In Dovey v Cory

Lorp MacnacHtTen. My Lords, I have had an opportunity
of reading in print the judgment of my noble and learned
friend on the Woolsack, and I desire to express my concurrence
in it, and at the same time to guard myself from being under-
stood to assent to all the propositions supposed to have been
laid down by the Court of Appeal in this case. I say no more,

488

H. L, (E.)
1901

—~
Dovry
vy
Cory.

Lord
Macnaghten.

HOUSE OF LORDS [1901]

because it seems to me that when Sir Robert Reid withdrew
all charges involving moral obliquity against Mr. Cory the case
was at an end. And I do not think it desirable for any
tribunal to do that which Parliament has abstained from
doing—that is, to formulate precise rules for the guidance or
embarrassment of business men in the conduct of business
affairs. There never has been, and I think there never will be,
much difficulty in dealing with any particular case on its own
facts and circumstances; and, speaking for myself, I rather
doubt the wisdom of attempting to do more. I understand
from my noble and learned friend Lord Shand that he also
takes this view.

Lorp Davry. My Lords, I agree with your Lordships in
thinking that the appellant has not succeeded in making out a
case for the relief which he asks against the respondent.

The appellant seeks to make the respondent liable under
three heads: (1.) In respect of losses incurred by advances of
money which he alleges that the respondent and the other
directors of the bank negligently made to irresponsible persons,
and without sufficient security. (2.) In respect of advances to
the directors themselves, which he alleges were made contrary
to the express provisions of the articles of association. (8.) In
respect of sums paid to the shareholders (including the
respondent himself) by way of dividend on their shares, which
he alleges were paid out of the capital of the bank, and not out
of profits. In fact, he alleges that there were no profits out of
which such dividends could properly be paid, and that an

apparent profit was created only by including as assets debts

'known to be bad and irrecoverable.

As regards the first two heads of claim, Wright J., as well
as the Court of Appeal, has held that the claims cannot be
sustained, and as I agree with the reasons which have been
assigned for so holding, I need not trouble your Lordships by
repeating them. As regards the third head of claim, the case
as presented at your Lordships' bar has been very much
narrowed by the admission of the appellant's counsel that the
respondent ceased to be a director in December, 1890, and his

Ad: AND PRIVY COUNCIL.

acceptance of the decision of the Court of Appeal that the
Statute of Limitations applies so as to bar the recovery of any
sums paid away prior to six years before the commence-
ment of the proceedings. The claim is thus confined to
the three dividends paid in July, 1889, December, 1889, and
July, 1890.

My Lords, I think it appears from the evidence that, in the
balance-sheets upon which these dividends were recommended
by the directors, bad and irrecoverable debts were in fact
included amongst the assets of the company, and that if those
debts had been written off (as they ought to have been) the
balance-sheet would not have shewn any profit out of which
the dividends could have been paid. But before proceeding to
discuss the evidence upon which it is sought to fix the
respondent with responsibility, I will say a few words with
regard to the law upon the subject with a view to ascertain
exactly what it is the appellant must establish.

My Lords, I need only refer to three cases, which seem to
me to contain the whole law upon the subject. In Stringer's
Case (1) the business of the company in question was of an
extremely speculative and hazardous character, and the directors
had paid a dividend on their estimated value of assets which
were afterwards totally lost. It was held that the estimate,
having been made bona fide, and without any intention to
defraud anybody, a director could not be made liable when
the company was wound up to replace the money. In Fance's
Case (2) Lord Romilly laid down the principle which he thought
governed cases of this description thus: '' When an improper
payment has been made, if it be a mere error of judgment it
cannot be recovered; if it be a fraudulent payment then it
can." The learned judge explained what he meant by a
fraudulent payment: "'I mean one where the person who
makes it or is concerned in making it is at the time aware of
the impropriety of making it, but does so in order to obtain a
benefit for himself"; and he adds: ''The director may be
ignorant of this fact, but if his ignorance arises from his

(1) (1869) L. R. 4 Ob. 475. (2) L. RB. 6 Ch. 104.

489

H. L. (E.)
1901

—m~
Dovry
Oe
Cory.

Lord Davey.

490

HLL. @,)

1901
—w~
Dovey
Vv.
Cory.

Lord Davey.

