AC 465 IDI Enterprises Pty Ltd and Another v Classified Transport Pty Ltd

in re CITY EQUITABLE FIRE INSURANCE COMPANY, ©. 4.

LIMITED. 1924
ROMER J.
[No. 0048 of 1922.]
Feb. 4, 5, 6,
Wits 11 12

Company—Winding Up—Misfeasance—Directors and Auditors—Duties— 13, 14, 15, 18,
Investments—Loans—Signing Cheques—Inspection and Safe Custody 19, 20, 21, 22,
of Securities—Declaration of Dividends—Fraud of Managing Director a5 26T,

—Clause in Articles exempting Directors and Auditors from Liability March 3, 4,

—“ Wilful Neglect or Default”—Companies (Consolidation) Act, 1908 5, 6;

(8 Edw. 7, c. 69), ss. 113, 215, 279. May 22.

Cr AS

In the winding up by the Court of the above mentioned company July 3, 4,
an investigation of its affairs disclosed a shortage in the funds, of which _7, 8, 9,
the company should have been possessed, of over 1,200,000/., due in 10, 11.
part to depreciation of investments, but mainly to the instrumentality
of the managing director and largely to his deliberate fraud, for which |
he had been convicted and sentenced. : rN

Art. 150 of the company’s articles of association provided (inter alia)
that none of the directors, auditors, secretary or other officers for the
time being of the company should be answerable for the acts, receipts,
neglects or defaults of the others or other of them, or for any bankers
or other persons with whom any moneys or effects belonging to the
company should or might be lodged or deposited for safe custody, or
or insufficiency or deficiency of any security upon which any moneys
of or belonging to the company should be placed out or invested, or
for any other loss, misfortune, or damage which might happen in the
execution of their respective offices or trusts, or in relation thereto,
unless the same should happen by or eprough their own wilful neglect
or default respectively.

On a misfeasance summons under s. 215 of the Companies (Consolida-
tion) Act, 1908, the Official Receiver as liquidator sought to make the
respondent directors, all of whom (except the managing director) had
admittedly acted honestly throughout, liable for negligence in respect
of losses occasioned by investments and loans, and of payment of
dividends out of capital.

2K 2 1

408

C. A.
1924

Recs
Crry Equit-
ABLE FIRE
INSURANCE
Co.,

In re.

CHANCERY DIVISION. 1925}

In determining the questions of the liability of the respondent directora
raised by the summons, Romer J. enunciated and adopted the following
principles relative to the duties of directors and to the meaning to be
attached to the words “ wilful neglect or default’ in art. 150.

Duties of Directors.—The manner in which the work of a company
is to be distributed between the board of directors and the staff is a
business matter to be decided on business lines. The larger the business
carried on by the company the more numerous and the more important
the matters that must of necessity be left to the managers, the accountants,
and the rest of the staff.

In ascertaining the duties of a director of a company, it is necessary
to consider the nature of the company’s business and the manner in

' which the work of the company is, reasonably in the circumstances
| and consistently with the articles of association, distributed between
, the directors and the other officials of the company.
In discharging those duties, a director (2) must act honestly, and
'(b) must exercise such degree of skill and diligence as would amount
to the reasonable care which an ordinary man might be expected to
take, in the circumstances, on his own behalf. But, (c) he need not
exhibit in the performance of his duties a greater degree of skill than
, may reasonably be expected from a person of his knowledge and experi-
{ ence; in other words, he is not liable for mere errors of judgment; -
\\(d) he is not bound to give continuous attention to the affairs of his <
| company; his duties are of an intermittent nature to be performed at .
periodical board meetings, and at meetings of any committee to which.
‘he is appointed, and though not bound to attend all such meetings.
he ought to attend them when reasonably able to do so; and (e) in
_respect of all duties which, having regard to the exigencies of business-
and the articles of association, may properly be left to some other.
official, he is, in the absence of grounds for suspicion, justified in trusting,
| that official to perform such duties honestly. ~

Overend & Gurney Co. v. Gibb (1872) L. R. 5 H. L. 480; Lagunas
Nitrate Co. v. Lagunas Syndicate [1899] 2 Ch. 392; In re National
Bank of Wales [1899] 2 Ch. 629 ; [1901] A. C. 477 (sub nom. Dovey v.
Cory); and In re Brazilian Rubber Plantations and Estates, Ld. [1911]
1 Ch. 425, applied.
vy A director who signs a cheque that appears to be drawn for a legitimate
purpose is not responsible for seeing that the money is in fact required
for that purpose, or that it is subsequently applied for that purpose,
assuming, of course, that the cheque comes before him for signature
in the regular way, having regard to the usual practice of the company. °
A director must of necessity trust to the officials of the company to.
perform properly and honestly the duties allocated to them.

Before any director signs a cheque, or parts with a cheque signed by :
him, he should satisfy himself that a resolution has been passed by the
board, or committee of the board (as the case may be), authorizing the
signature of the cheque; and where a cheque has to be signed between
meetings, he should obtain the confirmation of the board subsequently
to his signature.

The authority given by the board or committee should not be for the
signing of numerous cheques to an aggregate amount, but a proper

1 Ch. CHANCERY DIVISION. 409

list of the individual cheques, mentioning the payee and the amount GQ. A.
of each, should be read out at the board or committee meeting and 192 924
subsequently transcribed into the minutes of the meeting.

Joint Stock Discount Co. v. Brown (1869) L. R. 8 Eq. 381 distinguis uished. Crry Equrr-
It is the duty of each director to see that the company’s moneys 7°" a
NSURANCE

are from time to time in a proper state of investment, except so far as Co.,

the articles of association may justify him in delegating that duty Jn re.
to others. _- rae

Before presenting their annual report and balance sheet to their
shareholders, and before recommending a dividend, directors should
have a complete and detailed list of the company’s assets and invest-
ments prepared for their own use and information, and ought not to
be satisfied as to the value of their company’s assets merely by the
assurance of their chairman, however apparently distinguished and
honourable, nor with the expression of the belief of their auditors, how-
ever competent and trustworthy. \.~

It is not the duty of a director of a big insurance company to supervise
personally the safe custody of the securities of the company. It would
be impracticable, on every purchase of securities, for actual delivery
thereof to be made to the directors, or, on every sale, for the delivery
to the brokers of the securities sold to await a meeting of the board
or of a committee of directors. The duty of seeing that the securities
are in safe custody must of necessity be left to some official of the company
in daily attendance at the office of the company, such as the manager,
accountant, or secretary. \“

A director is not responsible for declaring a dividend unwisely. He
is liable if he pays it out of capital, but the onus of proving that he
has done so lies upon the liquidator who alleges it.

ry Wilful Neglect or Default—An act, or an omission to do an act, is
wilful where the person who acts, or omits to act, knows what he is-
doing and intends to do what he is doing, but if that act or omission.

~ amounts to a breach of that person’s duty, and therefore to negligence,:
he is not guilty of wilful neglect or default unless he knows that he is. |

committing, and intends to commit, a breach of his duty, or is recklessly f

a, careless in the sense of not caring whether his act or omission is or is. |
‘not a breach of his duty. -. be
\ Lewis v. Great Western Ry. Co. (1877) 3 Q. B. D. 195; Forder v
\ Great Western Ry. Co. [1905] 2 K. B. 532; and Leeds City Brewery, Ld.

y. Platts, post, p. 532n., applied.

This statement of the meaning of “ wilful neglect or default” was
subsequently approved by Warrington and Sargant L.JJ. in the Court
of Appeal on the Official Receiver’s appeal against Romer J.’s decision
exonerating the auditors :—

Held, (1.) Following In re Brazilian Rubber Plantations and Estates, Ld.
[1911] 1 Ch. 425, that the immunity afforded by art. 150 was one of the
terms upon which the directors held office in the company, and availed
them as much on a misfeasance summons by the Official Receiver under
s. 215, as it would have done in an action by the company against them
for negligence; and

(2.) Upon the evidence and in accordance with the principles enunciated
above, that none of the respondent directors (other than the managing

)

410

OC. A.
1924

a)

Ciry Equit-

ABLE FIRE
INSURANCE

Lt

In re,

ans?

CHANCERY DIVISION. [1925)

director) was liable for the losses covered by the points of claim, and

that in those instances in which all or some of the directors had been

guilty of negligence, such negligence was not wilful and art. 150 applied
to exonerate them from liability.

On the same misfeasance summons the Official Receiver sought to
make the respondent auditors liable for negligence and breach of duty
with respect to the audit by them of the balance sheets for the three
years immediately previous to the winding up.

In determining the question of liability of the respondent auditors
raised by the summons, Romer J. applied the principles enunciated
by Lindley L.J. in In re London and General Bank (No. 2) [1895]
2 Ch. 673 and also the following further principles relative to the duties
of auditors.

An auditor is not ever justified in omitting to make personal inspection
of securities that are in the custody of a person or company with whom
it is not proper that they should be left, whenever such personal inspection
is practicable. ;

A company’s stockbrokers, however respectable and responsible
they may be, are not proper persons to have the custody of its securities
except on such occasions when, for short periods, securities must of
necessity be left with them; but immediately such necessity ceases
the securities should be lodged in the company’s strong room or with
its bank, or placed in other proper and usual safe keeping.

Whenever an auditor discovers that securities of the company are
not in proper custody, it is his duty to require that the matter be put
right at once, or, if his requirement is not complied with, to report the
fact to the shareholders, and this whether he can or cannot make a
personal inspection :—

Held, on the evidence and in accordance with the principles enunciated
above: (1.) that the auditors were not guilty of any breach of duty
as auditors—

(a) In describing, after a full investigation in which they were misled
and deceived, and their reports to the board suppressed, by the
chairman of the company, large sums of money left in the hands of
the company’s stockbrokers and lent to the general manager of the
company as “ Loans at call or short notice,” “Loans” or “ Cash
at hand and in bank’’; or

(6) In failing to discover that the company’s stockbrokers, in order
to reduce their indebtedness to the company for the purposes of
the audit, made purchases, on behalf of the company, immediately
before the close of the company’s financial year, of Treasury Bills
which in fact never came into the possession of the company and
were sold immediately the new financial year had opened.

(2.) That the auditors committed a breach of duty in not personally
inspecting the securities of the company in the hands of the stock-
brokers of the company, and in accepting from time to time the certificate
of the brokers that they held large blocks of such securities, and in
not either insisting upon those securities being put in proper custody
or in reporting the matter to the shareholders; but that inasmuch as
throughout the audit the auditors honestly and carefully discharged
what they conceived to be the whole of their duty to the company,

1 Ch. CHANCERY DIVISION. 411

such negligence was not wilful, and art. 150 applied to exonerate them OC. A.
“ from liability.

On the appeal of the Official Receiver from the above decision so far a
only as it affected the respondent auditors, - Ciry Equrr-

The Court (Pollock M.R., Warrington and Sargant L.JJ.), in affirming Greek
as a whole the decision of Romer J.:— ;
Held, (1.) That s. 215 was a procedure section only and created no In re.
new or additional liability. ee
(2.) That the measure of the auditor’s responsibility depends upon
-the terms of his engagement. There may be a special contract defining
the duties and liabilities of the auditors. If there is, then that contract
governs the question. The articles will, however, be looked at if there
is no special agreement, because the auditors will presumably have taken
their duties upon the terms (among others) set out in the articles. That,
is not to say that auditors can set aside a statutory obligation. No| Y
agreement or article of association cam remove an imperative or!
statutory duty. ;
(3.) Sect. 113 does not lay down a rigid code. The duty imposed
on the auditors by it is not absolute, but depends upon the information
given and explanations furnished to them, so that there is abundant
scope for discretion. Art. 150 is not in conflict with the section.
The onus-lies upon the auditors, who would not be excused for total
omission to comply with any of the requirements of the section, or for
any consequences of deliberate or reckless indifferent failure to ask
for information on matters which—call_for further explanation,
(4.) Auditors should not be content with a certificate that securities
are in the possession of a particular company, firm, or person unless
the company, etc., is trustworthy, or, as it is sometimes put, respectable,
and further is one that in the ordinary course of business keeps securities
for its customers. In all these cases the auditor must use his judgment.
The definition of “‘ wilful misconduct” by Lord Alverstone C.J.
in Forder v. Great Western Ry. Co. [1905] 2 K. B. 532, 536, adopted
by Pollock M.R. :
Quaere, whether in the particular circumstances of the case, apart
from art. 150, there was negligence on the part of the auditors (as held
by Romer J.) in not personally inspecting the securities which were
in the possession of the company’s stockbrokers and in accepting their
certificate instead.

ADJOURNED SUMMONS.

The City Equitable Fire Insurance Company, Ld. (herein-
after referred to as “the company’), was incorporated on
December 17, 1908, under the Companies Acts, 1862 to 1907,
and the objects of the company were to carry on every kind
of insurance and reinsurance business other than life assurance
and employers’ liability insurance. The original capital of
the company was 50,000/., divided into 10,000 ordinary
shares of 51. each, but this was subsequently increased to

412

C. A.
1924

eS
Crry Equrt-
ABLE FIRE
INSURANCE
Co.,
In re.

CHANCERY DIVISION. [1925]

375,000. by the creation of 300,000 preference shares and
additional 25,000 ordinary shares of il. each respectively.

The objects for which the company was established included
also power: (12.) to lend deposit or advance money on
securities and property to or with such persons and on such
terms as might be expedient; (14.) to amalgamate or
enter into partnership or any arrangement for sharing
profits, union of interests, joint adventure, reciprocal con-
cessions or co-operation with any person or company carrying
on or engaged in or about to carry on or engage in any
business or transactions which the company was authorized
to carry on or engage in; (15.) generally to purchase, take on
lease, or in exchange, hire or otherwise acquire any real or
personal property; and (18.) to accumulate capital for the
purposes of the company and to invest and deal with the
moneys of the company upon such stocks, funds, shares,
securities and investments and in such manner as might
from time to time be determined.

The articles of association of the company so far as material
for the purposes of this report provided as follows :—

Art. 106. ‘“ All moneys, bills and notes belonging to the
company shall be paid to or deposited with the company’s
bankers to an account to be opened in the name of the
company. Cheques on the company’s bankers, unless and
until the directors shall otherwise from time to time resolve,
shall be signed by at least two directors and countersigned }
by the secretary.”

Art. 120. “The directors or any committee of directors
may meet together for the despatch of business, adjourn
and otherwise regulate their meetings as they think fit, and
determine the quorum necessary for the transaction of business.
Until otherwise determined two shall be a quorum. Questions
arising at any meeting shall be decided by a majority of votes.
In case of an equality of votes the chairman shall have a
second or casting vote.”

Art. 123. “ The directors may delegate any of their powers,
other than the powers to borrow and make calls, to committees
consisting of such members of their body as they think fit.

1 Ch. CHANCERY DIVISION.

Any committee so formed shall in the exercise of the power
so delegated conform to any regulations that may from time
to time be imposed upon them by the Board.”

Art. 139. “ A balance sheet shall be made out in every year
and laid before the company in general meeting. Such
balance sheet shall be made up to a date not more than
three months before such meeting, and shall be accom-
panied by a report of the directors as to the state of the
company’s affairs and the amounts (if any) which they
‘recommend to be paid in dividend or propose to carry to
reserve, : .*. :

Art. 140. “Once at least in every year the accounts of
the company shall be examined, and the correctness of the
profit and loss account and balance sheet ascertained by one
or more auditor or auditors.”

Art. 141. “The appointment, powers, rights, remuneration
and duties of the auditors shall be regulated by ss. 112
and 113 of the Companies (Consolidation) Act, 1908, and
any statutory modification, extension or re-enactment thereof
for the time being in force.”

Art. 150. “The directors, auditors, secretary and other
officers for the time being of the company, and the trustees
(if any) for the time being acting in relation to any of the
affairs of the company, and every of them, and every of their
heirs, executors and administrators, shall be indemnified
and secured harmless out of the assets and profits of the
company from and against all actions, costs, charges, losses,
damages and expenses which they or any of them their or
any of their heirs, executors or administrators shall or may
incur or sustain by or by reason of any act done, concurred
in or omitted in or about the execution of their duty, or
supposed duty, in their respective offices or trusts, except
such (if any) as they shall incur or sustain by or through
their own wilful neglect or default respectively, and none
of them shall be answerable for the acts, receipts, neglects or
defaults of the other or others of them, or for joining in any
receipts for the sake of conformity, or for any bankers or other
persons with whom any moneys or effects belonging to the

413

C. As
1924

eee,
Crry Equrt-
ABLE FIRE
INSURANCE
Co.,
In re.

CHANCERY DIVISION. [1925]

company shall or may be lodged or deposited for safe custody,
or for insufficiency or deficiency of any security upon which

- any moneys of or belonging to the company shall be placed

out or invested, or for any other loss, misfortune or damage
which may happen in the execution of their respective
offices or trusts, or in relation thereto, unless the same
shall happen by or through their own wilful neglect or default
respectively.”

The constitution of the directorate of the company; the
appointment of a finance committee with power to make
or sell investments on behalf of the company ;. and the causes
which on February 14, 1922, necessitated the making of an
order upon the petition of the company for the winding up
of the company by the Court, are set out in the following
judgment of Romer J.

This was a summons by the liquidator under s. 215 of the
Companies (Consolidation) Act, 1908, against the respondent
directors and auditors.

The allegations against the respondent directors, were
misfeasance, negligence, breach of trust and breach of duty
for :—

(1.) The investment of 701,7391. of the company’s moneys
in certain investments set forth in the points of claim but
confined at the hearing to a sum of 228,813/. invested in
shares in Claridge’s Hotel, Paris, which had, so far as realized,
produced 67,5571., the estimated value of those unrealized
being 24,0001., and to a sum of 70,9701. invested in shares
of the United Brass Founders and Engineers, Ld., the
estimated value of which was 11851. ;

(2.) The investment of 445,374l. in a ranch in Brazil ;

(3.) Permitting E. G. Mansell, the general manager, and
now a bankrupt, to become indebted to the company for
110,000/., the whole of which was lost to the company ;

(4.) Lending to or allowing to remain in the hands of
Ellis & Co., the company’s brokers and now bankrupt, the
sum of 350,000/., the greater part of which was lost to the
company ;

(5.) Lending to G. L. Bevan, the chairman of the company

1 Ch. CHANCERY DIVISION.

and senior partner in Ellis & Co., who had since been
adjudicated bankrupt and had been convicted and sentenced
for his frauds on the company, the sum of 93291., which was
lost to the company ;

(6.) Lending to the Saskatoon Grain Company a sum of
93291., which had been wholly lost ;

(7.) Paying dividends out of capital in respect of the
financial year ending February 28, 1921, and

(8.) Paying an interim dividend out of capital in respect
of the financial year ending February 28, 1922.

The allegations against the respondent auditors were that
as auditors of the company they were guilty of negligence and
breach of duty with respect to the audit by them of the
- balance sheets of the company for the years ended February 28,
1919; February 29, 1920; and February 28, 1921, in that—

(a) They failed to verify the existence in fact of any of the
securities of which the company was therein stated to be
possessed ;

(b) They failed to see that the balance sheets respectively
disclosed the indebtedness of Ellis & Co. to the company ;

(c) They included moneys due from Ellis & Co. and from
Mansell amongst the loans at call or short notice ;

(d) They failed to see that the balance sheets respectively
pointed out to the shareholders the fact that Ellis & Co. and
Mansell were indebted to the company and the manner in
which such indebtedness arose ;

(e) They included as cash at the bank and in hand debts
due from Ellis & Co. and moneys which were not the moneys
of the company alone, and

(f) They failed to call attention to the fact that securities
appearing in the balance sheets respectively as the property
of the company were in fact hypothecated. This last
allegation was withdrawn at an early stage of the hearing.

The Official Receiver claimed compensation from the
auditors for the loss sustained by the company through their
alleged negligence in respect of the above-mentioned matters.

The summons came on for hearing before Romer J. on
February 4, 1924.

415

C. A.
1924

—_—
Crry Equrr-
ABLE FIRE
INSURANCE

7)

In re.

416 CHANCERY DIVISION. [1925]

GOA: Topham K.C.,C. A. Bennett K.C. and Harold Christie for the

1924 Official Receiver as liquidator. No fraud is alleged against any

Orry Equir- of the respondents, except Bevan. The allegation against

roum SRE them is purely one of negligence, and the common law principle

Co., applies—namely, that where a person undertakes an operation

53 which requires a certain amount of skill, he will be responsible

for damaging results from his not exercising the amount of

skill which a reasonable person, who is competent to carry

out that transaction, would make use of. For example, a

person acting as a director of a large insurance company is

bound to exercise the skill that a reasonable person, competent

to act in that way, would exercise, and he is not entitled to

say that he knew nothing about business; that he was not

a business man at all, and that he was there for some quite ©
subsidiary purpose.

In the case of an insurance company the investment of
the funds of the company is a most important matter, and
we submit that the directors ought to ascertain from time
to time what the investments are in which the funds under
their control are invested, that they should provide some
system for the care and custody of the investments which
they hold, and that they ought to see that the investments
are reasonably proper for the class of company of which they
are directors.

Where directors take so little part in the management of
the business of the company as to make it perfectly easy,
without inquiry, for one of their number to dissipate the
funds of the company then they ought to be liable for the
consequences.

Directors are always held to be trustees of moneys in their
hands or under their control: In re Lands Allotment Co. (1),
and misapplication of those moneys through mistake or
carelessness is a breach of trust for which they are liable
quite apart from any question of misfeasance.

When a director undertakes a certain transaction requiring
any special skill, he must exercise the skill ordinarily used
by persons who are transacting that particular thing : Jones v.

(1) [1894] 1 Ch. 616.

1 Ch. CHANCERY DIVISION.

Bird. (1) Even if these directors were not expected to exercise
special skill, the disastrous result would not have occurred
if they had exercised the ordinary care of an ordinary man
in his own business. They left the investment of the funds
of the company in the hands of one man, Bevan, and in so
doing were guilty of negligence: Charitable Corporation v.
Sutton. (2)

Where a director signs a cheque under a provision in the
articles saying that two directors must sign, he is prima facie
liable to see that he has signed for a proper purpose ; but if
it is signed in pursuance of a resolution of the Board, that
would throw the responsibility on to those who passed the
resolution ; Joint Stock Discount Co. v. Brown. (3) Payment
of dividends is another specific act which shifts the burden
of proof on to the directors of showing that they were in fact
paid out of profits: Leeds Estate, Building and Investment
Co. v. Shepherd.(4)

The duty of an auditor, as stated by Lindley L.J. in Jn re
London and General Bank (No. 2) (5), is to “ check the cash,
examine vouchers for payments, see that the bills and securi-
ties entered in the books were held by the bank, and take
reasonable care to ascertain their value.” The auditors in
this case have fallen far short of that standard.

Then art. 150 limits the liability of directors except in cases
of their own wilful neglect or default. Wilful default was
defined by Bowen L.J. in In re Young and Harston’s Contract (6) ;
it means, not that a man deliberately refrains from doing
anything, but that, being a free agent and knowing what he is
doing, he does not do something. It excludes, we submit, such
a case as this. The strongest case against the liquidator’s
contentions is to be found in dicta in In re National Bank
of Wales (7), which went to the House of Lords sub nomine
Dovey v. Cory (8), and the result of which appears to be
that where a director does not go into matters of detail but

(1) (1822) 5 B. & Al. 837. (5) [1895] 2 Ch. 673, 684.
(2) (1742) 2 Atk. 400. (6) (1885) 31 Ch. D. 168, 174.
(3) L. R. 8 Eq. 381. (7) [1899] 2 Ch. 629.

(4) (1887) 36 Ch. D. 787. (8) [1901] A. C. 477.

eo

417

GC. A.
1924

Ses
Crry Egurr-
ABLE FIRE
INSURANCE
Co.,

In re.

418

C. A.
1924

Crry Equrr-

ABLE FIRE

INSURANCE
Co.,
‘In re.

CHANCERY DIVISION. [1925]

delegates details to his subordinates, and they defraud, then he
cannot be held liable. Neville J. also in In re Brazilhan Rubber
Plantations and Estates, Ld.(1), stated certain principles relative
to a director’s duty which, we submit, were merely dicta. The
judgments in Lewis v. Great Western Ry. Co.(2) do not help
in determining whether there is any difference between
negligence and wilful negligence.

