Die Veneris, 20° Februarii,
1942
Parliamentary
Archives,
HL/PO/JU/4/3/973
REGAL (HASTINGS) LIMITED
Viscount
Sankey
Lord
Russell of
Killowen
Lord
Macmillan
Lord
Wright
Lord
Porter
V.
GULLIVER AND OTHERS.
Viscount
Sankey
MY LORDS,
This is an Appeal by Regal
(Hastings) Limited from an Order of
His Majesty's Court of Appeal
dated the 15th February, 1941. That
Court dismissed the Appeal of
the Appellants from a judgment of
the Hon. Mr. Justice
Wrottesley, dated the 3Oth August, 1940. The
Appeal was brought
by special leave granted by this House on the
2nd April, 1941.
The Appellants we're the
plaintiffs in the action and are referred
to as "Regal";
the Respondents were the Defendants.
The action was brought by Regal
against the first five Respon-
dents, who were former Directors
of Regal, to recover from them,
sums of money amounting to £7,010
8s. 4d., being profits made by
them upon the acquisition and sale
by them of shares in the sub:
sidiary company formed
by Regal and known as Hastings Amal-
gamated Cinemas Limited.
This Company is referred to as
" Amalgamated ".
The action was brought against the Defendant,
Garton, who was
Regal's former solicitor, to recover the sum of
£1,402 1s.
8d., being profits made by him in similar dealing in the
said
shares. There were alternative claims for damages for mis-
feasance
and for negligence.
The action was based on the
allegation that the directors and
the solicitor had used their
position as such to acquire the shares
in Amalgamated for
themselves, with a view to enabling them at
once to sell them at
a very substantial profit, that they had obtained
that profit by
using their offices as directors and solicitor and were,
therefore,
accountable for it to Regal, and also that in so acting
they had
placed themselves in a position in which their private
interests
were likely to be in conflict with their duty to Regal. The
facts
were of a complicated and unusual character. I have had
the
advantage of reading, and I agree with, the statement as to
them
prepared by my noble and learned friend, Lord Russell
of
Killowen. It will be sufficient for my purpose to set them out
very
briefly.
In the summer of 1935 the
directors of Regal, with a view to the
future development or sale
of their Company, were anxious to
extend the sphere of its
operations by the acquisition of other
cinemas. In Hastings and
St. Leonards there were two small ones
called the Elite and the
De Luxe. Negotiations began both for
their acquisition or control
by lease or otherwise and for the dis-
posal of Regal itself.
Part of the machinery for the
purpose was the creation by Regal
of a subsidiary company, the
Amalgamated. It was registered on
the 26th September, 1935, with
a capital of £5,000 in £1 shares.
The
directors were the same as those of Regal with the addition
of
Garton. It was thought that only £2,000 of the capital was
to
be issued and that it would be subscribed by Regal, who
would
control it.
Then difficulties began with
the Elite and the De Luxe as to a
lease, amongst others whether
the directors of Amalgamated
would guarantee the rent. The
directors were not willing to do so.
At last all
difficulties were surmounted at a crucial meeting of
October 2nd,
1935. It was a peculiar meeting, the directors both
of Regal and
Amalgamated were summoned to attend at the same
2 [2]
place and at the same time. They
did so, but, although separate
minutes were subsequently
attributed to each Company, it is not
easy to say from the
evidence at any particular moment for which
company a particular
director was appearing. It was resolved
that Regal should apply
for 2,000 shares in Amalgamated. It was
agreed that £2,000
was the total sum which Regal could find. The
value of the leases
of the two cinemas was taken at £15,000. The
draft lease was
approved. Each of The Regal directors, except
Gulliver, the
Chairman, agreed to apply for 500 shares, Gulliver
saying he would
find people to take up 500. The Regal directors
requested Garton
to take up 500. I will deal later with particular
evidence
applying to Gulliver and Garton, who delivered separate
defences.
Thus the capital of Amalgamated
was fully subscribed, Regal
taking 2,000 shares, the five
Respondents taking 500 shares each,
and the persons found by
Gulliver the remaining 500. The shares
were duly paid for and
allotted. In the final transaction shortly
afterwards these shares
were sold at substantial profit and it is this
profit which Regal
asks to recover in this action.
The directors gave evidence and
were severely cross-examined
as to their good faith. The trial
Judge said: " All this subsequent
" history does not
help me to decide whether the action of the
" directors of
the Plaintiff company and their solicitor on the 2nd
"
October was bona fide in the interests of the company and
not
" mala fide and in breach of their duty to the
company ", and later
on he said: " I must take it that
in the realisation of those facts it
" means that I cannot
accept what has to be established by the
" Plaintiff, and
that is that the Defendants here acted in ill faith ",
and
later, " Finally I have to remind myself, were it necessary,
that
" the burden of proof, as in a criminal case, is the
Plaintiffs', who
" must establish the fraud they allege. On
the whole I do not think
" the Plaintiff company succeeds in
doing that and, therefore, there
" must be judgment for the
Defendants."
This latter
statement was criticised by du Parcq, L.J., in the
Court of
Appeal, who says: " To anyone who has read the plead-
"
ings but not followed the course of the trial that would seem a
"
remarkable statement on the part of the learned Judge, because
"
it is common ground that there is no allegation of fraud in the
"
pleadings whatever . . . but the course which the case has taken
"
makes the learned Judge's statement quite comprehensible
"
because it does appear to have been put before him as, in the
"
main at any rate, a case of fraud."
It must be taken, therefore,
that the Respondents acted bona fide
and without fraud.
" In the Court of
Appeal the Master of the Rolls said: " If the
"
directors in coming to the conclusion that they could not put
up
" more than £2,000 of the company's money had been
acting in
" bad faith, and if that restriction of the
company's investment had
" been done for the dishonest
purpose of securing for themselves
" a profit which not only
could but which ought to have been pro-
" cured for their
company, I apprehend that not only could they
" not have held
that profit for themselves if the contemplated trans-
"
action had been carried out, but they could not have held a profit
"
for themselves even if that transaction was abandoned and
"
another profitable transaction was carried through in which
they
" did in fact realise a profit through the shares
... but once they
" have admittedly bona fide come to
the decision to which they
" came in this case, it seems to
me that their obligation to refrain
" from acquiring those
shares for themselves comes to an end. In
" fact, looking
at it as a matter of business, if that was the conclusion
"
which they came to, a conclusion which in my judgment was
[3] 3
" amply justified on the
evidence from the business point of
" view, then there was
only one way left of raising the money,
" and that was
putting it up themselves. . . . That being so, the
" only way
in which these directors could secure that benefit
" for
their company was by putting up the money themselves.
" Once
that decision is held to be a bona fide one and fraud drops
"
out of the case, it seems to me there is only one conclusion,
"
namely that the appeal must be dismissed with costs". It
seems
therefore that the absence of fraud was the reason of the
decision.
In the result, the Court of
Appeal dismissed the Appeal and from
their decision the present
Appeal is brought.
The Appellants say they are
entitled to succeed—
" (1) because the
Respondents secured for themselves
" the profits upon the
acquisition and sale of the shares in
" Amalgamated by using
the knowledge acquired as
" directors and solicitor
respectively of Regal and by using
" their said respective
positions and without the knowledge
" or consent of Regal;
" (2) because the doctrine
laid down in such cases with
" regard to trustees is equally
applicable to directors and
" solicitors ".
Although both in the Court of
first instance and the Court of
Appeal the question of fraud was
the prominent feature, the Appel-
lants' Counsel in this House at
once stated that it was no part of his
case and quite irrelevant
to his arguments. His contention was
that the Respondents were in
a fiduciary capacity in relation to
the Appellants and as such
accountable in the circumstances for the
profits they made on the
sale of the shares.
As to the duties and liabilities
of those occupying such a fiduciary
position, a number of cases
were cited to us which were not brought
to the attention of the
trial Judge. In my view the Respondents
were in a fiduciary
position and their liability to account does not
depend upon proof
of mala fides.
The general rule of equity is
that no one who has duties of a
fiduciary nature to perform is
allowed to enter into engagements in
which he has or can have a
personal interest conflicting with the
interests of those whom he
is bound to protect. If he holds any
property so acquired as
trustee he is bound to account for it to his
cestui que trust.
The earlier cases are concerned
with trusts of specific property,
Keech v. Sandford (1726)
Sel. Ch. Cas. 61, Wh. and Tud. Edition
9th, II, 648, per Lord
Chancellor King.
