Scottish Court of Session Decisions

This was an application by the Liquidators of the City of Glasgow Bank under the 165th section of the Companies Act 1862 (25 and 26 Vict. cap. 89), which provides—“Where in the course of the winding-up of any company under this Act it appears that any past or present director, manager, official, or other liquidator, or any officer of such company, has misapplied or retained in his own hands, or become liable or accountable for, any moneys of the company, or been guilty of any misfeasance or breach of trust in relation to the company, the Court may, on the application of any liquidator, or of any creditor or contributory of the company, notwithstanding that the offence is one for which the offender is criminally responsible, examine into the conduct of such director, manager, or other officer, and compel him to repay any money so misapplied or retained, or for which he has become liable or accountable, together with interest after such rate as the Court thinks just, or to contribute such sums of money to the assets of the company by way of compensation in respect of such misapplication, retainer, misfeasance, or breach of trust, as the Court thinks just.”

The following were the principal averments of the liquidators:—

“(1) [After narrating the constitution of the company, its insolvency, and the progress of the liquidation]—The creditors of the bank have not yet been paid the full amount of the debts due to them, in consequence of the liquidators not having yet realised sufficient funds for the purpose.

(4) By the contract of copartnery of the bank it was provided (art. 12) that ‘At every annual general meeting the ordinary directors shall exhibit a statement or abstract of the preceding yearly balance-sheet, and such farther statement or report of the affairs of the company as the ordinary directors may deem expedient or proper for the interests of the company to be made public, as is provided for in article 44 hereof; and the annual dividend of profits shall be then declared; and every such abstract shall be binding and conclusive on all the partners, but without prejudice to the provision hereinafter contained as to the appointment of auditors.’

Page: 280↓

(5) The said contract contained the following provisions (art. 44) regarding the books of the company:—‘There shall be regular books kept for the business of the company, and the various departments thereof, and all the transactions, affairs, and obligations of the company shall be duly inserted in such books; which books shall be balanced on the first Wednesday of June in each year, at which period statements or abstracts of the company's affairs shall be made out and regularly examined, docqueted, and subscribed by the said ordinary directors previous to the foresaid annual general meeting to be held in Glasgow on the first Wednesday of July thereafter, and at the said meeting the said statements or abstracts shall be reported for the satisfaction of all concerned; and as it is of great importance in conducting the affairs of a bank that the business and transactions of the bank should be kept private, on which account all directors and other persons connected with other banking establishments are disqualified from being directors of this company, and as the same reason applies to the examination of the books or documents of this company by other partners than the ordinary directors, it is hereby declared that the partners other than the said ordinary directors shall on no account or pretence have right to examine the books and documents of the company, but shall be bound to rest satisfied with the statements and abstracts above provided for.’

(6) The said contract contained the following provisions (art. 45) regarding dividends and reserved fund:—‘Whereas it is of importance to the permanent welfare and prosperity of any banking establishment, and may tend greatly to raise the value of the stock of this company, that the profits made for a considerable time after commencing the business should not be divided, but should be allowed to accumulate as a reserved or sinking fund to meet future contingencies, and to secure a more permanent and large division of profits in future years than could otherwise safely be made, it is hereby agreed that no dividend of the company shall be made for or during the first year of the company unless the ordinary directors shall in their discretion deem it expedient, but such profits, or such part thereof, as may not be appropriated by the said directors for a dividend shall be retained and form part of a fund to be called “the Reserved Fund,” and in each succeeding year during the continuance of this company the nett profits which shall arise and accrue to the company shall (after setting apart such proportion of the said nett profits as the ordinary directors shall think requisite for forming and maintaining the said surplus fund) be divided amongst the partners in proportion to their respective shares and the surplus fund for the time being shall be carried to a separate account in the books of the company; and the said fund is hereby declared to be also a reserved fund of capital to meet any emergencies, losses, or extraordinary demands upon the company, and also to prevent as far as may be a fluctuation in the amount of dividends of succeeding years: Declaring that the said surplus fund may be applied for the several purposes aforesaid by the ordinary directors in their discretion; and it shall be lawful for the ordinary directors besides, and in addition to the dividends annually payable to the partners from time to time, to take not exceeding one-third part of the surplus fund and to apply the same in the way of bonus amongst the partners in proportion to the number of their shares; and the said reserved surplus fund shall on the dissolution of the company belong to and be divided amongst the partners then entitled to the capital stock, in the same proportions as they shall be entitled to such capital.’

(7) Mr William Mackinnon, merchant in Glasgow, now of Balinakill, Argyleshire (hereinafter called the respondent), was a shareholder of the bank from the year 1857 till 1874. He was appointed an ordinary director on 5th July 1858, and acted as such thereafter till his resignation on 28th July 1870. During that period, and for a considerable time before he became a director (having been a member of an investigation committee as after mentioned), he was intimately acquainted with the affairs of the bank, and took a prominent part in its administration.

(8) It was the duty of the respondent, as one of the directors of the bank, to take care that not more than the nett profits arising and accruing to the company should be divided each year among the partners, and that dividends should only be paid out of the nett profits of the company, or out of the reserved or surplus fund accumulated from profits. The respondent during the period that he was a director of the bank failed in the said duty, and in violation of the bank's contract authorised or permitted the division among the partners of funds which were not nett profits which had arisen and accrued to the company, and were no part of the reserved or surplus fund, but formed part of the capital stock of the company. (9) In particular, the respondent and the other directors of the bank, at the annual balances in June, in the years 1858 to 1870 inclusive, placed to the debit of certain accounts of advances to or for behoof of certain American railway companies interest at rates varying from 5 per cent. to 10 per cent., and they carried these sums of interest to the credit of the annual profit and loss account. The interest so charged, and appearing at the credit of the profit and loss account, was treated by the respondent and the other directors during these years as profit which had arisen and accrued to the bank, and they declared and paid away the same among the partners as part of the dividends of the company. The respondent and the other directors well knew that the interest so charged was not profit which had arisen and accrued to the bank, and that, on the contrary, the interest or return received on account of the American railway advances was of trifling amount. During the twelve years that the respondent was director (1858–1870) the amount of interest charged to the said railway account was £315,897, 7s. 8d., whereas the amount actually received was £4230, 10s. 11d., leaving a balance of £311,666, 16s. 9d., which sums were from time to time entered in the profit and loss account as ‘interest received,’ and in the reports and balance-sheets published by the directors as profit which had arisen and accrued to the bank, and were paid away as such, although the profit had not arisen and accrued to the company, and the dividends of these years were to that extent paid out of capital.

