Hardoon v Belilios

The judgment of their Lordships was delivered by

Lorp Linpnry. The question raised by this appeal is
whether the plaintiff, who is ithe registered holder of some
shares in a banking company which is being wound up, is
entitled to be indemnified by the defendant who is the beneficial

(1) (1868) L. R. 4 C. P. 36. (7) L. R. 6 H. L. 328.

(2) (1886) 82 Ch. D. 625. (8) (1868) L. R. 3 Ch. 791.

(3) (1849) 14 Q. B. 205. (9) (1872) L. BR. 7 Ch. 395.

(4) 6 App. Cas. 855. (10) (1873) L. RB. 8 Q. B. 458;
(5) L. R. 18 Eq. 18. (1874) 9 Q. B. 247.

(6) (1887) 36 Ch. D. 256. (11) L. R. 10 Eq. 47.

(12) L. R. 15 Eq. 363; 8 Ch. 9389.

A. C. AND PRIVY COUNCIL.

owner of those shares, against calls made upon them in the
winding-up of the company. The Courts of Hong Kong have
decided against the plaintiff upon the evidence adduced by
him, and have entered judgment of non-suit. The defendant
adduced no evidence; it did not become necessary for him to
do so. The Chief Justice, who first heard the case, decided
that the defendant was the sole beneficial owner of the shares,
but that the plaintiff had failed to prove any contract by the
defendant to indemnify him either express or implied. On
appeal the Chief Justice and Wise J. considered that, although
the defendant had become the sole beneficial owner of the
shares, the relation of trustee and cestui que trust had not
been created between the plaintiff and the defendant, and that
the defendant had not become liable to indemnify the plaintiff.
Against these decisions the plaintiff has appealed to this Board.

The facts of the case so far as they are material are shortly
as follows :—

The bank in question was formed and registered with limited
liability under the Companies Act, 1862. Its capital was
divided into shares which were not fully paid up when it went
into liquidation, which it did in December, 1894. Calls have
been made on the contributories, of whom the plaintiff is one.
He is a contributory in respect of fifty 10/7. shares. He has
been sued by the liquidator for the calls made on him in respect
of those shares, and judgment has been given against him for
4021. 12s. 11d., which he seeks to recover from the defendant.

The fifty shares in question were placed in the plaintiff's
name in April, 1891, by-his then employers, Benjamin & Kelly,
who were share-brokers. The plaintiff never had any beneficial
interest in them; but he was registered as their holder on
April 8, 1891. A provisional certificate of his ownership was
made out, and he signed a blank transfer of them, and those
two documents were held by Benjamin & Kelly, who paid the
application and allotment money and first call. This certificate
and transfer afterwards came into the hands of one Coxon, who
acted on behalf of a syndicate formed to speculate in shares in
another company. 'The defendant financed this syndicate, and
the provisional certificate and blank transfer of the fifty shares

121

J.C.

1900
——~
Harpoon

V
Be .ixtos.

HarDoon

OF
BE ILt0s.

'HOUSE OF LORDS [1901]

in question were with other securities pledged by Coxon with
the defendant as security for his advances. In October, 1891,
the plaintiff's provisional certificate was exchanged for an
ordinary certificate, which the defendant has ever since held.
In March, 1892, dividends were paid on those shares, and
the defendant as holder of these fifty shares demanded these
dividends from the plaintiff, and received them from him. The
operations of the syndicate resulted in considerable loss. Their
accounts with the defendant were closed, and in October, 1892,
the defendant became the absolute owner of the shares. This
at least is the conclusion arrived at by both Courts in Hong
Kong from the entries in the defendant's books, and there are
no grounds on which this Board can come to any different
conclusion.

