240 HOUSE OF LORDS {1900} H.1.(&) that this judgment be reversed, and that the respondents do 1900 pay to the appellants the costs both here and below. Owntna oF ern Lorps Macnacurrn, Morris, Davey, Brampron, and v RoBERTSON concurred. Ownzns oF Stuamsare “Ao.” Order appealed from reversed so far as it held the Feel Gannet to be in fault ; decree of Bucknill J. © GaNNET” — restored with costs here and below. Cross- appeal dismissed ; cause remitted to the Admiralty Division. Lords’ Journals, April 3, 1900. Solicitors: W. Batham; Pritchard & Sons, for Batesons, Warr & Wimshurst, Liverpool. [HOUSE OF LORDS.) mu) GUUCKSTHIN = Abraruanr. 1900 ~~ AND April 5. — BARNES (Orrrcian Recerver anp Orrictan Liqurator or OLYMPIA, LIMITED) t ‘RESPONDENT. Company—Promoters—Secret Profit by Promoters—Duty of Disclosure, A syndicate was formed to raiso a fund, buy property and resell it to a company or some other purchaser; the fund to be in the names of trustess who wore to promote and register a company to which thoy should resoll the property, and who if a company should be formed were to be directors, ‘The trustees bought up some of the charges upon the property for sums below the amount which the charges afterwards realized, and theroby mado a profit for the syndicate of 20,0001. ‘They bought the property for 140,0001,, formed a limited company and resold the property for 180,001. to tho company, of which they were the first and at that time the only directors. ‘They issued a prospectus inviting applications for shares and disclosing the two prices of 140,0002. and 180,002. but not the profit of 20,0002. ‘That some profit had been made by buying up the charges might have been discovered by a close examination of a contractAC. AND PRIVY COUNCIL. which was referred to in the company’s memorandum and articles of association and in the prospectus. Shares were issued and the company afterwards went into liquidation:— Held, that the trustees ought to have disclosed to the company the profit of 20,000/.; that they had not disclosed it; that the fact that the company could not now rescind was no bar to relief; and that the appel- Jant as one of the trustees was bound to replace that portion of the 20,0002. which had been paid to the trustees as their share. Tho decision of the Court of Appeal, Jn re Olympia, Limited, [1898] 2.Ch, 158, affirmed, In 1893 the National Agricultural Hall Company, Limited, owning the place of entertainment called Olympia, was being wound up. A syndicate was formed to buy and resell Olympia. The facts and documents by which this scheme was carried out are fully set forth in the report below. (1) Briefly they were as follows. By an agreement of January 19, 1893, between the secretary to the syndicate and the appellant, reciting that the syndicate proposed to purchase Olympia with a view to the resale either to a company to be registered under the Companies Acts or to some other purchaser, it was stated (inter alia) that a fund was to be raised, and that if the company was formed the appellant and three other persons named Lyons, Hart and Hartley, who were members of the syndicate, had consented to become directors of the proposed company, and that those four persons should be trustees for the syndicate, with powers to buy and resell Olympia, to promote and register the intended company and to purchase (as an interim invest- ment) any first mortgage bonds of the company then in liquida- tion. Several persons subscribed for various sums and a fund was raised. The four syndicate trustees bought up some of the debenture bonds at a discount, and also a mortgage for 10,0002. at the price of 500/. They afterwards bought in February the property called Olympia for 140,002. by auction before the chief clerk, By an agreement of March 20, 1893, between the syndicate trustees (called the vendors) and one Close, a trustee for the intended company, it was agreed (inter alia) that the company should buy Olympia for 180,000/. Clause 7 contained the (A) [1898] 2 Ch. 153-160. 241 HL. (B) 1900 Guvoxsreiy ° Banwes,242 HOUSE OF LORDS 11900] H.L.(E) following paragraph: The validity of this agreement shall not 1900 a be impeached on the ground that the vendors parties. hereto Guvoxste 88 promoters or otherwise stand in a fiduciary relation to the v. BARNES. company, nor shall the vendors parties hereto be required to “account for any profit made or to be made by them by the purchase of any debentures or of any other charge upon any of the property of the National Agricultural Hall Company, Limited, which are to be satisfied wholly or in part out of the fand paid or to be paid into court. On the same day the company was registered as Olympia, Limited. The memorandum of association stated its objects, one of which was to carry out the above agreement with Close, and the articles of association provided that that agreement should be binding and carried into effect by the directors. Clause 7 was not specifically referred to. Soon after a pro- spectus inviting applications for debentures and shares was issued stating (inter alia) that “the promoters of the company hereinafter called the vendors who constitute the entire board of the company” (namely, the appellant, Lyons, Hart and Hartley) had bought the property for 140,000/. and would be the vendors to the company for 180,000/. The only reference to their dealings with the debentures and mortgage of the old company was as follows: ‘Any other profits made by the syndicate from interim investments are excluded from the sale to the company.” The prospectus referred to the agreement