place on the 29th of May 1826, and was attended by the principal shareholders, including the directors. A report was submitted by the directors, and approved of, containing a full statement of the affairs of the company up, to that date, and of the various arrangements which had been made for the completion of the purchases of the several heritable properties, the nature and terms of the building contracts into which they had entered for the erection of the premises at Meadowbank, and the state of progress of these buildings, which were then almost completed. The directors also explained, that “although names were put down for 2,032 shares, amounting in sterling money to 50,800 l., of which the directors allocated 2,000 shares, yet the contract was only signed by proprietors to the amount of 806 shares, being 20,150 l.” The report set forth the difficulties which the directors had experienced in carrying through the different pecuniary and other arrangements, from the delay on the part of many of the subscribers in paying up their instalments.
The meeting authorized these directors “to adopt such farther measures, from time to time, as they may consider necessary for promoting the prosperity of the concern.”
The affairs of the company became more involved, and the management more difficult, the subscribing partners declining to pay their different calls on the subscribed capital. The directors had to raise money
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At a general meeting in 1830 it was resolved to wind up the affairs of the company. It appeared from the reports on the affairs of the company, prepared by a juridical accountant, that “a total loss has arisen on the concern, as at 31st May 1834, of 36,685 l. 19 s. 2 ½ d., and after deduction of the amount of calls on the partners received and applied (extending to 15,068 l. 2 s. 10 3⁄4; d.), there remains a deficiency beyond the recovered capital, and the estimated property and funds of the company, of 21,617 l. 16 s. 3 ¼ d.;” that almost the whole of the above-mentioned loss had arisen from the fall in value of the heritable properties and buildings below their original cost, joined to the loss of interest on the prices, and the expense of titles and securities arising out of the purchase of those properties. The directors, or those in whose right they now stand, had made large advances from their own private funds, for the purpose of liquidating the debts and obligations of the company. The total amount of the outstanding debts of the company, in so far as the same had been ascertained, including the advances made by the directors, and advances by certain others of the partners, for the company's behoof, and in extinction of its obligations, was then 24,504 l. 10 s. 3 3⁄4 d.
The defenders (appellants) who, besides the respondents, were the remaining solvent partners of the copartnery, having refused to contribute, with a view to make up this deficiency, an action was raised against
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There were also conclusions for having it found that the appellants, in the event of any of their number becoming insolvent, should be liable rateably for any deficiency thereby occasioned; and there were also additional subsidiary conclusions with reference to the ultimate winding up of the concern.
In defence it was pleaded, 1st, that the liability of each partner was limited to the amount of the shares subscribed for; 2d, that the debts concluded for were contracted by means of loans and obligations entered into in violation of the contract, particularly the eighth article, and on the personal responsibility of the respondents
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A record having been prepared, parties were heard before Lord Jeffrey, as Ordinary, who (6th December 1836) pronounced the following interlocutor;—
“The Lord Ordinary having heard the counsel for the parties very fully, on the closed record and whole process, and made avizandum, repels the defence founded on the clause (or clauses) in the contract of copartnership, alleged by the defenders to import an absolute limitation of the liabilities of the partners inter se to the amount of the sums severally subscribed by them for and as their shares in the said copartnership; repels also the defence founded on the allegation that the pursuers or directors of the said company had no right to begin business, and no power to bind the partners for any debts or obligations on behalf of the said company, till the whole capital of 50,000 l. had been subscribed for and secured; and farther, repels the defence founded on the clause or provisions of the contract by which the defenders allege that the powers of the directors to borrow money on the responsibility of the company and the partners thereof were restrained; and, before farther answer, appoints the cause to be enrolled, that parties may
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explain in what way the cases of the several defenders are or may be affected by this deliverance, what findings or decernitures may be required to apply it to their several cases, and what farther determinations may be necessary to exhaust the cause as to the said several defenders, or any of them.”