Maugham K.C. and Lionel Cohen for the respondent the
Earl of March. On behalf of the respondent directors, we
seek to establish five propositions with regard to the liability
of directors :—

(1.) Directors are bound to act honestly: Lagunas Nitrate
Co. v. Lagunas Syndicate (3); In re National Bank of Wales (4) ;
affirmed in the House of Lords sub nom. Dovey v. Cory (5),
Prefontaine v. Grenier.(6)

(2.) Directors, subject to certain qualifications hereinafter
mentioned, are bound to use fair and reasonable care and
diligence in the discharge of their duties, and subject to any
special article absolving them, will be liable as for neglizence
if they substantially fail in this respect. That is in the nature
of an admission, but is subject to certain qualifications which
appear in the following propositions: In re Cardiff Savings
Bank (7); Lagunas Nitrate Co. v. Lagunas Syndicate (3) ;
In re National Bank of Wales (4); Dovey v. Cory. (5)

(3.) Directors’ duties, however, are of a somewhat special
kind. Their attention to the company’s affairs is only of an
intermittent nature, namely at periodical board meetings.
They are not bound to attend except at board meetings, nor
are they bound to attend all board meetings. They are not
bound to inquire into matters which are not brought before
the board, unless, indeed, they are put upon inquiry by facts
being brought to their attention which call for explanation ;
in other words, directors are not managers and do not con-
tract to manage the affairs of the company: Overend and

(1) [1911] 1 Ch. 425. (4) [1899] 2 Ch. 629.
(2) 3Q. B.D. 195. (5) [1901] A. C. 477.
(3) [1899] 2 Ch. 392. (6) [1907] A. C. 101.

(7) [1892] 2 Ch. 100.

1 Ch. CHANCERY DIVISION. 419

Gurney Co. v. Gibb (1); In re Denham & Co. (2); In re Cardiff 0. A.

Savings Bank (3); In re Lands Allotment Co. (4) 1924
Directors who do no more than attend board meetings, Gre Hours.

act honestly at them, and abstain from probing into matters fR™ Pe

into which they are able to probe, but to which their attention pec
has not been directed, are relieved from liability in such a a
case as the present : In re National Bank of Wales (5), affirmed

in the House of Lords sub nomine Dovey v. Cory (6); Pre-
fontaine v. Grenier (7); Leeds Estate, Building and Investment

Co. v. Shepherd (8), explained by Lord Davey in Dovey v.

Cory. (6)

(4.) Directors do not in any way warrant that they are
skilful or competent, and they may be much the reverse
without incurring liability. Accordingly, they are not liable
for errors of judgment, and the care and diligence for which
they contract are only such as are reasonably to be expected
from them having regard to their personal capacity and experi-
ence: J'urquand v. Marshall (9)\; Overend & Gurney Co. v.
Gibb (1); In re Denham & Co. (2); Lagunas Nitrate Co. v.
Lagunas Syndicate (10); In re National Bank of Wales. (5)

(5.) Directors cannot be held liable for being defrauded,
and are not called upon to distrust or to guard against the
possibility of fraud being committed by employees of the
company, or by any of their co-directors : Land Credit Co. of
Ireland v. Lord Fermoy (11) ; Joint Stock Discount Co. v.
Brown (12), both cases dealing with the signing of cheques,
but in circumstances very different from the present case,
and in the former case involving a transaction ultra vires :
In re Denham & Co. (2); Dovey v. Cory (6); Prefontaine v.
Grenier. (7)

Those five propositions represent the liability of directors
apart from the provisions of s. 279 of the Companies

(1) L. R.5 H. L. 480. (7) [1907] A. C. 101.

(2) (1883) 25 Ch. D. 752. (8) 36 Ch. D. 787.

(3) [1892] 2 Ch. 100. (9) (1869) L. BR. 4 Ch. 376.

(4) [1894] 1 Ch. 616. (10) [1899] 2 Ch. 392.

(5) [1899] 2 Ch. 629. (11) (1869) L. R. 8 Eq. 7; (1870)
(6) [1901] A. C. 477. L. R. 5 Ch. 763.

(12) L. R. 8 Eq. 381.

CHANCERY DIVISION. [1925]

(Consolidation) Act, 1908, and apart from any articles of associa-
tion. We submit that this respondent cannot be held liable in
respect of any of the matters covered by those propositions.

Charitable Corporation v. Sutton (1) was the case of a
charitable trust managed by persons who although called
directors were in fact trustees, and is not any authority upon
the duties of directors of a limited liability company.

Having regard to art. 150 it is not possible for the applicants
to succeed without attacking the good faith of the directors.
Except by striking the word “ wilful” out of that article,
this respondent cannot be held liable. “ Wilful’’ connotes
a neglect or default committed by the director of which the
director is guilty, but knowing well at the moment that he
is guilty of a neglect or default in regard to his duty. He knows
what his duty is, and does something short of it. In Dovey v.
Cory (2) there was no such article as this. Under a somewhat
analogous clause, trustees of a debenture deed were held not to
have committed a breach of trust wilfully : Leeds City Brewery,
Ld. v. Platis.(3) In re Young and Harston’s Contract (4) is
very far from this case, which is much nearer to In re Brazilian
Rubber Plantations and Estates, Ld. (5), where Neville J.
decided that directors might well be excused under a similar
article.

If we are wrong on all our contentions, then we submit
that s. 279 of the Companies (Consolidation) Act, 1908, applies
with especial force to this respondent, and that he ought
fairly to be excused for any negligence or breach of duty.

Barrington-Ward K.C. and H. du Parcg for the respondent
Peter Haig Thomas, adopted the preceding argument, and
addressed the Court on the evidence.

Sir Walter Schwabe K.C., G. D. Johnston and J. A. Reid
for the respondent director, H. R. Grenside.

Upon the true construction of art. 150 this respondent is
not liable. He has not been guilty of wilful neglect or default
within the meaning of those terms as explained by Leeds City

(1) 2.Atk. 400. (3) Post, p. 582n.

(2) [1901] A. C. 477. (4) 81 Ch. D. 168.
(5) [1911] 1 Ch. 425.

1 Ch. CHANCERY DIVISION.

Brewery Ld. v. Platts (1); Lewis v. Great Western Ry. Co. (2) ;
Forder v. Great Western Ry. Co. (8); In re Young and Harston’s
Contract. (4)

In the matter of the cheques drawn to Ellis & Co., the
members of the finance committee and the directors were
entitled to rely upon the officials of the company to carry
out their directions: In re National Bank of Wales (5) ;
Dovey v. Cory (6); and there was nothing ultra vires in
handing moneys to the company’s brokers for investment
in securities.

The cheques to Mansell were signed at well regulated
intervals, and by different directors, and the evidence shows
that they did not know that Mansell was being overpaid.
The ultimate agreement with Mansell was obtained by the
trickery of Bevan, and by suppressing information which he
ought to have disclosed.

Directors who pay dividends, as the respondents did, under
an honest and reasonable belief in a state of facts which
would justify the payments, are not liable to replace those
funds if it turns out that in fact the payments were ultra
vires: In re Kingston Cotton Mill Co. (No. 2)(7); In re
National Bank of Wales. (5)

We submit that this respondent has not been guilty of
culpable or gross negligence, nor of wilful default.

Gover K.C. and H. J. Wallington for the respondent
Lord Ribblesdale referred to In re Denham & Co. (8); Leeds
City Brewery, Ld. v. Platts (1); In re Young and Harston’s
Contract (4); In re Mayor of London and Tubbs’ Contract (9) ;
Elliott v. Turner (10); In re Johnson (11); Sheffield and South
Yorkshire Permanent Building Society v. Aizlewood (12) ; Leeds
Estate, Building and Investment Co. v. Shepherd, (13)

Sir John Simon K.C., Sir Malcolm Macnaghten K.C. and

(1) Post, p. 532n. (7) [1896] 1 Ch. 331, 347.
(2) 3 Q. B.D. 195. (8) 25 Ch. D. 752, 767, 768.
(3) [1905] 2 K. B.532. (9) [1894] 2 Ch. 524.

(4) 31 Ch. D. 168. (10) (1843) 13 Sim. 477.

(5) [1899] 2 Ch. 629. (11) [1886] W. N. 72.

(6) [1901] A. C. 477, 484, 492. (12) (1889) 44 Ch. D. 412, 453.

(13) 36 Ch. D. 787, 798.
Von. I. 1925. 2L 1

421

CoyAc
1924

es
Ciry Equrir-
ABLE FIRE
INSURANCE
Co.,
In re.

422

C. A.
1924

——
Crry Equit-
ABLE FIRE
INSURANCE
Co.,

In re.

CHANCERY DIVISION. [1925]

R. J. T. Gibson for the respondent Sir Douglas Dawson ;
and Wilfrid Greene K.C. and W. P. Spens for the respondent
Milligan, adopted the previous arguments, and addressed. the
Court on the evidence on behalf of these respective respondent
directors. .

Stuart Bevan K.C. and George Phillips for the respondent
auditors. We desire to reserve the point that the auditors
are not officers of the company within the meaning of s. 215
of the Companies (Consolidation) Act, 1908. It is not open
to us to argue that question here, inasmuch as in In re London
and General Bank (1) it was held by the Court of Appeal
that an auditor was an officer within the meaning of the
corresponding section in the earlier Act, but in the later case
of Inre Kingston Cotton Mill Co. (2) Lord Herschell expressed
no opinion upon the question whether the earlier case was
rightly decided but left that question open, although the
Court of Appeal in the later case (3) felt themselves bound
by the decision in In re London and General Bank. (1)

The evidence shows that Mr. Lepine displayed extra-
ordinary care and accuracy in his work and figures. He fully
maintained the standard of duty which, apart from agreement,
he had to the company—namely, to exhibit the care and
skill which an accountant of standing should exercise, but
that is not the only standard to be considered, for, by virtue
of art. 150, he can only be liable if any neglect or default on
his part was of the wilful character dealt with by Lord
Sterndale M.R. and Warrington L.J. in Leeds City Brewery
Ld. v. Platts.(4) There has, we submit, been no wilful
neglect or default on the part of Mr. Lepine. With
regard to the Treasury Bills, there was nothing in the books
to show that there was any window dressing. He obtained
verification certificates of the existence of the securities,
and we submit that he was not negligent because he did not
inspect them, relying, in common with other people of standing
in the City of London, upon the word of Ellis & Co. There
is no rigid rule with regard to the inspection of documents,

(1) [1895] 2 Ch. 166. (3) [1896] 2 Ch. 279.
(2) [1896] 1 Ch. 6, 16. (4) Post, p. 532n.

1 Ch. CHANCERY DIVISION.

and it is purely a matter for the discretion of the auditor
in each particular case. If Mr. Lepine had pressed to inspect
the securities it is inconceivable in the circumstances that
Bevan would not have managed to produce them.

The auditors had no duty to disclose in the balance sheets
the names of Ellis & Co. or of Mansell as debtors. The reports
of the auditors drew attention to these debts, but those reports
were suppressed by Bevan and never reached the directors.
Further it was no part of the auditors’ duty to consider the
agreement with Mansell, authorized as it was by the directors.
These debts were rightly called “loans at call or short
notice’; they were payable on demand, loans terminable
within a short period or short loans ; De Peyer v. The King. (1)
Moneys in the hands of Ellis & Co. were moneys held by them
as agents for the company and were rightly described as
“cash at bank or in hand”; they did not include debts,
properly so called, from Ellis & Co. The principles relating
to an auditor’s duty are clearly laid down in In re London and
General Bank (No. 2) (2) and in In re Kingston Cotton Mill
Co. (No. 2) (8) and are applicable to the present case, and if
applied to the facts of this case, absolve the respondent
auditors from all liability.

Topham K.C. in reply. This is a case in which one
unscrupulous person took advantage of the opportunities
for fraud which were quite innocently provided by his too
trusting colleagues on the board, who misapprehended their
duties. They deliberately and intentionally did certain
things and omitted certain things, and left things to others,
not realizing in most, if not all, cases that it was their duty
to look after those things themselves. They allowed vast
sums to remain in the hands of Ellis & Co. without any
control of any kind with a consequent heavy loss to the
company. If directors do not take as much care in looking
after the funds of the company as a reasonable and prudent
man would in like circumstances take in his own affairs,
they are liable for the consequences. If that is the true

(1) (1909) 100 L. T. 256. (2) [1895] 2 Ch. 673.

(3) [1896] 2 Ch. 279.
212 l

423

C. A.
1924

——_—
City Equir-
ABLE FIRE
INSURANCE
Co.,

In re.

424

C. A.
1924

a
Crry Equit-
ABLE FIRE
INSURANCE
Co.,

In re.

CHANCERY DIVISION. [1925]

standard, then for the purposes of this case s. 279 of the
Companies (Consolidation) Act, 1908, does not carry the
matter any further: Lewis v. Great Western Ry. Co. (1);
Forder v. Great Western Ry. Co. (2); and Leeds City Brewery,
Id. v. Platts (3), are not relevant to the consideration of
art. 150, the latter part of which is really a reproduction of
s. 24 of the Trustee Act, 1893, which repeated s. 31 of Lord St.
Leonard’s Act, and those sections only stated the existing
law relative to trustees: In re Brier (4); Dix v. Burford (5) ;
Mucklow v. Fuller. (6) The rights given by s. 215 of the
Companies (Consolidation) Act, 1908, are independent of
and cannot be modified by any sucn provisions as those of
art. 150, and I submit that in this respect In re Brazilian
Rubber Plantations and Estates, Ld. (7) was wrongiy decided.

Cur. adv. vult.

May 22. Romer J. On June 27, 1916, Gerrard Lee Bevan
became a director of the City Equitable Fire Insurance
Company, Ld. The company at that time was carrying on
successfully the business of reinsurance of fire and marine
risks, and was in a sound financial condition. On February 14,
1922, an order was made for the winding up of the company
by the Court. A searching investigation of the affairs of
the company was then made, and this investigation disclosed
a shortage in the funds of which the company should have
been possessed of over 1,200,000/. This deplorable state of
affairs was in no way due to the company’s trading operations
as a reinsurance company. From the year 1916 onwards
to February 28, 1921, which is the date of the company’s
last published balance sheet, there was a steady and most
remarkable increase in the premium income of the company,
due principally to the fact that it had been able to secure
a large part of the business of the Munich Reinsurance
Company, who, before the outbreak of war, had done most

(1) 3Q. B.D. 195. (4) (1884) 26 Ch. D. 238.
(2) [1905] 2K. B.532. (5) (1854) 19 Beay. 409,
(3) Post, p. 532n. (6) (1821) Jac. 198,

(7) [1911] 1 Ch. 425.

1 Ch, CHANCERY DIVISION.

of the reinsurance business in this country. For the year
ending February, 1916, the company’s premium income
from all classes of insurance was 363,000/. For the year
ending February, 1919, the premium income on fire and
general account was 613,483l., and on marine account was
1,351,000/. For the year ending February, 1920, the corre-
sponding figures were 1,189,759. and 1,422,471/., and for
the year ending February, 1921, they were 2,071,515]. and
1,469,1977. In each of the years 1919, 1920 and 1921 there
was a large and progressive trading profit. The collapse
of the company was not, therefore, due to its reinsurance
business. It was entirely due to the following causes.
Various industrial investments of the company, of which
the net cost to the company had been 701,739/., have realized
or are estimated to realize 202,3731., representing a loss of
close upon 500,000/. Over 445,000]. of the company’s funds
had been applied in acquiring an interest in certain lands in
Brazil, and this interest is estimated at the present time to
be worth about 100,000/. only. No less a sum than 110,0001.
had found its way into the hands of.the company’s manager
in circumstances to be detailed hereafter, and none of that
money is recoverable. A sum of 385,000]. odd was due
from Ellis & Co., the company’s brokers, of which firm Bevan
was the senior partner, and against this indebtedness the
company held collateral security that has realized under
31,0007. In respect of the balance it is estimated that only
about 14,000/. will ultimately be received as dividend in the
bankruptcy of that firm. Bevan himself had misappropriated
other moneys of the company amounting to nearly 7000L.,
and some 9000]. had been lent by Bevan or Ellis & Co. to
a company known as the Saskatoon Grain Company without
any authority whatever. Little, if anything, will ever be
recovered in respect of these two sums. Nearly the whole
of these enormous losses were brought about through Bevan’s
instrumentality, and a large part of them by his deliberate
fraud. For that fraud he has been tried, and convicted,
and is now suffering the just penalty. But the question
not unnaturally arises as to whether, during the period

425

C. A.
1924
~~
Crry Equir-

ABLE FIRE
INSURANCE

426 CHANCERY DIVISION. [1925]

c. A. covered by Bevan’s nefarious activities, the other directors
1924 and the auditors of the company were properly discharging
Crry Equir- the duties that they owed to the company’s shareholders.
alee The Official Receiver, as the liquidator of the company,

aoe alleges that they were not. He has accordingly included them,
— ‘or such of them as are still living, as respondents to the

i summons which he issued against Bevan under s. 215 of the
Companies Act; and whilst admitting, and rightly admitting,
that they have acted honestly throughout, he claims that
they have been guilty of such negligence as to render them-
selves liable to the company in damages. Whether they
are, or are not so liable, is the question that I have to
determine. It will be convenient to consider the case of
the directors and the case of the auditors separately, and I
propose to begin with the directors. But before investigating
the facts it will be convenient to consider the law applicable
to the case.

It has sometimes been said that directors are trustees.
If this means no more than that directors in the performance |
of their duties stand in a fiduciary relationship to the |
company, the statement is true enough. But if the statement
is meant to be an indication by way of analogy of what those
duties are, it appears to me to be wholly misleading. I can
see but little resemblance between the duties of a director
and the duties of a trustee of a will or of a marriage settlement.
It is indeed impossible to describe the duty of directors in
general terms, whether by way of analogy or otherwise.
The position of a director of a company carrying on a small
retail business is very different from that of a director of a
railway company. The duties of a bank director may differ
widely from those of an insurance director, and the duties
of a director of one insurance company may differ from those
of a director of another. In one company, for instance,
matters may normally be attended to by the manager
or other members of the staff that in another company are
attended to by the directors themselves. The larger the
business carried on by the company the more numerous,
and the more important, the matters that must of necessity

1 Ch. CHANCERY DIVISION.

be left to the managers, the accountants and the rest of the
staff. The manner in which the work of the company is to be
distributed between the board of directors and the staff is
in truth a business matter to be decided on business lines.
To use the words of Lord Macnaghten in Dovey v. Cory (1):
“T 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.”

In order, therefore, to ascertain the duties that a person
appointed to the board of an established company under-
takes to perform, it is necessary to consider not only the
nature of the company’s business, but also the manner in
which the work of the company is in fact distributed between
the directors and the other officials of the company, provided
always that this distribution is a reasonable one in the circum-
stances, and is not inconsistent with any express provisions
of the articles of association. In discharging the duties of
his position thus ascertained a director must, of course, act
honestly ; but he must also exercise some degree of both
skill and diligence. To the question of what is the particular
degree of skill and diligence required of him, the authorities
do not, I think, give any very clear answer. It has been laid
down that so long as a director acts honestly he cannot be
made responsible in damages unless guilty of gross or culpable
negligence in a business sense. But as pointed out by
Neville J. in In re Brazilian Rubber Plantations and Estates,
Ld. (2), one cannot say whether a man has been guilty of
negligence, gross or otherwise, unless one can determine
what is the extent of the duty which he is alleged to have
neglected. For myself, I confess to feeling some difficulty
in understanding the difference between negligence and gross
negligence, except in so far as the expressions are used for

(1) [1901] A. C. 477, 488. (2) [1911] 1 Ch. 425, 437.

427

C. A.
1924

-——_
Ciry Equit-
ABLE FIRE

428

C.. A.
1924

“——
City Equrr-
ABLE FIRE
INSURANCE

Co.,

In re.

Romer J.

CHANCERY DIVISION. [1925]

the purpose of drawing a distinction between the duty that
is owed in one case and the duty that is owed in another.
If two men owe the same duty to a third person, and neglect
to perform that duty, they are both guilty of negligence, and
it is not altogether easy to understand how one can be guilty
of gross negligence and the other of negligence only. But
if it be said that of two men one is only liable to a third person
for gross negligence, and the other is liable for mere negligence,
this, I think, means no more than that the duties of the two
men are different. The one owes a duty to take a greater
degree of care than does the other: see the observations of
Willes J. in Grill v. General Iron Screw Collier Co.(1) If,
therefore, a director is only liable for gross or culpable neglhi-
gence, this means that he does not owe a duty to his company,
to take all possible care. It is some degree of care less than
that. The care that he is bound to take has been described
by Neville J. in the case referred to above as “reasonable
care’’ to be measured by the care an ordinary man might
be expected to take in the circumstances on his own behalf.
In saying this Neville J. was only following what was
laid down in Overend & Gurney Co. v. Gibb (2) as being
the proper test to apply, namely: ‘‘ Whether or not the
directors exceeded the powers entrusted to them, or whether
if they did not so exceed their powers they were cognisant
of circumstances of such a character, so plain, so mani-
fest, and so simple of appreciation, that no men with any
ordinary degree of prudence, acting on their own behalf,
would have entered into such a transaction as they
entered into ?”

There are, in addition, one or two other general propositions
that seem to be warranted by the reported cases: (1.) A
director need not exhibit in the performance of his duties a
greater degree of skill than may reasonably be expected
from a person of his knowledge and experience. <A director
of a life insurance company, for instance, does not guarantee
that he has the skill of an actuary or of a physician. In the
words of Lindley M.R.: “If directors act within their powers,

(1) (1866) L. R. 1 C. P. 600, 612. (2) L. R.5 H. L. 480, 486.

1 Ch. CHANCERY DIVISION.

if they act with such care as is reasonably to be expected
from them, having regard to their knowledge and experience,
and if they act honestly for the benefit of the company they
represent, they discharge both their equitable as well as their
legal duty to the company”: see Lagunas Nitrate Co. v.
Lagunas Syndicate.(1) It is perhaps only another way of
stating the same proposition to say that directors are not
liable for mere errors of judgment. (2.) A director is not
bound to give continuous attention to the affairs of his
company. His duties are of an intermittent nature to be
performed at periodical board meetings, and at meetings of
any committee of the board upon which he happens to be
placed. He is not, however, bound to attend all such meetings,
though he ought to attend whenever, in the circumstances,
he is reasonably able to do so. (3.) In respect of all duties
that, having regard to the exigencies of business, and the
articles of association, may properly be left to some other
official, a director is, in the absence of grounds for suspicion,
justified in trusting that official to perform such duties
honestly. In the judgment of the Court of Appeal in In re
National Bank of Wales, Ld. (2), the following passage occurs
in relation to a director who had been deceived by the manager,
and managing director, as to matters within their own
particular sphere of activity: ‘‘ Was it his duty to test the
accuracy or completeness of what he was told by the general
manager and the managing director ? This is a question on
which opinions may differ, but we are not prepared to say
that he failed in his legal duty. Business cannot be carried
on upon principles of distrust. Men in responsible positions
must be trusted by those above them, as well as by those
below them, until there is reason to distrust them. We
agree that care and prudence do not involve distrust ; but
for a director acting honestly himself to be held legally liable
for negligence, in trusting the officers under him not to conceal
from him what they ought to report to him, appears to us to
be laying too heavy a burden on honest business men.” That
case went to the House of Lords, and is reported there under

(1) [1899] 2 Ch. 392, 435. (2) [1899] 2 Ch. 629, 673.

429

C. A.
1924

=
City Equit-
ABLE FIRE
INSURANCE
Co.,
In re.

Romer J.

430

C. A.
1924

“~~
Crry Equit-
ABLE FIRE

Romer J,

CHANCERY DIVISION. [1925]

the name of Dovey v. Cory.(1) Lord Davey, in the course
of his speech to the House, made the following observations: (2)
“‘T 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 (3), and by Chitty J. in In re Denham
& Co. (4), that 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, notwithstanding that they were laid on the
table of the board for reference.”