The rule, however, applies to
agents, as for example solicitors
and directors, when acting in a
fiduciary capacity. In Ex parte
James (1802) 8 Ves. jun.
337; the headnote reads: " Purchase of a
" bankrupt's
estate by the solicitor to the commission set aside. The
"
Lord Chancellor would not permit him to bid upon the resale,
"
discharging himself from the character of solicitor, without the
"
previous consent of the persons interested, freely given, upon full
"
information ". Lord Eldon said, p. 345: " The doctrine as
to
" purchase, by trustees, assignees, and persons having a
confidential
" character, stands much more upon general
principle than upon
" the circumstances of any individual
case. It rests upon this, that
" the purchase is not
permitted in any case, however honest the
" circumstances,
the general interests of justice requiring it to be
"
destroyed in every instance, as no Court is equal to the examina-
"
tion and ascertainment of the truth in much the greater number
"
of cases." In Hamilton v. Wright (1842), 9 Cl. and Fin.
III, the
4 [4]
headnote reads: " A trustee
is bound not to do anything which can
" place him in a
position inconsistent with the interests of his trust,
" or
which can have a tendency to interfere with his duty in dis-
"
charging it. Neither the trustee nor his representative can be
"
allowed to retain an advantage acquired in violation of this rule."
Lord Brougham said, at p. 124,
"The knowledge which he
" acquires as trustee is of
itself sufficient ground for disqualification,
" and of
requiring that such knowledge shall not be capable of
" being
used for his own benefit to injure the trust. The ground of
"
disqualification is not merely because such knowledge may enable
"
him actually to obtain an undue advantage over others."
In
Aberdeen Railway Company v. Blaikie (1853), I, MacQ.,
461, the
headnote reads: " The director of a railway company
is a trustee,
" and as such is precluded from dealing on
behalf of the company
" with himself or with a firm of which
he is a partner." Lord
Cranworth said, at p. 471, "A
corporate body can only act by
" agents, and it is of course
the duty of those agents so to act as best
" to promote the
interests of the corporation whose affairs they are
"
conducting. Such agents have duties to discharge of a fiduciary
"
nature towards their principal, and it is a rule of universal
appli-
" cation that no one having such duties to discharge
shall be allowed
" to enter into engagements in which he has
or can have a personal
" interest conflicting, or which
possibly may conflict, with the
" interests of those whom he
is bound to protect."
It is not, however, necessary to
discuss all the cases cited because
the Respondents admitted the
generality of the rule as contended
for by the Appellants but were
concerned rather to confess and
avoid it. Their contention was
that in this case upon a true perspec-
tive of the facts they were
under no equity to account for the profits
they made. I will deal
first with the Respondents, other than
Gulliver and Garton. We
were referred to the Imperial Hydro-
pathic Company v. Hampson
(1882), 23, Ch. D., 1, where Bowen,
L.J., at p. 12, drew
attention to the difference between directors and
trustees, but
the case is not an authority for contending that a
director cannot
come within the general rule.
No doubt there may be exceptions
to the general rule, as for
example where a purchase is entered
into after the trustee has
divested himself of his trust
sufficiently long before the purchase to
avoid the possibility of
his making use of special information
acquired by him as trustee:
(see the remarks of Lord Eldon, in ex
Parte James (ubi supra)
at p. 352) or where he purchases with full
knowledge and
consent of his cestui que trust. Imperial v. Hamp-
son (ubi
supra) makes no exception to the general rule that a solici-
tor
or director if acting in a fiduciary capacity is liable to
account
for the profits made by him from knowledge acquired when
so
acting.
It is then argued that it would
have been a breach of trust for the
Respondents as directors of
Regal to have invested more than
£2,000 of Regal's money in
Amalgamated and that the transaction
would never have been carried
through if they had not themselves
put up the other £3,000.
Be it so, but it is impossible to maintain
that because it would
have been a breach of trust to advance more
than £2,000 from
Regal and that the only way to finance the matter
was for the
directors to advance the balance themselves, a situation
arose
which brought the Respondents outside the general rule and
permitted
them to retain the profits which accrued to them from
the action
they took. At all material times they were directors and
in a
fiduciary position, and they used and acted upon their
exclusive
knowledge acquired as such directors. They framed
resolutions
by which they made a profit for themselves. They
sought no
authority from the company to do so, and by reason of
their posi-
tion and actions, they made large profits for which,
in my view,
they are liable to account to the company.
[5] 5
I now pass to the cases of
Gulliver and Garton. Their liability
depends upon a careful
examination of the evidence. Gulliver's
case is that he did not
take any shares and did not make any profit
by selling them. His
evidence, which is substantiated by the docu-
ments, is as
follows. At the board meeting of October 2nd he was
not anxious to
put any money of his own into Amalgamated. He
thought he could
find subscribers for £500 but was not anxious to
do so. He
did, however, find subscribers—£200 by South Down
Land
Company, £100 by a Miss Geering and £200 by
Seguliva
A.G., a Swiss company. The purchase price was paid by
these
three, either by cheque or in account, and the shares were
duly
allotted to them. The shares were held by them on their
own
account. When the shares were sold the moneys went to them
and
no part of the moneys went into Gulliver's pocket or into
his
account.
In these circumstances, and
bearing in mind that Gulliver's
evidence was accepted, it is clear
that he made no profits for which
he is liable to account. The
case made against him rightly fails and
the appeal against the
decision in his favour should be dismissed.
Carton's case is that in taking
the shares he acted with the know-
ledge and consent of Regal and
that consequently he comes within
the exception to the general
rule as to the liability of the person
acting in a fiduciary
position to account for profits.
At the meeting of October 2nd,
Gulliver, the Chairman of Regal,
and his co-directors were
present. He was asked in cross-examina-
tion about what happened
as to the purchase of the shares by the
directors. The question
was: " Did you say to Mr. Garton, ' Well,
" Garton, you
have been connected with Bentley's for a long time
" will you
not put up £500? ' His answer was, " I think I can
"
put it higher. I invited Mr. Garton to put the £500 and to
make
" up the £3,000." This was confirmed by
Garton in examination
in chief. In these circumstances, and
bearing in mind that this
evidence was accepted, it is clear that
he took the shares with the
full knowledge and consent of Regal
and that he is not liable to
account for profits made on their
sale. The appeal against the
decision in his favour should be
dismissed.
The appeal against the decision
in favour of the Respondents
other than Gulliver and Garton should
be allowed, and I agree
with the order to be proposed by my noble
and learned friend,
Lord Rusell of Killowen as to amounts and
costs. The appeal
against the decision in favour of Gulliver and
Garton should be
dismissed with costs.
18679 A3
Viscount
Sankey
Lord
Russell of
Killowen
Lord
Macmillan
Lord
Wright
Lord
Porter
[6]
REGAL
(HASTINGS), LIMITED
v.
GULLIVER AND OTHERS.
Lord Russell of Killowen
MY LORDS,
The very special facts which
have led up to this litigation require
to be stated in some
detail, in order to make plain the point which
arises for decision
on this Appeal.
The Appellant is a limited
company called Regal (Hastings), Ld.,
and may conveniently be
referred to as Regal. Regal was incor-
porated in the year 1933
with an authorised capital of £20,000
divided into 17,500
preference shares of £1 each and 50,000 ordi-
nary
shares of one shilling each. Its issued capital consisted of
8,950
preference shares and 50,000 ordinary shares. It owned,
and
managed very successfully, a freehold cinema theatre at
Hastings
called the Regal. In July, 1935, its board of directors
consisted
of one Walter Bentley and the Respondents Gulliver,
Bobby,
Griffiths, and Bassett Its shareholders were twenty in
number. The
Respondent Garton acted as its solicitor.
In or about that month, the
Board of Regal formed a scheme
for acquiring a lease of two other
cinemas (viz., the Elite at
Hastings, and the Cinema de Luxe at
St. Leonards), which were
owned and managed by a company called
Elite Picture Theatres
(Hasting and Bristol) Limited. The scheme
was to be carried out
by obtaining the grant of a lease to a
subsidiary limited company,
which was to be formed by Regal, with
a capital of 5,000 £1 shares,
of which Regal was to
subscribe for 2,000 in cash, the remainder
being allotted to Regal
or its nominees as fully paid for services
rendered. The whole
beneficial interest in the lease would, if this
scheme were
carried out, enure solely to the benefit of Regal and
its
shareholders, through the shareholding of Regal in the
subsidiary
company.