To this interlocutor his Lordship added the subjoined note, explanatory of the grounds of his opinion. 1
_________________ Footnote _________________
1 “The first of the above-mentioned defences appeared to be that chiefly relied on. It was rested mainly on the provision in the close of the first article of the contract, ‘that the partners should be bound to relieve each other of the debts and engagements of the company only to the extent of and in proportion to their respective shares therein,’ and partly upon passages in the 8th, 9th, and 13th articles, which were said to confirm the construction put by the defenders on this first provision. According to that construction, this provision was specially intended to protect the body of partners from the consequences of overtrading, or rash and imprudent dealings, on the part of the directors, and was equivalent to an injunction that they should at no time put more than the subscribed capital at hazard, under pain of being made personally answerable, and without relief, for the consequences of any more extensive speculations. Now, if any thing be clear in this case, the Lord Ordinary takes it to be, that this limitation of the provision to the case of directors having occasion for relief is totally inadmissible. It is in express terms a provision limiting the right of relief of all the partners, as against each other. The case of directors is not once named or alluded to in any part of the article; and it is not less, but more, extravagant to say that it applies exclusively to them, than it would be to say that they alone were exempted from its operations. If it had really been intended to impose such a restriction upon the powers of the directors to bind the company, it is inconceivable that the parties should have introduced it into this first article, which merely sets forth the universal and common-law rights and liabilities of the partners, instead of bringing it in as a limitation of the great general powers given to those directors by article 8, which does contain a special limitation as to borrowing, or as a qualification of the great immunities conferred on them by article 21.
If the true meaning and effect of the restraining words now cited be therefore as the defenders contend, it necessarily follows that no one partner of the company who has been obliged by a creditor to pay any of its debts or engagements, or who is distressed by such a creditor,
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Against this interlocutor a reclaiming note was presented to the Second Division of the Court, and on
_________________ Footnote _________________ will be entitled to any relief from the other partners, beyond the amount which may remain unpaid upon the subscribed capital of each, and if all have paid up their whole subscriptions he will be entitled to no relief at all. Now the first question is, whether it is conceivable that so monstrous and unjust a provision could be intended, or could by possibility be admitted to have effect? The Lord Ordinary has never been able to get over this, and thinks that any construction of which the words are at all susceptible must be preferred to one which would lead to such a consequence. The defenders, indeed, endeavour to show that the consequences would all fall back upon the directors; and that if it was right that they should not trade beyond their capital, except at their own peril, there would be no harm in denying, even to an innocent partner, who might be subjected in the consequences of their so overtrading, all relief as against the other innocent partners, seeing, they said, that he might still have relief against the rash directors themselves; but this is evidently altogether fallacious. Take, first, the most favourable case for the defenders; assume, contrary to the fact, that the directors would do wrong in trading beyond the capital, and suppose that a private partner, having no concern with the management, is obliged to pay a debt so contracted, is there any justice or common sense in saying that he shall not be relieved by the other partners, who were equally liable to such distress? or, under the words relied on, would be enabled to claim relief from the directors who overtraded? Those directors are not liable for each other. The individuals who subjected the concern to the debt may be all insolvent, and the whole subscribed capital may have been long ago paid up. Then the directors are all necessarily partners; and it is not easy to see how they should not have the benefit of the provision in question as well as the others. There is confessedly no provision, nor any thing like a provision, in the contract, that the individual directors who overtrade shall be bound to relieve the partners who may be consequently distressed by the company creditors; and what the defenders seem to go on, in this attempt to escape from the result of their construction, is really nothing more than some vague notion of equity, and an assumed common-law liability of the directors, to an award of damages and reparation as the penalty of their so overtrading. In any ordinary case, however, there would plainly be no such liability; and in the cases most likely to occur there would be no shadow even of equity in seeking to subject them to such a penalty. There is, in point of fact, it must always be remembered, no declaration in the contract that no engagement shall ever be entered into beyond the subscribed capital. Now, suppose the whole of that capital paid up, and yielding great profits, under an admirable system of management, and that the directors, in order to increase those profits, contract for 100 more cows.
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“The Lords having considered this
_________________ Footnote _________________
and a corresponding range of new cow-houses, could it ever be said that this was a malversation, for which, in the event of any ultimate miscarriage, they could be made liable at common law in their own persons, and without relief from their partners? And if there would plainly be no such liability at common law, how is it possible to construe or spell it out of a provision in the contract which makes no distinction between directors and other partners; and instead of imposing any extraordinary liability on its members, consists wholly in a declaration (as the defenders at least allege) that they shall all be freed from the common and natural liability of partners.
