The Law of Misrepresentation in Relation

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LAW
KD
1583
.B75x
1912
THE LAW
OF
MISREPRESENTATION
IN RELATION TO
LIMITED LIABILITY COMPANIES
A. M. BRICE
THE LIBRARY
OF THE
OMNIBUS ARTIBUSE
25086
X -5823
THE LAW OF MISREPRESENTATION
IN RELATION TO
LIMITED LIABILITY COMPANIES.

RD
1583
.875x
1912
THE LAW OF
MISREPRESENTATION
IN RELATION TO
BY
A. MONTEFIORE BRICE
OF THE MIDDLE TEMPLE AND THE OXFORD CIRCUIT,
BARRISTER-AT-LAW.
1859-
Arthur Joker Montefion
LONDON
SWEET AND MAXWELL, LIMITED ,
3, CHANCERY LANE.
1912.
BRADBURY, Agnew, & co. Ld., printers,
LONDON AND TONBRIDGE.
X-5853
PREFACE .
It is hoped that this short introduction to a large

subject may be found useful by persons interested in
Limited Liability Companies, whether laymen or legal
practitioners, seeing that within a moderate compass it
touches upon all the main aspects of the bearing of the
.96
doctrine of misrepresentation on such Limited Com-

panies, and deals, inter alia, with the distinction between
fraudulent and innocent misrepresentation ; with the
leading cases, whether under the general or the statute
law, which govern both classes of misrepresentation ; with
the actions of Deceit and for Rescission ; with the
7
situations introduced by Delay, Laches, Acquiescence,
Lapse of Time and Estoppel ; with the defence alleging
misrepresentation as an answer to an action for specific
performance ; and with the Criminal Liability of directors,
13/17
managers and other officers and agents of such Companies

for fraudulent misrepresentation .
A. M. B.
2, Garden Court, Temple.
525086
1
TABLE OF CONTENTS .
CHAP. PAGE
I. MISREPRESENTATION, FRAUDULENT AND INNO-
CENT I
II. THE GENERAL LAW 6
III. THE STATUTE LAW 31
IV. THE ACTION OF DECEIT 62
V. RESCISSION • 67
VI. DELAY ; LACHES ; ACQUIESCENCE ; LAPSE OF

TIME 74
VII. ESTOPPEL 86
VIII. THE DEFENCE OF MISREPRESENTATION ΤΟ

ACTION FOR SPECIFIC PERFORMANCE • 93
IX. CRIMINAL LIABILITY : THE CRIMINAL PROSECU-

TION OF DIRECTORS AND OTHER OFFICERS AND
AGENTS OF LIMITED LIABILITY COMPANIES
FOR OFFENCES CONNECTED WITH FRAUDU-
LENT MISREPRESENTATION • • ΙΟΙ
TABLE OF CASES .
PAGE
AARON'S REEFS, LTD. v. Twiss, [ 1896] A. C. 273 ; 65 L. J. P. C.
54; 74 L. T. 79 • · · • • 45, 78, 80, 99
Allcard v. Skinner ( 1887), 36 C. D. 145 ; 56 L. J. Ch. 1052 ; 57
L. T. 61 ; 36 W. R. 251 • · 75
Ambrose Lake Co. , In re ( 1880) , 14 C. D. 390 ; 49 L. J. Ch. 457 ;
457 ; 42 L. T. 604 ; 28 W. R. 783 70
Andrews v. Mockford, [ 1896 ] 1 Q. B. 372 ; 65 L. J. Q. B. 302 ;
73 L. T. 730 . · • 65
Angus v. Clifford, [ 1891 ] 2 Ch. 449 ; 60 L. J. Ch. 443 ; 65 L. T.
274 ; 39 W. R. 498 • · 4, 36, 38
Arkwright v. Newbold ( 1881 ), 17 C. D. 301 ; 50 L. J. Ch. 372 ;
44 L. T. 393 . • 65
Arnison v. Smith (1889), 41 C. D. 348 ; 61 L. T. 63 ; 37 W. R.
739 ; 5 T. L. R. 413 · • 37, 65, 72, 77
Ashley's Case ( 1870), 9 Eq. 263 ; 39 L. J. Ch. 354 ; 22 L. T. 83 ;
18 W. R. 395 81, 82
Attwood v. Small ( 1838) , 6 Cl. & Fin. 232 ; 49 R. R. 115 99
BAHIA AND SAN FRANCISCO RY. Co. , In re ( 1868), L. R. 3 Q. B.

584 ; 37 L. J. Q. B. 176 ; 16 W. R. 862 ; 18 L. T. 467 . 91
Balkis Consolidated Co. v. Tomkinson, [ 1893 ] A. C. 396 ; 63
L. J. Q. B. 134 ; 69 L. T. 598 90, 91
Barwick v. English Joint Stock Bank ( 1867) , L. R. 2 Ex. 259 ;
36 L. J. Ex. 147 ; 16 L. T. 461 ; 15 W. R. 877 • 55, 63
Bentinck v. Fenn ( 1887), 12 App. Cas. 652 • 70
Blennerhasset v. Day ( 1812), 2 Ba. & Be. 104 ; 53 R. R. 79 84
Bloomenthal v. Ford, [ 1897 ] A. C. 156 ; 66 L. J. Ch. 253 ; 76
L. T. 205 ; 45 W. R. 449 • • • 92
Broad v. Munton ( 1879), 12 C. D. 131 ; 48 L. J. Ch. 837 ; 40
L. T. 828 • • 58
Brookes v. Hansen, [ 1906] 2 Ch. 129 ; 75 L. J. Ch. 450 ; 94
L. T. 728 36
Brownlie v. Campbell ( 1880), 5 App. Cas. 925 · 12
X TABLE OF CASES.
PAGE
Browne v. McClintock ( 1873), L. R. 6 H. L. 434 ; 22 W. R. 521 84
Burgess's Case ( 1880) , 15 C. D. 512 ; 49 L. J. Ch . 541 ; 43 L. T.
45 ; 28 W. R. 792 . 70
Burkinshaw v. Nicolls ( 1878), 3 App. Cas. 1026 ; 39 L. T. 308 ;
26 W. R. 819 86, 92
CACKETT v. Keswick, [ 1902 ] 2 Ch. 456 ; 71 L. J. Ch. 641 ; 87

L. T. 11 ; 51 W. R. 69 . 58,65
Cairncross v. Lorimer (1860), 3 Macq. 827 ; 3 L. T. 130 89
Cargill v. Bower ( 1878) , 10 C. D. 502 ; 47 L. J. Ch. 649 ; 38 L. T.
779 ; 26 W. R. 716 · 63
Carling v . London and Leeds Bank (1887), 56 L. J. Ch . 321 ;
35 W. R. 345 . • 73
Carr v. London and North Western Ry. Co. (1874), L. R. 10
C. P. 307 ; 44 L. J. C. P. 109 ; 31 L. T. 785 ; 23 W. R. 411
Central Ry. Co. of Venezuela v. Kisch ( 1865), L. R. 2 H. L. 99 ;
36 L. J. Ch. 849 ; 16 L. T. 500 ; 15 W. R. 821 · 24, 46
Chadwick v. Manning, [ 1896] A. C. 231 ; 65 L. J. P. C. 42 · 89
Chetham v. Hoare (1870), 9 Eq. 571 ; 39 L. J. Ch. 376 ; 22
L. T. 5 . 84
Clarke v. Hart ( 1858) , 6 H. L. C. 633 ; 108 R. R. 231 • 84
☺80
☺
8
☺
ŏ
0
8
Clegg v. Edmondson ( 1857) , 8 D. M. & G. 787 ; 27 L. T. 117 • 83
Clermont v. Tasburgh ( 1819) , 1 Jac. & W. 112 ; 20 R. R. 243 · 95
Clough v. London and North Western Ry. Co. ( 1871 ), L. R.
7 Ex. 26 ; 41 L. J. Ex. 17 ; 25 L. T. 708 • • 68, 70, 78
Concessions Trust, In re, [ 1896] 2 Ch. 757 . 92
DEPOSIT AND GENERAL LIFE ASSURANCE Co. v. Ayscough

(1856), 6 El. & Bl. 761 . • 96
Derry v. Peek ( 1889), 14 App . Cas. 337 ; 58 L. J. Ch. 864 ; 61
L. T. 265 ; 38 W. R. 33 · • 4, 5, 6, 7, 9, 28, 39, 88
Downes v. Ship ( 1868) , L. R. 3 H. L. 343 ; 19 L. T. 741 ; 37
3323
L. J. Ch. 642 · • 43
Draper v. Dean and Jason ( 1679), Finch's Rep. 439, n. • 12
Drincqbier v. Wood, [ 1899] I Ch. 393 ; 68 L. J. Ch. 181 ; 79
L. T. 548 ; 47 W. R. 252 · 44
EASTGATE, In re, [ 1905 ] 1 K. B. 465 ; 74 L. J. K. B. 324 ; 92 L. T.

207 · • 67
Eaglesfield v . Londonderry ( 1876), 4 C. D. 693 ; 35 L. T. 822 ;
25 W. R. 190 . 77
Edgington v. Fitzmaurice ( 1885) , 29 C. D. 459 ; 53 L. T. 369 ;
33 W. R. 911 36, 73
TABLE OF CASES. xi
PAGE
Erlanger v. New Sombrero Phosphate Co. ( 1878), 3 A. C. 1218 ;
48 L. J. Ch. 73 ; 39 L. T. 269 ; 27 W. R. 65 . 18 , 48, 49, 67,
75, 83
FARQUHARSON BROS. v. King, [ 1902 ] A. C. 325 ; 71 L. J. K. B.

667 ; 86 L. T. 810 ; 51 W. R. 94 .. • • 87
Freeman v. Cooke ( 1848), 2 Ex. 654 ; 18 L. J. Ex. 114 ; 12 L. T.
66 ; 76 R. R. 711 . 91
GIBSON V. Barton ( 1875) , L. R. 10 Q. B. 329 108

Glasier v. Rolls (1889) , 42 C. D. 459 ; 58 L. J. Ch. 820 ; 38
W. R. 113 • • · 14, 36
Gluckstein v. Barnes , [ 1900 ] A. C. 240 ; 69 L. J. Ch. 385 ; 82
L. T. 393 51 , 62, 70
Green v. Nixon ( 1857) , 23 Beav. 530 2
Greenwood v. Leather Shod Wheel Co. , [ 1900] 1 Ch. 434 ; 69
L. J. Ch. 131 ; 81 L. T. 595 . · 43, 57, 58
HALL v. Warren ( 1804), 9 Ves. 605 • • 94

Hart v. Frontino and Bolivia S. A. Gold Mining Co. (1870),
L. R. 5 Ex. III • 91
Hichens v. Congreve (1828), 4 Russ. 562 ; 6 L. J. Ch. 167 ; 33 5555
R. R. 173 53
Hogan v. Healey (1876), I. R. 11 C. L. 119. 65
JORDEN v. Money ( 1854), 5 H. L. C. 185 ; 23 L. J. Ch. 865 ; 1OI

R. R. 116 89, 91
KARBERG'S CASE, [ 1892 ] 3 Ch. 1 ; 61 L. J. Ch. 741 ; 66 L. T. 700 36,

40, 71, 81
Kent v. Freehold Land Co. ( 1868), 3 Ch. 493 ; 37 L. J. Ch. 653 ;
16 W. R. 990 · 36, 71, 80
Knox v. Hayman ( 1892) , 67 L. T. 137 73
LAGUNAS NITRATE Co. v. Lagunas Syndicate, [ 1899] 2 Ch. 392 ;

68 L. J. Ch. 699 ; 81 L. T. 334 ; 48 W. R. 74 · 46, 49, 67, 71
Leeds and Hanley Theatres, [ 1902 ] 2 Ch . 809 ; 72 L. J. Ch. 1 ;
87 L. T. 488 ; 51 W. R. 5 · · · · 71
Le Lievre v. Gould, [ 1893] 1 Q. B. 491 ; 62 L. J. Q. B. 353 ;
68 L. T. 626 ; 41 W. R. 468 . · • 3, 4, 62
Liberian Government Concessions, &c. Co. , Ltd. , In re ( 1892),
9 T. L. R. 136 • • • • 28
Life Ass . of Scotland v . Siddall (1861 ), 3 D. F. & J. 58 ; 4 L. T.
311 ; 9 W. R. 541 . 74
xii TABLE OF CASES.
PAGE
Lindsay Petroleum Co. v. Hurd ( 1874), L. R. 5 P. C. 221 ; 22
W. R. 492 • • · 75, 78
Load v. Green ( 1846), 15 M. & W. 216 ; 15 L. J. Ex. 113 ; 10
Jur. 163 ; 71 R. R. 627 . · • 67
London and Globe Finance Corporation, In re, [ 1903] 1 Ch.
728 ; 88 L. T. 194 ; 51 W. R. 651 • 3, 101 , 104, 105 , 106, 109
London and Staffordshire Fire Insurance Co. ( 1883), 24 C. D.
149 ; 31 W. R. 781 ; 48 L. T. 955 ; 53 L. J. Ch. 78 • • 29
Low v. Bouverie, [ 1891 ] 3 Ch. 113 ; 60 L. J. Ch. 594 ; 65 L. T.
533 ; 40 W. R. 50 . 86, 88
Lynde v. Anglo- Italian Hemp Co. , [ 1896] I Ch. 178 ; 65
L. J. Ch. 96 ; 73 L. T. 502 · 71
MACLEAY v. Tait, [ 1906] A. C. 24 ; 94 L. T. 68 ; 54 W. R. 365 55, 59

Maddison v. Alderson ( 1883), 8 App. Cas. 473 ; 52 L. J. Q. B.
737 ; 49 L. T. 303 ; 31 W. R. 820 • 89
McConnell v. Wright, [ 1903 ] 1 Ch. 546 ; 72 L. J. Ch. 347 ; 88
L. T. 431 ; 51 W. R. 661 , C. A. • 65
McKenzie v. British Linen Co. ( 1881 ), 6 App. Cas. 82 ; 44 L. T.
431 ; 29 W. R. 477 · 88, 89
Mullens v. Miller ( 1882), 22 C. D. 194 ; 52 L. J. Ch. 380 ; 48
L. T. 103 ; 31 W. R. 820 98
NELSON v. Rex, [ 1902 ] App. Cas. 250 . · 102
8888
Nene Valley Drainage Commissioners v. Dunkley ( 1868), 4
C. D. I. 99
(Newbigging v. Adam (1886), 34 C. D. 589 ; 13 A. C. 308 ; 56
L. J. Ch. 275 ; 55 L. T. 794 ; 35 W. R. 597 . 68
New Brunswick and Can. Ry. and Land Co. v. Muggeridge
(1860), I Dr. & Sm. 383 · 98
Nicols' Case (1885), 29 Ch. D. 421 97
888
Norway v. Rowe ( 1812) , 19 Ves . 144 ; 12 R. R. 157 83
OAKES v. Turquand ( 1867), L. R. 2 H. L. 325 ; 36 L. J. Ch.

949 ; 16 L. T. 808 . · 25, 27, 80, 96
Odessa Tramways Co. v. Mendel ( 1887) , 8 C. D. 235 ; 26 W. R.
887 ; 38 L. T. 731 ; 47 L. J. Ch. 505 . · · • • 96
Ogilvie v. Currie ( 1868), 37 L. J. Ch. 541 ; 18 L. T. 593 ; 16
W. R. 769 · 80
Overend, Gurney & Co. v. Gibb ( 1872), L. R. 5 H. L. 480 ; 42
L. J. Ch. 67 . · 48, 50, 64
PAWLE'S CASE ( 1869), 4 Ch. 497 ; 38 L. J. Ch. 412 ; 17 W. R.

599 · • 81, 82
TABLE OF CASES. xiii
PAGE
Peek v. Derry ( 1887), 37 Ch. D. 541 ; 57 L. J. Ch. 347 ; 59 L. T.
78; 36 W. R. 899 65, 72
v. Gurney ( 1873) , L. R. 6 H. L. 377 ; 43 L. J. Ch. 19 ; 22
W. R. 29 63, 64, 77, 79
Peel, Ex parte, In ve Barned's Banking Co. [unreported], . • 81
Post v. Marsh ( 1880) , 16 C. D. 395 ; 50 L. J. Ch. 287 ; 43 L. T.
628 ; 29 W. R. 198 • · ΙΟΟ
Postlethwaite, Re (1889), 37 W. R. 200 ; 60 L. T. 514 · 74
Prendergast v. Turton ( 1841 ), I Y. & C. 98 ; affirmed 13
L. J. Ch. 268 ; 57 R. R. 255 • 83, 84
RAWLINS v. Wickham ( 1858) , 3 D. & J. 304 ; 28 L. J. Ch. 188 ;

32 L. T. (O. S.) 231 ; 7 W. R. 145 • · 69, 85
Redgrave v. Hurd (1881), 20 C. D. 1 ; 51 L. J. Ch. 113 ; 45 L. T.
485 ; 30 W. R. 251 14, 28, 43 , 45, 65 , 69, 76 , 84 , 99
Reese River Silver Mining Co. v. Smith ( 1869) , 7 Eq. 347 ; 20
L. T. 163 ; 17 W. R. 601 • 27, 65, 80, 96
Reg. v. Aspinall ( 1877), 2 Q. B. D. 48 · • IIO
v. Birt ( 1899), 63 J. P. 328 • • 109
v. Brown (1858) , 7 Cox, 442 112
v. Burch ( 1865) , 4 F.¡& F. 407 • 112
v. de Berenger ( 1814), 3 M. & Sel. 67 · 112
v. Gurney (1869), 11 Cox, 414 • IIO, III
v. Hall, [1891 ] 1 Q. B. 747 · · 113
v. Price ( 1840) , 11 A. & E. 727 • 113
v. Silverlock, [ 1894 ] 2 Q. B. 766 . • III
v. Tylor and International Commercial Co. , [ 1891 ] 2 Q. B.
588 ; 61 L. J. M. C. 38 ; 65 L. T. 662 ; 56 J. P. 118, C. A. . 113
Rex v. Lawson, [ 1905 ] 1 K. B. 541 ; 74 L. J. K. B. 296 ; 20
Cox, 812 108
Richardson v. Silvester ( 1874), L. R. 9 Q. B. 34 ; 43 L. J. Q. B.
I ; 29 L. T. 395 ; 22 W. R. 74 · · · · 64
Roberts v. Tunstall (1844), 4 Ha. 257 ; 14 L. J. Ch. 184 ; 67
R. R. 54 • · 75
Ruben v . Great Fingall Consolidated, [ 1906 ] A. C. 439 ; 75
L. J. K. B. 843 ; 95 L. T. 214 54, 63
SALOMON V. Salomon, [ 1897] A. C. 22 ; 65 L. J. Ch. 35 ; 75

L. T. 426 48
Savery v . King (1865) , 5 H. L. C. 627 ; 25 L. J. Ch. 482 ; 4
W. R. 571 · 84
Scott and Alvarez's Contract, In re, [ 1895] 1 Ch. 596 ; 64 L. J.
Ch. 376 ; 72 L. T. 455 . 94
xiv TABLE OF CASES.
PAGE
Scott v. Dixon ( 1859), 29 L. J. Ex. 62, 63, n.; 45 W. R. 193 64
v. Snyder Dynamite Projectile Co. ( 1892 ), 66 L. T. 283 ;
affirmed 67 L. T. 104 (C. A.) · 29, 73
Scottish Petroleum Co. ( 1883) , 23 C. D. 413 ; 49 L. T. 348 ; 31
W. R. 846 • 79
Sharpley v. Louth and East Coast Ry. Co. (1876), 2 C. D. 663 ;
35 L. T. 71 ; 46 L. J. Ch. 259 • 79, 80
Shaw v. Holland, [ 1900] 2 Ch. 305 ; 69 L. J. Ch . 621 ; 82 L. T.
782 • · 66
Shepherd and Another v. Broome , [ 1904 ] A. C. 342 ; 73 L. J. Ch.
608 ; 91 L. T. 178 ; 53 W. R. III · · 59
Smith v. Chadwick ( 1884) , 9 A. C. 187 ; 53 L. J. Ch. 873 ; 50
L. T. 697 ; 32 W. R. 687 • · • 23, 64, 73
Stewart's Case ( 1886), I Ch. 574 ; 35 L. J. Ch. 738 ; 14 L. T.
817 43
788
TAYLOR v. Ashton ( 1843), 11 M. & W. 401 .
Thompson v. Rourke, [ 1893 ] P. 70 89
Trechmann v. Calthorpe, [ 1906] A. C. 24 ; 94 L. T. 68 ; 54
W. R. 365 · 57
Tullis v . Jacson, [ 1892 ] 3 Ch. 441 ; 61 L. J. Ch. 655 ; 67 L. T.
19
340 ; 41 W. R. II . •
Twycross v. Grant ( 1877), 2 C. P. D. 469 ; 46 L. J. C. P. 636 ;
36 L. T. 812 ; 25 W. R. 701 . · · 66
Tyrrell v. Bank of London ( 1862), 10 H. L. C. 26 ; 31 L. J. Ch.
369 70
UNITED SHOE MANUFACTURING Co. v. Brunet, [ 1909] A. C. 330 ;
78 L. J. P. C. 101 ; 100 L. T. 579 • 68
VANE V. Vane (1873), 8 Ch. 383 ; 42 L. J. Ch. 299 ; 28 L. T. 320 ;

21 W. R. 252 · • 84
Veuve Monnier et Ses Fils, Ltd. , In re, [ 1896] 2 Ch. 525 ; 65
L. J. Ch. 748 ; 74 L. T. 670 ; 44 W. R. 577 · · . 92
WAINWRIGHT'S CASE ( 1881 ), 19 C. D. 140 ; 51 L. J. Ch. 67 ; 45
L. T. 562 ; 30 W. R. 125 4I
Wauton v. Coppard , [ 1899] 1 Ch. 92 ; 68 L. J. Ch. 8 ; 79 L. T.
467 ; 47 W. R. 72 . · • • 98
Whalley v. Whalley ( 1816), 3 Bligh, 1 ; 1 Mer. 436 · 75, 84
Whitechurch, Ltd. v. Cavanagh, [ 1902 ] A. C. 117 ; 71 L. J. K. B.
400 ; 85 L. T. 349 ; 50 W. R. 218 . 89
THE
LAW OF MISREPRESENTATION
IN RELATION TO
CHAPTER I.
MISREPRESENTATION, FRaudulent AND INNOCENT.
A MISREPRESENTATION, whether fraudulent or innocent,

may be said to be, in law, an amalgamation of six
elements, and before it can be safely assumed that mis-
representation exists, in the legal sense of the term , each
of these six elements must be sought and ascertained.
First, then, there must be an untrue statement.
Next, there must be the making of that untrue statement
to a party to the contract in question.
Thirdly, we have to ascertain the condition of the mind
of the person who makes the statement as to its truth or
untruth.
Fourthly, we must prove the intention of that person to
induce the other party to the contract to enter into it.
Fifthly, we must show the reliance which is placed on
the statement by the person to whom it is made ; and ,
Sixthly, the statement must bear such a relation to the
contract that its falsity makes the contract unconscionable
in equity or voidable in law.
L.M. I
2 MISREPRESENTATION AND LIMITED COMPANIES.
Misrepresentation may be fraudulent or innocent ; where

it is false to the knowledge of the person making it, it is a
fraud or fraudulent ; where it is not known to be false , it
is either careless or innocent. But whether the misrepre-
sentation be one or the other, the law provides a remedy
for the person who has suffered detriment from either.
To provide an exhaustive definition of fraud, on which
fraudulent misrepresentation is based, has passed the wit
of lawyers. So infinite in variety is fraud, so fertile is
man's cunning in devising fresh schemes of deceit, so
unexhausted and so apparently inexhaustible is his capacity
for deception that the Courts of Justice, though by no
means unacquainted with the perfidy of human beings,
have always refused to say what shall or what shall not in
all cases constitute fraud, and by so doing have wisely left
themselves free to apply acknowledged principles to such
facts as are laid before them from time to time.
Nevertheless, lawyers have essayed to give definitions of
misrepresentation, whether fraudulent or innocent. The
great French jurist, Pothier, has put it quite simply : “ It
is any kind of artifice by which one deceives another."
Professor Holland (" Jurisprudence," 10th ed. , p. 229)
finds fraudulent misrepresentation when there is present
" the intentional determination of the will of another to a
decision harmful to his interests, by means of a represen-
tation which is neither true nor believed to be true by the
person making it." So far back as 1679, Lord Chancellor
Finch wrote in his report on Dean v. Jason (a) : “ In the
civil law by fraud is meant all surprise, trick, cunning,
99
dissembling, and any unfair means to cheat another.'
" It is not my intention ," said Sir Samuel Romilly in
Green v. Dixon (b) , "to attempt any complete definition of
the word fraud ; but I consider that it implies a wilful act
(a) Fin. 439. \ (6) (1857) 23 Beav. 535.

