This is an Appeal by Regal (Hastings) Limited from an Order of His Majesty's Court of Appeal dated the 15th February, 1941. That Court dismissed the Appeal of the Appellants from a judgment of the Hon. Mr. Justice Wrottesley, dated the 3Oth August, 1940. The Appeal was brought by special leave granted by this House on the 2nd April, 1941.
The Appellants we're the plaintiffs in the action and are referred to as "Regal"; the Respondents were the Defendants.The action was brought by Regal against the first five Respondents, who were former Directors of Regal, to recover from them, sums of money amounting to Â£7,010 8s. 4d., being profits made by them upon the acquisition and sale by them of shares in the subsidiary company formed by Regal and known as Hastings Amalgamated Cinemas Limited. This Company is referred to as " Amalgamated ". The action was brought against the Defendant, Garton, who was Regal's former solicitor, to recover the sum of Â£1,402 1s. 8d., being profits made by him in similar dealing in the said shares. There were alternative claims for damages for misfeasance and for negligence.
The action was based on the allegation that the directors and the solicitor had used their position as such to acquire the shares in Amalgamated for themselves, with a view to enabling them at once to sell them at a very substantial profit, that they had obtained that profit by using their offices as directors and solicitor and were, therefore, accountable for it to Regal, and also that in so acting they had placed themselves in a position in which their private interests were likely to be in conflict with their duty to Regal. The facts were of a complicated and unusual character. I have had the advantage of reading, and I agree with, the statement as to them prepared by my noble and learned friend, Lord Russell of Killowen. It will be sufficient for my purpose to set them out very briefly.
In the summer of 1935 the directors of Regal, with a view to the future development or sale of their Company, were anxious to extend the sphere of its operations by the acquisition of other cinemas. In Hastings and St. Leonards there were two small ones called the Elite and the De Luxe. Negotiations began both for their acquisition or control by lease or otherwise and for the disposal of Regal itself.
Part of the machinery for the purpose was the creation by Regal of a subsidiary company, the Amalgamated. It was registered on the 26th September, 1935, with a capital of Â£5,000 in Â£1shares. The directors were the same as those of Regal with the addition of Garton. It was thought that only Â£2,000 of the capital was to be issued and that it would be subscribed by Regal, who would control it.
Then difficulties began with the Elite and the De Luxe as to a lease, amongst others whether the directors of Amalgamated would guarantee the rent. The directors were not willing to do so. At last all difficulties were surmounted at a crucial meeting of October 2nd, 1935. It was a peculiar meeting, the directors both of Regal and Amalgamated were summoned to attend at the sameplace and at the same time. They did so, but, although separate minutes were subsequently attributed to each Company, it is not easy to say from the evidence at any particular moment for which company a particular director was appearing. It was resolved that Regal should apply for 2,000 shares in Amalgamated. It was agreed that Â£2,000 was the total sum which Regal could find. The value of the leases of the two cinemas was taken at Â£15,000. The draft lease was approved. Each of The Regal directors, except Gulliver, the Chairman, agreed to apply for 500 shares, Gulliver saying he would find people to take up 500. The Regal directors requested Garton to take up 500. I will deal later with particular evidence applying to Gulliver and Garton, who delivered separate defences.
Thus the capital of Amalgamated was fully subscribed, Regal taking 2,000 shares, the five Respondents taking 500 shares each, and the persons found by Gulliver the remaining 500. The shares were duly paid for and allotted. In the final transaction shortly afterwards these shares were sold at substantial profit and it is this profit which Regal asks to recover in this action.
The directors gave evidence and were severely cross-examined as to their good faith. The trial Judge said: All this subsequent history does not help me to decide whether the action of the " directors of the Plaintiff company and their solicitor on the 2nd " October was bona fide in the interests of the company and not " mala fide and in breach of their duty to the company ", and later on he said: I must take it that in the realisation of those facts it means that I cannot accept what has to be established by the Plaintiff, and that is that the Defendants here acted in ill faith, and later, Finally I have to remind myself, were it necessary, that the burden of proof, as in a criminal case, is the Plaintiffs', who must establish the fraud they allege. On the whole I do not think the Plaintiff company succeeds in doing that and, therefore, there must be judgment for the Defendants.