But the radical fallacy of the defenders attempt to palliate the revolting consequences of their doctrine is that it is not true, in point of fact, that engagements which cannot be answered by the subscribed capital of the company must necessarily have been contracted by overtrading on the part of the directors; and that it is, on the contrary, undeniable, that cases must continually occur in which the natural right of partners to be rateably relieved of company debts by each other would be most unjustly cut off by that interpretation, while there was not the least pretext for recurring on the directors, or any one else, for reparation. Suppose the whole capital paid up and yielding a large profit, and the directors resolved, notwithstanding, to incur no new expense beyond the amount of the said capital actually in their hands. Suppose that the final call on the partners had recently yielded 10,000 l., and that this sum was deposited in a bank, and that on the faith of this they had contracted for 2,000 l. worth of cows, and 5,000 l. worth of new buildings, these undoubtedly would be engagements within their powers, and the line of their duty, even according to the rigid and imaginary restriction of the defenders. But suppose the bank to fail, the cows to die of distemper, the houses to be destroyed by fire, and the whole concern to be broken up before the prices of these articles were paid, and then suppose that the sellers and contractors should sue an individual partner for those company debts, and obtain decreet against him, could it be seriously maintained that he should have no relief whatever against his partners, but be obliged to pay 7,000 l. of company debts out of his own pocket, from the mere accident of his having been selected by a company creditor in preference to all or any of those who were equally liable to their diligence? Yet, if the defenders' reading of the provision in question is the right one, this would be the inevitable consequence. The partners are only to relieve each other to the extent of their subscribed capital still unpaid; but in the supposed case it is all paid, and the debts having been contracted when there was abundant capital in the hands of the directors to answer them, even the shallow pretext of handing him over to them for indemnity would be excluded. It is needless, indeed, to go to such an extreme
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_________________ Footnote _________________
case as has now been supposed, for the purpose of testing the doctrine of the defenders, since, unless it be held that no company is to contract any debts or engagements after its subscribed capital is paid up, however ample the stock in which that capital has been invested may be to answer them at the time, it is obvious that unavoidable misfortunes may reduce the creditors to the necessity of coming on individual partners for satisfaction, and that the most unheard-of injustice must be done, if they were to be excluded from all claim of relief on their associates.
The Lord Ordinary is satisfied, therefore, that this cannot be the meaning and effect of the provision relied on by the defenders; and the next question therefore is, what then is its meaning, and how are the words of it to be satisfied? These words, no doubt are awkward and ill assorted, but to him he will confess that they seem of very little importance; the whole passage from the word ‘declaring,’ in the first line of the page, to the end of the article, being, in his opinion, little more than an idle amplification of the elementary principle of all copartnerships, and which would be implied, though not once mentioned in the contract, viz., that the partners should share profit and loss according to their interest in the concern, [the words, ‘but only to the extent of and in proportion to their shares therein,’ being merely a clumsy and tautological way of expressing a proportional liability, and which, with a slight variance, might have been more clearly worded as follows:—‘but each only to an extent proportional to his share in the stock of the said company.’
But though the Lord Ordinary inclines strongly to think this, and no more, the true meaning of the words in question, he conceives that the peculiar form of expression may be explained by one or two suppositions equally inconsistent with the views of the defenders, and either of them far preferable to their interpretation. The clause, it will be observed, sets out with declaring generally, and without qualification, that the partners “shall have right to the profits, and be liable to the losses, arising upon the said business;” and it is only after having made this separate and absolute provision that it proceeds to say, “and shall be bound to relieve each other of the debts and engagements of the company, but only to the extent of and in proportion to their shares.” Now, the Lord Ordinary would suggest, that the debts and engagements of the company, thus contradistinguished from its losses, may have been meant of such debts and engagements only as might be satisfied without loss to the company, as being within the amount of the unpaid-up shares of the several partners; and that the limitation meant no more than this, that when any individual partner was distressed for debts of this description, he was to be entitled to proportional and total relief from the rest, but to the extent only of those
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Alexander and others appealed.
_________________ Footnote _________________
unpaid shares, by means of which the matter might, in such a case, be settled without any sacrifice of the funds actually in the hands of the company, and vested in its business, and consequently without giving occasion to any thing that could be entered as loss in the books of the concern. When the debts and engagements, however, exceeded the amount of unpaid shares, they necessarily fell upon the input or vested stock (or its profits), and thus passed into the separate head of losses, for which, by the preceding part of the clause, the whole partners are made liable absolutely, and without any limitation.