with Close but not to clause 7. As a matter of fact in addition to the 40,000/. profit which the prospectus stated, the syndicate realized more than 20,0001. profit, being the difference between the sum they gave for the debentures and mortgage and the sum they received, as holders of the charges, from the liquidator of the National Agricultural Hall Company. Of this profit the appellant, Lyons, Hart and Hartley received 63417. Debentures and shares were issued, and in 1897, Olympia Limited having gone into liquidation, the respondent took out a summons against the appellant under s. 10 of the Companies (Winding-up) Act 1890. The summons was dismissed by Wright J., but the Court of Appeal (Lindley, Rigby and Collins L.JJ.) reversed his decision andA.C. AND PRIVY COUNCIL. ordered the appellant to pay 6341/. with interest to the official receiver. (1) 1899. Nov. 30; Dee. 1, 4,5. Swinfen Eady Q.C. and Muir Mackenzie (Cassel with them) for the appellant. ‘There was no evidence of fraud in the sale, and at the time when the mortgage securities were purchased the appellant was not a promoter or otherwise in a fiduciary position to the company. The purchase of the charges was a separate and collateral transaction, and the trustees were not bound to disclose it. If they were under such a duty they discharged it, as sufficient disclosure was made to satisfy the statute. Even if the appel- lant is wrong in these contentions, the company are not entitled to recover. Their proper remedy (if any) was rescis- sion of the contract; but as that is now not possible they can only ask for damages, and no loss having been sustained the damages are nominal. The agreement of March 20, 1893, was a special bargain and binding on the company. The company was incorporated for the express object of carrying out that- agreement. The articles of association expressly provided that the appellant and his co-directors should adopt it and carry it into effect and the directors did so. The company is therefore absolutely bound by it: see ss. 11 and 16 of the Companies Act 1862. A promoter is one who in fact forms a company. At the date of the impugned transaction there was no definite purpose of forming a company; it was only one of two alternatives. To use the language of James L.J. in Gover's Case (2) ‘‘at the date of the contract there was no company, no promoter, trustee, or director.” This appeal is governed by Erlanger v. New Sombrero Phosphate Co. (3), which was twice argued in this House: see Lord Hatherley (4); and Lord Blackburn. (5) To adopt Lord Hatherley’s words the syndi- cate was entitled to deal with these charges “as they thought proper.” Lord Cairns used similar language. See also Lady- well Mining Co. v. Brookes. (6) Secondly, there was in fact (1) [1898] 2 Ch, 153. (4) 8 App. Cas, at p. 1242, (2) (1875) 1 Ch. D. 182. (6) 8 App. Cas. at p. 1267. (8) (1878) 8 App. Cas, 1218, (6) (4887) 35 Ch, D. 400. 243, HLL (BE) 1900 Guvoxersy . Banngs.244 HLL. (B) 1900 Quocsrew Bansws, HOUSE OF LORDS {1900} disclosure. In the prospectus, memorandum and articles there was sufficient notice both of the existence and nature of the profit. It is true the amount was not stated; but that is not necessary. ‘The language was perfectly clear, and the words “interim investments” must have been understood by share- holders. There is at all events no evidence that any one was misled into taking shares who would have been deterred if he had known the precise facts. Further, assume the disclosure to have been insufficient, rescission is out of ‘the question, the company cannot repudiate, damages are the only remedy, and the Court will not award damages without evidence of loss. On this point see Bentinck v. Fenn (1), which affirmed the decision of the Court of Appeal (2) and of Pearson J. (3) It is there distinctly laid down by Lord Herschell that if a person in a fiduciary position omits to disclose a profit, but no more than a fair price has been given by the company, rescission or nominal damages are all that can be claimed. [They also referred to Hmma Silver Mining Co. v. Lewis (4) and Peel's Case. (5)] A. T. Lawrence Q.C. and A. R. Kirby for the respondent. At the date of the purchase of the debentures the appellant and the three gentlemen who acted with him were joint pro- moters and at the date of receipt of the 63417, were also directors. There was one scheme throughout to which every step taken was subsidiary; there was in reality no such alternative as has been suggested. From the beginning the purpose was to form the company and the appellant was in a fiduciary relation to the shareholders. This being so the syndi- “cate was under a joint and several liability under the summons : Filitcroft's Case (6) ; and all the authorities which in such cases have enforced such liability are applicable. The disclosure of the profit of 40,0007. was misleading. The net profit was 60,0002.; and mere disclosure by reference will not satisfy statutory requirements. It is too late in the day to contend (1) (1887) 12 App. Cas. 652. (8) (1884) 26 Ch. D. 221, (2) (1885) 29 Ch, D, 795 (subnom., (4) (1879) 4 C. P. D. 896. In ze Cape Breton Co.). (8) (1867) L. R. 2 Ch, 674, (6) (1882) 21 Ch. D. 519.A.C. AND PRIVY COUNCIL. that a man only becomes a promoter on the eve of registration of the company; he becomes so on the first step taken towards that end. The appellant and his associates were bound by the representation made by their prospectus that they were only making a profit of 40,0002. less expenses, and that statement they must make good. Swoinfen Eady Q.C. in