Houldsworth v City of Glasgow Bank

JurisdictionUK Non-devolved
Judgment Date12 March 1880
Docket NumberNo. 6.
CourtHouse of Lords
Date12 March 1880
Houldsworth
and
City of Glasgow Bank.

Ld. Chancellor (Cairns), Ld. Hatherley, Ld. Selborne, Lord Blackburn.

No. 6.
House of Lords

Public Company—Fraud—Action by shareholder against company in liquidation for damage caused by fraudulent representations of directors inducing him to purchase shares from the company.

Where a person has been induced to become a partner in a joint stock company by the fraud of the agents of the company, so long as he remains a partner of the company, and cannot or will not rescind the contract whereby he became a partner, he can have no action of damages for the fraud against the company itself.

A person purchased, in February 1877, from the company, stock of an unlimited joint stock banking company registered under the Companies Act, 1862. In October 1878 the company stopped payment and went into liquidation. In December following the purchaser raised an action against the company and its liquidators for damages which he stated at (1) the sum he had paid for the stock; (2) the amount of the first call on him in the liquidation; and (3) the estimated amount of future calls. His ground of action was that he had been induced by fraudulent misrepresentations of the manager and directors of the bank to purchase the stock from the bank. He admitted that at the date of his action it was too late for him to rescind the contract.

Held (aff. judgment of the First Division) that as rescission of the contract was admittedly impossible, and the purchaser was therefore obliged to remain a partner of the company, his action of damages against the company was irrelevant.

(In the Court of Session July 4, 1879, ante, vol. vi., p. 1164.)

A. H. Houldsworth appealed to the House of Lords against an interlocutor of the First Division of the Court of Session dismissing this action at his instance against the City of Glasgow Bank. The action concluded (1) for payment of £9046, 5s. 3d., the price paid by him for £4000 of the bank stock bought by him in February 1877, including certain charges; (2) for decree ordaining the defenders to free and relieve him of the loss and damage incurred through payment of the first call in the liquidation; and (3) for relief against future calls, all in name of damages; and he founded his claim on the ground that he had been induced by the fraudulent misrepresentations of the manager and directors of the company to purchase the stock from the bank.

The Lord Ordinary (Rutherfurd Clark) assoilzied the defenders. On a reclaiming note, the First Division (Lord Shand diss.) dismissed the action.

After hearing counsel for the appellant the House of Lords intimated that they would take time to consider their judgment.

At delivering judgment,—

Lord Chancellor.—My Lords, in this case the appellant bought from the City of Glasgow Bank £4000 of its stock in February 1877, paying £9,000 for it. He was registered as a partner, received dividends, and otherwise acted as a partner. When the bank went into liquidation in October 1878 he was entered on the list of contributories, and has since then paid very large sums for calls. On the 21st of December 1878 he commenced the present action against the liquidators to recover damages in respect of the sum he had paid for shares and the moneys he since paid for calls, and he founds his right to relief upon the ground of fraudulent misrepresentations made by the directors and others connected with the bank, for whose representations he alleges the bank was answerable.

As the question is one of relevancy, I will assume that the allegations of fraudulent misrepresentation are such as that if the bank had been a going concern the appellant would have been entitled to rescind his contract and to have recovered back all sums paid in respect of his shares. The Court of Session was of opinion that even although the averments amount to what I have stated still they afford no ground for an action against the liquidators, and they have dismissed the action, with costs. In my opinion the Court was right.

It was admitted before your Lordships—as indeed it could not be denied—that after the winding up of the company commenced it was too late for the appellant to repudiate his stock, and that he must remain, as the liquidation found him, a partner in the bank, and a contributory as such. It also came to be admitted in the course of the arguments at your Lordships' bar that, if the appellant, remaining a partner, had a right to raise an action for damages against the liquidators after the winding up, he must also have had a right before the winding up to have remained a partner, and also then to have brought an action for damages. It appears to have been contended in the Court below that the appellant might be unable to maintain the present action as a claim in the liqui dation to be satisfied pari passu with other creditors, and yet might be able to maintain it as a claim against the company, or against shareholders in the company, after all other creditors were satisfied. In the argument at your Lordships' bar I think it was felt to be impossible to maintain this theory of a deferred or secondary right of action against the company. I am satisfied there is no foundation for it. The Winding-up Act has no provisions for the payment of claims against the company except the claims of creditors. Creditors are supposed to be paid pari passu, and there is no provision, after they are paid, for opening up fresh claims by a contributor against the company. There are, indeed, provisions which, after the debts are paid, enable any inequalities in the contributions of the contributories to be put right, but that is quite a different matter.

