Nash v Lynde

[1929] A.C. 158

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(Decision by: Lord Hailsham LC)

Between: Nash - Appellant
And: Lynde - Respondent

Court:

Judges:
Lord Hailsham LCViscount Sumner
Lord Buckmaster
Lord Carson
Lord Warrington of Clyffe

Subject References:
COMPANY
Prospectus
'Issue'
Non-compliance with statutory Requirements
Subscription for Shares on Faith of Prospectus
Damage

Legislative References:
Companies (Consolidation) Act, 1908 (8 Edw. 7, c. 69) - ss. 81, sub-s. 1 (e); 285

Judgment date: 12 November 1928

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Decision by:
Lord Hailsham LC

A company being in want of further capital, a document was prepared by the appellant, who was the managing director, and signed by the other directors, stating the position of the company, that it was proposed to issue 20,000 preference shares, and giving an estimate of the profits after the new capital was available. Attached was an application form for preference shares. A second document was also prepared by the appellant, written on the company's paper and addressed to a fellow director, marked "Strictly private and confidential," which, after setting out the amount of nominal and issued capital, stated the purposes for which the additional capital was required, and concluded thus:

"I shall be very happy to discuss this proposition in all its details with any one who is really interested."

Attached was a form of application for ordinary shares. Several copies of these documents were given to the appellant's fellow director, who sent a copy to a solicitor, with a request, in substance, that he should find some client willing to provide the capital required. The solicitor sent the documents to the respondent's brother-in-law, and he in turn sent them to the respondent, who, on the faith of the statements they contained, subscribed for 3000 ordinary shares in the company. Subsequently ascertaining that a considerable part of the issued capital had been issued otherwise than for cash - a fact that was not stated in either of the documents - he sued the appellant for damages for the loss he had sustained through the omission by the appellant to comply with the requirements of s. 81, sub-s. 1 (e), of the Companies (Consolidation) Act, 1908.

At the trial the jury found that the two documents were an offer of shares by the company to the public. In answer to the question, whether they were in fact issued to the public, the jury said:

"There is no proof of this."

The jury further found that the respondent sustained damage to the amount of 2000l. After argument, the trial judge held that there had been no breach of s. 81, sub-s. 1 (e), and gave judgment for the appellant, but his judgment was reversed by the Court of Appeal:-

Held, that the documents were not issued as a prospectus within the meaning of s. 81, sub-s. 1 (e).

Decision of the Court of Appeal [1928] 2 K.B. 93 reversed.

Appeal from an order of the Court of Appeal ^[F1] reversing a judgment of Salter J.

The respondent, who had subscribed for 3000 1l. ordinary shares in a private company called the British and Foreign Industrials, Ld., on the faith of the two documents mentioned in the headnote (called in the action documents "A" and "B") sued the appellant, the managing director of the company, for (inter alia) damages for non-compliance with the requirements of s. 81, sub-s. 1 (e), of the Companies Act, 1908.

The action was tried before Salter J. and a special jury. The facts are fully stated in the report of the case before the Court of Appeal and in the judgment of the Lord Chancellor, and they are summarized in the headnote.

The questions put by Salter J. to the jury upon the claim under the Companies Act and their answers thereto were as follows:-

(a)

Was A and B an offer of shares made by the company to the public? - Yes.

(b)

Was A and B issued to the public? - No proof of this.

(c)

Did the plaintiff sustain damage by reason of the omission to state the issue of shares as fully paid? - Yes.

(d)

What damages, if any? - 2000l.

Upon further consideration Salter J. held upon these findings that there had been no prospectus "issued" by or on behalf of the company within the meaning of s. 81, sub-s. 1 (e), of the Companies (Consolidation) Act, 1908, and gave judgment for the defendant (the appellant).

The Court of Appeal, by a majority (Atkin L.J. and Eve J.; Scrutton L.J. dissenting), reversed the judgment of Salter J., and ordered judgment to be entered for the plaintiff (respondent) for 2000l.