The Respondent Garton, on the
instructions of Regal, negotiated
for the acquisition of the
lease, with the result that an offer to take
a lease for 35 or 42
years at a rent of £4,600 for the first year, rising
in the
second and third years, up to £5,000 in the fourth and
sub-
sequent years, was accepted on behalf of the owners on the
21st
August, 1935, subject to mutual approval of the form of the
lease.
Subsequently the owners of the two cinemas required the
rent under
the proposed lease to be guaranteed.
On the nth September, 1935,
Walter Bentley died; and on the
18th September, 1935, his son, the
Respondent Bentley, who was
one of his executors, was appointed a
director of Regal. It should
now be stated that concurrently with
the negotiations for the
acquisition of a lease of the two
cinemas, Regal was contemplat-
ing a sale of its own cinema,
together with the leasehold interest
in the two cinemas which it
was proposing to acquire.
On the 18th September, 1935, at
a Board meeting of the Regal,
the Respondent Garton was instructed
that the directors were pre-
pared to give a joint guarantee of
the rent of the two cinemas, until
the subscribed capital of the
proposed subsidiary company
amounted to £5,000. He was
further instructed to deal with all
offers received for the
purchase of Regal's own assets. On the 26th
September, 1935, the
proposed subsidiary company was registered
under the name Hastings
Amalgamated Cinemas, Ld., which may
tor brevity be referred to as
Amalgamated. Its directors were the
five directors of Regal, and
in addition the Respondent Garton.
[7] 2
Harry Bentley, who had been
appointed a director of Regal
only on the 18th September at the
end of the Board meeting of
that date, enquired from Garton the
position as regards the new
company Amalgamated. In reply he
received a letter dated the
26th September, 1935, in which the
position, as at that date, is set
out by Garton. After stating
that the capital of Amalgamated is
£5,000, of which £2,000
is being subscribed by Regal, " which sum
" will form
virtually the whole of the present paid up capital"
of
Amalgamated, and that the rent is to be guaranteed by the
directors
so long as the issued capital of Amalgamated is under
£5,000, he
concludes as follows: —
" Inasmuch as it is the intention of all the parties that the
Regal
(Hastings) Ltd. will not only control the Hastings
(Amalgamated) Cinemas
Ltd., but will continue to hold virtually
the whole of the capital, the
position of a shareholder of Regal
(Hastings) Ltd. is merely that he has
the advantage of a possible
asset of the two new cinemas on sale by the
Regal (Hastings) Ltd.
of its undertaking, so that the price realised to the
shareholders
of the Regal (Hastings) Ltd. will be the amount that he
would
normally have received for his interest in such company, plus
his
proportion of the sale price of such two new cinemas."
On the 2nd October, 1935, an
offer was received from would-be
purchasers offering a net sum of
£92,500 for the Regal cinema and
the lease of the two
cinemas. Of this sum £77,500 was allotted as
the price of
Regal's cinema, and £15,000 as the price of the two
leasehold
cinemas. This splitting of the price seems to have been
done by
the purchasers at the request of the Respondent Garton;
but it
must be assumed in favour of the Regal directors that they
were
satisfied that £77,500 was not too low a price to be paid
for
their company's cinema, with the result that £15,000
cannot be
taken to have been in excess of the value of the lease
which Amal-
gamated was about to acquire.
On the afternoon of that same
2nd October, the six Respondents
met at No. 62 Shaftesbury Avenue,
London, the registered offices of
Regal. Various matters were
mentioned and discussed between
them, and they came to certain
decisions. Subsequently minutes
were prepared which record the
different matters as having been
transacted at two separate and
distinct Board meetings, viz., a
meeting of the Board of Regal,
and a meeting of the Board of
Amalgamated. The Respondent Gulliver
stated in his evidence
that two separate meetings were held, that
of the Amalgamated
Board being held and concluded, before that of
the Regal Board
was begun. On the other hand the Respondent
Bentley says " It
" was more or less held in one lump,
because we were talking about
" selling the three
properties." And the Respondent Garton states
that after it
was decided that Regal could only afford to put up
£2,000 in
Amalgamated, which was purely a matter for the con-
sideration of
the Regal Board, the next matter discussed was one
which figures
in the minutes of the Amalgamated Board meeting.
Moreover both
meetings are recorded in the minutes as having been
held at 3 p.m.
Whatever may
be the truth-as to this, the matters discussed
and decided
included the following: (1) Regal was to apply for
2,000 shares in
Amalgamated: (2) the offer of £77,500 for the
Regal cinema
and £15,000 for the two leasehold cinemas was
accepted:
(3) the solicitor reporting that completion of the lease
was
expected to take place on the 7th October, it was resolved that
the
seal of Amalgamated be affixed to the engrossment when avail-
able
: and (4) the Respondent Gulliver having objected to guaran-
teeing
the rent it was resolved—here I cite the words of the minute
—"
that the directors be invited to subscribe for 500 shares each
"
and that such shares be allotted accordingly."
3 [8]
On the 7th October, 1935, a
lease of the two cinemas was
executed in favour of Amalgamated,
for the term of 35 years from
the 29th September, 1935, in
accordance with the agreement pre-
viously come to. The shares of
Amalgamated were all issued, and
were allotted as follows: 2,000
to Regal, 500 to each of the Respon-
dents Bobby, Griffiths,
Bassett, Bentley, and Garton, and (by the
direction of the
Respondent Gulliver) 200 to a Swiss company called
Seguliva A.G.,
200 to a company called South Downs Land Co.,
Ltd., and 100 to a
Miss Geering.
In fact the proposed sale and
purchase of the Regal cinema
and the two leasehold cinemas fell
through. Another proposition,
however, took its place, viz., a
proposal for the purchase from the
individual shareholders of
their shares in Regal and Amalgamated.
This proposal came to
maturity by agreements dated the 24th
October, 1935, as a result
of which the 3,000 shares in Amalgamated
held otherwise than by
Regal were sold for a sum of £3 16s. 1d. per
share, or in
other words at a profit of £2 16s. 1d. per share over the
issue
price of par.
As a sequel to the sale of the
shares in Regal, that company
came under the management of a new
Board of directors, who
caused to be issued the writ which
initiated the present litigation.
By this action Regal seek to
recover from its five former direc-
tors and its former solicitor
a sum of £8,142 l0s. 0d. either as
damages or as money had
and received to the Plaintiff's use. The
action was tried by
Wrottesley J., who entered judgment for all the
Defendants with
costs. An appeal by the Plaintiffs to the Court
of Appeal was
dismissed with costs.
My Lords, those are the relevant
facts which have led up to the
debate in your Lordships' House,
and I now proceed to consider
whether the Appellant is entitled to
succeed against any and which
of the Respondents.
The case has, I think, been
complicated and obscured by the
presentation of it before the
trial judge. If a case of wilful mis-
conduct or fraud on the part
of the Respondents had been made
out, liability to make good to
Regal any damage which it had
thereby suffered could no doubt have
been established; and efforts
were apparently made at the trial by
cross-examination and other-
wise to found such a case. It is,
however, due to the Respondents
to make it clear at the outset
that this attempt failed. Nor was the
case so presented to us
here. We have to consider the question of
the Respondent's
liability on the footing that in taking up these
shares in
Amalgamated they acted with bona fides, intending to act
in
the interest of Regal.
Nevertheless they may be liable
to account for the profits which
they have made, if while standing
in a fiduciary relationship to
Regal they have by reason and in
course of that fiduciary relation-
ship made a profit
This aspect of the case was
undoubtedly raised before the trial
judge, but in so far as he
deals with it in his judgment, he deals with
it on a wrong basis.
Having stated at the outset quite truly that
what he calls "
this stroke of fortune " only came the way of the
Respondents
because they were the directors and solicitor of Regal,
he
continues this—
' But in order to succeed the
Plaintiff company must show that the
"Defendants both ought
to have caused and could have caused the Plaintiff
"company
to subscribe for these shares, and that the neglect to do so
caused
"a loss to the Plaintiff company. Short of this, if
the Plaintiffs can estab-
"lish that though no loss was made
by the company, yet a profit was cor-
"ruptly made by the
directors and the solicitor, then the company can claim
"to
have that profit handed over to the company, framing the action in
such
"a case for money had and received by the Defendants for
the Plaintiffs'
"use."
[9] 4
Other passages in his judgment
indicate that in addition to this
" corrupt" action by
the directors, or perhaps alternatively, the
Plaintiffs in order
to succeed must prove that the Defendants acted
mala fide, and
not bona fide in the interests of the company, or that
there
was a plot or arrangement between them to divert from the
company
to themselves a valuable investment. However relevant
such
considerations may be in regard to a claim for damages result-
ing
from misconduct, they are irrelevant to a claim against a
person
occupying a fiduciary relationship towards the Plaintiff
for an
account of the profits made by that person by reason and in
course
of that relationship.
