Burland v Earle

JurisdictionUK Non-devolved
Judgment Date1902
CourtPrivy Council

Law of Canada - Canadian Act 27 & 28 Vict. c. 23 - Powers of Company - Formation and Investment of Reserve Fund - Purchase by Director and Resale to Company.

It is an elementary principle that a Court has no jurisdiction to interfere with the internal management of companies acting within their powers.

The company must sue to redress a wrong done to it; but if a majority of its shares are controlled by those against whom relief is sought, the complaining shareholders may sue in their own names, but must shew that the acts complained of are either fraudulent or ultra vires.

A company formed by letters patent under Canadian Act 27 & 28 Vict. c. 23 is not bound to divide all its profits on each occasion amongst its shareholders. It can legally reserve any portion thereof at its own discretion, and a Court has no jurisdiction to regulate it. Whether the undivided portion is retained to credit of profit and loss or carried to credit of a reserve, it may lawfully, in the absence of any express power, be invested on such securities as the directors may select subject to the control of a general meeting, but not restricted to such investments as trustees are authorized to make. It is not ultra vires for a company to invest in the name of a sole trustee. He is strictly accountable, but the dissentient shareholders are not entitled to an injunction against the directors and the company in respect of such investment so long as it appears to be bonâ fide.

Where a director purchased property without mandate from the company and under such circumstances as did not make him a trustee thereof for the company, and thereafter resold the same to the company at a profit:—

Held, that whether or not the company was entitled to a rescission of the contract of resale, it was not entitled to affirm it and at the same time treat the director as trustee of the profit made.

In re Cape Breton Co., (1884) 26 Ch. D. 221 and (1885) 29 Ch. D. 795, approved.

CONSOLIDATED APPEAL and cross-appeal from a decree of the Court of Appeal (Nov. 13, 1900) varying a decree (May 23, 1899) by the Chief Justice of the Queen's Bench Division of the High Court for Ontario.

The respondents, as shareholders in the American Bank Note Company, sued in December, 1897, under the circumstances stated in their Lordships' judgment, to compel the defendants, as directors, and the company to distribute in dividends a rest or reserve fund which, during a long course of years, had been accumulated. By an amended statement of claim on May 6 1898, they prayed, inter alia, for (1.) a declaration that certain investments of the company's funds in the sole name of Burland (a director), and also investments thereof by way of loan or otherwise, were illegal and ultra vires of the company, and that Burland be ordered to restore, with interest, all sums received by him for the purpose of such investments; (2.) a declaration that Burland purchased the plant and material of the insolvent Burland Lithographic Company as a trustee for the American Bank Note Company, and an order directing him to account for the profit made by him out of its resale to the company; (3.) a declaration that certain salaries had been paid wrongfully, and an order that they be refunded.

The principal question in the appeal was whether the majority of the shareholders have a right to retain the balance of profit and loss available for dividends instead of distributing the same as dividends, and as a consequence of such retention to invest such balance in shares and bonds of joint stock companies and other investments foreign to the business of the company.

The Chief Justice held that there was no express power given to the company to establish a reserve fund, and that the company had no implied power to do so, nor to invest such reserve fund upon securities or at all; but that it was unnecessary to determine whether the company had or had not such power, because no reserve fund was ever in fact set apart by the directors or the company, and that the sums at the credit of the profit and loss account in the balance-sheets were in reality net profits and as such available as dividends, and were applicable for that purpose only having regard to the powers of the company and the rights of the shareholders, and ought to have been so applied.

He accordingly ordered distribution, “retaining for the use of the company a reasonable sum for contingencies,” the amount thereof to be decided by himself in case of the parties differing about the same. The Chief Justice further directed that the defendant G. B. Burland should account as trustee for his dealings and transactions with the net profits of the company during the six years prior to suit; and also for all profits made by him from the sale by him to the company of the plant, &c., of the lithographic company purchased by him.

On November 13, 1900, the Court of Appeal decreed — (1.) That at the commencement of this action the sum of $264,167.21, being the amount shewn by the balance-sheet for the year 1897 as at credit of profit and loss account, less the sum of $44,022.32, which then formed the reserve fund, was undrawn profits and as such was available for dividends, and should be so applied; but this is not to affect the right of the directors and shareholders of the said company to appropriate out of future profits such further reserve as the needs of the company may properly require. (2.) That the defendants do forthwith proceed to take the proper steps for the distribution of the said undrawn profits in dividends among the shareholders. (3.) That the defendant George B. Burland is liable to account to the defendant company for his dealings and transactions with its net profits which, during the period of six years prior to the commencement of the action, have come to his hands as trustee for the company. (4.) That the defendant George B. Burland is liable to account for and pay over to the company all the profits made by him from the sale by him to the company of the plant, machinery, and materials of the Burland Lithographic Company, together with interest thereon. (5.) That the defendant George B. Burland is trustee for the company of and liable to account for all such parts of its net profits as are now held by him or invested in his name, or which he has received and converted to his own use. (6.) That the defendant George B. Burland is liable to account for and pay over to the company all moneys, with interest thereon, charged by him in respect of a loan made to one Bennett, unless he shall establish upon the reference hereinafter directed that the loan was made by the company. (7.) That the defendant George B. Burland is liable to account for and pay over to the company all sums which, since April 24, 1888, he has withdrawn from the said defendant company as salary in excess of the sum of $12,000 per annum. (8.) That the defendant Jeffrey H. Burland is liable to account for and pay over to the company all sums of money which he has withdrawn from the company as salary since May 28, 1895. (9.) An account of what is due from the defendants George B. Burland and Jeffrey H. Burland to the company, having regard to the declarations aforesaid. (10.) An injunction against the future employment of the net profits and earnings of the said company in the purchase of shares of the capital stocks of banks and other companies, and from using any portion thereof for the purpose of making loans to persons or corporations, and from in any way dealing with the said net profits already earned otherwise than in accordance with this judgment. (11.) An injunction against the defendant George B. Burland from investing in his own name or personally controlling any portion of the earnings or moneys of the company, or from dealing with the same otherwise than in accordance with the provisions of the judgment. (12.) and (13.) related to costs.

Blake, K.C., and R. C. Smith, K.C., for the appellants, contended, with regard to the main question of the reserve fund, that the Court of Appeal was right in holding that the power to create it existed in the company; but that the amount thereof was a question of internal management and policy to be decided by the directors or a majority of the shareholders acting in the legitimate exercise of their judgment. The company was absolute owner of all its profits, and incident thereto had the legal right to decide whether they should be distributed or reserved. The Court, in the absence of conduct amounting to fraud or oppression, had no right or duty of interference. The company was empowered to make by-laws, and reference was made to No. 13, which authorized the directors, subject to approval of a general meeting, to create a reserve fund. In the case of this company the creation of a reserve had been its settled policy for thirty years, and had never been objected to by any shareholder, but had been voted for by the respondents.

There was no case of hardship. Reasonable dividends had not been withheld; and even if they had been, it would primâ facie be a matter of internal management and policy, of which the majority of the shareholders are the judges. Reference was made to Brice on Ultra Vires, 3rd ed. p. 349; Stringer's CaseF1; Lindley, 5th ed. p. 430. With regard to the investment of the reserve fund, it was contended that the power to invest was incident to the power to accumulate, and it was a part of internal management to invest in such securities as could be easily realized.

With regard to Burland's sale to the company of certain assets of an insolvent company purchased by him, it was contended that he did not act in any fiduciary character in making the...

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