HOUSE OF LORDS [1901)

wilfully shutting his eyes to the facts which are before him, he
is equally guilty." I think that this statement of the law is
very nearly, but not quite, accurate. In my opinion it is not
necessary that the motive of the improper payment should be
to obtain a benefit for the director himself. I also understand -
Lord Romilly to include in the expression '' wilfully shutting
his eyes," culpable negligence or reckless indifference by the
director in the performance of his duties. Lord Romilly
decided that. case in favour of the director. The Court of
Appeal took a different view of the facts from that taken by
Lord Romilly, and held that the directors in the preparation of
the so-called balance-sheet had not followed the directions in
their articles of association, and the balance-sheet did not in
fact purport to shew a profit out of which a dividend could be
paid. In such a case there can be no doubt of the liability of
the director who took part in the payment of the dividend.

The case of Leeds Estates, déc., Co. v. Shepherd (1), before
Stirling J., was a case of the same description. The directors
had not followed the directions contained in the articles of
association. The learned judge, in the course of his judgment,
states the law thus: ''It seems to me that the views expressed
by the learned judges who decided Rance's Case (2) are con-
sistent with the proposition that directors who are proved to
have, in fact, paid a dividend out of capital fail to excuse
themselves if they have not taken reasonable care to secure
the preparation of estimates and statements of account, such
as it was their duty to prepare and submit to the shareholders,
and have declared the dividends complained of without having
exercised thereon their judgment as mercantile men on the
estimates and statements submitted to them."

My Lords, I agree in this statement of the law, and I do not
think it inconsistent with that of Lord Romilly, properly
understood, and subject to the observation which I have
already made upon it. It is by this standard that the conduct
of the respondent must be judged in this case.

The respondent, in his affidavit, states generally that he was,

(1) 86 Ch. D. 787. (2) L. R. 6 Ch. 104,

A.C. AND PRIVY COUNCIL.

from first to last, under the honest and genuine belief that the
affairs of the company were in a sound and solvent condition,
and that its business was being carried on at a profit, and that
its net profits for the time being were amply sufficient to
justify the dividends which were from time to time, during his
directorship, paid to the shareholders. And he adds that the
general manager and branch managers were, so far as he knew,
men of unquestioned competence and integrity, and that he
and his co-directors were compelled by the magnitude of the
business and the exigencies of the case generally to rely upon
(and he did rely upon) these officials in all ordinary matters
relating to the accounts of customers and other questions of
detail. And he deals specifically with the various matters
alleged in the liquidator's evidence on the same lines. The
respondent was cross-examined on his affidavit at great, but
not unnecessary, length. Iam not, I think, doing injustice to
the appellant's case when I say that reliance was chiefly placed
on the '' weekly states' and "' quarterly returns' made by the
branch managers, or that if he cannot succeed in fixing the
respondent with liability on these documents, his case fails.
These returns were laid on the table in the board room at each
meeting of the directors. The comparative analysis of them,
made by the skilled accountant who advises the appellant,
does, I think, shew that certain accounts which were treated
as good by the general manager in the preparation of the
balance-sheets, submitted by him to the directors, were, in
fact, irretrievably bad, and it is difficult to acquit the general
manager of improper conduct in including them as assets.
The respondent says in his affidavit that the '' weekly states"
consisted- each week of a very large and voluminous pile of
sheets, which it would have taken the directors a couple of
days to go through, and that it was the duty of the general
manager to go through the weekly states, with the letters of
the branch managers accompanying them, and to place upon
the agenda any points arising upon them which he considered
ought to be brought to the attention of the directors; and

upon the discussion of such points the documents were, when .

necessary, referred to; but, except in such cases, the weekly

491

H. L. (E.)
1901

eam

Dovny
Vv.

Cory.

Lord Davey.

492

H. L. (E.)
1901

—~
DovrEy
Vv
Cory.

Lord Davey.

HOUSE OF LORDS [1901]

states were not consulted by the directors, but they relied on
the general manager going carefully through them and drawing
their attention to any matter requiring their consideration.
On cross-examination he adhered to this statement. He
added that the chairman also went through them often inai-
vidually, and he did so for the board. He admitted that,
before recommending a dividend, he did not look at all the
accounts or look at the books themselves, but he said that the
directors looked at the documents which were put before them
by the manager—the amount which he considered was doubtful
and bad—and they made a reserve for it. He also said that it
was never brought before him that amounts due from bankrupt
debtors were included in the balance-sheet of each year, and
he never heard of any single case of that kind. It further
appeared, from the evidence of other witnesses, that the
branches of the bank were regularly visited and their books
examined by the chairman and two inspectors.