reply. The House took time for consideration. April 5. Earn or Hatspury L.C. My Lords, in this case the simple question is whether four persons, of whom the appellant is one, can be permitted to retain the sums which they have obtained from the company of which they were directors by the fraudulent pretence that they had paid 20,000. more than in truth they had paid for property which they, as a syndicate, had bought by subscription among themselves, and then sold to themselves as directors of the company. If this is an accurate account of what has been done by these four persons, of course so gross a transaction cannot be per- mitted to stand, That that is the real nature of it I now proceed to shew. In the year 1892 the freehold grounds and buildings known as “ Olympia ” were the property of a company which in that year was being wound up. That company had issued deben- tures to the extent of 100,000, as a first charge and a mortgage as a second charge for 10,000/. The four persons in question knew that the property would have to be sold, and they com- bined to buy it in order that they might resell it to a company to be formed by themselves. The combination, which called itself the Freehold Syndicate, but which, perhaps, the common law would have described by a less high-sounding title, pro- ceeded to buy up so far as they could the incumbrances on the property called “Olympia.” They expended 27,0002. in buying debentures. These, of course, were very much depre- ciated in value, and they gave 500J. for the mortgage of 10,0002. As soon as this transaction had been completed they, partners in it, proceeded to form a company, and it was of course 245, HL (&. 1900 .Guocrenmn 7. Banwes.246 HOUSE OF LORDS [1900] H.L.(E.) necessary that the company should be willing to help, and 1900 GuvcKsren w Banves, Barl of He Lc. my accordingly the four persons in question were made by the articles of association the first directors. The property was sold on February 8 by the chief clerk of North J. for 140,000/., and the syndicate purchased nominally for that sum, but, by reason of the arrangement to which I have referred, that sum was less by 20,7347. 6s. 1d. than what they appeared to give. On March 29 they completed as directors the purchase of the property for 180,000/., and they as directors paid to themselves as members of the syndicate 171,0002. in cash and 90007. in fully paid-up shares—in all 180,000/. The prospectus by which money was to be obtained from the public disclosed the supposed profit which the vendors were making of 40,000/., while in truth their profit was 60,7341. 6s. 1d., and it is this undisclosed profit of 20,000/., and the right to retain it, which is now in question. My Lords, I am wholly unable to understand any claim that these directors, vendors, syndicate, associates, have to retain this money. I entirely agree with the Master of the Rolls that the essence of this scheme was to form a company. It was essential that this should be done, and that they should be directors of it, who would purchase. The company should have been informed of what was being done and consulted whether they would have allowed this profit. I think the Master of the Rolls is absolutely right in saying that the duty to disclose is imposed by the plainest dictates of common honesty as well as by well-settled principles of common law. Of the facts there cannot be the least doubt; they are proved by the agreement, now that we know the subject-matter with which that agreoment is intended to deal, although the agree- ment would not disclose what the nature of the transaction was to those who were not acquainted with the ingenious arrangements which were prepared for the entrapping the intended victim of these arrangements. In order to protect themselves, as they supposed, they inserted in the prospectus, qualifying the statement that they had bought the property for 140,000/., payable in cash, thatA.C. AND PRIVY COUNCIL. they did not sell to the company, and did not intend to sell, any other profits made by the syndicate from interim investments. Then it is said there is the alternative suggested upon the agreement that the syndicate might sell to a company or to some other purchaser. In the first place, I do not believe they ever intended to sell to anybody else than a company. An individual purchaser might ask inconvenient questions, and if they or any one of them had stated as an inducement to an individual purchaser that 140,000/, was given for the property, when in fact 20,0007. less had been given, it is # great error to suppose that the law is not strong enough to reach such a statement; but as I say, I do not believe it was ever intended to get an individual purchaser, even if such an intention would have had any operation. When they did afterwards sell to a company, they took very good care there should be no one who could ask questions, They were to be sellers to themselves as buyers, and it was a necessary provision to the plan that they were to be both sellers and buyers, and as buyers to get the money to pay for the purchase from the pockets of deluded shareholders, My Lords, I decline to discuss the question of disclosure to the company. It is too absurd to suggest that a disclosure to the parties to this transaction is a disclosure to the company of which these directors were the proper guardians and trustees. They were there by the terms of the agreement to do the work of the syndicate, that is to say, to cheat the shareholders ; and this, forsooth, is to be treated as a disclosure to the company, when they were really there to hoodwink the shareholders, and so far from protecting them, were to obtain from them the money, the produce of their nefarious plans. I do not discuss either the sum sued for, or why Gluckstein alone is sued. The whole sum has been obtained by a very gross fraud, and all who were parties to it are responsible to make good what they have obtained and withheld from the shareholders. : I move your Lordships that the appeal be dismissed with costs. 