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[VOL. X.


CompanyWinding-upPromotion MoneyDirector, Liability of, for alleged
MisfeasanceCompanies Act, 1862, s. 165.
Upon the formation of a company promotion money had been improperly
paid, of which B. was cognizant though not a party thereto. B. suhse-.
quently became a director, but took no steps to recover the money for the
The company was now being wound up. On a summons by tho liquidator
to make B. liable under the above circumstances:
Held, that B. was not liable for wilful default or for misfoasance under
sect. 165 of the Companies Act, 1862.

THE Forest of Dean Coal Mining Company was formed in 1873

for the purchase of certain collieries of which J. F. Corbett was
the owner.
In the negotiations for the purchase, in 1872, it was agreed that
the purchase-money for the collieries should be 35,000, to be paid
by the company partly' in money and partly in shares; and it was
agreed between Corbett and J. F. Johnson, the promoter of the
company, that Johnson and his nominees should receive out of
the purchase-money 10,000 for its promotion, which sum was
subsequently paid to them. At that time Osman Barrett had a
mortgage on the collieries for 7000, and it was agreed that he
should join in the conveyance, and take a fresh mortgage for the
same amount. The property was accordingly conveyed to the
trustees of the company, and a fresh mortgage executed.
Barrett was informed by Corbett at the time of these transactions of the payment of the said sum of 10,000, but he was not
then a shareholder in the company nor one of the proposed
directors. He afterwards qualified, and, in December, 1875, he
became a director, but he did not take any steps towards recovering for the company the said sum of 10,000.
In 1877 an order was made for winding up the company, and
the liquidator now applied, by way of adjourned summons, to
make Johnson and his nominees liable to repay to the company
the said sum, and also to make Barrett liable for his alleged misfeasance in not taking steps to recover the money of the payment
of which he was cognizant.

VOL. X.]



The main question was whether, under the above circumstances,

Barrett was to be made liable.

In re

Chitty, Q.C., and Whitehome, for the liquidator, in support of the


There is no question as to the liability of Johnson and his

nominees to refund the sum of 10,000, which was improperlypaid to them out of the purchase-money of the collieries, but we
contend that Barrett is also liable. ' He was at the time of the
purchase mortgagee of the collieries, and it will not be disputed
that he was cognizant of the transaction. He subsequently became a director, and then it was his duty to communicate to the
shareholders the misappropriation of the company's property and
to move his co-directors to take steps to recover the money.
He is in the position of a trustee who has been guilty of wilful
default. At any rate, he is within the terms of sect. 165 of the
Companies Act, 1862, inasmuch as he is a past director who " has
been guilty of a misfeasance or breach of trust in relation to
the company."


Baveij, Q.O., and Bush, for Mr. Barrett, were not called on.



I am quite clear about this case. One must be very careful in

administering the law of joint stock companies not to press so
hardly on honest directors as to make them liable for these constructive defaults, the only effect of which would be to deter all
men of any property, and.perhaps all men who have any character
to lose, from becoming directors of companies at all. On the
one hand, I think the Court should do its utmost to bring
fraudulent directors to account, and, on the other hand, should
also do its best to allow honest men to act reasonably as directors.
Wilful default no doubt includes the case of a trustee neglecting to sue, though he might by suing earlier have recovered a
trust fund,in that case he is made liable for want of due dili^gence in his trust. But I think directors are not liable on the
same principle. Directors have sometimes been called trustees,
or commercial trustees, and sometimes they have been called

M. R.
j n re


[VOL. X.

managing partners, it does not much matter what you call them
so long as you understand what their true position is, which is
that they are really commercial men managing a trading concern

^ or t n e k e n e n ^ of themselves and of all the other shareholders

in it. They are bound, no doubt, to use reasonable diligence

having regard to their position, though probably an ordinary

director, who only attends at the board occasionally, cannot be
expected to devote as much ,time and attention to the business as
the sole managing partner of an ordinary partnership, but they
are bound to use fair and reasonable diligence in the management
of their company's affairs, and to act honestly.
But where without fraud and without dishonesty they have
omitted to get in a debt due to the company by not suing within
time, or because the man was solvent at one moment and became
insolvent at another, I am of opinion that it by no means follows
as a matter of course, as it might in the case of ordinary trustees
of trust funds or of a trust debt, that they are to be made liable.
Traders have a discretion as to whether they shall sue their
customers, a discretion which is not vested in the trustees of a
debt under a settlement. In fact the customers of a trading partnership are very often allowed time, because the partners may
think that, if they do not allow them time, they will drive the
customers into bankruptcy and so suffer a greater loss than by
giving them time; indeed they not only very often give them
time, but they lend them money or sell them goods in the hope
that better times may come and enable them to pay their debts.
Again, it may very often be most injurious to the trading
concern to sue some of their debtors after the first few losses,
because driving some of their debtors into bankruptcy might be
very injurious to the trade, more so, in fact, than the chance of
suffering a loss by letting them go on without taking action
against them. Such a case as this has, in my opinion, no direct
relation to the rule which makes it incumbent on a trustee to sue
a debtor at once under pain of having the liability for the debt
afterwards thrown upon him, on the ground that if he had sued
he could have got the money. On the other hand, as we know, a
debtor must be presumed to be solvent unless the trustee can show
he was insolvent. .

