Aaron's Reefs Ltd v Twiss
[1896] A.C. 273(Judgment by: Lord Halsbury LC (including background))
Between: Aaron's Reefs Ltd - Appellant
And: Twiss - Respondent
Judges:
Lord Halsbury LCLord Watson
Lord Herschell
Lord MacNaghten
Lord Morris
Lord Davey
Subject References:
COMPANY
Prospectus
Fraudulent Misrepresentation
Shareholder
Repudiation by Plea
Forfeiture of Shares
Legislative References:
Companies Act, 1867, c. 131 - s. 38
Judgment date: 30 April 1896
Judgment by:
Lord Halsbury LC (including background)
Where a person is induced by a fraudulent prospectus to apply for an allotment of shares, and his shares are afterwards forfeited by his failure to pay calls, he ceases to be a shareholder and becomes a mere debtor to the company, and if he has done nothing to affirm the contract he may repudiate it and defend an action for calls on the ground of the fraud.
A prospectus which merely specifies the dates of and names of the parties to contracts in compliance with the Companies Act, 1867, s. 38, does not give notice of circumstances contained in the contracts which are material to be known and the omission of which causes the prospectus to give a false impression.
The decision of the Irish Court of Appeal ([1895] 2 I. R. 207) affirmed.
The following statement of the facts is taken from the judgment of Lord Watson:-
The appellant company was incorporated in January 1890 with a nominal capital of 200,000l., divided into 800,000 shares of 5s. each, for the purpose of acquiring the right to work and of working ores, auriferous deposits, and precious stones. In February 1890 the company, under two deeds of purchase, acquired the right to work what is therein described as the mining concession of La Victoria, in the Republic of Venezuela. The price payable for one portion of the concession was 19,000l., and for the other 131,000l.; and the company undertook to pay over to each of the vendors a moiety of the moneys received from the public for the subscription of shares until the first of these sums was paid off, and thereafter to pay two-thirds of the moneys derived from that source, in extinction of the balance of 112,000l. of the second sum, retaining the other third as working capital.
The concession of La Victoria was well known to many persons who indulge in gold-mining speculations, and among them the directors of the new company. One of these gentlemen, who was examined as a witness for it in the present case, gave the following abstract of its history. It was first taken up by the Victoria Gold Company, Limited, which was formed for that purpose in the year 1882, who agreed to pay 100,000l. for it, and, after "prospecting for mining operations," went into liquidation in November, 1885. In January 1886 a new company, called Victory, Limited, was formed, and took over the assets and liabilities of its predecessor. The public subscribed for 170,000 of its 5s. shares; and the whole subscriptions, amounting to 42,500l., were "spent in the mine."
The company paid no dividend, but lasted till the end of 1887, when it was wound up by order of the Court, and its property, including the concession, was sold for 2000l. in cash, the purchaser at the same time undertaking liabilities to the amount of 8000l. A month afterwards a new company, the Victory or Victoria Company, Limited, was started, which is said to have taken over the concern from the last purchaser, giving him in exchange 3910l. in cash and 131,000l. in paid-up shares, besides assuming the liabilities which he had undertaken. The third company did not, like its unfortunate predecessors, find its way into liquidation. So far as appears, it neither spent money in prospecting nor in attempting to work or develop the mine; and the only profitable business it seems to have engaged in was when its leading spirits got up the present and fourth company, and proceeded to transfer the concern to it at the price of 150,000l., to be paid in hard cash out of the money to be subscribed by the new shareholders.
In February 1890 the appellant company issued a prospectus, on the faith of which the respondent in this appeal, an Irish gentleman residing in Limerick county, became a subscriber, on the terms it offered, for 100 shares. The prospectus invited subscriptions for 200,000 shares only, upon which a deposit of 1s. per share was to be paid, and no further call made during the year. The shares were allotted to the respondent, who paid the deposit money.
On March 5, 1891, after the expiry of the year, the company made a call of 4s. per share, payable on the 19th of that month.
The respondent did not comply with that request, and on April 27 he received an intimation that his shares would be forfeited if payment were not made on or before May 4. On May 5 notice was sent him that the shares had been forfeited. The articles of association provide that a member whose shares are forfeited shall nevertheless remain liable for calls previously made.