In the Court of Appeal, upon
this claim to profits, the view was
taken that in order to succeed
the Plaintiff had to establish that
there was a duty on the Regal
directors to obtain the shares for
Regal. Two extracts from the
judgment of the Master of the Rolls
show this. After mentioning
the claim for damages, he says: —
" The case is put on an
alternative ground. It is said that in the cir-
" cumstances
of the case the directors must be taken to have been acting in
"
the matter of their office when they took those shares; and that
accordingly
" they are accountable for the profits which they
have made. . . . There
" is one matter which is common to
both these claims which, unless it is
" established, appears
to me to be fatal: It must be shown that in the
"
circumstances of the case it was the duty of the directors to obtain
these
" shares for their company."
Later in his judgment he uses
this language: —
" But it is said that the
profit realised by the directors on the sale of
"the shares
must be accounted for by them. That proposition involves that
"on
the 2nd October, when it was decided to acquire these shares, and at
the
"moment when they were acquired by the directors, the
directors were
"taking to themselves something which properly
belonged to their com-
"pany."
Other portions of the judgment
appear to indicate that upon this
claim to profits, it is a good
defence to show bona fides or absence
of fraud on the part
of the directors in the action which they took,
or that their
action was beneficial to the company, and the judgment
ends thus:
—
" That being so, the only
way in which these directors could secure that
" benefit for
their company was by putting up the money themselves. Once
'' that
decision is held to be a bona fide one, and fraud drops out of
the case,
'' it seems to me there is only one conclusion, namely,
that the Appeal must
" be dismissed with costs."
My Lords, with all respect I
think there is a misapprehension here.
The rule of equity which
insists on those who by use of a fiduciary
position make a profit,
being liable to account for that profit, in no
way depends on
fraud, or absence of bona fides; or upon such ques-
tions
or considerations as whether the profit would or should other-
wise
have gone to the Plaintiff, or whether the profiteer was under
a
duty to obtain the source of the profit for the Plaintiff, or
whether
he took a risk, or acted as he did for the benefit of the
Plaintiff, or
whether the Plaintiff has in fact been damaged or
benefited by his
action. The liability arises from the mere fact
of a profit having, in
the stated circumstances, been made. The
profiteer, however honest
and well-intentioned, cannot escape the
risk of being called upon to
account.
The leading case of Keech v.
Sandford (Sel. Ch. Ca. 61) is an
illustration of the
strictness of this rule of Equity in this regard, and
of how far
the rule is independent of these outside considerations.
A lease
of the profits of a market had been devised to a trustee for
the
benefit of an infant. A renewal on behalf of the infant was
refused:
it was absolutely unobtainable. The trustee, finding that
it was
impossible to get a renewal for the benefit of the infant, took
a
lease for his own benefit. His duty to obtain it for the infant
was
incapable of performance; nevertheless he was ordered to
assign
5 [10]
the lease to the infant, upon
the bare ground that if a trustee on the
refusal to renew might
have a lease for himself, few renewals would
be made for the
benefit of cestuis que trust. ' This may seem
" hard,"
said Lord King, " that the trustee is the only person of all
"
mankind who might not have the lease, but it is very proper that
"
rule should be strictly pursued, and not in the least relaxed ".
One other case in Equity may be
referred to in this connection,
viz., ex parte James (8
Ves. jun. 337) a decision of Lord Eldon's.
That was a case of a
purchase of a bankrupt's estate by the solicitor
to the
commission, and Lord Eldon (at p. 345) refers to the doctrine
thus:
—
" The doctrine as to purchases by trustees, assignees, and
persons having
a confidential character, stands much more upon
general principle than
upon the circumstances of any individual
case. It rests upon this, that
the purchase is not permitted in
any case, however honest the circum-
stances, the general
interests of justice requiring it to be destroyed in every
instance,
as no Court is equal to the examination and ascertainment of
the
truth in much the greater number of cases."
Let me now consider whether the
essential matters which the
Plaintiff must prove, have been
established in the present case.
As to the profit being in fact
made there can be no doubt. The
shares were acquired at par and
were sold three weeks later at
a profit of £2 16s.
1d. per share.
Did such of the first rive
Respondents as acquired these very
profitable shares acquire them
by reason and in course of their
office of directors of Regal? In
my opinion, when the facts
are examined and appreciated the answer
can only be that they
did. The actual allotment no doubt had to be
made by themselves
and Garton (or some of them) in their capacity
as directors of
Amalgamated; but this was merely an executive act,
necessitated
by the alteration of the scheme for the acquisition
of the lease of
the two cinemas for the sole benefit of Regal and
its shareholders
through Regal's shareholding in Amalgamated. That
scheme
could only be altered by or with the consent of the Regal
Board.
Consider what in fact took place on the 2nd October, 1935.
The
position immediately before that day is stated in Garton's
letter
of the 26th September, 1935. The directors were willing
to
guarantee the rent until the subscribed capital of
Amalgamated
reached £5,000; Regal was to control Amalgamated
and own
the whole of its share capital; with the consequence
that
the Regal shareholders would receive their proportion of
the
sale price of the two new cinemas. The Respondents then
meet
on the 2nd October, 1935. They have before them an offer
to
purchase the Regal cinema for £77,500, and the lease of the
two
cinemas for £15,000. The offer is accepted. The draft lease
is
approved; a resolution for its sealing is passed in anticipation
of
completion in five days. Some of those present, however, shy
at
giving guarantees, and accordingly the scheme is changed by
the
Regal directors in a vital respect. It is agreed that a
guarantee shall
be avoided, by the six Respondents bringing the
subscribed capital
up to £5,000. I will consider the
evidence and the minute in a
moment. The result of this change of
scheme (which only the
Regal directors could bring about) may not
have been appreciated
by them at the time; but its effect upon
their company and its share-
holders was striking. In the first
place, Regal would no longer
control Amalgamated, or own the whole
of its share capital; the
action of its directors had deprived it
(acting through its share-
holders in general meeting) of the
power to acquire the shares.
In the second place, the Regal
shareholders would only receive
a largely reduced proportion of
the sale price of the two cinemas.
The Kegal directors and Garton
would receive the moneys of
which the Regal shareholders were thus
deprived. This vital
alteration was brought about in the following
circumstances (I
[11] 6
refer to the evidence of the
Respondent Garton.) He was asked
what was suggested when the
guarantees were refused, and this is
his answer:—
" Mr. Gulliver said ' We
must find it somehow. I am willing to find
' £500. Are you
willing,' turning to the other four directors of Regal, ' to
' do
the same? ' They expressed themselves as willing. He said, ' That
'
makes £2,500 ', and he turned to me and said, ' Garton, you
have been
' interested in Mr. Bentley's companies; will you come
in to take £500?' I
agreed to do so."
Although this matter is recorded
in the Amalgamated minutes, this
was in fact a decision come to by
the directors of Regal, and the
subsequent allotment by the
directors of Amalgamated was a mere
carrying into effect of this
decision of the Regal Board. The resolu-
tion recorded in the
Amalgamated minute runs thus—
" After discussion it was resolved that the directors be invited
to sub-
" scribe for 500 shares each, and that such shares be
allotted accordingly ".
As I read that resolution, and
my reading agrees with Carton's
evidence, the invitation is to the
directors of Regal, and is made for
the purpose of effectuating
the decision which the five directors of
Regal had made, that each
should take up 500 shares in Amal-
gamated. The directors of
Amalgamated were not conveying an
" invitation " to
themselves. That would be ridiculous. They were
merely giving
effect to the Regal directors' decision to provide
£2,500
cash capital themselves, a decision which had been followed
by a
successful appeal by Gulliver to Garton to provide the balance.
My Lords, I have no hesitation
in coming to the conclusion
upon the facts of this case, that
these shares when acquired by the
directors were acquired by
reason, and only by reason, of the fact
that they were directors
of Regal, and in the course of their execu-
tion of that office.
It now remains to consider
whether in acting as directors of
Regal they stood in a fiduciary
relationship to that company.