MISREPRESENTATION , FRAUDULENT AND INNOCENT. 3
on the part of one whereby another is sought to be

deprived, by unjustifiable means, of what he is entitled
to." 66 Fraud," said Story (" Equity Jurisprudence," ( Ist
Eng. ed.) , p. 114), " in the sense of a Court of Equity ,
properly includes all acts, omissions, and concealments
which involve a breach of legal and equitable duty, trust,
or confidence, justly reposed, and are injurious to another,
or by which an undue and unconscientious advantage is
taken of another." The Civil Code of France suggests ,
in Article 1116, a definition in general terms : " Fraud is
a ground for avoiding a contract where the devices prac-
tised by one of the parties are such as to make it evident
that without these devices the other parties would not have
contracted."
Finally, before fraud can become operative , it is neces-
sary that the method employed be successful in deceiving.
No measure or degree of fraud will amount to a legal
fraud if the person upon whom it is exercised knows the
truth, perceives the artifice, or, in any case, is not
deceived. For, as the old maxim has it, " He is not
deceived who knows himself to be deceived. " " To
deceive," says Buckley, J. , in In re London and Globe Finance
Corporation (c), " is to induce a man to believe that a thing
is true which is false, and which the person practising the
deceit knows or believes to be false. To defraud is to
deprive by deceit . It is by deceit to induce a man to act
to his injury. More tersely it may be put, that to deceive
is by falsehood to induce a state of mind ; to defraud is by
deceit to induce a course of action."
Again, misrepresentation may be so reckless as to
amount to fraud. Gross negligence, however great , is no
fraud itself (see Le Lievre v. Gould (d), per Lord Esher),
but an element to be taken into account when considering
whether in a certain transaction fraud and dishonesty are
(c) [ 1903] I Ch., at 732. (d) [ 1893 ] 1 Q. B. p. 497.
I- 2
4 MISREPRESENTATION and Limited COMPANIES.
present. If a man makes a wilful statement, intending it

to be acted upon, and he is reckless whether it is true
or false, " he has," says Bowen, L.J. (Le Lievre v.
Gould) (e), " a wicked mind, but his mind is wicked not
because he is negligent but because he is dishonest in not
caring about the truth of his statement. . . . It is the
wicked indifference which constitutes the fraud." Again,
Lindley, L.J., in Angus v. Clifford (ƒ) , says that to support
an action for fraudulent misrepresentation, " it is not
sufficient that there is a blundering carelessness, however
gross, unless there is a wilful recklessness, by which I
mean wilfully shutting one's eyes, which is, of course,
fraud " ; and Lord Esher (Le Lievre v. Gould) (g) declares
that " a man must also be said to have a fraudulent mind
if he recklessly makes a statement intending it to be acted
upon, and not caring whether it be true or false. I do
not hesitate to say that a man who thus acts must have a
wicked mind."
But misrepresentation may be innocent, even though at
the same time it be careless . A false statement made in
the honest belief that it is true will not allow of an action
for fraudulent misrepresentation (Derry v. Peek) (h), for
there is no such thing as legal fraud in the absence of
moral fraud. Further, " making a false statement through
want of care falls far short of, and is a very different thing
from, fraud, and the same may be said of a false repre-
sentation believed in, but on insufficient grounds " (Lord
Herschell in Angus v. Clifford) (i). " An honest blunder
in the use of language is not dishonest. What is honest
is not dishonest " (Bowen , L.J., Angus v. Clifford) (k).
Important as it is to bear in mind the legal distinction
between fraudulent and innocent misrepresentation, still
more important does it become when the remedy for
(e) [ 1893 ] I Q. B. p. 500. (h) (1889) 14 App. Cas. 337.
[ 1891 ] 2 Ch. p. 463. (2) Supra, p. 449.
(g) Supra, p. 497. (k) Supra, p. 470.
MISREPRESENTATION , FRAudulent and INNOCENT. 5
either has to be considered. For while the remedy for

fraud in representation is fairly exhaustive, that for
innocent misrepresentation is partial and dependent on
circumstances .
Thus, while an action for deceit and consequent damages
or compensation , or for the annulment or rescission of the
contract (upon the ground that " fraud vitiates every-
thing " ), or the setting up of an estoppel, are remedies
open to the person aggrieved by fraudulent misrepresen-
tation, for merely innocent misrepresentation it may
happen that there is no remedy open to the injured
person. No action of deceit will lie, and it has been laid
down that rescission will not be granted in a case of mis-
representation made through honest mistake, unless the
subject-matter be different in substance from what it was
represented to be : " A material misrepresentation ," said
Lord Bramwell in Derry v. Peek (1), " though not fraudu-
lent, may give a right to rescind a contract where capable
of such rescission." That is to say, when and where the
parties can be put back in their former position and
restitutio in integrum be made. Subject to this, where
rescission is claimed it is only necessary to prove that
there was misrepresentation ; then, however honestly it
may have been made, however free from blame the person
who made it, the contract, having been obtained by mis-
representation, cannot stand (Lord Herschell in Derry v.
Peek) (m).
Again, though the falsity of a statement is not known ,
though it was carelessly or innocently made, yet, since the
representation is in fact false, it is unconscionable in the
person who made the statement to enforce the resulting
contract, and, consequently, the specific performance of a
contract flowing from innocent misrepresentation will not
be granted .
(4) (1889) 14 App. Cas. p. 347. (m) Supra.
CHAPTER II.
THE GENERAL LAW.
COMPANIES (CONSOLIDATION) ACT, 1908, s. 81 , sub- S. 9 : -

""
Nothing in this section shall limit or diminish any
liability which any person may incur under the
general law or this Act apart from this section."
THE law of fraudulent misrepresentation has suffered

change in comparatively recent years. The boundary
between the old view of the law and the recent is drawn
by the case of Derry v. Peek (a) ; it is the landmark of the
modern law of fraudulent misrepresentation. The earlier
theory is put quite clearly by Sir James Hannen in his
judgment in the Court of Appeal in that case : " I take
the law to be that if a man takes upon himself to assert a
thing to be true which he does not know to be true and
has no reasonable ground to believe to be true, in order to
induce another to act upon the assertion, who does so act,
and is thereby damnified, the person so damnified is
entitled to maintain an action for deceit." And in the
same case Lopes, L.J., laid it down that an action for
deceit (or fraudulent misrepresentation) may be maintained
against a person making a false statement, intended to be
and in fact relied on by the person to whom it is made, if
such statement is untrue in fact " but believed by the
person making it to be true, but without any reasonable
grounds for such belief."
(a) (1889) 14 App. Cas. 337.

THE GENERAL LAW. 7
It is this view of the law that the House of Lords in

Derry v. Peek held to be wrong. Lord Herschell, in his
famous judgment (b) says that , " All the learned judges in
the Court below concurred in thinking that it was sufficient
to prove that the representations made were not in accord-
ance with fact, and that the person making them had no
reasonable ground for believing them. They did not treat
the absence of such reasonable grounds as evidence merely
that the statements were made recklessly, careless whether
they were true or false, and without belief that they were
true, but they adopted as the test of liability, not the
existence of belief in the truth of the assertions made, but
whether the belief in them was founded upon any reason-
able grounds." The House of Lords differed from this
view, citing amongst other cases in support of their own
the judgment of Parke, B. , in Taylor v. Ashton (c) : " It is
insisted that even that (viz. , the gross negligence which
the jury had found), accompanied with a damage to the
plaintiff in consequence of that gross negligence, would be
sufficient to give him a right of action. From this pro-
position we entirely dissent, because we are of opinion
that, independently of any contract between the parties ,
no one can be made responsible for a representation of this
kind unless it be fraudulently made. . . . It is not neces-
sary to show that the defendants knew the facts to be
untrue ; if they stated a fact which was untrue for a
fraudulent purpose, they at the same time not believing
that fact to be true, in that case it would be both a legal
and moral fraud." And the House of Lords held, per
Lord Herschell (d), that, " First, in order to sustain an
action of deceit there must be proof of fraud and nothing
short of that will suffice. Secondly, fraud is proved when
it is shown that a false representation has been made ;
(d) p. 374.
(1889) 14 App.
M. & Cas.4
, at ,363.
W. 401
8 MISREPRESENTATION And Limited COMPANIES
(1 ) knowingly ; or (2 ) without belief in its truth ; or

(3) recklessly careless whether it be true or false. . . . To
prevent a false statement being fraudulent there must, I
think, always be an honest belief in its truth. Thirdly,
if fraud be proved, the motive of the person guilty of it is
immaterial. It matters not that there was no intention to
cheat or injure the person to whom the statement was
made."
So much for a misrepresentation which is fraudulent.
But we next have to consider the misrepresentation which
is innocent, and the Lord Chancellor lays down the law
in this respect in the course of the same judgment. An
action of deceit, that is for a fraudulent misrepresentation ,
differs essentially from one brought to obtain rescission of
a contract on the ground of misrepresentation of a material
fact. The principles which govern the two actions
differ widely. "When rescission is claimed ," says Lord
Herschell (e) , " it is only necessary to prove that there was
misrepresentation ; then, however honestly it may have
been made, however free from blame the person who made
it, the contract, having been obtained by misrepresentation,
cannot stand." Consequently, if a shareholder has been
induced to subscribe by an innocent misrepresentation or
non-disclosure, he can obtain rescission of his contract as
long as he can prove that the statement in which mis-
representation or non-disclosure of some material fact was
present was issued by the company or by some director,
promoter, or other person whose acts have been authorised
or adopted by the company, and that he was induced to
subscribe by such misrepresentation or non -disclosure.
But it must not be forgotten that the decision of the
House of Lords in Derry v. Peek led to legislation with
special reference to limited companies. The Directors'
Liability Act of 1890 and the Companies Act of 1900 were
(e) (1889) 14 App. Cas. p. 359.
THE GENERAL LAW. 9
*
the legitimate children of Derry v. Peek ; they are now
represented by sects. 84 and 81 respectively of the
Companies (Consolidation) Act of 1908, and provide,
according to Sir Frederick Pollock (" Pollock on Con-
tracts, " p. 588 n ., 8th ed.), a mitigation of " the mis-
chievous consequence of Derry v. Peek," or, as Lord
Lindley puts it, they were framed " to meet a particular
grievance, and do not replace an unsound doctrine which
leads to unfortunate results by a sounder principle which
would avoid them " (" Lindley on Companies," 5th ed.,
Supp. 2).
These statements remind us that Derry v. Peek came as
a thunderclap upon many lawyers, the echoes of which
reverberate even to this day. But the importance of
bearing in mind the definition laid down by Derry v. Peek
is due, amongst other considerations, to subs-sect. (9 ) of
sect. 81 of the Companies (Consolidation) Act, 1908, which
enacts that " Nothing in this section shall limit or diminish
any liability which any person may incur under the general
law or this Act apart from this section ."
The following cases are illustrative of the principles
that have been discussed above, and may be briefly
considered,
An action of deceit will not lie for innocent misrepre-

sentation. Fraud is proved when it is shown that
a false representation has been made knowingly, or
without belief in its truth, or recklessly without
caring whether it be true or false.
DERRY V. PEEK (ƒ) .
In this case a special Act, incorporating a tramway com-

pany, provided that the carriages might be moved by
(ƒ) ( 1889) , 14 App. Cas. 337.

IO MISREPRESENTATION AND LIMITED COMPANIES.
animal power, and, with the consent of the Board of

Trade, by steam power. The directors issued a prospectus
containing a statement that by their special Act the com-
pany had the right to use steam power instead of horses.
The paragraph in the prospectus ran as follows : " One
great feature of this undertaking, to which considerable
importance should be attached , is that, by the special Act
of Parliament obtained , the company has the right to use
steam or mechanical motive power instead of horses, and
it is fully expected that by means of this a consider-
able saving will result in the working expenses of the
line as compared with other tramways worked by
horses."
On the faith of this statement the plaintiff took shares.
The Board of Trade afterwards refused their consent to
the use of steam power, and the company was wound up.
The plaintiff brought an action of deceit against the
directors, and lost it in the Court of first instance, won it
in the Court of Appeal, and lost it again in the House of
Lords, which held that the defendants were not liable,
because the statement made by them as to steam power
was made by them in the honest belief that it was true,
and it was held by the Lords in this case that in an action
of deceit the plaintiff must prove actual fraud, and fraud is
proved when it is shown that a false representation has
been made knowingly, or without belief in its truth, or
recklessly without caring whether it be true or false. But
a false statement made through carelessness and without
reasonable ground for believing it to be true, may be evi-
dence offraud, but does not necessarily amount to fraud.
Such a statement, if made in the honest belief that it is
true, is not fraudulent, and does not render the person
making it liable to an action of deceit.
On the other hand, there was ample evidence upon
which an order for rescission could have been obtained,
THE GENERAL LAW. II
but as the company had been wound up that form of relief

was not open to the plaintiff.
This is the great case which so disturbed the views then
prevalent on the point and led to its principles being cut
down, so far as limited companies are concerned, by the
Directors' Liability Act of 1890 and the Companies Act
of 1900, now embodied in the Companies (Consolidation)
Act, 1908, ss. 81 , 84.
" I think," said Lord Herschell (g), " the authorities
establish the following propositions : First, in order to
sustain an action of deceit, there must be proof of fraud,
and nothing short of that will suffice. Secondly, fraud is
proved when it is shown that a false representation has
been made, ( 1) knowingly ; or (2) without belief in its truth ;
or (3 ) recklessly, careless whether it be true or false.
Although I have treated the second and third as distinct
cases, I think the third is but an instance of the second,
for one who makes a statement under such circumstances
can have no real belief in the truth of what he states. To
prevent a false statement being fraudulent, there must, I
think, always be an honest belief in its truth. And this
probably covers the whole ground , for one who knowingly
alleges that which is false has obviously no such
honest belief. Thirdly, if fraud be proved, the motive of
the person guilty of it is immaterial. It matters not that
there was no intention to cheat or injure the person to
whom the statement was made.
" I desire to say distinctly that when a false statement
has been made the questions whether there were reasonable
grounds for believing it , and what were the means of
knowledge in the possession of the person making it, are
most weighty matters for consideration . The ground upon
which an alleged belief was founded is a most important
test of its reality. I can conceive many cases where the
(g) At p. 374.
12 MISREPR and LIMITED COMPANI .
ESEntat ES
ion
fact that an alleged belief was destitute of all reasonable
foundation would suffice of itself to convince the Court
that it was not really entertained, and that the repre-
sentation was a fraudulent one. So, too, although means
of knowledge are, as was pointed out by Lord Blackburn
in Brownlie v. Campbell (h) , a very different thing from
knowledge, if I thought that a person making a false
statement had shut his eyes to the facts, or purposely
abstained from inquiring into them, I should hold that
honest belief was absent, and that he was just as fraudu-
lent as if he had knowingly stated that which was
false. ...
"What conclusion ought to be drawn from their (the
witnesses') evidence ? I think they were mistaken in
supposing that the consent of the Board of Trade would
follow as a matter of course because they had obtained
their Act. It was absolutely in the discretion of the
Board whether such consent should be given. The pro-
spectus was therefore inaccurate. But that is not the
question. If they believed that the consent of the Board
of Trade was practically concluded by the passing of
the Act, has the plaintiff made out, what it was for him
to do, that they have been guilty of a fraudulent mis-
representation ? I think not. I cannot hold it proved as
to any one of them that he knowingly made a false state-
ment, or one which he did not believe to be true, or was
careless whether what he stated was true or false . In
short, I think they honestly believed that what they
asserted was true, and I am of opinion that the charge
of fraud made against them has not been established . . . .
Adopting the language of Jessel, M.R. , in Smith v.
Chadwick (i), I conclude by saying that, on the whole,
I have come to the conclusion that the statement, ' though
in some respects inaccurate and not altogether free from
(h) (1880) 5 App. Cas., at p. 952. (2) (1882) 20 Ch. D. , at p. 67.
THE GENERAL LAW. 13
imputation of carelessness, was a fair, honest, and bonâfide

statement on the part of the defendants, and by no means
exposes them to an action for deceit .' "
And Lord Halsbury, L.C. (k), pointed out that " if the
facts are reconcilable with the innocence of the directors,
and with the absence of the mens rea which I consider an
essential condition of an action for deceit, the mere fact
of the inaccuracy of the statement ought not to be pressed
into constituting a liability which appears to me not to
exist according to the law of England ."
Upon the question of innocent misrepresentation, which
was not in question in the case, Lord Bramwell (1) pointed
out that a material misrepresentation , though not fraudu-
lent, may give a right to avoid or rescind a contract where
capable of such rescission ; but " to found an action for
damages there must be a contract and breach, or fraud.
The statement of claim in this case states fraud . Of
course, that need not be proved merely because it is stated.
But no one ever heard of or saw a statement of claim or
declaration for deceit without it. There is not an authority
at common law, or by a common law lawyer, to the
contrary. "
And, dealing with rescission in the case of even innocent
misrepresentation, Lord Herschell holds (m) that " where
rescission is claimed it is only necessary to prove that
there was misrepresentation ; then, however honestly it
may have been made, however free from blame the person
who made it, the contract, having been obtained by
misrepresentation , cannot stand."
(k) At p. 344. (m) At p. 359.

(7) At p. 347.
Rescission will lie, but an action of deceit cannot be

sustained where the plaintiff does not discharge
the onus of proof of fraud on the part of
defendant.
GLASIER v. ROLLS (n).
The prospectus had stated that the business had paid 17

per cent. on the capital employed in it, but this was untrue
if " capital employed " included the whole value of the
business premises. The plaintiff sued Rolls for damages,
and Rolls, the principal partner in the firm being converted
into a company, had concurred in the conversion, and his
name appeared on the prospectus as managing director of
the company with a note that he would not join the board
till after the transfer had been completed. He did not
issue the prospectus, but saw it in draft though not in its
final shape, and made alterations in it. The plaintiff
recovered judgment with damages, and the defendant
appealed, but before the appeal came on for hearing Derry
v. Peek was decided by the House of Lords, and , as a con-
sequence, the judgment was reversed by the Court of
Appeal on the ground that the plaintiff had not proved
that the statement was made dishonestly.
Misrepresentation is a good defence to an action for

specific performance ; and the same would be
ground for a counterclaim for rescission of the
contract and for damages .
REDGRAVE v. HURD (0).
This is not a case where a company was involved, but as

a case of misrepresentation of the first importance, it must
(n) (1889) 42 Ch. D. 436, (0) ( 1881) 20 Ch. D. 1.

THE GENERAL LAW. 15
be included amongst those so discussed and dealt with

here.
In this case the plaintiff, a solicitor, had advertised that
as he was elderly and contemplating retirement he would
first take as a partner a solicitor who would not object to
purchase his suburban residence for £1,600. The defendant
answered the advertisement, and saw the plaintiff, who
said his business brought in about £300 a year. The
plaintiff produced summaries of accounts for three years
which showed that an average business was done of nearly
£200 a year, and on being asked how he made up the £300
a year, he produced papers which he said related to business
not included in the summaries. The defendant did not
examine those papers, but as a fact they showed only
trifling business and the gross annual receipts from the busi-
ness, were about £200 a year. The defendant, not knowing
this, signed the agreement to purchase the house, and paid
a deposit, the plaintiff refusing to insert in the agreement
any mention of the business. The defendant took posses-
sion but, finding the business not as represented , declined
to complete, and when the plaintiff brought an action for
specific performance, the defendant in his defence disputed
the right to specific performance on the ground of misrepre-
sentations as to the business, and, further, by counter- claim
claimed on the same ground rescission of the contract and
damages. In his counter-claim, however, he did not specifi-
cally state what representations had been made, nor did he
allege whether they were false to the plaintiff's knowledge.
It was held by the Court of Appeal that when one person
induces another to enter into an agreement by a material
representation which is untrue, it is no defence to an action
to rescind the contract that the person to whom the repre-
sentation was made had the means of discovering , and
might, with reasonable diligence, have discovered that it
was untrue ; further, that it is no defence in such an action
that the defendant made a cursory and incomplete inquiry

into the facts, for that if a material representation is made
to him he must be taken to have entered into the contract
on the faith of it, and in order to take away his right to
have the contract rescinded if it is untrue it must be shown
by him that he had knowledge of facts which showed it to
be untrue, or that he stated in terms, or showed clearly by
his conduct, that he did not rely on the representation .
Consequently the Court of Appeal held that the defendant
was entitled to have the contract rescinded and the deposit
returned, but that as the defendant had not pleaded know-
ledge on the part of the plaintiff that the statements as to
the business were untrue, and had not specifically alleged
the statements in his counter-claim, he could not recover
damages.
Two points in this case are particularly important. If a
man is induced to enter into a contract by misrepresenta-
tions it is not a sufficient answer to him to say, " If you
had used due diligence you would have found out that
the statement was untrue. You had the means afforded
you of discovering its falsity, and did not choose to avail
yourself of them." It is a settled doctrine of equity, not
only as regards specific performance but also as regards
rescission, that this is not an answer unless there is such
delay as constitutes a defence under the Statute of Limita-
tions. That is quite a different thing. Under the statute
delay deprives a man of his right to rescind on the ground
of fraud, and the only question to be considered is from
what time the delay is to be reckoned. The delay counts
from the time when by due diligence the fraud might have
been discovered. The effect of misrepresentation is not
got rid of on the ground that the person to whom it was
made has been guilty of negligence. Where men issue a
prospectus in which they make false statements of the
contracts made before the formation of a company, and
THE GENERAL LAW. 17
then say that the contracts themselves may be inspected at

the offices of the company or its solicitors, it has always
been held that those who accept such false statements as
these are not deprived of their remedy merely because they
neglect to go and look at the contracts. See the judgment
of Jessel, M.R. ( þ).
The other point of importance in this case is this : When
a person makes a material representation to another to
induce him to enter into a contract, and the other enters
into that contract, it is not sufficient to say that the party
to whom the representation is made does not prove that
he entered into the contract relying upon the representation.
If it is a material representation calculated to induce him
to enter into the contract, it is an inference of law (see
Jessel, M.R. ) (q) that he was induced by the representa-
tion to enter into it, and in order to take away his title to
be relieved from the contract on the ground that the repre-
sentation was untrue, it must be shown that he possessed
knowledge of the facts contrary to the representation, or
that he stated in terms, or showed clearly by his conduct,
that he did not rely on the representation . Where there
is neither evidence that the person to whom the represen-
tation is made knows facts which would show the state-
ment to be untrue nor that he says or does anything to show
that he does not actually rely upon the statement , the
inference remains that he does so rely, and the statement
being a material statement, the fact of it being untrue is
sufficient ground for rescinding the contract.
(p) At pp. 14 and 15. (9) At p. 21.
L.M. 2
The misrepresentations and concealment of facts by

promoters who have a fiduciary relation to the
company are grounds for rescission.
ERLANGER v. NEW SOMBRERO PHOSPHATE

COMPANY (r).
It was held in this case that persons who purchase

property and then create a company to purchase from
them the property they have bought, stand in a fiduciary
position towards that company and must faithfully state
to the company the facts which apply to the property,
and would influence the company in deciding on the
reasonableness of acquiring it.
In this case a syndicate, of which Erlanger was at the
head, bought from the official liquidator of an insolvent
company an island reputed to be rich in mines of phos-
phates. Erlanger managed the purchase and began to
promote a company which was to buy the land and work
the mines. He nominated five directors, of whom two
were abroad and of the remaining three two were persons
under his control who were supplied by him with the
qualification shares. Of these two persons, one acted as
a business agent for Erlanger, and the other was a per-
sonal friend. The sale of the land was made nominally
by one who had really no interest in it, and the sale was
made to that director who was the business agent of
Erlanger, and who thus acted as purchaser for the com-
pany. Then the two directors, and a third, who was
appointed by Erlanger but knew nothing of the foregoing
transactions, accepted on behalf of the company, as its
directors, the purchase contract, and issued a prospectus
very favourable in character, and allotted shares sub-
scribed upon the terms of the prospectus. At the first
(r) (1878) 3 App. Cas. 1218.