In November, 1893, a call of 1/. per share was made payable
by four instalments of 5s.each. The first three of these instal-
ments, payable in November, 1893, February and April, 1894,
were at the plaintiffs request paid by the defendant to the
plaintiff and by him to the bank. The defendant said he was
not liable to pay them; and in his books he debited the plain-
tiff with those payments, but there is no evidence that the
plaintiff was informed of this. The fact that the defendant
did not at this time debit Coxon with these calls seems to their
Lordships very strong evidence that at this time Coxon's
interest in these shares was at an end, and they belonged
absolutely to the defendant.

On April 10, 1894, the plaintiff wrote to the defendant
asking that the shares might be transferred out of the plaintiff's
name; but the defendant declined to get this done, and the
plaintiff said no more about it until June, 1894, when the
fourth instalment of 5s. in respect of the call of 17. became due.
The plaintiff then asked the defendant to pay this instalment,
and he did so, but debited the plaintiff with the amount as
before. Shortly afterwards the plaintiff's solicitors wrote to
the defendant and asked him to have the shares transferred out
of the plaintiffs name. But the defendant declined, saying
that the shares were lodged with him by Coxon, who was
absent from the Colony.

A.C. AND PRIVY COUNCIL.

Further correspondence took place after calls had been made
by the hquidator on the plaintiff as already stated; but the
defendant refused to indemnify the plaintiff, and this action
was commenced.
| "It appears from the evidence as it stands that the defendant
became in October, 1892, the sole beneficial owner of these
shares, the legal title to which was vested in the plaintiff.
Assuming this to be established, their Lordships are at a loss to
understand what more was required to create the relation of
trustee and cestui que trust between the plaintiff and the
defendant. The facts that they never stood in the relation of
vendor and purchaser, that there was no contract between
them, that the defendant never requested the plaintiff to
become his trustee, are quite immaterial. All that is necessary
to establish the relation of trustee and cestui que trust is to
prove that the legal title was in the plaintiff and the equitable
title in the defendant. This might be proved in many ways.
The mode of proof is quite immaterial. Being proved, no
matter how, the relation of trustee and cestui que trust was
thereby established.

No one can be made the beneficial owner of shares against
his will. Any attempt to make him so can be defeated by
disclaimer. But the moment the defendant accepted the
beneficial ownership of these shares he became the plain-
tiff's cestui que trust, and the plaintiff had no option in
the matter.

The next step is to consider on what principle an absolute
beneficial owner of trust property can throw upon his trustee
the burdens incidental to its ownership. The plainest principles
of justice require that the cestui que trust who gets all the
benefit of the property should bear its burden unless he can
shew some good reason why his trustee should bear them him-
self. The obligation is equitable and not legal, and the legal
decisions negativing it, unless there is some contract or custom
imposing the obligation, are wholly irrelevant and beside the
mark.| Even where trust property is settled on tenants for
life and children, the right of their trustee to be indemnified
out of the whole trust estate against any liabilities arising out

123

J.C,
1900

yw
Harpoos
v.
DELILIO8.

124

J.C. *
1900

~~
Harpoon
Vv.
BELILIOS.

HOUSE OF LORDS i [1901]

of any part of it is clear and indisputable ; although, if that
which was once one large trust estate has been converted by
the trustees into several smaller distinct trust estates, the
liabilities incidental to one of them cannot be thrown on the
beneficial owners of the others. This was decided in Fraser v.
Murdoch (1), which was referred to in argument. But where
the only cestui que trust is a person sui juris, the right of the
trustee to indemnity by him against liabilities incurred by the
trustee by his retention of the trust property has never been
limited to the trust property ; it extends further, and imposes
upon the cestui que trust a personal obligation enforceable in
equity to indemnify his trustee. This is no new principle, but
is as old as trusts themselves.

In Balsh v. Hyham (2) the trustee sought indemnity in
equity, not against a liability incidental to the ownership of
the trust property, but against a liability incurred by him by
borrowing money at the request and for the benefit of his
cestui que trust. The Court decided that the plaintiff was
entitled in equity to the relief which he sought on the broad
ground "that a cestui que trust ought to save his trustee
harmless as to all damages relating to the trust." This
language (although open to criticism if applied to cestuis que
trustent who are not sui juris and also sole beneficial owners)
shews plainly enough that it was taken for granted as well
settled that, speaking generally, absolute beneficial owners of
property must in equity bear the burdens incidental to its
ownership and not throw such burdens on their trustees.