On September 21, 1891, the appellant company brought the present suit against the respondent, before the Exchequer Division of the High Court of Justice in Ireland, for recovery of the call of 4s. per share. The defence, which was delivered on December 21, 1891, substantially consisted in the allegation and plea that the prospectus was untrue in material respects, and that his contract to take shares, having been induced by fraud, could not be enforced. In the voluminous proceedings which have followed upon these pleadings the appellant company has traversed the allegations of fraud, and has also maintained that the respondent is estopped from challenging the validity of the contract by reason of his failure, within a reasonable time, to repudiate it, or to take steps for procuring its rescission.
At the trial of the cause before Holmes J. the jury found
- (1.)
- that the fact and terms of the sale by the Victoria Gold Mining Company to the City Stock Exchange Company, and of the resale of the last-named company to the plaintiff company, were material matters which ought to have been disclosed in the prospectus; and
- (2.)
- that these matters were not disclosed in the prospectus, with the fraudulent intent of concealing from persons reading it matters which if known would have prevented them from becoming shareholders, and of inducing them by such concealment to apply for shares.
The jury also found
- (5.)
- that the defendant was induced to apply for the allotment of shares by the prospectus, and
- (7.)
- that the statement that the mine had been proved "rich" in the prospectus was false.
There are other findings of the jury, none of them favourable to the company, which I do not find it necessary to consider for the purposes of this appeal.
After verdict, the judge who presided at the trial entered judgment for the respondent. A motion to set aside the verdict was thereafter dismissed unanimously by two learned judges of the Exchequer Division. The Court of Appeal was equally divided, [F1] the Lord Chancellor and the Master of the Rolls being of opinion that there was neither untruth nor fraud in the prospectus, and also that, if there had been, the respondent would have been barred from objecting to the validity of his contract to take shares by his own delay in repudiating it; whilst FitzGibbon and Barry L.JJ. took an opposite view upon both these points. The Court being equally divided, the order was that the order of the Exchequer Division do stand affirmed. Against these decisions the plaintiffs brought the present appeal.
April 24, 28. Levett Q.C. and Edward Ford for the appellants. There has been no misrepresentation of fact - there is the gold if there is money to work it. The company believed in the mine, and did not mislead the shareholders. Even if they failed to disclose all the facts, the non-disclosure was not fraudulent unless an obligation to disclose is proved; and there is no obligation to do more than the statute (Companies Act, 1867, c. 131, s. 38) requires, namely, to give the names of the parties to and the dates of contracts. In an action of deceit there must be a fraudulent misrepresentation unambiguous in meaning: Smith v. Chadwick. [F2] There was no real finding of false statements by the directors.
Further, if there were fraudulent misstatements, the respondent ought to have exercised his right of avoidance at once: Taite's Case. [F3] He was too late, and the rights of third parties have intervened. No ground is shewn either for an action of deceit or for the return of the purchase-money.
[Lord Halsbury L.C. referred to Clarke v. Dickson, [F4] and LORD DAVEY to Peek v. Gurney. [F5] ]
Ronan Q.C. (of the Irish Bar), Carson Q.C. and W. R. Edwardes, for the respondent, were not heard.
April 30. Lord Halsbury L.C. My Lords, this is an appeal from an order of the Court of Appeal in Ireland affirming an order of the Exchequer Division refusing to set aside the findings, verdict, and judgment entered for the defendant (the respondent at your Lordships' bar) at the trial of the action. It was an action in respect of calls on shares. The defendant in the action succeeded in having the judgment entered for him, and the appeal is now brought claiming that the judgment shall be entered for the plaintiffs notwithstanding certain findings of the jury, to which I shall refer presently.
My Lords, the action was brought by the company, who are appellants, in order to recover a certain amount of calls. So far as the pleadings are concerned, they become immaterial in themselves considering what has passed at the trial, but, nevertheless, they may be important to be looked at for the purpose of seeing what was the question which was properly open upon the record, and in what way, notwithstanding the findings of the jury, the plaintiffs contend that they are entitled to judgment.
My Lords, the short case of the defendant was that he was induced to enter into the contract upon which he was sued by fraud of the plaintiffs, and that fraud consisted in fraudulent representations made in the prospectus by which he was induced to become a shareholder. My Lords, I think some little doubt was entertained during the progress of the argument as to whether the plea of fraud could be relied upon, having regard to the allegation that the status of shareholder acquired by the person who subscribed to the shares threw upon him the necessity of shewing that he had not adhered to the contract, and that, notwithstanding the fraud, he must do that which in him lay to get rid of the character of shareholder in order to enable him to avail himself of the plea of fraud.