THE GENERAL LAW. 19
meeting of the shareholders, the third director, who knew

nothing of the earlier history of the undertaking, took
the chair, and on being questioned by a shareholder as
to rumours of the earlier transactions, avowed his want
of knowledge and declared his confidence in the scheme.
The shareholders did not learn the facts concerning the
purchase, and adopted it at the meeting. This was in
February, 1872. But in June, 1872 , there was a general
meeting of the shareholders and a committee of investi-
gation was appointed , and when this committee reported
in August, 1872, the original directors were removed and
a new board elected with power to take steps for the
benefit of the company. In December a bill was filed
to rescind the contract, and it was held by the House of
Lords, before whom it was twice argued, that the contract
could not be sustained. It should be remembered that in
this case the Lord Chancellor ( Cairns) doubted whether
there had not been such delay on the part of the company
in coming for relief as to amount to laches depriving
the company of the title to obtain relief.
Very shortly, the salient facts of the case were these :
Sombrero, a small island in the West Indies, had been
leased by the Crown to the Sombrero Company, which
had been working the phosphate of lime beds on the island
unsuccessfully and was ordered to be wound up . Erlanger
and his co-appellants formed a syndicate and bought the
lease for £55,000 ; and a company was formed under the
title of the New Sombrero Phosphate Company, and the
directors, under the memorandum and articles of associa-
tion, were empowered to adopt and carry into effect the
contract for the purchase of the island by the company.
This contract for the purchase of the island was between
a certain dummy vendor and one of the directors nominated
by Erlanger, as a purchaser acting on behalf of the
company. The contract did not reveal the price paid
2-2
by the syndicate to the official liquidator, and the price

to be paid by the company was £ 110,000 of which
£80,000 was to be paid in cash and the balance taken
in fully paid-up shares. The date of the contract and of
the registration of the company was September 20, 1871 .
At the statutory meeting in February, 1872 , a shareholder
complained that he had heard a rumour that what the
company was to buy at £110,000 had but a few days before
been sold to the vendors to the company for £55,000, and
he referred to a person, one of the directors of the com-
pany, as one of the persons who had made the original
purchase, observing, " I think it was an improper trans-
action that one of the directors should be both the buyer
and the seller of the property. That requires a little
explanation on the part of the board. " Sir T. Dakin , one
of the directors , was in the chair, and said that he was told
that one of the directors, with other persons , had bought
the island a month before the company was thought of or
projected ; that it appeared to him that the prospectus
fully stated the purchase contract on behalf of the com-
pany ; that the property was not originally bought by a
member of the company, for it did not exist ; and that he
did not know the original purchase price. At the annual
meeting in June a committee of investigation was
appointed , in August new directors were elected by a
general meeting, and in December a bill was filed against
all the members of the syndicate and prayed for relief.
This was dismissed in the court of first instance, but on
appeal the contract was ordered to be rescinded as to all
who were members or representatives of members of the
syndicate, the purchase money by the company to be
repaid, and, on payment of the money so ordained to be
repaid to the company, the island was to be restored by the
company to the syndicate. This decision was confirmed
by the House of Lords.
THE GENERAL LAW. 21
It was pointed out by Lord Penzance in his judgment

that the company never had an opportunity of exercising,
through independent directors, a fair and independent
judgment upon the subject of the purchase, and that this
result was brought about by the conduct and contrivance
of the vendors. It was the vendors, in their character of
promoters, who had the power and the opportunity of
creating and forming the company in such a manner
that with adequate disclosures of fact an independent
judgment on the company's behalf might have been
formed. But instead of doing so they used that power
and opportunity for the advancement of their own
interests. Placed in this position of unfair advantage
over the company which they were about to create, they
were bound, according to the principles constantly acted
upon in the Courts of Equity, if they wished to make a
valid contract of sale to the company, to nominate inde-
pendent directors and fully disclose the material facts.
The relations of principal and agent, trustee and cestui
que trust, parent and child, guardian and ward, priest and
penitent, all furnish instances in which the Courts of
Equity have given protection and relief against the pres-
sure of unfair advantage resulting from the relation and
mutual position of the parties, whether in matters of
contract or gift ; and this relation and position of unfair
advantage once made apparent, the Courts have always
cast upon him who holds that position the burden of
showing that he has not used it to his own benefit.
Lord Cairns, again , in dealing with the main question ,
held that the promoters of a company stand in a fidu-
ciary position. They have in their hands the creation and
moulding of the company, and if they are doing this in
order that the company may, as soon as it starts into life,
become, through its directors, the purchaser of their own
property it is incumbent on the promoters to take care
that in forming the company they provide it with a board

who shall not only be aware that the property they are
asked to buy is the property of the promoters, but shall
also be a competent and impartial judge as to whether the
purchase ought to be made. The owner of property may
promote a company and then sell his property to it, but
he is bound to take care that he sell it to the company
through the medium of a board which can and does
exercise an independent judgment on the transaction , and
is not left under the impression that the property belongs
not to the promoter but to someone else .
The question of laches arose in this case, and the
judgments of the House of Lords deal with the point
as to whether or not the company had been so dilatory
in bringing its action as to be disentitled to relief.
But it was held by the House, Lord Cairns dissenting
on this point, that the delay of fourteen months between
the date of the contract and the filing of the bill was
not a delay which disentitled the company to relief. For
many months the company had moved for a return of the
difference between the original and the subsequent pur-
chase prices : they were not advised to seek rescission
until a late period, " but a temporary mistake of the
remedy does not extinguish the right to one " (per Lord
Hagan) (s), but they then, as soon as they were fully
informed as to the facts, made the proper demand and
instituted the suit. Moreover, those who deal inequitably
with a company know that it must necessarily be slow in
its proceedings, and are not entitled to complain that time
elapses, unless the delay is excessive after all the facts
have been ascertained . What is excessive delay depends
in each case upon the circumstances . Delay counts from
the time when with due diligence the fraud might have
been discovered. See Redgrave v. Hurd (t).
(s) At p. 1259. (t) ( 1881 ) 20 Ch. D. per Jessel, M.R. , at p. 13.
THE GENERAL LAW. 23
An action of deceit may not lie for fraudulent mis-

representation ambiguous in meaning.
SMITH V. CHADWICK (u).
In this case the prospectus of a company, which was

being formed to take over ironworks, contained a statement
that " the present value of the turnover or output of the
entire works is over £ 1,000,000 sterling per annum." If
that statement meant that the works had actually in one
year turned out produce worth at current prices more than
£1,000,000, or at that rate per year, it was untrue. If it
meant only that the works were capable of turning out
that amount of produce, it was true. The statement
occurred in the following passage : " The ironworks are
the largest and most important in Scotland, and have been
equipped in a substantial, complete and permanent
manner. They can now produce at the rate of 1,500 tons
of finished bars and plates per week, or about 75,000 tons
per annum. The rolling mills, with some slight alterations,
will be capable of turning out 90,000 tons of manufactured
iron per annum . The present value of the turnover
or output of the entire works is over £ 1,000,000 per
""
annum .'
It was held by Lords Selborne, Blackburn , and Watson
that the material statement, taken in connection with the
context, was ambiguous and capable of the two meanings ;
that it lay on the plaintiff to prove that he had interpreted
the words in the sense in which they were false , and had ,
in fact, been deceived by them into taking the shares, and
that, as he had as a matter of fact failed to prove this, the
action could not be maintained. Lord Bramwell held that
the statement was capable only of the meaning in which
it was untrue, and that plaintiff had proved that he had
(u) (1884) 9 App. Cas. 187.

understood it in that sense ; but that there was not sufficient

evidence that the statement was fraudulent on the part of
the defendant, and that the decision of the Court of Appeal
should be affirmed on that ground.
It was unfortunate for the plaintiff in this case that he
had not been better advised, for he had sworn in answer to
interrogatories that he understood the meaning of the
defendant's statements "to be that which the words
obviously conveyed, " and added that he was " unable to
express in other words what he understood to be the
meaning thereof," and this unnecessary vagueness was not
removed at the trial, for he was not asked then, either in
chief or cross-examination , what interpretation he had put
on the words. The attitude of the Lords on this occasion
may be further explained by the fact that the action of the
defendant appeared to be bonâ fide, though this was in the
days antecedent to Derry v. Peek.
Rescission will lie for misrepresentation by misstate-

ment and concealment.
CENTRAL RAILWAY COMPANY OF VENEZUELA V. KISCH (x).
Here it was held that the public are entitled to have the
same opportunity of judging everything material to a
knowledge of the true character of the undertaking as the
promoters themselves possess , and where there has been
fraudulent misrepresentation or wilful concealment of facts,
by which a person has been induced to enter into a con-
tract, it is no answer to his claims to be relieved of it that
he might have known the truth by proper inquiry.
The prospectus of the railway company stated that " the
engineer's report , maps, plans, &c . , may be inspected and
further information obtained at the offices of the company,"
(x) (1865) L. R. 2 H. L. 99.

THE GENERAL Law. 25
and an examination of all these papers would have provided

the information the want of which the plaintiff alleged as
a ground for rescinding his contract. But, trusting to the
representations, he did not examine all, and it was held
that his neglect to do so was no answer to his demand to
be relieved of the contract .
It was also held in this case that the phrase " available
capital of the company " is not a true but a deceptive
description of capital which may be raised under the
borrowing powers of the directors .
A contract induced by fraudulent misrepresentation is

not void, but voidable at the option of the party
defrauded, and that until avoided it is valid.
Further, it is too late to rescind after the rights of
creditors have intervened on a winding up.
OAKES v. TURQUAND (y).
It was held in this case, which was an action against

the liquidators of Overend, Gurney & Co. , Limited , that
where a person has been, by the fraudulent misrepre-
sentation of directors, or by their fraudulent concealment
of facts, drawn into a contract to purchase shares in a
company, the directors cannot enforce the contract
against him, but he may rescind it. But he must do so
within a reasonable time. And in this case, where the
prospectus differed materially from the memorandum of
association , and thus constituted a ground upon which
Mr. Oakes could have obtained an order of rescission , an
interval of ten months elapsed during which the plaintiff
could have inspected the memorandum of association-
an opportunity of which, according to Lord Chelmsford,
(y) ( 1867) L. R. 2 H. L. 375.

" he was bound to avail himself "-and , consequently, his

voluntary ignorance upon the subject until the winding -up
order came precluded him from raising the objection.
Further, a contract induced by fraud is not void but
voidable ; and, therefore, though the persons who by
their fraud induced it may not enforce it, other persons
may, in consequence of it, acquire interests and rights
which they may enforce against the party who has been
so induced to enter into it. It is true that the direct
remedy of a creditor of an incorporated company is solely
against the company and not against its individual
members as upon a contract with them, and though, as
between the company and the member, the member may
have a good legal and equitable defence to a call upon
himself, he may yet be liable to contribute to the assets
ofthe company required for the payment of the company's
creditors. For a contributory is a person who has agreed
to become a member and whose name is upon the
register with his consent.
Further, it is the duty of a person taking shares in
a company to use reasonable diligence in making himself
acquainted with the provisions of the memorandum of
association, and, if he fails to do so, he must take the
consequences of his neglect ; for a variance between the
prospectus and the memorandum of association will not
necessarily and as of course relieve a member of a
company from his liability as a contributory, seeing that
the contract is not void but voidable. Lord Chelmsford
pointed out that persons who have taken shares in a
company are bound to make themselves acquainted with
the memorandum of association, which is the basis upon
which the company is established, and that if they fail to
do so, and the objects of the company are extended
beyond those described in the prospectus, the persons who
have so taken shares ought to be held bound by
THE GENERAL LAW. 27
acquiescence , unless they apply for rescission with due

diligence.
In a case of fraudulent misrepresentation rescission is

granted after an order for winding up.
REESE RIVER SILVER MINING COMPANY, LIMITED v.

SMITH (z).
This case decided that if, before a winding-up order is

made, a person files a bill against a company alleging that
he had been induced by fraud and misrepresentation to
become a member of the company, and on that ground
praying to have his name removed from the lists of its
members, he will, on establishing his allegation, be
entitled to have his name removed from the lists of the
company, although between the date of filing the bill
and the decree of the Court upon it an order has been
obtained to wind up the company. Further, where a
contract is voidable, but not void, it remains valid till it is
rescinded. This rescission is not confined to the time of
the order of the Court declaring the contract void, but
relates to the period when, by filing a bill for its
rescission, a party has duly taken steps to rescind it. This
case must be distinguished from Oakes v. Turquand (a),
which decided that a contract induced by fraud or mis-
representation is not void, but voidable at the option of
the party defrauded, and until avoided it is valid ; and,
further, that it is too late to rescind after the rights of
creditors have intervened on a winding up.
This case is also notable for the judgment of Lord
Cairns, who held that if persons make assertion of facts as
to which they are ignorant, whether such assertions are
(*) (1869) L. R. 4 H. L. 54. (a) (1867) L. R. 2 H. L. 375.

true or untrue, they become, in a civil point of view, as

responsible as if they had asserted that which they knew
to be untrue. But see Derry v. Peek (b).
It is a case of misrepresentation where the vendor is
falsely represented in the prospectus as providing

all the preliminary expenses of floating the com-
pany.
In re LIBERIAN GOVERNMENT CONCESSIONS AND
EXPLORATIONS COMPANY, LIMITED (c).
Here it was stated in the prospectus that " the vendor,

who is the promoter, will provide all the preliminary
expenses of floating the company, the issue and subscrip-
tion of its capital, and the remuneration of brokers,"
whereas, in point of fact, there was a contract between
the company and the vendor, stipulating that if the com-
pany proceeded to allotment the company would repay to
the vendor the stamps, duties, and fees paid by him in
respect of the registration of the company, and the legal
charges and expenses in relation thereto.
It was held by Stirling, J., that the terms " preliminary
expenses of floating the company " included the legal
expenses, that the misrepresentation was material, and
that the plaintiff must be believed when he said that he
was induced by this statement to take shares. It is
obvious that the plaintiff would have discovered the true
state of things had he gone to the office of the company
and examined the contract between the company and the
vendor, but there is no legal liability resting upon him to
do so . " He is entitled to rely on the express statement
contained in the prospectus," said Stirling, J., which
was on the authority of Redgrave v. Hurd (d), where
(1889) 14 App . Cas. 337. (d) ( 1881 ) 20 Ch. D. 1.
(1892) 9 T. L. R. 136.
THE GENERAL LAW. 29
Jessel, M.R. (e), says : " It has always been held that those
who accepted those false statements as true were not
deprived of their remedy merely because they neglected to
go and look at the contracts."
In a case of innocent misrepresentation rescission is

granted.
In re LONDON AND STAFFORDSHIRE FIRE INSURANCE
COMPANY (ƒ).
This was a case where the directors issued a circular
inviting subscriptions for new shares, and innocently
inserted in the circular a statement that was untrue. The
judgment of Pearson , J. , deals chiefly with the question
whether the applicant had been guilty of laches to an
extent that would deprive him of the right to rescission ;
but this point was decided in his favour, and rescission was
granted on the ground that the statement in the circular,
namely, that " the surplus assets, as appear by the last
balance sheet, amount to upwards of £10,000," was a
material misrepresentation of the state of the company at
the time, although the mistake was innocent and was due
to the fact that at the date of the drawing up of the
balance sheet from which the figures were taken an under-
estimate had been honestly made of the outstanding losses
and an over-estimate of the outstanding revenue.
Rescission will lie where the prospectus misrepresents

that the company is to acquire an existing patent
and conceals the fact that the invention has only
been provisionally protected .
SCOTT v. SNYDER DYNAMITE PROJECTILE COMPANY,
LIMITED (g).
The prospectus in this case contained, inter alia, the
(e) At p. 14. (g) (1892) 66 L. T. 278.
(f) ( 1883) 24 Ch. D. 149.
following statement : " This company is formed for the

purpose of purchasing patent rights of a most formidable
and destructive projectile, the invention of Mr. F. H.
Snyder. The property to be conveyed to the company
include (1 ) the patent rights and invention for the United
Kingdom ; (2) the patent rights and invention for India,
the Colonies, and British Possessions ; (3) one-half interest
in all patent rights and inventions for the Continent and
all other parts of the world except the United States ;
(4) all secret processes in connection therewith ; (5) all
further and future improvements in and about the same."
At the date of the issue of the prospectus no patent or
grant in the nature of a patent for the United Kingdom or
elsewhere, except in America, had been granted or made
in respect of the alleged invention, but a provisional speci-
fication had been lodged before the date of the prospectus
for the purpose of obtaining a patent, and, as a fact, before
the case came to trial, but not before the date of the
prospectus, the grant of a complete patent was obtained.
It was held that the statement was a misstatement and a
concealment amounting to misrepresentation , and that the
would-be investor is entitled to know the true facts before
he embarks on the undertaking. On other statements it
was also held that they were uncandid and inaccurate in
fact, and amounted to misrepresentation. ร
CHAPTER III.
THE STATUTE LAW.
SECTS. 81 AND 84 of the COMPANIES (CONSOLIDATION)

ACT, 1908 (THE COMPANIES ACT, 1900 ; AND THE
DIRECTORS' LIABILITY ACT, 1890) (a).
IT has already been stated that, although the law of
(a) 81. -- ( 1) Every prospectus subscription on each previous

issued by or on behalf of a company, allotment made within the
or by or on behalf of any person who two preceding years, and the
is or has been engaged or interested amount actually allotted, and
in the formation of the company, must the amount, if any, paid on
state- the shares so allotted ; and
(a) the contents of the memoran- (e) the number and amount of
dum, with the names, descrip- shares and debentures which
tions, and addresses of the within the two preceding
signatories, and the number years have been issued, or
of shares subscribed for by agreed to be issued, as fully
them respectively ; and the or partly paid up otherwise
number of founders or man- than in cash, and in the latter
agement or deferred shares, case the extent to which they
if any, and the nature and are so paid up, and in either
extent of the interest of the case the consideration for
holders in the property and which those shares or deben-
profits ofthe company ; and tures have been issued or are
(b) the number of shares, if any, proposed or intended to be
fixed by the articles as a quali- issued ; and
fication of a director, and any (f) the names and addresses of the
provision in the articles as to vendors of any property pur-
the remuneration of the direc- chased or acquired by the
tors ; and company, or proposed so to
(c) the names, descriptions, and to be purchased or acquired,
addresses of the directors or which is to be paid for wholly
proposed directors ; and or partly out of the proceeds
(d) the minimum subscription on of the issue offered for sub-
which the directors may pro- scription by the prospectus,
ceed to allotment , and the or the purchase or acquisition
amount payable on applica- of which has not been com-
tion and allotment on each pleted at the date of issue
share ; and in the case of a of the prospectus, and the
second or subsequent offer of amount payable in cash,
shares, the amount offered for shares, or debentures, to the
misrepresentation as laid down in Derry v. Peek (b) still

holds good and is expressly preserved by sub-sect. 9 of
vendor, and where there is the company, or to any con-

more than one separate ven- tract entered into more than
dor, or the company is a sub- two years before the date of
purchaser, the amount SO issue of the prospectus ;
payable to each vendor : Pro- and
vided that where the vendors (1) the names and addresses of the
or any of them are a firm the auditors (if any) of the com-
members of the firm shall not pany and
be treated as separate ven- (m) full particulars of the nature
dors ; and and extent of the interest (if
(g) the amount (if any) paid or any) of every director in the
payable as purchase money in promotion of, or in the pro-
cash, shares, or debentures, perty proposed to be acquired
for any such property as by, the company, or, where
aforesaid, specifying the the interest of such a director
amount (if any) payable for consists in being a partner in
goodwill ; and a firm , the nature and extent
(h) the amount (if any) paid with- of the interest of the firm,
in the two preceding years, or with a statement of all sums
payable, as commission for paid or agreed to be paid to
subscribing or agreeing to him or to the firm in cash or
subscribe, or procuring or shares or otherwise by any
agreeing to procure subscrip- person either to induce him
tions, for any shares in, or to become, or to qualify him
debentures of, the company , as, a director, or, otherwise
or the rate of any such com- for services rendered by him
mission : Provided that it shall or by the firm in connexion
not be necessary to state the with the promotion or forma-
commission payable to sub- tion of the company ; and
underwriters ; and (n) where the company is a com-
(i) the amount or estimated amount pany having shares of more
of preliminary expenses ; than one class, the right of
and voting at meetings of the
(j) the amount paid within the two company conferred by the
preceding years or intended several classes of shares re-
to be paid to any promoter, spectively.
and the consideration for any (2) For the purposes of this section
such payment ; and every person shall be deemed to be a
(k) the dates of and parties to every vendor who has entered into any
material contract, and a contract, absolute or conditional, for
reasonable time and place at the sale or purchase, or for any option
which any material contract of purchase, of any property to be
or a copy thereof may be in- acquired by the company, in any case
spected : Provided that this where-
requirement shall not apply (a) the purchase money is not fully
to a contract entered into in paid at the date of issue ofthe
the ordinary course of the prospectus ; or
business carried on or in- (b) the purchase money is to be
tended to be carried on by paid or satisfied wholly or in
(b) Supra.
THE STATUTE LAW. 33
sect. 81 ofthe Companies ( Consolidation) Act, 1908, sects. 81

and 84 of that Act now embody the repealed Acts of 1900
part out of the proceeds of (7) This section shall not apply to
the issue offered for subscrip- a circular or notice inviting existing
tion by the prospectus ; or members or debenture holders of a
(c) the contract depends for its company to subscribe either for shares
validity or fulfilment on the or for debentures of the company,
result of that issue. whether with or without the right to
(3) Where any of the property to renounce in favour of other persons,
be acquired by the company is to be but subject as aforesaid, this section
taken on lease, this section shall shall apply to any prospectus whether
apply as if the expression " vendor " issued on or with reference to the
included the lessor, and the expression formation of a company or sub-
"purchase money "" included the sequently.
consideration for the lease, and the ex- (8) The requirements of this section
pression " sub-purchaser " included a as to the memorandum and the quali-
sub-lessee. fication, remuneration, and interest of
(4) Any condition requiring or directors, the names, descriptions,
binding any applicant for shares or and addresses of directors or proposed
debentures to waive compliance with directors, and the amount or estimated
any requirement of this section, or amount of preliminary expenses, shall
purporting to affect him with notice not apply in the case of a prospectus
of any contract, document, or matter issued more than one year after the
not specifically referred to in the date at which the company is entitled
prospectus, shall be void. to commence business.
(5) Where any such prospectus as (9) Nothing in this section shall
is mentioned in this section is pub- limit or diminish any liability which
lished as a newspaper advertisement, any person may incur under the
it shall not be necessary in the general law or this Act apart from
advertisement to specify the contents this section.
of the memorandum or the signatories 84.-(1 ) Where a prospectus invites
thereto, and the number of shares persons to subscribe for shares in or
subscribed for by them. debentures of a company, every
(6) In the event of non-compliance person who is a director of the com-
with any of the requirements of this pany at the time of the issue of the
section, a director or other person prospectus, and every person who has
responsible for the prospectus shall authorised the naming of him and is
not incur any liability by reason of the named in the prospectus as a director
non-compliance, if he proves that— or as having agreed to become a
(a) as regards any matter not dis- director either immediately or after an
closed, he was not cognisant interval of time, and every promoter
thereof ; or of the company, and every person
(b) the non-compliance arose from who has authorised the issue of the
an honest mistake of fact on prospectus, shall be liable to pay
his part : compensation to all persons who sub-
Provided that in the event of non- scribe for any shares or debentures on
compliance with the requirements the faith of the prospectus for the loss
contained in paragraph (m) of sub- or damage they may have sustained
section (1) of this section no director by reason of any untrue statement
or other person shall incur any therein, or in any report or memo-
liability in respect of the non-com- randum appearing on the face thereof,
pliance unless it be proved that he or by reference incorporated therein
had knowledge of the matters not or issued therewith, unless it is
disclosed. proved-
LM . 3
and 1890- namely, The Companies Act of 1900 and the

Directors' Liability Act of 1890 -and provide, in conse-
(a) With respect to every untrue consent, and that on becoming
statement not purporting to aware of its issue he forthwith
be made on the authority of gave reasonable public notice
an expert, or of a public that it was issued without his
official document or statement, knowledge or consent ; or
that he had reasonable ground (iii) that after the issue of the pro-
to believe, and did up to the spectus and before allotment
time of the allotment of the thereunder, he, on becoming
shares or debentures, as the aware of any untrue statement
case may be, believe, that the therein, withdrew his consent
statement was true ; and thereto, and gave reasonable
(b) With respect to every untrue public notice of the with-
statement purporting to be a drawal, and of the reason
statement by or contained in therefor.
what purports to be a copy of (2) Where a company existing on
or extract from a report or the eighteenth day of August one
valuation of an expert, that it thousand eight hundred and ninety,
fairly represented the state- has issued shares or debentures, and
ment, or was a correct and for the purpose of obtaining further
fair copy of or extract from capital by subscriptions for shares or
the reports or valuation. debentures issues a prospectus , a
Provided that the director, director shall not be liable in respect
person named as director, of any statement therein, unless he
promoter, or person who has authorised the issue of the pro-
authorised the issue of the spectus, or has adopted or ratified it.
prospectus, shall be liable to (3) Where the prospectus contains
pay compensation as aforesaid the name of a person as a director of
if it is proved that he had no the company, or as having agreed to
reasonable ground to believe become a director thereof, and he has
that the person making the not consented to become a director,
statement, report, or valuation or has withdrawn his consent before
was competent to make it ; and the issue of the prospectus, and has
(c) With respect to every untrue not authorised or consented to the
statement purporting to be a issue thereof, the directors of the
statement made by an official company, except any without whose
person or contained in what knowledge or consent the prospectus
purports to be a copy of or was issued, and any other person who
extract from a public official authorised the issue thereof, shall be
document, that it was a liable to indemnify the person named
correct and fair representation as aforesaid against all damages, costs,
ofthe statement or copy of or and expenses to which he may be
extract from the document : made liable by reason of his name
or unless it is proved- having been inserted in the prospectus,
(i) that having consented to be- or in defending himself against any
come a director of the com- action or legal proceedings brought
pany he withdrew his consent against him in respect thereof.
before the issue of the pro- (4) Every person who by reason of
spectus, and that it was issued his being a director, or named as a
without his authority or con- director or as having agreed to become
sent ; or a director, or of his having authorised
(ii) that the prospectus was issued the issue of the prospectus, becomes
without his knowledge or liable to make any payment under
THE STATUTE LAW. 35
quence, remedies alternative and additional to those already

granted by the general law. And it will be useful at this
point to describe briefly the effect they have had on the
law, and then to illustrate that effect by discussing some
leading cases which have been settled since the dates of
those Acts.
Sect. 81 provides that a prospectus (except a circular
which invites subscriptions for further shares or debentures ,
as the case may be) must contain a statement of certain
particulars mentioned in the section , though some of these
particulars can be omitted if the prospectus be published
more than a year subsequent to the date on which the
company was originally entitled to commence business,
while others, again, may be omitted when the prospectus
is being published as a newspaper advertisement . But no
person is to incur liability for non-compliance with the
provisions of the section if he can prove that as regards
any matters not disclosed he had no knowledge of them,
or that the non-compliance arose from an honest mistake
of fact. Nor, further, will any such person incur any
liability for the non-disclosure of the interest of any director
in the company, or in the property which the company is
to acquire, unless it can be proved that such person had
knowledge of such matters . But the rights of any person
under the general law are reserved, and, consequently, it is
quite possible that, though a prospectus complies with the
this section may recover contribution, prospectus, or of the portion

as in cases of contract, from any other thereof containing the untrue
person who, if sued separately, would statement, but does not include
have been liable to make the same any person by reason of his
payment, unless the person who has actingin a professional capacity
become so liable was, and that other for persons engaged in pro-
person was not, guilty of fraudulent curing the formation of the
misrepresentation. company :
(5) For the purposes of this sec- The expression "expert " includes
tion- engineer, valuer, accountant,
The expression " promoter 29 and any other person whose
means a promoter who was a profession gives authority to a
party to the preparation of the statement made by him.
3-2
36 MISREPRESENTATION AND LIMITED COMPANIES .
terms of this section, yet misrepresentation , both fraudu-

lent and innocent, may be present, and an allottee, in
consequence, will be entitled to rescission of his contract,
or to an action of deceit for damages against the company,
or to his action under sect. 84.
While dealing with this section, it may be pointed out
that the prospectus need not disclose the amount paid by
the vendor for the property to be acquired by the com-
pany, if the vendor be the absolute owner of it, nor need
the prospectus disclose the amount paid or to be paid by
others than the company, but the prospectus must state
the whole of the consideration , to whomsoever payable,
which the company will have to pay in respect of the
purchase (Brookes v. Hansen) (c).
The materiality of the contracts and statements which
are not but ought to be disclosed or are misrepresented is
dealt with elsewhere, but it may be convenient here to
cite a few examples. Thus, it is a material misrepresenta-
tion to state that the object of an issue of certain deben-
tures is to develop the trade of the company when it is to
pay off pressing liabilities (Edgington v. Fitzmaurice) (d) ;
that the net profits of a business are over 17 per cent.
when, in fact, they are not more than half that rate
(Glasier v. Rolls) (e) ; that full reports on the property to
be acquired have been made for the directors when, in
fact, they were made for the vendor (Angus v. Clifford) (ƒ) ;
that the directors have subscribed for a large number of
shares, or that a certain amount had been subscribed , when
neither statement was true (Kent v. Freehold Land Com-
pany) (g) ; that certain persons have agreed to go on the
board of directors, when, in fact, they had not (Karberg's
case) (h) ; or that more than half the capital had been sub-
(c) [ 1906 ] 2 Ch. 129. (f) [ 1891 ] 2 Ch. 449.