247 HLL. (B) 3900 Gucoxerss Bates. Sarl of Halsbr LC.248 HL. (B) 1900 Gucogsruw ». Baryes, HOUSE OF LORDS 1900] Lorp Macnacuten. My Lords, Mr. Swinfen Eady argued this appeal with his usual ability, but the case is far too clear for argument. The learned counsel for the appellant did not, Tam sure, raise the slightest doubt in the mind of any of your Lordships as to the propriety of the judgment under appeal ; the only fault to be found with the learned judges of the Court of Appeal, if I may venture to criticise their judgment at all, is that they have treated the defences put forward on Mr. Gluck- stein’s bebalf with too much ceremony. Vor my part, I cannot see any ingenuity or any novelty in the trick which Mr. Gluckstein and his associates practised on the persons whom they invited to take shares in Olympia, Limited. It is the old story. It has been done over and over again. These gentlemen set about forming a company to pay them a handsome sum for taking off their hands a property which they had contracted to buy with that end in view. They bring the company into existence by means of the usual machinery. ‘They appoint themselves sole guardians and protectors of this creature of theirs, half-fledged and just struggling into life, bound hand and foot while yet unborn by contracts tending to their private advantage, and so fashioned by its makers that it could only act by their hands and only see through their eyes. ‘They issue a prospectus representing that they had agreed to purchase the property for a sum largely in excess of the amount which they had, in fact, to pay. On the faith of this prospectus they collect subscriptions from a confiding and credulous public. And then comes the last act. Secretly, and therefore dis- honestly, they put into their own pockets the difference between the real and the pretended price. After a brief career the company is ordered to be wound up. In the course of the liquidation, the trick is discovered. Mr. Gluckstein is called upon to make good a portion of the sum which he and his associates had misappropriated. Why Mr. Gluckstein alone was selected for attack I do not know any more than I know why he was only asked to pay back a fraction of the money improperly withdrawn from the coffers of the company. However that may be, Mr. Gluckstein defends his conduct, or, rather I should say, resists the demand, on four grounds,A.C. AND PRIVY COUNCIL. which have been gravely argued at the bar. In the first place, he says that he was not in a fiduciary position towards 249 HL.) 1900 Olympia, Limited, before the company was formed. Well, for @uycasrew some purposes he was not. For others he was. A good deal might be said on the point. But to my mind the point is immaterial, for it is not necessary to go back beyond the formation of the company. In the second place, he says, that if he was in a fiduciary position he did in fact make a proper disclosure. With all deference to the learned counsel for the appellant, that seems to me to be absurd. “Disclosure” is not the most appropriate word to use when a person who plays many parts announces to himself in one character what he has done and is doing in another. ‘To talk of disclosure to the thing called the company, when as yet there were no shareholders, is a mere farce. To the intended shareholders there was no disclosure at all. On them was practised an elaborate system of deception. The third ground of defence was that the only remedy was rescission. That defence, in the circumstances of the present case, seems to me to be as contrary to common sense as it is to authority. The point was settled more than sixty years ago by the decision in Hichens v. Congreve (1), and, so far as I know, that case has never been questioned. The last defence of all was that, however much the share- holders may have been wronged, they have bound themselves by a special bargain, sacred under the provisions of the Com- panies Act, 1862, to bear their wrongs in silence. In other words, Mr. Gluckstein boldly asserts that he is entitled to use the provisions of an Act of Parliament, which are directed to a very different purpose, as a shield and shelter against the just consequences of his fraud. My Lords, I am afraid I must call your Lordships’ attention for a moment to the prospectus of Olympia, Limited. In my opinion it is the cardinal point of the case, and I do not think full justice has been done to it. The prospectus, I am sorry to find, was prepared in the office of a well-known solicitor. 1 wish I could say that it displays the simplicity and candour (2) (1881) 4 Sim. 420. A. 0. 1900. : 8 ae ® Baunes, Lord ‘Macnaghten,250 H.L.