(10) The advances referred to in the preceding article by the City of Glasgow Bank on account of the said American railway companies

Page: 281↓

began to be made by the directors in April 1856 (before the defender became a director), and continued to be made from time to time till 1870, when the respondent ceased to be a director. For the purposes of this application it is only necessary shortly to explain the nature of these advances.

(11) The Racine and Mississippi Railroad Company (hereafter called the Racine Company) was formed in 1852 to construct a railway from Racine City on Lake Michigan westwards to Savanna on the Mississippi, a distance of 138 miles. By the autumn of 1855, 68 miles of the line had been constructed, reaching Beloit. In order to complete the remaining 70 miles to Freeport, the company on 1st September 1855 issued mortgage bonds for 680,000 dollars over the part of the line already made. These bonds were for 1000 dollars each, bearing 8 per cent. interest, and having a currency of about 30 years; a sinking fund of 1 1 2 per cent. was to be annually set aside to reduce principal, and the bonds were convertible into ordinary stock. (12) In the spring of 1856 Mr William Gemmell, a partner of the firm of Thomas Gemmell & Company, wire-rope manufacturers and merchants, Glasgow, contracted with the Racine Company for the acquisition of 370 of these bonds. The rate appears to have been 80 per cent., in the expectation that they could be disposed of at a higher figure. On 26th March 1856 Gemmell had a meeting with Mr Robert Salmond, then manager of the City of Glasgow Bank, regarding the Racine bonds, and on 27th March 1856 wrote to him inquiring whether the bank would be willing to hold the bonds intended for sale in this country, pay the coupons when supplied with funds, and grant temporary advances, if required, to the Racine Company on the security of the bonds. The bank was offered 8 per cent. interest for advances, and a commission for other duties. On 28th March 1856 Mr John Low, then secretary of the bank (now deceased), wrote to Gemmell that the bank would take charge of the bonds and pay coupons when put in funds, but declining to give advances, at the same time hinting that when the undertaking was better known the matter might be again brought up. (13) Notwithstanding this refusal, credit accounts began immediately to be authorised and advances to be made by the bank at the request of Gemmell on the security in whole or in part of Racine bonds and stock. These advances were made to Gemmell and to the Racine Company, or to others on their behalf, and continued from 15th April 1856 till the temporary stoppage of the bank in November 1857. The total amount of credits to or on account of these parties authorised by the bank during that period was £139,450, and the total amount of cash advanced and bills current, for which the bank was liable in November 1857, was £117,608. Against this sum the bank held Racine bonds of the nominal value ( i.e., at par) of about £141,540, and other American securities and stocks of the nominal value of about £19,367. The real value of these securities was greatly less, and did not exceed one-half.

(14) The City of Glasgow Bank on 11th November 1857 found it necessary to suspend business owing to its embarrassments, and did not resume business till 31st December 1857. Immediately on the stoppage of the bank in November 1857, a private meeting of shareholders was held, at which a committee of shareholders was appointed, of which the respondent was one, to act with the directors. On 1st December 1857 a general meeting of shareholders was held, when it was resolved to authorise the directors and said acting committee to appoint an investigation committee, to consist of two shareholders, two accountants, and three merchants not connected with the bank. The respondent was one of the shareholders placed on the investigation committee by the directors and acting committee. The respondent acted on both these committees, and with the directors made an investigation into the affairs of the bank, upon which a report was made to an adjourned meeting of shareholders on 8th December 1857. The respondent then or subsequently became fully informed of the nature and extent of the credit accounts and advances mentioned in the preceding articles. (15) At a meeting of the directors and investigation committee held on 29th December 1857, at which the respondent was present, a set of rules and regulations for the conduct of the bank was adopted, and directed to be inserted in the minute-book, which was done. The 5th rule provided that no discounts or advances should be made without the sanction of at least two directors, and then not to exceed £50,000. The 8th rule provided that no additional advances should be made to any customer except under sanction of at least two directors, and then only within the said limit. The 13th rule provided that ‘in order for the future to prevent the inconvenience arising from the bank's funds being locked up, permanent loans, and loans upon securities not easily or immediately convertible, shall be discouraged and discontinued and wherever such loans have been made they shall be gradually called up as being in their nature opposed to sound banking principles.’ It was provided by rule 19th that until next annual meeting (July 1858) six shareholders, of whom the respondent was one, should ‘act in concert and be deemed to be a part of the board of directors;’ and by the 20th rule that the shareholders acting on the committee should be ‘subject to the same penalties and regulations as the directors.’ At the annual meeting of the shareholders held on 5th July 1858 the respondent was appointed a director of the bank, and acted as such from that time till his resignation in July 1870.