= These are the general principles that I shall endeavour to
apply in considering the question whether the directors of
this company have been guilty of negligence. But in order
to determine whether any such negligence, if established,
renders the directors liable in damages, it is necessary to
consider the provisions of art. 150 of the company’s articles
of association. That article is in these terms. [His Lordship —
read the article and continued:] The earlier part of this
article appears to be concerned with actions and claims
against the directors brought or made by persons other than
the company itself. The importance of the article for the
present purpose is to be found in the later part, which provides
that the directors are not to be answerable for insufficiency
or deficiency of any security or for any other loss, misfortune,
or damage which may happen in the execution of their respec-
tive offices or trusts or in relation thereto “ unless the same
shall happen by or through their own wilful neglect or default

(1) [1901] A. C. 477. (3) (1878) 9 Ch. D. 329.
(2) Ibid. 492. (4) 25 Ch. D. 752.

1 Ch. CHANCERY DIVISION.

respectively.” In opening the case for the liquidator,
Mr. Topham treated this article as in no way modifying the
general law relating to directors. He contented himself with
citing a passage from the judgment of Bowen L.J. in In re
Young and Harston’s Contract.(1) That was a case in which
the Court of Appeal had to consider whether a vendor of real
estate had been guilty of wilful default within the meaning
of a condition of sale which imposed upon the purchaser a
liability to pay interest on his purchase money from the date
fixed for completion until actual payment if the completion
were delayed from any cause whatever other than wilful
default on the part of the vendor. Bowen L.J. expressed
himself as follows: ‘‘ Default is a purely relative term, just
like negligence. It means nothing more, nothing less, than
not doing what is reasonable under the circumstances—not
doing something which you ought to do, having regard to
the relations which you occupy towards the other persons
interested in the transaction. The other word which it is
sought to define is ‘ wilful.’ That is a word of familiar use
in every branch of law, and although in some branches of
the law it may have a special meaning, it generally, as used
in Courts of law, implies nothing blameable, but merely
that the person of whose action or default the expression
is used, is a free agent, and that what has been done arises
from the spontaneous action of his will. It amounts to
nothing more than this, that he knows what he is doing,
and intends to do what he is doing, and is a free agent.” If
these words of Bowen L.J. be read without reference to the
facts of the case in which they were used, I should agree
that the word “wilful” in art. 150 was superfluous, and
qualifies in no way a director’s liability for negligence. For
a director acting under compulsion, or at a time when his
mind was no longer functioning, could hardly be said to be
guilty cf negligence or default—words that by themselves
surely connote free agency and spontaneous action of the
will. It is, however, to be observed that in In re Young
and Harston’s Contract (2) the vendor left this country on

(1) 31 Ch. D. 168, 174. (2) 31 Ch. D..168.

(

431

C. A.
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Romer J.

432 CHANCERY DIVISION. [1925]

c. A. the very day on which the sale should have been completed
1924 without even leaving an address to which the conveyance
Crry Eaurr- could be sent to him for execution. Sir James Hannen says
oe this (1): “‘ The cardinal point in the case appears to be this,

Aes whether where a person has entered into a contract to be

Roux 3, completed upon a particular day—in this case the 8th
ae September—and he, knowing that, goes away upon the 6th to
take his autumn holiday, he has been guilty of wilful default
thereby causing the non-completion of the contract. It seems
to me a very plain case, and I really can entertain no doubt
whatever as to what any jury would have thought, and we,
in the position of the jury, come to the conclusion that he
made default in not being in the position to complete the
contract so far as it lay with him upon the 8th of Sep‘ember ;
and that was default of an intentional character on his part,
and therefore wilful.” Then a little lower down: “Our
judgment, therefore, is that where a man knowing that some
act has to be done by him on the particular day, goes away
in disregard of that obligation, he is guilty of default; and
doing it intentionally, it is wilful within the terms of a contract
of this kind.” It was a case, therefore, where the vendor’s
default consisted not merely of an omission to do an act
which it was his duty to do, but of an omission to do an act
which he knew it was his duty to do. This is the view of
the case that was taken in the later decision of the Court of
Appeal in In re Mayor of London and Tubbs’ Contract. (2)
That also was a case arising under a contract between vendor
and purchaser of real estate, and again the Court had to
consider whether the vendor had been guilty of wilful default
within the meaning of a condition similar to that in the
earlier case. The default of the vendor consisted of an
innocent misstatement as to his title contained in the contract.
Lindley L.J. in his judgment said (3): “I am aware that
in Elliott v. Turner (4) Vice-Chancellor Shadwell expressed
the opinion that forgetfulness might amount to wilful default.
The case before him was, however, of a very different kind

(1) 31 Ch. D. 173. (3) [1894] 2 Ch.536.
(2) [1894] 2 Ch. 524. (4) 13 Sim. 477.

1 Ch. CHANCERY DIVISION.

from the present. I confess that I am more disposed to
concur with Lord Bramwell’s observations on the term
‘wilful misconduct’ in Lewis v. Great Western Ry. Co. (1)
They are, in my opinion, quite consistent with Lord Bowen’s
observations in In re Young and Harston’s Contract (2), if
it be borne in mind that Lord Bowen presupposed knowledge
of what was done, and intention to do it, and was not addressing
himself to a case of an honest mistake or oversight. No
doubt the statements contained in the 4th condition were
deliberate, and to that extent ‘ wilful’; but the misstatement
was not ‘ wilful.” Lopes LJ. said (3), in speaking of
the judgment of Bowen L.J. in In re Young and Harston’s
Contract (2): ‘‘I do not think the learned judge was con-
templating an honest oversight. He was dealing with a
different case, where, two days before the time fixed for
completion, the vendor left England without having executed
the conveyance which was ready for his execution in the
afternoon of the day fixed.’ Then, after quoting a passage
from the judgment of Sir James Hannen, cited above, he
added: ‘“‘ What the vendor did there was not regarded as a
mistake, much less an honest or unintentional oversight.
That case, in my judgment, is distinguishable from the present,
and expressions applicable to that case are inapplicable
here. In Lewis v. Great Western Ry. Co. (1) Lord Justice
Bramwell says—defining ‘ wilful’ in connection with miscon-
duct—‘ wilful misconduct ’’ means misconduct to which the
will is a party, something opposed to accident or negligence ;
the misconduct, not the conduct, must be wilful.’ This,
to my mind, is a more accurate definition of ‘ wilful’ than
that given by Vice-Chancellor Shadwell in Elliott v. Turner (4),
where he says, ‘In my opinion the word “wilful” can have
no other meaning than “‘spontaneous”’: and, if the neglect
or default in this case arose from the voluntary act of the
parties, either awake or asleep with reference to their rights
and interests, and did not at all arise from the pressure of
external circumstances over which they could have no control,

(1) 3Q. B. D. 195, 206. (3) [1894] 2 Ch. 538.
(2) 31 Ch. D. 168. (4) 13 Sim. 485.

433

Gs. Jae
1924

we
Crry Equit-
ABLE FIRE
INSURANCE
Co.,
In re.

Romer J.

434 CHANCERY DIVISION. [1925]

c. A. I apprehend that the neglect or default was wilful.’ It is

1924 difficult to lay down any general definition of ‘ wilful.’ The

Cry Equrr- word is relative, and each case must depend on its own
eal particular circumstances.”

wee, ' If I may say so with respect, the difficulty is not so much

Rome j, im ascertaining the meaning of the adjective “ wilful,” as in

oe ascertaining precisely what is the noun to which the adjective

is to be applied. \An_act, or an omission to do an act, is

wilful where the person of whom we are speaking knows

what he is doing and intends to do what he is doing. But if

that act or omission amounts to a breach of bis duty, and

therefore to negligence, is the person guilty of wilful negligence ?

In my opinion that question must be answered in the negative

unless he knows that he is committing, and intends to

commit, a breach of his duty, or is recklessly careless in the

sense of not caring whether his act or omission is or is not

a breach of duty. This conclusion appears to me to be

warranted by at least three authorities, one of which was

referred to in the passage quoted above from the judgment

of Lopes L.J. In Lewis v. Great Western Ry. Co. (1) the

question arose as to the meaning of the phrase “ wilful

misconduct”? in a contract for the carriage by the

defendant company of goods of the plaintiff. The

goods had admittedly been damaged owing to the conduct

of the defendants’ servants. Under the terms of the contract,

however, the defendants were not liable unless the damage

was occasioned by the wilful misconduct of their servants.

Bramwell L.J. said (1): “‘ Was this damage caused by the

wilful misconduct of the defendants’ servants ? Mr. Powell’s

argument, when analysed, is to this effect: ‘The conduct

of which we complain was their conduct, and that conduct

was misconduct, and it was not accidental, therefore it was

wilful.’ So that, in the result, unless a thing is a pure

accident, it is wilful. If aman were walking along and tripped

over some goods which he did not happen to see, it would

be said that the tripping was the result of his conduct, which

was misconduct—not accidental but wilful—and that the

(1) 3Q. B. D. 195, 206.

1 Ch. CHANCERY DIVISION.

wilfulness was in not looking out. I do not, however, think
that the question can be thus dealt with. There is such a
mass of authorities to show what ‘ wilful misconduct’ is,
that we should hardly be justified, as a Court of Appeal, in
departing from them, even if we thought them to be wrong.
‘ Wilful misconduct’ means misconduct to which the will
is a party, something opposed to accident or negligence ;
the misconduct, not the conduct, must be wilful.” Brett LJ.
said (1): “In a contract where the term wilful misconduct
is put as something different from and excluding negligence
of every kind, it seems to me that it must mean the doing of
something, or the omitting to do something, which it is wrong
to do or to omit, where the person who is guilty of the act
or the omission knows that the act which he is doing, or that
which he is omitting to do, is a wrong thing to do or to omit ;
and it involves the knowledge of the person that the thing
which he is doing is wrong; I think that if he knows that
what he is doing will seriously damage the goods of a consignor,
then he knows that what he is doing is a wrong thing to do;
and also, as my Lord has put it, if it is brought to his notice
that what he is doing or omitting to do, may seriously endanger
the things which are to be sent, and he wilfully persists in
doing that against which he is warned, careless whether he
may be doing damage or not, then I think he is doing a wrong
thing, and that that is misconduct, and that, as he does it
intentionally, he is guilty of wilful misconduct ; or if he does,
or omits to do something which everybody must know is likely
to endanger or damage the goods, then it follows that he is
doing that which he knows to be a wrong thing to do. Care
must be taken to ascertain that it is not only misconduct
but wilful misconduct, and I think that those two terms
together import a knowledge of wrong on the part of the
person who is supposed to be guilty of the act or omission.”
Cotton L.J. delivered judgment to the same effect. Both
Brett L.J. in the passage I have just read, and Cotton L.J.
in his judgment, draw, no doubt, a distinction between wilful
misconduct and negligence of every kind. But I cannot

(1) 3 Q.B.D. 210.

435

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1924

BE
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ABLE FIRE
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7)
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Romer J,

436 CHANCERY DIVISION. [1925]

c. A. assent to the argument of Mr. Topham that these judg-

1924 ments afford no assistance in determining whether or

Crry Equir- not there be any difference between negligence and wilful
ABLE FIRE : :

negligence. The case seems to me to be an authority for

wh the proposition that a wilful act, which act amounts to

Roma j, negligence, is not wilful negligence unless there be a will to

be negligent.

In Forder v. Great Western Ry. Co. (1), the question of the
meaning of wilful misconduct again came up for consideration
before a Divisional Court. Lord Alverstone C.J. in giving
judgment said (2): “‘I am quite prepared to adopt, with one
slight addition, the definition of wilful misconduct given by
Johnson J. in Graham v. Belfast and Northern Counties Ry.
Co. (3), where he says: ‘ Wilful misconduct in such a special
condition means misconduct to which the will is party as
contradistinguished from accident, and is far beyond any
negligence, even gross or culpable negligence, and involves
that a person wilfully misconducts himself who knows and
appreciates that it is wrong”“conduct on his part in the existing
circumstances to do, or to fail or omit to do (as the case may
be), a particular thing, and yet intentionally does, or fails
or omits to do it, or persists in the act, failure, or omission
regardless of consequences.’ The addition which I would
suggest is, ‘or acts with reckless carelessness, not caring
what the results of his carelessness may be.’ ”’

The third of the authorities to which i have referred
is a recent decision of the Court of Appeal in Leeds City
Brewery, Ld. v. Platis. (4) The case does not appear to be
reported (4), but I have been furnished with a transcript of
the judgments of the members of the Court, consisting of
Lord Sterndale M.R. and Warrington and Younger L.JJ.
The question that had to be decided was as to the liability
of a trustee of a debenture trust deed for the loss occasioned
by an investment that had been made by him. . The invest-
ment was an unauthorized,one, and, in making it, the trustee
was admittedly guilty of a breach of trust. It was, however,

(1) [1905] 2 K. B.532. (3) [1901] 21. R. 13.
(2) Ibid. 535. (4) Now reported post, p. 532n.

1 Ch. CHANCERY DIVISION.

held by the Court of Appeal that the trustee was absolved
from liability by virtue of two clauses in the trust deed. Those
two clauses when read together went a good deal further
than the 150th article of association of the City Equitable
Fire Insurance Company, and the actual decision has little,
if any, bearing upon the question of the liability of the
respondents in the present case. But both Lord Sterndale
and Warrington L.J. in delivering judgment made certain
observations that are of general application. By one of the
clauses it was provided that the trustees of the deed and each of
them should be kept indemnified from and against all actions,
proceedings, costs, charges, claims and demands whatsoever
that might arise or be brought or made against them or him
in respect of any matter or thing done or omitted without
their or his own wilful default. In referring to this clause,
Lord Sterndale said: ‘‘ With regard to those words about
their or his own wilful default, I think Mr. Maugham is
right in saying that they are not used in the technical way
when you are speaking of taking an account on the basis of
wilful default, but I think they are used as meaning—unless
they have failed to do their duty purposely and wilfully,
unless there is some wilful misconduct.” Then, after stating
that the other clause relied upon by the trustee was not
meant to protect him against a wilful doing wrong, he added :
“Therefore the question to my mind which has to be decided
to settle this appeal is whether Mr. Beevers was to be held to
have done this wilfully and intentionally knowing that what
he was doing was wrong. The learned judge has found that
he did. It was wilful neglect, as he calls it, which I take to
mean wilfully doing what was wrong, and wilfully doing
what he knew it was his duty not to do, or not doing what
he knew it was his duty to do.” Warrington L.J., after
referring to one of the clauses in question, said: ‘“ The
learned judge, and here I agree with his view, has held that
assuming that the trustee was guilty of wilful breach of trust,
he would not be protected by that clause. I am inclined to
agree with him there. But then it becomes important to
consider what is meant by a wilful breach of trust, or wilful
Vox. I. 1925. 2M 1

437

Gs Ag
1924
Ciry Equit-

ABLE FIRE
INSURANCE

438

Cy Ak
1924

ee,
Crry Equrr-
ABLE FIRE
INSURANCE
Co.,
In re.

Romer J,

CHANCERY DIVISION. [1925]

negligence or wilful failure to perform his duty. I think
it means this. I think it means deliberately and purposely
doing something which he knows, when he does it, is a breach
of trust, consisting in.a failure to perform his duty as trustee.”

Mr. Topham, in his reply, urged that these authorities were
not relevant to the consideration of art. 150. The later part
of that article, he said, was substantially a reproduction of
s. 24 of the Trustee Act, 1893, which in turn was a repetition
of s. 31 of Lord St. Leonard’s Act, and he contended that
these sections had always been regarded as doing little more
than stating the existing law in relation to trustees. In
support of this contention he cited In re Brier (1); Dux v.
Burford (2); and Mucklow v. Fuller. (3) In In re Brier (1)
the question to be decided was whether or not certain trustees
should be charged with a sum of money collected by their
agent, which sum had been lost, owing to the agent’s subse-
quent insolvency. The passage in Lord Selborne’s judgment
relied upon by Mr. Topham is as follows: “I think that in
this case the burden of proof is upon the respondents who
seek to charge the executors with this money. The statute
22 & 23 Vict. c. 35, s. 31, provides, in effect, that trustees
shall not be responsible for any banker, broker, or other
person with whom trust moneys have been deposited (which
I understand to mean properly deposited) unless it can be
shown that that loss happened through their own wilful
fault. The statute incorporated, generally, into instruments
creating trusts the common indemnity clause which was
usually inserted in such instruments. It does not substantially
alter the law as it was administered by Courts of equity,
but gives it the authority and force of statute law, and appears
to me to throw the onus probandi on those who seek to
charge an executor or trustee with a loss arising from the
default of an agent, when the propriety of employing an
agent has been established. In the present case, the learned
judge in the Court below has virtually decided that this was
a case of proper employment of an agent for a proper purpose,

(1) 26 Ch. D. 238, 243, 244, (2) 19 Beay. 409.
(3) Jac. 198.

1 Ch. CHANCERY DIVISION.

and, as far as I can judge, the nature of the case justifies
that view.” But when the whole of the judgment is read,
it is, I think, reasonably clear that Lord Selborne, when
referring to the law as it was administered by Courts of
equity, was referring to the law as to the employment of
agents by trustees. He had not to consider, and he expressed
no opinion as to, the meaning of the expression “ wilful
default.” This sufficiently appears from a later part of his
judgment, which is in these words: ‘Then if a person seeks
to charge the executors with a loss arising from the default
of an agent whom it is admitted to have been reasonable
to employ, does it not lie on him to inform the Court of the
circumstances under which the loss arose, the time during
which the money was in the agent’s hands, the time at which
the insolvency took place? This having been done, the
executors, on the other hand, would have an opportunity
of shewing what efforts they had made and what means
they had used for getting in the money and what, if any,
were the difficulties in their way. Now, it appears to me
here, that the person on whom the onus probandi lies has
failed to inform the Court of the circumstances which it was
absolutely necessary for the Court to know, before it could
come to the conclusion that the loss by the agent’s insolvency
was due to some wilful default on the part of the executors.”

In Diz v. Burford (1) a trustee was held liable for the loss
occasioned by reason of his omission to procure himself to
be admitted tenant to certain copyholds upon the security
of which the trust fund of 400/. was invested. In consequence
of this omission his co-trustee had been enabled to obtain
possession of the trust fund and convert it to his own use.
The will creating the trust contained a direction that the
trustees should not be chargeable, but only for their respective
receipts, payments, acts and wilful defaults and not otherwise,
nor with any sum or sums of money other than such as should
come to their or his own hands respectively by virtue of the
will, nor with any loss or damage which might happen to the
said sum of 400/. in consequence of its remaining on security

(1) 19 Beav. 409, 413.
2M 2 1

439

CzAS
1924

—_—
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440

C. A.
1924

as
Crry Eaquit-
ABLE FIRE
INSURANCE
Co.,
In re.

Romer J.

CHANCERY DIVISION. [1925}

as therein directed, unless the same should happen by or
through his or their respective wilful default. Sir John
Romilly, in holding the trustee liable, said: ‘I think Yells
is not exonerated by the indemnity clause. All the testator
has said is, that if by remaining on the security any loss or
damage should arise, the trustees shall not be liable, unless
it should happen by their default. Thus, if the estate had
become of less value, or the mortgagor had become unable
to pay, the trustees were to incur no liability. The ordinary
trustee indemnity clause affords no security to a trustee who
neglects to take the steps necessary to secure the fund.” The
decision therefore was that the trustee was not exonerated
by the particular indemnity clause in that case. The
construction which Sir John Romilly put upon the clause
did not necessitate a determination of the meaning of the
words “ wilful default.” He did no doubt make a general
observation as to the ordinary trustee indemnity clause, but
it would, I think, be wrong to infer from what he said that
he considered every trustee who neglected to secure the trust
fund to be necessarily guilty of “ wilful default.”

In Mucklow v. Fuller (1) a testatrix by her will, reciting
that one Mucklow was indebted to her in a sum of 5001.,
directed her executors and trustees to get in and place the
5001. on Government stock or security at interest within
three years after her decease and appointed Mucklow and
the defendant Fuller to be her executors. The 500/. was
never got in or invested, as directed by the will, and was
ultimately lost owing to Mucklow’s insolvency. The question
to be decided was whether Fuller was liable for the loss. The
will contained a clause declaring that Mucklow and Fuller
were to be chargeable with or accountable for such moneys
only as they should actually receive, and not to be answerable
or accountable for each other, but each for his own acts,
receipts, payments, neglects, or defaults only, and not for
any moneys for which they should join in any transfer or
sign any receipt for conformity; and they were not to be
answerable for any banker with whom they might deposit

(1) Jac. 198, 201.

1 Ch. CHANCERY DIVISION.

the trust moneys, or for any other loss, unless it should
happen through their wilful default. It seems that Fuller,
although he had proved the will, had, except for two small
transactions, entirely neglected his duties. Lord Eldon, in
holding him to be liable, said, in reference to the indemnity
clause, “ I cannot but think it most dangerous to lay it down,
that with such a clause as this, he can prove the will, and then
say that some one else may perform the trusts.”’ Lord Eldon
had treated. the defendant as acting bona fide and as holding
the opinion that he had nothing to do with the trusts. But
I do not think that Lord Eldon was in any way considering
what was the meaning of the expression “ wilful default ” as
applied to a person acting in a trust. His decision appears
to have merely been that the ordinary indemnity clause
has no application at all to a man who neglects the trust
altogether. It only applies to an acting trustee; it never
begins to apply to one who does not act at all.

There is not, so far as I know, an authority in which the
meaning of ‘“‘ wilful default ” in the ordinary trustee indemnity
clause has been determined or even considered. I am
therefore at liberty to place upon art. 150 the construction
which appears to me to be warranted by the authorities in
which the meaning of “ wilful default,” “ wilful neglect ”
and “ wilful misconduct” has been determined in other
connections. Before leaving this article, however, there is
another matter to which I ought to refer. In the case of
In re Brazilian Rubber Plantations and Estates, Ld. (1), to
which reference has already been made, it was sought to make
directors liable for negligence. The articles of association
contained a clause exonerating a director from liability for
loss or damage unless the same happened through his own
dishonesty. Neville J. acquitted the directors of negligence,
but he also held that this clause in the articles of association
was also a fatal objection to the application of the liquidator
which was made, as is the present application, under s. 215
of the Companies (Consolidation) Act, 1908. Referring to
the clause in question he said: “I do not see how to escape

(1) [1911] 1 Ch. 425, 440.

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CHANCERY DIVISION. [1925}

from the conclusion that this immunity was one of the terms
upon which the directors held office in this company. I do
not think that it is illegal for a company to engage its
directors upon such terms. I do not think, therefore, that an
action by this company against its directors for negligence,
where no dishonesty was alleged, could have succeeded. It
appears to me that an application under s. 215 of the Com-
panies (Consolidation) Act, 1908, stands on the same footing.”
He then referred to certain observations of Lord Macnaghten
and Lord Herschell in Cavendish Bentinck v. Fenn (1) as
warranting this conclusion. Mr. Topham did not feel justified
in asking me to decline to follow this decision, but he reserved
to himself the right to question it in the Court of Appeal, and
to ask that Court to hold that the rights given by s. 215 of
the Act are independent of and cannot be modified by any
provision contained in the articles of association. In these
circumstances I propose to follow the decision of Neville J.
upon this point without expressing any opinion of my own.