(d) ( 1885) 29 Ch. D. 459. (g) ( 1867) 4 Eq. 588.
(e) (1889) 42 Ch. D. 436. (h) [ 1892] 3 Ch. 1.
THE STATUTE LAW. 37
scribed, when, in fact, it had only been conditionally

subscribed (Arnison v. Smith) ( i).
Again, sect. 84 of the Companies (Consolidation) Act,
1908, re-enacts the Directors' Liability Act of 1890, and
so preserves the additional remedy for the shareholder or
debenture-holder which it was thought necessary to pro-
vide after Derry v. Peek. A director or a promoter of the
company, or any person who has authorised the issue of
the prospectus is liable to pay compensation to all sub-
scribers of shares, debentures, or debenture stock for the
damage suffered by them through any misrepresentation in
the prospectus, whether direct or indirect-that is to say,
whether it be in the prospectus or be in any report on the
face of it, or is by reference incorporated in it, or issued
with it ; and the only defences open to the directors or
promoters or other persons responsible for the prospectus
are that they have reasonable grounds for believing that the
statements in the prospectus are true, and do, in fact, so
believe ; or that, as regards statements in reports and valua-
tions or in copies of or extracts from them contained in the
prospectus, they have reasonable grounds for believing such
statements to be accurate representations or correct copies
or extracts of or from such reports, and if such statements
are false that they have reasonable grounds for believing
that the person making the reports or valuation is com-
petent to make it, or that, having consented to become
directors, they withdrew their consent before the issue of
the prospectus, and that it was issued without their
authority or consent, and that, on becoming aware of
such issue, they gave reasonable public notice that it was
so issued, or that after such issue or before allotment
they, on becoming aware of any untrue statement in the
prospectus, withdrew their consent thereto and gave
reasonable public notice of the same.
(2) (1889) 41 Ch. D. 348.
It will be noticed how far this takes the law beyond

Derry v. Peek. For fraudulent knowledge we have
" no reasonable ground to believe," and for the corporate
liability of the company we have the personal liability of
the director or promoter to pay compensation, not merely
to shareholders, but also to debenture or debenture stock-
holders, for any damage suffered by them in respect of
misrepresentation, which such directors or promoters
cannot prove to have been reasonably believed by them
to be true.
The following cases are illustrative of the foregoing
principles, and may now be briefly considered.
An action of deceit will not lie for careless or innocent

misrepresentation.
ANGUS v. Clifford (k) .
In this case it was held that if a person who makes a

false statement entertains a bonâ fide belief that the state-
ment is true, an action of deceit cannot be maintained
against him on the ground that he formed his belief care-
lessly or on insufficient reasons. If he had formed no
belief whether the statement was true or false, and made
it recklessly without caring whether it was true or false,
an action of deceit will lie against him. But such action
will not lie if he made the statement carelessly with-
out appreciating the importance and significance of the
words used, unless there is proof of indifference to their
truth.
The material passage in the prospectus of the company
involved in this case ran thus : " Full reports on the
company have been prepared for the directors by the fol-
lowing eminent engineers- Mr. J. M. J., Mr. J. M. P., Mr.
W. H. R., and Mr. A. D. M. These gentlemen have
(k) [ 1891 ] 2 Ch. 449.
THE STATUTE LAW. 39
personally inspected the property, and Mr. D. M. has

advised the board as to the means to be adopted for
working and developing the same to the best advantage.
These reports have convinced the directors that the estate
is a rich one, and they have no hesitation in recommending
the shares to the public as a genuine investment. " As a
fact, however, the reports were not made for the directors,
but for the vendors, and the plaintiff swore in the action of
deceit that he brought, that he understood the statements
in the prospectus to mean that the reports had been made
under the instructions of the directors, acting in the
interest of the company, and that he had been induced by
those statements to take shares in the company, the Gold
Valley Company. The judges of the Court of Appeal
(where the judgment of Romer, J. , in the court below
was reversed) held that the facts showed that the mis-
representation was not made knowingly or without belief
in its truth, or recklessly, indifferent as to whether it were
true or false ; that, on the contrary, Sir Charles Clifford
and his co-directors (who were co-defendants in the
action) had merely blundered ; that they had not shut
their eyes not caring whether the statement was true or
false ; that they had not seen the effect of what they were
saying or the construction which would be put upon it
when they had passed the words " for the directors "; that
it was pure carelessness or negligence but not recklessness
or fraud, and a case of negligent as distinguished from
fraudulent conduct. Lord Lindley put it thus (1) : " After
Peek v. Derry (m) an action of this kind cannot be sup-
ported without proof of fraud, an intention to deceive, and
it is not sufficient that there is blundering carelessness,
however gross, unless there is wilful recklessness , by which
I mean wilfully shutting one's eyes, which is, of course,
fraud."
(1) p. 469. (m) (1889) 14 App. Cas. 337.

Misrepresentation in a prospectus issued before the

formation of the company is ground for rescission.
IN RE METROPOLITAN COAL CONSUMERS' Association ,

KARBERG'S CASE (n).
In this case Karberg applied for shares in a company

then about to be formed but not yet registered, and he was
induced thereto by the statements in a prospectus which
was issued by the promoters . The particular statement
which induced him to apply for shares was a state-
ment in the prospectus announcing that Lord B. and
Admiral M. would be members of the council of adminis-
tration which was to be the governing body of the
association. Three days after Karberg's application , the
company was registered under the Companies Acts, and
some six months later Karberg discovered that neither
Lord B. nor Admiral M. were or ever had been members
of the council, and consequently he took out a summons
to have his name removed from the list of shareholders,
and, although the company went into liquidation before
Karberg's Case came into court, it was held : (1) that the
prospectus, although issued by the promoters before the
formation of the company, was the basis of the contract
between Karberg and the company for the allotment of
shares ; (2 ) that the effect of the statement in the prospectus
was not merely that B. and M. had expressed their willing-
ness to become members of the council of administration ,
but that they had authorised the publication of their
names as members, and that this was a false statement
of fact ; (3) that such misstatement in the prospectus was
material to the contract and was relied on by Karberg ;
and (4) that in consequence he was entitled to rescission .
It should be noticed that in this case there is no question,
(n) [ 1892] 3 Ch. 1 .

THE STATUTE LAW. 4I
as in Wainwright's Case (o) , of the directors issuing the

prospectus containing the misrepresentation. Wainwright
applied to the same company after it was registered on the
faith of a prospectus issued by the company after its forma-
tion. But here we have the application made before the
registration of the company and on the faith of a prospectus
issued by the promoters before the company came into
existence. And again, whereas in Wainwright's Case the
prospectus stated that Lord B. and Admiral M. were
members of the council of administration, in Karberg's
Case the prospectus stated in effect that they would be
members of the council-a very different matter.
Nevertheless the Court held that misrepresentation
existed, and that it was a material inducement to the
plaintiff to part with the money, and that he was entitled
to rescission.
It is important to notice the character of the mis-
representation . On November 14, 1888 , Lord B. , in
response to a circular, sent to the promoter a signed form
supplied by that gentleman , in which he expressed his
willingness to become a member of the council of adminis-
tration of the company, and also to be a patron of the same
company. It is not clear whether Admiral M. signed
such a form , but it was in evidence that he wrote a letter to
the promoter in which the following passage occurs : " I
fear I can be of little use to the council , as my time is fully
occupied ; but if it is desired, I have no objection to
helping it in any way that I can. " The company itself
issued a prospectus (substantially similar to that issued by
the promoters) on February 7, 1889, and on the 14th
Lord B. applied for shares, but on the 16th withdrew his
application and refused to have anything to do with the
company. Admiral M. had refused to take any shares in
the company or have anything to do with the company
(0) (1890) 62 L. T. N. S. 30 ; 63 L. T. N. S. 429.
beyond ordering coal from it on January 21 , 1889. On

January 28, Mr. Karberg applied upon the application
form , provided with the prospectus, for a number of shares,
and these were allotted to him on February 2 , 1889.
The prospectus which induced Karberg to apply for
shares might have meant that when the company was
formed there was reason to expect that it was bonâ fide
believed and expected by those who issued it that Lord B.
and Admiral M. would be on the council of administration .
" If this was the meaning," said Lindley, J., " the statement
was true ; for the letters those gentlemen signed might be
fairly understood so as to qualify this expectation and
belief. ... But the prospectus may mean , and , I think
does mean, more than I have suggested. It may mean,
and does, I think, mean that Lord B. and Admiral M. had
not only expressed their willingness to become members
of the council of administration, but had so far approved
of the prospect as to have authorised the publication of
their names in the list of those who would be members of
the council of administration of the company when formed,
although they might possibly change their minds or retire
early. I have come to the conclusion that this is the real
meaning, because no other would have answered the
purpose of those who issued the prospectus. A statement
that Lord A. and Admiral X. were expected to join the
company would not answer any useful purpose. The
evidence satisfies me that the names of Lord B. and
Admiral M. were inserted in the prospectus without their
knowledge and authority, and that, although they had
expressed a willingness to join the council, still many
matters had to be settled before it could be fairly said that
they had agreed to do so, and before any statement that
they had agreed to become members of the council ought
to have been published."
As to the misrepresentation not being made by the
THE STATUTE Law. 43
company or its agent, the Court followed Stewart's Case (p),

and Downes v. Ship ( q), and held that an application to a
company based upon a prospectus issued by the promoters
of the company before its formation cannot be dissevered
by the company from such prospectus. The misrepresenta-
tion in the prospectus vitiated the only contract into which
Karberg and the company entered and entitled Karberg to
repudiate it, provided it was material and the repudiation was
made in time. But, as the company had not made the mis-
representation by itself or by its agents , it was held not to
be liable in damages. As regards rescission, the company
was in the same position as if it had made a misrepresenta-
tion without knowing it to be untrue. In an action for
rescission of contract on the ground of misrepresentation
it is not necessary to prove knowledge by the defendant of
its untruth (see Redgrave v. Hurd) (r) .
Rescission will lie for misrepresentation when the

prospectus contains misleading statements .
GREENWOOD v. Leather ShOD WHEEL COMPANY (a).
In this case it was held that a misleading statement in

"" within sect.
a prospectus is an 66 untrue statement 3,
sub-sect. ( 1) of the Directors' Liability Act, 1890 , and that
the liability which is imposed by that section for any
untrue statement in a prospectus is absolute, and in no
way affected by the consideration whether the statement
was untrue in the sense in which it was used by those who
were responsible for the prospectus.
In the court below Kekewich, J., held that the plaintiff
took his shares on the faith of the prospectus ; that some
of the most important statements in the prospectus had
(1866) L. R. I Ch . 574. (r) ( 1881) 20 Ch. D. 12.

(1868) L. R. 3 H. L. 343. (a) [ 1900] I Ch. 421.
44 MISREPRESENTATION And Limited COMPANIES.
been so worded as to be seriously misleading and untrue,

although each, if taken separately, might be true in a
sense ; and that not only the company but the co-defen-
dants, the directors and the promoter, were severally liable
to pay compensation to the plaintiff by reason of the
untrue statements in the prospectus . The chief state-
ments that were held untrue referred to certain orders,
upon which the prospectus of commercial success was
based, and mentioned, inter alia, that " orders have
already been received from the Bank of England , House
of Commons, Royal Mint, &c." ; " Wheels for the trolleys
in the House of Commons have been ordered and are now
in use " ; whereas, in point of fact, in the case of the House
of Commons, for example, the evidence showed that the
person who supplied refreshments to the House had one
trolley with these wheels ; that neither the House nor any
official on its behalf had given a single order ; and that as
regards the other orders no single order had been obtained
except for trial and experiment, and in many of these cases
the persons giving the orders had made special arrange-
ments by which they incurred no liability to pay for
them.
The Court of Appeal confirmed the findings of the Court
below in respect of these matters , and held also that
the Court would not give effect as against a shareholder
to a " tricky " waiver clause in a prospectus or application
form. This point has, however, now lost its chief interest,
as the Companies ( Consolidation ) Act, 1908 , makes a
waiver clause inoperative ; but see pp. 57, 58 .
See also Drincqbier v. Wood (b), where a statement was
held untrue within the meaning of sect. 3 of the Directors'
Liability Act, 1890, by reason of the suppression of
material facts. A statement is untrue if it is distinctly
misleading.
(6) [ 1899] I Ch. 393, 407.

THE STATUTE LAW. 45
Where the defendant in an action for payment on

calls proves misrepresentation, his contract to take
shares, having been induced by fraud, cannot be
enforced.
AARON'S REEFs, Limited v. Twiss (c).
Here it was held by the House of Lords that, where a

person is induced by a fraudulent prospectus to apply for
an allotment of shares, and his shares are subsequently
forfeited by the failure to pay calls, he ceases to be a
shareholder and becomes a mere debtor to the company,
and if he has done nothing to affirm the contract he may
repudiate it and defend an action for calls on the ground
of the fraud.
Further, a prospectus merely specifying dates of and
names of the parties to contracts does not give notice
of circumstances contained in the contracts which are
material to be known, and the omission of this causes the
prospectus to give a false impression. Jessel, M.R. , pointed
this out clearly in Redgrave v. Hurd (d), where he says :
" If a man is induced to enter into a contract by a false
representation it is not a sufficient answer to him to say,
'If you had used due diligence you would have found out
that the statement was untrue. You had the means
afforded you of discovering its falsity, and did not choose
to avail yourself of them .' " And Lord Halsbury , in giving
judgment in the present case, said : " I take it to be a
settled doctrine of equity, not only as regards specific
performance, but also as regards rescission, that this is not
an answer unless there is such delay as constitutes a
defence under the Statute of Limitations. That, of course,
is quite a different thing."
(c) [ 1896] A. C. 273. (d) ( 1881) 20 Ch. D. at p. 13.

The history of the mine, the property of the appellant

company, had been chequered, and had shown it to be
practically valueless , and the appellant company was the
fourth company promoted to run the mine. The appellant
company was floated with a capital of £200,000 , and
the purchase price was fixed at £150,000 in cash, although
the property of the second company, including the con-
cession of the mine, had been sold for £2,000 less than
three years previously. Full disclosures of these facts
would have revealed the truth but greatly prejudiced the
company, especially as in its prospectus it had stated that
the mine had been proved " rich. ”
A mere reference to a contract existing in a prospectus
is not notice of a contract, and cannot be set up by a
person who has been guilty of inducing another to enter
into a contract by false representations (see also Central
Railway Company of Venezuela v. Kisch) (e).
Where rescission is refused .
LAGUNAS NITRATE COMPANY v. LAGUNAS SYNDICATE (ƒ).
It was held on appeal in this case that the company

was not entitled to rescission or damages, for ( 1) at the
date of the contract the company had, by its memorandum
and articles, notice that its directors were also the vendors
or agents of the vendor syndicate, and the mere fact that
its directors did not constitute an independent board was
not a sufficient ground for setting aside the contract ;
(2) there had been no misrepresentation made to, or any
material fact concealed from, any of the persons who were
members of the company at the date of the contract,
(e) (1867) L. R. 2 H. L.99, and p. 24, supra. [ 1899] 2 Ch. 392.

THE STATUTE LAW. 47
those persons being the directors themselves ; (3) although

the contract and prospectus were, on the evidence, mis-
leading in certain particulars which would have entitled
the company at the time to repudiate the contract, yet
through the subsequent alteration of the property con-
sequent on its being worked by the company the position
of the parties had been so changed that they could not
be restored to their original position ; and (4) the
defendants (the directors), had not been guilty of such
negligence or breach of trust as to render them liable in
damages in law for the loss occasioned to the company, or
in equity to make good the loss.
The company was promoted and formed by the directors
of the syndicate, and the directors of the syndicate
prepared and signed the memorandum and articles of
association of the company, the articles nominating them
as the first directors, and stating that they were also
directors of the syndicate. These directors prepared the
company's prospectus and the purchase contract, and
affixed the seals both of the syndicate and the company
to the latter. The same solicitors and secretary acted for
both company and syndicate. Some two years subsequent
to the completion of the purchase the shareholders of
the company, believing the company had paid too much
for its property, and that there had been misrepresentation ,
appointed an independent board of directors, who , with
the sanction of a general meeting of the shareholders,
brought this action against the syndicate and also against
the first directors, for rescission and damages on the
ground of misrepresentation and misfeasance, but not
alleging fraud. From the date of the contract to the
commencement of the action the company had by the
original, and subsequently by the independent, board
carried on the business of the company, which involved
the working of the property the subject of the contract.
Incidentally, the following principles were affirmed in

this case :-
(1) In equity the promoters of a company stand in

fiduciary relation to it and to those persons whom
they induce to become shareholders in it, and cannot
in equity bind the company by any contract with
themselves without fully and fairly disclosing to the
company all material facts which the company ought
to know. Erlanger v. New Sombrero Phosphate
Co. (g) is the leading case on this point.
(2) A company when registered is a corporation
capable by its directors of binding itself by a contract
with themselves as promoters if all material facts are
disclosed. Salamon v. Salamon & Co. (h) is the leading
case on this point.
(3) The directors of a company, acting within their
powers and with reasonable care, and honestly in the
interests of the company, are not personally liable for
losses which the company may suffer by reason of
their mistakes or errors in judgment. Overend,
Gurney & Co. v. Gibb (i) is the leading authority on
this point .
(4) A contract can be set aside in equity on proof
that one party induced the other to enter into it by
misrepresentation of material facts, although such
misrepresentation may not have been fraudulent.
(5) A voidable contract cannot be rescinded or set
aside after the position of the parties has been changed,
so that they cannot be restored to their former
position. Fraud may exclude the application of this
principle, but, said Lindley, M.R. , " I know of no
other exception ."
As to (1), Lindley, M.R. , held , first, that it could not be
(g) ( 1878) 3 App. Cas. 1218, and (h) [ 1897 ] A. C. 22.

p. 18, supra. (2) (1872) L. R. 5 H. L. 480.
THE STATUTE LAW. 49
argued that the contract was void on the ground that

there were not in truth two parties capable of contracting
with one another. If the agreement was set aside it must
be on some other ground. As to the maintenance by the
directors of their proper fiduciary relation , he pointed out
that what vitiated the agreement in Erlanger's Case (j) was
the concealment ofthefact that two out of the three managing
directors were agents of the vendors and promoters, and
the untrue statement that a provisional contract had been
entered into by the directors, whilst, in fact, it had only
been framed by the promoters and adopted by three
directors, two of whom were not known to be their agents,
and the third of whom knew nothing about the matter.
In the Lagunas Case, said Lindley, " there is no secrecy
or concealment of the true position of the first directors,
and no untrue statement as to what they did for the
company. In the face of the memorandum and articles of
association it is impossible to treat the Nitrate Company
or the members thereof as ignorant of the real truth as to
the position of the directors."
As to (2) , the Master ofthe Rolls considered it impossible
to hold that it is the duty of the promoters of a company
to provide it with an independent board of directors, if the
real truth is disclosed to those who are induced by the
promoters to join the company. "Treating promoters of
companies as in a fiduciary relation to them and as having
a power of appointing trustees (namely directors), I cannot
treat companies or their shareholders as so many cestuis
que trust under disability, nor even as cestuis que trust for
whom trustees are appointed without their consent."
As to (3), he said : " If directors act within their powers ,
if they act with such care as is reasonably to be expected
from them, having regard to their knowledge and
experience, and if they act honestly for the benefit of the
(j) p . 18, supra.
L.M. 4
company they represent, they discharge both their equit-

able as well as their legal duty to the company. In this
Case they clearly acted within their powers ; they did
nothing ultra vires ; fraud is not imputed. The inquiry ,
therefore, is reduced to want of care and bona fides with
a view to the interests of the Nitrate Company. The
amount of care is difficult to define, but it is plain that
directors are not liable for all the mistakes they may make,
although if they had taken more care they might have
avoided them. See Overend, Gurney & Co. v. Gibb. (k)
Their negligence must not be the omission to take all
possible care ; it must be much more blamable than that ;
it must be in a business sense culpable or gross. I do not
know how better to describe it " (p. 435).
As to (4), this principle is not peculiar to companies and
has been discussed above.
As to (5), rescission was refused, although it was held
that there had been, as to the property to be purchased,
misrepresentation , careless or innocent but not fraudulent ,
sufficient to entitle to rescission had the Nitrate Company
moved in the matter at an earlier date. It was refused
on the ground that "the acts done by the plaintiff
company since the dissatisfied shareholders became aware
of the actual facts have been far in excess of anything
that has in any reported case been held not to be incon-
sistent with a right to rescission " (per Collins, L.J. ) ;
that " the real difficulty in the way of rescission turns on
the impossibility of restoring the parties to their original
""
position (per Lindley, M.R.). The Nitrate Company
worked their property vigorously as soon as they could ;
they called upon the syndicate to make large outlays upon
it, and such outlays were made ; the company's business
was carried on at a profit, and large dividends were
declared and paid ; the syndicate had sold the shares it
(k) ( 1872) L. R. 5 H. L. 480.
THE STATUTE LAW. 51
received in part payment of the purchase money. In

December, 1895, a new member joined the board ; an
entirely new board was formed in March , 1896 ; rescission
was not thought of, but damages were claimed ; the works
were carried on as before ; the action was commenced in
June and rescission was then thought of for the first time.
Even then the works were carried on, not merely to keep
the business going, but with a view to profit, and a dividend
was declared though not paid. " Still," said Lindley, M.R. ,
" if this were a case of fraud, the Court would be justi-
fied in making an order for repayment of the purchase
money (including the amount realised by the sale of the
shares) on the plaintiffs accounting for all their profits."
A promoter is liable for profit not disclosed in the

prospectus.
GLUCKSTEIN 7. BARNES (1).
In this important case the House of Lords dealt very

fully with the responsibility of the promoter for misrepre-
sentation by concealment in a prospectus issued by him.
The respondent Barnes was the official receiver and official
liquidator of Olympia, Limited, and Gluckstein was one of
the promoters of that company, the others being Messrs.
Lyons, Hart, and Hartley. The company which origin-
ally owned Olympia was being wound up, and a syndicate
was formed to buy and resell that property. A fund was
raised, and this was put in the names of trustees (Messrs .
Gluckstein, Lyons, Hart, and Hartley), who were to pro-
mote and register a company, to which they should resell
the property, and who were to be directors if such company
should be formed. These trustees bought up some of the
charges upon the property for sums which proved less
than the amount which these charges afterwards realised ,
(4) [ 1900] A. C. 240.
4-2
and by so doing made a profit for the syndicate of £20,000 .

They bought the property for £ 140,000 , formed Olympia,
Limited, and sold the property to the company for £ 180,000 ,
they being at this time the first and only directors of this
company. Then they issued a prospectus, which disclosed
the two sums of £140,000 and £ 180,000 but not the sum
qf £20,000. That some profit had been made by buying
up the charges on the property might have been dis-
covered by a close examination of a contract referred to in
the prospectus and the memorandum and articles of
association. However, debentures and shares were issued,
and the company went into liquidation , whereupon the
liquidator took proceedings against the appellant, who was
ordered by the Court of Appeal to pay £6,341 , with
interest, to the official receiver (m).
It was held by the House of Lords 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 (being in liquidation)
was no bar to relief ; and that the appellant as one of the
trustees was bound to replace that portion of the £20,000
which had been paid to the trustees as their share.
The judgment of Lord Macnaghten , in dealing with the
points raised by this appeal, is singularly clear. " These
gentlemen," he said, " 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 creation 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.
(m) [ 1898] 2 Ch. 153.
THE STATUTE Law. 53
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 dishonestly, they put into their
own pockets the difference between the real and the pre-
tended 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.'
One of the arguments on appeal was that there had been
disclosure . The actual passage in the prospectus ran
thus : " Any other profits made by the syndicate from
interim investments are excluded from the sale to the
company. " Lord Macnaghten dealt with this in the
following words : " But then, ' says Mr. Gluckstein, ' there
is something in the prospectus about " interim invest-
ments," and if you had only distrusted us properly and
read the prospectus with the caution with which all pro-
spectuses 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 discount.' I
decline altogether," added Lord Macnaghten , “ to take
any notice of such an argument . I think the statement in
the prospectus as to the price of the property was deliber-
ately intended to mislead the shareholders and to conceal
the truth from them " (see also Hichens v. Congreve) (n).
(n) ( 1831) 4 Sim. 420.
Another important point dealt with in this case was the

question of recovering contributions from co- promoters or
co- directors. Mr. Gluckstein desired the official liquida-
tor to proceed against his associates before calling upon
him to make good the whole amount with which he had
been charged . Lord Macnaghten acknowledged that
"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 shown to Mr. Gluck-
stein. He may or may not be able to recover a con-
tribution from those who joined with him in defrauding
the company. He can bring an action at law if he likes."
All the judgments in the above case are of great
importance as defining the real position of promoters and
directors in their respective fiduciary relations to the
companies they promote or direct.
The secretary of the company having fraudulently

issued a share certificate, the company is not
estopped from refusing to register the apparent
transferees as owners .
Ruben v . GREAT FINGALL CONSOLIDATED (0).
In this case the appellants advanced in good faith money

to the secretary of the company for his own purposes on
the security of a share certificate of the company issued
to them by the secretary, certifying that the appellants
were registered in the company's register of shareholders
as transferees. The certificate was apparently in proper
form , but the seal of the company had been affixed to it
by the secretary without authority and fraudulently, and
he had forged the signatures of the two directors.
The appellants brought an action against the company
(0) [ 1906] A. C. 439.
THE STATUTE LAW. 55
for damages for refusing to register them as owners of the

shares, and it was held that in the absence of any evidence
that the company ever held out the secretary as having
authority in this behalf to do anything more than the
mere ministerial act of delivering share certificates, when
duly made, to the owners of shares, the company were
not estopped by the forged certificate from disputing the
claim of the appellants or responsible to them for the
wrongful action of their secretary.
The doctrine that persons dealing with limited com-
panies are not bound to inquire into their indoor manage-
ment applies only to irregularities that otherwise might
affect a genuine transaction. It cannot apply to a forgery.
A secretary, by delivery of a certificate, does not warrant
or represent that the certificate is genuine. Unless he is
empowered to make such warranty or representation there
can be no estoppel. The general rule is that " the master
is answerable for every such wrong of the servant or agent
as is committed in the course of the service and for the
master's benefit " (Willes, J., in Barwick v. English Joint
Stock Bank) (p). Where the secretary is acting fraudu-
lently for his own illegal purposes no representation by
him relating to the matter will bind his employers.
In the absence of fraud, a subscriber who has agreed

to waive any further compliance with a section of
of an Act cannot maintain an action for damages.
[NOTE : Waiver clauses are now illegal ; see pp. 57, 58,
infra.]
MACLEAY v. TAIT (q).