(16) In February 1858 the Racine Company was in embarrassed circumstances, and unable to pay the interests on its bonds. The second part of the line was formed to the extent of only one-fourth. The company had meantime made an issue of 700,000 dollars of bonds over that part, and had contracted with a Mr George A. Thomson, stockbroker, London, afterwards of New York, to place the said bonds, which he had failed to do. The bank, on the security of 163 of these bonds of 1000 dollars each, and a promissory note for £20,700 by the president of the company (Durand), had discounted drafts of Thomson upon Watson & Company, of Glasgow, to the extent of £20,000. Thomson and Watson & Company were quite unable to pay, and the Racine Company had no prospect of meeting their president's promissory note by the time it fell due on 29th April 1858. The promissory

Page: 282↓

note was accordingly dishonoured, and a month later an arrangement was made under which it was handed back to the company in exchange for 194 more bonds of 1000 dollars each over the second part of the line, and means were taken to help forward the completion of that part to Freeport. (17) In autumn 1858 Thomson and Watson & Company, who were liable with the Racine Company for a large part of the advances made by the bank, but were quite unable to meet their share of liability, relinquished in favour of the bank all interest in the Racine bonds held in security, and obtained discharges from the bank. In autumn 1859 a similar settlement was made with Gemmell, who renounced in favour of the bank (with certain exceptions) all the Racine bonds and other securities held by the bank, and in which he was interested in connection with the advances before mentioned; the bank thus became the sole parties in right of the said Racine bonds and other securities, and entitled to foreclose or realise them in consequence of the Racine Company's failure to repay the advances. (18) On 10th May 1859 the Racine Company, in consequence of its inability to pay interest on the bonds for which a suit for foreclosure on the eastern division of the line was pending, and in order to enable the bondholders to provide for the extension of the road to Freeport, and to manage the line till their bonds, with interest, should be paid, surrendered the whole line to the Farmers' Loan and Trust Company as trustees for the bondholders. The line was to be redeemable within five years after its opening to Freeport. Thereupon the Trust Company, at the request of the bank, through their agents Messrs Richard Irvin & Company, of New York, appointed the said Mr George A. Thomson and two others to manage the road for the benefit of the bondholders, of whom the bank were the principal. The bank held at this time bonds over the east or finished part of the line to the extent of 361,000 dollars, and over the west part to the extent of 194,000—in all 555,000 dollars.

(19) In addition to the advances previously made, the bank directors, from the beginning of the year 1859, from time to time authorised large advances to be made to the said George A. Thomson and to the Racine Company, and purchased additional bonds of the company, none of which were yielding interest. They also subscribed largely to the stock of, and made advances to the Northern Illinois Railway Company, whose line was a continuation of the Racine Company's. They further authorised advances to be made on credit accounts opened in the name of other parties for the purpose of aiding the said undertakings. The said accounts were closed with large debit balances before the respondent ceased to be a director, and the balances were carried to the debit of the railway account. Of these separate accounts, one called the iron rail credit account No. 26/7, in name of ‘William Mackinnon & Company’ (the respondent's firm), ‘and James N. Fleming,’ was on 1st June 1870 carried to the railway debenture account with a debit balance of £11,821, 15s. 4d. Another iron rail credit account No. 27/4, in name of ‘Wm. Mackinnon & Company’ (the respondent's firm),’ J. N. Fleming, and Smith Fleming & Company,’ was on the same date carried to the railway debenture account with a debit balance of £26,806, 1s. 8d. Another credit account in connection with speculations in grain, in name of the said G. A. Thomson, called grain credit account No. 2, was on the same date carried to the railway debenture account with a debit balance of £12,382, 5s. 3d. The other separate credit accounts were opened in the individual names of the directors of the bank (including the respondent) and others, who formed a combination for the purpose of purchasing bonds of the Racine Company. The debit balances on these accounts were on 1st June 1870 and prior dates carried to the debit of the railway debenture account, amounting in all to upwards of £40,000. (20) In 1866 George A. Thomson entered into a scheme for the formation of a company to construct an elevator and warehouse at Racine, to be worked in connection with the grain carried on the line to that terminus. In 1867 he came to this country and applied to the bank for 200,000 dollars to defray the expense connected with the scheme; and on 18th July 1867 the bank directors resolved to authorise Irvin & Company, their American agents, ‘to take up stock in the Elevator Company’ (now called the Racine Warehouse and Dock Company), ‘to the extent of 200,000 dollars, and to place it in the name of Messrs Mackinnon’ (the respondent), ‘Potter, and Fleming, or in the name of Irvin & Company in trust.’ Of this 200,000, 40,000 dollars advanced to Thomson in March 1867, and 54,743 dollars advanced to him in June 1867, were reckoned as payments to account, leaving a balance of upwards of 105,000 dollars to be advanced. The money was accordingly advanced by the bank, and the stock purchased and taken in name of Irvin & Company in trust. The respondent, though not present at the said meeting, was fully aware of and approved of what was done, and throughout took a prominent part in the negotiations with Thomson. The amount of stock purchased was 300,000 dollars, which was held by the bank at the time of its stoppage in 1878.

(21) In 1867 the Racine and Mississippi Railroad Company and the Northern Illinois Railroad Company were consolidated into one company, bearing the name of the Western Union Railroad Company, and in 1869 the bond and stock holders thereof, of whom the bank was the principal, sold the securities they held to Alexander Mitchell, banker, Milwaukee, State of Wisconsin, on behalf of himself and others. The offer made by Mitchell to the bond and stock holders of the Western Union Company was addressed to a committee of bond and stock holders of the company which met in London, and was agreed to by them on 28th April 1869. It was thereafter considered by the bank directors on 29th April 1869, and approved of by them, the respondent being present. The approval was communicated to the London committee. It was an offer to purchase the securities over the Western Union Railroad, extending from Racine to Port Byron (about 181 miles), on the conditions therein mentioned. (22) Mr C. S. Leresche, London, who afterwards became secretary of the bank, was, in May 1869, sent out by the bank directors and the London committee to settle the bargain, to adjust matters with Thomson and Irvin & Company, and to hand over the securities in the hands of the latter

Page: 283↓

in exchange for the new securities of the Western Union Company. In carrying out the arrangements the bank elected to repurchase ordinary stock of the company, and the full amount, 1,999,000 dollars stock, was purchased at the sum of 325,000 dollars, the rate fixed in the contract……

(25) On 18th of July 1870, shortly after these transactions were settled with the various parties interested, the respondent resigned his office of director of the bank, and it was accepted by the board on 28th July 1870. At that time the balances at the debit of the two accounts in the bank books, which contain a record of these railway transactions, were as under. They include the liabilities arising out of the two iron rail credits, the grain credit, the combination account, the elevator account, and other items which were originally entered in the names of others, but which in the final settlement were carried to the debit of the railway accounts with the bank:—

Balance at debit of ‘railway debenture account,’	£600,695 17 0
Balance at debit of ‘railway stock account,’	304,470 16 4
	£905,166 13 4

(26) When the sale to Mitchell and others was concluded, the bank received the following securities instead of the old securities held by them:—

Western Union Railroad bonds,	$2,931,170
Western Union Railroad stock,	1,992,160
Racine Warehouse and Dock stock (elevator),	300,000

After deducting 5000 dollars bonds, given to the London committee, there remained 2,926,170 dollar bonds. The odd 170 dollars in bonds were, for convenience, converted into 180 dollars stock, making the accounts as follows:—

Bonds,	$2,926,000
Stock,	1,992,340
Racine Warehouse, &c., stock,	300,000

These securities remained in the possession of the bank till it stopped in 1878.