I must now turn to the facts of the case for the
purpose of ascertaining first, whether in any of the
matters charged against them the respondents have been
guilty of negligence, and secondly, whether any such
negligence was wilful, negligence and default meaning
for all practical purposes one and the same thing. That
Bevan was guilty not merely of wilful negligence but
also of fraud will appear quite clearly. The real question
that I have to decide is with reference to his co-directors.
These co-directors are Mr. Peter Haig Thomas, Mr. Henry
Ralph Grenside, the Earl of March, Lord Ribblesdale, Sir
Douglas Dawson, Mr. David Macbeth Moir Milligan, and
Sir Henry Grayson. Of these gentlemen Mr. Grenside became
a director on March 31, 1915, Lord March, Lord Ribblesdale,
and Sir Douglas Dawson on April 21, 1915, Mr. Haig Thomas
on June 27, 1916, Mr. Milligan on August 27, 1916, and Sir
Henry Grayson on December 4, 1917. They all continued
to be directors down to the date of the liquidation of the
company, with the exception of Lord March, who retired

(1) (1887) 12 App. Cas. 652, 669,

1 Ch. CHANCERY DIVISION.

from the board on January 3, 1922. A Mr. ©. T. Barclay
was also a director of the board during part of Bevan’s
directorship, but he resigned on October 5, 1920, and died
soon afterwards, and his position need not be further con-
sidered except in so far as it affected his co-directors. All
the others that I have mentioned were made respondents to
the summons. By arrangement between the Official Receiver
and Sir Henry Grayson, however, all further proceedings
against him have been stayed. I am accordingly relieved
of the task of considering any question as to his liability.
In these circumstances, whenever in this judgment I refer
to the respondent directors, I intend to exclude the respondents
Bevan and Sir Henry Grayson, and, of course, Mr.
C. T. Barclay. The Official Receiver in these proceedings
sought to make the respondent directors liable for the losses
occasioned to the company by (1.) Investing or permitting to
be invested moneys of the company amounting to 701,739.
in the investments set forth in para. 12 of the points of claim.
(2.) Investing or permitting to be invested 445,3741. in a ranch
in Brazil. (3.) Authorizing or permitting the manager Mansell
to become indebted to the company in the sum of 110,0001.
(4.) Lending or allowing to remain in the hands of Ellis & Co.,
the company’s brokers, large sums of money amounting at
the date of the winding up to some 350,000/. (5.) Making
or permitting to be made a loan to Bevan of 69521. (6.) Lend-
ing to a company called the Saskatoon Grain Company a sum
of 93291. (7.) Paying dividends in respect of the financial
year ending February 28, 1921, and (8.) Paying an interim
dividend in respect of the financial year ending February 28,
1922. The claims in respect of these dividends, alleged by
the Official Receiver to have been paid out of capital, are,
however, in the nature of alternative claims. ‘There are one
or two other matters referred to in the points of claim, in
respect of which the Official Receiver sought to make the
respondent directors liable, but they were abandoned by his
counsel during the hearing before me and need not be
mentioned further.

I propose, so far as is possible, to consider each of these

443

C. A.
1924

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ABLE FIRE
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Co.,
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Romer J.

444

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CHANCERY DIVISION. [1925]

matters separately, and in the order in which I have mentioned
them ; and to consider, wherever it becomes necessary to
do so, the position of each of the respondent directors
individually in relation to the particular matter in question.
Before doing so, however, I desire to make one general obser-
vation. Cases have not been unknown in which a director
has lent his name to a company for what may be called
window dressing purposes, and has treated himself as having
thereby given ample consideration for his remuneration and
as being absolved from any further effort towards promoting
the welfare of the company. This cannot be said of any one
of the respondent directors. It was not possible for them
all to attend to the company’s affairs with equal regularity.
Lord March, for instance, owing to serious illness resulting
in grave physical incapacity, was unable, except for two
occasions in 1918, to attend any board meetings until the
summer of 1920. He offered indeed to resign his directorship
in the year 1917, but he was persuaded by his colleagues to
remain. Mr. Milligan, who resides and carries on business
in Aberdeen, was for that reason unable to attend at meetings
of the board as often as he could have wished. But I am
satisfied from the evidence adduced before me that each one
of the respondent directors was willing and anxious to give
of his best to the company and at all times took as active a
part in the work of the board as circumstances would
reasonably permit.

Turning now to the claims made by the Official Receiver,
I come first to that in respect of the investments mentioned
in para. 12 of the points of claim. During the hearing before

me, the claim of the Official Receiver under this heading was

ultimately confined to two investments—namely, the invest-
ment of a sum of 228,813/. in shares in Claridge’s Hotel, Paris,
and the investment of a sum of 70,970]. in shares in the
United Brass Founders and Engineers, Ld. In so limiting
his claim, the Official Receiver in no way admitted that the
remainder of the investments specified in para. 12 of the
points of claim were proper investments for the funds of an
insurance company. It was, however, reasonably clear that

1 Ch. _ CHANCERY DIVISION.

if he could not succeed in respect of the two particular invest-
ments mentioned he was not likely to succeed in respect of
the remainder; while if he did succeed in respect of these
two investments and the other matters included in the other
heads of claim to which reference has been made, the combined
wealth of the respondent directors would. not be sufficient to
make good the losses that had been thereby occasioned to
the company.

Before considering the circumstances of the two investments
thus selected by the Official Receiver for attack, it is necessary
to refer to the setting up of the finance committee of the
board. This was done by a resolution passed at a board
meeting held on July 25, 1916, at which Bevan, Haig Thomas,
Lord Ribblesdale, Grenside and Sir Douglas Dawson were
present. The minute recording this resolution is in these
terms: ‘‘ Mr. Bevan, Mr. Thomas and Mr. Grenside were
appointed a finance committee with power to make or sell
investments on behalf of the company not exceeding 5000I.
in any one security.’’ In passing this resolution the directors
were exercising the power of delegation conferred upon them
by art. 123 of the company’s articles of association. That
article is in these terms: ‘‘ The directors may delegate any
of their powers, other than the powers to borrow and make
calls, to committees consisting of such members of their body
as they think fit. Any committee formed shall in the exercise
of the power so delegated conform to any regulations that
may from time to time be imposed upon them by the Board.”
But not only was it within the powers of the directors to set
up the finance committee. It was, judged in the light of
what was then known to the directors, a most reasonable
thing to do. Bevan, who had been elected chairman of the
board on July 11, 1916, was one of the greatest authorities
on finance in the City of London. In reputation and in credit
he stood second to none. His advice on questions of invest-
ment was eagerly sought and readily followed. Later events
have indeed proved him to be a rogue. But it is, I think,
impossible to form a just estimate of the conduct of the
respondent directors, not only in respect of the finance

445

C. A.
1924

——
Ciry Equit-
ABLE FIRE
INSURANCE
Co.,
In re.

Romer J.

446 CHANCERY DIVISION. [1925]

Cc. A. committee and its doings, but also in respect of all the matters

1924 with which I have to deal, unless a clear picture can be formed

Crry Equrr- Of Bevan as he must have appeared to his colleagues at the

ed time. Mr. Haig Thomas was also a man of great business

fhe experience. He had, before joining the board of the City

fs = Equitable, been chairman and managing director respectively

— of two of the largest colliery companies in South Wales,

whose combined capitals amounted to about three million

pounds. Mr. Grenside for his part brought into the finance

committee the legal knowledge and the more general business

experience of a solicitor. In October, 1916, Mr. C. T. Barclay

became an additional member of the board and of the finance

committee, and remained so until he retired in October, 1920.

He was the senior partner in the firm of Messrs. Sheppard,

Pelley & Co., a firm of stockbrokers of the highest reputation.

‘To a committee thus constituted the other respondent directors

might well delegate the duties of investing the funds of

the company. I cannot help regretting that Mr. Milligan

was not added to the committee, as he had had a greater

practical experience of the business of an insurance company

than the remainder of the board. I feel sure that he would

have prevented one or two investments made by the finance

committee which, whatever else may be said of them, were

not prudent investments for an insurance company to make.

Mr. Milligan, however, was, as already stated, resident in
Aberdeen.

It will have been observed that, according to the minute
recording the appointment of the finance committee, their
powers of investment in any one security were limited to
50001. Strangely enough, no director who gave evidence
before me retains any recollection of this restriction having
been imposed. Certainly it was never observed by the finance
committee, and this must have been known to the board
from an early date. Ata board meeting held on November 14,
1916, a report of the finance committee of that date was read
and approved, and such report informed the board of the
purchase of 7000 Commercial Bank of London shares at a
price of 31. each, and of 25,000]. British Government three

1 Ch. CHANCERY DIVISION.

months’ Treasury Bills. At this board meeting the only
director present who was not a member of the finance com-
mittee was Sir Douglas Dawson. It was, however, the practice
of the secretary to forward to each director a copy of the
minutes of the board meetings. The other directors were,
therefore, made aware about this time of the fact that the
5000]. limit was being disregarded by the committee. The
truth is that the restriction was forgotten both by the finance
committee and by the board. It was not until May 4, 1920,
that the attention of the board was called to it by Mansell,
the general manager, who said that he had found in an old
minute that there was a limit of 5000/. At a board meeting
of that date it was accordingly resolved, on the proposal of
Lord Ribblesdale, seconded by Sir Douglas Dawson: ‘ That
the finance committee be authorised to deal with securities
to an unlimited amount, this resolution superseding that
passed on the 25th July, 1916.” I think that, in the circum-
stances, it must be taken that at all material times the limit
imposed by the resolution of July 25, 1916, had been at first
tacitly, and afterwards expressly, revoked by the board. It
has been necessary to deal at this length with the constitution
and authority of the finance committee, because it was the
finance committee that resolved upon the investment of
moneys of the company in Claridge’s Hotel, Paris, and in the
- United Brass Founders. [His Lordship then dealt in detail
with the facts and evidence concerning these investments
and the investment of 150,000/. in the Brazilian ranch
authorized by the finance committee, and although he
considered that as members of the finance committee
Mr. Grenside and Mr. Haig Thomas had been guilty of
negligence in connection with the investment in the Brazilian
ranch, yet he was of opinion that their negligence was not
wilful and that art. 150 afforded an answer to any claim against
either of them in that respect, and his Lordship came to the
conclusion that he was not prepared to find them, either as
members of the finance committee or as directors, or any other
of the respondent directors, liable in respect of any of the three
investments above mentioned. His Lordship continued : }

447

C. A.
1924

“—
Crry Equrir-
ABLE FIRE
INSURANCE
Co.,

In re.

Romer J.

Crry Equit-
ABLE FIRE
INSURANCE
Co.,
In re.

Romer J.

CHANCERY DIVISION. [1925]

I must now deal with the claim of the liquidator in respect
of the loan of 110,000/. to Mansell. As already stated, Mansell
was the general manager of the company. He had held
that post from the date of the formation of the company in
the year 1908, and appears to have been a man of great
ability and experience in all matters connected with insur-
ance. The respondent directors put the greatest trust in
him, and, for all that they knew to the contrary, were at all
material times justified in so doing. Subsequently to the
liquidation of the company, Mansell was put upon his trial
for fraud in connection with the affairs of the company and
was acquitted. So far, therefore, as he was concerned in
the matters now to be related, he is entitled to be absolved
from all suspicion of fraud. But unquestionably he betrayed
the trust and confidence reposed in him by the respondent
directors. He was remunerated by a salary of 2000/. a year
and a commission on profits, the commission amounting to
something between 60001. and 70001. a year. His salary
was paid by regular instalments, and need not be further
mentioned. The trouble has arisen out of the payments
made to him on account of, or in anticipation of, his com-
mission. By January 3, 1919, Mansell had received 61001.
on account of his commission for the year ending February 28,
1919, and he was paid two further sums of 2000]. and 30001.
on January 7 and 21, 1919, respectively. The sum due to .
Mansell for commission and expenses for the whole year ending
February 28, 1919, was 48751. It was therefore obvious by
January 3 that Mansell’s commission account would be
considerably overdrawn by the end of the financial year,
especially if, as I cannot doubt was the case, Mansell knew
that he would obtain the two further sums to which I have
referred. In those circumstances, at a meeting of the finance
committee held on January 3, 1919, at which Bevan, Barclay,
Grenside and Mansell were present, the chairman, according
to the minute of that meeting, stated ‘“‘ that he had received
an application from the general manager for an advance of
15,0001. at 5 per cent. interest for the purchase of a freehold
residential farm property repayable by instalments and

1 Ch. CHANCERY DIVISION.

the same was approved.” On March 13 a further sum of
90001. was paid to Mansell, making, with the 6225]. then
due from Mansell on his overdrawn commission account,
a sum of 15,225J. There was nothing wrong in making
a loan to Mansell on proper security. As a matter of fact,
however, the company never obtained any security for the
loan on his “ freehold residential farm.’’ From what happened
afterwards, it would appear that the approval of the advance
was obtained by Bevan from the finance committee for the
purpose of concealing from his co-directors the fact that
Mansell was being overpaid on his commission account.
Nothing was said to the finance committee about these
overpayments at the time, for Grenside was unaware of the
fact that Mansell was ever overpaid until the month of
March, 1921. The other respondent directors were also in
ignorance of this fact, Mr. Haig Thomas down to February,
1921, and the others down to shortly before the liquidation
of the company. Whether this ignorance of the respondent
directors as to the Mansell overpayments was consistent
with the proper discharge of their duties to the company I
shall have to consider. For the moment I merely state as a
finding of fact that this ignorance existed. Down to March 13
then, Mansell had received some 15,0001. in excess of what
was due to him for commission, and if the attention of any
director had been called to this indebtedness of his to the
company, the minute of the finance committee of January 3,
1919, could be referred to as affording a satisfactory explana-
tion. The overpayments however continued. During the
year ending February, 1920, Mansell received from the
company further sums amounting in all to 44,000/., his com-
mission for that year amounting only to 67971. His indebted-
ness to the company was thus increased to 54,427]. by
February 20, 1920, this sum including, of course, the 15,0001.
sanctioned by the finance committee. In this state of affairs,
Mr. Lepine, of the firm of Messrs. Langton & Lepine, the
auditors of the company, when conducting the audit for the
year ending in February, 1920, sent a report to Mr. Bevan
dealing with various questions that remained to be settled

449

CAS
1924

“~~
Crry Equit-
ABLE FIRE
INSURANCE
>
In re.

Romer J.

450

C. A.
1924

Ce
Crry Equit-
ABLE FIRE
INSURANCE
Co.,

In re.

Romer J.

CHANCERY DIVISION. [1925]

before the audit could be completed. One of these questions
concerned the indebtedness of Mansell, and, as to this,
Mr. Lepine wrote in his report as follows: ‘‘ With regard to the
loan to Mr. Mansell we would remind you that the only minute
is one dated the 3rd January, 1919, authorising a sum of
15,0001. We understand that a further minute is to be
recorded at the next board meeting. We would also draw
your attention to the fact that no interest has yet been charged
in respect of this loan. We, however, are informed that a
formal agreement is to be prepared with reference to the
loan generally.”’ I shall have to deal with this report more
fully, and with certain letters addressed both by Bevan and
Mansell to Mr. Lepine in connection with the loan when I
have to deal with the claims made by the Official Receiver
against the auditors. For the moment I shall confine myself
to such facts as affect the respondent directors. It is perhaps
needless to say that this report was never communicated by
Bevan to any of his co-directors, and that when once
Mr. Lepine had closed his audit, relying upon the assurance of
Bevan as to the recording of a further minute, and the pre-
paration of a formal agreement, Bevan, for the time being,
took no further steps in the matter. The overpayments,
however, continued, and by the end of February, 1921,
Mansell’s indebtedness had increased to 96,233]. Now another
audit was approaching, and something would have to be done
to satisfy Mr. Lepine. Some minute must be recorded and
some agreement must be prepared. What followed affords
a striking example of Bevan’s methods. [His Lordship then
dealt with the minute, the entry of which in the minute book,
he found on the facts, was fraudulently made by Bevan,
and with the agreement which was subsequently made with
Mansell for a loan to him of 110,0001. (inclusive of the 96,2331.),
the board’s sanction to which his Lordship also found was
fraudulently obtained by Bevan, and he came to the conclu-
sion that he could not hold the respondent directors liable
for any loss occasioned by the agreement, although, in his
Lordship’s opinion, it was impossible to acquit Mr. Grenside
of carelessness of such a degree as might well have constituted

1 Ch. CHANCERY DIVISION.

negligence; but as he had acted in complete good faith, he
could not be held guilty of wilful negligence, and having
regard to art. 150, his Lordship could not hold him liable for
any loss occasioned by the agreement. His Lordship then
continued :] I must now consider the question of the responsi-
bility of the respondent directors for the overpayments to
Mansell. Every payment made to him on account or in
anticipation of commission was made by a cheque drawn
in his favour signed, as required by the articles of association,
by two directors and also by Mansell himself, or, in I think
four instances, by the accountant Mr. Lock. The dates and
amounts of the cheques so drawn in favour of Mansell between
April 2, 1918, and November 17, 1921, which, after deducting
the sums due to him in respect of commission and expenses
during that period, amounted to the 110,000/., are set out
in certain particulars delivered by the liquidator on March 29,
1923, and are bound up with the pleadings. These cheques
are fifty-four in number. A document handed up to me
during the trial and numbered 19a gives in each case, with
the exception of the cheque on December 9, 1919, for 30001.,
the names of the directors by whom the cheque was signed.
This document includes, however, by mistake a cheque for
50001. dated September 27, 1921, which has nothing to do
with the matter. The Official Receiver contends that each
respondent director is at all events liable for the sums received
by Mansell by means of the cheques signed by that director.
In support of this contention Mr. Topham relied upon the
decision of James V.-C. in Jownt Stock Discount Co. v.
Brown. (1) In that case directors had expended money
of their company in payment for certain shares which the
company had no power to acquire. One of the directors
named Bravo only joined the board after the transaction had
been resolved upon by the board, but he had subsequently
signed a cheque for 5000/., part of the moneys in question.
In holding him liable James V.-C. said: “‘ Mr. Bravo’s case
is somewhat different in this respect, that Mr. Bravo was
not a party to the original resolution. Mr. Bravo, however,

(1) L. R. 8 Eq. 381, 404.

451

C. A.
1924

es

Ciry Equrr-
ABLE FIRE

INSURANCE

452

C. A.
1924

a
Crry Equrt-
ABLE FIRE
INSURANCE
Co.,

In re.

Romer J.

CHANCERY DIVISION. [1925]

signed a cheque for 50001., part of the moneys in question.
He says he signed that cheque as a matter of form. It has
been repeated with reference to him and some other of the
defendants here that signing cheques in that way is a mere
ministerial act. J am startled at hearing any such statement.
A company for its own protection against the misapplication
of its funds requires that cheques should be signed by certain
persons. Of course it is quite clear that no company of this
kind could be carried on if every director were obliged to
sign every cheque, and it is therefore required that the
cheques should be signed by a certain number of persons
for the safety of the company. That implies, of course,
that every one of those persons takes care to inform himself,
or if he does not take care to inform himself is willing to
take the risk of not doing so, of the purpose for which and
the authority under which the cheque is signed ; and I cannot
allow it to be said for a moment that a man signing a cheque
can say: ‘I signed that cheque as a mere matter of form ;
the secretary brought it to me; a director signed it before
me; two clerks have countersigned it; JI merely put my
name to it.’ Most of us have been obliged to trust in the
course of our lives to a great number of persons when we
have had to sign deeds and things of that kind; but if we
trust, of course we must take the consequences of our so
trusting. Mr. Bravo in this instance signed the 5000]. cheque
probably relying that it was all right ; but, of course, relying
that it was all right, he must be responsible for so trusting
that it was all right.” In that particular case, if the director
had inquired as to the purpose for which the cheque was
required, he would have ascertained that it was for a purpose
which he must have known or be deemed to know was ultra
vires. But a director who signs a cheque that appears to
be drawn for a legitimate purpose is not responsible for
seeing that the money is in fact required for that purpose
or that it is subsequently applied for that purpose, assuming,
of course, that the cheque comes before him for signature
in the regular way having regard to the usual practice of the
company. If this were not so, the business of a large company

1 Ch. CHANCERY DIVISION

could not be carried on. In the case of an insurance company,
for instance, the cheques to be signed at the board meeting
would often include cheques in payment of insurance claims.
If a claim appears to have been examined into and passed
by the manager or other proper official for the purpose, a
director who signs the necessary cheque in payment of the
claim (the cheque being brought before him in the customary
way) cannot be expected to investigate the whole matter
over again, for the purpose of satisfying himself that the
claim is well founded. A director must of necessity trust
to the officials of the company to perform properly and
honestly the duties allocated to those officials. In many
large companies—it was so in the case of the City Equitable
—it is the duty of the manager to pay the salaries and wages
of the staff. For that purpose cheques are drawn by the
directors in his favour, the exact amounts required being
calculated by him. So long as there is nothing suspicious
about the amount, the directors are justified in trusting him

to calculate it correctly, and to use the proceeds of the’

cheque for the purpose for which it was drawn. The fact,
therefore, that a respondent director signed cheques in favour
of Mansell for or on account of commission does not necessarily
make him responsible to the company for any payments so
made to Mansell in excess of what was really due to him.
In order to determine whether any respondent director can
be made so liable, I must consider the circumstances in which
he signed the cheques in question for the purpose of seeing
whether there was anything that should have put him on
inquiry, either by reason of the amounts for which the cheques
were drawn, or of any irregularity in the method in which
they were presented to him for payment.

The practice as to the drawing, authorizing, and signing
of cheques in the City Equitable was as follows: the cheque
books were normally in the custody of Mr. Lock, the
accountant, and it was in his department and under his super-
vision that the cheques for signature by the directors were,
or ought to have been, filled up. The request for the drawing
of any particular cheque would come from Mr. Mansell or

Vou. I. 1925. 2N 1

453

C. A.
1924

——
Crry Eeurr-
ABLE FIRE
INSURANCE
Co.,
In re.

Romer J.

454

C. A.
1924

Crry Equrt-
ABLE FIRE
INSURANCE
Co.,
In re.

Romer J,

CHANCERY DIVISION. [1925]

Mr. Bevan. Mr. Lock himself drew up about 5 per cent.
of the company’s cheques, the balance being drawn by
members of his staff. The counterfoil was filled up by the
person who drew the cheque. Any cheque placed before the
board ought, therefore, in the ordinary course, to have
passed the scrutiny of the company’s accountant. It turns
out in fact that in some cases Mr. Mansell got cheques filled
up by a member of Mr. Lock’s staff without in any way
communicating with Mr. Lock. But this could not be known
to the directors. In respect of each cheque drawn, except
in respect of insurance losses, there was also prepared in the
accountant’s office a slip, on which was stated the amount
of the cheque and the purpose for which it was drawn, and
this slip was stamped “ Authorised for payment at Board
Meeting ’’—a space being left for the date of the meeting.
Before the meeting of the board, or committee of the board,
at which cheques were to be signed, a list of them was prepared
in the accountant’s department. Up to the end of the year
1918 this list stated, in respect of each cheque, the name
of the payee, the amount of the cheque, and the purpose
for which it was required. But early in the year 1919 the
practice was altered without the knowledge of any director,
except possibly Mr. Bevan, and for the future the list merely
gave the amount of the cheque without disclosing the name
of the payee or the purpose for which the money was required.
Neither Mr. Lock nor Mr. Witts, the secretary of the company,
could state upon whose authority the change was made.
But it seems probable that it was made upon the instructions
of Mr. Mansell. The list, both before and after this change
in practice, was sent from the accountant’s department to
that of the secretary to enable him to prepare the agenda
for the directors’ meeting. The list was not however tran-
scribed in the agenda book, but merely the total amount
for which cheques were required. The list itself never came
before the directors. At the directors’ meeting the cheque
books were on the table together with the slips to which I
have referred, and, in the case where insurance losses were
to be paid, the papers relating to the claim. The meeting

1 Ch. CHANCERY DIVISION.

would resolve that cheques be drawn to the amount stated
in the agenda book, and each cheque would be signed by any
two directors that happened to be present. In the case of
the cheques with which I have particularly to deal, and also
no doubt in other cases, the cheque had as a rule been pre-
viously signed by Mr. Mansell or Mr. Lock, and the counter-
foils initialled by the latter. When the directors had signed
& cheque they initialled the relevant slip and the cheque
was complete. Except in one respect, to which I will call
attention later, this practice in relation to the company’s
cheques is not open to criticism. Every director who signed
a cheque at a directors’ meeting would see from the slip and
the counterfoil the purpose for which the cheque was required.
He was, moreover, entitled to assume that the cheque had
been passed by the general manager, the accountant and the
secretary. He would therefore have done all that could
reasonably be required of him as to satisfying himself both
as to the purpose and as to the authority for signing the
cheque. There were certain occasions upon which a cheque
had to be signed between the directors’ meetings, but inas-
much as none of the Mansell cheques were signed in this way
I need not investigate that matter further. All the Mansell
cheques were signed. by meetings of the board or a committee
of directors in the manner which I have described. So far
as procedure was concerned, there was no irregularity of
which any respondent director had notice, nor was there
anything about the amount for which any cheque was drawn
that ought to have excited suspicion. No single cheque in
favour of Mr. Manself exceeded 30001. with the exception of
one for 90001. drawn on March 13, 1919. This cheque,
however, which was drawn in consequence of the resolution
of the finance committee of January 3, 1919, was not signed
by any respondent director other than Mr. Grenside, and he
had been a party to, and therefore knew of, the resolution.
No single cheque, therefore, with the exception that I have
mentioned, exceeded what a director might reasonably
consider to be properly payable to Mansell on account of or

in anticipation of his commission.
2N 2 1

455

C. A.
1924

“—
Crry Equit-
ABLE FIRE
INSURANCE

Co.,

In re.

