Aaron's Reefs Ltd v Twiss
[1896] A.C. 273(Decision by: Lord Watson)
Between: Aaron's Reefs Ltd - Appellant
And: Twiss - Respondent
Judges:
Lord Halsbury LC
Lord WatsonLord 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
Decision by:
Lord Watson
(After stating the facts given above.) My Lords, Mr. Levett and Mr. Ford said everything that could possibly be urged on behalf of the appellant company; but after hearing them, I found it impossible to differ from the opinion of the great majority of the Irish judges. I think that the findings of the jury which I have already noticed, although the first two of them are peculiar in their form, are not only intelligible, but are reasonable, and are fully warranted by the evidence in the case.
The personal knowledge which its framers had of the antecedents of the Victoria concession must have made it a difficult, if not an impossible task for them to prepare a prospectus which would be attractive without being dishonest. They apparently succeeded in making it attractive; but in doing so they appear to me to have come a long way short of common honesty. The substance of the representations conveyed by it is, that the property acquired by the company had already been proved to be rich in gold, and only required the erection of machinery (tenders for which were about to be invited) in order to be at once in a position to make returns; that it was proposed to erect a forty-stamp mill in the first instance, and to make additions from time to time; that an average yield of 11/2 ounces per ton would give a monthly return of 3600 ounces of gold per month, value nearly 14,000l., the greater part of which would be available for distribution as dividends, and that it was not unreasonable to anticipate that the mine would readily and speedily pay dividends to the extent of 100 per cent.
The prospect of becoming interested in a rich mine of gold which was to make returns at once, with the probable result of yielding a handsome dividend although it should not nearly approach to cent. per cent., was very alluring. If the readers of the prospectus had known that of the 10,000l. which they were asked to contribute during the coming year not one sixpence would be available for working the mine, that there would be no money available for that purpose until 38,000l. of calls had been paid, and that thereafter, until a further sum of 112,000l. had been paid, only one-third of the subscriptions or calls received by the company would be available, I think they would have taken a much less sanguine view of the situation.
It was argued for the company that, inasmuch as its contracts for the purchase of the concession are generally referred to towards the end of the prospectus, the respondent must be held to have had notice of their contents. That appears to me to be one of the most audacious pleas that ever was put forward in answer to a charge of fraudulent misrepresentation. When analyzed it means simply that a person who has induced another to act upon a statement made with intent to deceive must be relieved from the consequences of his deceit if he has given his victim constructive notice of a document, the perusal of which would have exposed the fraud. The extravagance of the plea in the present case is not lessened by the fact that the respondent had no light of access to the document, and that it is clear that he was neither invited nor expected to examine it.
The expression "material matters" which occurs in the first two findings of the jury is one which might in some cases require serious consideration. The duty of disclosure is not the same in the case of a prospectus inviting share subscriptions as in the case of a proposal for marine insurance. In an honest prospectus many facts and circumstances may be lawfully omitted, although some subscribers might be of opinion that these would have been of materiality as influencing the exercise of their judgment. But the statement of a portion of the truth, accompanied by suggestions and inferences which would be possible and credible if it contained the whole truth, but become neither possible nor credible whenever the whole truth is divulged, is, to my mind, neither more nor less than a false statement. It was in that sense that the jury affirmed the suppression of all information with respect to the purchase of the concession to be material and fraudulent; because they thought, as I do, that such suppression was necessary in order to enable the company to manufacture a tempting bait for the unwary, and to submit to them a prospectus which was neither true nor honest.
As already stated, I am also of opinion that the finding, to the effect that the statement in the prospectus "that the mine had been proved rich" was false, was reasonable and was warranted by the evidence; and if so it was unquestionably calculated to deceive, being the very basis upon which the representations made as to the prospects of the mine and its anticipated returns are reared. It appears to me to be proved by the evidence that, not only was the statement false, as found by the jury, but that it was known by the framers of the prospectus to be so.
There are no less than twelve reports quoted in the prospectus, which are now relied on as evidencing the large proportion of gold to be found in the quartz rock of the concession, one of these being mere hearsay of somebody else, and another anonymous; only one of the remaining ten purports to contain an assay of samples, which was not made by the writer of it, the writer himself being one of the directors of a defunct company who failed to make the mine pay. No date is attached to any of these reports; but it appears from the evidence of Robert Larchin, a director of the appellant company until March, 1892, that they were all written before December, 1887, when the second company went into liquidation. They bear internal evidence (and there is no proof to the contrary) of having been prepared for no other purpose than that of influencing the share market; and the framers of the prospectus of 1890 were perfectly aware that the brilliant predictions in which they abound had been falsified by experience.