(B) 1900 Guvoxsrei ® ‘Banes. ‘Lord ‘Macnaghten. HOUSE OF LORDS [1900] which some persons perhaps might expect from such an origin. Now this is what the self-constituted guardians of Olympia, Limited, and its shareholders tell those whom they invite to join with them in their enterprise: “The promoters of this company, hereinafter called the vendors, who constitute the entire board of the company which lately produced ‘ Venice in London,’ recently entered into a contract on behalf of a syndi- cate of which they themselves are members, for the purchase of the entire Olympia property. The vendors effected this purchase on the 8th February, 1893, at competition before the chief clerk of Mr. Justice North in the Chancery Division of the High Court of Justice for the sum of 140,000/. payable in cash, and they will, acting on behalf of such syndicate, be the vendors of that property to this company. . . . Any other profits made by the syndicate from interim investments are excluded from the sale to the company. A printed form of the memo- randum of agreement which was signed by each member of that syndicate may be inspected by intending applicants for shares or debentures at the offices of the solicitors of the com- ‘pany. ‘The vendors have agreed to resell to the company the whole of the property purchased by them on the 8th February, 1893, for the sum of 180,0007. (being nearly 18,0007. less than ‘the amount of Messrs. Driver & Co.'s valuation) payable as to 155,000/. in cash, and the balance in cash or shares of the company.... Out of the profit to be made by the vendors on behalf of the syndicate the vendors have agreed to pay interest at the rate of 5 per cent. per annum upon the amount for the time being paid up on the shares and debentures until the opening of the first entertainment, They will also provide all the preliminary expenses of the formation and bringing out of the company, and the issue of its capital up to and including allotment, and all costs including stamp duty in connection with the completion of the purchase of the property and the mortgage to secure debentures. The conveyance will be made direct to the company by direction of the vendors.” My Lords, it is a trite observation that every document as against its author must be read in the sense which it was intended to convey. And everybody knows that sometimesA.C. AND PRIVY COUNCIL. half a trath is no better than a downright falsehood. Is the statement in the prospectus which I have just read as to the price which the vendors had to pay for the property true or false? In the letter it is true. The vendors had bid 140,0002. for the property, and had formally agreed to pay that sum for it. But for all that, the sum of 140,000. was not the sum they were going to pay, and they knew that well enough. ‘They had provided themselves with counters, obtained at little cost, which in reckoning the price would be taken, as they knew, at their face value, so that the price of the property to them would be only about 120,000. Is that what Mr. Gluck- stein and his associates meant the public to understand? Surely ordinary persons reading the prospectus, and attracted by the hopes of profit held out by it, would say to themselves, “Here is a scheme which promises well. The gentlemen who are putting the property on the market know something about it, for they were the sole directors and managers of ‘ Venice in London,’ which was a very profitable speculation, They have had the whole property valued by well-known auctioneers, who say that it is worth more than is asked for it. True, they secure a profit of 40,0007. for themselves, but then they disclose it frankly, and it is not all clear profit. There is interest to be paid, and all the expense of forming the company. And they have actually agreed to pay 140,000. down. That sum, they tell us, is ‘payable in cash.’” You will observe those last words, “payable in cash.” Their introduction is almost a stroke of genius. That slight touch seems to give an air of reality and bona fides to the story. Would anybody after that suppose that the directors were only going to pay 120,001. for the property, and pocket the difference without saying anything to the shareholders? “ But then,” says Mr. Gluckstein, “there is something in the prospectus about ‘interim investments,’ and if you had only distrusted us properly and read the prospectus with the caution with which all prospectuses ought to be read, and sifted the matter to the bottom, you might have found a clue to our meaning. You might have discovered that what we call ‘interim investments’ was really the abatement in price effected by purchasing charges on the property at a 3 U2 251 HL. da) 1900 Guvoxsren ® Bannzs, Lord Macnagiten,252 HOUSE OF LORDS [1900] H.L.(B) discount.” My Lords, I decline altogether to take any notice 1900 of such an argument. I think the statement in the prospectus Gusoam a8 to the price of the property was deliberately intended to Banses, mislead the shareholders and to conceal the truth from them. a My Lords, on so plain a case as this I am very reluctant to Mecitgieer. quote any authority; but I think I ought to call your Lord- ships’ attention to the case of Hichens v. Congreve (1), to which T have already alluded, and that for two reasons : first, because it seems to have been lost sight of in the argument of this case ; and, secondly, because the facts there have a singular resem- blance to the facts of the present case. The defences in the two cases are, for the most part, identical. Hichens v. Congreve (1) was decided by Shadwell V.