I did not very clearly follow at the moment how that arose, but I see that the same question arose in a case in the Court of Queen's Bench, and it is instructive, not with reference to the mere question of the fraud here, but with reference to the state of the law which it discloses, to see how that question was dealt with. In that case, as in this, the action was for calls, and the defendant had pleaded simply that the contract was obtained by fraud. The judgment of the full Court of Queen's Bench gives the reason why that plea, without setting out what is put forward in this plea, was a bad plea: Deposit Life Assurance Co. v. Ayscough. [F6] It was there contended, as at one time I thought it might be contended here, that a simple plea of fraud was enough - that, as the plaintiffs were suing upon a contract, it would be enough to say that the contract was obtained by fraud. But the learned judges point out that the action was brought in pursuance of the statute 7 & 8 Vict. c. 110, s. 55, which provides that where a call has been made by a company
"it shall be sufficient to state only that at the time of the commencement of the suit the defendant, as the holder of certain shares .... in a certain company or undertaking, as the case may be, ... was indebted to the company in a certain sum .... for certain instalments of capital then due and payable in respect of the said shares, and that the defendant hath not paid the same,"
and that if it be proved upon the trial of any such action
"that the defendant was the holder of any share when such instalments, or any of them, in respect of the same, and for which the action is brought, became due, then such company shall recover such instalments."
The answer made to the simple plea of fraud is very compendiously given by Crompton J. in the course of the argument. He says:
"When the record shews that the contract has been executed so far that the defendant has received a benefit, I have doubted whether in an action on the contract, the plea of fraud must not shew that he has restored what he has received. But this action is not upon the contract; it is given by statute 7 & 8 Vict. c. 110, s. 55, against the holder of shares; and your plea is not good unless it shews the defendant not to be the holder of the shares. He is the holder at least till he dis-affirms, though he became so in consequence of fraud."
Upon that ground the plea was held bad.
My Lords, in the case before your Lordships, therefore, it must be taken that that was an essential part of the plea; but although the learned judge has reserved all power of amendment in the pleadings not inconsistent, of course, with the findings of the jury, I do not see how that case can now be set up on the part of the plaintiffs. There is here neither evidence, nor, so far as I can see, any contention that the defendant had adhered to the contract.
My Lords, I want to clear away one or two other questions which have been raised, and in particular the quotation from an unreported judgment of Chitty J., not upon the facts, which are absolutely irrelevant here, for we have nothing to do with any facts except such as are proved here. I observe that Chitty J. used this language, and I see it is quoted by some of the learned judges below as justifying the view they entertained in favour of the plaintiffs. The words are:
"Bold promoters seem to rely upon the public not asking to see contracts referred to in the prospectus and to know the law that those who take shares on the faith of a prospectus which refers them to the contracts cannot complain on the ground of ignorance of what is to be found in them."
My Lords, that, parenthetically put as it is, seems to import that such is the law. That has been decided not to be the law by the Court of Appeal, presided over at that time by Sir George Jessel, and by this House. My Lords, that very argument was used before Sir George Jessel in the case of Redgrave v. Hurd, [F7] and in a very luminous judgment he disposed of that argument absolutely. He said:
"There is another proposition of law of very great importance which I think it is necessary for me to state because, with great deference to the very learned judge from whom this appeal comes, I think it is not quite accurately stated in his judgment. If a man is induced to enter into a contract by a false representation it is not a sufficient answer to him to say, 'If you had used due diligence you would have found out that the statement was untrue. You had the means afforded you of discovering its falsity, and did not choose to avail yourself of them.' I take it to be a settled doctrine of equity, not only as regards specific performance, but also as regards rescission, that this is not an answer unless there is such delay as constitutes a defence under the Statute of Limitations. That of course is quite a different thing. Under the statute, delay deprives a man of his right"
on other grounds.
Then, my Lords, such being the state of the authorities, the case of the Central Ry. Co. of Venezuela, v. Kisch [F8] in your Lordships' House seems to me to reduce this matter to but a very small point. The question of the reference to contracts is referred to in that case, and it is stated in broad terms that a mere reference to a contract existing in a prospectus is not notice of a contract, and cannot be set up by a person who has been guilty of inducing another to enter into a contract by false representations.
My Lords, if that is the state of the law and of the pleadings, this case is reduced to a very small compass. Was there evidence for the jury that this contract was obtained by fraud of the plaintiff company? And was there evidence for the jury of the falsehood of the statements which are contained in the prospectus? My Lords, I cannot entertain the smallest doubt upon either of those questions. With reference to the first, whether the contract was obtained by fraud of the company, assuming there to be a fraud (a matter with which I will deal in a moment) I cannot entertain the least doubt that this was a very fascinating prospectus: there were statements in it which I will deal with more particularly hereafter, but they were statements calculated to shew that it was a very good thing - that it was a commercial adventure which was likely to produce very large profits, perhaps not 100 per cent., but at all events large profits.
