United Kingdom House of Lords Decisions

Lord Chancellor—My Lords, the facts of this case lie in a very narrow compass.

The appellant is the holder of £6000 stock in the bank, £5000 of this stock he bought in the years 1872 and 1873 from trustees who held it for the bank, and £1000 was allotted to him by the bank in 1873. After the bank stopped payment, as your Lordships have heard in the other cases, the directors employed accountants to make a report upon its affairs. This report was made on the 18th of October 1878, and was on that evening sent by post to the shareholders. The appellant received his copy of the report on the 19th of October, and thereupon he discovered, as he alleges, that he had been induced to take the stock in the bank by fraudulent misrepresentations of the directors. The 20th of October was a Sunday, and on the 21st of October he commenced an action in the Court of Session for reduction of his contract as a shareholder with the bank. The resolutions to wind up the company voluntarily were passed on the following day — the 22d of October—and on the 13th of December, the name of the appellant having been put by the liquidators on the list of contributories, he presented a petition to have his name removed, which petition was refused, and hence the present appeal.

My Lords, I ought to assume, and will assume for the present purpose, that whatever difficulties arising from lapse of time and other circumstances might—as between the appellant and the bank—lie in the way of his succeeding in the action of reduction he has instituted, he would have been entitled, had the bank been a going concern, to have succeeded in the action. The question is—Can he succeed in rescinding his contract after the bank has stopped payment?

The Lord President states that the law upon this subject is contained in three propositions. In the first place, a contract induced by fraud is not void, but only voidable at the option of the party defrauded. Secondly, this does not mean that the contract is void till ratified, but it means that the contract is valid till rescinded; and thirdly, the option to void the contract is barred where innocent third parties have, in reliance on the fraudulent contract, acquired rights which would be defeated by its recission.

Upon the two first of these propositions there cannot, I should think, be any dispute; and none was raised in the argument at your Lordships' bar. Nor was there any dispute as to the principle of the third proposition. The only question was as to its precise wording, and the extent and mode of its application.

The case of Oakes v. Turquand (L.R., 2 Eng. and Ir. Apps. 325) in this House has established that it is too late, after a winding-up has commenced, to rescind a contract for shares on the ground of fraud. This, no doubt, is on the grounds stated by the Lord President, that innocent third parties have acquired rights which would be defeated by the recission. The case of Oakes v. Turquand, however, while it decided negatively that a contract could not be rescinded on the ground of fraud after a winding-up had commenced, did not decide affirmatively the converse proposition, that up to the time of the commencement of a winding-up a contract to take shares could be rescinded upon the ground of fraud. Whether it can or not be so rescinded up to that time must, I think, depend upon the particular circumstances of the case.

In an ordinary partnership not formed on the joint-stock principle, it is impossible, as a general rule, for a partner at any time to retire from or repudiate the partnership without satisfying or remaining bound to satisfy the liabilities of the partnership. He may have been induced by his copartners by fraud to enter into the partnership, and that may be a ground for relief against them; but it is no ground for getting rid of a liability to creditors. This is the case whether the partnership is a going concern or whether it has stopped payment or become insolvent. In the case of a joint-stock company, however, the shares are in their nature and creation transferable, and transferable without the consent of creditors; and a shareholder, so long as the company is a going concern, can by transferring his shares get rid of his liability to creditors either immediately or after a certain interval. The assumption is, that while the company is a going concern no creditor has any specific right to retain the individual liability of any particular shareholder.

It is on the same or on a similar principle that so long as the company is a going concern a shareholder who has been induced to take up shares by the fraud of the company has a right to throw back his shares upon the company without reference to any claims of creditors. He would have a right to transfer his shares without reference to creditors. The company is a going concern, is assumed to be solvent and able to meet its engagements, and to have a surplus; and, the company being solvent, its duty to pay the repudiating shareholder what is due to him, and to take the shares off his hands, is an affair of the company and not of its creditors.

But if the company has become insolvent, and has stopped payment, then, even irrespective of winding-up, a wholly different state of things appears to arise. The assumption of new liabilities under such circumstances is an affair not of the company but of its creditors. The repudiation of shares which, while the company was solvent, would not or need not have inflicted any injury upon creditors, must now of necessity inflict a serious injury on them. I should therefore be disposed in any case to hesitate before admitting that after a company has become insolvent and stopped payment, whether a winding-up has commenced or not, a recission of a contract to take'shares could be permitted as against creditors.

But in the case before your Lordships the facts are extremely peculiar, and I do not think that your Lordships in affirming the judgment of the Court of Session will find it necessary to lay down

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