In this case the respondent subscribed for shares in the
Standard Exploration Company, Limited, upon the faith
of the prospectus issued with the sanction ofthe appellant, a
(p) (1867) L. R. 2 Ex. 259, at p. 265. (9) [ 1906] App. Cas. 24.
director of that company. Undoubtedly a material con-

tract was omitted from the prospectus, but the respondent
in applying for the shares agreed " to waive any further
compliance with sect. 38 of the Companies Act, 1867 , than
is contained in the said prospectus." This section consists
oftwo parts : the first states that a company's prospectus
must contain certain particulars ; the second declares that
a prospectus which does not contain these particulars
" shall be deemed fraudulent on the part of the promoters ,
directors, and officers of the company knowingly issuing the
same as regards any person taking shares on the faith
of such prospectus, unless he shall have had notice of such
contracts." The particulars which are required to be
stated are the dates and names of the parties to any
contract entered into by the company or the promoters,
directors or trustees thereof, before the issue of such
prospectus.
It was held that the contract was unintentionally
omitted , and that all the parties concerned in the issue of the
prospectus were innocent of any fraudulent misstatement
or concealment. Further, that the respondent had not
proved that he had suffered damage, or proved that if the
omitted contract had been disclosed he would not have
taken shares. Further, that when there is no fraud in
fact and the non -disclosure is owing to an honest mistake ,
a subscriber for shares who has agreed to waive any further
compliance with sect. 38 than is contained in the prospectus
cannot maintain an action for damages. " I am of opinion , "
said Lord Lindley (r), " that the defendants are entitled
to be protected by the plaintiff's agreement to waive any
further compliance with sect. 38 than is contained in the
prospectus. This is a case in which all the defendants are
honest men . If they are liable, they are so by reason of
an unfortunate mistake on their part. • In most ofthe
(~) p. 34.
THE STATUTE LAW. 57
cases in which the effect of a waiver clause has been dis-

cussed, the clause has been unsuccessfully relied on as a
protection against trickery ; but in the first of these ,
Greenwood v. Leather Shod Wheel Co. (s), it was pointed
out that although such clauses are worthless for such pur-
poses, yet they might prove useful to protect honest men
from unjust demands. These actions (there were two
actions before the House of Lords , the other being Trech-
mann v. Calthorpe), are instances in which the defendants
can justly claim the protection of the waiver clauses con-
tained in the prospectus and application for shares.”
Similarly, Lord Halsbury (t) : " Where a clause of that
sort has been inserted as part of what I may call the
machinery for fraud, it will, of course, afford no protection
to those who have contrived it ; but where, as in this case,
it is a perfectly honest slip , why should not that slip be
caused by the waiver clause ? I know no reason."
It must be remembered that sect. 38 of the Companies
Act, 1867, was, together with much of the Act, repealed
by the Companies Act, 1900 ; but the repeal is still
subject, of course , to existing rights and liabilities. Further,
the foregoing case shows that it was perfectly legal to
waive and to reply upon the waiver compliance with the
section in question. In the absence of fraud or trickery,
a waiver clause properly utilised is legitimate and
binding.
And it must also be remembered that sub -sect. 4 of sect. 81
of the Companies (Consolidation) Act, 1908, enacts that
66
any conditions requiring or binding any applicant for
shares or debentures to waive compliance with any require-
ment of this section or purporting to affect him with notice
of any contract, document, or matter not specifically
referred to in the prospectus shall be void " (not voidable,
be it noted). Therefore, any matter to which this section
(s) [ 1900] I Ch. 421, and p. 43, supra. (t) p. 27.

applies cannot be waived. Nor will such a waiver clause,

if appearing on an application form contemplated and
required by the prospectus, be anything but void.
But though this may apply to sect. 81 it does not apply
to sect 84, which re-enacts the provisions of the Directors'
Liability Act of 1890. In this section a statutory obliga-
tion is imposed on directors and others to pay compensation
to those whom they have induced to subscribe for shares,
and have in consequence suffered damage by reason of
any untrue statement in the prospectus, or in any report
or memorandum appearing on the face thereof, or by
reference incorporated therein or issued therewith , subject
to certain exceptions. There is nothing in this section .
which forbids the right to waive and enjoy a waiver, or in
the section (81 ) (rendering a waiver clause void in respect
of the provisions of that section ) which extends such pro-
hibition to the provisions of section 84. It is impossible
in law, of course , to contract to waive fraud or a fraudulent
misrepresentation , but there is nothing repugnant either to
law or equity in a subscriber for shares undertaking not to
bring an action in respect of innocent misstatements, nor to
seek to make void a contract which proves to have been
induced by such misstatements. Lindley, M.R. , in Greenwood
v. Leather Shod Wheel Company (u) said : “ A stipulation in a
tricky waiver clause like the one before us affords no pro-
tection to the person who seeks protection from it. The
principle of refusing to give effect to parts of documents so
as to prevent successful deception by means of them is
quite familiar in its application to general words in releases
and to catching conditions of sale ( cf. Broad v. Munton) (x).
The refusal is based on ordinary principles of honesty, and
is as applicable to tricky waiver clauses as to other tricky
documents." And , said Farwell, J. , in Cackett v. Keswick ( y),
(u) [ 1900] I Ch. 421 , and p. 43, (x) (1879) 12 Ch. D. 131 .
supra. (y) [ 1902] 2 Ch. 456.
THE STATUTE LAW. 59
" A man who desires to take advantage of a waiver clause

must state the facts fairly. " And, to refer to Lord Halsbury
again (Macleay v. Tait) (z), " where, as in this case, it is a
perfectly honest slip , why should not that slip be cured by
the waiver clause ? I know no reason. "
A Director is liable for innocent non- disclosure of

material contract.
SHEPHERD AND ANOTHER v. BROOME (a) .
In this case a director of a limited liability company

knew that a prospectus issued by the directors did not
disclose a contract and a resolution of the board of
directors, both of which were in fact material. The
director was advised that they were not, and he honestly
believed that they were not. An action for damages for
fraud was commenced and for compensation under the
Directors ' Liability Act, 1890, by reason of the untrue
statement that certain other contracts were the only
contracts to which the company was a party.
It was held that, though the director was not in fact
fraudulent, he must be " deemed to be fraudulent "
within sect. 38 of the Companies Act, 1867 , and that
proof that the plaintiff took shares upon the faith of the
prospectus would make the director liable, both under the
Act of 1867 and the Directors' Liability Act, 1890 , s. 3,
sub- s. (1).
Sect. 38 of the Act of 1867 compelled the Court to treat
that as fraudulent which in truth was not fraudulent :
" The statute, rightly or wrongly, contemplated the possi-
bility of there being no actual fraud, and intentionally
enacted that, even if there was no fraud in the ordinary
sense, yet, if the facts established the issue of a prospectus
(*) p. 55, supra. (a) [ 1904] A. C. 342.

which did not mention a contract under the circumstances

contemplated by that section and which exist in this case,
such prospectus should be deemed to be fraudulent " (per
Halsbury, L.C.) (b).
" He is said to have infringed two statutory enactments ,
namely, sect. 38 of the Companies Act, 1867 , and sect. 3
of the Directors' Liability Act, 1890. The first of these
has been, happily, repealed, but its repeal was too late to
render the Act inapplicable to this case. The appellant
is alleged to have infringed these enactments by not
noticing in a prospectus certain letters and resolutions of
the board which ought to have been referred to in it, and
especially a letter of September 21 , 1898, and a resolution
of October 10 of the same year. There can, in my
opinion, be no doubt that these letters and resolutions
were extremely material, and ought not to have been
suppressed. The appellant knew of their existence , but
he honestly believed that it was unnecessary to refer to
them. . . . If the case had turned only on sect. 38 of the
Act of 1867 it would have become necessary to consider
the effect of the waiver clause inserted, not only in the
prospectus, but also in the applications for shares. But
it is not necessary to decide this question , for the waiver
clause has no application to the appellant's liability under
the Directors' Liability Act of 1890. The prospectus
unfortunately stated a fact which was not true, namely,
that the only contracts to which the bank was a party
were the two which were mentioned in it. The untrue
statement brings the case clearly and unmistakably within
sect. 3 sub-sect. (1 ) of the Directors ' Liability Act, 1890 "
(per Lord Lindley) (c).
With reference to waiver clauses, the Act of 1908 enacts
(sub-s. (4) of s. 81 ) that any condition requiring or binding
any applicant for shares or debentures to waive compliance
(b) p. 345. (c) At pp. 346, 347.
THE STATUte Law. 61
with any requirement of this section , or purporting to

affect him with notice of any contract, document, or
matter not specifically referred to in the prospectus, shall
be void. Accordingly, so far as this sub-section is con-
cerned a waiver clause is useless .
But in reference to sect. 84, sub-sect. ( 1 ), of the Act of
1908 (which reproduces the Directors ' Liability Act of
1890), where a statutory obligation is imposed to pay
compensation to shareholders who have suffered damage
by misrepresentation , a waiver clause might be effectively
employed for the purpose of avoiding the risk of innocent,
as opposed to fraudulent, misrepresentation . A contract
by which the subscriber binds himself not to sue in the
event of innocent misrepresentation being established , or
to regard the contract as on that ground voidable , would
be valid. See Tullis v. Jacson (d.)
With regard to sect. 38 of the Companies Act, 1867,
which was repealed by the Act of 1900 , that repeal , of
course, is without prejudice to rights and liabilities then
existing, and its bearing may, though with ever decreasing
frequency, still have to be considered .
(d) [ 1892] 3 Ch. 441.

CHAPTER IV.
THE ACTION OF DECEIT.
THE points to be considered in such an action are the

six elements in the legal doctrine of misrepresentation ,
and they are : (1 ) the untrue statement ; (2 ) the making of
such statement to a party to the contract ; (3 ) the condition
of mind of the person making the statement as to its truth
or untruth ; (4) the intent of the person making the state-
ment to induce the other to enter into the contract ;
(5) the reliance placed on such statement by the person
to whom it is made ; (6) the statement having such a
relation to the contract that its falsity makes the contract
unconscionable and voidable.
To put it quite briefly, an action will lie in respect of a
false and fraudulent representation made by the defendant
to the plaintiff, intended to be acted on by him, and on
which he has acted, and thereby suffered damage. In
order to sustain this action it is not sufficient to prove that
the representation was false ; there must also be proof of
fraud. In the words of Lord Bowen, " There must be
fraud in order to found an action of fraud " (Le Lievre v.
Gould) (a). That is to say, that the representation was
false to the knowledge of the maker, or fraudulent in the
sense that, though literally true, it was calculated and
intended to mislead (Lord Macnaghten, in Gluckstein v.
Barnes) (b).
If the agent of a principal makes, in the course of that
principal's business, or otherwise within the scope of the
(a) [ 1893] I Q. B. p . 500. (b) [ 1900] A. C. 240, 250, 251,
and p. 57, supra.
THE ACTION OF DECEIT . 63
agent's authority, a fraudulent representation for the

benefit of the principal, the principal (as well as the agent)
is liable (Barwick v. English Joint Stock Bank) (c) ; but if
the representation is made by the agent for his own private
end, the principal will not be liable (Ruben v. Great Fingall
Consolidated) (d). In this case the appellants , Messrs.
Ruben and Ladenburg, who were stockbrokers , advanced
in good faith to the secretary of the company a sum of
money for his own purposes on the security of a share
certificate of the company issued to them by the secretary,
certifying that the appellants were registered in the com-
pany's register of shareholders as transferees of shares.
This certificate was in form in accordance with the com-
pany's articles of association , but the seal of the company
was affixed to it fraudulently and without authority by the
secretary, and the signatures of the two directors were
forged by him. In an action against the company for
damages, for refusing to register the appellants as owners
of the shares, it was held that in the absence of any
evidence that the company ever held out the secretary as
having authority in this behalf to do anything more than
the mere ministerial act of delivering share certificates,
when duly made, to the owners of shares, the company
were not estopped by the forged certificate from disputing
the claim of the appellants, or responsible to them for the
wrongful action of the secretary. An agent, however, is
not liable for the fraud of another agent, as was shown in
Cargill v. Bower (e) , where it was held that a director of a
company is not liable for a fraud (such as the issue of a
fraudulent prospectus of the company) committed by his
co-directors or by any other agent of the company, unless
he has expressly authorised or tacitly permitted its com-
mission (and see Peek v. Gurney) (ƒ), but this was before
(c) ( 1867) L. R. 2 Ex. 259. (e) (1878) 10 Ch. D. 502.
(d) [ 1906] A. C. 439, and p. 54, ( 1873) L. R. 6 H. L. 377.
supra.
the Directors' Liability Act of 1890 , now incorporated in

sect. 84 of the Companies (Consolidation ) Act, 1908.
In order to ground an action for deceit, it is not neces-
sary that the misrepresentation should be made directly to
the plaintiff. It has been held to be enough that the
defendant intended that the plaintiff should be deceived
by and act upon it. If, for example, directors circulate a
false report formally addressed to their shareholders, but
really intended to catch widows and clergymen with money
to invest, a widow or a clergyman who has been thereby
induced to buy shares may sue for the loss sustained (Scott
v. Dixon (g), and see Peek v. Gurney) (h).
And where a prospectus is issued , not only for the pur-
pose of inviting subscriptions for shares, but also to induce
persons to buy shares in the open market, the function of
the prospectus is not exhausted by the subscription and
allotment of shares, for a person who has received such
prospectus and is thereby fraudulently induced to purchase
subsequently shares in the open market has a cause of
action against the promoters in respect of the misrepre-
sentation. But, of course , if such person did not rely on
the misrepresentation , he is unable to maintain an action
for deceit (Smith v. Chadwick) (i).
Then, again, the misrepresentation must have induced
the plaintiff to act in the way he did. The misrepresenta-
tion may be addressed to the public at large , or to a class
of the public at large, and in such a case any member of
the class or of the public, as the case may be, is entitled to
sue (Richardson v. Silvester) (k) . While, ordinarily, a pur-
chaser ofshares in the market cannot sue the directors upon
a fraudulent prospectus (Peek v. Gurney) (1), yet if the
prospectus had been intended to induce the public to buy
in the market, so as to raise the value of the shares, a
(g) (1860) 29 L. J. Ex. 62 n. (k) (1873) L. R. 9 Q. B. 34.
(h) (1873) L. R. 6 H. L. 377 ( ) (1873) L. R. 6 H. L. 377.
(2) (1884) 9 App. Cas. 187.
THE ACTION OF DECEIT. 65
member of the public could sue such directors (Andrews v.

Mockford) (m). The plaintiff, of course, must have been
actually deceived, and the deception must have been a
material inducement to him to do what he did,
though it need not have been the only inducement
(Peek v. Derry (n) ; Reese River Company v. Smith) (0),
and if he were in fact deceived it does not matter if he
had the means of ascertaining the truth (Redgrave v.
Hurd) ( p).
As to damages, a successful plaintiff is clearly entitled
to be awarded damages in respect of any injury which can
be considered the direct and natural consequence of his
acting on the faith of the misrepresentation of the
defendant. In actions of deceit, the measure of damages
is not the full consideration which has passed from the
defrauded party. Allowance must be made for any benefits
he may have received under the contract, and the difference
will be the damage recoverable (Hogan v. Healey) (q) .
If the plaintiff has been induced by misrepresentation
to take shares in a company, the method of measuring the
damage is to ascertain the difference between the price
paid for the shares and the actual value at the time of
allotment, and this actual value is reached, not by ascer-
taining the market value at that time, but by the subse-
quent history of the shares, even to the point of the winding
up of the company (Arkwright v. Newbold (r) ; Arnison v.
Smith (s); Cackett v. Keswick) (t) . If the shares are the
equivalent of the money paid , there is no damage (and no

action in consequence), but if they are of less value than
the price paid, he is damaged to that extent (McConnell v.
Wright) (u) ; and he is entitled to an inquiry as to the
(m) [ 1896] 1 Q. B. 372. (1881) 17 Ch. D. 302.

(n) ( 1887) 37 Ch. D. 541 . (1889) 41 Ch. D. 363.
(0) ( 1869) L. R. 4 H. L. 64. ( ) [ 1902] 2 Ch. 456.
(p) ( 1881 ) 20 Ch. D. 1. (u) [ 1903] 1 Ch. 546, per Collins,
(9) ( 1877) I. R. II C. L. 122. M.R.
L.M. 5
difference between the price paid and the real value

(Twycross v. Grant) (x) . The successful plaintiff can only
recover the entire price he paid if the shares are absolutely
worthless. If the shares were worthless from the
beginning, then their apparent value could only be derived
from the misrepresentation . But if the plaintiff, by his
action, has reduced the value of the shares, he is not
entitled to have the amount of that reduction added to
his damage. The fact that the shares had, for a short
time after the issue, a fictitious mårket value, does not
reduce the damage by that value, for the plaintiff would
be entitled to wait until the company is in operation
(Shaw v. Holland) (y) . There is a rule that fiduciary
persons should account for property wrongfully taken by
them at the highest value during the period in which it
was in their hands. But they ought not be charged with
more than the real value, which is not necessarily the
same thing as the market value (Shaw v. Holland) (z) .
(x) (1877) 2 C. P. D. 469. (z) Supra.

(y) [ 1900] 2 Ch. 305
CHAPTER V.
RESCISSION .
FRAUD vitiates everything to which it attaches, and

evidence can always be given to prove it, even if it con-
tradicts an agreement in writing, and , consequently,
contracts procured by fraud are voidable at the option of
the defrauded party.
Contracts induced, or in any way tainted, by fraud can ,
at the instance of the defrauded party, be rescinded and
avoided, provided that the parties can be restored to the
position in which they were at the time of the transaction
(Load v. Green (a) ; Lagunas Company v. Lagunas Syndi-
cate (b) ; Re Eastgate) (c) . " It is, I think, clear on
principles of general justice, " said Lord Blackburn, in
Erlanger v. New Sombrero Phosphate Company (d), “ that as
a condition to a rescission , there must be a restitutio in
integrum ." But if such defrauded party has received any
benefit from the contract, or the property has, in the mean-
while, deteriorated (save through the fraudulent action of
the defrauding party) , then this must be accounted and
compensated for. " It would be obviously unjust, " said
Lord Blackburn, in Erlanger v. New Sombrero Phosphate
Company (e) , " that a person who has been in possession of
property under the contract which he seeks to repudiate
should be allowed to throw that back on the other party's
hands without accounting for any benefit he may have
derived from the use of the property, or if the property,
(a) ( 1846) 15 M. & W. 220. (d) (1878) 3 App. Cas. Pt. 2, 1278.
(b) [ 1899] 2 Ch. 392. (e) Supra.
(c) [ 1905] I K. B. 465.
5-2
though not destroyed , has been in the interval deteriorated ,

without making compensation for that deterioration . ”
But as long as he makes no election , he retains the
right to avoid the contract or sue for damages, unless, if
while he is deliberating, an innocent third party has
acquired an interest in the property, or if, in consequence
of his delay, the position even of the wrongdoer is affected,
in which case he will be precluded from exercising his
right to rescind (Clough v. The London and North Western
Railway Company) (ƒ).
Rescission in part cannot be claimed unless the parts
are so severable as to form distinct and independent
contracts (United Shoe Manufacturing Company V.
Brand) (g), where the Judicial Committee of the Privy
Council, per Lord Atkinson, held that "the party
defrauded cannot avoid one part of a contract and affirm
another part, unless indeed the parts are so severable from
each other as to form two independent contracts. "
But rescission, when open to the defrauded party,
entitles him to be restored, as nearly as may be, to his
former position, and this includes a right to be indemnified
against obligations incurred under the contract .
But a person who is misled by an innocent misrepre-
sentation is not entitled to damages, and therefore in
such a case this right to indemnity excludes those
liabilities which are the natural consequences of the
contract, but are not actually created by the contract
itself.It is said that the injured party is entitled to be
replaced in statu quo. " It seems to me, ” said Bowen , L.J.
(Newbigging v. Adams) (h) , “ that when you are dealing
with innocent misrepresentation you must understand
that proposition that he is to be replaced in statu quo with
this limitation, that he is not to be replaced in exactly
(f) ( 1871) L. R. 7 Ex. 34, 35. (½) ( 1886) 34 Ch. D. 592 C. A.

(g) [ 1909 ] A. C. 330.
RESCISSION . 69
the same position in all respects, otherwise he would

be entitled to recover damages, but is to be replaced in
his position, so far as regards the rights and obligations
which have been created by the contract into which he
has been induced to enter. In such a case it seems to me
that complete rescission would not be effected unless
the misrepresenting party not only hands back the benefits
which he has himself received, but also reassumes the
burden which, under the contract, the injured person had
taken upon himself. Speaking only for myself, I should
not like to lay down the proposition that a person is to be
restored to the position which he held before the mis-
representation was made, nor that the person injured
must be indemnified against loss which arises out of the
contract, unless you place upon the words ' out of the
contract ' the limited and special meaning which I have
endeavoured to shadow forth. Loss arising out of the
contract is a term which would be too wide. It would
embrace damages at common law, because damages at
common law are only given upon the supposition that
they are damages which would naturally and reasonably
follow from the injury done. I think Redgrave v. Hurd (i)
shows that it would be too wide , because in that case
the Court excluded from the relief which was given the
damages which had been sustained by the plaintiff in
removing his business and other items. There ought, as
it appears to me, to be a giving back and a taking back
on both sides, including the giving back and the taking
back of the obligations which the contract has created,
as well as the giving back and the taking back of the
advantages " (and see Rawlins v. Wickham) (k).
With reference to the doctrine that there can be no
rescission if third parties, ignorant of the misrepresenta-
tions, have acquired rights under the contract for value
(i) ( 1881) 20 Ch. D. 1. (k) (1858) 3 De G. & J. 304.
(Clough v. London and North Western Railway Company) (1),

it should be pointed out that a shareholder who has been
induced to take shares by the fraud of the company is
prevented from avoiding the contract and obtaining the
removal of his name from the register of shareholders if
there has been made an order for winding up, or a petition
for winding up has been presented on which an order is
subsequently made, and even after a resolution for a
voluntary winding up . Because by that time the interests
of third parties have intervened, and the creditors of the
company have acquired an accrued right. Even if there
are no creditors, Burgess's Case (m) shows that after a
company is wound up it ceases to exist, and rescission is
impossible.
If a person standing in a fiduciary relation to a company
sells his own property to the company without disclosing
his interest, the company may rescind. Or, if the person
stood in that fiduciary relation when he bought the
property, the company can , if it pleases, decline to rescind
but pay no more for the property than he himself gave
(Tyrrell v. Bank of London and Others (n) ; Ambrose Lake
Company (0), Bentinck v. Fenn) (p). If, however, a person
did not then so stand, or if the company elects not to
rescind, or rescission has become impossible, the company
would probably be without remedy, unless the concealment
was also a misrepresentation. For although it may be too
late for rescission , yet there may lie an action of deceit
against the vendor, and if there is a difference between the
price given and the fair value of the property that differ-
ence is recoverable as secret profit (Gluckstein v. Barnes) (q).
Nor is the price at which the promoting vendor bought
the property the measure of its value at the date of
( ) ( 1871) L. R. 7 Ex. 34. (0) ( 1880) 14 Ch. D. 390, 398.

(m) ( 1880) 15 Ch. D. 507, 509. (p) (1887) 12 A. C. 652, 658.
(n) ( 1862) 10 H. L. C. p. 46. ) [ 1900 ] A. C. 240.
RESCISSION. 71
purchase by the company (Lagunas Company v. Lagunas

Syndicate) (r), and the measure of the damage is the profit
which the same persons obtained on the purchase and
resale (Leeds and Hanley Theatres) (s).
Where a person has been induced to buy shares by
misrepresentation in a company prospectus, he is entitled
to rescind, to have his money paid back to him, and his
name removed from the register. Money paid by him on
calls must be repaid, with interest at 4 per cent. (Karberg's
Case) (t) ; but if he has received dividends rescission will
be granted subject to an account being taken of receipts
and payments, and the repayment of the balance to him
with costs (Kent v. Freehold Land and Brickmaking
Company) (u).
To sum up, in order to entitle a shareholder to rescission
for misrepresentation , such misrepresentation must be
made-
(a) By the directors or general agents of the com-
pany entitled to act and in fact acting on its behalf.
(b) By a special agent acting within the scope of
his authority, which will include a person constituted
agent by the subsequent adoption of his acts.
(c) In circumstances where the company can be
shown to have had knowledge of the misrepresentation
before the contract is complete.
(d) In circumstances where the company or its
agents have knowledge that the contract is induced
by representations and these eventually prove material
and untrue (Lynde v. Anglo -Italian Hemp Company) (x).
(See Karberg's Case (y), for representations not made
by the company).
The right to rescind is not lost because there are
[ 1899 ] 2 Ch. 411 . (u) ( 1867) 4 Eq. 598.

[ 1902 ] 2 Ch. 809. (x) [ 1896 ] I Ch. 178.
[ 1892] 3 Ch. 1. (v) [ 1892 ] 3 Ch. i.
statements which, as well as that containing the misrepre-

sentation, have induced the shareholder to subscribe for
shares. In Peek v. Derry (z), Cotton , L.J. , said : “ As I
understand the law, it is not necessary that the misstate-
ment should be the motive, in the sense of the only motive,
the only inducement, to the party who has acted to his
prejudice so to act. It is quite sufficient if the statement
is a material inducement to the party to act upon it. Of
course it would be almost impossible to say it was the
only inducement . There must be so many matters which
enter into a man's mind in considering whether or no he
shall take shares or whether he shall do any similar act.
But, in my opinion (and I need not refer to the dicta of
various judges which have been to the same effect), it is
quite sufficient if it is a material inducement to the party
who has suffered loss to take the shares ." So, in Arnison
v. Smith (a), Kekewich, J. (b) , said : " The defendants say
that this was not the only inducement. The prospectus
set forth other good reasons for inducing people to
subscribe, and the plaintiffs were moved by these reasons.
No doubt they were to some extent. Some relied upon
the names of the directors and of the trustees for the
debenture-holders ; some had a large notion about water-
works generally ; and others happened to know Genoa,
or were attracted by the description of it in the prospectus.
One plaintiff noticed that the contract had been entered
into with a well-known firm. Many thought it was a
good thing, and one was struck by the intention to apply
for a quotation upon the Stock Exchange. It is not
possible to analyse the different motives which actuated
the applicants for this stock." In Peek v. Derry (≈), Lord
Justice Cotton says : " It is quite sufficient if the statement
is a material inducement to the party to act upon it," and
(*) (1887) 37 Ch. D. App. 574. (b) At p. 360.