But I must protest against it being supposed that in order to prove a case of this character of fraud, and that a certain course of conduct was induced by it, a person is bound to be able to explain with exact precision what was the mental process by which he was induced to act. It is a question for the jury. If a man said he was induced by such and such an inducement held out in the prospectus, I should not think that conclusive. It must be for the jury to say what they believed upon the evidence. Looking at the evidence in this case, I should say if I were a juryman that this was a very fascinating prospectus, and was calculated to induce any one who believed the statements in it to invest his money in the concern.
Then, inasmuch as the jury have found that, I think, upon very good evidence in the prospectus itself, it remains only to consider the final question, namely, whether or not there was evidence for the jury which would justify them in finding that this was a fraudulent prospectus - that these statements were fraudulent and false. Now, in dealing with that question, again I say I protest against being called on only to look at some specific allegation in it; I think one is entitled to look at the whole document and see what it means taken together. Now, if you look at the whole document taken together, knowing what we now know and what the jury had before them, I suppose nobody can doubt that this was a fraudulent conspiracy. I observe that one or two of the learned judges below used very plain language upon it, and remarked upon the fact that Mr. Gilbert, who seems to have been the head and front of it, was not subjected to an inquiry in a criminal court. But, be that as it may, the question before your Lordships now is whether the jury were justified in finding with these facts before them what they did find.
It is said there is no specific allegation of fact which is proved to be false. Again I protest, as I have said, against that being the true test. I should say, taking the whole thing together, was there false representation? I do not care by what means it is conveyed - by what trick or device or ambiguous language: all those are expedients by which fraudulent people seem to think they can escape from the real substance of the transaction. If by a number of statements you intentionally give a false impression and induce a person to act upon it, it is not the less false although if one takes each statement by itself there may be a difficulty in shewing that any specific statement is untrue.
But I do not shrink from the question whether any of these statements are untrue. I think some of them are absolutely untrue. I will take one or two for example, although I think that the whole thing exhibits falsehood. I observed in the prospectus there is a statement to the effect that reports of the most favourable character had been made upon this mine. That is not true. I only mention it in passing - I do not propose to rely upon it. The reports were made in respect of another company, and made some of them eight or nine years before. That is untrue, and, of course, even assuming what I shall deal with in a moment and what the words "proved to be rich" may imply - assuming that there had been an inquiry into the state of the mine, a prospecting, as it is called, eight or nine years before - to treat that as something which had happened at the formation of this company is of itself a gross misrepresentation. Much may have happened in the eight or nine years intervening; and we now know as a fact that much did happen in those eight or nine years, shewing that, whatever opinion might reasonably have been entertained eight or nine years before, there was no ground for thinking that such a belief would have been entertained by skilled persons if they had just been inquiring into the state of this concession at the time when the company was formed.
But, my Lords, it is said that there is no proof that this mine was not "proved to be rich," which is one of the material allegations. My Lords, I do not understand in what way it is suggested that the word "proved" is to be used. I observe that one of the learned judges (the judge who tried the cause) seems to think that there is no middle course between an actual working of a mine, the production of metal in it, and what he describes as "prospecting."
I venture to differ from that view. The word "proved" is not a word of art. It might be proved in many ways. But what proof or pretence of proof was there here? It is said, "Oh, the mine is very rich still - at all events, you did not give any evidence that it was not"; but if there is this evidence, that three companies have tried to work it and have failed, can anybody say that that reflects no light upon the richness or comparative poverty of the mine? I should have thought it was ample evidence. Some comment has been made upon the absence of cross-examination on the subject. I should have thought for myself that it would have been very rash for those who had no means of contradicting anything that was said to cross-examine persons who had, by the hypothesis, not many scruples as to what they might say, and that it was far wiser (it seems to have been successful) to leave the statements which they chose to make to be judged of by the jury. I think that the result shews that the learned counsel who conducted the case for the defendant were wise in the discretion they exercised. But still the question comes back to this: What was it that the jury had before them which was such evidence as entitled them to say that this mine was proved not to be rich? I protest against its being supposed that the only source of evidence of that sort is to be the evidence of somebody who goes down and examines the mine. The result of actual experience, the failure to make it available as a commercial adventure, is good and cogent evidence that the mine itself was not what it was represented to be in the knowledge of those who were putting forth this prospectus.