If this, however, be the just view of the provision, it is certain that the pursuers are entitled to judgment, the whole sums for which they now call on the defenders being either truly and literally losses, or debts and engagements, which remain after all the subscribed stock has been applied towards their liquidation.
The second supposition (which is not inconsistent with the preceding), by which a just and reasonable meaning may be given to the words in dispute, is, that they were intended not to cut off the inherent right of a distressed partner to equal relief from the others, but only to oblige him to seek it simultaneously and proportionally from them all; to deprive him, in short, of the power competent to an extraneous creditor of the company, of selecting one or a few to bear the common burden, and to make it necessary at once to convene the whole, and to come against each only to the extent of the proportion indicated by the amount of his share in the concern. This, it is conceived, was a proper and laudable object, and will fully explain and satisfy the words of the provision in question.
Understood in this sense, too, it has been carefully attended to by the pursuers in framing their summons, the conclusions being directed against the whole solvent partners of the company, and only for their rateable and proportional shares of the sums demanded.
If the case had admitted of no other solution the Lord Ordinary would have adopted either of these constructions in preference to that of the defenders, and indeed he is strongly inclined to the views on which the last of them is founded; but he has already stated that he considers both as unnecessary, and is satisfied on the whole that the words so much relied on are mere surplusage, and mean nothing more than what was already expressed, and would indeed have been implied if the whole clause had been omitted. One main reason for this opinion is derived from the tenor of that part of the second head or article of the contract, in which the whole of the passage already referred to in the first article is carefully repeated, with
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Appellants Arguments.
Appellants.—1. The action was ill-founded, because in a question inter socios the appellants could only be
_________________ Footnote _________________ one or two slight verbal changes, and the remarkable omission of the words ‘but only to the extent of,’ on which the whole case of the defenders depends. From the words ‘bind and oblige,’ in the fourth line of this second article, to ‘shares of the capital stock,’ in the ninth line, the whole is a literal transcript of the passage in the first article, including the obligation of relief, of which so much has been said, and the material thing is, that this obligation of relief is expressed in the second edition, without any limitation, except that of being proportional to the interest in the stock. It now runs thus,—“and shall be bound to relieve each other of all the debts and engagements of the company in the proportion of their respective interests or shares in the capital stock.” What was the object of this anxious iteration of a very unnecessary clause the parties have been unable to explain, and the Lord Ordinary does not pretend to understand. But as it is undeniable, that all the other slight variances of expression in the six lines so repeated do not make the least change in the sense or substance of the provision, so the utter omission of the words on which the defenders exclusively rely, affords a strong and almost conclusive reason for holding that this also was a variance by which the sense was not thought to be affected, and that the clear and indisputable meaning of the last edition of the words must also have been that of the first. If it was not, there is a palpable contradiction in these two consecutive clauses; and a contradiction which cannot be extricated or reconciled. By the one clause, the partners are bound to relieve each other only to the extent of and in proportion to their subscribed capital unpaid, and by the other they are bound to relieve each other in proportion to their interests in that subscribed capital. As to the meaning of the last there can be no doubt, and that meaning is entirely conformable to justice and common law. The former is in some measure ambiguous, and admits, as has been seen, of various interpretations; and, according to the defenders construction, it is utterly repugnant to justice, and without example in practice. If it admitted of no other construction but this, one of the contradictory provisions must give way, and the Lord Ordinary conceives that it cannot be that which stands last in the deed, and is alone conformable to equity and general law. If it does admit of construction, however, there can be no better guide to the true meaning than the immediate subsequent clause, in which the whole matter is resumed, with direct reference to the specific capital, which had not been previously defined. If this leading defence is not maintainable on the first article of the contract taken by itself, it is plainly in vain to hope that it may be aided by any of the rest. The special restriction upon borrowing in the close of the eighth article will be noticed in reference to the
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_________________ Footnote _________________
last defence. But as to any bearing it may be supposed to have on the first, it is enough to observe,—1st, that it relates expressly to the directors, and not to partners generally; and 2d, that it would obviously have been unnecessary if the first article had imported what the defenders now allege.