(27) During the whole period that the respondent was a director (July 1858 to July 1870) the said railway accounts were practically unproductive. The companies were quite unable to pay dividends on their stock, and in rare instances was there even a partial payment of interest on the bonds held by the bank.

(28) Notwithstanding this, as above stated, interest at rates varying from 5 per cent. to 10 per cent. was added to the amount of the debt in the books of the bank at the yearly balances in June, and carried to the credit of the profit and loss account. The following is an abstract shewing that the amount of interest so charged to the railway accounts between the years 1858 and 1870 is £315,897, 7s. 8d., while the amount of interest actually received during the same period is £4230, 10s. lid.

For year ending	Interest Received.	Interest Charged.
June 1858	..	£ 1,705 12 1
Do. 1859	..	7,552 7 5
Do. 1860	..	7,536 3 10
	Carried forward	£16,794 3 4

For year ending	Interest Received.	Interest charged.
	Brought forward	£16,794 3 4
June 1861	£ 40 17 3	15,282 1 4
Do. 1862	18 0 0	16,046 0 6
Do. 1863	148 5 6	20,516 1 7
Do. 1864	3,023 8 2	26,720 6 5
Do. 1865	..	31,017 14 2
Do. 1866	..	33,965 17 5
Do. 1867	1,000 0 0	37,318 4 5
Do. 1868	..	36,468 13 5
Do. 1869	..	33,657 17 0
Do. 1870	..	48,110 8 1
	£4,230 10 11	£315,897 7 8
Deduct interest received,		4,230 10 11
Excess of interest charged over interest received,		£311,660 16 9

The practical result of this was to make it appear from the published balance sheets of the bank that during these years profits had arisen and accrued to the bank to the extent of £311,666, 16s. 9d. beyond what had actually arisen and accrued.

(29) The respondent, throughout the whole time he was director, was well aware of the nature of the transactions with the said railway companies, and of the amounts advanced and expended as above set forth, and he took a leading part in the management. He knew that little or no return was being derived from the said advances, and that interest was notwithstanding annually charged and carried to profit and loss account, and that dividends were declared and paid upon the footing that the said interest represented profits which had actually arisen and accrued.

(30) It was the respondent's duty, as one of the directors (in terms of article 44 of the contract), to have statements or abstracts of the bank's affairs made out at the annual balance in June, and regularly examined, docqueted, and subscribed by himself and the other directers, and thereafter reported to the annual meeting of shareholders. The said statements or abstracts were prepared, and were afterwards examined and docqueted by the directors at their meetings. The respondent approved of the balance-sheets and statements, and he signed those of 1859, 1860, and 1861; and they included, among other misstatements, as part of the profits received or earned, the interest charged on the said railway accounts as aforesaid. The annual reports were prepared from the said statements or abstracts, and recommended the declaration and payment of dividends from the profits so represented as received or earned. The dividends were accordingly paid in conformity with said recommendation, and the total amount of the payments made out of capital on this account alone exceeded £311,666, 16s. 9d. The shareholders had no means of knowing, and did not know, that any part of the profits so represented as received or earned was not so, and they approved of the reports in the belief that the profits were truly received or earned. The dividends so declared and paid during the said years were (so far as they bore to be made up of the interest before mentioned) paid out of the capital stock of the company. The liquidators reserve all action

Page: 284↓

competent against the respondent in respect of other misapplications of the bank's funds and misstatements of its books and accounts.

(32) The respondent has, in the circumstances above set forth, misapplied and become liable or accountable for moneys of the bank to the extent of the said sum of £311,666, 16s. 9d., and has been guilty of misfeasance or breach of trust in relation to the bank. The liquidators therefore submit that he should be compelled to repay the said sum, with periodical interest at 5 per cent. per annum. The respondent is liable for the said sum, or for certain parts thereof, jointly and severally along with others who were directors for the whole or part of the period from 1858 to 1870; and all action competent against these co-obligants is hereby reserved.”

The liquidators therefore prayed the Court “to decern and ordain the said William Mackinnon to make payment to the said George Auldjo Jamieson, John Cameron, and James Haldane, as liquidators foresaid, of the sum of Three hundred and eleven thousand six hundred and sixty-six pounds sixteen shillings and ninepence sterling, or such other sum as shall be ascertained to be the amount of the interest debited to the accounts in the books of the said City of Glasgow Bank, titled railway debenture account and railway stock account, and paid away as dividend, in accordance with the reports of the directors of the bank adopted at the annual meeting of the shareholders held in the month of June in the years 1858 to 1870, both inclusive, with periodical interest at the rate of five per cent. per annum from the respective dates of payment of the said dividends till payment; or otherwise to decern and ordain the said William Mackinnon to contribute such sums of money to the assets of the bank, by way of compensation in respect of the misapplication, misfeasance, or breach of trust libelled, as the Court may think just.”