The !short report of Balsh v. Hyham (8) shews that this
general rule was well recognised, and that the decision was
only an illustration of its application to the facts then before
the Court.

It is impossible to read the judgment of Vice-Chancellor
Wigram in Phené v. Gillan (4) without coming to the conclusion
that he also regarded the general rule as well established.

The principle acted upon in Balsh v. Hyham (2) was recon-
sidered and most strikingly illustrated in the well-known

(1) 6 App. Cas. 855. (3) 2 Eq. Ca. Ab. 741, fol. 8.
(2) (1728) 2 P. Wms. 453. (4) 5 Hare, 1.

A. G. AND PRIVY COUNCIL.

case of the German Mining Co., Ex parte Chippendale (1),
where the shareholders of a mining company were held lable
personally to indemnify the directors against payments made
by them in discharge of debts contracted by them, but which
payments created no legal obligation on the company enforce-
able at law, and could not be recovered by the directors from
the company by any action at common law. The shareholders
in vain contended in that case that the directors had only a
right to indemnity out of the assets of the company. (2)
Where, as in Balsh v. Hyham (8), a trustee seeks indemnity
in respect of transactions in which he need not have engaged

and which were not within the scope of his trust, he must |
|}

prove that his cestui que trust either authorized or ratified |

such transactions. But if he has incurred liability within the
scope of his trust, and for the benefit of his cestui que trust,
Ex parte Chippendale (1) shews that nothing more is required.

When a trustee seeks indemnity from his cestui que trust
against liabilities arising from the mere fact of ownership,
there is neither principle nor authority for saying that the
trustee need prove any request from his cestui que trust to
incur such liability. In the case supposed the trust involves
such liabilities, and the trustee, whilst he remains such, can-
not get rid of them. He is subject to them as legal owner;
but in equity they fall on the equitable owner unless there are
good reasons why they should not.

As regards shares, this right of a trustee to be indemnified
by his cestui que trust against calls has been repeatedly recog-
nised and enforced on the principles applicable to the equitable
ownership of property, and without reference to the principles
applicable to contracts, or specific performance, or any other
legal or equitable doctrine. Nothing can be plainer or sounder
than the language of James V.-C. in Castellan v. Hobson (4),
and of Chitty J. in Loring v. Davis. (5) James v. May (6)
proceeded on the same principle. Other cases to the same
effect might be cited, but it is unnecessary to refer to them.

(1) (1853) 4D. M. & G. 19. (4) L. R. 10 Eq. 47.

(2) Page 54. (5) 82:Ch. D. 634.
(3) 2 P. Wms. 453. (6) L. R. 6 H. L, 328.

125

J.C.
1900

—~

HARDOoon
vw.

BE.ILtos.

-_—

J. €.
1900

a
HaRDOON
0.
BELILIOS.

HOUSE OF LORDS {1901}

No case has been found, nor as their Lordships believe can be
found, which is opposed to these authorities.

The principle was recognised by Fry J. in Hughes-Hallett
v. Indian Mammoth Gold Mines Co. (1), although he there
held that the application for indemnity was premature.