Accordingly the appellant company had hardly been formed before they began to press John Nicholls, who had been employed by their predecessors and whom they continued to employ at the mine in Venezuela, for a favourable report of the auriferous qualities of the quartz. They received from him in February the gratifying assurance that he actually had in his possession "several pieces shewing visurable gold," and also that he "saw gold in several pieces of quartz." In April 1890 further pressure elicited from the same servant the information that "Mr. Fenn is testing some of the quartz from the Arran Reef and some from the Howard Reef." Of the results of that testing nothing was heard at the trial. During the same month Nicholls reported that he had met with "small seams of quartz shewing a little gold by panning"; and in May he further reported that he had "found specks of gold by panning."
Not being altogether satisfied with the tenor of the communications which they had received from Nicholls, the company wrote to him on September 16, 1890,
"You must keep two men working on the drive, don't forget, at any cost. It is most important to have something coming forward as to work being done, and I think you will cut the lode first here."
The letter produced the following reply by wire:
"We have struck a well defined lode."
The reply was probably not considered satisfactory, as nothing was heard at the trial of any gold being found in the "well defined lode."
The respondent did not remit the deposit payable in respect of his 100 shares or obtain an allotment of them until September 1890. Even if the company believed (which in my opinion it did not) in the truth of the representations made in its prospectus with regard to the richness of the mine, it is too heavy a draft on my credulity to suppose that it continued to entertain that belief in September 1890. In that case its acceptance of the respondent's money and the issue of shares to him, without any explanation of what had come to its knowledge since the date of the prospectus, was neither more nor less than a fraud. The truth is that the whole circumstances of this case are redolent of fraud; and I should have been surprised if the jury had come to any other conclusion than that which is embodied in their verdict.
The question remains whether the respondent was not entitled to challenge the contract under which he became a member of the company by reason of his having unduly delayed his repudiation. I venture to think, with all deference, that the reasoning of the Lord Chancellor of Ireland and the Master of the Rolls upon this point is founded upon a misapprehension of the law. The authorities relating to rescission by the member of a registered company with the view of having his name removed from the list rest upon considerations which involve the interests of creditors of the company, or of his socii; and they have no application to the present case unless it is shewn that on May 5, 1891, the respondent had lost his right to escape from the liabilities of a shareholder on the plea that he had been fraudulently induced.
Accordingly, the argument of counsel for the appellant company was, very properly, maintained before us upon the footing that on or before May 5, 1891, the respondent could not have succeeded in a suit to have his name removed from the register of the company. In the absence of a liquidation order, or any equivalent, that argument necessarily rested upon the assumption that the respondent was before that date in the knowledge of the fraud which had been practised upon him. The main defect of the argument consists in the want of any foundation in fact. There is not a tittle of evidence tending to shew that the respondent had such knowledge. It is true that in answer to a letter of March 10 he had been furnished with the names of the directors of the company, which put him upon his inquiry; and also that before May 6 he had formed a shrewd suspicion that he had been the victim of a fraud. But the whole weight of the evidence supports the conclusion that, until he had an opportunity of examining the documents produced in this suit, he knew of no tangible grounds for disputing the validity of his contract with the company.
In that state of matters the forfeiture of his shares on May 5, 1891, remanded him and the company to the common law relation of debtor and creditor, which, in so far as concerns the right of rescission, was thus defined by the Exchequer Chamber in Clough v. London and North Western Ry. Co.: [F10]
"We think that so long as he has made no election he retains the right to determine it either way, subject to this, that if in the interval whilst he is deliberating an innocent third party has acquired an interest in the property, or if in consequence of his delay the position even of the wrong-doer is affected, it will preclude him from exercising his right to rescind."
In this case it cannot be affirmed that the respondent had indicated his election to be bound by the contract, or that any innocent third party had acquired an adverse interest, or that the wrongdoer had been prejudicially affected by his delay. It must also be kept in view that the respondent is not seeking to rescind the contract: he is merely resisting its enforcement by the party guilty of the fraud.
For these reasons I concur in the judgment which has been moved by the Lord Chancellor.