-C. in 1831. There had been a demurrer to the bill, which was over- ruled by the Vice-Chancellor and by Lyndhurst L.C. on appeal, a motion for payment of money into court, which was successful, and then the case came on for hearing. The facts were these: A Mr. Flattery was the fortunate possessor of a property in Ireland containing treasures of coal and iron, rarely met with on the other side of the channel, and he was anxious to dispose of it. One Sir William Congreve entered into negotiations with him, and found that he was willing to sell for the modest sum of 10,0002. Then Sir William associated with himself two gentlemen of the name of Clarke, and the three proposed to themselves to buy the property, and work it by means of a company. But they thought that the company could well afford to pay 25,0001. for it, and they supposed that they might honestly, or, at any rate, without being found out, put the extra 15,000/. into their own pockets, concealing from the pro- posed shareholders the difference in price. Mr. Flattery seems to have been not unwilling to lend himself to the scheme. So a contract was drawn up for the sale of the property from Mr. Flattery to the trustees of the company for the price of 25,0001., out of which, of course, Mr. Flattery was only to keep 10,0002. Sir William Congreve and the two Clarkes got up the company, issued a prospectus, and prepared a deed of settle- ment stating that the ‘property had been bought from Mr. (2) (1828) 4 Russ, 662; (1829) 1 R. & M. 150; (1831) 4 Sim, 420.A.C. AND PRIVY COUNCIL. Flattery for 25,0007.; and they appointed themselves and other persons directors of the company. A large sum of money was collected, a large body of subscribers executed the deed of settle- ment, and later on a private Act of Parliament was obtained establishing and regulating, but not incorporating, the company. Some years afterwards the proceedings of Sir William Congreve and his associates were discovered, and a bill was filed by certain shareholders on behalf of themselves and the rest of the share- holders other than the defendants to compel them to refund the 15,0002. As the Vice-Chancellor pointed out, if Sir William Con- greve and the Messrs. Clarke had agreed among themselves that they would form a partnership or a company for the purpose of working the mines, and had held out to the persons who should form the company that it should be formed on the basis that they should pay 15,000/. to Sir William Congreve and the Messrs. Clarke as the consideration for their having the mines, no objection whatever could have been made to the transaction. But the objection was that the real transaction was not dis- closed, and “that the persons who became members of the company could not possibly know that it was the intention of Sir William Congreve and the Messrs. Clarke that the 15,000/, should be paid out of the funds of the company for the benefit of Sir William Congreve, the Messrs. Clarke, and those gentle- men whom they permitted to participate in it.” Then the Vice-Chancellor, after stating the facts and relevant documents, proceeds as follows: ‘‘It is useless for the Messrs. Clarke and Sir William Congreve to state, as they have done, in their answers that they apprehended that the sums which so came to their hands were profits which they were entitled to; for it is impossible that they could, if they fairly exercised their judgments which as directors they were bound to exercise, form any such opinion; and it is perfectly plain to my mind that it was not competent to those who were forming a com- pany thus to deal with the funds of the company, making at the game time the representations which they did make. If they had been dealing with one individual only, no doubt could be entertained upon the matter. Two objections were made to the relief that is asked in this case. First it was said that the 253 HL. (B) 1900 Quvoxsrem 2. ‘Baaves, Lord ‘Macnaguten.254 HL.) 1900 Guvoxeraiy ®. Banwrs, Lord ‘Macnaghten. HOUSE OF LORDS (1900) property was worth 25,0007. So it might have been; but in my opinion the value of the property is quite immaterial, for the question here is what was held out to the company to have been the sum actually paid for it, and I conceive that if there was a misrepresentation in that respect, the parties who made that representation must be answerable for it. The other objection that was made was that the mines were not, and could not have been, purchased for the company ; for that at the time when the agreement was entered into there was no company in existence. Strictly speaking it is true that there was no company in existence; but these gentlemen were endeavouring to form a company, and they had taken upon themselves the character of directors for the benefit of all persons who had agreed to be, or might afterwards become, members of the company. The 25,000/. was to be paid out of the funds which should be subscribed by persons who might thereafter become members of the company, and my opinion, therefore, is that all those persons who might thereafter become members of the company through the instrumentality and representations of those directors are entitled to the pro- tection of this Court. Then it was said that there can be no relief except in the way of restitution of the mines; but that appears to me to be a fallacy. On the 22nd of June 1825 an Act of Parliament was passed which establishes this company and directs that its capital shall be 300,000/.; and I apprehend that in no other way can there be any relief in this case than by making those who have subtracted the 15,000. from the funds of this company repay that sum, for it would be no relief to make Flattery take back the mines: that would destroy the company altogether. When these directors represented that 25,0001. was to be paid for the purchase of the mines it must be considered that they intended that the company should have the mines, and that they meant it to be understood that that was the lowest price at which they could be purchased. What