The ninth article again plainly relates exclusively to calls on the partners for the instalments of their subscribed capital, and to nothing else. It regulates in great detail the forms of such calls, and the subsequent proviso that the directors shall have no power thus to call for any sum beyond that subscribed, manifestly relates to such calls only, and not to actions of relief by partners distressed for company debts, or seeking to equalize the burden of its losses, after its business is at an end. The proviso was probably unnecessary; but it was apparently suggested by the loose wording of an earlier part of the same article, in which the directors are empowered to make their calls “at such times and to such amount as they shall think proper.” In fact, it is precisely equivalent to a parenthesis like this after the word amount, “(but never exceeding the sum subscribed by each such partner,)” which would have been a better way of expressing what might very well have been left to implication, and would obviously have afforded no room for the strained inference of the defenders.
The only other article referred to in relation to this first defence was the 13th, and when fully considered, it appears to make strongly against the views of the defenders. It relates to the right of a partner allowed to retire, or to sell his shares, to be relieved of all antecedent debts, &c., of the company. It first provides, that “he shall be entitled to relief of the whole of such debts,” and then the other partners “bind and oblige themselves severally to relieve him in proportion to their shares, and to the extent of their liability herein-before expressed.” Now, at the very most, this merely falls back on the original definition or measure of liability, and tends in no way to limit or define it. But looking to the clear and unqualified right of the retiring partner to be at all events relieved of the whole debts and obligations, and considering that on the defender's view of this original liability, he could have no relief at all, in the very probable case of the whole subscribed capital being paid up, when the creditors came to him for payment, it seems obvious that this liability could not be so limited as they allege, without imputing to this provision the most manifest inconsistency, as well as the grossest injustice.
With regard to the defence rested on the allegation that the directors had no right to begin business, or undertake engagements for the company, till the whole capital of 50,000 l. was subscribed, it is not
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The contract was framed on the basis that the partners were not to be liable under any circumstances
_________________ Footnote _________________ necessary to consider, whether there might not be cases where such a ground of pleading might be admitted. It is enough, that it is clearly excluded by the circumstances of the present. In the first place, the contract, though only begun to be signed in April 1825, expressly provides, that the copartnership shall be held to have commenced in January preceding, and refers to and recognizes in various places (and particularly in articles 5 and 8), the proceedings of various meetings of directors in February and March preceding. In particular it declares (article 5), that the directors appointed by a meeting of the 2d February shall be continued in office for two full years, so as that no interruption should be given to the operations in which they were engaged. To the Lord Ordinary it appears that no party signing this contract can be allowed to pretend ignorance of what had been done or sanctioned at these previous meetings. But the matter is not left to implication, for, in the 8th article of the contract, deliberately subscribed by the defenders, the directors are in express terms empowered “to complete and carry into effect the purchases made of the lands of Wheatfield and Meadowbank, and to take measures for the erection of suitable accommodation for the establishment, and to enter into all contracts and deeds necessary,” &c. Now, the lands of Wheatfield had been already bought for a price of 12,000
l., and the lands of Meadowbank for 9,750
l.; and yet the defenders, who all sign before any thing like the amount of these sums was subscribed, do instruct the directors, on their responsibility, to carry into effect those purchases, and to grant all necessary deeds for that purpose. It is quite in vain to say that partners who thus expressly recognized and adopted as acts of the company purchases made four months before, and when there was not one farthing of actual subscription, must be held (upon mere implication) to have meant that nothing further should be done till 50,000
l. had been actually collected; and that when they directed buildings to be erected on the lands so purchased they had no notion of authorizing any contract being entered into for that purpose till this whole capital was secured. If they declared it right and laudable to lay out 20,000
l. when they had no capital at all, it is extravagant to say that they would have reprobated the idea of contracting for necessary buildings to the extent of 9,000
l., when they had a subscribed capital of only 20,150
l. The directors accordingly entered immediately into such a contract, and the buildings were actually in progress before most of the defenders subscribed. The Lord Ordinary cannot think it doubtful that they were fully warranted in so doing, by the express terms of the contract already in part recited. But in this way the company was bound, by the express authority of the defenders and the other subscribers, and before a single subscription was realized, to the extent of more than 30,000
l., which was
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the true origin of the debts still owing, and in fact, with the other unavoidable expenses of the experiment thus authorized, the source of the whole losses which have been sustained.