Romer J.

456

@. A.
1924

ie

Crry Eauir-
ABLE FIRE

INSURANCE

Romer J.

CHANCERY DIVISION. [1925]

The real difficulty arises by reason of the frequency and
the total amount of such cheques signed by some of the
respondent directors. In the cases of Lord March and
Mr. Milligan there can be no criticism in this respect. The
former only signed three Mansell cheques in the year 1920,
totalling 7000/., and two in 1921, totalling 4000/. The

latter only signed two in 1919 and two in 1920, the total

amounts being 40001. and 6000/. respectively. Having regard
to the large sums being earned by Mansell in commission,
there was nothing in these figures that ought to have excited
suspicion. The two cheques signed by Mr. Milligan in 1919
were indeed signed upon the same day—namely, August 5.
But they were drawn upon different banks and would, there-
fore, be in different books, and Mr. Milligan did not realize
when signing the second that he had already signed one for
a similar amount. The same thing happened upon two
other occasions in the case of others of the respondent
directors. It would appear that the device of drawing two
cheques in Mansell’s favour on the same day was resorted to
whenever it was desired that he should be paid at one time
more than 3000]. on account of his commission. It will be
observed by a reference to the particulars of the points of
claim that with the exception of the cheque for 9000/. already
mentioned the Mansell cheques during 1919 were usually
for 2000]. and in 1926 were usually for 3000/. This increase
would not arouse any suspicion, for the profits of the company
were steadily increasing. But if Mansell required at one
time 40001., as he did on August 5, 1919, and September 16,
1919, or 5000/., as he did on November 4, 1919, two cheques
were prepared in the accountant’s office, each of which was
drawn for half the amount required and upon different
banks. Seeing that the number of cheques drawn at the
directors’ meetings was usually anything between 60 and
100, it might well happen that a director would fail
to notice that he was signing two cheques for Mansell
on the same day, and this indeed happened on each of the
occasions referred to. But had any director when signing
the cheques in one book recollected that he had already

1 Ch. CHANCERY DIVISION,

signed one in Mansell’s favour in the other, I cannot help
thinking that, as was suggested by Sir John Simon, the
existence of two cheques would have been readily explained
as being due to the carelessness of some official in the
accountant’s office. It is impossible not to feel some
sympathy for the respondent directors, hoodwinked as they
were by a fraudulent chairman and not receiving proper
protection from the officials in whom they placed their trust.
To return, however, to the particular cases of Lord March
and Mr. Milligan, I cannot find them guilty of any breach
of duty merely because the amounts for which they signed
cheques in Mansell’s favour did not make them suspect that
he was being overpaid. In the case of all the other respondent
directors, however, there is to be found a circumstance that
is absent from the cases of Lord March and Mr. Milligan.
For each one of them signed in the course of one or both of
the financial years 1919 and 1920 cheques for more than it
was reasonable to suppose could be due or accruing due to
Mansell in respect of his commission. This was more parti-
cularly so in the case of Mr. Grenside. For the financial
year ending February, 1920, he signed cheques in Mansell’s
favour for no less than 21,0001. exclusive of the 90001. cheque
on March 31, 1919, given to complete the loan to Mansell
of 15,0001. For the financial year ending February, 1921,
the cheques so signed by him amounted to 26,0001. That
he did not in fact realize what was the aggregate amount of
cheques signed by him in each of those years is, in my
judgment, perfectly clear. But was this ignorance on his
part consistent with a proper discharge of his duty to the
company ? This question must, I think, be answered in the
affirmative unless it was his duty to the company to keep,
and from time to time to check, a list of all the cheques he
signed, or unless it was his duty to the company to possess
a better memory than that with which nature had endowed
him. Let me take the financial year ending in February,
1921. During this year he signed cheques for the following
amounts: 20001. on March 2, and another 20001. on March 16
—30001. on May 4, a like sum on June 15, July 6, July 20,

457

Cc. A.
1924
Crry Equit-

ABLE FIRE
INSURANCE

458

C. A.
1924

ae
Crry Equrr-
ABLE FIRE

INSURANCE

CHANCERY DIVISION. [1925]

September 17, November 2—1000/. on December 7 and
3000/7. on February 1. Now, although it was his duty to
satisfy himself as to each Mansell cheque as to the purpose
for which and the authority under which he was signing it,
when once he had done this, there was nothing in the amount
of any individual cheque to impress upon his mind the fact
of his having signed it. It would appear to him to be a
perfectly proper thing to sign a cheque for 2000/. on March 16
in respect of, or on account of, commission, and the fact that
he had signed this cheque among a hundred others might
not unreasonably escape his memory when signing another
equally innocent looking and apparently regular cheque a
fortnight later. Even more excusable might be his failure
to remember the signing of both these cheques when he
signed the cheque for 3000]. on May 4. Wisdom after the
event shows that he could have detected the fraud that was
being practised upon him by somebody by keeping a list of
all the cheques that he signed in Mansell’s favour. But
there was no ostensible reason for doing this in the case of
these cheques in particular, and to keep a list of all cheques
that he signed would have been quite impracticable and far
outside any duty that a director owes his company. Nor
can I think that a director fails in his duty by reason of lapses
of memory that are in the circumstances reasonably excusable.
He only undertakes to bring to the service of the company
a memory of the normally imperfect nature, and Mr. Grenside’s
memory would appear to have been of this order. His
greatest lapse in this respect occurred on January 20, 1920,
when he was the victim of the two cheque trick. But I am
not prepared to treat his failure to realize that he was signing
two cheques for Mansell on the same day as inexcusable.
I think that Sir John Simon was justified in saying that even
now we do not know all that took place in connection with
the obtaining of the signatures of the directors to the Mansell
cheques. There are one or two incidents, such as the alteration
in one case of the entry on the counterfoil from ‘“‘ Loan
Account ” to “ Contingent Commission,” and the discrepancy
in two other cases between the date borne by the cheque

1 Ch. CHANCERY DIVISION.

and that inserted in the counterfoil which gives rise to the
suspicion that Mr. Bevan and any accomplice he may have
had were possibly employing artifices more intricate than
those we know of for the purpose of deceiving his co-directors.
Most assuredly his colleagues were deceived, and I can find
nothing to suggest that they were more gullible than the
majority of mankind.

What I have said about Mr. Grenside applies with even
greater force to Mr. Haig Thomas, Sir Douglas Dawson, and
Lord Ribblesdale. The last named was not himself in a
position to give evidence in explanation of his conduct. As
a matter of fact he only signed cheques to the aggregate
amount of 11,000/. in the year 1919, and 9000/. in the year
1920—figures that would not of themselves call for much
explanation on his behalf. On two occasions, however, in
1919 he was a party to signing two Mansell cheques on the
same day. But in view of the evidence given by his co-
directors as to the diligence and interest that he ordinarily
displayed in the discharge of his duties I cannot doubt his
complete innocence. He was successfully tricked, but cannot,
in the circumstances, ‘be blamed on this account. But while
freeing all the respondent directors from liability for their
individual signing of the Mansell cheques, there is one matter
connected with their general practice in relation to cheques
that provokes adverse criticism. Before any director actually
signs, or at any rate parts with a cheque signed by him, he
should satisfy himself that a resolution has been passed by
the board, or committee of the board, as the case may be,
authorizing the signature of the cheque. In the case where
a cheque has to be signed between meetings, he must, of
course, obtain the confirmation ef the board subsequently
to his signature. Such cases are, however, exceptional, and
need not be further considered. But, in the ordinary case,
the precedent authority of the board or committee ought
always to be obtained, and, in the case of the City Equitable,
this authority was in truth always obtained, but it was
obtained in a way that rendered the precaution practically
useless. For, as already pointed out, the authority given

459

C. A’
1924

es
Crry Equit-
ABLE FIRE
INSURANCE
Co.,
In re.

Romer J,

460

Cc. A.
1924
Orry Equit-

ABLE FIRE
INSURANCE

CHANCERY DIVISION. [1925]

was merely one for the signing of cheques to an aggregate
amount, neither the payee nor the amount of the
individual cheques being mentioned. In my _ opinion
this practice was wrong in principle, and, in its result,
rendered possible the over-payments to Mansell. For if
a proper list of the cheques were read out at the meeting,
and were subsequently transcribed into the minutes
of the meeting (copies of which were circulated, at any
rate, in the case of board meetings), every director would
have had brought to his attention, not merely the Mansell
cheques that he himself had to sign, but all the Mansell
cheques that were being authorized by the directors, and
it seems almost certain that one or more of the directors
would in that case have been struck by the frequency with
which Mansell’s name appeared in the list as a payee of
large sums, and his overpayments would have been sum-
marily stopped. Whether the omission of the respondent
directors to follow the proper practice in giving authority
for the signing of cheques constituted negligence on their
part may be a question of some difficulty. But if it was
negligence it was not wilful negligencé as I understand that
phrase, so that I need not pursue that matter further. There
is, however, one more matter to be mentioned before parting
with the question of the Mansell overpayments. In each
of the balance sheets for the year ending the last day of
February, 1919, 1920 and 1921, the sums then due from
Mansell were in fact included. On February 28, 1919, the
sum due from him was 62551., on February 29, 1920, 52,4271.,
and on February 28, 1921, 96,2337. His name, however, did
not appear in these balance sheets, nor did these particular
sums. They were merely included in the total sum appearing
in the balance sheets for 1919 and 1920 as loans at call or
short notice, and as loans in that for 1921. Any director,
therefore, who inquired, or. whose duty it was to inquire as
to the loans owing to the company would have discovered,
or must be deemed to have discovered, the existence of
Mansell’s indebtedness. I shall, however, have to consider
the whole position of the respondent directors in the matter

1 Ch. CHANCERY DIVISION.

of loans when I deal with the question of their liability for
the much larger sums that were extracted from the company
by Bevan for his own benefit. My conclusions upon that
question will govern the question of their liability for the
smaller sums extracted for the benefit of Mansell, so far as
that liability depends wpon the knowledge that they ought
to have obtained by inquiring into the state of the company’s
loans, whether at call, short notice, or otherwise.

I must now turn to the claim made by the Official Receiver
in respect of moneys lent to, or left in the hands of, Ellis
& Co., the company’s brokers. The story of these moneys
begins with a resolution of the finance committee of
January 30, 1917: “To grant to Messrs. Ellis & Co. a loan
of 30,0001. against securities with a 10 per cent. margin to
be lodged by that firm with the company.” There were
present at this meeting Messrs. Bevan, Haig Thomas, and
Grenside, and the secretary. According to Mr. Haig Thomas,
the finance committee subsequently sanctioned an increase
of this loan to 100,000/., though, according to Mr. Grenside’s
recollection, the total amount of the loan ultimately sanctioned
by the finance committee was 200,000]. There was nothing
inherently wrong in such loan, whether it was for the larger
or the smaller amount, so long as the security lodged with
the company by Ellis & Co. was ample, as it, in fact, was at
all times material to the consideration of the present question.
At the dates of the balance sheets for 1919, 1920 and 1921
the estimated value of the collateral security held by the
company was always largely in excess of 220,000/. This
security, after the liquidation of the company, realized under
31,0001., but there is no evidence before me that the estimates
of the value at the dates mentioned were in any way too
large. The amount of the loan was, however, largely
increased by Ellis & Co. without the authority or
knowledge of either Mr. Thomas or Mr. Grenside. This
was rendered possible by the fact that Ellis & Co. had from
time to time enormous sums of the company’s money in
their hands over which, so far as I have been able to ascertain,
no one of the respondent directors exercised any control, and

461

C. A.

1924
~—_
City Equrt-
ABLE FIRE
INSURANCE
Co.,

In re.

Romer J.

462 CHANCERY DIVISION. [1925]

c. A. in respect of which no account was ever asked for or seen by
1924 him. These moneys were derived from the sale of invest-
Crry Equir- ments carried out by Messrs. Ellis & Co. as the brokers of
Saal the company, and by cheques drawn on the company’s

Co. banking accounts in their favour. What purported to be

In re.

Ronny, accounts of the dealings of Ellis & Co. with moneys and
i securities of the company were indeed sent by them to the
company, but these accounts never seem to have got further
than the accountants’ department, and were never seen
by any respondent director. Out of the moneys so received
by them, Messrs. Ellis & Co. from time to time paid for
the more permanent investments that were authorized by
the finance committee. This committee, however, except on
rare occasions, never concerned itself with the short-dated
securities, or with temporary investments such as loans at
call on the Stock Exchange or elsewhere. In consequence of
this, Mr. Bevan, through his firm, was enabled to deal practi-
cally as he thought fit with the available cash of the company
that was not required for the investments decided upon by
the finance committee. There were two accounts kept by
Mr. Lock, the accountant, in the investment ledger in the
name of Messrs. Ellis & Co.—namely, a loan account and an
investment account, and the entries in these accounts were
made by Mr. Lock in accordance with the instructions of
Bevan given by him verbally, or through the medium of the
monthly accounts. If Bevan required, for his own purposes,
a few more thousands of pounds of the company’s money
reposing in the hands of Messrs. Ellis & Co. he had only
to direct Mr. Lock to debit his firm’s loan account with the
sum required, and the thing was done. In these circum-
stances it is not surprising that the debit to Messrs. Ellis
& Co. on loan account was increased at first to 250,0001.,
and in February, 1921, to 350,000. The balances in their
hands on investment account continued to grow meanwhile,
and at times were enormous. It will be sufficient to take
the year 1921. On January 14 there was due from Ellis
& Co. the sum of 123,055/. on investment account. At a
meeting of the finance committee held on January 18 at

1 Ch. CHANCERY DIVISION.

which Messrs. Bevan, Thomas, and Grenside were present,
in addition to the general manager, it was agreed to reduce
the company’s aggregate holding in industrial securities,
and Bevan was authorized to sell certain holdings at his
discretion, the proceeds to be invested in Government Bills
in due course. Various sales were accordingly carried out
by Ellis & Co. during the month of January, with the result
that at the end of that month the balance of cash in their
hands on investment account was over 550,000/. By means
of the entry of a perfectly fictitious purchase of Treasury
Bills and National War Bonds, purporting to have been made
on February 25, and by an unauthorized transfer to loan
account of 100,000. on February 28, the balance shown
by the books of the company was reduced as at that date
to 73,6501. But in point of fact this sum of 550,000/. in
substance remained uninvested in their hands down to the
date of liquidation. The National War Bonds and Treasury
Bills purporting to have been bought on February 25 were
never delivered or intended to be delivered, as will appear
later on in this judgment. The pretended purchase was
entered in the accounts merely for the purpose of misleading
the auditors and the respondent directors and others who
might be concerned with the balance sheet of February 28.
When, therefore, this date was passed Bevan pretended to
sell the bonds and bills, and the balance shown in the books
to the debit of Ellis & Co. on investment account would
once more have been swollen by the amount supposed to
have been realized by this fictitious sale had not Bevan taken
steps to avoid it. The steps he took were simple. Of the
securities sold by Ellis & Co. in pursuance of the resolution
of the finance committee of January 18, 1921, nearly 320,0001.
worth had been sold to a syndicate of which Bevan was
certainly a member, and possibly the sole member. It was,
at any rate, clearly under his control. So in the first few
days of March Messrs. Ellis & Co., without any authority
whatsoever from anyone but Bevan, purported to resell these
securities to the company, thus purporting to reduce their
debit balance by 319,517/. As a matter of fact the proceeds

Cc

464

C. A.
1924

ee.
“Crry Equtr-
ABLE FIRE
INSURANCE
Co.,
In re,

Romer J,

CHANCERY DIVISION. [1925]

of this pretended resale were not actually credited to Ellis
& Co. in the company’s books until December 31, 1921,
that being the date of the first monthly account of Ellis
& Co. in which the resale was recorded. It would seem
as if the resale were something that Bevan only intended to
put forward in case any of his co-directors should discover
the amount of the balance due from Ellis & Co. In the
meantime further moneys continued to come in by reason
of sales of investments and an occasional cheque from the
company, and the balance due from Ellis & Co., even if
they were credited with the proceeds of the resale, remained
during the months of April, May and June at about the
sum of 50,000/. It was only kept down to this comparatively
moderate sum by Bevan taking 190,000/. and more for the
purposes of the Brazilian ranch, and investing some 40,0001.
in shares of the United Brass Founders, in both cases without
the knowledge or authority of any of his co-directors, as
mentioned in an earlier part of this judgment. Finally,
when in December, 1921, it had become obvious to Bevan
that the amount of his firm’s indebtedness could no longer
be concealed, Messrs. Ellis & Co. proceeded to unload upon
the company a number of doubtful securities, and to debit
the company with a further large contribution to the Brazilian
ranch. By these means, and by certain cash payments to
the company obtained, I know not how, from Ellis & Co.
in October, November and December the balance due from
them to the company had, according to the company’s books,
disappeared both on loan and investment account, and a
balance was actually shown due to them of 13,950]. This
balance was, of course, wholly fictitious. If Ellis & Co.
were debited, as they should be, with the sale price of the
securities purporting to be resold to the company in March,
1921, and the cost at which they had unloaded other securities
on the company in the month of December, 192i, the balance
due from them on December 31, 1921, amounted with
interest to 385,469/., as shown by exhibit “‘ F.G.L. 1”’ prepared
by the late Mr. Van de Linde. To this, however, must be
added the cost price of certain securities, referred to in the

1 Ch. CHANCERY DIVISION. 465

exhibits, which were bought by Ellis & Co., but were never 0. A.
delivered by them to the company, amounting to 47,8901., 1924
and for the purpose of estimating the loss occasioned by crry Equrr.
moneys of the company being left in Ellis & Co.’s hands (2™ =

there should also be added the sums expended by Mr. Bevan Pre
without any authority upon the Brazilian ranch and the ,,— .
United Brass Founders, amounting together to another
318,375]. The collateral security held by the company as
against Ellis & Co.’s loan realized 30,859). The total
loss to the company in respect of the loan to Ellis & Co.
and by reason of the company’s moneys being left in their
hands amounted, therefore, to over 720,000/., and I must now
consider whether this loss has been occasioned by the wilful
negligence or default of any of the respondent directors.
So far as it was due to the loan sanctioned by the finance
committee, little remains to be said. The advancing to
members of the Stock Exchange of moneys of the company
not immediately required for current business purposes, or
for permanent investment, if made upon adequate security,
was a legitimate method of employing the company’s funds,
and there was no reason why such an advance should not be
made to Messrs. Hillis & Co. merely because Mr. Bevan was a
member of that firm. Owing to a serious fall in the value
of the securities deposited with the company as cover for the
loan, it was, in the end, inadequately secured. But there
is no evidence before me to show that any of the respondent
directors was aware, or should have been aware, that there
was insufficient cover for the loan at any time when inter-
vention on his part could have served any useful purpose.
I cannot find that any respondent director was guilty of any
negligence in the matter of the loan sanctioned by the finance
committee. But the loss that was due to the unfettered
control that Ellis & Co. were permitted to exercise over
moneys of the company left in their hands gives rise to more
difficult questions. The undoubted fact that Ellis & Co.
did have this unfettered control was due to the following
circumstances. The respondent directors, other than Mr. Haig
Thomas and Mr. Grenside, were under the impression

466

O. A.
1924

—
Ciry Eqouit-
ABLE FIRE
INSURANCE

CHANCERY DIVISION. [1925]

that it was the duty of the finance committee to see to the
proper investment of all the funds of the company not
immediately required for the purpose of the company’s
business. Mr. Thomas and Mr. Grenside, however, thought
that the finance committee were only concerned with the
permanent investments, and that the temporary investment
of the company’s funds on loans at call or in short-dated
securities was a matter that had been left to the chairman
and general manager to arrange. [His Lordship then referred
in detail to the evidence of Lord March, Sir Douglas
Dawson and Mr. Milligan on this question, and continued :]
Now these passages that I have read from the evidence of
Lord March, Sir Douglas Dawson and Mr. Milligan certainly
seem to indicate that they did not ever seriously bring their
minds to bear upon the question as to how and by whom the
temporary investments were being made. They appear to
have assumed that such matters were being attended to by
the finance committee. But such assumption was justified
in the case of Sir Douglas Dawson and Mr. Milligan by the
terms of the resolution of July 25, 1916; for, in my opinion,
the duty delegated to the finance committee by that resolution
was to act as a finance committee generally in relation to
temporary as well as to permanent investments. There is
no evidence as to Lord Ribblesdale’s views upon the matter,
He was, however, present at the board meeting of July 25,
1916, and I cannot doubt that he too must have been under
the impression that the finance committee was attending to
the investments generally. Any other conclusion would be
inconsistent with the evidence given by his co-directors as
to his general conduct in discharging his duties as a director.
It is also to be observed that in the early days of the finance
committee’s existence, the board of directors themselves
approved certain transactions of the finance committee,
which included temporary as well as permanent investments.
On November 14, 1916, the board approved the purchase
by the finance committee of Treasury Bills; on February 6,
1917, it approved the loan of 30,0001. to Ellis & Co.; on
April 3, 1917, a loan up to 50,600/. to Messrs. Sheppard,

1 Ch. CHANCERY DIVISION.

Pelley & Co. Lord March did not know the terms of the
resolution appointing the finance committee, but he knew,
of course, of the existence of this committee, and it was not
unreasonable for him to assume (even if he did not know of
what had taken place at the board meetings just referred to)
that they had been appointed to attend to the company’s
investments generally. I am not in the circumstances
prepared to find any one of these four gentlemen guilty of
negligence for omitting to make inquiries as to who were
looking after the temporary investments of the company,
though, had any inquiries of his been addressed to
Mr. Grenside or Mr. Haig Thomas, he would have discovered
that they took a very different view as to the precise functions
of the finance committee. [His Lordship then reviewed the
evidence of Mr. Grenside and Mr. Haig Thomas, showing
that they considered and understood that the duty of seeing
to permanent investments only, and not also to temporary
investments, had been delegated to the finance committee,
and continued :] This evidence discloses a truly astonishing
state of things. It is the duty of each director to see that the
company’s moneys are from time to time in a proper state
of investment, except in so far as the company’s articles of
association may justify him in delegating that duty to others.
So far as the respondent directors, other than Mr. Haig
Thomas and Mr. Grenside, are concerned, they were justified
in delegating this general duty to the finance committee,
and thought that they had done so. The position of
Mr. Thomas and Mr. Grenside was, however, very different.
They knew that neither the board nor the finance committee
were attending to the temporary investments and were
content to leave the duty of doing so to Mr. Bevan and
Mr. Mansell. In this they were wrong. Thinking, as they
did, that the duty had not been delegated to the finance
committee, they should have regarded it as being still reposed
in the board as a whole. That Bevan and Mansell were
persons enjoying the highest reputation is beside the mark.
If the shareholders had desired to leave hundreds of thousands
of pounds of the company’s money under the sole control

467

C. A.
1924

ee
Crry Eaurr-
ABLE FIRE
INSURANCE
Co.,
In re,

Romer J.

468

Gaels
1924

as
Crry Equit-
ABLE FIRE
INSURANCE
Co.,
In re.
Romer J.