is complained of is that by improper representation 15,000/. has been withdrawn from the funds of the company and paid into the pocket of private individuals. Is it not obvious, therefore, that the relief to be given is the restitution of the 15,0001, ?”A.C. AND PRIVY COUNCIL. My Lords, I need not comment on the Vice-Chancellor’s judgment. It seems to me to cover the whole of the present 255 HL.) 1900 case except the defence founded on the provisions of the Guccreres Companies Act, 1862, and with that I have already dealt. There are two things in this case which puzzle me much, and I do not suppose that I shall ever understand them. I mention them merely because I should be very sorry if it were thought that in those two matters the House unanimously approved of what has been done. I do not understand why Mr. Gluckstein and his associates were not called upon to refund the whole of the money which they misappropriated. What they did with it, whether they put it in their own pockets or distributed it among their confederates, or spent it in charity, seems to me absolutely immaterial. In the next place, I do not understand why Mr. Gluckstein was only charged with interest at the rate of 3 per cent. I should have thought it was a case for penal interest. In these two matters Mr. Gluckstein has been in my opinion extremely fortunate. But he complains that he may have a difficulty in recovering from his co-directors their share of the spoil, and he asks that the official liquidator may proceed against his associates before calling upon him to make good the whole amount with which he has been charged. My Lords, there may be occasions in which that would be a proper course to take. But I cannot think that this is a case in which any indulgence ought to be shewn to Mr. Gluckstein. He may or may not be able to recover a contribution from those who joined with him in defrauding the company. He can bring an action at law if he likes. If he hesitates to take that course or takes it and fails, then his only remedy lies in an appeal to that sense of honour which is popularly supposed to exist among robbers of a humbler type. I agree that the appeal must be dismissed with costs. Lorp Ropertson. My Lords, I am satisfied of the liability of the appellant. Once the facts are analyzed (and this has been done thoroughly in the Court of Appeal) they are seen to be. of no ambiguous import. The appearance of complexity which Panes. Machaghten.256 HLL. (B) 1900 Guvoxsrem w. Banwes, ond Robertson. HOUSE OF LORDS (1900) the case presents arises from the matters in hand having been dressed up artificially, so that things have been separated in language and treatment which in their nature are inseparable and correlative. To my thinking, the central fact in the history is, that while the object of the syndicate was to make profit out of the resale of Olympia, it was an essential part of the enterprise, as originally designed and as actually carried out, that the same individuals who sold as syndicate should buy as directors. This was provided by the third head of the agreement which set up the syndicate, and it has a far-reaching effect at all the stages of the argument. First of all, it seems to me to conclude the question whether these gentlemen were promoters when they bought the mort- gages. I do not lay out of account the refreshment contract and the advertising contract, for the entering into contracts for the company is a clear assumption of agency and, therefore, of a fiduciary relation to it. But apart from those contracts, where speculators have formed, exclusively of themselves, the directorate of a company, to be immediately floated for the purpose of buying the property which those same individuals are associated to acquire and resell, they have brought them- selves directly within Lord Cairns’s statement of the law in Erlanger's Case. (1) They have taken a decisive step in shaping and limiting the company. It may well be asked, if this be not an act of promotion what is? The hypothesis of all the law which we are considering is that the company is not yet formed ; and unless these gentlemen had registered the company (and thus passed out of this stage altogether) it is difficult to see what more overt acts of promoting and forming the company they could have done. The only available argument against this conclusion was that the gentlemen forming the syndicate might have changed their minds and sold to an individual. This is true, but true only in the sense that, till registration of the company and a bargain with the company, they were free to change their minds—true in the sense in which every enterprise not actually (A) 8 App. Cas. 1218,A.C. AND PRIVY COUNCIL. 257 consummated may be abandoned. But as matter of fact, these H.L.