The respondent lodged answers, in which he submitted that the note ought to be refused as incompetent and irrelevant, and unfounded in fact and law; and he entered into a full explanation of his position both as regards the facts and the law. The following were his most important statements:—“The respondent desires to inform the Court that the liquidators on 30th June 1880 raised an ordinary action in the Court of Session, in which they claim from the respondent payment of a sum of £122,565, 2s. 8d., being the alleged loss sustained by the City of Glasgow Bank in connection with the American railway securities, which also form the subject of the present note. The statements of fact made in that action are to a large extent identical with, though more complete than, those made in the present note, and the claim there made against the respondent is based, as in the present note, on the allegation that he failed to perform his duty as a director with reference to the said securities. The respondent is advised that the effect of a decision against him in said action would be to satisfy in whole or in part the claim made in the present note, and that a decision in his favour in said action might affect the question of his liability to said claim. The respondent submits to the Court that, apart from the answer to be immediately stated, this note is an unfair and oppressive proceeding, and that the liquidators ought to have included in the said action their whole claims against the respondent, and particularly those in connection with the said American railway securities.

“The respondent further submits that the present note is not a competent application under the 165th section of the Companies Act 1862. It is incompetent in respect—(1) It involves a serious question between the parties, which is the subject of a depending ordinary action; (2) it does not allege any misapplication, retainer, misfeasance, or breach of trust, nor does it crave a decree for repayment or contribution within the meaning of section 165; (3) it alleges a wrongful payment of dividend by all the directors of the bank, some of whom are dead, but it is directed against the respondent alone.

The respondent further says, that assuming its competency under section 165, the liquidators are not entitled to make this application. The liquidators represent the general body of shareholders, whose estate they are appointed to recover for behoof of creditors, yet here they seek repayment of money which has been paid to the shareholders, and for which therefore the shareholders have no claim against the respondent. Further, the liquidators are not entitled to recover the dividends paid on those shares, amounting to £750,965, which have during the liquidation been surrendered to the liquidators, and the surrenderors of which the liquidators represent individually; and as regards the dividends declared on the large amount of stock held by the bank, or in trust for the bank, amounting to £160,313, the claim made is unintelligible. Further, the liquidators do not say that the unrealised assets in their hands are insufficient for the payment of creditors in full. They merely say that they have not yet realised assets sufficient for that purpose. The fact is, that the creditors of the bank have already been paid in full, and there is no deficiency but a surplus of assets, and the sums claimed in the present note are therefore not required for that purpose. Or, if the creditors have not yet been paid in full, that is because the liquidators have not yet realised the whole assets, or have failed properly to realise some portion of the assets. Whatever therefore the rights of the liquidators in other circumstances might have been, the present application is made, not in the interests of creditors who are paid or provided for, or for the purpose of recovering the expenses of liquidation, but in the interest of a small section of shareholders who still retain their shares, or who have acquired shares during the liquidation for purposes of speculation, and who, if they did not receive payment of the dividends in question, represent the shareholders who did. According to the report of the liquidators to the contributories for the year ending 22d October 1880, issued 15th December 1880, after making provision for all claims, and also laying aside £100,000 to meet prospective income deficiencies, there is in the hands of the liquidators a surplus of assets over liabilities amounting to £286,677. From the same report it appears that the shares held by solvent contributories, and not surrendered to the liquidators, amount to £88,722.

The respondent further says, that assuming the competency of the application under section 165, and the title of the liquidators to make it, it is brought too late. It is now more than ten years since the respondent ceased to be a director of

Page: 285↓

the bank. The latest of the transactions complained of occurred before July 1870 (when the respondent ceased to be a director), and the earliest more than twenty-two years ago. This delay has seriously prejudiced the respondent's defence. The responsible manager of the bank during nearly the whole period of the respondent's directorship was Mr Alexander Stronach, who is now dead. Owing to lapse of time numerous documents and vouchers relating to the present question have been lost or destroyed. The delay has also prejudiced the right of relief which, in the event of his being held liable, the respondent would have, and would seek to enforce, against the shareholders who received the dividends alleged to have been improperly paid, most of whom are dead or insolvent, and others of whom it would be impossible to trace.

The respondent further says that the necessary parties have not been called to this application. The liability sought to be enforced against the respondent is based on a series of acts jointly done by the board of directors, and the respondent not only disputes his several liability for such acts, but denies that he joined in certain of these acts. The other directors or their representatives ought therefore to be made parties to this application.

The respondent further says that this note is irrelevant. The note contains no relevant averment of breach of duty as director by the respondent. What is stated is that the respondent treated as profit sums of interest earned which had not at the time been received in cash. In the case of advances or investments temporarily unproductive, or where the interest earned was not from year to year received in cash, the directors or the manager of the bank were, it is submitted, entitled to debit such accounts with the current rate of interest, or the rate agreed upon, or an ordinary and reasonable amount of interest—the directors believing that sufficient security was held for payment of the account. Debiting interest in this way is according to the custom of bankers, and the provisions of the contract of copartnery founded on which refer to the payment of dividend out of nett profits earned and fairly stated according to the usual practice of bankers, or out of the reserve fund. It is not said that the respondent acted in bad faith or from a corrupt regard to his own interest.

The note is also irrelevant in respect it seeks to make the respondent severally liable under section 165 for dividends paid by the board of directors. The 27th article of the contract of copartnership provides that—‘The said ordinary directors shall not be liable for omissions, nor shall they be liable for the responsibility of persons dealing with the company, nor for the sufficiency of the securities in which the funds of the company may be invested; nor shall the directors be liable for the acts and intromissions of the manager or other officers of the company, or of any other persons entrusted with the business or funds of the company, nor shall they be liable in solidum, nor for the actings, intromissions, or negligence of each other, but each of them for his own actings and intromissions allenarly: Declaring that from and after the 1st of March 1839 there shall be set apart as an allowance to the six ordinary directors for their trouble and services (exclusive of the manager) the sum of £6 weekly, to be distributed among them in such a manner as they shall from time to time appoint, by a minute entered in their sederunt-book; and further declaring that it shall be competent for the partners at any annual general meeting to increase the said allowance to the ordinary directors.’