Directors of a limited company are
the creatures of Statute, and
occupy a position peculiar to
themselves. In some respects they
resemble trustees, in others
they do not. In some respects they
resemble agents, in others they
do not. In some respects they
resemble managing partners, in
others they do not. In the case of
the Forest of Dean Coal
Mining Co. (10 C.D. 450) a director was
held not liable for
omitting to recover promotion money which had
been improperly paid
on the formation of the company. He knew
of the improper payment,
but he was not appointed a director until
a later date. It was
held that although a trustee of settled property
which included a
debt would be liable for neglecting to sue for it, a
director of a
company was not a trustee of debts due to the com-
pany and was
not liable. I cite two passages from the judgment of
Sir George
Jessel, M.R.: —
Directors have sometimes been
called trustees, or commercial trustees,
" and sometimes they
have been called managing partners, it does not matter
" what
you call them so long as you understand what their true position
is,
" which is that they are really commercial men managing a
trading concern
" for the benefit of themselves and all the
other shareholders in it."
Later, after pointing out that
traders have a discretion whether they
shall sue for a debt, which
discretion is not vested in trustees of a
debt under a settlement,
he says: —
" Again, directors are
called trustees. They are no doubt trustees of
assets which have
come into their hands, or which are under their control,
but they
are not trustees of a debt due to the company. ... A director
is
the managing partner of the concern, and although a debt is due to
the
concern I do not think it is right to call him a trustee of
that debt which
remains unpaid, though his liability in respect of
it may in certain cases
and in some respects be analogous to the
liability of a trustee."
The position of directors was
considered by Kay, J., in the case of
the Faure Electric Co.
(40 C.D. 141). That was a case of directors
7 [12]
having applied the company's
money in payment of an improper
commission; a claim was made for
the loss thereby occasioned to
the company. In referring to the
liability of directors, the learned
judge pointed out that
directors were not trustees in the sense of
trustees of a
settlement, that the nearest analogy to their position
would be
that of a managing agent of a mercantile house with large
powers,
but that there was no analogy which was absolutely per-
fect; and
he added: —
" However, it is quite
obvious that to apply to directors the strict rules
" of the
Court of Chancery with respect to ordinary trustees might fetter
"
their action to an extent which would be exceedingly disadvantageous
to
" the companies they represent."
In addition a passage from the
judgment of Bowen, L.J., in
Imperial Hydropathic Co. v. Hampson
(23 C.D. 1) may be usefully
recalled. He says:
" I should wish ... to
begin by remarking this, that when persons
" who are
directors of a company are from time to time spoken of by judges
"
as agents, trustees, or managing partners of the company, it is
essential
" to recollect that such expressions are used not
as exhaustive of the powers
" or responsibilities of those
persons, but only as indicating useful points
'' of view from
which they may for the moment, and for the particular pur-
"
pose, be considered—points of view at which for the moment they
seem
" to be either cutting the circle or falling within the
category of the suggested
" kind. It is not meant that they
belong to the category, but that it is
" useful for the
purpose of the moment to observe that they fall pro tanto
"
within the principles which govern that particular class."
These three cases, however, were
not concerned with the ques-
tion of directors making a profit;
but that the equitable principle in
this regard applies to
directors is beyond doubt. In Parker v.
McKenna (L.R. 10
Ch. 96), a new issue of shares of a joint stock
bank was offered
to the existing shareholders at a premium. The
directors arranged
with one Stock to take, at a larger premium, the
shares not taken
up by the existing shareholders. Stock, being
unable to fulfil his
contract, requested the directors to relieve him
of some. They did
so, and made a profit. They were held account-
able for the profit
so made. The Lord Chancellor (Lord Cairns)
stated (at p. 118)
that: —
" The Court will not
enquire, and is not in a position to ascertain,
" whether the
Bank has lost or not lost by the acts of the directors. All that
'
the Court has to do is to examine whether a profit has been made by
an
' agent, without the knowledge of his principal, in the course
and execution
' of his agency, and the Court finds in my opinion
that these agents in the
' course of their agency have made a
profit, and for that profit they must
' in my opinion account to
their principal."
In the same case James, L.J.,
(at p. 124) stated his view in the
following terms: —
' It appears to me very
important that we should concur in laying down
" again and
again the general principle that in this Court, no agent in the
"
course of his agency, in the matter of his agency, can be allowed to
make
" any profit without the knowledge and consent of his
principal, that that
" rule is an inflexible rule, and must
be applied inexorably by this Court,
" which is not entitled
in my judgment to receive evidence, or suggestion, or
"
argument, as to whether the principal did or did not suffer any
injury in
" fact, by reason of the dealing of the agent, for
the safety of mankind
" requires that no agent shall be able
to put his principal to the danger of
" such an enquiry as
that."
In the case of the Imperial
Mercantile Credit Association v.
Coleman (6 E. & I. App.
189) one Coleman, a stockbroker and a
director of a financial
company, had contracted to place a large
amount of railway
debentures for a commission of 5 per cent. He
proposed that his
company should undertake to place them for a
commission of 1 1/2
per cent. The 5 per cent, commission was in due
course paid to the
director, who paid over the 1 1/2 per cent, to the
[13] 8
company. He was held liable to
account for the 3 1/2 per cent., by
Malins, V.C., who said (see 6
Ch. App. at p. 563): —
" It is of the highest
importance that it should be distinctly understood
" that it
is the duty of directors of companies to use their best exertions
for
" the benefit of those whose interests are committed to
their charge, and that
" they are bound to disregard their
own private interests whenever a regard
" to them conflicts
with the proper discharge of such duty."-
His decree was reversed by Lord
Hatherley on the ground that the
transaction was protected under
the company's Articles of Associa-
tion. Your Lordships' House,
however, thought that in the circum-
stances of the case the
Articles of Association gave no protection,
and restored the
decree with unimportant variations. The liability
was based on the
view, which was not disputed by Lord Hatherley,
that the director
stood in a fiduciary relationship to the company.
That
relationship being established he could not keep the profit
which
had been earned by the funds of the company being em-
ployed in
taking up the debentures. The Courts in Scotland have
treated
directors as standing in a fiduciary relationship towards
their
company and, applying the equitable principle, have made
them
accountable for profits accruing to them in the course and by
reason
of their directorships. It will be sufficient to refer to
the case of the
Huntington Copper Co. v. Henderson (4
Rettie 294) in which the
Lord President cites with approval the
following passage from the
Lord Ordinary's judgment: —
" Whenever it can be shown
that the trustee has so arranged matters as
" to
obtain an advantage, whether in money or in money's worth, to
himself
" personally through the execution of his trust, he
will not be permitted to
" retain it, but be compelled to
make it over to his constituent."
In the result I am of opinion
that the directors standing in a
fiduciary relationship to Regal
in regard to the exercise of their
powers as directors, and having
obtained these shares by reason
and only by reason of the fact
that they were directors of Regal and
in the course of the
execution of that office, are accountable for the
profits which
they have made out of them. The equitable rule laid
down in Keech
v. Sandford, ex parte James and similar authorities
applies to
them in full force. It was contended that these cases
were
distinguishable by reason of the fact that it was impossible
for
Regal to get the snares owing to lack of funds, and that the
directors
in taking the shares were really acting as members of
the public.
I cannot accept this argument. It was impossible for
the cestui
quo trust in Keech v. Sandford to
obtain the lease, nevertheless the
trustee was accountable: and
the suggestion that the directors were
applying simply as members
of the public is a travesty of the facts.
They could, had they
wished, have protected themselves by a
resolution (either
antecedent or subsequent) of the Regal share-
holders in general
meeting. In default of such approval, the
liability to account
must remain.
The result is that in my opinion
each of the Respondents Bobby,
Griffiths, Bassett and Bentley is
liable to account for the profit which
he made on the sale of his
500 shares in Amalgamated.
The case of
the Respondent Gulliver, however, requires some
further
consideration, for he has raised a separate and distinct
answer to
the claim. He says—" I never promised to subscribe for
"
shares in Amalgamated. I never did so subscribe. I only promised
"
to find others who would be willing to subscribe. I only found
"
others who did subscribe. The shares were theirs; they were never
"
mine. They received the profit. I received none of it." If
these
are the true facts, his answer seems complete. The evidence
in my
opinion establishes his contention. Throughout his
evidence
Gulliver insisted that he only promised to find £500,
not to sub-
scribe it himself. The £500 was paid by two
cheques in favour of
9 [14]
Amalgamated, one a cheque for
£200 signed by Gulliver as director
and on behalf of the
Swiss company Seguliva, the other a cheque
for £300 signed
by Gulliver as managing director of South Downs
Land Co., Ltd.