CHANCERY DIVISION. [1925]

of Bevan, they would have done so. But the shareholders
had preferred to have associated with Bevan a board of six
or seven other directors, and it was not for these other directors
to leave Bevan to discharge one of the most important of
the duties that had been entrusted by the shareholders to
the board as a whole, however reasonable and however safe
it might have seemed to the directors to do so. Still less
would it be permissible to leave the control of the company’s
temporary investments to the general manager. It is not
any part of the functions of a manager of an insurance
company to decide upon the method of investment of the
company’s cash resources. His advice and assistance will
no doubt be sought. But the responsibility for the ultimate
decision as to investment must rest with the directors or,
when the articles permit, with a committee of the directors,
and none the less that the investment is only a temporary
one. In my judgment, Mr. Haig Thomas and Mr. Grenside
were guilty of a breach of their duty as directors in failing
to control and safeguard the moneys of the company that
were not in a state of permanent investment. If, therefore,
they were responsible for losses sustained by their mere
negligence, I could not acquit them of responsibility for the
whole of the money due from Ellis & Co. at the date of the
liquidation in excess of the loan to that firm sanctioned by
the finance committee, not merely because that money was
allowed to remain in Ellis & Co.’s hands, but on the broader
and more general ground that I have mentioned. I should
have had to find them responsible for the loss occasioned
by any and every temporary investment made by Bevan or
Mansell. But this breach of duty on the part of Mr. Thomas
and Mr. Grenside was due to nothing more than ignorance
of what their duty was in the matter. It is clear that it never

occurred to either of them that it was his duty to keep under

his own control the matter of the temporary investments.
But further than this, it is established to my satisfaction
that each of them in fact honestly thought that he did not
owe any such duty to the company. In these circumstances,
unless I have arrived at a wrong conclusion as to the meaning

1 Ch. CHANCERY DIVISION.

of the expression “‘ wilful negligence or default,” both of them
must be absolved by reason of the 150th article of association
from liability for this breach of their duty.

The question of liability for the loss occasioned by leaving
money in the hands of Ellis & Co. does not, however, end
there, either as regards these two gentlemen or as regards
the rest of the respondent directors. For though, as I have
already held, none of them is liable merely on the ground
that the disposition of the moneys of the company not in a
state of permanent investment was left in the control of
Bevan or Mansell, he might yet be responsible for the losses
occasioned by the improper way in which Bevan in fact
disposed of those moneys, so far as such disposition came
to his notice or would have come to his notice had he made
proper inquiries. In considering this aspect of the case, it
is not necessary to draw any distinction between those
respondent directors who were and those who were not
members of the finance committee. For although the members
of the finance committee did, in my opinion, owe a higher
duty to the company than the other directors, in the matter
of the periodical investigation of the investments of the
company, both permanent and temporary, yet as regards
the latter class of investment Mr. Thomas and Mr. Grenside
did not think that their position was in any way different
from that of an ordinary director, and the question of any
liability they may have incurred for acting upon this
assumption has already been dealt with. In these circum-
stances, I must treat them as though for the purpose of
temporary investments the finance committee consisted of
Bevan and Mansell. Treating then all the respondent
directors for this purpose as being on the same footing, the
question arises as to whether any of them in fact knew of
the improper use that was being made by Bevan of the control
that had so unfortunately been left in his hands, and secondly,
whether they would have known of it had they made all such
inquiries as it was their duty to make. As to their knowledge
in fact there is no difficulty. Each one was at all material
times in complete ignorance that moneys of the company

Vou. I. 1925. 20 1

469

C. A.
1924

paces

Crry Equrr-
ABLE FIRE

INSURANCE

470 CHANCERY DIVISION. [1925]

Cc. A. were left in the hands of Ellis & Co. It was, of course, known
1924 to the directors that moneys of the company were being
Orry Equrr- paid to Ellis & Co., for a large number of cheques were from
ae time to time drawn in their favour and signed by two directors,
ee _ and on a sale of investments the proceeds would in the first
Romer j, instance be received by them. But the directors were
ae justified in signing the cheques in favour of the company’s
brokers, seeing that these cheques were placed before them

for signature by the responsible officials of the company in

what appeared to be the ordinary course and for purposes

that appeared to be proper. If, for instance, certain invest-

ments had been decided upon by the finance committee,

money would necessarily have to be paid to the company’s
brokers for the purpose ; and it was not, in my opinion, the

duty of any director who was asked to sign a cheque in favour

of the brokers on investment account, that cheque being

placed before him by the officials whose duty it was to see

that the directions of the finance committee were being
carried into effect, to inquire into the question whether the

money was really required for the purposes of investment, or

to see that the money was in fact applied for such purpose.

Nor would a director be liable for allowing proceeds of sale

of investments to be received by the brokers. They would

only be liable if such proceeds were to their knowledge left

in the brokers’ hands for a longer time than was necessary.

And that this was being done was just the fact of which they

were ignorant. [His Lordship referred to the evidence on

this point and continued :] But the more difficult question

arises as to whether this ignorance of the respondent
directors was consistent with a proper discharge of their

duties to the company. The answer to this question depends

upon how far it was the duty of a director of the City Equitable,

not being a member of the finance committee, to ascertain

from time to time the manner in which the money of the
company had been invested. This question arises not only

in connection with the moneys in the hands of Ellis & Co.

but also in connection with the overpayments to Mansell.

In my opinion, it could not reasonably be expected of such

1 Ch. CHANCERY DIVISION.

a director that he should keep himself acquainted at all times
with the details of the company’s investments. Speaking
generally, he would be justified in trusting to the finance
committee to perform properly the duties delegated to them.
But the duty of making a report to the company in general
meeting as to the state of the company’s affairs and the
amount recommended to be paid in dividend, as required
by the 139th article of association, was the duty of the board
of directors as a whole and not of the finance committee. For
the purposes of enabling them to make such report it was,
in my judgment, essential that there should be prepared for
the use and information of the directors a complete list of
the company’s assets. It would be impracticable for every
director to go through the list and satisfy himself as to the
maintenance of the book values of each security. This task
might properly be left to a small committee of directors,
upon whose report the others would be justified in acting.
But in the present case no such list was ever before the
board or was ever called for by any individual director.
Mr. Haig Thomas indeed was supplied on two occasions
with what. purported to be a list of investments, one at some
date early in 1919 and the other in April, 1920. The second
of these two lists purported to show the investments as they
existed on February 29, 1920, Mr. Haig Thomas being told
upon the telephone by some individual at the company’s
office who has never been identified that there had been no
change in the investments since that date. This, as a matter
of fact, was wholly untrue. Nor were the lists complete
lists. The first one, a copy of which was also sent to
Mr. Grenside, contained no mention whatever of any loan
to or indebtedness of Ellis & Co., and the second one showed
a sum of no more than 4690]. as due from them on investment
account. It seems probable that Mr. Grenside also saw this
list. In point of fact, a comparison of the total amount of
the assets set out in those lists with the total set out in the
balance sheets for these two years would have shown Mr. Haig
Thomas and Mr. Grenside that the lists were inaccurate.
But they made no such comparison, nor indeed were the lists
202 1

471

Cras

1924
“~
Crry Equit-
ABLE FIRE
INSURANCE
Co.,

In re.

Romer J.

472 CHANCERY DIVISION. [1925]

c. A. obtained by them for the purposes of the balance sheets at
1924 all. These two lists are not in truth relevant to the point
ciry Equir- that I am considering, but they do provide another illustration
ABrE Aven of the difficulties with which the respondent directors had to
oa _ contend by reason of the untrustworthiness of the officials
nous y, Of the company. The list of investments which, in my
ae opinion, the directors should have obtained in connection
with and for the purposes of the balance sheet in each year

would have been a list that showed in detail all the investments

that were lumped together in the balance sheet under general
headings, in order that the directors might form some idea

for themselves as to whether the total sum brought in as

the value of the investments under each general heading

was justified for the purpose of the balance sheet and of the
dividend that they were recommending. No such list was
however called for by any of the respondent directors, in any

one of the relevant years, 1919, 1920 and 1921. Had they

done so, they would have discovered that Mansell was
indebted to the company in 62251. in 1919, 52,427]. in 1920

and 96,2331. in 1921. They would also have discovered that

their brokers owed the company 51,423]. in 1919, 15,6901.

in 1920 and 423,650]. in 1921. These three last-mentioned

sums were a long way short of a true statement of Ellis & Co.’s
indebtedness, but this was due to the fact that in 1919 and

1920, just as in 1921, fictitious purchases of Treasury Bills

for a large amount were entered in Ellis & Co.’s accounts

for the purpose of reducing their indebtedness as shown by

the company’s books. The directors, therefore, would not

have ascertained the true state of affairs as regards Ellis & Co.,

and so far as the years 1919 and 1920 were concerned there

would not have appeared to them that there was any cause

for criticism or inquiry as to the indebtedness of that firm,

seeing that the company held abundant security, and that

the debt in each year fell a long way short of the 100,0001.

that the finance committee had sanctioned. But they would

have ascertained that their general manager was indebted

to the company in large sums in respect of which the company

held no security, and that in the month of February, 1921,

1 Ch. CHANCERY DIVISION.

Ellis & Co. had increased the amount of their loan to 350,0001.
without any authority and held in their hands without

473

CAS
1924

security moneys of the company amounting to 73,6501. It crey Equrr-

is therefore reasonable to suppose that had the directors
made or caused to be made inquiries as to the items that
went to make up the total sums appearing in the balance
sheets under the heading of loans at call or short notice
in the balance sheets for the years 1919 and 1920, under
which headings the debts of Mansell .and the loan to Ellis
& Co. were included, or as to the items that went to
make up the sum appearing in the balance sheet of
1921 under the heading of “Cash at bank and in hand,”
under which heading the 73,650/. due from Ellis & Co.
was included, a considerable sum might have been saved
to the company. In not making or causing to be made
these inquiries the respondent directors, in my opinion,
failed to come up to the strict standard of their duty.
They appear to have contented themselves with making
general inquiries of Bevan on the occasions when the balance
sheets came before them for approval, and were satisfied with
his assurances, that were no doubt readily forthcoming. For
the rest, they seem to have relied upon the certificate of the
auditors, which contained a statement that in the belief of
the auditors the assets set forth in the balance sheet were in
the aggregate fully of the value as stated therein. Having
regard to the high reputation that Bevan possessed in the
City of London and elsewhere it is not difficult to understand
how the respondent directors allowed themselves to be satisfied
with the assurances given by him, fortified by the certificate
of the auditors. As it turned out, the respondent directors
were being tricked and defrauded by Bevan and so were
the auditors themselves, and neither these directors nor the
auditors received from the officials of the company the
protection and assistance that they were entitled to expect.
For the moment, however, I am only concerned with the
respondent directors, and, though I feel considerable sympathy
with them in being surrounded by officials whom events
have shown to be unreliable, and in being led by a chairman

ABLE FIRE
INSURANCE
Co.,

In re.

Romer J,

474 CHANCERY DIVISION. [1925]

CG. A. whom events have shown to be a daring and unprincipled

1924 scoundrel, I also feel bound to express my opinion that in
Ory Equrr- the particular matter that I am now considering they did
pare et less than the law required of them. When presenting their

jap _ annual report and balance sheet to their shareholders, and

a when recommending the declaration of a dividend, directors
ought not to be satisfied as to the value of their company’s
assets merely by the assurances of their chairman, even as
distinguished and honourable as Bevan appeared at the time
to be, nor with the expression of the belief of an auditor as
competent and trustworthy as Mr. Lepine was and still is.
As I have already stated, a list of the company’s assets should
have been prepared, and this was never done. But for the
150th of the articles of association, I should, in my judgment,
have to hold the respondent directors (other than Lord March)
liable in varying degrees for the loss to the company that
might have been prevented had such a list been called for
on the occasion of the approval by the board. of the balance
sheets for the years 1919, 1920 and 1921 respectively.
Lord March would have to be excepted, inasmuch as he was
not present on any one of these occasions. The other
respondent directors, however, are relieved from any such
liability by reason of the article, for I am quite satisfied that
they erred in perfect good faith and in ignorance of what
was their duty to the company in this respect.

One more matter has to be dealt with before leaving the
subject of the indebtedness of Ellis & Co. At all material
times during the years 1919, 1920 and 1921 securities of the
company were left in the hands of that firm. In view of
what is now known of Bevan’s character, it is not surprising to
find that he pledged these securities for his own purposes. The
larger number of them were by good fortune sold subsequently
and the proceeds in due course credited to the company.
But at the date of the company’s liquidation and Ellis & Co.’s
bankruptcy, the securities -to which I have already referred,
and of which the book value was 47,8901., still remained in
their hands and were wholly lost to the company. The
Official Receiver accordingly seeks to charge the respondent

Romer J.

1 Ch. CHANCERY DIVISION.

directors in any case with this sum upon the ground that it
was a breach of their duty to allow securities of the company

475

C. A.
1924

to be retained by their brokers. Had any one of the respondent crry Equrr-

directors been aware of the fact that securities were left in
the hands of Ellis & Co. for safe custody he would have been
guilty of breach of duty if he had not insisted on the practice
being summarily stopped. But in fact they were all ignorant
that this was being done. The Official Receiver contends,
however, that this ignorance does not protect them, as they
ought to have initiated some system of safeguarding the
company’s securities under which it would have been impossible
for Ellis & Co. to obtain possession of them. This object
could, no doubt, have been attained if the directors had taken
the securities to the bank in person or had personally super-
vised the locking up of the securities in a safe, retaining sole
control of the key. But it is not the duty of a director of
such a company as the City Equitable to see in person to the
safe custody of securities. That is one of the matters which
the directors must almost of necessity leave to some official
who is at the office daily, such as the manager, accountant or
secretary. When an investment is made through the brokers,
it would be quite impracticable for the directors to receive
actual delivery of the securities. So too when investments
are sold, delay and great inconvenience would result if the
delivery of the securities to the brokers had to await a meeting
of the board or of a committee of directors. The respondent
directors would therefore be justified in trusting to Mr. Mansell,
their general manager, or Mr. Lock, their accountant, to
perform the duty of putting into safe custody the securities
of the company. And this is what in fact the respondent
directors appear to have done. [His Lordship referred to
the evidence in support of this statement and also the
evidence of Mr. Lock, the company’s accountant, showing
that in point of fact and without the knowledge of the
respondent directors, but with the connivance of Bevan and
Mansell, Ellis & Co. had almost complete control of the
company’s securities, and continued:] No system could
protect the securities against this sort of thing short of

ABLE FIRE
INSURANCE

CHANCERY DIVISION. [1925]

personal supervision of the securities by the respondent
directors themselves, and such supervision they are not
bound to give. I cannot hold them liable for any loss
sustained by reason of the company’s securities being retained
by Messrs. Ellis & Co.

The next charge against the respondent directors with
which I have to deal is in respect of a sum of 69521. 19s. 7d.,
which has been generally referred to in these proceedings
as a loan to Bevan, but which is more accurately described
as moneys of the company misappropriated by him. It can
be dealt with comparatively shortly. [His Lordship reviewed
the evidence, and held that the “loan to Bevan” was
founded on a minute fraudulently forged and entered by
Bevan, and that none of the respondent directors was liable
for this loan or for the Saskatoon loan, and continued :]
Only two matters remain to be considered, so far as the
respondent directors are concerned. These are the two
payments of dividends in the year 1921. Of these, one was
recommended by the directors at the Board meeting of
May 20, 1921, and declared at the annual general meeting
of the company in June, 1921, in respect of the year ending
February 28, 1921. The other, which was an interim
dividend, was declared by the directors at a board meeting
held on November 1, 1921, in respect of the half year ending
on August 31, 1921, and is stated in the points of claim to
have been paid on November 18. It is alleged by the Official
Receiver that both these dividends were paid out of capital.
All that I need say about this allegation is that there is no
sufficient evidence to support it. If the assets comprised in
the balance sheet of 1921 were on February 28 of the value,
or even somewhere near the value, therein stated, the first
dividend was most assuredly not paid out of capital. Nor
was the interim dividend, unless by the month of November
those assets had depreciated considerably in value. But no
evidence was adduced before me as to the value of the assets
at the critical times. It does indeed seem probable that some
of the assets, and notably the debt due from Ellis & Co.,
had depreciated considerably in value by November. But

1 Ch. CHANCERY DIVISION.

I do not know that it is even probable that the depreciation
had been so great as to render improper a payment of the
small interim dividend amounting only to some 15,0001.
In any case I cannot hold the respondent directors guilty
of a payment of dividend out of capital on mere probability.
The onus of proving his case is upon the Official Receiver,
and this onus he has not discharged. It is not for the
respondent directors to prove, especially after this lapse of
time, that the dividends were in fact paid out of profits.
There is certainly some ground for suggesting that, having
regard to a certain shortness of cash at the company’s disposal
in the month of November, 1921, the declaration of the interim
dividend was somewhat unwise. The payment of the dividend,
however, was only resolved on after a very full discussion by
the directors then present, and after hearing from Mr. Mansell
personally, or through Bevan, a satisfactory account of
the condition of the company’s insurance business. I am
satisfied that, at the time, it appeared to the directors to be
a safe and prudent thing to do. In any case a director is
not responsible for declaring a dividend unwisely. He would
only be liable for paying the dividend out of capital, and I am
unable to find that the directors did so in the present case.
The result is that the case of the Official Receiver fails
against all the respondent directors. He is, however, entitled
to relief against Bevan in respect of many of the transactions
to which I have referred. So far as the investment in
Claridge’s Hotel is concerned, I have not sufficient evidence
to justify me in making him responsible for the loss thereby
occasioned. But I am satisfied that in the matter of the
investments in the United Brass Founders and in the Brazilian
ranch, Bevan acted fraudulently, as he did too in the matter
of the loan of 110,000/. to Mansell and his own misappro-
priation of the sum of 69521. I propose therefore to declare
that in these four matters he was guilty of a fraudulent
breach of trust, and to direct an inquiry as to the damages
sustained by the company by reason of the two investments,
and to order him to repay to the company the sums of
110,000/. and 69521. with interest. In respect of the moneys

477

C. A.
1924

—_—
Crry Equit- —
ABLE FIRE

478

C. A.
1924

——_
Crry Equit-
ABLE FIRE

CHANCERY DIVISION. [1925]

owing from Ellis & Co. at the date of the liquidation it would
not be right, in the circumstances, to treat him as having
acted improperly in making the loan to Ellis & Co. that was
sanctioned by the finance committee, which I propose to
treat as having been 200,000/. The collateral security
deposited by Ellis & Co. realized 30,8597. 2s. 10d., so that the
loss to the company in respect of the loan was 160,149/. 17s. 2d.
He is, however, liable to make good the difference between
this sum and the sum of 407,604]. 13s. 1ld. shown as due from
Ellis & Co. in the exhibit “F.G.L. 1,” and I accordingly
make an order against him for payment of 238,454]. 16s. 9d.
As, in calculating this sum, he has been charged with the -
cost price to the company of such of the shares in the United
Brass Founders as were never delivered, this fact must be
taken into account in ascertaining the damage sustained by
the investment in that company. There must be added,
however, to the sum I have ordered him to pay 93291. 14s. 5d.
in respect of what has been called the Saskatoon loan.

It remains for me to deal with the charges made against
the respondents, Messrs. Langton and Lepine, the auditors
of the company. By para. 4 of the claiming part of the points
of claim, the Official Receiver asks for a declaration that these
respondents were guilty of negligence in respect of the audit
by them of the balance sheets of the company for the years
ending February 28, 1919, February 29, 1920, and February 28,
1921, respectively, and are liable to pay to the liquidator
compensation for the loss sustained by the company by
reason of such negligence and breach of duty. The Official
Receiver also asked for a declaration that such compensation
included the dividends paid in respect of the year ending
February 28, 1921, as having been paid out of capital.
Mr. Topham, at the end of his reply, however, stated that
he did not press for any separate relief in respect of these
dividends, but merely for a general inquiry as to the damages
sustained by the company by reason of the auditors’
negligence. But in any case, as I have already pointed out,
the Official Receiver has not proved that the dividends were
in fact paid out of capital. Now the negligence and breach

1 Ch. CHANCERY DIVISION.

of duty charged at the Bar against the auditors in respect
of their audit of the three balance sheets in question come
under three heads: (1.) Their misdescriptions in the balance
sheets of the debts of Ellis & Co. and Mansell by including
them under ‘“ Loans at call or short notice” or ‘ Loans ”’
or in the case of part of Ellis & Co.’s debt under the heading
of “ Cash at bank and in hand,” and their consequent failure
to disclose to the shareholders the existence of those debts.
(2.) Their failure to detect the fact that much larger sums
were in the hands of Ellis & Co. at the date of each of the
balance sheets than were so included. (3.) Their failure to
detect and report to the shareholders the fact that a number
of the company’s securities, which were in the custody of
Ellis & Co., were being pledged by that firm to its customers.
I will deal presently with each of these matters in turn, but,
before doing so, there are one or two general observations
about the auditors that must be made.

The audit in each of the three years was, in fact, conducted
by Mr. Lepine alone. His partner, Mr. Langton, had
conducted the audits of the accounts of the company from the
date of its incorporation until the completion of the balance
sheet for the year ending February 28, 1917, but from that
time ceased to take any active part in the audits. In the
discharge of his duties in the three years, 1919 to 1921,
Mr. Lepine, speaking generally, displayed great skill, care
and industry. Eloquent testimony of this is furnished by
the numerous accounts, memoranda, and reports which he
prepared in connection with the three audits, and which
were produced by him in the course of his evidence. Each
audit took from six to eight weeks to complete, and during
that time two or three clerks of the auditors would be in
continuous attendance at the company’s offices. The work
of these clerks would of course be done under the direc-
tion of Mr. Lepine who, during the latter part of the audit,
was himself in fairly continuous attendance. The late
Mr. Van de Linde, who was himself an accountant of great
experience, and who, after the company went into liquidation,
made an able and thorough examination of the company’s

479

C. A.
1924
Crry Eaquir-

ABLE FIRE
INSURANCE

480

C. A.
1924
City Equit-

ABLE FIRE
INSURANCE

CHANCERY DIVISION. [1925]

affairs, testified as to the care and accuracy displayed by
Mr. Lepine in the audits. The following passage is taken
from his cross-examination by Mr. Stuart Bevan: “ Q. 1409.
I am quite aware of what the complaints are with regard to
Messrs. Langton & Lepine, but putting those on one side,
because they have to be investigated to see whether there
is any foundation for them at all, does your investigation
shew that these audits were very carefully conducted by
Mr. Lepine? He was always calling for documents, checking
entries and so forth ?—Yes. Q. 1410. It must have involved
a great deal of work ?—Yes, a great deal I think. Q. 1411.
And extraordinary accuracy in his figures ?—Yes. I think
the figures are accurate right through. Q. 1412. I have
not yet heard or read, and I have been here all the time, that
there is any suggestion that there is any wrong figure ?—As
far as the figures are concerned, I think there is great accuracy
right through. Q. 1413. In fact, throughout, always putting
aside these matters we have to address ourselves to, speaking
generally, throughout, the greatest care shewn and accuracy
achieved ?—Yes. Q. 1414. Involving, as you say, a very
large amount of investigation and labour ?—Yes, I think so.”
But if in the course of these long and arduous audits Mr. Lepine
has in even one instance fallen short of the strict duty of an
auditor, he cannot, I apprehend, be excused merely because
in general he displayed the highest degree of care and skill.
As to what that duty is, there is not much authority to be
found in the books. But in In re London and General Bank
(No. 2) (1) Lindley L.J. dealt at some length with the duties
of the auditor of a company. He says this: “It is no part
of an auditor’s duty to give advice, either to directors or
shareholders, as to what they ought to do. An auditor has
nothing to do with the prudence or imprudence of making
loans with or without security. It is nothing to him whether
the business of a company is being conducted prudently or
imprudently, profitably or unprofitably. It is nothing to
him whether dividends are properly or improperly declared,
provided he discharges his own duty to the shareholders.

(1) [1895] 2 Ch. 673, 682.

1 Ch. CHANCERY DIVISION.

His business is to ascertain and state the true financial position
of the company at the time of the audit, and his duty is con-
fined to that. But then comes the question, How is he
to ascertain that position? The answer is, By examining
the books of the company. But he does not discharge his
duty by doing this without inquiry and without taking any
trouble to see that the books themselves shew the company’s
true position. He must take reasonable care to ascertain
that they do so. Unless he does this his audit would be
worse than an idle farce. Assuming the books to be so kept
as to shew the true position of a company, the auditor has to
frame a balance sheet shewing that position according to the
books and to certify that the balance sheet presented is
correct in that sense. But his first duty is to examine the
books, not merely for the purpose of ascertaining what they
do shew, but also for the purpose of satisfying himself that
they shew the true financial position of the company. This
is quite in accordance with the decision of Stirling J. in Leeds
Estate, Building and Investment Co. v. Shepherd.(1) An
auditor, however, is not bound to do more than exercise
reasonable care and skill in making inquiries and investi-
gations. He is not an insurer; he does not guarantee that
the books do correctly shew the true position of the company’s

affairs; he does not even guarantee that his balance sheet
is accurate according to the books of the company. If he
did, he would be responsible for error on his part, even if he
were himself deceived without any want of reasonable care
on his part, say, by the fraudulent concealment of a book
from him. His obligation is not so onerous as this. Such
I take to be the duty of the auditor; he must be honest—
i.e., he must not certify what he does not believe to be true,
and he must take reasonable care and skill before he believes
that what he certifies is true. What is reasonable care in
any particular case must depend upon the circumstances
of that case. Where there is nothing to excite suspicion
very little inquiry will be reasonably sufficient, and in practice
I believe business men select a few cases at haphazard, see

(1) 36 Ch. D. 802.