1928. Oct. 23. Topham K.C. (with him Maurice Healy) for the appellant. The jury have found that documents A and B are a prospectus, and the appellant cannot quarrel with that finding, but the question is whether the prospectus has been "issued" within s. 81, sub-s. 1 (e), of the Companies (Consolidation) Act, 1908. "Issued" there means issued to the public, and it has always been so construed: Twycross v. Grant, ^[F2] per Cockburn C.J.; Baty v. Keswick; ^[F3] Sherwell v. Combined Incandescent Mantles Syndicate; ^[F4] Sleigh v. Glasgow and Transvaal Options. ^[F5] The jury having found that there was no proof that documents A and B were issued to the public, Salter J. was right in giving judgment for the appellant.

du Parcq K.C. (with him W. T. Monckton) for the respondent. A prospectus as defined by s. 285 of the Act of 1908 includes every "invitation offering to the public for subscription or purchase any shares or debentures of a company," and the jury have found that these documents were an offer of shares to the public. That offer having been made, it was sent out as such offer, and ultimately came into the hands of the respondent, who, as the jury have found, sustained damage by reason of the omission to state the issue of shares as fully paid. The Act contemplates, first, an offer to the public, and, secondly, an issue to somebody as such offer. If those two conditions are fulfilled the Act is satisfied. Issue to the public is not necessary. On the findings of the jury the respondent was entitled to judgment.

Topham K.C. replied.

The House took time for consideration.

1928. Nov. 12. Lord Hailsham L.C. -

This case as it comes before your Lordships' House raises a narrow point under s. 81 of the Companies (Consolidation) Act, 1908.

The appellant, Nash, was in the year 1921 the managing director of a company known as British and Foreign Industrials, Ld., which was a company incorporated as a private company under the Companies Act with a nominal capital of 50,000l., of which 40,300l. had been issued; of this 40,300l. 30,000l. had been issued as fully paid in part purchase of patents, etc.

In the autumn of 1921 the company required further capital. The appellant prepared a scheme for increasing the capital to 100,000l. and issuing 20,000l. of preference shares on the terms that every applicant for two preference shares should have the right to apply for and to be allotted one ordinary share at par. The scheme was embodied in a document beginning "Gentlemen," and originally intended for submission to the directors; in that form it was signed by all the directors, and thereafter it was in form a statement to the world of an intention to issue share capital on the terms set out; and attached to this document there was an application form for preference shares. At about the same time the appellant sent to his co-director, Eshelby, a document headed "Strictly private and confidential," and dated September 26, 1921, which contained a number of particulars as to the company. This latter document stated what was the issued capital, but contained nothing to show that any part of the capital has been issued as fully paid: this document seems to have had attached to it an application form for ordinary shares. On September 26 Mr. Eshelby sent both the documents with the application forms attached to one Alcock, a solicitor at Liverpool, enclosed in a letter in these terms:-

"Dear Alcock,

Further to our previous conversation I now have pleasure in enclosing information concerning the proposition as follows:-

1.

General Scheme for increase of capital as laid before the Board of Directors together with general particulars. This scheme is merely a basis, and could be altered to accommodate any party proposing to invest a substantial sum.

2.

A personal letter from the managing director giving more specific information. This is for your confidential information and use.

I understand you have wealthy clients who might be willing to become shareholders, or you may know of someone who would like to start a son in a prosperous concern. In either case, I think, there would be no difficulty in accommodating the conditions to suit your clients.

The additional capital is required wholly for development purposes.

With kind regards."

It appears that Mr. Alcock was a friend of one Major Wrigley; the respondent, Lynde, is a brother-in-law of Major Wrigley; he had been for some years resident in India, and had shortly before this date returned to England, and was looking for a suitable opening in which to invest some capital and find employment for his business experience. On October 4, 1921, Mr. Alcock wrote to Major Wrigley enclosing the document which he had received from Mr. Eshelby, and suggesting that if Major Wrigley thought it was at all the sort of thing which Mr. Lynde was looking for, he, Alcock, would give the respondent an introduction to Eshelby, and he could then investigate the company's affairs for himself.

On the following day Major Wrigley sent on the whole of the letters and documents which he had received from Alcock to the respondent. The respondent thereupon went to see the appellant in London, treating Mr. Alcock's letter to Major Wrigley as a letter of introduction; the appellant went through the documents with the respondent, but did not materially add to the information contained in them, and in particular said nothing about the issued capital. Mr. Eshelby made inquiries from Mr. Alcock as to the respondent's antecedents and business, and ultimately on October 18, 1921, there was a second interview between the appellant and the respondent, and an agreement was reached that the respondent should take up 3000 ordinary shares in the company, and should be appointed a director of the company at a salary of not less than 400l. per annum upon his return from India in the following spring. This arrangement was duly carried out and the shares were taken up and the appointment was made. Later on the British and Foreign Industrials, Ld., sold most of their assets to a new company called "John Nash, Ld.," and the respondent became a director of that company at a higher salary.