They were enclosed in a letter of the 3rd October,
1935, from
Gulliver to Garton, in which Gulliver asks that the
share
certificates be issued as follows: 200 shares in the name of
himself,
Charles Gulliver, 200 shares in the name of South Downs
Co., Ltd.,
and 100 shares in the name of Miss S. Geering. The
money for
Miss Geering's shares was apparently included in South
Down
Co.'s cheque. The certificates were made out accordingly, the
200
shares in Gulliver's name being, he says, the shares
subscribed for
by the Swiss company.
When the sale and purchase of
the Amalgamated shares was
arranged, the agreement for the sale
and purchase was signed on
behalf of the vendor shareholders
(other than the Respondent Bent-
ley) by Garton & Co.: and in
a letter of the 17th October, 1935,
Gulliver sent to Garton
(who held the three certificates) three trans-
fers, viz. (1) a
transfer of 200 shares executed by South Downs
Land Co., Ltd., (2)
a transfer of 200 shares executed by himself,
and (3) a transfer
of 100 shares executed by Miss Geering. When
the purchase money
was paid cheques were drawn as follows: a
cheque for £360 in
favour of Miss Geering, a cheque for £720 in
favour of South
Downs Land Co., Ltd., and a cheque for the same
amount in favour
of Gulliver. By letter of the 24th October, 1935,
written by
Gulliver to the National Provincial Bank, these cheques
were paid
into the respective accounts of Miss Geering, South
Downs Land
Co., Ltd., and Seguliva, A.G.
From the evidence of Gulliver it
appeared that Miss Geering is a
friend who from time to time makes
investments on his advice;
that the issued capital of South Downs
Land Co., Ltd., is £1,000 in
£1 shares, held by
some 11 or 12 shareholders, of whom Gulliver is
one and holds 100
shares; and that in the Swiss company Gulliver
holds 85 out of 500
shares.
It is of the first importance on
this part of the case to bear in
mind that these directors have
been acquitted of all suggestion of
mala fides in regard to
the acquisition of these shares. They had
no reason to believe
that they could be called to account. Why
then should Gulliver go
to the elaborate pains of having the shares
put into the names of
South Downs Co. and Miss Geering, and of
having the proceeds of
sale paid into the respective accounts before
mentioned, if the
shares and proceeds really belonged to him ?
Ex hypothesi he
had no reason for concealment; and no question
was raised against
the transaction until months after the proceeds
of sale had been
paid into the banking accounts of those whom
Gulliver asserts to
have been the owners of the shares. I can see no
reason for
doubting that the shares never belonged to Gulliver, and
that he
made no profit on the sale thereof.
Counsel for the Appellant,
however, contended that the trial
judge had found as a fact that
Gulliver was the owner of the shares;
and he relied on certain
scattered passages in the judgment, the
strongest of which seems
to me to be the one in which the learned
Judge said—" I
may say this with regard to Mr. Gulliver, that I
" have not
been misled in any way or led to decide in his favour by
"
the fact that he handed over his shares to his nominees, but rather
"
the reverse ". I cannot regard that as a finding by the judge
that
the shares were subscribed for by Gulliver under aliases, and
that
the shares and the proceeds of sale in fact belonged to him.
It is
equally susceptible of the meaning that he allowed others to
sub-
scribe for the shares which he could have obtained for
himself had
he so wished. But if it be claimed as a finding of
fact in the former
sense, all I can say is that there is no
evidence which in my opinion
would justify such a finding.
[15] 10
It was further argued that even
if the shares and the proceeds
of sale did not belong to Gulliver,
he is nevertheless liable to account
to Regal for the profit made
by the owners of the shares, and that
upon the authority of the
case of the Liquidators of the Imperial
Mercantile Credit
Association v. Coleman, to which I have already
referred.
One of the contentions put forward there by Coleman
was that his
transaction was a transaction for the benefit of a part-
nership
in the profits of which he was only interested to the extent
of a
half, and that accordingly he could only be made accountable
to
that extent. That contention was disposed of by Lord Cairns
in the
following terms: —
" My Lords, I think there
is no foundation for this argument. The
"profit on the
transaction was obtained by Mr. Coleman, and in the view
"that
I take was obtained by him as a director of the Association.
Whether
"he desired ori whether he determined to reserve it
all to himself or to share
"it with his firm appears to me to
be perfectly immaterial. The source from
"which the profit is
derived is Mr. Coleman. It is only through him that
"his firm
can claim. He is liable for the whole of the profits which
were
"obtained; and it is not the course for a Court of
Equity to enter into the
"consideration of what afterwards
would have become of those profits."
I am unable to see how this
authority helps Regal if it be assumed
that neither the shares nor
the profit ever belonged to Gulliver.
It was further said that
Gulliver must account for whatever
profits he may have made
indirectly through his shareholding in
the two companies, and that
an enquiry should be directed for this
purpose. As to this, it is
sufficient to say that there is no evidence
to ground such an
enquiry. Indeed the evidence so far as it goes
shows that neither
company has distributed any part of the profit.
Finally, it was said that
Gulliver must account for the profit on
the 200 shares as to which
the certificate was in his name. But
if in fact the shares
belonged beneficially to the Swiss company
(and that is the
assumption for this purpose), the proceeds of sale
did not belong
to Gulliver, and were rightly paid into the Swiss
company's
banking account: Gulliver accordingly made no profit
for which he
is accountable.
As regards Gulliver, this Appeal
should in my opinion be dis-
missed.
There remains to consider the
case of Garton. He stands on a
different footing from the other
Respondents in that he was not a
director of Regal. He was Regal's
legal adviser; but in my opinion
he has a short but effective
answer to the Plaintiffs' claim. He was
requested by the Regal
directors to apply for 500 shares. They
arranged that they
themselves should each be responsible for £500
of the
Amalgamated capital, and they appealed, by their chair-
man, to
Garton to subscribe the balance of £500 which was required
to
make up the £3,000. In law his action, which has resulted in
a
profit, was taken at the request of Regal, and I know of no
principle
or authority which would justify a decision that a
solicitor must
account for profit resulting from a transaction
which he has entered
into on his own behalf, not merely with the
consent, but at the
request of his client.
My Lords, in my opinion the
right way in which to deal with
this Appeal is (1) to dismiss the
Appeal as against the Respondents
Gulliver and Garton with costs,
(2) to allow it with costs as against
the other four Respondents,
and (3) to enter judgment as against
each of these four
Respondents for a sum of £1,402 1s. 8d. with
interest at 4
per cent, from the 25th October, 1935, as to £1,300
part
thereof, and from, the 5th December, 1935, as to the balance.
As
regards the liability of these four Respondents for costs, I
have
read the shorthand notes of the evidence at the trial, and it
is clear
11 [16]
to me that the costs were
substantially increased by the sugges-
tions of mala fides and
fraud with which the cross-examination
abounds, and from which
they have been exonerated. In my
opinion a proper order to make
would be to order these four
Respondents to pay only
three-quarters of the Appellants' taxed
costs of action. The taxed
costs of the Appellants in the Court
of Appeal and in this House
they must pay in full.
One final observation I desire
to make. In his judgment the
Master of the Rolls stated that a
decision adverse to the directors
in the present case involved the
proposition that if directors bona
fide decide not to
invest their company's funds in some proposed
investment, a
director who thereafter embarks his own money
therein is
accountable for any profits which he may derive there-
from. As to
this, I can only say that to my mind the facts
of this
hypothetical case bear but little resemblance to the story
with
which we have had to deal.
Viscount
Sankey
Lord
Russell of
Killowen
Lord
Macmillan
Lord
Wright
Lord
Porter
[17]
REGAL (HASTINGS), LIMITED
v.
GULLIVER AND OTHERS.
Lord
Macmillan
MY LORDS,
The real question for decision
in this Appeal seems unfortunately
to have been somewhat obscured
by the course of the arguments
before the trial judge and to some
extent also in the Court of
Appeal.
The issue as it was formulated
before your Lordships was not
whether the directors of Regal
(Hastings) Limited had acted in
bad faith. Their bona fides was
not questioned. Nor was it
whether they had acted in breach of
their duty. They were not
said to have done anything wrong. The
sole ground on which it
was sought to render them accountable was
that, being directors
of the plaintiff company and therefore in a
fiduciary relation to it,
they entered in the course of their
management into a transaction
in which they utilised the position
and knowledge possessed by them
in virtue of their office as
directors, and that the transaction re-
sulted in a profit to
themselves. The point was not whether the
directors had a duty to
acquire the shares in question for the com-
pany and failed in
that duty. They had no such duty. We must
take it that they
entered into the transaction lawfully, in good faith
and indeed
avowedly in the interests of the company. But that
does not
absolve them from accountability for any profit which they
made if
it was by reason and in virtue of their fiduciary office as
directors
that they entered into the transaction.
