Houldsworth v. City of Glasgow Bank

Publication Date01 Jan 1956
AuthorJ. A. Hornby
DOIhttp://doi.org/10.1111/j.1468-2230.1956.tb00344.x
HOULDSWORTH
v.
CITY
OF
GLASGOW
BANK
IT
was in the
Modem
Law
Review'
that Professor Gower, whilst
recognising their authority, first asserted that the speeches
in
Houldsworth
v.
City
of
Glasgow
Banka
appeared to show
a
con-
fusion between the corporate company and its members and that
the reasoning was unsatisfactory.
In
his recently published book
'
Professor Gower redibms his dislike of this decision, which he
regards
as
anomalous.
This
decision, which has the effect that
a
shareholder
who
has been induced to subscribe for shares
on
the
faith of
a
fraudulent statement in
a
company prospectus cannot sue
the company for damages unless he
also
rescinds the contrac$
of
allotment, is,
as
Professor Gower says,
''
entirely contrary
to
the
normal rules of the law of contract, for one can recover damages
for fraud without also rescinding the contract." Professor Gower
considers this exception to the general rule an anomaly caused, in
his opinion, by the failure of the House of Lords, prior to the
decision of the leading case
of
Salomon
v.
Salmon
f5.
Co.,.
to
realise that
a
company is an entity distinct from its members.
He suggests, however, that the decision may be explained away
by reference to the concept of
a
company's share capital as
8
guarantee fund for creditors.
"
The conception is at the basis
of
the rule that a shareholder who wishes to rescind must do
so
promptly, since the existence of his shares may have led others
to
extend credit
to
the company.' But
if
a
shareholder were
permitted
to recover damages notwithstanding that he had
lost
the right to rescind, the consequences to third parties would be
just
as
detrimental, since the assets of the company would be
equally depleted. Hence the rule that he must
ad
promptly, and
unless he does
so
and
rescinds the allotment (thus ceasing to be
a
shareholder) he
will
lose all remedies against the company."
With all due iespect for Professor Gower, his attempted
rationalisation of the case seems unsatisfactory. He says that to
allow
an
action againiit the company for damages for the fraudulent
misrepresentation inducing the share subscription, when
it
is too
1
(1950) 18
M.L.R.
567,
note
8.
a
(ISSO)
6
App.Cas.
817
(ELL.).
a
Modern Company
Loto
(London: Btevene
&
Sons,
Ltd.,
1954),
st
pp.
63-64,
279
and
814-315.
4
[1897]
A.C.
22
(H.L.).
I
have sttem
ted
to
ehow
in
s
review
of
Profeenor Gower's
bobk
(71
L.Q.B.
416)
that,
alkough
there
is
some 'uatification for
hie
view that the rule
in
Ookea
v.
Turquond
(1867)
L.R.
!2
b.L.
825
is
based
on
the notion that,
in
gmFting
credit
to
s
compsny,
creditors
rely
on
the company's
share
capital
so
a
perantee fund,"
this
is
not
in
fact
the
true explanation
of
the
rule.
54

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