This alone might dispose of the defence, that the directors had no right to expose the partners to hazard, or to bind them in any obligation till the whole capital was subscribed. But there is another provision in the contract which is separately conclusive upon this head. This is the latter part of the second article, which expressly declares, that it “shall be in the power of the directors to retain, for behoof of the company, such number of shares as they may think proper of the said capital stock, to be disposed of by them in such way as they may think best for the company.” Now, under this provision, it is plain that the directors might have retained, and for as long as they thought fit, any proportion of the 2,000 shares into which the 50,000 l. of proposed capital was to be divided; and it would be palpably absurd to say, that they were not to begin business so long as any part of these was so retained. How, then, can it be pretended that, under this contract, they were not entitled to begin business till the whole 2,000 shares were appropriated? And what practical difference would it have made, if they had, by an express minute, declared the 1,300 shares which were actually undisposed of, had been retained in terms of this provision, for behoof of the concern? In point of substance and effect they were so retained, and as completely at the disposal of the company and its managers as if a minute to this effect had been formally engrossed in the books. That it was not so engrossed may be an impeachment of their book-keeping or accuracy in entering their transactions, but can never deprive them of the substantial power, under which they have really acted, or subject them to forfeitures as for breach of an imaginary interdict against entering on business till all the shares are actually taken by individual partners, in the very face of this express licence and permission to the contrary.
The last defence disposed of by the preceding interlocutor, is that founded on the concluding part of the 8th article of the contract, by which the directors are empowered to borrow “on the credit and security of the company,” to the extent of 3,000 l., provided there is subscribed capital unpaid up to that amount at the time. This, though properly an empowering clause, is contended to import a prohibition to borrow, except on those conditions, and this prohibition, the defenders say, the directors have violated, by borrowing to a much larger extent, and when there was no such unpaid capital; and they maintain they cannot be called on to relieve them of the consequence of such borrowings.
Now, the short answer to this is, that there have been ‘no borrowings on the credit and security of the company,’ to a greater extent than is permitted by the contract; that the greater part of the transactions
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complained of under that name consisted merely in granting new securities for debts previously existing, and recognized in the contract itself, and the remainder in raising money on the personal credit of individual partners or directors, and afterwards advancing it to pay off the most pressing of the existing debts of the company. According to the Lord Ordinary's impression, there is no one case in which money has been raised, directly or indirectly, on the company's account, in order to extend its business (the case evidently contemplated in the provision referred to), or for any other purpose than to satisfy the claims to which the company was liable from the very beginning, or which ought to have been defrayed by the withheld instalments on the subscribed capital. It is needless to go here into the details of those proceedings; but with the exception of the sums actually advanced for those purposes out of the private funds of individual directors, the Lord Ordinary is not of opinion that any farther investigation is necessary. With regard to these, a question may no doubt be raised, whether the condition of the company was not such as to have made it the duty of the directors rather to have allowed the creditors, whom they thus pacified with their own money, to have proceeded with diligence against its property, than to have delayed an inevitable catastrophe by such interference. If the defenders can make out any case of gross and pernicious imprudence of this kind, it will be open to them to do so under the preceding interlocutor, which merely finds that these were not acts of borrowing on the credit and security of the company, in contravention of the contract. To him it certainly occurs, that it would be next to impossible to make out such a case. By paying the most urgent debts of the company with their own money, they may have done no real service to the concern. But they would seem entitled, at all events, to come in the place of the stranger creditors, whose proceedings they thus arrested, and against whose claims it is admitted that the defenders would have had no protection.
In these circumstances, it is needless to inquire into the justness of the legal assumption, that the grant of a limited power in a contract of this description implies such a penal prohibition against exceeding the limit, as in every case to infer the forfeiture of equitable rights, otherwise competent at common law, to persons in the situation of the pursuers; and it is equally unnecessary to consider the effect of the declaration, which immediately precedes this implied prohibition, viz. “that the powers of the directors shall, in all particulars, be subject to such limitations, extensions, and alterations as a general meeting shall think fit,” taken in connexion with the fact, that the whole proceedings of the directors, with their books and documents, were submitted to several general meetings, subsequent to the public conclusion of all the transactions now complained of, and deliberately sanctioned by a general vote of approbation.”
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The first clause contained the important qualification as to this limitation of liability. It expresssly declares, that the partners “shall have right to the profits and be liable for the losses arising from or upon the said business, and shall be bound to relieve each other of all the debts and engagements of the company, but that only to the extent of and in proportion to their respective shares therein.” This qualification is set forth as a substantive provision in the very outset of the contract. It occurs in the very first clause. And it is quite clear that this is the operating clause.