481

C. A.
1924

ee
Crry Equrr-
ABLE FIRE
INSURANCE
Co.,
In re.

Romer J,

482

C. A.
1924

“~Y
Ciry Equit-
ABLE FIRE
INSURANCE
Co.,

In re.

Romer J.

CHANCERY DIVISION. [1925]

that they are right, and assume that others like them are
correct also. Where suspicion is aroused more care is obviously
necessary ; but, still, an auditor is not bound to exercise
more than reasonable care and skill, even in a case of sus-
picion, and he is perfectly justified in acting on the opinion of
an expert where special knowledge is required. Mr. Theobald’s
evidence satisfies me that he took the same view as
myself of his duty in investigating the company’s books
and preparing his balance sheet. He did not content himself
with making his balance sheet from the books without troubling
himself about the truth of what they shewed. He checked
the cash, examined the vouchers for payments, saw that the
bills and securities entered in the books were held by the
bank, took reasonable care to ascertain their value, and in
one case obtained a solicitor’s opinion on the validity of an
equitable charge. I see no trace whatever of any failure by
him in the performance of this part of his duty. It is satis-
factory to find that the legal standard of duty is not too high
for business purposes, and is recognized as correct by business

?

men.” I must now inquire whether, in the matters complained

_of, Mr. Lepine fell short of the duty of an auditor as so explained

and defined.

On February 28, 1919, Ellis & Co., according to the books
of the company, owed the sum of 51,4237. 19s. 4d. and Mansell
the sum of 6225/. Both these sums were included by
Mr. Lepine in the balance sheet as of that date under the
description “‘ Loans at call or short notice 177,648/. 19s. 4d.”
Now it is said that neither of these sums was a loan at call
or short notice. Mansell’s debt certainly was not. Ellis &
Co.’s probably was. But I do not propose to decide this
question, for I cannot see that any human being has been
misled by these debts being referred to as “‘ Loans at call or
short notice,” rather than as “Loans.” If the description of
them in the balance sheet as “ Loans”? would have induced
any director or shareholder to make some inquiry as to their
nature, which he was induced to refrain from making by
reason of their description as “ Loans at call or short notice,”
the matter would be different. But not only is this inherently

1 Ch. CHANCERY DIVISION.

improbable, there is actual evidence that it was not so. For
in the balance sheet of February 28, 1921, the description
was altered for a reason that will hereafter appear. No
longer was there any sum brought in under the former
description. The loan to Ellis & Co. and the debt of Mansell
were, with some other loans, lumped together in the balance
sheet under the generic description ‘“ Loans.” And just as,
in the two preceding years, no director or shareholder made
any inquiry as to how the sum brought in under the description

483

C. A.
1924

——
Crry Equit-
ABLE FIRE

of “ Loans at call or short notice’ was made up, no inquiry ©

was made as to the items going to make up the sum brought
in under the heading of “ Loans” in 1921. The alteration
in the heading did indeed attract the attention of Mr. Milligan.
But the only inquiry he made was as to the reason for having
so large a sum out on loan, as to which he received a very
plausible explanation from Bevan. He made no inquiry as
to how the sum was arrived at. The truth is, that the
ignorance of the respondent directors and of the shareholders
as to the indebtedness of Ellis & Co. and Mansell, so far as
it was contributed to by Mr. Lepine, was due to his omission
to call specific attention to this indebtedness in the balance
sheet by mentioning both the debtors by name. But if the
directors choose to lend money to their brokers, or their
general manager, there is no reason why they should not do
so, nor can I see any reason why the auditor should call the
attention of the shareholders specifically to the fact of their
having done so. In the words of Lindley L.J. an auditor
has nothing to do with the prudence or imprudence of making
loans with or without security. He must, of course, take
care that he does not bring into his balance sheet at face
value a debt that is not a good one. The credit of Ellis & Co.,
however, was above suspicion, and, in addition, the company
held collateral security against their indebtedness* to the
value of over 286,000/. Nor was there any reason to suppose
that the debt of Mansell was not good. It was, however,
unsecured, and accordingly Mr. Lepine, in his report addressed
to Bevan in his capacity of the chairman of the company,
called attention to the fact in these terms: ‘ The loans

484

@aAs
1924
Ciry Equir-

ABLE FIRE
INSURANCE

CHANCERY DIVISION. [1925]

177,648/. 19s. 4d. include a sum of 6225/. due from your
general manager, and for which the company do not hold
any security.” Mr. Lepine, of course, intended this report
to be placed before the board of directors, and was justified
in supposing that this had been done. Bevan, in fact,
suppressed it, but I cannot see how Messrs. Langton and
Lepine can be held responsible for this. Mr. Lepine in this
matter did, I think, all that it was reasonable for him to do
in the circumstances.

Much of what I have said about the 1919 balance sheet
applies to that of 1920. According to the books of the
company there was no balance due from Ellis & Co. on loan
account on February 29, having regard to the fact that it
had all been transferred to investment account. But after
this transfer had been made, the books showed a balance
due from them on this latter account of 46907. 16s. 6d., in
respect of which the company held collateral security to the
value of over 275,0001. But in January of that year Ellis &
Co. had debited the company with 161,000. in respect of the
Brazilian branch. Now, as already stated, the only sum that
the finance committee had authorized in respect of this
investment was 150,000/., and this fact Mr. Lepine, with
his usual care and industry, had discovered. Having noted
it in one of his memoranda of queries, he had an interview
with Bevan upon the matter. As a result of this interview,
Messrs. Ellis & Co. addressed to the company a letter in the
following terms: “Re Ranch Account. You will doubtless
remember that in all you have been debited in this connection
161,000/., and the matter was discussed between Mr. Lepine
and Mr. Bevan a few days ago. The amount has now been
adjusted to your actual participation, namely, 150,0001., so
we have credited you the sum of 11,0001. with interest from
the 3lst December, 1919, to the 30th instant, and the
amount will appear in your statement of the 30th June.”
The result of recrediting the company with the 11,0001. was,
of course, to increase the indebtedness of Ellis & Co. by that
amount, and whether it was treated as due from them on
loan account or on investment account was not very material.

1 Ch. CHANCERY DIVISION.

In the meantime Mansell’s debt had increased to 52,4271. 14s. 5d.
In the balance sheet this sum, and the 11,0001. due from
Ellis & Co., are included in a sum of 387,564I. 5s. 9d. brought
in under the description of ‘‘ Loans at call or short notice.”
The balance due from Ellis & Co. on investment account is
included in a sum of 270,000/. odd described as being “‘ Cash
at bank and in hand.” Mr. Lepine seems to have thought
that this sum in the hands of the company’s brokers was
as much cash in hand as if it had been in the hands of one
of the company’s officials. In this I think that he was
wrong, but it would have made no difference to any one had
it been included, as it could have been, under the heading
of “Loans” or “Sundry debtors.” But as regards the
debt due from Mansell, the balance sheet is open to a
criticism in no way connected with the question whether
the debt ought to have been included under the heading
“Loans at call or short notice.” For the only advance to
Mansell that had been sanctioned was one of 15,0001. approved
of at the meeting of the finance committee on January 3,
1919. Mr. Lepine accordingly looked up this minute, and
made inquiries of Mr. Bevan about this and numerous other
matters as to which he was not satisfied after making his
examination of the books and documents of the company.
These inquiries were made at an interview he had with
Bevan on June 2, 1920. This interview is dealt with as
follows in Mr. Lepine’s examination: “‘Q. Will you tell my
Lord what took place between you and Bevan on the 2nd of
June ?—So far as I remember, Bevan informed me that
although the amount authorized by the minute of January,
1919, had been exceeded, it was perfectly in order; that
the directors were fully cognisant of the loan which had
been made to Mansell in connection with his property, and
that but for his absence from London a minute would have
been passed at a board meeting by the time I had come to
do the audit. Q. That is Bevan’s absence ?—Yes. Q. Did
he say what would be done in the future ?—He told me that
a minute would be passed at the next board meeting, and
some agreement entered into with regard to the matter
Vou. I. 1925, He! 1

485

C. A.
1924

——
Ciry Equrr-
ABLE FIRE
INSURANCE
Co.,

In re.

Romer J,

486

Cy A.
1924

—
Crry Equit-
ABLE FIRE

CHANCERY DIVISION. [1925 }

generally. I asked him to confirm that, as to the deeds being
in. his possession. I asked him to confirm that byletter. Q.One
of the queries you raised was as to the security ?—Yes.
Q. Was anything said: about security ?—Yes, he told me he
held the deeds in his office. Q. What deeds ?—The deeds of
the property which Mansell had purchased. Q. I see there
is a letter from Mr. Bevan about this matter on the 2nd June,
1920, the same day ?—It was written on the same day.
Q. Was it written after the interview ?—Yes. Q. ‘I write
to say in connection with the loan made by the City
Equitable to the manager, Mr. Mansell, we hold certain
deeds representing the properties he has purchased in Kent,
which, of course, also cover the stock and any other assets
on the property.’ Mr. Bevan having told you that, and
having confirmed it in writing in this way, had you any
reason to suppose that it was untrue ?—No, not at all.
Q. I see you wrote in answer to that on p. 702 a letter of
the 3rd of June to Mr. Bevan: ‘I am obliged by your four
letters of the 2nd instant with reference to various invest-
ments made by the above company up to 29th February
last. With regard to the loan to Mr. Mansell, this amounted
to 52,4271. 14s. 3d. as at 29th February last, which figure
has been arrived at after deducting the amount due to him
for profit commission for the past year; you will recollect
that the only minute with regard to a loan is that of the
3rd January, 1919, which only authorized a sum of 15,000I. ;
I, however, understand that a further minute will be passed
at the next meeting of the Board. I will also remind you
that Mr. Mansell has not been charged with any interest
up to 29th February last, but that you are now giving
instructions as to this’ ?—Yes. Q. Did you accept Mr. Bevan’s
explanation and believe that a minute would be passed con-
firming these advances ?—Yes.” Following this interview,
Mr. Lepine made a report to the chairman as in the preceding
year, and this report contains the following passage: ‘“‘ With
regard to the loan to Mr. Mansell, we would remind you
that the only minute is one dated 8rd January, 1919,
authorizing a sum of 15,000/.: we understand that a further

1 Ch. CHANCERY DIVISION.

minute is to be recorded at the next board meeting. We
would also draw your attention to the fact that no interest
has yet been charged in respect of this loan: we, however,
are informed that this matter is now having your attention,
and, further, that a formal agreement is to be prepared with
reference to the loan generally.’ Mr. Lepine thereupon
allowed the debt to be included in the balance sheet without
insisting upon a minute being passed or a formal agreement
prepared. Having regard to what we now know, it is no
doubt easy to criticize Mr. Lepine’s action in doing this.
But putting one’s self into his place, and looking at the
matter as it appeared to him at the time, his action was
reasonable, and, except for one qualification, to which I will
call attention presently, was not inconsistent with his duty
as an auditor. For he had seen the slips that had been
initialled by the directors who had signed the cheques in
Mansell’s favour, and these would seem to confirm the state-
ment of Bevan, if confirmation were required, that the
directors were fully cognisant of the loan which had been
made to Mansell. The absence of a formal minute recording
their approval would not, therefore, be a reason for delaying
the completion of the balance sheet, or the issue of the
auditor’s certificate, especially as he had taken the precaution
of referring to the matter specifically in the report that he
thought would be shown to the board. But, as usual, this
report was suppressed by Bevan, and, as usual, Bevan had
lied. Not only had he lied as to the directors’ knowledge.
He had also lied as to there being any security. And in
this lie he was ably supported by Mansell himself. For
Mr. Lepine, in accordance with his practice where loans
were concerned, had required an acknowledgment of the
loan from the debtor. Mansell had accordingly signed a
letter addressed to the company in these terms: “ Dear
Sirs, I beg to confirm that as at the 28th February
last the total sum which has been advanced to me on
loan account in connection with my property at Penny-
bridge, Wadhurst, Sussex, is 52,4271. 14s. 3d. I am, yours
faithfully, E. G. Mansell, General Manager.” The words
2P2 1

487

C. A.
1924

ees

Crry Equit-
ABLE FIRE
INSURANCE

488 CHANCERY DIVISION. [1925]

c. A. ‘fin connection with my property” were the words
1924 that Bevan had used at the interview of June 2 for
Crry Equrr- the purpose of conveying the idea that the loan was
Aure FR" secured on Mansell’s property, and though Mansell did not
pee _ say in terms that the loan was so secured, he obviously
Rome y, intended Mr. Lepine to believe that it was. His reference
eam to his property was otherwise meaningless. But it is just
in connection with this non-existent security that the quali-
fication to which I referred above must be added to the state-
ment, otherwise well founded, that Mr. Lepine performed
his duty as an auditor in this matter. For Mr. Lepine did
not insist on inspecting the deeds of the property himself.
He accepted the assurance of Bevan that the deeds were in
Bevan’s office. The whole question as to the duty of an
auditor to make personal inspection of securities is, however,
dealt with later in connection with the other charges made
against Messrs. Langton and Lepine, and need not be further

discussed at present.

On February 28, 1921, the position, even as shown in
the books of the company, had changed considerably for the
worse. There was then, according to the investment ledger,
a sum of 350,000]. owing by Ellis & Co. on loan account,
and 73,650]. owing on investment account, while Mansell’s
indebtedness had increased to 96,2337. As regards the latter,
Bevan had not caused a minute to be passed or an agreement
to be entered into, although, as has already appeared in the
part of this judgment that deals with the charge against
the respondent directors in connection with Mansell’s loan,
Bevan was already engaged in the fraudulent device which
resulted in the execution of the Mansell agreement. In the
balance sheet Mansell’s debt and Ellis & Co.’s debt of 350,0001.
were included in an entry of “‘ Loans 514,6331.”’ The securities
held by the company as collateral security for the 350,0001.
were, on February 28, 1921, worth only 247,570]. This, of
course, did not satisfy Mr. Lepine, who raised a query upon
it which was thus described in his evidence: ‘‘ The query I
did raise was that on the bank certification as to the collateral
security the collateral security did not come anywhere near

1 Ch. CHANCERY DIVISION. 489

the amount of the loan. I referred that fact to Mr. Lock, oo. A.
and he informed me that further collateral security had been _1924
lodged during, I think, the first week in March, and produced crry Equir-
to me the bank’s green slip acknowledging those further {2" PiR®
securities. The bank obviously could not confirm having ©.
held them on the 28th February, when they were not lodged a
until, I think, the 2nd or 3rd March, but I obtained from Serpe
Mr. Lock, and he showed me, the bank’s green slip on which

they used to enter securities as they were lodged, or as they

were withdrawn, and I think there is a note on the account
somewhere to that effect.” The note in question shows

that the market price of the further securities was 104,0001.

From Mr. Lepine’s point of view the 350,0001. was still
properly described as a “‘ Loan at call or short notice.” But

the Mansell agreement had been produced and carefully

read by Mr. Lepine in the course of the audit for 1921. In

view of this agreement, it was obviously impossible to describe

the loan to Mansell as being at call or short notice, and so

the general heading was altered to ‘‘ Loans.” This was
admittedly a proper description of the 350,000/., and of the

sum due from Mansell, unless it was Mr. Lepine’s duty to

refer to the debtors by name. There was, however, no
particular reason why he should have done so. He had

again inspected the slips initialled by the directors, who
signed the Mansell cheques, and he saw the agreement of

March 4, 1921, and the minute of the board meeting at which

it purported to have been approved. He had satisfied himself

that the 350,000]. was secured. It was no part of his duty

to criticize or call attention to transactions that were well
within the powers of the board, and were, on the face of them,
perfectly regular. He had carefully studied the Mansell
agreement and had taken the trouble to prepare a fairly

full abstract of its contents. He had required that the
agreement should be stamped, and had made a note that the

policy on Mansell’s life was to be assigned to the company.

Both of these requirements of his were complied with. I
cannot see that his duty required him to do any more.

It may at first sight seem somewhat strange that Mr. Lepine

490

C. A.
1924

“NT
Crry Equrt-
ABLE FIRE

CHANCERY DIVISION. [1925]

should not have made some inquiries as to the provision
contained in cl. 9 of the agreement under which Mansell was
freed from all further liability. in case the company ceased
to carry on business before the loan had been repaid out of
his commission. But in February, 1921, the possibility of
such an event happening must have seemed to Mr. Lepine
to be so remote a contingency as not to warrant serious con-
sideration. It is indeed to be observed that in the abstract.
of the agreement that he made he did not think it worth
while to include that provision. The abstract does take
note of the provision under which the loan was to be cancelled
if Mansell ceased to be manager. But, notwithstanding
this, Mr. Lepine thought that the loan was well secured.
The following passage in his cross-examination in relation to
the Mansell agreement and the loan indicates his reasons for
so thinking. He was asked this: “Did you think it was
quite an ordinary kind of agreement ?—I thought that the
directors had considered it was in the interests of the company
that Mr. Mansell should have this money, and I left it at.
that, I think. Q. You left it at that ?—Yes, except that I
wanted to see that the policy referred to, the short-term
policy, had been assigned to the company, and I took steps
to see that that was done. Q. You realised, of course, that
if Mr. Mansell left the service of the company the liability
to pay ceased ?—Yes. Q. Did not you consider that that
was such an extraordinary matter that you should have called
the attention of the shareholders to that ?—No, I did not.
It was the policy of the directors. Q. Of course, you saw
that it was only payable out of future commissions ?—Yes,
I think I did, and I think I worked it out to see if, on the
new basis, there was a probability of his paying those. Q. How
long did you calculate it would take him to pay them ?—I
think the instalments are referred to in the agreement. Q. You
said you worked it out ?—Yes, to see whether his remunera-
tion approximately, on the past basis, as far as one could
see, would in any way amount to the instalments referred
to in the agreement. Q. From that calculation did you
find out how long it would take for him to repay that loan ?

1 Ch. CHANCERY DIVISION.

—I found at the time on the past basis—unfortunately I
have not got my note here, but I think there was some con-
siderable sum over. Q. You put that debt in as an asset
of the company for its full value ?—Yes, at that time. Q. It
depended, did it not, upon whether Mr. Mansell continued
in the employment of the company ?—Yes; but at that
time he was in the employ of the company, and the company
was a going concern, and I knew how highly the directors
valued his services. At that time it was a going concern,
and, in my opinion, it was a perfectly good amount of expendi-
ture.’ In my opinion Mr. Lepine was guilty of no breach
of duty in connection with any one of the three balance sheets
in the way he dealt with the indebtedness of Ellis & Co.,
or the indebtedness of Mansell, subject only, as to the latter,
to the qualification to which I have already referred in
connection with the balance sheet of 1920, and subject, as
to the former, to the following observation. The 73,6501.
shown by the company’s books to be due from Ellis & Co.
on investment account was included in the balance sheet
in a sum of 188,0001. odd stated to be cash at bank and in
hand. In my opinion it was not cash in hand. It was
merely money owing to the company by the brokers, and
the company held no security to cover it. But Mr. Lepine
had seen a letter of March 1, 1921, written by Ellis & Co.
to Mr. Lock for the purposes of the audit, in which it was
stated that 50,0007. of this money had been earmarked
to the company’s American account (that is, for the pur-
poses of the company’s American business) for remittance
during the month of May. There appeared therefore nothing
to call for special remark in so large a sum being in
Ellis & Co.’s hands, and, having regard to the credit and
reputation of that firm, neither Mr. Lepine nor any one
else would have felt any anxiety about the money being
forthcoming whenever it might be required. Mr. Lepine
was cross-examined as to his justification in describing this
sum as cash in hand as follows: ‘‘Q. Do you seriously say
—J want you to consider this answer—that it is proper when
you are preparing the balance sheet of the company to whom

491

CoPAr
1924

——_— :
Crry Equrr-
ABLE FIRE

Romer J,

492 CHANCERY DIVISION. [1925]

c. A. the money is due to describe the money in the hands of the
1924 brokers as being cash at bank and in hand ?—Yes. The
Crry Equrr- only other alternative, I suggest, is that it might be put as
seis = 25 ‘Cash at bank and in hand, and on other accounts’: that
Bes _ is the only suggestion that I can make as to that heading.
Rome 3, @ Why ‘cash’ at all ?—Because it was the balance of cash
ae in their hands. There was 50,0001. which they were retaining,
according to their certificate to me, to send to America. I
knew they did act as agents in connection with the American
business. Q. The expression ‘cash’ is meant to convey
something that is quite liquid ?—Yes, absolutely, I quite
agree. Q. Do you suggest that this sum of 73,0001. was
quite liquid ?—Yes, I do at that time. My view was then
that if the company had asked Ellis & Co. for a cheque for
73,000/. on the Ist March they would have got it. Q. Is
that still your view ?—No, not to-day; one has to judge at
the time of the audit. Q. Do you not see now, quite seriously,
that this was, in the light of the facts, a serious mis-
description ?—As I know the facts to-day, yes, certainly,
I agree. Q. And you never have described such a sum as
this before as cash in hand ?—No, because I have never
had such a case.” There was, therefore, a misdescription,
but I should hesitate long before holding Mr. Lepine to be
guilty of negligence in this respect. I need not, however,
pursue this matter further, because, even if the misdescrip-
tion did amount to negligence, it caused no damage to the
company. Had Mr. Lepine in fact included the money
under the heading “ Cash at bank and in hand and on other
accounts ’’ he would not, in my opinion, have laid himself
open to legitimate criticism, and the subsequent course of

events would have been in nowise altered.

I now turn to the second head under which the auditors
are charged with negligence in the preparation of the three
balance sheets. The negligence alleged against them under
this head is, in effect, that they did not detect the operation
carried out annually by Bevan, and euphemistically referred
to in the proceedings before me as the operation of “ window
dressing.” A passing reference to it has already been made

1 Ch. CHANCERY DIVISION.

in this judgment. It was-an operation that consisted of a
pretended purchase by Ellis & Co. of Treasury Bills shortly
before, and a pretended resale of the Bills soon after the close
of the financial year. The effect of the operation was to
reduce to comparatively insignificant proportions the sum
shown by the books to be due from Ellis & Co. on investment
account at that date. The Bills were never delivered by
Ellis & Co., and indeed were never even received by them.
The operation was intended, amongst other things, to deceive
the auditors as to the extent of the firm’s indebtedness to
the company, and it succeeded in doing so. The question
to be decided is, whether Mr. Lepine was guilty of negligence
in allowing himself to be deceived. Now the facts relating
to these pretended purchases and sales are, so far as
material, as follows: On February 27, 1919, Ellis & Co.
ostensibly purchased on their own behalf through Messrs.
Kleinworts, an eminent firm of brokers, 200,0001. Treasury
Bulls for 198,5761. Messrs. Ellis & Co., of course, had no
intention of parting with this sum of cash, so they got Messrs.
Kleinworts to make them an advance against the Bills
of 198,000/. carrying interest at 5 per cent. to March 3,
when it had been arranged that Messrs. Kleinworts should
sell them. On February 28 accordingly Messrs. Ellis & Co.
sent their cheque for 198,576l. to Messrs. Kleinworts, who in
their turn sent a cheque to Messrs. Ellis & Co. for 198,0001.
On March 3 Messrs. Kleinworts sold the Bills for Ellis & Co.’s
account for 198,600/. and sent Ellis & Co. their cheque for
this amount. On the same day Ellis & Co. repaid to Messrs.
Kleinworts the 198,000/. and interest. In the meantime
Ellis & Co. had, by letter of February 27, informed Mr. Lock
that they had purchased for the company 200,000/. Treasury
Bills at a cost of 198,576l. and had debited that sum to the
company in their accounts. On March 3 they credited the
company in the accounts with 198,600/. as on a sale of such
Bills. The result of all this was that in the balance sheet
for the year ending February 28, 1919, there appears amongst
the investments of the company 200,000/. Treasury Bills,
and the debt of Ellis & Co. is brought in as 51,4237. In

493

C. A.
1924

Seng
City Equrr-
ABLE FIRE
INSURANCE
Co.,

In re.