The equitable doctrine invoked
is one of the most deeply rooted
in pur law. It is amply
illustrated in the authoritative decisions
whicli my noble and
learned friend Lord Russell of Killowen has
cited. I should like
only to add a passage from Lord Kames's
" Principles of
Equity," which puts the whole matter in a sentence :
"
Equity,' he says, " prohibits a trustee from making any profit
by
" his management, directly or indirectly." (3rd
edition, 1778,
Vol. II, p. 87.)
The issue thus becomes one of
fact. The plaintiff company has
to establish two things: (1) That
what the directors did was so
related to the affairs of the
company that it can properly be said to
have been done in the
course of their management and in utilisation
of their
opportunities and special knowledge as directors; and
(2) that
what they did resulted in a profit to themselves. The first
of
these propositions is clearly established by the analysis of
the
whole complicated circumstances for which the House is
indebted
to my noble and learned friend who has preceded me. The
second
proposition is admitted, except in the case of Mr.
Gulliver, in whose
case I agree that on the evidence he is not
proved to have made any
profit personally. The conditions are
therefore in my opinion
present which preclude the four directors
who made a personal
profit by the transaction from retaining such
profit.
The position of the Respondent
Mr. Garton is quite different. He
was the solicitor of the
plaintiff company and in no sense a trustee
for it. True, he made
a profit, as did the four directors, but he sub-
scribed for his
shares not only with the knowledge but at the ex-
press request of
his clients, and I know of no principle on which he
could be held
accountable to them for any resultant profit to
himself.
I should have been content
simply to express my concurrence
with the views expounded by my
noble and learned friend Lord
Russell of Killowen, with which I
wholly agree, but for the fact that
we are differing from the
Court of Appeal. For that reason I have
thought it proper to state
briefly the grounds of my concurrence.
Viscount
Sankey
Lord
Russell of
Killowen
Lord
Macmillan
Lord
Wright
Lord
Porter
[18]
REGAL (HASTINGS), LIMITED
v.
GULLIVER AND OTHERS.
Lord Wright
MY LORDS,
Of the six Respondents, two,
Gulliver and Garton, stand on a
different footing from the other
four. It is in regard to the latter
that the important question of
principle brought into issue by
the decisions of Wrottesley J. and
the Court of Appeal call for
determination. That question can be
briefly stated to be whether
an agent, a director, a trustee or
other person in an analogous
fiduciary position, when a demand is
made upon him by the person
to whom he stands in the fiduciary
relationship to account for
profits acquired by him by reason of
his fiduciary position and by
reason of the opportunity and the
knowledge, or either, resulting
from it, is entitled to defeat the
claim upon any ground save that he
made the profits with the
knowledge and assent of the other person.
The most usual and
typical case of this nature is that of principal
and agent. The
rule in such cases is compendiously expressed to be
that an agent
must account for net profits secretly (that is without
the
knowledge of his principal) acquired by him in the course of
his
agency. The authorities show how manifold and various are
the
applications of the rule. It does not depend on fraud or
cor-
ruption.
The Courts
below have held that it does not apply in the present
case for the
reason that the purchase of the shares by the Respon-
dents,
though made for their own advantage, and though the
knowledge and
opportunity which enabled them to take the
advantage came to them
solely by reason of their being directors
of the Appellant
Company, was a purchase which in the
circumstances the Respondents
were under no duty to
the Appellants to make, and was a purchase
which it was
beyond the Appellant's ability to make, so that if
the Respon-
dents had not made it, the Appellant would have been
no
better off by reason of the Respondents abstaining from
reaping
the advantage for themselves. With the question so stated
it was
said that any other decision than that of the Courts below
would
involve a dog-in-the-manger policy. What the Respondents
did,
it was said, caused no damage to the Appellant, and involved
no
neglect of the Appellant's interests or similar breach of duty.
But
I think the answer to this reasoning is that both in law and
equity
it has been held that if a person in a fiduciary
relationship makes
a secret profit cut of the relationship, the
Court will not enquire
whether the other person is damnified or
has lost a profit which
otherwise he would have got. The fact is
in itself a fundamental
breach of the fiduciary relationship. Nor
can the Court adequately
investigate the matter in most cases. The
facts are generally difficult
to ascertain or are solely in the
knowledge of the person who is being
charged. They are matters of
surmise; they are hypothetical
because the enquiry is as to what
would have been the position
if that party had not acted as he
did, or what he might have done
if there had not been the
temptation to seek his own advantage,
if in short interest had not
conflicted with duty. Thus in Keech v.
Sandford, Cases
Ch., Temp. King, a case in which the fiduciary
relationship was
that of trustee and cestui que trust, the trustee
was held
liable to convey a lease to the infant cestui que trust,
though
the lessor had refused to renew to the infant. Lord
Chancellor
King said, " This may seem hard that the trustee is the
"
only person of all mankind who might not have the lease." It
did
[19] 2
not matter that the infant could
not himself have got it and that
he was not damaged by the trustee
taking it for himself. One
reason why the rule is strictly pursued
is given by Lord Eldon in
ex p. James, 8 Ves. Jun. 337, "
no Court is equal to the examination
" and ascertainment of
the truth in much the greater number of
" cases." In
Parker v. McKenna, L.R. 10 Ch. 96, a most
instructive
case, the rule is so admirably stated by James L.J.
that I cannot
resist repealing his language, though my noble and
learned friend
Lord Russell of Killowen in his speech just
delivered, which I have
had the opportunity of reading in print
and with which I agree
completely, has already quoted it to your
Lordships. The words of
the Lord Justice which I emphasise are "
that that rule is an in-
" flexible rule, and must be applied
inexorably by this Court, which
" is not entitled to receive
evidence or suggestion or argument as
" to whether the
principal did or did not suffer an injury in fact
" by reason
of the dealing of the agent, for the safety of mankind
"
requires that no agent shall be able to put his principal to the
"
danger of such an enquiry as that." The italics are mine.
I
need not multiply citations to the same effect, or illustrations
of
the different circumstances in which the rule has been applied.
In the present case the four
Respondents were acting in the
matter as agents for the Appellant
Company in their capacity of
directors, that is " as
commercial men managing a trading concern
" for the benefit
of themselves and all other shareholders in it" if I
may
borrow that part of the description applied to directors by
Sir
George Jessel M.R., in Forest of Dean Coal Mining Co., 10
Ch.
D. 450 at p. 452. In the numerous actions, or most of
them,
which have been brought against directors of companies
for
profits secretly (that is without the assent of the
shareholders)
secured in the course of their dealing as directors,
the claims
have been against them in their capacity as agents.
Thus,
to take a familiar instance, in Boston Deep Sea Fishing
and
Ice Company v. Ansell, 39 Ch. D. 339, the Defendant
was
held liable to account to the Plaintiff Company of which he
was
director for secret bribes or bonuses which he had received
from
persons making contracts with the Company. The
Defendant's
liability flowed from the fiduciary relationship in
which he stood
to the Company as its agent. Bowen L.J. said at p.
367, " The
' law implies a use, that is, there is an implied
contract, if you put
' it as a legal proposition—there is an
equitable right, if you treat it
' as a matter of equity—as
between the principal and agent that
' the agent should pay it
over, which renders the agent liable to
' be sued for money had
and received, and there is an equitable
' right in the master to
receive it and to take it out of the hands of
' the agent, which
gives the principal a right to relief in equity." But
as it
was held in Lister v. Stubbs, 45 Ch. D. 1, the relationship
in
such a case is that of debtor and creditor, not trustee and
cestui que
trust. Many instances can be quoted from the
books of the
stringency with which the Courts have enforced the
rule that a
director must account to his Company for any benefit
which he
obtains in the course of and owing to his directorship,
even though
the benefit comes from a third person and involves no
loss to the
Company. I cite as one example Archer's case,
1892 1 Ch. D. 322,
where a director was held liable to account to
the Company for
the sum paid to him by the promoter of the Company
by way of
indemnity against the money which the director had to
pay for his
qualification shares.
The analysis of the facts in the
present case which has been
made by Lord Russell of Killowen shows
clearly enough
that the opportunity and the knowledge which
enabled the
four Respondents to purchase the shares came to
them
simply in their position as directors of the Appellant
Com-
pany. Wrottesley J. clearly so held. He said at the outset
3 [20]
of his judgment, "There is
no doubt they (the Respondents)
' did take up in their own names
shares which only after
' a few days and certainly only after a
week or two they were
' able to sell at a very large profit
indeed. There is no doubt that it
' was only because they were
directors and solicitor respectively of
' the Plaintiff Company
that this stroke of fortune came in their
' way." But he
decided against the Appellant Company because he
fixed his
attention on his view that the Appellant suffered no loss by
the
Respondents' conduct, instead of fixing attention on the crucial
fact
that the Respondents made a secret profit out of their agency.