(a) (1889) 41 Ch. D. 348.
RESCISSION . 73
in the Court of Appeal in this case Lord Halsbury, at

p . 369, said : " The second requisite is that the fraud was
an inducing cause to the contract. It is an old expedient,
and seldom successful, to cross-examine a person who has
read a prospectus, and ask him as to each particular state-
ment what influence it had on his mind, and how far
it determined him to enter into the contract. This is
quite fallacious ; it assumes that a person who reads a
prospectus and determines to take shares on the faith of it
can appropriate among the different parts of it the effect
produced by the whole. This can rarely be done even at
the time, and for a shareholder thus to analyse his mental
impressions after an interval of several years, so as to say
which representation in particular induced him to take
shares, is a thing all but impossible. A person reading
the prospectus looks at it as a whole, and he thinks the
undertaking is a fine commercial speculation, he sees good
names attached to it, he observes other points which he
thinks favourable, and on the whole he forms his conclusion.
You cannot weigh the elements by ounces. It was said,
and I think justly, by Sir G. Jessel in Smith v. Chadwick (c),
that if the Court sees on the face of the statement that it
is of such a nature as would induce a person to enter into
the contract, or would tend to induce him to do so, or
that it would be a part of the inducement to enter into the
contract, the inference is, if he entered into the contract,
that he acted on the inducement so held out , unless it is
shown that he knew the facts, or that he avowedly did not
rely on the statement whether he knew the facts or not."
See also Edgington v. Fitzmaurice (d), Carling v. London
and Leeds Bank (e), Scott v. Snyder Company (ƒ), Knox v.
Hayman (g).
(c) (1881 ) 20 Ch. D. 27, 44. (f) ( 1892) 66 L. T. 283.

(d) ( 1885) 29 Ch. D. 459. (g) ( 1892) 67 L. T. 139.
(e) ( 1887) 56 L. T. 115.
CHAPTER VI.
DELAY.
(LACHES, ACQUIESCENCE, LAPSE OF TIME .)
In many cases, but not in all, a man may bar his own
right to relief by acts of negligence or delay, or by actual
or implied acquiescence in the state of things which he
ultimately seeks to disturb. Lapse of time may be itself
evidence of acquiescence, if there be knowledge of the
facts ; but if there be no knowledge of the facts, then lapse
of time is no bar to relief (Life Association of Scotland
v. Siddall) (a), though from great lapse of time in some
cases there may be properly implied an acquiescence (Life
Association of Scotland v. Siddall) (b). Moreover, mere
lapse of time strengthens the presumption of law that a
transaction is legal (Re Postlethwaite) (c).
Courts of equity do not encourage stale demands or
assist those who sleep on their rights , for the good reason,
amongst others, that there is a special difficulty in pro-
curing full or satisfactory evidence with respect to remote
transactions and a particular hardship in disturbing long
settled relations. So definite is the attitude of equity
upon this point that where a matter is only equitable and
not to be determined by law, the equity courts will
refuse relief to persons who would have had a clear claim
to relief had they come within what in all the circum-
stances would have been a reasonable time, and even
when the term allowed by the Statute of Limitations has
(a) (1861) 3 D. F. & J. 58. (c) (1889) 37 W. R. 200.

(b) Supra, p. 77.
DELAY. 75
not run. The lapse of time or delay, in addition to being

of itself a bar to relief, may be accepted in equity as
evidence of assent or acquiescence or waiver (Whalley v.
Whalley (d), Roberts v. Tunstall (e) , Allcard v. Skinner) (ƒ).
Lindsey Petroleum Company v. Hurd (g) is a leading case
on this point. Sir Barnes Peacock, in delivering the
judgment of the Court in this case, observed that the
doctrine of laches in a court of equity is not an arbitrary
or a technical doctrine. Where it would be practically
unjust to give a remedy, either because the party has by
his conduct done that which might fairly be regarded as
equivalent to an evasion of it , or where by his conduct
and neglect he has, though perhaps not waiving that
remedy, yet put the other party in a situation in which it
would not be reasonable to place him, if the remedy were
afterwards to be asserted- in either of these cases lapse of
time and delay are most material. But in every case if
an argument against relief, which would otherwise be just,
is founded on mere delay, that delay, of course, not
amounting to a bar by any Statute of Limitations, the
validity of that defence must be tried upon principles
substantially equitable.
Two circumstances always important in such cases are the
length of the delay, and the nature of the acts done during
the interval, which might affect either party, and cause a
balance of justice or injustice in taking the one course or
the other, so far as relates to the remedy. If the situa-
tion of the parties has in no substantial way been altered,
either by the delay or by anything done during the in-
terval, there is nothing to give special importance to the
defence founded on time.
These principles have been noted and approved in many
subsequent cases . Notably in Erlanger v. New Sombrero
(d) ( 1821 ) 3 Bligh, 1. ( f ) ( 1887) 36 Ch. D. 187 .

(e) (1844) 4 Ha. 257. (g) ( 1874) L. R. 5 P. C. 240.
Phosphate Company (h), where Lord Blackburn said : " I have

looked in vain for any authority which gives a more distinct
and definite rule than the passage just cited ; and I think,
from the nature of the inquiry, it must always be a ques-
tion of more or less depending on the degree of diligence
which might reasonably be required , and the degree of
change which has occurred, whether the balance of justice
and injustice is in favour of granting the remedy, or with-
holding it. The determination of such a question must
largely depend on the turn of mind of those who have to
decide, and must therefore be subject to uncertainty, but
that is inherent in the nature of the inquiry."
While, then, mere delay may sometimes operate and be
of itself sufficient to bar a right recognised in equity
alone the right to rescind, for example-it constitutes no
defence to a legal claim-e.g. , the right to an action of
deceit or a claim for damage-unless the statutory period
oflimitation has expired. In the case of misrepresentation ,
negligence or laches afford no answer unless there is such
a delay as would bring the case within the Statute of
Limitations. " If a man is induced," said Jessel , M.R.,
in Redgrave v. Hurd (i), " to enter into a contract by a
false representation it is not a sufficient answer to him to
say, ' If you had used due diligence you would have found
out that the statement was untrue. You had the means
afforded you of discovering its falsity, and did not choose
to avail yourself of them.' I take it to be a settled
doctrine of equity, not only as regards specific perform-
ance but also as regards rescission , that this is not an
answer unless there is such delay as constitutes a defence
under the Statute of Limitations. That, of course, is
quite a different thing. Under the statute delay deprives
a man of his right to rescind on the ground of fraud , and
the only question to be considered is from what time the
(h) (1878) 3 App. Cas. 1279. (i) ( 1881 ) 20 Ch . D. , at pp. 13, 14.
DELAY. 77
delay is to be reckoned . It had been decided , and the

rule was adopted by the statute, that the delay counts
from the time when by due diligence the fraud might have
been discovered. Nothing can be plainer, I take it , on
the authorities in equity than that the effect of false repre-
sentation is not got rid of on the ground that the person
to whom it was made has been guilty of negligence . One
of the most familiar instances in modern times is where
men issue a prospectus in which they make false state-
ments of the contracts made before the formation of a
company, and then say that the contracts themselves may
be inspected at the offices of the solicitor. It has always
been held that those who accepted those false statements
as true were not deprived of their remedy merely because
they neglected to go and look at the contracts."
And though, if induced to take shares in a company by
fraudulent misrepresentation, a man's laches or delay may
subsequently be held to bar his right to repudiate the con-
tract, he may still bring his action of deceit and recover
damages. Thus, in Eaglesfield v. Londonderry (k) , Bag-
gallay, L.J., observes : " I am not prepared to say that
in an action for damages for misrepresentation the delay
of five years in commencing the action would necessarily
be a bar to the claim, but I do say that in proceedings
against a company to set aside a contract on the basis of
misrepresentation discovered by the party five years pre-
viously, and no proceedings taken to set the transaction
aside, such delay must be fatal to the plaintiff's case. "
But even though a person affirm a contract, he may yet
in certain cases , sue the person who by fraud induced him
to enter into it. See Arnison v. Smith (1), per Cotton, L.J.;
Peek v. Gurney (m) ; but if he affirms the contract he
renders himself unable to defend an action for calls upon
(k) (1876) 4 Ch. D. App., at p. 715. (m) (1873) L. R. 6 H. L. 377.

(1) ( 1889) 41 Ch. D., at p. 371.
the ground of fraud. Thus , in Aaron's Reefs v. Twiss (n),

it was held that where a person is induced by a fraudulent
prospectus to apply for shares and his shares are afterwards
forfeited by his failure to pay calls, he ceases to be a share-
holder and becomes a mere debtor to the company, and if
he has done nothing to affirm the contract he may repudiate
it and defend an action for calls on the ground of the
fraud. On the question as to whether the shareholder had
lost his right to repudiation by unreasonable delay, Lord
Davey (0) said : " I entirely agree in the observations of
the Court of Exchequer Chamber delivered by Mellor, J. ,
in the case of Clough v. London and North Western Railway
Company (p), to which I may add the judgment delivered
by Lord Selborne in the Privy Council in Lindsey Petro-
leum Company v. Hurd (q). The question is,' to quote
Mellor, J., ' Has the person on whom the fraud was prac-
tised, having notice of the fraud , elected not to avoid the
contract, or has he elected to avoid it, or has he made no
election.' Lapse of time without rescinding will furnish
evidence of an intention to affirm the contract. But the
cogency of this evidence depends upon the particular
circumstance of the case and the nature of the contract in
question. When a person has contracted to take shares
in a company and his name has been placed on the
register, it has always been held that he must exercise his
right of repudiation with extreme promptness after the
discovery of the fraud or misrepresentation for this reason :
the presence of his name on the register may have induced
other persons to give credit to the company or to become
members of it. If a man claims, ' said James, L.J., ' to
rescind his contract to take shares in a company on the
ground that he has been induced to enter into it by misre-
presentation, he must rescind it as soon as he learns the
(n) [ 1896 ] A. C. 273. (p) (1871) L. R. 7 Ex. 26.

At p. 294. (9 ) ( 1874) L. R. 5 P. C. 221.
DELAY. 79
facts, or else he forfeits all claim to relief : see Sharpley v.

South and East Coast Railway Company (r). In In re
Scottish Petroleum Company (s) , Baggallay, L.J. , expressed
a doubt whether the delay of even a fortnight in re-
pudiating the shares after the shareholder was fully in-
formed of all the circumstances and no further investi-
gation was necessary would not be fatal. The point was
not, however, necessary to the decision of that case. It
may be observed that in the Court of Chancery and the
Chancery Division questions of this kind usually arise in
suits to rescind the contract where the shareholder is
plaintiff. In those cases laches or lapse of time is treated
as a defence, and requires to be alleged and proved by the
defendant."
Where an action of deceit was brought against directors
in respect of shares applied for under the inducement of a
misrepresentation in the prospectus, it was held by the
House of Lords that the rule of equity will follow by
analogy that of the law, and that the only amount of delay
which can be regarded as a bar to relief is that amount
which is determined by the Statute of Limitations (Peek v.
Gurney (t) ) . Where, therefore, a person became possessed
of shares in October, 1865 , and the company was ordered
in June, 1866, to be wound up, and he contested his
liability to be made a contributory, but was, in July, 1867,
declared liable as such, and in March, 1868, filed his bill
against the directors to be indemnified by them, it was
held that delay could not be set up as an answer to the
suit. " The suit in the present case," said Lord Chelms-
ford (Peek v. Gurney) (u) " is not for the rescission of the
contract, but is founded upon the loss the appellant has
sustained, and may sustain, in consequence of his being
(1876) 2 Ch. D. , at p. 685. PP. 377, 384, 402.

(s) (1883) 23 Ch. 413, 434. (u) Supra, at p. 384.
(t) ( 1873) L. R. 6 H. L., see
bound by the contract he has entered into. It is a pro-

ceeding similar to an action at law for deceit ; and the
only amount of delay which could be a bar to relief is fixed
by the Statute of Limitations, by analogy to which equity
generally proceeds in question of laches."
But if a shareholder comes to the Court to be released
from his shares on the ground of misrepresentation, he
must use diligence and be prompt. In Kent v. Freehold
Land and Brickmaking Company (x) it was held that a
plaintiff cannot be relieved from shares in a company upon
the ground of misrepresentation in the prospectus, on a
bill filed after the presentation of a petition for the winding-
up of the company, on which an order was subsequently
made, and Cairns, L.C. , said, " that he adhered to the
principles he had laid down in Reese River Silver Mining
Company, Smith's Case (y), namely, that where a share-
holder before a winding-up was commenced, files a bill to
have his name taken off the register of a company, and
obtains an injunction suspending the exercise of the
powers of the company against him as a shareholder, that
amounts to a complete repudiation of the shares." But in
Kent v. Freehold Land and Brickmaking Company, the bill
had not been filed in time (see also The Scottish Petroleum
Company (z) ; Aaron's Reefs v. Twiss (a) ; and Lord Davey's
judgment (b) ; also Ogilvie v. Currie) (c).
When a shareholder applies for shares on the faith of a
prospectus he is bound to ascertain at the earliest possible
moment whether the memorandum and articles of associa-
tion accord with the prospectus. If he does not do this,
and the objects of the company should be extended beyond
those described in the prospectus, such shareholder will
be held to have acquiesced. Thus , in Oakes v. Turquand (d),
(x) (1876) 3 Ch. 493. (6) At. p. 294.
(1) (1867) L. R. 2 Ch. 604. (c) (1868) 37 L. J. Ch. 541.
(*) ( 1883) 23 Ch. D. 413. (d) (1867) L. R. 2 H. L. 325.
(a) [ 1896 ] A. C. 273.
DELAY. 81
Chelmsford, L.C. quoted with approval the view of Lord

Cairns in Ex parte Peel, In re Barned's Banking Company (e),
where that great judge said : " It is the bounden duty of a
person to ascertain, at the earliest practicable moment,
what is the charter or title deed under which the company
in which he has agreed to become a shareholder is carrying
on business. I think he ought to be held bound to look
to the memorandum and articles of association before he
applies for shares . But even when the memorandum and
articles of association are not in existence at the time, I
think, at the very latest, when he receives his allotment of
shares, he ought to satisfy himself that there is nothing in
the memorandum or articles of association to which he
desires to make any objection . " " And," added Lord
Chelmsford, " this appears to me to lay down a clear and
precise rule, which will render unnecessary the considera-
tion in each case whether a reasonable time has or has not
elapsed from which acquiescence may be assumed " (ƒ).
By the requirements of the Act , of course , every prospectus
now contains the contents of the memorandum of
association.
As to what constitutes the period of time within which
the ground of misrepresentation may be successfully urged
in an action to repudiate the shares, that depends in each
case upon the actual circumstances. In Pawle's Case (g),
for example, and in Karberg's Case (h) a delay that was
caused by awaiting the trial of another case brought by a
shareholder in the same position was held not to prejudice
the plaintiff, even though a winding-up order had inter-
vened. But in Ashley's Case (i), where the shareholder
did not repudiate and remained silent and attended meet-
ings, and did not move in the matter until a winding-up
(e) An unreported case. (h) [ 1892 ] 3 Ch. 1.

(f) At p. 352. (1873) 9 Eq. 263.
(g) ( 1869) 4 Ch. 497.
L.M. 6
order had been made, and until after the result of the
trial, it was held that he was barred by his delay. When-
ever a misrepresentation is made of which any one of the
shareholders has notice, and can take advantage to avoid
his contract with the company, it is his duty to determine
at once whether he will depart from the company, or
whether he will remain a member. A man must not play
fast and loose ; he must not say, " I will abide by the
company, if successful, and I will leave the company if it
fails."
Ashley's Case must be distinguished from Pawle's Case.
A meeting of shareholders of the company had been held,
and a number of them agreed to have nothing to do with
the company on the ground of the alleged misrepresenta-
tion, and it was further agreed that one of them was to
take action, and that the others , while contributing to the
cost of it, would be bound by the decision in that suit.
Pawle was one of those who had so agreed ; and though
during the proceedings the company was ordered to be
wound up and Pawle's name remained on the register of
members, it was held that he was not liable as a con-
tributor to the company. But in Ashley's Case, though
the same meeting of dissentient shareholders was held , and
a suit was prosecuted in the same manner and upon the
same conditions , Ashley , though present at the meeting ,
did nothing. He did not say he dissented , he did not say
he assented. He took no part in the burden of litigation.
He remained quiet for sixteen months and then , when the
action against the company was successful , he sought to
repudiate his shares . But although he was aware of the
misrepresentation and of the proceedings by the dissenting
shareholders , he did not make up his mind until the
question was decided by the Courts . But in the mean-
time the company was carrying on business and entering
into onerous contracts , and in this he was held to have
DELAY. 83
borne his part and was consequently disentitled to

repudiate.
Delay may be set up against a company just as much
as it may be against an individual. Laches apply to both
equally. But a company, being an aggregate of individuals,
must, by the terms of its existence, move more or less slowly,
and in Erlanger v. New Sombrero Phosphate Company (j)
it was held that in considering the period of time which
might be held to constitute laches, allowance must be
made for the fact that the governing body of a company
may have to be changed before it is possible for the share-
holders of a company to procure the setting aside of a
contract ; and those who have misled a company must
be held to be aware that a company necessarily moves
slowly, and that it will not lie in their mouths to complain
of delay which can be shown in the circumstances to be
reasonable.
Thus, in Erlanger v. New Sombrero Phosphate Company (k),
Lord Blackburn dealt with the question of time from this
point of view. " I can find no case," he said , “ in
which even a private individual has been precluded by
mere delay, except where the delay has been much
greater than in this case. In Prendergast v. Turton (1)
nine years elapsed, and in Clegg v. Edmonson (m ) nearly as
long ; and in both cases the plaintiff had lain by whilst
the defendants were investing money in the mine, until
that investment proved remunerative. It was clearly not
equitable to leave the defendants to all the risk of loss
and claim to themselves a profit, and this seems to be
what Lord Eldon principally relied on in Norway v.
Rowe (n). In the present case there is no ground for
imputing to the plaintiff what Lord Lyndhurst in
(1) (1878) 3 App . Cas. 1280. (m) (1857) 8 D. M. & G. 789.

(k) (1878) 3 App. Cas. , at p. 1282. (n) (1812) 19 Ves. 144.
() (1841) I Y. & C. C. C. 98.
6-2
Prendergast v. Turton calls a conditional acquiescence .

As it is pointed out in Clarke v. Hart (0) there was in
Prendergast v. Turton very nearly , if not quite, a legal
defence. Here, taking the time at which the active
shareholders were put upon exerting diligence to be
February, there was not quite nine months before the
filing of the bill. That is not very long for getting the
majority of shareholders to make an inquiry, turn out the
board, and get proper advice before instituting a suit ; and
having come to the conclusion that the company once
had the right to the relief, I think the burden is on the
defendant to show that the company have precluded
themselves from the relief to which they had a right."
But time does not begin to run against a person, so,
that is, as to bar the remedy, until that person has full
information as to his rights and injuries (Blennerhassett v.
Day (p); Whalley v. Whalley (q) ; Savery v. King) (r), or
has within his control full means of knowledge (Brown
v. M'Clintock (s) ; Redgrave v. Hurd (t) ; but means of
knowledge are not equivalent to knowledge, if culpable
negligence cannot also be imputed) ; or until he could, by
the exercise of reasonable diligence, have obtained evidence
of the fraud (Chatham v. Hoare (u) ; Vane v. Vane) (x).
The representation once made releases the party from
any investigation, even if the opportunity is afforded, per
Baggallay, L.J. , Redgrave v. Hurd (y). “ I do not mean to
say," he added, " that there may not be certain circum-
stances of suspicion , which might put a person upon
inquiry, and make it his duty to inquire, but under
ordinary circumstances the mere fact that he does not
avail himself of the opportunity of testing the accuracy of
(1858) 6 H. L. C. 658. (t) (1881) 20 Ch. D. 13.

(p) ( 1812) 2 Ba. & Be. 104, 119. (u) (1870) 9 Eq. 571.
(9) (1816) 3 Bligh, 1. (x) ( 1873) 8 Ch . 383.
(r) (1865) 5 H. L. C. 627. (y) ( 1881) 20 Ch. D. , at p. 23.
(s) (1873) L. R. 6 H. L. 456.
DELAY. 85
the representation made to him will not enable the

opposing party to succeed on that ground. The case of
Rawlins v. Wickham (z) is a very strong illustration of the
application of that principle. There, a person who had
been induced by false representation to enter into a
partnership continued in that partnership for four years,
and then for the first time discovered the fraud which had
been practised upon him. He was held entitled to relief,
though at any time during that period he might have
investigated matters for himself."
(*) (1858) 3 De G. & J. 304.

CHAPTER VII.
ESTOPPEL.
IN law an estoppel is an admission or something which

may be treated as an equivalent to an admission, and of
such a nature that anyone who is affected by it will not
be permitted to contradict it. An estoppel, however, is
not in itself a cause of action : it is merely a step towards
relief ; a rule of evidence which precludes a person from
denying the truth of some statement previously made by
him. See Low v. Bouverie (a).
An estoppel - that is, the language on which an estoppel
is based— must be both precise and unambiguous. That
does not of necessity mean that the language must be of
such a character that it cannot possibly be open to more
than one construction, but that it must be such that it
might be reasonably understood in one particular sense
by the person to whom it is addressed . The estoppel
must be of such a character as would justify a claim for
relief on the ground that a person is precluded from
denying the truth of the fact that he has asserted. See
Bowen, L.J., in Low v. Bouverie (b) . In the House of
Lords, in Burkinshaw v. Nicolls (c), Lord Blackburn put the
doctrine thus : "When a person makes to another the repre-
sentation ' I take upon myself to say such and such things
do exist, and you may act upon the basis that they do
exist ,' and the other man does really act upon that basis, it
seems to me it is of the very essence of justice that,
between those two parties, their rights should be regu-
(a) [ 1891 ] 3 Ch., per Lindley, L.J., (b) Supra.

at p. IoI. 1878) 3 App. Cas. 1004, 1026.
ESTOPPEL. 87
lated, not by the real state of the facts, but by that

conventional state of facts which the two parties agree to
make the basis of their action."
Estoppel arises where you are precluded from denying
the truth of anything which you have represented as a
fact, although it is not a fact. (See Farquharson Brothers
v. King) (d).
The law of estoppel with reference to misrepresentation
may be summarised as follows :-
1. There is jurisdiction in equity in certain cases to
enforce a demand against the person who makes an
untrue representation upon which he knows that the
person to whom he makes it intends to act, if and when
such person has acted upon the faith of it and suffered
loss in consequence .
2. This is, of course, readily done when the misrepre-
sentation is fraudulent, for an action of deceit will then lie
at law.
3. Where the misrepresentation is innocent, relief is
given both at law and in equity in all cases where the suit
will be effective if the defendant is estopped from denying
the truth of his representation .
4. If there is no estoppel, an innocent misrepresentation
will not support an action at law for damages thereby
occasioned.
5. Estoppel is effective in the case where an action
must succeed or fail if the defendant or plaintiff is
prevented from disputing a particular allegation. Thus,
in equity, if an assign of X. sues X.'s trustee to recover
the fund assigned, and the trustee is prevented from
denying its existence in his hands ; or, at law, if the
assign of a debt sues the alleged debtor and that debtor is
prevented from denying that the debt is due. Conversely,
an estoppel may be a defence, as where a limited company
(d) [ 1902 ] A. C., per Halsbury, L. C. , at p. 330.
sues a shareholder for calls and it is unable to deny that

the shares have been paid up. In such a case the
estoppel would prevent the company succeeding in its
action. This obviously would not apply to an action of
deceit, for in such an action the plaintiff relies on the
falsehood of the statement and not on its truth, and he
has to prove that the representation is not true and also
that it is made fraudulently .
Derry v. Peek (e) illustrates the difference between the
two courses open to the suitor. Derry v. Peek was an
action against the directors of a company by a person
who had been induced to take shares in the company
by an untrue, but not a fraudulent, statement in the
prospectus. To prevent the defendants denying the truth
of their representation would not enable the plaintiff in
such an action to succeed ; therefore the plaintiff could
not in this case rely on estoppel. But if the defence had
been that the statement was inaccurate and the defendants
could be estopped from denying the accuracy of their own
statement, then the plaintiff could rely on estoppel. The
plaintiff's case in Derry v. Peek was not that the statement
must be regarded as accurate, for that would give him
no relief; but that the statement was false, and false to
the knowledge of the defendants, and therefore fraudulent ;
and the defence that ultimately prevailed was that, though
it was not accurate, it at least was not fraudulent (Low v.
Bouverie) (f). And see Carr v. London and North Western
Railway (g).
Thus, in M'Kenzie v. British Linen Company (h) it was
held that a person who knows that a bank is relying upon
his forged signature to a bill cannot lie by and not divulge
that fact until he sees that the position of the bank is
(e) (1889) 14 App. Cas. 337. (1875) L. R. 10 C. P. 307.

f) p. 86, supra, per Kay, L.J., (h) (1881) 6 App. Cas. 82.
pp. III, 112.
ESTOPPEL . 89
altered for the worse. But there is no principle on which

his mere silence for a fortnight from the time when he first
knew of the forgery, during which the position of the bank
is in no way altered or prejudiced, can be held to be an
admission or adoption of liability or an estoppel. In
Jorden v. Money (i) it was held that the doctrine of estoppel
by representation is applicable only to representation as
to some state of facts alleged to be at the time actually in
existence, and not promises de futuro which , if binding at
all, are binding as contracts. And see Maddison v.
Alderson (k) and Cairncross v. Lorimer (1) . In Chadwick
v. Manning (m), in a suit by the plaintiff to declare an
agreement of indemnity discharged , and to restrain the
defendant from continuing his action thereon , it was held
that in the absence of a contract to discharge it, the defen-
dant could not be estopped from enforcing it by any
representation, expressed or implied, of his intention to
abandon it. To raise an equity on behalf of the plaintiff
there must be a misrepresentation of existing facts.
Although there need not be an active misrepresentation ,
and silent acquiescence when there is a duty to speak
may be enough (M'Kenzie v. British Linen Company (n) ;
Thompson v. Rourke) (o), yet a person may be forgetful and
silent or silent without being forgetful, for silence is
innocent and safe where there is no duty to speak (per
Lord Macnaghten in Chadwick v. Manning) (p).
In Whitechurch Limited v. Cavanagh (q) , it was held by
the House of Lords that in permitting its secretary to
certify transfers of shares a company does not authorise
the secretary to do more than give a receipt for certificates
of shares which are actually lodged in the office . If the
(2) (1854) 5 H. L. C. 185. (n) ( 1881) 6 App. Cas. 82.