VOL. X.]



But in my opinion no such liability attaches to directors of

M. E.
joint stock companies. They must, as ordinary managing partners
of a trading concern, be allowed a discretion, and not be too much
In re
interfered with by the Court, or have inquiries made by the Court FOREST OP
as to whether the debtor could have paid at a particular moment MINING
a larger or a smaller amount if he had been sued. So much with
regard to ordinary debts.
Again, directors are called trustees. They are no doubt trustees
of assets which have come into their hands, or which are under
their control, but they are not trustees of a debt due to the
company. The company is the creditor, and, as I said before,
they are only the managing partners. In my opinion it is extravagant to call them trustees of a debt- when it has not been
received. You may of course have an actual trust of a debt, as in
the case I put before, where trustees have assigned to them a debt
to get in, but that is not the case with directors of a company. A
director is the managing partner of the concern, and although a
debt is due to the concern I do not think it is right to call him a
trustee of that debt which remains unpaid, though his liability in
respect of it may in certain cases and in some respects be analogous
to the liability of a trustee. So much for the question of unpaid
The next point is this: does that reasoning which applies to a
debt apply to a demand of this kind, which is a liability, though
not strictly a debt ? I do not think it does. There are totally
different considerations applicable to this kind of demand or liability from those applicable to an uncontested debt.
Analogy or illustration is sometimes useful. In the case of
trustees newly appointed, their liability extends to seeing that
they get the trust funds into their hands; but did anybody ever
imagine that their liability extended beyond that, or that they are
bound to inquire into all the dealings with the trust fund from
the origin of the trust, and to pursue every past trustee who might
by any means whatever have become liable to pay more than the
actual trust funds ? The case I would put in illustration is this :
suppose a trust of 10,000 consols, and one of the trustees with
the connivance of the other sells out the stock and engages with
it in trade; ten years afterwards he replaces it; five years after


M. R.

In re

[VOL. X.

that the trustees retire, and new trustees are appointed in their
place, who find the fund intact. One of the trustees is then told,
" I t is all right now, but the money has only been paid in live
years before," and is told that one of the former trustees had used
it in his trade. It is intolerable to suppose that the new trustee
should be made liable for not filing a bill, as it was formerly
under the old procedure, or bringing an action, as it is now, against
the former trustee, or his representative supposing he is dead,
with the view of getting from him either the extra interest over
and above the interest of the consols, or the profits he might have
made from the use of the money in his business. Is that sort of
liability on the part of a former trustee one which the new trustee
is bound to enforce, though no doubt it would be one which the
cestui que trust has power to enforce ? In my opinion it would be
extending the liability of trustees, which in my judgment is quite
heavy enough as the law stands, to a point to which, it has never
been stretched before; and, as I have said before, I think if there
has been any error at all in the course taken by the Courts of
Equity against trustees it has been in pressing honest trustees too
far, one result of which has been that it is now very difficult to get
people to accept offices of trust for which they receive no remuneration, and in respect of which they may be placed under great
liabilities. I am always ready to make, and have always been
desirous of making, a dishonest man liable for every farthing of
which, he has defrauded a trust, and of making him liable also to
pay exemplary damages or interest in every case in which the law
will allow it; but at the same time I have always thought it
would have been much more wise in Courts of Equity had
they been less strict as regards mere omissions, or even what
they have chosen to call neglect, on the part of persons who
endeavour honestly and faithfully to perform their trust, but who
notwithstanding, either from some mere mistake, or some error in
law or of judgment on the part of themselves or their legal
advisers, or of some defalcation on the part of their agents, have
been made liable sometimes for vast sums of money, although they
had taken every possible pains to appoint proper solicitors and
counsel^ and to engage proper agents to advise them, and to
manage the estates, and to receive the rents and profits of them.

VOL. X.]