This latter statement was criticised by du Parcq, L.J., in the Court of Appeal, who says: To anyone who has read the pleadings but not followed the course of the trial that would seem a remarkable statement on the part of the learned Judge, because " it is common ground that there is no allegation of fraud in the " pleadings whatever . . . but the course which the case has taken " makes the learned Judge's statement quite comprehensible because it does appear to have been put before him as, in the main at any rate, a case of fraud.
It must be taken, therefore, that the Respondents acted bona fide and without fraud.
In the Court of Appeal the Master of the Rolls said: If the directors in coming to the conclusion that they could not put up more than Â£2,000 of the company's money had been acting in bad faith, and if that restriction of the company's investment had been done for the dishonest purpose of securing for themselves a profit which not only could but which ought to have been procured for their company, I apprehend that not only could they not have held that profit for themselves if the contemplated transaction had been carried out, but they could not have held a profit for themselves even if that transaction was abandoned and another profitable transaction was carried through in which they did in fact realise a profit through the shares ... but once they have admittedly bona fide come to the decision to which they came in this case, it seems to me that their obligation to refrain from acquiring those shares for themselves comes to an end. In fact, looking at it as a matter of business, if that was the conclusion which they came to, a conclusion which in my judgment wasamply justified on the evidence from the business point of " view, then there was only one way left of raising the money, and that was putting it up themselves. . . . That being so, the only way in which these directors could secure that benefit for their company was by putting up the money themselves.
Once that decision is held to be a bona fide one and fraud drops out of the case, it seems to me there is only one conclusion, namely that the appeal must be dismissed with costs". It seems therefore that the absence of fraud was the reason of the decision.
In the result, the Court of Appeal dismissed the Appeal and from their decision the present Appeal is brought.
The Appellants say they are entitled to succeed—
(1) because the Respondents secured for themselves the profits upon the acquisition and sale of the shares in Amalgamated by using the knowledge acquired as directors and solicitor respectively of Regal and by using their said respective positions and without the knowledge or consent of Regal;
(2) because the doctrine laid down in such cases with regard to trustees is equally applicable to directors and solicitors.
Although both in the Court of first instance and the Court of Appeal the question of fraud was the prominent feature, the Appellants' Counsel in this House at once stated that it was no part of his case and quite irrelevant to his arguments. His contention was that the Respondents were in a fiduciary capacity in relation to the Appellants and as such accountable in the circumstances for the profits they made on the sale of the shares.
As to the duties and liabilities of those occupying such a fiduciary position, a number of cases were cited to us which were not brought to the attention of the trial Judge. In my view the Respondents were in a fiduciary position and their liability to account does not depend upon proof of mala fides.
The general rule of equity is that no one who has duties of a fiduciary nature to perform is allowed to enter into engagements in which he has or can have a personal interest conflicting with the interests of those whom he is bound to protect. If he holds any property so acquired as trustee he is bound to account for it to his cestui que trust.
The earlier cases are concerned with trusts of specific property, Keech v. Sandford (1726) Sel. Ch. Cas. 61, Wh. and Tud. Edition 9th, II, 648, per Lord Chancellor King.The rule, however, applies to agents, as for example solicitors and directors, when acting in a fiduciary capacity. In Ex parte James (1802) 8 Ves. jun. 337; the headnote reads: Purchase of a bankrupt's estate by the solicitor to the commission set aside. The Lord Chancellor would not permit him to bid upon the resale, discharging himself from the character of solicitor, without the previous consent of the persons interested, freely given, upon full information. Lord Eldon said, p. 345: The doctrine as to purchase, by trustees, assignees, and persons having a confidential character, stands much more upon general principle than upon the circumstances of any individual case. It rests upon this, that the purchase is not permitted in any case, however honest the circumstances, the general interests of justice requiring it to be " destroyed in every instance, as no Court is equal to the examination and ascertainment of the truth in much the greater number of cases. In Hamilton v. Wright (1842), 9 Cl. and Fin. III, theheadnote reads: A trustee is bound not to do anything which can place him in a position inconsistent with the interests of his trust, or which can have a tendency to interfere with his duty in discharging it. Neither the trustee nor his representative can be allowed to retain an advantage acquired in violation of this rule.
