New Sombrero Phosphate Company v Erlanger

THIS was an appeal against a decision of the Court of Appeal which had reversed a decree of Vice-Chancellor Malins^F1.

Sombrero is a small island in the West Indies, which was the property of the Crown, but had been leased out by the Crown for twenty-one years from March, 1865, at a rent of £1000 a year. The lease had been assigned to a company called “The Sombrero Company,” the business of which was to work the beds of phosphate of lime with which the island abounded. The company got into difficulties, and was ordered to be wound up; and the lease, constituting the most valuable part of the assets, was ordered to be sold. Mr. Chatteris was the official liquidator, and he fixed the price of £55,000 for it. The Appellants, together with one Thomas Westall, formed what was called a syndicate (in this instance meaning a special partnership), for the purpose of purchasing it. It was purchased at the price put on it by Mr. Chatteris, after the syndicate had offered, but in vain, a smaller price for it. The purchase was effected by a provisional contract on the 30th of August, 1871, though, in consequence of the sale being made under the order of the Court of Chancery, it could not be, as a matter of form, concluded at that time. The Appellants having thus become the purchasers of the lease desired to sell it again and obtain a profit on the resale; and with that view to get up a company to purchase it and work the mines.

Erlanger, a Paris banker, was the chief of the syndicate, and his firm managed its pecuniary transactions. On the 16th of September, 1871, the following circular letter was written to the different members of that body, “We have formed a syndicate for the amount of £60,000, for the purchase of the island of Sombrero, including the stores. You are interested in the transaction for £, for which we beg you will send us a cheque, as we have to pay the money into Court.” This note was signed, “Emile Erlanger & Co.” The cheques were sent, and the money paid into Court, the banking firm being stated on the list as holding an interest in the purchase for “£18,430.” The qualification of a director was to be the possession of fifty shares in the company.

A memorandum of association was prepared, and articles and a prospectus were also issued. The memorandum stated, in the usual way, the objects of the company, which were to purchase the lease and work the mines. The articles (among other things), stated that, in the first instance, the number of directors should not be less than four, nor more than seven, but that number might be changed at any general meeting. Two directors were to “form a quorum for the transaction of business.” The directors were empowered to adopt and carry into effect the contract for the purchase by the company of the island. The contract for the purchase and the articles of association were both dated on the same day, the 20th of September, 1871, and the company was registered on that day. The contract for the purchase by the company purported to be made between John Marsh Evans, as the vendor, and Francis Pavy, as the purchaser on behalf of the company. This contract recited the purchase by the syndicate of the 30th of August, but did not name the price then given. The price to the company was to be £110,000, of which £80,000 were to be paid down, and the remaining £30,000 to be satisfied by fully paid-up shares in the new company. The money was to be obtained by the subscriptions for the shares, which were to be 13,000 in number, of £10 each. Evans was intimate with Baron Erlanger, and appeared to act on his behalf; Pavy was a person who had visited the island, and whose name was introduced into the business to represent the company until the contract should be submitted to the directors and adopted by them. The directors were in the first instance named by the syndicate. The first name on the list of directors was that of M. Drouyn de Lhuys (who was resident in France, occupied with the political affairs of that country), the second that of Mr. Eastwick, M.P. (then about to start on a voyage to Canada), the third was that of J. Marsh Evans (the person named in the contract as the vendor), the fourth was that of Alderman Dakin, then Lord Mayor of London, and the last that of Rear-Admiral Macdonald. Westall, a solicitor, acted in the matter; he was himself one of the syndicate, but he claimed to act in the character of agent, and demanded, and received, the sum of £500 for his services.

There was no distinct account of any shares having ever been held by M. Drouyn de Lhuys, nor did he appear to have attended any meeting of the directors of the company, or to have taken any part whatever in the business. Mr. Eastwick was stated to have received, as a loan, from Erlanger's house the requisite number of shares to constitute him a director; these he afterwards returned, and in Erlanger's affidavit it was left doubtful whether he ever took his seat at the board. He resigned his directorship at an early period. Alderman Dakin appeared to have paid for his shares and attended the board. Evans attended, as did also Macdonald; both appeared to have held shares given or lent them by Erlanger. The first meeting of directors took place on the 29th of September, 1871. Three were present, Dakin (who sat as chairman), Evans, and Macdonald. Westall attended in the character of solicitor, and produced the deed for incorporating the company, and also the contract of purchase for £110,000, and it was resolved “that the said contract be approved and confirmed.” A prospectus of the intended company was produced. It was intended to be issued to the public. It began by a statement that the contract for the purchase of the island had been made by the directors, it set forth, in the usual way, the advantages of the concern, and gave the names of the directors, and contained some calculations assuming the form of a statement of past, and also of anticipated, profits. After the publication of the prospectus, the number of applications for shares became considerable.

The first ordinary general meeting of the company took place on the 2nd of February, 1872. At that meeting, presided over by Sir T. Dakin, a Mr. Stephenson stated that he had heard a rumour that what the company was to buy at £110,000, had, but a few days before, been sold to the persons who were now the vendors to the company, for £55,000, and he alluded to a person, one of the directors for the company, as one of the persons who had made the original purchase, observing, “I think it was an improper transaction...