The note is further irrelevant in respect that while it discloses the existence of a reserve fund into which a portion of the profits of each year was or behoved to be carried, it takes no account of the sums carried to the said reserve fund during the period of the respondent's directorship. It does not allege that the whole profits were divided among the shareholders, but yet it nowhere states or indicates to what extent the said profits were divided or to what extent they were reserved.”

The respondent then denied that he had misapplied or become liable or accountable for the moneys of the bank mentioned in the note, or that he had been guilty of any misfeasance or breach of duty in relation to the bank, or that he had authorised the division among the shareholders of sums forming part of the capital of the bank.

He explained further that “When the respondent left the board in 1870 the railway securities held by the bank formed a sufficient cover for the advances made up to that date, both principal and interest. More particularly, the securities specifically received on account of interest formed a sufficient cover for the interest debited as at that date. These securities have since been exchanged away and realised by the liquidators, but no credit is given in this note for any portion of the amount realised. If loss has been sustained on the particular securities in question it is entirely due to the hasty and negligent realisation effected by the liquidators. In any view, the liquidators having adopted and exchanged away the securities in question without notice to the respondent, are not entitled to charge him with any loss arising on the ultimate realisation of those said securities.”

Counsel were first heard on the respondent's preliminary pleas.

Argued for the liquidators — This was an application under the 165th section of the Companies Act 1862, to have Mr Mackinnon ordained to replace certain funds belonging to the City of Glasgow Bank which had been misapplied by him in breach of his duty as a director. The funds in question were certain sums of interest which were debited to an account for advances to certain American railways. These sums amounted in all to £315,897, but the liquidators alleged that, with the exception of £4230, these sums were never earned, the accounts being unproductive, and that in so debiting these sums to the accounts and dividing them as dividend among the shareholders, the directors were in fact paying away the capital of the bank; and the liquidators said further that Mr Mackinnon as a director knew that the accounts were unproductive, and that the dividends were paid, and consequently that he was liable to replace the money thus misapplied by him. The motion which the liquidators now made was for a proof; but the respondent argued as preliminary objections that the application was incompetent, that it was irrelevant, that the liquidators had no title to make it, besides the minor objections.

Page: 286↓

It was necessary to distinguish the present application from the action which was in dependence in the Outer House. They both related to the same advances, but in the Outer House action the liquidators contended that these advances were illegitimate, and should never have been made, and that in consequence £122,565 was lost to the bank; and they asked that Mr Mackinnon should be ordained to repay that sum. In this application, on the other hand, no question was raised as to the legitimacy of the advances; all that was said was that on these advances no interest had been earned, and yet that nevertheless interest had been paid to the bank shareholders as part of their dividend. Coming to the respondent's objections, it was not easy to separate the question of competency from that of relevancy. They seemed to be two names for the same question, which was this, whether the liquidators had a case under the 165th section? That question was fully considered in the Merchantile Trading Company—Stringer's case—April 26, 1869, L.R. 4 Chan. App. 475, where an application like the present was held to be competent; so also in the County Marine Insurance Company—Rance's case—December 15, 1870, L.R. 6 Chan. App. 104. These cases only went the length of showing that the 165th section was applicable to the case of a managing director who had himself received a portion of a delusive dividend, to the effect of making him refund his share of the delusive dividend. The case of the National Funds Insurance Company, November 30, 1878, L.R. 10 Chan. Div. 118, went further, and directors were held liable to refund not only the dividends they themselves had received, but those they had paid to others illegally out of capital. That was no doubt a limited company. So in another case— Evans v. Coventry, April 15, 1856, 25 L.J. Chan. 489, aff. March 27, 1857, 26 L.J. Chan. 400—that was also practically a creditor's question. The cases were commented on in Lindley on Partnership, 4th ed. ii. 1334, also 595. Then there were the cases of Joint Stock Discount Company v. Brown, July 5, 1867, L.R. 8 Eq. 381; the Land Credit Company v. Lord Fermoy, March 24, 1869, L.R. 8 Eq. 7, and July 21, 1870, 5 Chan. 763, and the British Guardian Life Assurance Company, March 15, 1880, L.R. 14 Chan. Div. 335. [ Lord Shand—Have you any case in which a single party is called and a point of that kind taken? In the cases you have mentioned all the directors were said to have been liable.] No. Not under the 165th section. But there were instances of actions— Western Bank v. Baird, March 20, 1862. 24 D. 859. [The Lord President referred to Tulloch v. Davidson, February 23. 1860, 3 Macq. 783, and the Earl of Kinnoul v. Presbytery of Auchterarder, February 27, 1838, 16 S. 661, and March 10, 1843, 5 D. 1010.] It was said that this was not a creditor's question, as the bank was not a limited company and the creditors would in the end be paid in full. Now, there was still an outstanding debt of upwards of £1,800,000; but it must be conceded that ultimately that would be fully paid with interest. The liquidators, however, at present represented formally both creditors and shareholders, and the interest of the creditors to insist in this application was this—that they were not bound to wait. They were entitled to payment at once if it could be got. Now, Mr Mackinnon had misapplied these sums, for that must be assumed at the present stage, and there was therefore a fund for instant payment which ought to be made available to the creditors, reserving to Mr Mackinnon whatever right of relief he might be entitled to. Even as representing shareholders, however, the liquidators had a title. The shareholders ultimately liable for this deficit were the shareholders of 1878, when the bank stopped. Some of these were shareholders during the period of Mr Mackinnon's directorate, others were not. But Mr Mackinnon said—“You or your authors have received these dividends alleged to have been illegally paid, and therefore I, the person who have committed this breach of trust, am not liable to repay as in a question with you.” Surely the shareholders, who under the articles of the company could not investigate for themselves, were entitled to answer—“We received this money bona fide, believing it to be proper interest, not capital, and have spent it. You, who knew the contrary, must, if you have the means, indemnify us from the consequences of your breach of trust. At all events, you must ante omnia restore things as as far possible to the position they would have been in but for your breach of trust, reserving your rights if you have any”— Bates v. Hooper, July 18, 1855, 5 De Gex. Mac. and Gord. 338. If things were restored to that position they could then consider whether any distinction was to be drawn between the various classes of shareholders—between those still on the register who were so in 1870 when Mr Mackinnon retired, and those who had come on since 1870. It might be that the former class were not entitled to repayment from Mr Mackinnon, but shareholders becoming so after 1870 were entitled to stand on their contract which involved this among other things, that the capital was wholly extant— Waterhouse v. Jamieson, March 13, 1868, 6 Macph. 591, rev. May 24, 1870, 8 Macph. (H. of L.) 88. [ Lord Shand—The argument against you on this point will be that although you did not get this money, your predecessor, the holder of the shares, did.] The clause of the contract of copartnery regulating the sale and transfer of shares was the 33d, which provided that every person acquiring shares, whether by inheritance or purchase, “shall take and assume the place and liability of his author, ancestor, or other cedent, and become subject to all the obligations incumbent on him.” But that referred solely to questions between the outgoing and incoming shareholders and the company; it did not touch the relative rights of an incoming shareholder and a director who had improperly paid away capital. [ Lord President—I want to know whether the great variety of positions in which different shareholders may be placed does not suggest that this claim can only be enforced by each individual shareholder for his own interest in separate actions of damages. There is a good deal of light to be had upon that subject in the series of cases regarding the Aberdeen Bank and the Western Bank.] Davidson v. Tulloch, June 3, 1858, 20 D. 1045, aff. February 23, 1860, 22 D. (H. of L.) 7; and Gordon v. Davidson, February 26, 1864, 2 Macph. 758, were actions of damages by an individual shareholder against an individual director for misrepresentation,