(k) ( 1883) 8 App. Cas. 467. (0) [ 1893 ] P. 70.
(1) (1860) 3 Macq. H. L. C. per (p) Supra, at p. 238.
Campbell, L.C. , at p. 829. (4) [ 1902] A. C. 117.
(m) [ 1896 ] A. C. 231 .
secretary gives a receipt or an acknowledgment for certifi-

cates which have not been lodged, the company is not
estopped from setting up the true facts. In this case
transfers of shares in a company having been lodged with
the company's secretary without the certificate for the
shares, the secretary fraudulently certified upon the trans-
fers that the certificates for the shares were in the
company's office. The proposed transferee having brought
an action against the company for refusing to register him
as the owner, it was held that the company was not
estopped from showing that the proposed transferor had no
shares to transfer, and that the action would not lie. It
should be noted that this was a mere certification of trans-
fer of shares by the secretary, and not the issuing of a
formal certificate.
But in the Balkis Consolidated Company, Limited v.
Tomkinson (r) it was held that the company was estopped
by its certificate from denying that T. was the proprietor of
the shares, and that he was entitled to recover from the
company the damages which he had in fact sustained
owing to their refusal to register the purchaser in the
following circumstances. P. , the owner of shares in the
company, transferred them to persons who were registered
in the company's books as proprietors of the shares. P.
afterwards fraudulently executed a transfer of the shares for
value to T. ., who sent the transfer to the company and
received from them a certificate under their common seal
stating that he was the proprietor of the shares. T. , acting
bonâ fide on the faith of the certificate, sold the shares ;
but the company refused to register the purchaser as the
proprietor on the ground that after granting the certificate
to T. they had discovered that he was not the real owner
of the shares. T., then, to fulfil his contract with the pur-
( ) [ 1893 ] A. C. 396.
ESTOPPEL. 91
chaser, bought other shares in the market and sued the

company for the price.
It was long since held (in In re Bahia and San Francisco
Railway Company (s), that where a certificate is issued
stating that the person named in it is the registered holder
of certain shares, an estoppel may arise preventing the
company from denying it. In that case Lord Blackburn
remarked that when joint stock companies were established
it was a great object that the shares should be readily trans-
ferred, and that by granting the certificate the company
makes a statement that it has transferred the shares speci-
fied to the person named in it, and that he is the holder of
the shares. " It is quite clear," he said, " that a state-
ment of a fact was made by the company, on which the
company, at the very least, knew that persons wanting to
purchase shares might act. And the claimants having
bonâ fide acted upon that statement and suffered damage,
can they recover from the company ? I think they can on
the principle enunciated in Freeman v. Cooke " (t).
This decision was followed in Hart v. Fontino and Bolivia
South American Gold Mining Company (u), and in this
case of The Balkis Consolidated Company v. Tomkinson (x).
Lord Macnaghten , in quoting Lord Cranworth (Jorden v.
Money) (y), stated that it is a principle of universal applica-
tion that if a person makes a false representation to another,
and that other acts upon that false representation, the
person who has made it shall not afterwards be allowed to
set up that what he said was false and to assert the real
truth in place of the falsehood which has so misled the
other. Further, it is not necessary that the party making
the representation should know that it was false, no
fraud having been intended at the time. " But if the
(s) (1868) L. R. 3 Q. B. 584. (x) p. 90, supra.

(t) (1848) 2 Ex. 654. () p. 89, supra.
(u) (1870) L. R. 5 Ex. III .
party has unwittingly misled another you must add that

he has misled another under such circumstances that he
had reasonable ground for supposing that the person whom
he was misleading was to act upon what he was saying."
And see In re Concessions Trust (z) ; Bloomenthal v. Ford (a) ;
Burkinshaw v. Nicholls (b) ; and cf. In re, Veuve Monnier et Ses
Fils Limited (c), in which it was held that where, in the
circumstances of that case , a shareholder knew that certain
shares were the property of the company, that they had
not been transferred to him, and that they had not been
fully paid up by himself, he knows facts enough to lead any
one who considered them to the conclusion that the shares
were not fully paid up, and therefore that such a share-
holder could not rely on the certificates which stated that
he was the holder of the shares in question , and that they
were fully paid up, as an estoppel to prevent the company
denying that the shares were in fact fully paid up .
(*) [ 1896] 2 Ch. 757. (b) (1878) 3 App. Cas. 1004.

(a) [ 1897 ] A. C. 156. (c) [ 1896] 2 Ch. 525.
CHAPTER VIII .
DEFENCE OF MISREPRESENTATION TO ACTION FOR

SPECIFIC PERFORMANCE .
THE term specific performance indicates that state of

things which exists when a contract is performed by the
parties to it in the identical manner in which each has
contracted to perform it, so that the parties obtain in specie
exactly what by the contract they have bargained to obtain.
Clearly this is the natural and contemplated result of every
proper contract, and there are some jurists who lean to the
opinion that the logical remedy for a breach of contract is
not an action for damages for the breach but one for the
enforcement of specific performance. But the English
law, based largely as it is upon the Roman law, only
recognised the old Roman remedy-the action for
damages for breach of contract-until the Courts of
Equity came into being and became, as it were, courts of
conscience- as, indeed, they were at one time not infre-
quently called . One of the earliest acts of these Equity
Courts was to assume, in certain cases, where they deemed
it to be just, jurisdiction to decree the specific perform-
ance of contracts ; and so by degrees what was at first a
novelty and then a rarity has become a remedy of daily
occurrence. Though there still remains the judicial dis-
cretion, the Court does not refuse a specific performance
upon the arbitrary decision of any judge ; but, subject to
certain principles and rules, long since ascertained and
settled , exercises a judicial discretion which is controlled
by these principles and rules, and in compliance with them
grants a specific performance as a matter of course.
94 MISREPRESENTATION AND Limited Companies.
" Supposing," said Grant, M.R. , in Hall v. Warren (a)

"the contract to have been entered into by a competent
party, and to be in the nature and circumstances of it
unobjectionable, it is as much of course in this court to
decree a specific performance, as it is to give damages at
law." Equity, however, while she follows the Law, walks
arm-in-arm with Precedent, and in connection with specific
performance, it was well said by Rigby, L.J. , (In re Scott &
Alvarez' Contract (b) ) that " the question to what extent
a Court of Equity will go is very largely one of authority
as to what has been done before."
There are, however, numerous grounds upon which the
Court will refuse a decree of specific performance- such
as where the common law remedy of an action for damages
is adequate, or where the Court could not superintend or
enforce its decree, or could not enforce the specific perform-
ance of the contract as a whole, or where the contract is a
merely voluntary agreement (not being based upon a
valuable consideration) or where the contract is one strictly
personal -one, for example, for the performance of personal
services or where other grounds exist which make it
unreasonable to decree specific performance,
Further, specific performance will not be granted in the
case of misrepresentation. Where a person has been
induced by a material misrepresentation to enter into a
contract imposing obligations upon himself, the Court will
not allow the other person, who has so induced him to
contract, to obtain a decree of specific performance of such
contract and to impose upon the other the obligations which
were undertaken in consequence of the misrepresentation.
This holds good whether the misrepresentation be fraudu-
lent or whether it be innocent. Fraud , as has been pointed
out, though infinite in variety, always vitiates a contract,
and as long as the injured party to the contract does not
(a) (1804) 9 Ves. , at p. 608. (6) [ 1895] 2 Ch. , at p. 615.
MISREPRESENTATION AND SPECIFIC PERFORMANCE. 95
elect to abide by the contract when he discovers the fraud

in it, he can successfully plead the fraud in his defence to
an action for specific performance. So, too, with an
innocent misrepresentation ; if a party to a contract or his
agent makes innocently or carelessly some material mis-
representation which is in fact relied upon by the other
party and is an inducement to the contract , such misrepre-
sentation will generally constitute a good defence to an
action for specific performance.
Thus, in Viscount Clermont v. Tasburgh (c) , Plumer, M.R. ,
says : " There is no authority anywhere, no case where
the Court has, where misrepresentation was the ground of
a contract, decreed the specific performance of it ; and
nothing would be more dangerous than to entertain such a
jurisdiction. The principle on which performance of a
contract is compelled requires that it must be clear of the
imputation of any deception . The conduct of the person
seeking it must be free from all blame : misrepresentation,
even as to a small part only, prevents him from applying
here for relief. The reason of this is obvious : if it be so
obtained, the contract is void both at law and in equity.
When an agreement has been obtained by fraud, is the
effect to alter it partially, to cut it down, or modify it
only ? No, it vitiates it in toto ; and the party who has
been drawn in is totally absolved from obligation . If so,
what equity has the other party, who, by his misconduct
has lost one contract, to call on the court for his benefit
to make a new one ? If the defendant were willing to
consent to it, and to enter into a new agreement, it would
be a different case ; but if he refuses, if he insists that he
is absolved from it, what equity can there be in favour of
the other ? " But with reference to what Plumer, M.R ,
says as to the contract being void , it should be pointed out
that the effect of fraud on the contract is not to make it
(c) (1819) 1 J. & W. , pp. 119, 120.

void but voidable. " It is now well settled " said Lord
Campbell, C.J., in the Deposit & General Life Assurance
Company Registered v. Ayscough (d) (and see also Oakes v.
Turquand (e) ; and Lord Cairns in Reese River Silver
Mining Company v. Smith) (f) , “ that a contract tainted by
fraud is not void but only voidable at the election of the
party defrauded. " It is valid till disaffirmed, not void till
affirmed.
Ordinarily, of course, the court has jurisdiction to
specifically enforce a contract entered into by a person to
take shares or by a company to allot shares. Thus, in
Odessa Tramways Company v. Mendel (g) —an interesting case
which also involved the consideration of a fraud upon the
company-an action was brought by the company against
the defendant for the specific performance of an agree-
ment to take 2,000 £ 10 shares in the company and pay for
them at such times as should be required. The defendant's
name was on the register of shareholders and a call had
been made on him which he refused to pay. Simul-
taneously with the agreement to take the shares the board
of directors had agreed with the defendant to pay him
£4,000 in consideration of services rendered to the
company, and this amount was to be paid to him twelve
months after the shares had been paid in full. The
directors called upon the defendant to pay up the full
amount of a thousand of his shares and he refused to do
so, alleging that the two agreements formed really one
contract for the issue of shares at a discount ; that he had
rendered no services to the company and the contract was
merely divided into two parts in order to evade a provision
in the articles of association of the company prohibiting
the directors from issuing shares at a price below par
without the consent of a general meeting, and no such
(d) (1856) 6 El. & Bl. 761. (f) (1869) L. R. 4 H. L., at p. 69.
(e) (1867) L. R. 2 H. L. 325, and (g) ( 1878) 8 Ch. D. 235.
p. 25, supra.
consent had been given to the contract with the

defendant.
But the Court of Appeal held in this case, that as the
defendant had acted in collusion with the directors to
defraud the company, he could not be heard to set up this
fraud for the purpose of making invalid the agreement ,
which was ex facie valid , to take and pay for the shares ;
that as the parties had contemplated a piecemeal perform-
ance of the one agreement, the Court could compel the
performance of a part ; that, in the absence of proof of
mala fides the resolution of the directors to call up the
amount of the shares was conclusive evidence that the
money was required for the purposes of the company ;
and, consequently, specific performance of the agreement
to take and pay for the shares was accordingly decreed.
A company may, however, become disentitled to enforce
an agreement by undue delay. Thus, in Nicol's Case (h),
when the company wished to place on the register the
names of persons who had some years before agreed to
take shares, it was held that the lapse of time which had
intervened was sufficient to debar the company from
insisting on the performance of the contract . " It would
be contrary to all moral justice," said Baggallay, L.J.,
66 to allow it to do so. If the view which I have taken is
correct, that there was only an agreement on the part of
the subscribers to become members, the power of the
company to enforce the agreement would be barred by the
Statute of Limitations . If actual membership was con-
stituted there might be a question whether the statute
would apply ; but , I think, that no attempt having been
made for so many years to enforce the rights of the
company by placing the subscribers on the register, it is
now too late to do so " (i).
But where a prospectus contains material misrepresenta-
(h) (1885 ) 29 Ch. D. 421. (i) p. 442, 443.
L.M.
7
98 MISREPRESENTATION AND LIMITED Companies.
tion or the absence of true representation-e.g. , the

suppression of facts the knowledge of which might reason-
ably have deterred a person from contracting to take
shares the contract will not be enforced. Thus in the
New Brunswick & Canada Railway & Land Company v.
Muggeridge (k), where the defendant had pleaded mis-
representation as a defence to the action, it was held that
even where the misrepresentations or the want of accurate
representations are not fraudulent or intentional those who
make them cannot take advantage of want of caution and
prudence on the part of those who are misled by them.
If a prospectus be issued containing material misrepresenta-
tions, even though believed by the parties who issued it to
be true, and a person accepts shares upon the faith of those
representations, the parties who have made the misrepre-
sentation cannot compel the party who has contracted to
take the shares to perform his contract. See Kindersley ,
V.-C. (1).
When the misrepresentation is made not by the
principal but by his agent, and the purchaser relies on the
misstatement, such misrepresentation may be a good
defence to an action for specific performance . Thus, in
Mullens v. Miller (m), where an agent, commissioned by a
vendor to find a purchaser, has authority to describe the
property and to state any circumstance which may affect
the value of it so as to bind the vendor, and where such
agent, so commissioned, makes a false statement as to the
description or value (though not instructed to do so) upon
which the purchaser relies, the vendor cannot recover in
an action for specific performance where such misrepre-
sentation is pleaded in defence. See also Wauton v.
Coppard (n).
It is no answer to a defence of misrepresentation that
(k) (1860) I Dr. & Sm. 363. (m) (1882) 22 Ch. D. 194.
(4) At p. 383. (n) [ 1899] I Ch., pp. 97, 98.
the defendant possessed means of testing the truth of the

representation of which he complains so long as the
defendant did not avail himself of those means. See
Aaron's Reefs v. Twiss (0), where Lord Halsbury, L.C. ,
quotes with approval the judgment of Jessel, M.R. , in
Redgrave v. Hurd : " If a man is induced to enter into a
contract by a false representation it is not a sufficient
answer to him to say, ' If you had used due diligence you
would have found out that the statement was untrue.
You had the means afforded you of discovering its falsity,
and did not choose to avail yourself of them . ' I take it to
be a settled doctrine of equity, not only as regards specific
performance, but also as regards rescission, that this is not
an answer."
But if the defendant, having the means of testing the
truth of the representations, uses the means, his defence will
not be tenable. For in Attwood v. Small (p) it was held bythe
House of Lords that an action to rescind a contract on the
ground of fraudulent misrepresentation could not be main-
tained in circumstances where the directors of a company,
which was in fact a partnership , instead of relying upon
the representations of the vendor, had themselves tested
the accuracy of those representations, and after havingknow-
ledge declared that they were satisfied of their correctness.
If a defendant knows before he enters into the contract
that the material representation inducing him so to enter
is untrue, he cannot be heard to say that he was misled.
In the Nene Valley Drainage Commissioners v. Dunkley (q) ,
which was a suit by the vendors for specific performance,
it was set up by the defendant that the misdescription of
the property was sufficient to entitle him to resist the
decree on the ground of the contract having been induced
by material misrepresentation ; but it was held by the
(0) [ 1896] App. Cas. p. 279. (q) (1868) 4 Ch. D. p. 1.

(p) ( 1858) 6 Cl. & Fin. 232.
7-2
Court of Appeal that there was no misdescription which

could mislead the defendant- no deception , no surprise-
as he well knew what exactly it was that he was buying,
and that in consequence the decree for specific perform-
ance must stand.
But it is a good defence to an action for specific per-
formance if the performance of the contract would involve
a fraud upon the public. Thus, in Post v. March (r), the
plaintiffs, two Americans, claimed the specific performance
of a contract entered into by the defendant, and this was
resisted by the defendant, who denied the contract as now
alleged by the plaintiffs and urged that the plaintiffs were
seeking to enforce a contract which , if enforced, would
amount to a fraud on the public ; and it was held by
Fry, J. , that this would be the case, and that upon this
ground the plaintiffs were disentitled to the decree.
(~) ( 1880) 16 Ch. D. 395.
CHAPTER IX.
CRIMINAL LIABILITY.
The Criminal Prosecution of Directors and other

Officers and Agents of Limited Liability Com-
panies for Offences amounting to or arising out
of Fraudulent Misrepresentation .
THE statutes relating to limited liability companies have

probably done more than any legislation of the last fifty
years to further the commercial prosperity of the country.
According to Buckley, J. , in In re London and Globe Finance
Corporation, Limited (a) : " They have, to the advantage
as well of the investor as of the public, allowed and en-
couraged the aggregation of small, or comparatively small,
sums into large capitals which have been employed in
undertakings of great public utility, largely increasing the
wealth of the country. But at the same time in this
branch of the law the apathy of the public in setting the
law in motion has, I will not say encouraged, but has
at least failed to repress, grievous frauds which have been
committed and too often have gone unpunished. Rela-
tively, I think, compared with the advantages which have
accrued from the law of limited liability, the mischief of
such frauds has been small , but when regarded, not
relatively, but absolutely, the frauds which have been
committed under cover of these Acts have no doubt been
great."
But the criminal law contemplates the due punishment
(a) [ 1903] I Ch. 728, Buckley, J. , at pp. 731 , 732.

of fraud in connection with the promotion and manage-

ment of limited liability companies, and the setting in
motion of the procedure it has provided for prosecution in
such cases .
Sect. 81 of the Larceny Act of 1861 (24 & 25 Vict. c. 96)
provides for the punishment of any director , member or
public officer of any body corporate or public company who
shall fraudulently take or apply for his own use or benefit or
for any use or purposes other than the use or purposes of
such body corporate or public company any of the property
ofsuch body corporate or public company. The offence is a
misdemeanour, and conviction renders the offender liable
to penal servitude for not less than three or more than
seven years, or imprisonment with or without hard labour
for not more than two years -a punishment in substitu-
tion of sects. 75 and 76 of the Larceny Act of 1861
repealed and provided by 1 Edw. 7, c. 10 (Larceny Act of
1901) s. 1 , which by s. 2 (2) of this Act is to have effect as
part of the Larceny Act of 1861. For the proof offraud
see Nelson v. Rex (b), where a conviction of fraudulently
appropriating the moneys of a bank was set aside on the
ground that there was no evidence that the convicted
bank director had misappropriated any one draft to his
own use in fraud of the bank's right to have the
money.
Again, sect. 82 of the Larceny Act of 1861 (24 & 25
Vict. c. 96) , dealing with the keeping offraudulent accounts ,
provides for the punishment of any director, public officer or
manager of any body corporate or public company who as
such receives or possesses himself of any of the property of
such body corporate or public company otherwise than in
payment of a just debt or demand, and, with intent to
defraud, omits to make or to cause or direct to be made a
full and true entry thereof in the books and accounts of
(b) [ 1902] App . Cas. 250.
CRIMINAL LIABILITY. 103
such body corporate or public company. The offence is a

misdemeanour, and conviction renders the offender liable to
penal servitude for not less than three or more than seven
years, or to imprisonment with or without hard labour for
not more than two years.
Sect. 83 of the Larceny Act of 1861 deals with the
wilful destruction or mutilation of books, &c. , with intent
to defraud, and runs as follows :- " Whosoever, being a
director, manager, public officer or member of any body
corporate or public company, shall, with intent to defraud ,
destroy, alter, mutilate or falsify any book, paper, writing
or valuable security belonging to the body corporate or
public company, or make or concur in the making of any
false entry, or omit or concur in omitting any material
particulars, in any book of account or other document,
shall be guilty of a misdemeanour, and being convicted
thereof shall be liable, at the discretion of the court, to
any of the punishments which the Court may award ” (i.e.,
penal servitude for not less than three or more than seven
years, or imprisonment with or without hard labour for
not more than two years).
Sect. 84 of the Larceny Act of 1861 deals with the
publication of fraudulent statements and runs thus :-
66
Whosoever, being a director, manager or public officer
of any body corporate or public company, shall make,
circulate or publish, or concur in making, circulating or
publishing any written statement or account which he
shall know to be false in any material particular, with
intent to deceive or defraud any member, shareholder, or
creditor of such body corporate or public company, or
with intent to induce any person to become a shareholder
or partner therein or to intrust or advance any property to
such body corporate or public company, or to enter into any
security for the benefit thereof, shall be guilty of a misde-
meanour, and being convicted thereof shall be liable, at the
discretion of the court, to any of the punishments which the

Court may award " (i.e. , penal servitude for not less than
three or more than seven years, or imprisonment with or
without hard labour for not more than two years). The
foregoing section and sect. 83 were the sections under
which the prosecution of Whittaker Wright was instituted
and conducted for offences in connection with the London
and Globe Finance Corporation, Limited.
The Companies (Consolidation) Act, 1908 ( 8 Edw. 7,
c. 69), also provides by means of sects. 216, 217, 281 for
the criminal prosecution of fraudulent misrepresentation .
Sect. 216 of the Companies (Consolidation) Act, 1908
(re-enacting sect. 166 of the Companies Act of 1862
(25 & 26 Vict. c . 89) ) deals with the falsification of books :---
" If any director, officer or contributory of any company
being wound up destroys, mutilates, alters or falsifies any
books, papers , writings, or securities , or makes or is privy
to the making of any false or fraudulent entry in any
register, book of account, or document belonging to the
company with intent to defraud or deceive any person, he
shall be guilty of a misdemeanour and be liable to
imprisonment for any term not exceeding two years, with
or without hard labour."
This section appears to apply only to the falsification of
books, &c. , upon or in connection with the winding up of
a company, and although this section (or rather its
predecessor, sect . 166 of the Act of 1862) was one of the
sections for offences under which an order was made by
Buckley, J., for the prosecution of Whittaker Wright in
the case of the London and Globe Finance Corporation ,
Limited (c), yet in the indictment subsequently preferred
against him no count appeared alleging an offence under
this particular section , on the ground that the falsifications
(c) [ 1903] I Ch . 728.

charged against the accused had been committed upon

dates prior to the winding up of the corporation.
Sect. 217 of the Companies Consolidation Act, 1908,
deals with the direction of a prosecution by the Court in
case of a winding-up by the Court, and also with the
expenses of the prosecution, and provides that :-
(1 ) If it appears in the course of a winding-up by or
subject to the supervision of the Court that any past or
present director, manager, officer or member of the
company has been guilty of any offence in relation to the
company, for which he is criminally responsible, the Court
may, on the application of any person interested in the
winding-up or of its own motion , direct its liquidator to
prosecute the offence, and may order the costs and expenses
to be paid out of the assets of the company.
(2) If it appears to the liquidator in the course of a
voluntary winding-up that any past or present director,
manager, officer or member of the company has been
guilty of any offence in relation to the company for which
he is criminally responsible, the liquidator, with the
previous sanction of the Court, may prosecute the offender,
and all expenses properly incurred by him in the prosecu-
tion shall be payable out of the assets of the company, in
priority to all other liabilities.
The principles upon which these sections (re-enacting
sects. 167, 168, 25 & 26 Vict . c. 82 ) are administered were
laid down in the case of the London and Globe Finance
Corporation, Limited. (d) No one legitimately can or ought
to institute a criminal prosecution with a view to his
personal profit. Neither should a prosecution be instituted
from motives of vengeance against the offender. The
motive of every prosecution ought to be to inflict punish-
ment upon the criminal for the proper enforcement of the
(d) [1903] I Ch. 728.

law and for the advantage of the State, and with a view
to deter others from doing the like.
As to the employment of the company's assets in the
costs of a prosecution , it is true that the general scheme
of the Acts with reference to the liquidation of a company
provides that the assets are to be realised to the best
advantage for the benefit of those who are entitled to
share in their distribution . But the assets may be applied
for purposes other than these. There are sections
(Companies Winding-up Act, 1890 , ss. 7 and 8, now sects.
147, 148 ofthe Companies (Consolidation) Act , 1908) which
require the preparation of a statement of the company's
affairs at the expense of the assets leading to a preliminary
report which is to show whether further inquiry be
desirable . And sect. 217 of the Companies (Consolidation)
Act, 1908, is clear on the point, and it was upon this
section (which is the old sect. 167 of the Companies Act,
1862, re-enacted) that Buckley, J., proceeded in In re
London and Globe Finance Corporation, Limited, when
he had to consider the question of the payment of the
costs of prosecution .
What are the considerations which ought to govern the
matter ? " The principle lies, " said Buckley, J. (e), “ in the
answer to the following question : If the persons at whose
expense the prosecution would be instituted were not a
class, but were a single person, and that person were an
honest and upright man, desirous as a good citizen of
doing his duty by the State, are the circumstances such as
that in discharge of that duty , he would feel that he ought
at his own expense and to his own loss to institute a pro-
secution ? Not in every case in which a criminal offence
has been committed would such an one think it his duty
to prosecute. The question to be answered is, Would
he in this case think his duty to the State required him to
(e) [ 1903] I Ch. , at p. 734.
prosecute ? If that question be answered in the affirmative,

then, upon principle, I think that the Court ought to
direct a prosecution. Further, I think that the Court can,
and in a proper case ought , to direct a prosecution without
the assent, and even notwithstanding the dissent, of the
class or many of the class at whose expense the prosecution
would be instituted. It is noticeable that the section pro-
vides that the Court may act of its own motion .' "
Subsequent to the date upon which the offences dealt
with in the foregoing case were committed the Companies
Act of 1900 was passed , and sect. 28 of that Act , now re-
enacted as sect. 281 of the Companies (Consolidation) Act,
and dealing with the penalty for false statements, ran
thus : " If any person in any return , report, certificate,
balance sheet, or other document, required by or for the
purposes of this Act specified in the fifth schedule hereto,
wilfully makes a statement false in any material particular,
knowing it to be false , he shall be guilty of a misde-
meanour, and shall be liable on conviction on indictment
to imprisonment for a term not exceeding two years, with
or without hard labour, and on summary conviction to
imprisonment for a term not exceeding four months, with
or without hard labour, and in either case to a fine in
lieu of or in addition to such imprisonment as aforesaid,
provided that the fine imposed on summary conviction
shall not exceed £100."
The fifth schedule referred to in the foregoing section
embraces the conclusiveness of certificates of incorporation
(see sect. 17 of the Companies Act) ; restrictions on
appointment or advertisement of directors (see s. 72) ;
restrictions on commencement of business (see s . 87) ;
returns as to allotments (s . 88) ; statutory meetings (s . 65) ;
the particulars as to directors and mortgage debt and the
statement in the form of a balance sheet or the annual
summary (s. 26) ; the appointment and remuneration and
powers and duties of directors (ss. 112 , 113) ; obligations

of companies where no prospectus is issued (s. 82) ;
registration of mortgages and charges in England and
Ireland (s. 93) ; filing of accounts of receiver and manager
(s. 91) ; notice by liquidator of his appointment in voluntary
winding-up (s. 187) ; rights of creditors in a voluntary
winding-up (s. 188 ) ; requirements as to companies
established outside the United Kingdom (s. 274), and
annual report by Board of Trade (s. 283).
Further provision for criminal punishment in respect of
company offences is made by the Assurance Companies Act
of 1909 (9 Edw. 7, c. 49) . Sect . 24 of this Act is in these
terms :-" If any account, balance sheet, abstract, state-
ment, or other document required by this Act, is false in any
particular to the knowledge of any person who signs it, that
person shall be guilty of a misdemeanour, and shall be liable
on conviction on indictment to fine and imprisonment, or
on summary conviction to a fine not exceeding £50."
In order to sustain an indictment under sect. 84 of the
Larceny Act of 1861 against a director or manager or
other officer of a company for publishing fraudulent state-
ments, it will be necessary to prove that the defendant is
a director (manager, or as the case may be). If against a
manager it will be enough to show that the defendant in
fact managed the business of the company, and it will not
be necessary to prove his due appointment as manager
(R. v. Lawson) (f) ; and see Gibson v. Barton) (g). It must
then be proved that the defendant circulated and published
or concurred in circulating and publishing a statement in
writing or in print relating to the affairs of the company,
false in that material particular or those material par-
ticulars which would be stated in the indictment. It will
be for the judge to determine whether such particulars are
[ 1905] I K. B. 541 ; 74 L. J. (g) (1875) L. R. 10 Q. B. 329.