But further than that, I wish to say for myself I do not think any particular form of words is necessary to convey a false impression. Supposing a person goes to a bank where the people are foolish enough to believe his words, and says,
"I want a mortgage upon my house, and my house is not completed, but in the course of next week I expect to have it fully completed."
Suppose there was not a house upon his land at all, and no possibility, therefore, that it could be fully completed next week, can anybody say that that was not an affirmative representation that there was a house which was so near to completion that it only required another week's work upon it to complete it? Could anybody defend himself if he was charged upon an indictment for obtaining money under false pretences, the allegation in the indictment being that he pretended that there was a house so near completion that it only required a week's work upon it, by saying that he never represented that there was a house there at all?
So here, when I look at the language in which this prospectus is couched, and see that it speaks of a property which requires only the erection of machinery to be either at once or shortly in a condition to do work so as to obtain all this valuable metal from the mine, it seems to me that, although it is put in ambidextrous language, it means as plainly as can be that this is now the condition of the mine, that such and such additions to it will enable it shortly to produce all those great results, and that that is a representation of an actually existing fact. I should quite agree with the proposition that the Lord Chancellor of Ireland and the Master of the Rolls put forward - if you are looking to the language as only the language of hope, expectation, and confident belief, that is one thing; but it does not seem to have been in the minds of the learned judges that you may use language in such a way as, although in the form of hope and expectation, it may become a representation as to existing facts; and if so, and if it is brought to your knowledge that these facts are false, it is a fraud.
My Lords, as to the rest of the case, if there was evidence for the jury no one can doubt that the jury were right in coming to the conclusion to which they came. The whole of this transaction seems to me to have been fraudulent to the last degree, and I entirely concur with those learned judges who, in very plain language, said that the persons engaged in this transaction were guilty of a fraudulent conspiracy, and might have been indicted for it.
The other question which is raised here has reference to the financing of the company. Without troubling your Lordships with quoting it at length, I observe that, curiously enough, in the case of the Venezuelan Company [F9] in your Lordships' House, the very same argument that was used in this case was presented to the House at that time. It was said there that the money asked for was for the purpose of making a railway, and the mode in which the company carried on its business was suggested to be that an amount was to be spent upon the railway, or had been spent upon the railway. And the very identical words, I think, were used there by counsel to the House presided over by Lord Chelmsford, that people could not have been so stupid as to suppose that they would get a present of a concession, and that, therefore, a large deduction must be made for the money that would have to be paid for the concession. Lord Chelmsford deals with that argument, and he says,
"What you have said is that this money was to be used for that purpose."
There was there, as here, a very large debt, and it was held to be a fraud just on the same ground on which I think your Lordships will hold this to be a fraud. It was contended that the condition of things was such that the money could not be applied for that purpose, and Lord Chelmsford says: "Whether it was the case or not that the concession could be obtained for nothing I am sure I do not know: there is nothing inconceivable in the idea that the Venezuelan Government might have given a concession, and given it for nothing; and you are not to assume that the meaning of the language was different from its primâ facie impression."
Now, my Lords, in this case can anybody doubt what the condition of things was? It was a device or expedient for the purpose of dividing amongst these persons the money they were getting from the public upon the false colour and pretence that it was going to be used upon the development of this mine. I have some difficulty in referring to the correspondence, except the two letters that are certainly in evidence. I am reluctant to refer to anything that I do not find in evidence. Those two letters, however, are pregnant in what they prove with respect to what was actually going on in the mine. Mr. Nicholls, for whose honesty Mr. Levett expressed a somewhat strange admiration, said that he was anxious to withdraw the men from the mine - there were only two men there. There follows a correspondence, and upon that correspondence it seems to me that what was going on beyond doubt was this: there was to be an allegation which was reconcilable with the truth, which was to be told to this extent. If it was asked, "Are there men at work?" the answer would be, "Yes, there are two men at work on the raising, and one man directing." The object of that was to produce an impression in the London market that this was a mine which was at work, and of a very valuable character. Mr. Nicholls desires to withdraw a man, and then follows a letter which is certainly in evidence, which shews what was the object of this whole transaction.
My Lords, it seems to me it would be the strangest and most lamentable failure of justice if, with these facts proved and found by the jury, the plaintiffs could, notwithstanding these facts, succeed in enforcing the contract.
For these reasons, my Lords, it appears to me that this appeal ought to be dismissed with costs, and I so move your Lordships.