The question, therefore, mainly argued at your Lordships' bar, and upon which the decision of this case, must, as I think depend, was this—can a man induced by the fraudulent misrepresentations of agents of a company to take shares in the company, after he discovers the fraud, elect to retain the shares and to sue the company for damages?

There is no doubt that according to the law of England a person purchasing a chattel or goods, concerning which the vendor makes a fraudulent misrepresentation, may, on finding out the fraud, retain the chattel or the goods and have his action to recover any damages he has sustained by reason of the fraud. I will assume, although no distinct authority has been produced, and I do not wish to express a decided opinion upon it, that the law of Scotland in the case of a chatte or of goods is the same as that of England.

But does the same rule apply to the case of shares or stock in a partnership or company? We are accustomed to use language as to such a sale and purchase as if the thing bought or sold were goods or chattels, but this it certainly is not. The contract which is made is a contract by which the person called the buyer agrees to enter into a partnership already formed and going, taking his share of past liabilities and his chance of future profits or losses. He has not bought any chattel or piece of property for himself; he has merged himself in a society, to the property of which he has agreed to contribute, and the property of which, including his own contributions, he has agreed shall be used and applied in a particular way, and in no other way.

Does, then, the principle which in the case of a chattel admits of an action for damages, apply to the case of a partnership contract such as I have described?

It may go some way to answer this question to observe that although during the last quarter of a century actions in every shape and form have been brought or attempted to be brought arising out of dealings in shares alleged to have been fraudulent no case could be mentioned at the bar in which an action for damages has been sustained, the plaintiff retaining his position in the company. A few dicta were referred to, but they were of so vague and hypothetical a character that they are not deserving of further examination.

I will, however, ask your Lordships to look at the case on principle.

A man buys from a banking company shares or stock of such an amount as that he becomes, we will say, the proprietor of one-hundredth part of the capital of the company. A representation is made to him on behalf of the company that the liabilities of the company are £100,000, and no more. His contract, as between himself and those with whom he becomes a partner is that he will be entitled to one-hundredth part of all the property, and that the assets of the company shall be applied in meeting the liabilities of the company contracted up to the time of his joining them whatever their amount may be, and those to be contracted afterwards, and that if those assets are deficient the deficiency shall be made good by the shareholders rateably in proportion to their shares in the capital of the company. This is the contract, and the only contract, made between him and his partners, and it is only through this contract and through the correlative contract of his partners with him that any liability of him or them can be enforced.

It is clear that, among the debts and liabilities of the company to which the assets of the company and the contributions of the shareholders are thus dedicated by the contract of the partners, a demand that the company—that is to say, those same assets and contributions—shall pay the new partner damages for a fraud committed on himself by the company—that is, by himself and his copartners—in inducing him to enter into the contract which alone could make him liable for that fraud, cannot be intended to be included. Any such application of the assets and contributions would not be in accordance but at variance with the contract into which the new partner has entered.

He finds out, however, after he joins the company, that the liabilities were not £100,000, but £500,000. He is entitled thereupon, as I will assume, to rescind his...

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  • Securities and Financial Services Regulation
    • Singapore
    • Singapore Academy of Law Annual Review No. 2021, December 2021
    • 1 December 2021
    ...The Business Times (18 October 2021). 55 See para 27.4 above. 56 Hans Tjio, “Enforcing Corporate Disclosure” [2009] Sing JLS 332. 57 (1880) 5 App Cas 317. 58 As was the case itself in Houldsworth v City of Glasgow Bank (1880) 5 App Cas 317. 59 See para 27.3 above. 60 Houldsworth v City of G......
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    • 1 January 2008
    ...claims of shareholders to creditors to protect and balance the competing interests of the different parties that may be affected. (1) (1880) 5 App Cas 317. (2) Ibid (3) Ibid 322. (4) Although limited liability companies could be incorporated from 1855, with the introduction of the Limited L......

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