I
do not think that any different view was taken on this aspect of
the
case by the Court of Appeal, or that it was questioned by that
Court
that the opportunity of making the profits came to the
four
Respondents by reason of their fiduciary position as
directors.
But the Court of Appeal held that in the absence of any
dishonest
intention or negligence or breach of a specific duty to
acquire
the shares for the Appellant Company, the Respondents
as
directors were entitled to buy the shares themselves. Once, it
was
said, they came to a bona fide decision that the
Appellant Com-
pany could not provide the money to take up the
shares, their
obligation to refrain from acquiring those shares
for themselves
came to an end. But with the greatest respect, I
feel bound to
regard such a conclusion as dead in the teeth of the
wise and salut-
ary rule so stringently enforced in the
authorities. It is sug-
gested that it would have been mere
quixotic folly for the four
Respondents to let such an occasion
pass when the Appellant
Company could not avail itself of it. But
Lord Chancellor King
faced that very position when he accepted
that the person in the
fiduciary position might be the only person
in the world who could
not avail himself of the opportunity. It
is, however, not true that
such a person is absolutely barred,
because he could by obtaining
the assent of the shareholders have
secured his freedom to make the
profit for himself. Failing that
the only course open is to let the
opportunity pass. To admit of
any other alternative would be
to expose the principal to the
dangers against which James L.J.
in the passage I have quoted,
uttered his solemn warning. The
rule is stringent and absolute
because " the safety of mankind "
requires it to be
absolutely observed in the fiduciary relationship.
In my opinion the Appeal should
be allowed in the case of
the four Respondents.
In the case of the other two
Respondents, I agree with Lord
Russell of Killowen that the appeal
should be dismissed for the
several reasons which he has given in
regard to each of them. These
appeals turn on issues of evidence
and fact, and I do not desire to
add to what has fallen from my
noble and learned friend.
Viscount
Sankey
Lord
Russell of
Killowen
Lord
Macmillan
Lord
Wright
Lord
Porter
[21]
REGAL (HASTINGS), LIMITED,
v.
GULLIVER AND
OTHERS.
Lord Porter
MY LORDS,
I have had an opportunity of
reading the speech which has been
delivered by my noble and
learned friend, Lord Russell of
Killowen and had we not been
differing from the view of the Court
of Appeal I should not desire
to add to what he has said. But as
we are reversing the judgment
of both the Court of first instance
and the Court of Appeal I
desire, out of respect for the opinions
expressed in them, to
state in the briefest possible compass the
grounds for the view
which I hold.
My Lords, I am conscious of
certain possibilities which are in-
volved in the conclusion which
all your Lordships have reached.
The action is brought by the
Regal Company. Technically, of
course, the fact that an
unlooked-for advantage may be gained
by the shareholders of that
Company is immaterial to the question
at issue: the company and
its shareholders are separate entities.
But one cannot help
remembering that in fact the shares have
been purchased by a
financial group who were willing to acquire
those of the Regal and
the Amalgamated at a certain price. As
a result of your Lordships'
decision that group will, I think, receive
in one hand part of the
sum which has been paid by the other.
For the shares in
Amalgamated they paid £3 16s. 1d. per share,
yet part of
that sum may be returned to the group, though not
necessarily to
the individual shareholders, by reason of the
enhancement in value
of the shares in Regal:—an enhancement
brought about as a
result of the receipt by the Company of the
profit made by some of
its former directors on the sale of Amal-
gamated shares. This, it
seems, may be an unexpected windfall, but
whether it be so or not,
the principle that a person occupying a fidu-
ciary relationship
shall not make a profit by reason thereof is of such
vital
importance that the possible consequence in the present case
is in
fact, as it is in law, an immaterial consideration.
The Plaintiff, the Regal
Company, by its pleadings claimed
(1) damages for negligence, (2)
alternatively the profit obtained on
the sale of the shares in
Amalgamated as money had and received
by the Defendants to the
Plaintiffs' use, and (3) in the further
alternative damages for
misfeasance. No claim for fraud was
suggested, and the learned
judge at the trial expressly exonerated
the Defendants from any
liability for negligence or misfeasance.
Before your Lordships'
House the claim for money had and
received was alone persisted in.
The alternative claim for
misfeasance, however, seems also to
have been presented to the
Court of Appeal, but to have been
rejected by them, and in common
with the rest of your Lordships
I unreservedly accept the findings
of both Courts.
It remains, therefore, to
consider the claim that (in the words of
the Master of the Rolls)
" in. the circumstances of the case the
" directors must
be taken to have been acting in the matter of their
" office
when they took those shares and that, accordingly, they are
"
accountable for the profits which they have made ". That
the
shares were obtained by the Defendants by reason of their
position
as directors of Regal is, I think, plain. The original
proposition,
when the formation of the subsidiary company was
suggested, was
that the whole of the shares should be issued to
the Regal Com-
pany partly for cash and partly for services
rendered, and this
2 [22]
proposition was discussed and
accepted at board meetings of that
company. It was only afterwards
when the necessity for finding
£5,000 cash arose that the
issue to any one other than the company
was considered, and then
the directors turned to themselves,
" There is no doubt it
was only because they were directors and
" solicitor
respectively of the Plaintiff company that this stroke of
"
fortune came their way," says the learned judge, and I agree
with
his observation.
In these circumstances it is to
my mind immaterial that the
directors saw no way of raising the
money save from amongst
themselves and from the solicitor to the
company, or indeed that
the money could in fact have been raised
in no other way. The
legal proposition may, I think, be broadly
stated by saying that one
occupying a position of trust must not
make a profit which he can
acquire only by use of his fiduciary
position, or if he does he
must account for the profit so made.
For this proposition the cases
of Keech v. Sandford (1726),
Sel. Cas. Temp. King. 61, and exparte
James (1803) 8 Ves.
jun. 337 are sufficient authority.
The learned Judge and the
members of the Court of Appeal
appear to have adopted a narrower
outlook with which, with all
respect, I find myself unable to
agree. " In order to succeed the
" Plaintiff company
must show that the Defendants both ought to
" have caused and
could have caused the Plaintiff company to sub-
" scribe for
these shares and that the neglect to do so caused a loss
" to
the Plaintiff company " are the words used by the learned
Judge.
" It must be shown,"
says the Master of the Rolls, " that in the
"
circumstances of the case it was the duty of the directors to
obtain
" these shares for their company ".
And, again, " The position
of the Regal Company would have
' been very much strengthened by
having all these shares in the
' two companies in the same hands
with the possibility of one
' control. That being so, the only way
in which these directors
' could secure that benefit for their
company was by putting up the
' money themselves. Once that
decision is held to be a bona fide
' one, and fraud drops
out of the case, it seems to me there is only
' one conclusion,
namely, that the Appeal must be dismissed with
' costs."
To treat the problem in this way
is, in my view, to look at it
as involving a claim for negligence
or misfeasance and to neglect
the wider aspect. Directors, no
doubt, are not trustees, but they
occupy a fiduciary position
towards the company whose board
they form. Their liability in this
respect does not depend upon
breach of duty but upon the
proposition that a director must not
make a profit out of property
acquired by reason of his relationship
to the company of which he
is director. It matters not that he
could not have acquired the
property for the company itself—the
profit which he makes is
the company's, even though the property
by means of which he made
it was not and could not have, been
acquired on its behalf.
Adopting the words of Lord Eldon in
ex parte James (supra),
" the general interests of justice require it,
" as no
Court is equal to the examination and ascertainment of the
"
truth in much the greater number of cases."
My Lords, these observations
apply generally to the action, but
the cases of Gulliver and
Garton stand on a somewhat different
footing. As to them, there
are additional and special considera-
tions to be kept in mind. I
need not set them out or refer to them
further than by saying that
I find myself in agreement with the
reasoning and conclusion of my
noble and learned friend, Lord
Russell of Killowen, and would
submit with him that the Appeal
should be allowed so far as
concerns the Defendants Bobby,
Griffiths, Bassert and Bentley and
should be dismissed in the case
of Gulliver and Garton. I also
concur in the order as to costs
which he suggests.
(18679r) Wt. —
16 4/42 D.L. G. 338