In this state of the evidence, my Lords, I ask whether the
course of business at the board meetings, as described by
the respondent, was a reasonable course to be pursued by the
respondent and other directors, or whether the knowledge
which might have been derived from a careful and comparative
examination of the weekly states and quarterly returns from
the different branches of the bank ought to be imputed to the
respondent, or (alternatively) whether he was guilty of such
neglect of his duty as a director as would render him liable to
damages. I do not think that it is made out that either of the
two latter questions should be answered in the affirmative. I
think the respondent was bound to give his attention to and
exercise his judgment as a man of business on the matters
which were brought before the board at the meetings which he
attended, and it is not proved that he did not do so. But I
think he was entitled to rely upon the judgment, information,
and advice of the chairman and general manager, as to whose
integrity, skill, and competence he had no reason for suspicion.
I agree with what was said by Sir George Jessel in Hallmark's
Case (1), and by Chitty J. in In re Denham & Co. (2), that

(1) (1878) 9 Ch. D. 329. (2) (1888) 25 Ch. D. 752.

A.C. AND PRIVY COUNCIL.

directors are not bound to examine entries in the company's
books. It was the duty of the general manager and (possibly)
of the chairman to go carefully through the returns from the
branches, and to bring before the board any matter requiring
their consideration ; but the respondent was not, in my opinion,
guilty of negligence in not examining them for himself, not-
withstanding that they were laid on the table of the board for
reference. The case is no doubt one of some difficulty, but
the appellant has not made out to my satisfaction that the
respondent wilfully (as that term is explained in the cases I
have referred to) misappropriated the Santa funds in
payment of dividends.

My Lords, what I have said is sufficient for the decision of
this appeal. But I desire to express my dissent from some
propositions of law which were laid down in the Court of
Appeal, and upon which your Lordships thought it right to
hear the respondent's counsel. The learned judges seem to
have thought that a joint stock company, incorporated under
the Companies Acts, may write off to capital losses incurred in
previous years, and may in any subsequent year, if the receipts
for that year exceed the outgoings, pay dividends out of such
excess without making up the capital account. If this pro-
position be well founded, it appears to me that a company
whose capital is not represented by available assets need never
trouble itself to reduce its capital, with the leave of the Court
and subject to the other conditions imposed by the Act of
1877, in order to enable itself to pay dividends out of current
receipts.

My Lords, it may be that I have misapprehended the state-
ment of law intended to be made by learned judges in the
Court of Appeal. I think that is possible, because I find that
in Verner v. General and Commercial Investment Trust (1)
Lord Lindley says: '' Perhaps the shortest way of expressing
the distinction which I am endeavouring to explain is to say
that fixed capital may be sunk and lost, and yet that the excess
of current receipts over current payments may be divided, but

(1) [1894] 2 Ch. 239, at p. 266.
A.C. 1901. 3 2N

493

H. L. (E.)
1901

—~
Dovry
Vv
Cory.

Lord Davey.

494

H. L. (E.)
1901

—~
Dovry
Vv.
Cory.

Lord Davey.

HOUSE OF LORDS [1901}

that floating or circulating capital must be kept up, as other-
wise it will enter into and form part of such excess, in which
case to divide such excess without deducting the capital which
forms part of it will be contrary to law."

I reserve my opinion as to the effect of an actual and
ascertained loss of part of the company's fixed capital, as in.
the case put by Mr. Swinfen Eady of a loss of a ship uninsured.
But, subject to this observation, I think that the statement of
law contained in the passage I have quoted is not open to
objection, and it is only because the learned judge appears to
me to have departed from it in his judgment in the present:-
case that I have troubled your Lordships with these remarks.

I agree that the appeal should be dismissed.

Order appealed from affirmed and appeal
dismissed with costs.

Lords' Journals, August 1, 1901.

Golicitors: Riddell Con for Piomis Wee
Burton, Yeates & Hart, for Johnsons, Barclay & Lowe,
Birmingham ; Michael Abrahams, Sons & Co.

Applied. BRITISH »
{ Motor TRADE AssN. v.

SALVADORI.
{1949] 1 Ch. 556

s pes
A. C. AND PRIVY COUNCIL.