Page: 287↓

inducing the pursuer to become a shareholder. But in the Western Bank v. Baird, January and March 1860, 22 D. 447, the liquidator sued an action against an individual director for losses caused through his breach of duty as a director. The present case was not of the nature of an action of damages at all. It was a summary demand upon a director to replace money which he had misapplied. Besides the present proceedings, there might quite well be actions of damages by individual shareholders against Mr Mackinnon. The shareholders' loss was by no means exhausted by success in the present application. In regard to the action against Mr Mackinnon, that was for money illegally invested and lost, with interest at five per cent. on what was lost. If Mr Mackinnon paid the whole sum sued for in the action, the interest so paid would be applicable pro tanto to diminish the amount asked for here. On the whole matter the liquidators were entitled to a proof.

Robertson for the respondent—The following were the preliminary questions—(1) the substance and nature of the case against Mr Mackinnon (a) as not being within the 165th section of the Act, and ( b) as being irrelevant irrespective of the form of application; (2) whether the liquidators had a title either as representing shareholders or as representing creditors? (3) whether the present demand could be enforced against a single director in the absence of his fellow directors? (4) whether the remedy now sought was not barred by lapse of time and change of circumstances? (5) whether the substance of the present demand was not made in the other action? (6) whether having dealt with the principal of those advances without notice to Mr Mackinnon, and in such a way as to deprive them of their remedy against him as regards the principal by exchanging original properties for other and distinct subjects, the liquidators were not also barred from insisting in their claim for interest? Now, in the note there was not one word to suggest that these advances were not legitimate investments — merely that they were unproductive. That was to say, they did not produce interest which could as such be entered in the bank's books, although the bank received an equivalent in the form of bonds or stock of the railways. Were not the directors, therefore, in such circumstances within their duty and the exercise of their discretion when they debited the account with interest, and—for that seemed to follow—appropriated the amount so debited to dividend? If they believed the advances in question to be bad debts, which was not contended here, their duty was to write them off the bank's books. If they did not write them off, they had no alternative but to debit them with overdraft interest; Stringer's case, supra, was an authority. [ Lord Shand— There must have been inquiry there. Here you are stopping inquiry.] But the liquidators did not allege more than was proved and held insufficient in Stringer's case; therefore why inquire here? In that case the directors actually borrowed money to pay the dividend, yet they were held free. Rance's case, supra, was also an authority. [ Lord Shand— What do you say would have made the case relevant in the way you are taking it?] To have said that the investment was an illegitimate investment, and that not only had no interest been earned, but that notoriously and in point of fact none could have been earned. The respondent's construction of section 165 was much more limited than that attempted by the liquidators. Its primary and ordinary application was to the case of directors who had misapplied money to their own personal benefit. Taking the question of mora next, Mr Mackinnon ceased to be a director in 1870, and the liquidators had been three years in office; they were therefore on that ground barred from insisting in this claim— Mammoth Copperopolis of Utah, Limited, Nov. 18, 1880, Law Times, 754. The next point was this—that the present company was one of unlimited liability, whereas in all the English cases cited the companies were limited, with the exception of Evans v. Coventry, which was only an apparent exception, as the plaintiff had a right under his contract to interfere to prevent encroachment on capital. The distinction was clear—in an unlimited company creditors contracted on the faith of the partners; in the case of a limited company they contracted on the faith of the capital— Grissell's case, August 10, 1866, Law Rep. 1 Chanc. App. 528; Companies Act 1862, sec. 183, subsec. 3. Creditors had no interest therefore, it being admitted that the shareholders here were able to pay the debts of the company in full. Further, the rights of creditors were no higher than those of the company and its shareholders. The interest of creditors did not entitle a liquidator to over-ride positive contracts inter socios that the capital had been fully paid up when in fact it had not— Waterhouse v. Jamieson, supra. In Tennant's case in this liquidation, Jan. 22, 1879, 6 R. 554, all that was laid down was that the rights of the company were to be determined as at the date of the liquidation. The present question consequently was a shareholders' one only. Now, there were various classes of shareholders. There were first the shares held by the bank itself before the liquidation, and the shares surrendered to the bank in course of the liquidation was payment of a portion of the money here asked for to be paid in respect of such shares. Then there were the shareholders who were such during Mr Mackinnon's period of office, and still were so. Were they to receive payment of what they had already got as dividend? Lastly, there were the shareholders who had become so after Mr Mackinnon's retirement. Such shareholders could not claim repayment of dividends which had been received by their authors— Hunter v. Carron Company, June 25, 1868, 6 Macph. (H. of L.) 106; Turquand v. Marshall, April 18, 1868, L.R., 6 Equity 112, and Feb. 11, 1869, 4 Chanc. App. 376; Mayhew's case, May 27, 1854, De Gex, Macn. and Gord. 837. The case of all the shareholders therefore was within the rule frustra petis quod mox restiturus es. Assuming, however, that the money was repaid to the liquidators, they would have to determine to which of the shareholders, and in what proportions, it would have to be distributed, which made it practically a question which each shareholder should raise and settle for himself. It was said, further, that Mr Mackinnon was simply in the position of a trustee who by breach of trust had paid to a beneficiary money which ought to have gone to some one else interested in the trust, and it was contended that the trustee who had done that could not demand that the