Therefore, I think it is not the duty of a Judge to strain or

stretch the law so as to make it apply to new liabilities, and if
such a case as I have mentioned came before me I certainly
should not hold the new trustee liable.
Now, to apply these observations to the actual case before me,
I must first of all consider what the position of the Eespondent
Barrett was here, and I find that he was mortgagee of the vendor,
and a mortgagee, as I understand, for some 7000. The vendor
had a mine worth, to sell, 25,000. A company was formed to
buy the mine, and the promoters of the company induced the
vendor to do what was no doubt very wrong, and indeed amounted
to a fraud on the company, namely, to add nominally 10,000 to
the purchase price, so as to make the actual purchase price to the
company 35,000 instead of 25,000, so that the company was to
pay to the vendor 35,000 in money and shares, and the directors
were to divide the plunder or extra sum between themselves and
the promoters. Of course as regards all these promoters, some
of whom are not now accessible, there can be no question of their
liability for what was no doubt a gross fraud. The vendor got
nothing by it except this, that he got 25,000 for his mine, which
probably was not very readily saleable at that price, and no doubt,
therefore, he had an interest in the matter to that extent. But
still we must not forget that the company has affirmed the sale
for 25,000, taking away the profits of the directors, and it cannot
be possible, therefore, for the liquidator to say now that it was not
a good sale to the extent of 25,000.
Now, Mr. Barrett as mortgagee knew of the transaction, and he
got paid to some extent, not out of the 10,000, because he got
none of that, but out of the 25,000. Therefore he did not
receive any part of the plunder, and he is not responsible on that
ground any more than you could make the vendor responsible for
any part of the 25,000 on the ground that he would not have got
as much as 25,000 if he had not assented to it. But the ground
on which it is sought to make Mr. Barrett liable is t h i s :
The transaction took place in 1872, and he became a director of
the company in December, 1875. In 1877 the company went into
liquidation, and it is said that, having knowledge when he was
appointed a director, of the company of the facts I have mentioned,

In re


M. R.


[VOL. X.

it was his duty to communicate that knowledge, acquired by him

three years and a quarter before he became a director, to the
shareholders of the company; and that it was also his duty to
FOREST OP institute, or to endeavour to institute, proceedings against the
MINING promoters, in order to obtain the return of this 10,000 of which
' the company had been defrauded.
And then it is said that, because he did not communicate to the
shareholders the knowledge he had acquired previously to becoming a director, and because he took no steps as a director of
the company to institute proceedings against the promoters, he is
now to be made liable for this 10,000 under the doctrine of
wilful default, which means, I suppose, that he is bound to shew
that if proceedings had been instituted soon after December, 1875,
when he became a director of the company, those proceedings
would not, before the end of 1876, have produced the 10,000.
To my mind it is simply unreasonable to suppose it, and it is
incredible that that would have been the case.
In the first place, I have never heard that it has been held to
be the duty of a director to communicate to his shareholders
knowledge acquired by him years before, as to misconduct with
reference to the affairs of the company on the part of other
persons for which they may be still liable. I know of no reason
whatever why he should do so, or of anything which compels a
director to disclose to his shareholders his antecedent knowledge
even of frauds committed on the company.
I put a case which perhaps may sound ridiculous, but when you
have extravagant propositions to deal with, ridiculous illustrations
are really not the worst mode of meeting propositions of such a
character. Suppose the case of a company dealing with a man
for butter, and one of the directors of the company had, three
years before he became a director, purchased the butterman's
business, and had discovered that that butterman had been in the
habit of supplying the company for some years, and had also
discovered from the books of his vendor that he had supplied the
company with butter at short weight, and had already defrauded
the company of 1000he himself, of course, not continuing the
systemwould he, under such circumstances, be liable to the company for not disclosing to the shareholders that he had ascertained

VOL. X.]