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The ninth clause also expressly bears, “and in no event shall it be in the power of the directors to call upon the partners for a sum beyond that subscribed for by them respectively.” These words not only proceed on the notion of, but expressly provide for a restricted liability. The directors were empowered to direct the shares subscribed for to be paid by instalments. So long as any portion of these instalments was not paid they had a certain security for any engagements which they might undertake. But in so far as related to indemnification from the partners their claim ceased with the amount of the shares. Whatever engagements they might enter into beyond this sum they could not look to the partners for indemnity. The partners were entitled to stand on the stipulation, “that in no event shall it be in the power of the directors to call upon them for any sum beyond that subscribed for by them respectively.” If it had been the intention of the partners to undertake a general liability for each other, for all the obligations of the company, whether they exceeded the amount of the subscribed capital or otherwise, this clause would never have been introduced into the contract. It indicated, as plainly as words could do, that if the directors, by overtrading or mismanagement, exceeded the amount of capital, all obligations beyond it must be
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The other clauses in the contract aided the same construction, in which there is nothing unreasonable, as it only imports a salutary limitation of the common law liabilities, which it was expedient in this instance to restrain.
2. As the greater portion of the debt concluded for in the present summons was contracted by means of advances made by the individual directors, or of obligations entered into by them on their personal responsibility, and ultimately paid by them out of their own funds, the appellants were not bound to relieve the respondents of any such advances or obligations.
This proposition had been met in the note of the Lord Ordinary by the inconclusive remarks, that there had been truly no borrowings, “that the greater part of the transactions complained of under that name consisted merely in granting new securities for debts previously existing, and recognized in the contract itself, and the remainder in raising money on the personal credit of individual partners or directors, and afterwards advancing it to pay off the most pressing of the existing debts of the company.” All this, however, proceeds on a very obvious fallacy, in point of argument, and on a mistake in regard to the fact. The Lord Ordinary manifestly assumes, that the raising of money fell within the ordinary powers of administration of the directors, and that, provided they could raise it, without borrowing it, in the strict sense
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3. The appellants were not liable for the sums concluded for in this action, in respect that the respondents, contrary to the fair meaning of the contract, proceeded in the business of the partnership before the contract was subscribed for the whole stipulated capital, and that they afterwards persevered, when, in the knowledge that it was not then subscribed to the extent of one half of this capital, concealing from their copartners the important alteration which had occurred in the defalcation of the capital.
The appellants knew nothing of the relative number
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The Lord Ordinary notices the appellants “pretending ignorance” of what had been done. His Lordship says, that if they thought it right to lay out 20,000 l. “when they had no capital at all,” it is extravagant to say that they would have reprobated buildings at a cost of 9,000 l., “when they had a subscribed capital of only 20,150 l.” But this is absolute perversion of the fact. In place of having no capital at all, when they authorized an outlay of 20,000 l., they believed, upon the written report of the respondents, that they had a capital of 50,000 l.
Independently of the interlocutors being erroneous on their merits there would be manifest injustice in repelling these defences, which extend so deeply into the merits of the action, before the appellants have had an opportunity of bringing forward, their whole case upon the alleged acts of mismanagement, which they were confident would work their exemption from the present claim. No judgment ought therefore to be pronounced which would conclude them, by a decision in one branch of the cause.
Respondents Argument.
Respondents.—1. The respondents, as directors and partners, or in right of directors and partners, of the Caledonian Dairy Company, were by law liable only rateably, according to the respective shares held by them of its stock, for the losses sustained and debts and obligations incurred by that company; and they were
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In the first place, what each of the appellants was called upon to contribute towards the relief of the respondents was a sum proportioned to his own share of the stock. Had these claims been made by creditors who were not partners of the company the solvent partners would have been liable, conjunctly and severally, and each partner might have been sued in solidum. But as this is an accounting inter socios, the claim is framed upon a different footing, each of the appellants being sued only for his rateable proportion of the sums of which the respondents are entitled to be relieved.
In the next place, this was not an action for payment of calls to contribute to the stock of the company. The company has been dissolved, and the object of the action is merely to adjust and allocate among the different partners, according to their respective interests in the concern, the losses which have been incurred, and the debts which remain unpaid.