Lord Brougham said, at p. 124, "The knowledge which he acquires as trustee is of itself sufficient ground for disqualification, and of requiring that such knowledge shall not be capable of being used for his own benefit to injure the trust. The ground of disqualification is not merely because such knowledge may enable him actually to obtain an undue advantage over others. In Aberdeen Railway Company v. Blaikie (1853), I, MacQ., 461, the headnote reads: " The director of a railway company is a trustee, " and as such is precluded from dealing on behalf of the company " with himself or with a firm of which he is a partner. Lord Cranworth said, at p. 471, A corporate body can only act by agents, and it is of course the duty of those agents so to act as best to promote the interests of the corporation whose affairs they are conducting. Such agents have duties to discharge of a fiduciary " nature towards their principal, and it is a rule of universal application that no one having such duties to discharge shall be allowed " to enter into engagements in which he has or can have a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound to protect.
It is not, however, necessary to discuss all the cases cited because the Respondents admitted the generality of the rule as contended for by the Appellants but were concerned rather to confess and avoid it. Their contention was that in this case upon a true perspective of the facts they were under no equity to account for the profits they made. I will deal first with the Respondents, other than Gulliver and Garton. We were referred to the Imperial Hydropathic Company v. Hampson (1882), 23, Ch. D., 1, where Bowen, L.J., at p. 12, drew attention to the difference between directors and trustees, but the case is not an authority for contending that a director cannot come within the general rule.
No doubt there may be exceptions to the general rule, as for example where a purchase is entered into after the trustee has divested himself of his trust sufficiently long before the purchase to avoid the possibility of his making use of special information acquired by him as trustee: (see the remarks of Lord Eldon, in ex Parte James (ubi supra) at p. 352) or where he purchases with full knowledge and consent of his cestui que trust. Imperial v. Hampson (ubi supra) makes no exception to the general rule that a solicitor or director if acting in a fiduciary capacity is liable to account for the profits made by him from knowledge acquired when so acting.
It is then argued that it would have been a breach of trust for the Respondents as directors of Regal to have invested more than Â£2,000 of Regal's money in Amalgamated and that the transaction would never have been carried through if they had not themselves put up the other Â£3,000. Be it so, but it is impossible to maintain that because it would have been a breach of trust to advance more than Â£2,000 from Regal and that the only way to finance the matter was for the directors to advance the balance themselves, a situation arose which brought the Respondents outside the general rule and permitted them to retain the profits which accrued to them from the action they took. At all material times they were directors and in a fiduciary position, and they used and acted upon their exclusive knowledge acquired as such directors. They framed resolutions by which they made a profit for themselves. They sought no authority from the company to do so, and by reason of their position and actions, they made large profits for which, in my view, they are liable to account to the company.
I now pass to the cases of Gulliver and Garton. Their liability depends upon a careful examination of the evidence. Gulliver's case is that he did not take any shares and did not make any profit by selling them. His evidence, which is substantiated by the documents, is as follows. At the board meeting of October 2nd he was not anxious to put any money of his own into Amalgamated. He thought he could find subscribers for Â£500 but was not anxious to do so. He did, however, find subscribers—Â£200 by South Down Land Company, Â£100 by a Miss Geering and Â£200 by Seguliva A.G., a Swiss company. The purchase price was paid by these three, either by cheque or in account, and the shares were duly allotted to them. The shares were held by them on their own account. When the shares were sold the moneys went to them and no part of the moneys went into Gulliver's pocket or into his account.
In these circumstances, and bearing in mind that Gulliver's evidence was accepted, it is clear that he made no profits for which he is liable to account. The case made against him rightly fails and the appeal against the decision in his favour should be dismissed.
Carton's case is that in taking the shares he acted with the knowledge and consent of Regal and that consequently he comes within the exception to the general rule as to the liability of the person acting in a fiduciary position to account for profits.
At the meeting of October 2nd, Gulliver, the Chairman of Regal, and his co-directors were present. He was asked in cross-examination about what happened as to the purchase of the shares by the directors. The question was: Did you say to Mr. Garton, Well, Garton, you have been connected with Bentley's for a long time will you not put up Â£500? His answer was, I think I can put it higher. I invited Mr. Garton to put the Â£500 and to make up the Â£3,000. This was confirmed by Garton in examination in chief. In these circumstances, and bearing in mind that this evidence was accepted, it is clear that he took the shares with the full knowledge and consent of Regal and that he is not liable to account for profits made on their sale. The appeal against the decision in his favour should be dismissed.
The appeal against the decision in favour of the Respondents other than Gulliver and Garton should be allowed, and I agree with the order to be proposed by my noble and learned friend, Lord Rusell of Killowen as to amounts and costs. The appeal against the decision in favour of Gulliver and Garton should be dismissed with costs.