that this retired butterman had in this way defrauded the company of 1000, for which he or his estate might be made liable ?
It would be obviously, to my mind, an extravagant proposition
that that director could be made liable for not disclosing the
knowledge so acquired by him at so long a period before he became
a director of the company.
This however has, of course, no relation whatever to cases where
the whole matter forms part of one transaction, and where there
has been some arrangement, some juggle by which the parties to
a fraud might say, " we will not go on the direction of the company until the fraud is completed," because the Courts are quite
strong enough to reach cases of that sort when they arise, but this
is a case where the man derived no benefit whatever from the
frauds of the promoters. It appears to me that I should tnot be
expounding or applying the law, but that I should be making
new law, if I were to hold directors liable for withholding their
knowledge from shareholders under such circumstances.
Then is Mr. Barrett liable in this case for not taking proceedings ? I do not think it is very likely that he would have succeeded at the board in persuading his co-directors to take
proceedings at all. I do not think the majority of the board
would have concurred with him without the sanction of the shareholders j but even supposing he could have got their concurrence, what would it have amounted to ? It appears to me it
would still fall within the range of the observations I have.
already made, and that is, that as there was no obligation upon
him to tell his brother directors the knowledge he had, so there
was no obligation upon him to initiate by resolution or otherwise
any attempt to sue the promoters; because it must be remembered, as I said before, that it is not an admitted debt; if the
transaction had occurred some time before, there would have been
probably a protracted and very hostile litigation about it, and it
by no means follows that at the end of the litigation any money
would have been forthcoming any more than there is now; and
any discreet or cautious director might very well have said, " It is
not wise to take proceedings in this matter; we shall probably not
get anything by it, and if we do, it will do the company a great
deal of mischief, and we had far better let bygones be bygones."

M, R.
In re



M. E.
In re


[VOL. X.

I do not think it is for this Court to say that a man is to be made

liable simply because he does not choose to sue, or does not take
steps to sue under such circumstances.
That being so, I think he is not under any legal liability at all;
but even if he were, he could not be considered liable for the whole
10,000; he could only be held liable for what was lost by his not
suing. And supposing the company had brought an action in the
beginning of 1876, who can tell that the action would have been
ended in 1877, when the company went into liquidation ? I am
satisfied that they would have litigated it to the utmost, and the
company would have got into liquidation long before the end of
the litigation ; so that, even from that point of view, I am not at
all satisfied that there was anything really lost by their not suing,
and therefore the notion that this gentleman is to be made liable
on that ground is entirely unreasonable.
Then the next question is, whether the 165th section of the Act
applies to such a case as this ? That section provides that " where
in the course of the winding-up of any company under tin's Act it
appears that any past or present director, manager, official or
other liquidator, or any officer of such company, has misapplied or
retained in his own hands, or become liable or accountable for any
moneys of the company, or been guilty of any misfeasance or
breach of trust in relation to the company," he may be made
liable. Now Mr. Barrett is not liable under the first part of the
section at all. It was not money in his hands ; he is not liable
for money of the company, because the money had gone long ago,
and, therefore,-if he is liable at all, it is for misfeasance or breach
of trust in relation to the company, and misfeasance or breach of
trust means here either non-communication of his knowledge to
the shareholders or not endeavouring to institute proceedings.
Then the section provides that " the Court may on the application of any liquidator, or of any creditor or contributory of the
company, notwithstanding that the offence is one for which the
offender is criminally responsible, examine into the conduct of
such director, manager, or other officer, and compel him to pay
any money so misapplied or retained, or for which he has become
liable or accountable, together with interest after such rate as the
Court thinks just, or to contribute such sums of money to the



assets of the company by way of compensation in respect of such

misapplication, retainer, misfeasance, or breach of trust, as the
Court thinks just."
Of course, if I had arrived at the opinion that the man was
liable as for a breach of trust, I have jurisdiction under that clause
to make him pay, but it must be a liability for breach of trust or
under the word " misfeasance." But I should be very sorry to hold
that under those words I have a summary jurisdiction to inquire
whether a man had or had not properly exercised his discretion as
a director as to suing or not suing a debtor to the company, even
where the debt was not disputed, and a fortiori where it is a demand
of this kind. I do not think the section, when it talks of " misfeasance or breach of trust in relation to a company," could
have been meant to apply to such a case as I have now before
me, or that it was intended to enable the Court to say on a
summons of this description that it should, after examining into
the conduct of an officer of the company, come to the conclusion
that there must be negligence on the part of a director in such a
case, and that it therefore invests the Court, under those words
" misfeasance or breach of trust," with a power to make him pay
money to the assets of the company in respect of such a demand.
I do not think myself that the section applies to anythiug but
what I may call fairly plain and ordinary cases of misconduct, and
when I use the word " ordinary " I mean ordinary as regards these
companies, for many of them are certainly quite extraordinary as
regards other transactions, or that it was intended to go beyond
what was the settled law on the subject before the statute was
passed, so as to make that a case of misfeasance or breach of trust
which would not have rendered a man liable as a trustee before
the passing of the Act.
The summons as against Barrett will be dismissed with costs.
Solicitors : Wilhins, Blyih, & Fanshawe ; Torr & Co., agents for
Borlase & Yearsley, Mitcheldean.

M. E.
In re