It is true that the facts of this case are not in all respects
like those in the cases above alluded to. But although the
facts are different the result of them is the same—1.e., the facts
were such that the relation of trustee and cestui que trust was
created. In this case the defendant did not create the trust
on which the plaintiff originally held the shares. The defend-
ant had nothing to do with procuring their registration in the
plaintiff's name as trustee for Benjamin and Kelly and their
assigns. This feature of the case was strongly relied upon by
the defendant's counsel as distinguishing it from those above
mentioned, and reliance was placed on what Lord Blackburn
said in Fraser v. Murdoch (2) about makers of trusts (3) and
trusts to carry on business with particular funds. (4) But their
Lordships can find nothing in Lord Blackburn's judgment
which is inconsistent with the principles which in their Lord-
ships' opinion govern this case. The fact that the defendant
did not create the trust on which the plaintiff held the shares
when they were first placed in his name affords the defendant
no defence to this action. Although the defendant did not
create the trust, he accepted a transfer of the beneficial owner-
ship! in the shares, first as mortgagee and afterwards as sole
beneficial owner, with full knowledge of the fact that they
were registered in the plaintiff's name as trustee for their
original purchasers and their assigns, whoever they might
be. By this acceptance the defendant became the plain-
tiffs cestui que trust; and the plaintiff could not prevent it
or effectually dispute his trusteeship for the defendant. By
this acceptance the defendant created the trust for himself.
Having done so, the defendant as the beneficial owner of the
shares demanded from the plaintiff and obtained dividends
declared in respect of them. The defendant also paid calls

(1) (1882) 22 Ch. D. 561. (3) 6 App. Cas. 872.
(2) 6 App. Cas. 855. (4) 6 App. Cas. 875.

A. G AND PRIVY COUNCIL.

made upon them, although he attempted to protect himself
from any admission of liability by entering these payments in
his books as made on behalf of the plaintiff. Lastly, when
asked by the plaintiff to procure a transfer of the shares out of
the plaintiff's name, the defendant refused to do so, and thereby
compelled the plaintiff to continue to hold them as his trustee.
It is idle after this to rely on the fact that the defendant did
not create the trust in the first instance, and idle to talk of
renunciation or disclaimer of these shares by the defendant.
He cannot now get rid of the trust for himself which he
created by becoming beneficial owner of the shares, and which
trust he has recognised since as subsisting.

It is quite unnecessary to consider in this case the difficul-
ties which would arise if these shares were held by the plaintiff
on trust for tenants for life, or for infants, or upon special
trusts limiting the right to indemnity. In those cases there
is no beneficiary who can be justly expected or required
personally to indemnify the trustee against the whole of the
burdens incident to his legal ownership; and the trustee
accepts the trust knowing that under such circumstances
and in the absence of special contract his right to indemnity
cannot extend beyond the trust estate, i.e., beyond the respec-
tive interests of his cestuis que trustent. In.this case their
Lordships have only to deal with a person sui juris beneficially
entitled to shares which he cannot disclaim. The obligation
of such a person to indemnify his trustee against calls upon
them appears to their Lordships indisputable in a court of
equity unless, of course, there is some contract or other
circumstance which excludes such obligation. Here there is
none. Whether the plaintiff in this case could sue Benjamin
and Kelly on any promise by them to indemnify him need not
be discussed. Such a right if it exists in no way affects the
obligation of the defendant as the plaintiffs cestui que trust.
But it is obvious that any payment to the plaintiff by Benjamin
and Kelly or by the defendant in respect of the calls would
reduce the amount which the plaintiff could recover from the
defendant or from them as the case might be.

For these reasons their Lordships will advise Her Majesty

J.C.
1900

—m~
HarbDoon
v.
BELILIOs.

128 HOUSE OF LORDS [1901]

J.c. to allow the appeal, and to reverse the judgments appealed
1900 from with costs; and the defendant will pay the costs of this
Harpoon appeal.
Rerhiog Owing to the judgment appealed from being a judgment

of non-suit only, their Lordships are unable to advise Her
Majesty to order judgment to be entered for the plaintiff with
costs. The defendant is entitled to a new trial at the risk of
costs. But how in the face of his own books and conduct he
can reasonably hope for ultimate success their Lordships are
at a loss to conceive. If, however, he insists on his strict
rights, he is entitled to have the action remitted to Hong Kong
for retrial; and their Lordships will humbly so advise Her
Majesty.