The appellants, accordingly, had not disputed that the respondents have a legal right to such relief as is thus claimed by them, unless that right is excluded by the conditions of the contract of copartnery; but they said that that contract contains stipulations which exempts them from their legal obligation so to contribute towards the relief of their copartners. The Court of Session had found that pretence to be altogether untenable, on the grounds so unanswerably slated in the note of the Lord Ordinary.
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2. The contract of copartnery contained no condition importing a limitation of the liabilities of the partners, inter se, to the amount of the sums severally subscribed by them for and as their shares in the copartnership; but, on the contrary, it imposed upon them an express obligation to relieve each other rateably, according to their respective interests in the concern.
In no part of the first clause is the amount of the sums subscribed by the partners said to be the measure of their liability. From beginning to end of that clause the amount of the sums subscribed by them not only is not referred to for that purpose, but is never once mentioned for any purpose whatever. What the contract refers to as the measure of the liability of partners inter se, is just the equitable one established by the law of Scotland itself, viz. “proportions corresponding to their respective shares” in the company; and, in the next place, even had there been any doubt otherwise as to the meaning of the rule thus stated for regulating the liability of partners inter se, certain it is, that at all events it could not mean that the sums subscribed by the respective partners should be the limit of their liability. That meaning at all events must be excluded; for, it will be observed, that the right of the partners to profits, as well as their liability for losses, and for relief of debts, was to be measured by the same rule. The words “only to the extent of, and in proportion to, their respective shares therein,” apply to the one as well as to the other. The amount of the subscribed capital of each partner, therefore, cannot be the rule which is here prescribed for measuring the extent of his right
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The appellants were not entitled to resist the claim of the respondents on the pretence that the directors of the company had not power to bind the partners for debts and obligations on its behalf till the whole capital of 50,000 l. has been subscribed for and secured; and they were not freed from their legal obligation of rateable relief to the respondents by the clause in the contract relating to the borrowing of money.
These positions were amply supported by the reasoning of the Lord Ordinary, and the opinion of the Court as expressed by Lord Medwyn. 1 And there could be no danger to the ultimate and satisfactory adjustment of the rights of the parties in the further progress of the action by affirming these interlocutors, as every thing else was clearly reserved by the Lord Ordinary in disposing of three of the defences founded on.
The
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1 Report in Fac. Coll.
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“The action was resisted on the ground, 1, that the liability of each partner was limited to the amount of the shares subscribed for; 2, that the debts concluded for were contracted by means of loans and obligations entered into in violation of the contract, and on the personal responsibility of the respondents individually; 3, that the claim of the respondents was barred in respect that they proceeded to carry on the business after they knew that the capital was not half filled up, without communicating that fact to the partners; and, 4, that it was barred in respect that the whole of the losses had arisen from their own violation of the contract, their concealment and misrepresentation, and from their gross negligence and misconduct in the management of the company's affairs.”
Now, the interlocutor of the Lord Ordinary, affirmed by the Inner House, disposes of three of these grounds in the very same terms in which they are put forward by the defenders themselves. It repels
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My Lords, it is consistent with the practice of the
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1 Auchterarder Case, see antea, p. 220.
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Now, my Lords, that being very plain upon the interlocutor,—such being the understanding of the Lord Ordinary, and the clear opinion of the judges of the Second Division of the Court, and I may say the clear opinion of your Lordships upon the discussion of the merits of the case, in the way almost conceded by the learned counsel for the appellants, for no resistance could be made to the conclusion to which the Court of Session had come, the difficulty, if any, was supposed to arise upon this point of form. If your Lordships are of opinion, as I certainly am, that the point of form is not open to the observations which have been made upon it, your Lordships cannot hesitate, upon a matter which appears upon investigation to be extremely plain, to affirm the interlocutor of the Court below, with costs.
The House of Lords ordered and adjudged, That the said petition and appeal be and is hereby dismissed this House, and that the said interlocutors therein complained of be and the same are hereby affirmed: And it is further ordered, That the appellants do pay or cause to be paid to the said respondents the costs incurred in respect of the said appeal, the amount thereof to be certified by the clerk assistant: And it is also further ordered, That unless the costs, certified as aforesaid, shall be paid to the party entitled to the same within one calendar month from the date of the certificate thereof, the cause shall be remitted back to the Court of Session in Scotland, or to the Lord Ordinary officiating on the bills during the vacation, to issue such summary process or diligence for the recovery of such costs as shall be lawful and necessary.
Solicitors: Richardson & Connell — Archibald Grahame, Solicitors.