(E.) men intended, when they bought the mortgages, to sell to a 1900 company constituted in the mode and form described ; and they cuvoxsrew did sell to that company. The appellant in his evidence avows it; and the other facts are indicative, to the point of conclu- siveness, that nothing but a company would have served the ends of the syndicate. The mere expression in a deed of the truism that the adventurers could sell to an individual if they id not sell to a company can never avail against the ascertainment of the true facts of the scheme. The facts here are that the company had been so far organised that its executive was provisionally appointed. The directors of a company are its executive organ; to them its interests are confided; and in the present instance the com- pany, even in this, its inchoate stage, was identifiable through its executive. I hold that from the moment this step was taken the coming directors stood in a fiduciary relation to the company whose interests were to be in their sole hands. This conclusion rests not on technical rules of law, but on the dictates of fair play embodied in law. The people for whom these gentlemen were bound to act were their coming constituents, the persons out of whose money they proposed to make their gain. , And now I pass to the next stage of the case. Assuming the members of the syndicate to have been promoters at the date of the purchase of the mortgages, did they properly disclose it? In the skilful argument for the appellant the duty of disclosure on this hypothesis was conceded. But this concession must not disarm the criticism which, in considering the adequacy of the disclosure, first ascertains the relevancy of the transaction to the question what sum ought to be paid by the directors for the mortgaged property. ‘The theory of the appellant is that the purchase of the mort- gages was a collateral and independent transaction. It seems to me, on the contrary, to be an essential and inseparable part of one and the same transaction, and for this plain reason that the syndicate’s gain on the mortgages had to be paid by the company. The relevancy of the mortgage transaction to the w Banyes. ‘Lord Robertson.258 HL.) 1900 GuvoxsTEIy, w. Banus. Lon! Robertson. HOUSE OF LORDS [1900] question solved by the syndicate sitting as directors is this—a company, or any one else, considering what price shall be paid draws inferences as to the true value from the price paid by the seller and the proposed advance on that price. In short, what the possible buyer wants to know is the profit to be made by his seller. He may be entitled to know this, or he may not, according as his seller is bound or is not bound to disclose it, but the materiality of the knowledge is indisputable. Again, this transaction had another importance. The inference of value drawn from a competitive sale by auction is founded on the assumption that the sum paid was the least that the pro- perty could have been got for. In the present case, that inference would have been unsound. I do not know whether it was necessary, in order to secure the property, that the syndicate in their last bid should advance by 8000/., whereas all previous advances had been only of 10007. But I do know that the appellant had no interest to bid 133,000J. rather than 140,000/., for by the time the biddings had run thus high it was certain that the mortgages would be paid in full, and, as the syndicate knew that the directors would pay their price, it was indifferent to them, to the matter of a few thousands, whether the price which they nominally, and the shareholders really, paid to the vendor was more or less. On these grounds I consider that the transaction in mort- gages was so relevant to the question what price should the company pay for the property that it was necessary that it should be disclosed to the company completely and in detail, and the question is whether this was done. There are several overwhelming reasons for a negative answer. In the normal case, where the directors are truly and not merely in name the executive of the company, it may be assumed that they will be vigilant and critical of the particulars of a bargain of such paramount importance as the purchase of the property to be traded with, and that, dealing at arm’s length, they will examine into anything bearing on that matter that does not tell its own story in its face. But, in the present case, the company was paralyzed so far as vigilance and criticism were concerned; for the board-room was occupied by the enemy.AC. AND PRIVY COUNCIL. Now, the question whether adequate disclosure has been made to @ company by a vendor bound to do so must necessarily depend upon the intelligence brought to bear on the informa- tion. And if, by his own act, the promoter has weakened, or, as here, has annulled the directorate, his case on disclosure becomes extremely arduous—for he has to make out such dis- closure to shareholders as makes directors unnecessary. How this could be done we have no occasion to consider, for the appellant is not within sight of doing it, Indeed, the case is so clear that I do not think it is a case of inadequate disclosure, but of direct misrepresentation. Two statements were made which are clearly of that character. The one is the assertion that the purchase of the mortgages was a temporary invest- ment. If this means anything, it means that the syndicate having money on hand awaiting investment in one thing had temporarily put it to another. The contrary is the fact: part of the price of the mortgages was subscribed by the syndicate for its purposes of which this was, in terms, one; and much the greater part was borrowed from their bankers ad hoc. The second overt misrepresentation is that the syndicate had paid 140,000/. for the property, whereas the truth is that they were paying only 119,2651. 19s. 11d., the excuse for the former sum having been stated coming to no more than this—that they had to pay the vendor before their own accounts were closed. Thave only to add that I consider the liability of the appel- lant for the whole sum in thé order appealed against to be the necessary result of the ground of judgment which I adopt. Order appealed from affirmed and appeal dismissed with costs. Lords’ Journals, April 5, 1900. Solicitors: Lewis ¢ Lewis ; Roderic Oliver. 259 HL. (2) 1900 Gucoserets Banwes. Lord Robertson.