In the early part of 1924 disputes arose between the appellant and the respondent, and the respondent was dismissed by John Nash, Ld. He thereupon brought an action for breach of contract and recovered damages for his wrongful dismissal. When that action had been disposed of he issued the writ in the present action on June 18, 1926, claiming damages for fraud, with an alternative claim for damages for non-compliance with the requirements of s. 81, of the Companies (Consolidation) Act, 1908.

The case was tried before Salter J. and a special jury on May 26, 1927, when the learned judge left a series of questions to the jury. The jury negatived fraud. The last four questions were in these terms:-

(4.)

Was A. and B (these are the documents to which the application forms were attached) an offer of shares made by the company to the public? - Answer: "Yes."

(5.)

Was A and B issued to the public? - Answer: "There is no proof of this."

(6.)

Did the plaintiff sustain damage by reason of the omission to state the issue of the shares as fully paid? - Answer: "Yes."

(7.)

What damages, if any? - Answer: "2000l."

Upon further consideration of the effect of the jury's answers the learned judge held that in view of the answer to the fifth question there had been no breach of the provisions of s. 81, and he entered judgment for the defendant. From this decision the present respondent appealed to the Court of Appeal, and on February 21, 1928, the Court of Appeal, by a majority, reversed the decision of the trial judge, and ordered judgment to be entered for the respondent for the 2000l. awarded by the jury. It is from this decision that the present appeal is brought.

After this recital of the facts of the case it will be convenient to turn to the language of the Act of Parliament.

By s. 81 of the Companies (Consolidation) Act, 1908, so far as is relevant, it is provided:-

"(1.)

Every prospectus issued by or on behalf of a company or by or on behalf of any person who is or has been engaged or interested in the formation of the company must state:-

(e)

The number and amount of shares and debentures which within the two preceding years have been issued, or agreed to be issued, as fully or partly paid up otherwise than in cash and in the latter case the extent to which they are so paid up and in either case the consideration for which those shares or debentures have been issued or are proposed or intended to be issued."

By s. 285, "Prospectus" is defined as follows:-

"'Prospectus' means any prospectus, notice, circular, advertisement, or other invitation, offering to the public for subscription or purchase any shares or debentures of a company."

No point was taken on behalf of the appellant that if the documents A and B constituted a prospectus issued by or on behalf of the British and Foreign Industrials, Ld., the respondent was not entitled to the damages recovered by him upon the answers of the jury; but it was said that although the documents might constitute a prospectus within the definition section of the Act, s. 81 only applied to a prospectus issued to the public and that there was no evidence that these documents ever were issued to the public.

My Lords, I should be loth to hold that in order to bring s. 81 of the Act of Parliament into operation it must be proved that the prospectus in question had been published to any defined number of persons or that a plaintiff who had been misled by a prospectus which did not comply with statutory requirements must fail in his action unless he could prove that it had been published to persons other than himself.

In my judgment it is sufficient in order to bring s. 81 into operation that the prospectus in question should be proved to have been shown to any person as a member of the public and as an invitation to that person to take some of the shares referred to in the prospectus on the terms therein set out.

But in my opinion there is a narrower ground upon which the respondent must fail in the present case.

If the documents and letters be looked on as a whole I think it is clear that these documents were never issued to the respondent as an invitation to him to subscribe to the shares referred to in the prospectus on the terms mentioned, or at all. They were sent to him in order to give him a general idea of the position of the company in case he might think it afforded a suitable opening in which he could find employment upon the terms of investing a small amount of his capital. In fact, so far as the evidence goes, the proposed increase of capital never took place, and no preference shares were ever issued or allotted. It follows that there was no issue of a prospectus to the respondent.

The documents were shown not for the purpose of inviting a subscription upon their terms, but to afford information in case the respondent should wish to negotiate for employment with the company. If the documents had contained any intentional misstatement or concealment of material facts those responsible would have been liable in damages for fraud; but the jury have expressly negatived fraud, and unless the case can be brought within the language of s. 81 it is conceded that the respondent has no cause of action. In my opinion the respondent fails to show that these documents were ever issued as a prospectus at all, and it necessarily follows that s. 81 had no application to the facts to the present case.

It follows that in my opinion the appeal succeeds, and that the judgment of the trial judge in favour of the appellant should be restored with costs here and below. I move your Lordships accordingly.