Page: 288↓

beneficiary should repay what he had received in over payment. But that was not necessarily the case— Hood v. Clapham, Nov. 20, 1854, 19 Beav. 90. There was next the question of all parties not called. Where there was delict or quasi delict, there was joint and several liability; but where the action was founded on contract, all those who collectively were guilty of the breach of contract must be made parties— Western Bank v. Baird, January and March 1860, 22 D. 447, Lord Justice-Clerk (Inglis), p. 476. Here the application was based on breach of contract, not on delict. The remainder of the argument related to the competency of their application pending the action in the Outer House.

Replied for the liquidators—The 165th section was intended to be very comprehensive. Provided there was a misapplication of funds the Court might inquire into it, and it was no answer that there might be criminal responsibility as well. There was undoubtedly a misapplication of funds averred in this note. What was averred was not that the directors had paid dividend when in fact they had no cash in their coffers; that would be no misapplication; but it was that they had knowingly for a period of twelve years paid dividends out of interest which they had not received at all. Stringer' company there was a blockade-running company—a very risky adventure—the period impugned was one year only; the shareholders had not changed, and knew personally the nature of the investments; and the only creditor did the same, having contracted on the faith of the company's balance sheet. Nobody, therefore, had an interest. Now, had the liquidators any title to enforce this application? That involved two questions—first, had anybody such a title? and secondly, were the liquidators entitled to represent such persons. The duty of the liquidators was to collect the assets in order to distribute them among those in right of them. Creditors who but for the Companies Acts might have enforced their claims against individual shareholders were bound to wait only in so far as these Acts made that necessary. But no distinction in this matter was drawn in the statute between limited and unlimited companies. Section 183 was explained by section 196—see also sections 25 to 29. Waterhouse v. Jamieson settled that creditors had no title and interest to complain of any transaction between shareholders and directors which was not in violation of the contract of the company; but acts in violation of the contract were different. Then, as regards shareholders, the rule assignatus utitur jure auctoris did not apply to them. The Carron case really turned on the construction of a will. The transfer of a share was the transference of a right of property, as of land or of corporal moveables; and did not, like the transference of a debt, give the debtor the same defences as against the assignee as he had against the cedent. As regards the directors' right of ruling against the old class of shareholders, and the way to operate it— Salisbury v. Metropolitan Railway Company June 29, 1870, 22 Law Times, 839. Assuming, then, that some shareholders at least had an interest, had the liquidator a title to enforce that interest or must each injured person sue for himself? That the liquidator had such a title followed from the previous argument. He was on behalf of the company making a single and indivisible claim for breach of duty by which the company had been injured. Next, as regards the question of all parties not called—If this was an action upon a contract against one of several correi debendi, it could not be maintained against him alone, because the correi debendi being laid together as co-obligants by the provisions of the contract which was sought to be enforced, could not be separately sued for performance. But here the application was not founded on a violation of the contract—not upon that merely; it was founded on a breach of duty maintainable at common law, though it might be embodied in the contract of this bank— Baird, July 14, 1866, 4 Macph. 1070; British Guardian Life Assurance Company, March 15, 1880, 14 Chanc. Div. 335. Then as to the alleged acquiescence, who had acquiesced? The parties wronged, i.e., the shareholders, had never done so. The succeeding directors might have done so, but their delinquency in not calling their predecessor to account could not bind the shareholders who had under the contract no access to the company's books— Randall v. Errington, Feb. 15, 1805, 10 Vesey 423; Orr v. Glasgow, Airdrie, and Monkland Railway Company, April 24, 1860, 3 Macq. 799.

Replied for the respondent—It was within the discretion of the Court to grant or refuse a remedy under the 165th section. Here the Court ought to refuse to try a question of such magnitude, not on a closed record, but by petition and answers— Feltom's case, Nov. 18, 1865, 1 Eq. 219; Bank of Gibraltar, Nov. 17, 1865, 1 Chanc. App. 69. The liquidator represented a variety of interests—the shareholders being in different positions—and it was not intended that he should by this summary method get back money, leaving the rights of individual shareholders to be settled afterwards. Each of them ought to sue his own action— Mayhew's case; Mann v. Sinclair, June 20, 1878, 6 R. 1078. There none of the shareholders were damnified, on the principle assignatus utitur jure auctoris. There were other cases on this point which had not been cited— Ffooks v. South-Western Railway, Jan. 14, 1853, 1 Sm. and Giff. 142; Peek v. Gurney, Nov. 6, 1871, L.R., 13 Eq. 79, aff. July 31, 1873, L.R., 6 H.L. Eng. 377. It might, however, be that shareholders coming in after 1870 had done so on the faith of the entire capital being extant. Their remedy, however, was an action of damages against those through whose representations they had been induced to become shareholders.

At the suggestion of the Court a minute was lodged, from which it appeared that there were 208 solvent shareholders of the bank at the date of the present application, with a total holding of £88,722. Of these 69 with £38,324 acquired their shares prior to Mr Mackinnon's retirement in 1870, and 139 with £59,395 acquired them after that event. Of shareholders who had surrendered to the liquidators, £337,227 stock had been acquired before, and £420,515 after 1870; and the bank held £153,536 stock itself.

The Lords made avizandum.