(K. B.) 296 ; 20 Cox, 812.
material. It must further be proved that not only were

these particulars false, but that they were false to the
knowledge of the defendant, and this knowledge may be
shown either expressly, by his acts or declarations ; or
impliedly, from the position he occupied in the company,
the share he took in its management, and the opportunities
he had for knowing its condition . Further, it must be
proved that the defendant did these acts with the fraudu-
lent intent set out in the indictment (e.g. , " with intent
thereby then to deceive and defraud A. B. then being a
shareholder in the said public company," or, " with intent
thereby then to induce C. D. to become a shareholder
therein "), and this fraudulent intent would be in general
inferred from its tendency to produce the effect alleged to
have been intended, and from the defendant's knowledge
of the falsehood of the statement. It is not necessary to
prove that any person was actually prejudiced by the
fraudulent statement. In connection with this section
the definition given by Buckley, J. , in the case of the
London and Globe Finance Corporation (h), may be cited :
" To deceive is to induce a man to believe that a thing is
true which is false, and which the person practising the
deceit knows or believes to be false. To defraud is to
deprive by deceit ; it is by deceit to induce a man to act
to his injury. More tersely it may be put, that to deceive
is by falsehood to induce a state of mind ; to defraud is by
deceit to induce a course of action." Further, if a director
or manager of a public company publishes a false state-
ment of account, knowing that it is false , with the intent
that it shall be acted upon by those whom it reaches, he is
guilty in law of publishing such statement with intent to
defraud (Reg. v. Birt) (i).
It was under this section of the Larceny Act (24 & 25
Vict. c. 96, s. 84) that the prosecution in Reg. v. Gurney and
(h) [ 1905] I Ch. , at p. 732. (i) (1899) 63 J. P. 328.
ΙΙΟ MISREPRESENTATION AND LIMITED COMPANIES.
Others was instituted, and in that case Cockburn, C.J., (k)

in the course of his summing up, said : " The guilty mind
-what we lawyers call mens rea-is essential to con-
stitute a crime in the eye of the law. Misrepresentations
or concealment may, as I have told you, afford matter
of civil action and remedy. But you must have more
than that-you must have the guilty mind to constitute
the offence with which the defendants are charged. No
doubt every man must be taken, primâ facie at least , to
have intended what are the natural and necessary con-
sequences of his acts ; but if you find that there was
misrepresentation, and that it has ended in defrauding the
parties to whom it was addressed, the fair and legitimate
inference is that the intention was that the act done should
carry with it the consequences that have followed from it."
An indictment for obtaining money by false pretences
will lie under sect . 88 of the Larceny Act of 1861 , and
under this section it is sufficient in any such indictment
to allege that the party accused did the act with intent to
defraud, without alleging an intent to defraud any
particular person , and without alleging any ownership
of the chattel , money or valuable security ; and on the
trial of any such indictment it is not necessary to prove
an intent to defraud any particular person , but it is
sufficient to prove that the accused did the act charged
with an intent to defraud. And Brétt, L.J., in Reg. v.
Aspinall (1) pointed out that to support a charge of
obtaining money, &c. by false pretences, it is necessary
to show, and therefore allege, that the prisoner with a
wicked and criminal mind stated something which, if
true, would be an existing fact ; that he did so with
intent to procure the possession of money , &c.; that he
knew his statement was- that is to say, that so far as
(k) ( 1869) 11 Cox, p. 462 ; Finlay- (1) (1877) 2 Q. B. D. 38.

son's Report, p. 254.
CRIMINAL LIABILITY. III
his mind was concerned, he intended that his statement

should be-false ; that by the statement he did so act on
the mind of the prosecutor as that he did thereby
obtain money, &c.; that the statement was in fact
untrue in the sense of being incorrect. And this view of
the law was approved in Reg. v. Silverlock (m) , in which
Russell, C.J., held that there must be a false pretence
made to a definite person , that it must be proved that
such person on the faith of the false pretence parted with
his money or goods. These essentials must be stated in
the count charging the offence . And though the false
pretence be addressed to all persons to whose knowledge
it may come (as by means of a prospectus or an adver-
tisement), and who may desire to act on it, if a particular
person after seeing or hearing of it acts upon it and
goes to the person from whom it proceeds, and upon the
faith of it parts with his money or goods, it becomes a
fraud upon that particular person, who is one of the class
of persons for whom it was intended.
And while any one of the parties to the offence may
be separately prosecuted for the statutory offence , an
indictment will lie against any two or more for a con-
spiracy to commit such statutory offence as in each case
is alleged, when it can be proved that there was an
agreement between two or more persons to commit such
offence .Such conspiracy is itself indictable, though the
offence may be one that is punishable either on indict-
ment or on summary conviction. In the case of Reg. v.
Gurney and Others (n) Cockburn, C.J., pointed out that a
conspiracy to defraud is not the less an offence because it
is directed against society at large. If a number of
persons combine and confederate to cheat a particular
individual there can be no doubt that that is a criminal
(m) [ 1894] 2 Q. B. 766. (n) ( 1869) II Cox, p. 462 ; Fin-

layson's Report, p. 254.
conspiracy at law. It is not the less so because the

persons to be caught and deceived are not individually
in the eye and contemplation of the conspirators. That
was settled in Reg. v. De Berenger and Others (0).
Where a manager and a secretary were charged with
offences under sect. 84 of the Larceny Act, and also with
conspiracy to commit them, the prosecution was put to
its election as to which set of counts it would proceed on
(Reg. v. Burch) (p). As to the elements of conspiracy,
Montague Smith, J. , in the last cited case, at p. 421 , said :
" The essence of that offence (conspiracy) is jointly
concerting to make it ; or that there should be a criminal
concert between the two men. If there was not that
criminal concert the jury could not convict . . . the jury
must be satisfied , before they could convict , that there
was a conspiracy on the part of both to make a false
balance sheet, and that they had an intention to defraud.
The questions for consideration are three in number—
first, whether there was a conspiracy or concert between
them to make a balance sheet ; secondly, whether
that balance sheet was false and untrue ; and thirdly,
whether they conspired to defraud and deceive the
shareholders. If they found all these questions in the
affirmative, they would convict : if they found either in
the negative , it would be their duty to acquit them ..
Both the auditors had certified to the correctness of the
balance sheet. Still, their certificate was no answer for
the defendants, if the latter were guilty of the fraud."
In Reg. v. Brown (q) the directors of a joint stock bank,
knowing it to be in a state of insolvency, issued a
balance sheet showing a profit, and thereupon declared a
dividend of 6 per cent. They also issued advertisements
inviting the public to take shares upon the faith of
(o) (1814) 3 M. & Sel. 67. (9) (1858) 7 Cox, 442.

(P) (1865) 4 F. & F. 407.
their representations that the bank was in a flourishing

condition. "With regard to conspiracy, " said Lord
Campbell, C.J. in that case (r), " it is not essential that
evidence should be given of a formal consultation , in
which the parties are supposed to have definitely resolved
to do an illegal act, or to do a legal act by illegal
means , but if, as reasonable men, you see there was a
common design, and they were acting in concert to do
what is wrong, that is evidence from which a jury may
suppose that a conspiracy was actually formed. "
It may be added that where the Companies (Consolida-
tion) Act, 1908 (e.g., s. 81 ) prescribes no penalty in express
terms for a breach of duty, such breach of duty imposed
by a statute may amount to a misdemeanour, in pursuance
of the old principle that where an Act of Parliament
creates an offence and prescribes no penalty for it, the
offence is indictable at common law (Reg. v. Price) (s).
In such a case the person committing the breach of duty
would be liable to indictment for misdemeanour (Reg. v.
Hall (t) ; Reg. v. Tylor and International Commercial
Company (u) ).
p. (t) [1891 ] 1 Q. B. 747.
(
6) AtP.445; A. &E. 727. (u) [ 1891 ] 2 Q. B. 594.
L.M. 8
INDEX
ACQUIESCENCE, 26, 27, 74-85

conduct may be, 80, 81 , 82
evidence of, 74
lapse of time is, 75
length of time to amount to, 16, 76
neglect is, 75
silence may be, 89
when time begins to run in computing, 22, 84, 85
ACTION FOR CALLS, misrepresentation a defence to , 45
ACTION FOR RESCISSION, 5, 8 , 9—14, 25, 27, 29, 67–73
concealment of interest by promoter grounds, 70
for part of contract where severable, 68
interest of third parties preventing , 70
material inducement required in, 72
misrepresentation not necessarily sole inducement grounds, 72, 73
of material fact grounds, 8, 70, 71, 72
no damages in, 68, 69
not necessary to prove defendant's knowledge of misrepresentation , in ,
43
restitutio in integrum in, 5 , 50, 67, 68
what plaintiff entitled to in, 71
when contract induced by fraud, 67, 70
where delay bars right to, 77
claim refused in, 46
will lie, where, 5
not lie, where, 5
ACTION OF DECEIT, 5, 7, 8, 9-14, 62—66
damages in, 65
for fraudulent misrepresentation, 62
inducement required to ground, 64
measure of damages in, 65 , 66
misrepresentation need not be direct to ground, 64
open to buyer in market, 64
principal liable for agent in, 62, 63, 98
proof required for, 7, 8, 11, 13
will lie, where, 5
not lie, where, 5
AGENT, liability of principal for, 62, 63
limit of company's liability for, 55
AMBIGUOUS statement may be misrepresentation, 23
116 INDEX .
ASSETS, expenditure on costs of prosecution of company's, 106

BONA FIDE representation not fraudulent, 10-13
Carelessness , not fraud, 4, 39
COMPANIES (CONSOLIDATION) Act,
sect. 81...6, 9, 31-35
sect. 84...33, 37
sect. 216... 104
sect . 217... 105
sect. 281...107
COMPANY, winding-up, effect of, 25 , 27, 70, 79, 80, 105, 106
as promoters, directors of, 48
not treated as cestui que trust, 49. And see DIRectors ; PromoTERS ;
SECRETARY .
COMPENSATION , obligation of directors to pay, 33 (n.), 37, 61
CONCEALMENT OF FACTS, 18, 24, 29, 45 , 49, 51, 55
CONSPIRACY, elements of, 112
to commit company offences, III , 112
where none prescribed , penalty for, 113
CONTRACT, neglect to inspect, 28
induced by misrepresentation voidable, 26
omission of material facts in, 45
reference to contract, not notice of, 46
where misrepresentation cannot be enforced , 45
CONTRIBUTION FROM CO-PROMOTERS OR Co-directors, 54
CRIMINAL LIABILITY, court may direct liquidator to prosecute, where, 105
elements of conspiracy, 112
employment of company's assets for costs of prosecution, 106
evidence required in support of indictment for obtaining money by
false pretences, 110
evidence required in support of indictment for publishing fraudulent
statements, 108 , 109 , 11O
for conspiracy to commit offences connected with companies, 111 , 112
false statements in any material particular in return , report,
certificate, balance sheet or document, 107, 108
falsification of books, when company is being wound up, 104
fraudulent destruction or mutilation of books, 103
fraudulently taking or applying property of company, 102
keeping fraudulent accounts by directors, managers, and other
officers of a company, 102
publication of fraudulent statements, 103
liquidator may prosecute any past or present officer or member, where,
105
obtaining money by false pretences , 110
principles on which prosecution should be instituted, 105, 106
where none prescribed, penalty for, 113
DAMAGES, action for. See ACTION OF DEceit.
in action of deceit, 65
for rescission, no, 68, 69
measure of, 66
INDEX . 117
DECEIT, action of, 5, 7, 8, 9-14, 62-66

damages in, 65
for fraudulent misrepresentation, 62
for indirect representation , 64
inducement to be shown in, 64
liability of principal for agent, 62, 63, 98
measure of damages in, 66
open to buyer in market, 64
proof required for, 7, 8, 11 , 13
will lie, where, 5
not lie, where , 5, 9
DELAY, 16, 74-85
a bar to relief if with knowledge, 74
an answer to action for rescission, 76
by a company as opposed to an individual, 83
caused by awaiting result of trial prejudicial , where, 82
of similar case not prejudicial to
plaintiff, 81 , 82
evidence of intention to affirm contract, 78
in comparing prospectus with memorandum and articles of association,
80, 81
no answer to action of deceit, 76
no bar to relief if without knowledge, 74
to bar action of deceit, amount of, 16, 79
when time begins to run, in computing, 22, 84, 85
DIRECTORS, personal liability of, 33, 37
Companies (Consolidation) Act, and criminal liability of, 31-35, 37,
102-105
conspiracy of, III , 112
for carelessness , liability of, 39
for innocent non-disclosure, liability of, 59, 60
having conflicting interests, improper for, 20
must be independent, where, 18
need not be independent, where, 49
not liable for errors in judgment, 48
of company, as promoters, 48
to make contribution , liability of, 54
to pay compensation, liability of, 33 (n.), 37, 61
reasonable grounds for belief of, 37
withdrawal of consent to act, by, 37
DISCLOSURE OF MATERIAL Contracts, 36, 45 , 59
ESTOPPEL, definition of, 86
arises, where, 87
by keeping silence, 89
by representation, 89
effective, where, 87
forgetfulness not necessarily silence, 89
issue of a certificate may be, 91
jurisdiction in equity over, 87
knowledge of misrepresentation an, 92
not a cause of action, 87
secretary's fraud on company not necessarily, 90
where silence not, 89
118 INDEX.
EVIDENCE in support of indictment for publishing fraudulent statements,

108, 109, 11O
in support of indictment for obtaining money by false pretences, 110
EXPENSES, preliminary , include legal expenses, 28
FALSE pretences, obtaining money by, 110
statements in documents, 107, 108. And see MISREPRESENTAtion.
FALSIFICATION OF BOOKS, 104
FIDUCIARY relationship of promoters, 18, 21 , 48, 51
FRAUD. See MISREPRESENTATION .
FRAUDULENT accounts, keeping of, 102
destruction of books, 103
statements, publication of, 103
taking of property, 102
INDUCEMENT , need not be sole, 72, 73
must be material , 72
what is, 72, 73
INSPECTING CONTRACTS mentioned in prospectus, 28
KNOWLEDGE , an answer to defence of misrepresentation in action for specific

performance, 99
means of, open to plaintiff, no defence, 15 , 28, 53, 98, 99
of misrepresentation, 3, 17, 25
LACHES, 22, 26, 27, 29, 74-85
an equitable doctrine, 75
delay constitutes, 75, 76
length of time to constitute, 16, 76
may be against company as well as individual, 83, 84
neglect constitutes, 75
when time begins to run, in computing, 22, 84, 85
LEGAL EXPENSES, preliminary expenses include, 28
MISLEADING STATEMENT, misrepresentation , 43
MISREPRESENTATION, six elements of, I
a conspiracy of, 111 , 112
a defence to action for specific performance, 14, 15, 16, 17, 93—100
a material inducement , 72
ambiguous statement may be, 23
careless, 4, 8, II
change in the law of fraudulent, 6, 7
concealment may be, 18, 24, 29, 45, 57
contract induced by, not void but voidable, 26
definitions of, 2, 3, 4, 5
fraudulent, 2, 3, II
innocent, 2, 4, 5, 8, 59
innocent non-disclosure may be, 59, 60
in prospectus issued before incorporation, 40
knowledge of, 3, 17, 25
INDEX . 119
MISREPRESENTATION- continued.
law of fraudulent, 6, 7, 8, 9
may be evidence of fraud, 10
means of knowledge no answer to defence of, 98
misleading statement is, 43
no reasonable grounds for, 37, 38
not sole inducement, 77
of existing facts, 89
proof of fraudulent, II
reasonable grounds for, II
reckless, 3, 4, 8, II
relieves party from investigation, 84, 85
remedy for, 5
NEGLECT may be acquiescence, 75
PRELIMINARY expenses include legal expenses, 28
PROMOTERS. And see CRIMINAL LIABILITY.
bear a fiduciary relationship, 18, 21 , 48, 51
contribution from co-promoters, 54
directors of company as, 48
issue of prospectus before incorporation by, 40
liable for profit not disclosed in prospectus, 51
misrepresentation of, 21, 70
need not nominate independent directors, where, 49
nominating independent directors , 21
PROSPECTUS, concealment in, 18, 55
issued by promoters before incorporation, 40
misrepresentation in, 9, 14, 23, 24, 28, 29, 43
omission of material facts in contracts in, 45
untrue statement in, 43, 59
RECKLESS MISREPRESENTATION , 3 , 4, 8, II
RECTIFICATION OF REGISTER, 27, 70, 71, 78
REGISTER, rectification of, 27, 70, 71, 78
RESCISSION, action for, 5, 8 , 9-14 and 67-73
as to part where parts are severable, 68
entitled to restitutio in integrum, 68
for misrepresentation of material fact, 8, 71 , 72
material inducement grounds, 72
misrepresentation grounds, 71
not necessarily sole inducement, 72, 73
not entitled to damages in, 68, 69
necessary to prove defendant's knowledge of misrepresentation in,
43
restitutio in integrum, 5, 67, 68
what plaintiff entitled to in, 71
where claim refused in, 46
contract induced by fraud, 67
delay bars right to repudiate, 77
interests of third parties prevent, 70
parties can be restored to position, 67
promoter conceals interest, 70
120 INDEX .
RESCISSION-continued.
will lie, where, 5
not lie, where, 5
RESTITUTIO IN INTEGRUM, 5, 50, 67, 68
SECRETARY, where company not liable for fraud of, 54, 89
where company liable for fraud of, 90
SILENCE may constitute estoppel, 89
not acquiescence, where, 89
SPECIFIC PERFORMANCE , definition of, 93
deception defence to action for, 100
defendant cannot set up his own fraud in action for, 97
ground for refusing, 94, 95
knowledge an answer to defence of misrepresentation in action for, 99
means of knowledge no answer to defence of misrepresentation in
action for, 98, 99
misrepresentation by agent, answer to, 98
disentitles to, 94, 95, 98
of severable part of contract, 97
contract to take shares, 96
surprise defence to action for, 100
undue delay disentitles to, 97
where granted, 94
TIME begins to run, when, 84, 85
to constitute laches, length of, 16, 76
UNTRUE statement in prospectus, 43, 59
VENDOR, disclosure of price paid by, 36
VOIDABLE, misrepresentation makes contract, 26
WAIVER, 55
clause, 57, 58
still applicable, where, 58
WINDING-UP of company, effect of, 25, 27, 70, 79, 80, 105, 106
BRADBURY, AGNEW, & CO. LD., PRINTERS, LONDON and TONBRIDGE.

UNIVERSITY OF MINNESOTA
3 1951 D00 599 096 Q

The Law of Misrepresentation in Relation

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The Law of Misrepresentation in Relation

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This is a reproduction of a library book that was digitized

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LIMITED LIABILITY COMPANIES

LIMITED LIABILITY COMPANIES.

LIMITED LIABILITY COMPANIES

It is hoped that this short introduction to a large

doctrine of misrepresentation on such Limited Com-

managers and other officers and agents of such Companies

II. THE GENERAL LAW 6

III. THE STATUTE LAW 31

IV. THE ACTION OF DECEIT 62

VI. DELAY ; LACHES ; ACQUIESCENCE ; LAPSE OF

VIII. THE DEFENCE OF MISREPRESENTATION ΤΟ

IX. CRIMINAL LIABILITY : THE CRIMINAL PROSECU-

BAHIA AND SAN FRANCISCO RY. Co. , In re ( 1868), L. R. 3 Q. B.

CACKETT v. Keswick, [ 1902 ] 2 Ch. 456 ; 71 L. J. Ch. 641 ; 87

DEPOSIT AND GENERAL LIFE ASSURANCE Co. v. Ayscough

EASTGATE, In re, [ 1905 ] 1 K. B. 465 ; 74 L. J. K. B. 324 ; 92 L. T.

FARQUHARSON BROS. v. King, [ 1902 ] A. C. 325 ; 71 L. J. K. B.

GIBSON V. Barton ( 1875) , L. R. 10 Q. B. 329 108

HALL v. Warren ( 1804), 9 Ves. 605 • • 94

JORDEN v. Money ( 1854), 5 H. L. C. 185 ; 23 L. J. Ch. 865 ; 1OI

KARBERG'S CASE, [ 1892 ] 3 Ch. 1 ; 61 L. J. Ch. 741 ; 66 L. T. 700 36,

LAGUNAS NITRATE Co. v. Lagunas Syndicate, [ 1899] 2 Ch. 392 ;

MACLEAY v. Tait, [ 1906] A. C. 24 ; 94 L. T. 68 ; 54 W. R. 365 55, 59

NELSON v. Rex, [ 1902 ] App. Cas. 250 . · 102

Norway v. Rowe ( 1812) , 19 Ves . 144 ; 12 R. R. 157 83

OAKES v. Turquand ( 1867), L. R. 2 H. L. 325 ; 36 L. J. Ch.

PAWLE'S CASE ( 1869), 4 Ch. 497 ; 38 L. J. Ch. 412 ; 17 W. R.

RAWLINS v. Wickham ( 1858) , 3 D. & J. 304 ; 28 L. J. Ch. 188 ;

SALOMON V. Salomon, [ 1897] A. C. 22 ; 65 L. J. Ch. 35 ; 75

VANE V. Vane (1873), 8 Ch. 383 ; 42 L. J. Ch. 299 ; 28 L. T. 320 ;

LIMITED LIABILITY COMPANIES

MISREPRESENTATION, FRaudulent AND INNOCENT.

A MISREPRESENTATION, whether fraudulent or innocent,

Misrepresentation may be fraudulent or innocent ; where

(a) Fin. 439. \ (6) (1857) 23 Beav. 535.

on the part of one whereby another is sought to be

present. If a man makes a wilful statement, intending it

either has to be considered. For while the remedy for

THE GENERAL LAW.

COMPANIES (CONSOLIDATION) ACT, 1908, s. 81 , sub- S. 9 : -

THE law of fraudulent misrepresentation has suffered

(a) (1889) 14 App. Cas. 337.

It is this view of the law that the House of Lords in

(1 ) knowingly ; or (2 ) without belief in its truth ; or

An action of deceit will not lie for innocent misrepre-

DERRY V. PEEK (ƒ) .

In this case a special Act, incorporating a tramway com-

(ƒ) ( 1889) , 14 App. Cas. 337.

animal power, and, with the consent of the Board of

but as the company had been wound up that form of relief

imputation of carelessness, was a fair, honest, and bonâfide

(k) At p. 344. (m) At p. 359.

Rescission will lie, but an action of deceit cannot be

GLASIER v. ROLLS (n).

The prospectus had stated that the business had paid 17

Misrepresentation is a good defence to an action for

REDGRAVE v. HURD (0).

This is not a case where a company was involved, but as

(n) (1889) 42 Ch. D. 436, (0) ( 1881) 20 Ch. D. 1.

be included amongst those so discussed and dealt with

that the defendant made a cursory and incomplete inquiry