Romer J.

494

C. A.
1924

——
Crry EquvitT-
ABLE FIRE
INSURANCE

Co.,

In re.
Romer J,

CHANCERY DIVISION. [1925}

truth the company never had such an investment, and the
debt of Ellis & Co. should have been increased by 198,576/.
It should be stated, in fairness to Messrs. Kleinworts, that
they acted quite innocently in the matter, and did not know
that the company was concerned in any way with the
transaction. A similar operation was carried out in February,
1920, the amount of the Treasury Bills bought from Messrs.
Kleinworts on February 26 being 390,000/., the price 386,4201.,
Messrs. Kleinworts’ loan 385,000/., and the proceeds of the
sale of the Bills on March 5 being 386,856/. In February,
1921, the operation was repeated. Treasury Bills for 240,000.
were bought from Messrs. Kleinworts as on February 25
for 237,513/., Messrs. Kleinworts’ loan was for the same
amount, and the Bills were sold on March 3 for 237,744.
In 1920 and 1921 Messrs. Kleinworts retained the Bills in
their own possession as security for the loans to Ellis & Co.
In 1919 they would have done so had there been any Bills
to keep. But there were not. In the year 1921 there was,
in addition, an alleged purchase and resale by Ellis & Co.
of 200,0007. National War Bonds. In point of fact both
purchase and resale took place on March 4, through Messrs.
Hopkins, Blake & Co., a firm of brokers. Notwithstanding
this, Bevan sent to Mr. Lock a bought note recording the
purchase as having taken place on February 25 at a net
cost of 191,501/., and this sum was credited to Ellis & Co.’s
investment account as on that date.

Now, these being the facts, it is said on the part of the
Official Receiver, first, that Mr. Lepine ought to have discovered
the fraud that was being perpetrated by Bevan merely from
an examination of the company’s books, and, secondly, that
if he could not discover it in this way he ought to have dis-
covered it by insisting upon an inspection of the Bills. Now,
Mr. Van de Linde, who gave evidence on behalf of the Official
Receiver upon these points, agreed, as I understand his
evidence, that when Mr. Lepine was conducting the audits
for the three years in question there was nothing in the books
themselves from which Mr. Lepine ought to have discovered
the window-dressing transactions. But, as I gather that

1 Ch. CHANCERY DIVISION.

the Official Receiver asks me to put a different construction
upon Mr. Van de Linde’s evidence upon this point, I propose,
instead of considering that evidence in detail, to deal with
the entries in the books themselves. The essential thing to
be borne in mind in considering these entries is that, at the
time the audit was taking place, the books had only been
made up to the close of the financial year. When, therefore,
Mr. Lepine in the months of April and May was conducting
the audit for the year ending February 28, 1921, he would see
recorded in the investment ledger a purchase on February 25
of 240,000/. Treasury Bills. But the sale of these Bills on
March 3 would not be so recorded, for the entry of the sale
would not be made until after the audit was closed. There
would, of course, also be recorded in the ledger the sale in
March, 1920, of the 390,000/. Treasury Bills, and the Treasury
Bills account in the ledger would show that between then
and February, 1921, no further transactions in Treasury Bills
had taken place. There would be nothing, however, in
this circumstance to make Mr. Lepine suspicious unless he
happened to remember that he had observed something
similar when he was conducting the audits of 1919 and 1920.
But to suggest that he was guilty of negligence because in
1921 he failed to recollect what he had seen in 1920 is, I
think, to lack a sense of proportion. Jf Mr. Lepine’s duty
had been confined to the audit of the Treasury Bills account
I could understand the suggestion. But when the magnitude
of his task in each year is really understood, the suggestion
of negligence in this respect cannot be sustained for one
moment. It is, however, pointed out that when conducting
the audit for the year 1921 Mr. Lepine had before him in
one and the same folio of the investment ledger Treasury
Bills account, the records of the sale in March, 1919, the
purchase in February, 1920, the sale in March, 1920, and
the purchase in February, 1921, and that, apart from all
question of memory he was negligent, when conducting the
1921 audit, in not seeing all these four entries, and drawing
from them the obvious conclusion. When looking at this
folio merely for the purposes of this case, I agree that the

495

C. A.
1924

—
Crry Equit-
ABLE FIRE
INSURANCE
Co.,
In re.

Romer J.

496 CHANCERY DIVISION. [1925]

c. A. entries, which are few, do plainly lead to the conclusion that
1924 window dressing was taking place. But I cannot see that
Crry Equir- Mr. Lepine, when looking at the folio for the purposes of
ee his 1921 audit, was in any way negligent in not arriving at
a __ the same conclusion. In conducting the audit for one year,
== he had enough to do in all conscience without looking again

— at the entries that he had examined, checked and ticked off
in the books in the audit of the year before. I cannot hold
the auditors guilty of negligence because Mr. Lepine did not
discover Bevan’s fraud in the matter of window dressing
from his inspection of the company’s books. Ought he
then to have discovered it by insisting on an inspection of
the Treasury Bills and, in the case of the year 1921, of the
National War Bonds? What he did in fact in each of the
three years in question was to accept a certificate from
Ellis & Co. that on February 28 or 29, as the case might be,
they held, on account of the company, the Treasury Bills
and National War Bonds, as well as various other securities
of the company that were or were supposed to be in their
possession. Mr. Lepine did not insist on a personal inspection
of these various securities. Had he done so, he would have
discovered that the bills and bonds had been sold soon after
the date of the purchase, and the window-dressing nature of
the transaction would have been made clear. The question
of whether he was justified in accepting these certificates
from Ellis & Co. instead of inspecting the bills and bonds
personally raises the whole question as to the duty of an
auditor in relation to inspection, and must be considered
in connection with the third head under which Messrs.
Langton & Lepine are charged with negligence. The
charge under that head is, in effect, that the auditors are
responsible for the damage occasioned to the company,
amounting to some 47,000/., by reason of the pledging by
Ellis & Co. to their customers and the consequent loss of
various securities of the company, in the possession of that
firm. It is said by the Official Receiver that this loss would
not have occurred had Mr. Lepine insisted on personally
inspecting the securities instead of accepting Ellis & Co.’s

1 Ch. CHANCERY DIVISION. 497

certificates, and the Official Receiver makes the charge that, . A.

in not undertaking this personal inspection, Mr. Lepine was _1924

guilty of negligence. With this charge I must now deal. — crry Equir-
That it is the duty of a company’s auditor in general to *22% P=

INSURANCE
satisfy himself that the securities of the company in fact ©.

exist and are in safe custody cannot, I think, be gainsaid. = —
If authority for the proposition be required, it may be eee
found in the passage from Lindley L.J.’s judgment in the
London and General Bank case (1), which has already been
referred to. The auditor in that case, amongst other things,
“saw that the bills and securities entered in books were
held by the bank,” and this the Lord Justice plainly treated
as being part of an auditor’s “legal standard of duty,”
though he did not of course mean that in all cases the bills
and securities should be lodged with the bank. He meant
“with the bank or in other proper custody.” Nor is it at
all clear whether the Lord Justice meant that in all cases
the securities should be personally inspected by the auditor.
For an auditor may “ see ’”’ that the bank holds the securities
in the sense that he satisfies himself of the fact. In the case
of a responsible and reputable bank this, according to the
evidence of Mr. Van de Linde, would seem to be the custom
of auditors. But I think that it is a pity that there should
be any such custom. It would be an invidious task for an
auditor to decide as to any particular bank whether its
certificate should be accepted in lieu of personal inspection.
The custom, too, at once raises the question, much debated
in the course of the evidence before me, whether the courtesy
of accepting a certificate should be extended to an insurance
company or a safe deposit company. Indeed, if once it be
admitted that, in lieu of inspecting the securities personally,
the auditor may rely upon the certificate of the person in
whose custody the securities have properly been placed, the
auditor would be justified in accepting the certificate of any
official of the company who happened to be in charge of the
safe in which the securities are placed, supposing such official
to be a reputable and responsible person. At some time or

(1) [1895] 2 Ch. 673, 682-684.

498

Go A.
1924

Ree
Crry Equit-
ABLE FIRE
INSURANCE
Co.,

In re.

Romer J.

CHANCERY DIVISION. [1925]

another it will, I think, have to be considered seriously
whether it is not the duty of an auditor to make a personal
inspection, in all cases where it is practicable for him to
do so, whatever may be the standing and character of the
person or company in whose possession the securities happen
to be. I do not, however, propose to investigate this
question further upon the present occasion. For an auditor
is not, in my judgment, ever justified in omitting to make
personal inspection of securities that are in the custody of
a person or company with whom it is not proper that they
should be left, whenever such personal inspection is practicable.
And whenever an auditor discovers that securities of the
company are not in proper custody, it is his duty to require
that the matter be put right at once, or, if his requirement
be not complied with, to report the fact to the shareholders,
and this whether he can or cannot make a personal inspection.
The securities retained in the hands of Ellis & Co. for periods
long beyond the few hours in which securities must necessarily
be from time to time in the possession of the company’s
stockbrokers were not in proper custody. That Ellis & Co.
were at all material times regarded, and reasonably regarded,
by Mr. Lepine as a firm of the highest integrity and financial
standing is not to the point. A company’s brokers are not
the proper people to have the custody of its securities,
however respectable and responsible those brokers may be.
There are, of course, occasions when, for short periods,
securities must of necessity be left with the brokers, but
the moment the necessity ceases the securities should be
lodged in the company’s strong room or with its bank, or
placed in other proper and usual safe-keeping. In my
judgment, not only did Mr. Lepine commit a breach of his
duty in accepting, as he did, from time to time the certificate
of Ellis & Co. that they held large blocks of the company’s
securities, but he also committed a breach of his duty in
not either insisting upon those securities being put in proper
custody or in reporting the matter to the shareholders. This
was negligence, and, but for art. 150, it would be my duty
so to declare and to order Messrs. Langton & Lepine to make

1 Ch. CHANCERY DIVISION.

compensation for all the damages that such negligence caused
to the company, directing an inquiry to ascertain what those

499

CaaS
1924

damages were. For it is settled, by authorities that are Crry Equrr-
ABLE FIRE
INSURANCE

binding upon me, that an auditor is an officer of the company
within the meaning of s. 215 of the Companies (Consolidation)
Act, 1908, though Mr. Stuart Bevan, while admitting that it
was not open to him to argue the contrary in this Court,
reserved to his clients the right to contest the point in a
superior one. But art. 150 in express terms includes the
auditors of the company in the protection that it gives, and
it must be taken to be one of the terms upon which the
auditors were employed and gave their services. They are,
therefore, protected, unless the negligence of Mr. Lepine in
the matter was wilful. This it certainly was not, unless I
am mistaken as to the true meaning of the phrase “ wilful
negligence.” I have heard Mr. Lepine’s evidence in the
witness box, and I have inspected many of the numerous
documents prepared by him for the purposes of the audits
that he conducted. I am convinced that throughout the
audits that he conducted he honestly and carefully discharged
what he conceived to be the whole of his duty to the company.
If in certain matters he fell short of his real duty, it was
because, in all good faith, he held a mistaken belief as to
what that duty was. As against him and his partner, the
application of the Official Receiver must accordingly be
dismissed.

It only remains to deal with the costs of this application.
As against the respondent Bevan, the Official Receiver is
entitled to an order for payment of his costs, except in so far
as they have been increased by reason of the joinder of the
claims against the other respondents. As regards the costs
of the other respondents I order the Official Receiver to pay
them out of the assets, and also to retain out of the assets
his own costs, so far as he does not recover them from Bevan.
I am aware that there have been cases in which the Court,
while unable to fix a director with liability for breach of duty,
has, nevertheless, left him to pay his own costs as a penalty
for conduct in his capacity of director of which the Court did

=

Co.,
In re.

Romer J.

500 CHANCERY DIVISION. [1925}

c. A. not approve. In the present case, both the auditors and the
1924 respondent directors failed in some matters to perform their
Guy Hours strict duty, and, but for the provisions of art. 150, I should
ABLE FIRE have had, in respect of those matters, to grant some relief

INSURANCE
Aeon , the Official Receiver. But it would not, in my opinion,
Rona y, be right on this ground to refuse to give them their costs.
mes If I were to do so in such a case as the present, I should, in
effect, be depriving them to a material extent of the protection
which that article affords, and for which they must be deemed
to have stipulated as a condition of the service that they

undertook to render.
R. M.

C. A. The Official Receiver appealed from this decision so far as
it affected the auditors, Messrs. Langton & Lepine. The
appeal was heard on July 3, 4, 7, 8, 9, 10 and 11, 1924.

' Topham K.C., C. A. Bennett K.C. and Harold Christie
for the appellant repeated in substance the arguments used
by them in the Court below and referred to the following
authorities : In re London and General Bank (No. 2) (1); In
re Kingston Cotton Mill Co. (No. 2) (2); In re Owens (8);
Mucklow v. Fuller (4); Fenwick v. Greenwell (5); Drosier v.
Brereton (6); Dix v. Burford (7); Chapman v. Browne (8) ;
In re Brier (9); Robinson v. Harkin (10) ; Dovey v. Cory (11) ;
In re Young and Harston’s Contract (12); In re Mayor of
London and Tubbs’ Contract (13); Bennett v. Stone (14); Lewis v.
Great Western Ry. Co.(15); Forder v. Great Western Ry. Co. (16);
Leeds City Brewery Ld. v. Platis (17); Davidson’s Precedents
in Conveyancing, 3rd ed., vol. ili, Part I., p. 247.

Stuart Bevan K.C. and George Phillips for the respondents
were not called upon to argue.

(1) [1895] 2 Ch. 673. (10) [1896] 2 Ch. 415.

(2) [1896] 2 Ch. 279. (11) [1901] A. GC. 477; [1899]
(3) (1882) 47 L. T. 61. 2 Ch. 629.

(4) Jac. 198. (12) 31 Ch. D. 168.

(5) (1847) 10 Beav. 412. (13) [1894] 2 Ch. 524.

(6) (1851) 15 Beay. 221. (14) [1903] 1 Ch. 509.

(7) 19 Beay. 409. (15) 3Q. B.D. 195.

(8) [1902] 1 Ch. 785. (16) [1905] 2 K. B. 532.

(9) 26 Ch. D. 238. (17) Post, p. 532 n.

1 Ch. CHANCERY DIVISION.

Pottock M.R. This case is important in the sense that
it has arisen in the course of the liquidation of a notable
reinsurance company with many and considerable liabilities.
The company was at one time prosperous, and in a short
time it was brought to a tragic end by the fraud of its
chairman, who was later convicted and sentenced to a term
of imprisonment. Its downfall has involved many persons
in its ruin and consequent suffering to them. But no
development of the law is involved in its termination and
the problems raised can be solved by the application of
principles already well ascertained. In the course of the
liquidation of the City Equitable Company a summons for
misfeasance under s. 215 of the Companies (Consolidation)
Act, 1908, was taken out by the liquidator against the
directors of the company and Messrs. Langton & Lepine,
who had for some years acted as auditors of the company.
Messrs. Langton & Lepine are auditors of good standing
in the City of London, and the appeal is in respect of
a judgment given by Romer J. wpon the case as presented
against them. The learned judge after a long and careful
trial came to the conclusion that the liquidator was not
entitled to recover from the directors, and the result of his
judgment was the same as against the auditors. But the
liquidator has appealed before us claiming that the judgment,
so far as it has held that the auditors were not liable, ought
to be reversed.

I do not propose to restate all the facts. Romer J.,
in a judgment which deserves more than a passing word of
appreciation for its grasp of the details of a long and com-
plicated case, and its co-ordination of the facts, as well as
its application of the law to them, has fully presented the
facts, and I do not think that his conclusions upon them
have been challenged by Mr. Topham on this appeal. I
shall therefore not endeavour to recapitulate the facts, but
I shall merely refer to such of them as may be necessary.

Before dealing however with the claim against the auditors
I must, in order to make my judgment intelligible, first
refer to certain features which have been the subject more

Vou. I. 1925. 2Q 1

501

CA:
1924

ed
Crry Equit-
ABLE FIRE
INSURANCE
Co.,
In re.

502 CHANCERY DIVISION. [1925]

Cc. A. particularly of discussion in this Court. The balance sheets
1924 of the City Equitable Fire Insurance Company for the
Orry Equrr- years 1919, 1920 and 1921, were all audited by Messrs.
ee Langton & Lepine, and they all contain the proper statement :
In 2. | We have obtained all the information and explanations
Pollock Lk, We have required. In our opinion such balance sheet is
ae properly drawn up so as to exhibit a true and correct view
‘of the state of the company’s affairs according to the best

of our information and the explanations given us as shown

by the books of the company.” But it is said as against
Messrs. Langton & Lepine that they were guilty of a dereliction

of their duty as auditors, and that if they had fulfilled that

duty the disaster which overtook the company would not

have occurred; or, at any rate, would not have been of such
magnitude, and some of the losses incurred by the company

would have been avoided. It is, I think, important to
mention one or two of the features of these balance sheets.

We have before us a very careful and helpful summary of

the errors in the balance sheets, and it appears that in each

of the balance sheets a course was adopted whereby it was

made to appear that there were a larger number of invest-

ments in British Government securities than was in fact

the case. It is also said that a larger amount was
represented as being loans at call or short notice than

was the fact, that instead of securities being available

in the hands of the company itself or of its bankers,

some of them were in the hands of Ellis & Co., and in fact

had been pledged by them, and that if the auditors had

been more careful they would have discovered these dis-
crepancies between the real facts and those which were
presented in the balance sheets. Passing to the balance

sheet for 1920 it appears to me that in that there was
included in the loans at call or short notice a sum of 52,0001.,

which was due from Mr. Mansell, the general manager of the

City Equitable Company, and also a sum of 11,000/., which

was due from Ellis & Co. There were also the same features

with regard to apparent investments in Government securities

which were not truly made, and there was a considerable

1 Ch. CHANCERY DIVISION.

and increased sum due from Ellis & Co. The last balance
sheet differs in one respect from the other balance sheets,
inasmuch as instead of the loans being described as “ at call
or short notice” they are described as “loans” only. It
appears that the loan to Mansell, which had grown from
over 6000/. in 1919 to 52,000]. in 1920, had reached a figure
of 96,0007. in 1921. The sum due from Ellis & Co. in 1921
was over 73,000/., but was included in ‘‘ Cash at bank or
in hand,” and there was, contrary to the fact, a very much
larger representation of investments in Government securities.

Now when one approaches this case, quite apart from the
question of iaw with which I shall have to deal later, it is
of the first importance to remember that one is looking into
facts which have been subjected to the scrutiny and have
been explained by the ability of accountants who have come
in to look at all the books, and not only the books of the
City Equitable Company but also the books of Ellis & Co.
It is not easy to reconstruct the true position as it stood before
the auditors when they were called upon to do their duty in
the three successive years in which their conduct is challenged.
It is also proper to remember that when a big disaster has
occurred, such as the failure of this company, which, as I
have said, was a notable company in its day, there is, on
the part of some, a desire to find a scapegoat who can be
made responsible, and possibly make good some of the losses
which have occasioned disaster to so many. But it is the
duty of the Court, as far as possible, to endeavour to ascertain
what was the problem presented to the auditors, and
what was the knowledge available to them at the time.
It is right, and this is fully recorded in Romer J.’s
judgment, to say that the audit in these three successive
years, which was carried out by Mr. Lepine, the partner
entrusted with it, was carried out with diligence and care.
It occupied something like from six to eight weeks, and in
a passage in his judgment Romer J. gives a striking testimony
from the evidence, to which he adds his own authority, to
show that he was quite satisfied that Mr. Lepine had been
both diligent and discriminating and had endeavoured to

2Q2 1

503

C. A.
1924

ae
Crry Eeurir-
ABLE FIRE
INSURANCE
Co.,
In re.

Pollock M.R.

504

Cc. A.
1924

ee:
Crry Equit-
ABLE FIRE
INSURANCE
Co.,
In re.

Pollock M.R.

CHANCERY DIVISION. [1925]

bring the very best of his abilities to bear on the problem
before him. Romer J. cites a passage from the evidence
of Mr. Van de Linde, who testified to the care and accuracy
displayed by Mr. Lepine in the audit. Mr. Van de Linde
says this: ‘‘ As far as the figures are concerned, I think
there is great accuracy right through,’ and then in
reply to this question: “In fact, throughout, always putting
aside these matters we have to address ourselves to, speaking
generally, throughout, the greatest care was shown and
accuracy achieved ?”’ he answered: “Yes.” The learned
judge at the close of his judgment says that he is convinced
“that throughout the audits Mr. Lepine conducted, he
honestly and carefully discharged what he conceived to be
the whole of his duty to the company.” That judgment
was delivered after the learned judge had had an opportunity
of hearing a great number of cases cited to him, a good
number of addresses from counsel, and after he had spent
many days in the hearing and trial of the case. I should
like myself to add that upon the facts presented to us, it
appears that Mr. Lepine did discover and ask for explana-
tions which do him credit, for it must be remembered that
he had to overcome—if he was to succeed in the task
which it is now suggested he ought to have succeeded in
—the cunning of a dishonest chairman, and he had to
circumvent the ingenuity of the general manager, who
was concerned at the same time in obtaining for himself
an agreement which I should describe as a fraudulent agree-
ment on the face of it. Mr. Lepine had, therefore, set before
him a task which must be a difficult one at any time, but
one about which, if he failed in it, there would only have
been recorded of him that he failed to do what would have
been a very signal achievement if he had succeeded ; because
we are to remember not only what was the position of the
City Equitable Company, its directors and its chairman, but
the position of Ellis & Co. Ellis & Co., of which the chairman
of the company, Mr. Gerard Lee Bevan, was the senior partner,
was a firm of stockbrokers of good standing and large business
on the London Stock Exchange. Mr. Bevan was a man

1 Ch. CHANCERY DIVISION.

credited with very great ability and of great reputation
as a financier. Mr. Lepine did discover in the course of his
inquiries three points which I desire to mention. With
regard to the loan to Mansell he pointed out in 1920 that it
had reached a figure of 52,000/., whereas the only minute
he could find relating to it authorized a sum of 15,0001. and
not more to be advanced to Mansell. He made inquiries,
and he received the answer from Mr. Bevan himself that
a minute would be duly recorded authorizing the loan up
to the amount at which it stood—namely, 52,0001. It
appeared to be» regular to Mr. Lepine from this fact, that
all the cheques by which the loan had been made, and some
slips attached to them, if I read the evidence rightly, bore
the signatures of directors, so that it was not a case in which
the manager appeared to be helping himself to the money
of the company, but one in which the directors were placing
in the manager’s hands, for some reason which Mr. Lepine
may or may not have appreciated, sums which totalled up
to 52,0007. But Mr. Lepine did discover the discrepancy
between the amount of the authorized loan and the amount
of the actual loan, and he required and was promised that
the matter should be regularized in due course by a minute.
Again in 1920 he discovered a matter which he also desired
to put right. There was an investment in which the City
Equitable Company was concerned in some ranch in Brazil,
and payments were made, apparently through Ellis & Co.,
for the development of that ranch, but it appeared that in
the course of 1920, or at the time the balance sheet of 1920
was produced, a sum of 161,000/. had been paid through
Ellis & Co. to the account or for the purposes of the develop-
ment of the ranch, and Mr. Lepine discovered that the actual
amount authorized according to the minute was 150,000/.
and no more. We are told that Ellis & Co. in some way, or
the partners of Ellis & Co., or Mr. Bevan, or, at any rate, one
of what I may call the group of persons concerned, who would
be in touch with Mr. Lepine, were also interested in this
adventure. When Mr. Lepine called attention to the fact
that 161,000/. had been sent or dispatched or placed in

505

C..A.
1924

——
Crry Equrr-
ABLE FIRE
INSURANCE
Co.,

In re

Pollock M.R.

506

C. A.
1924

—

Crry Equit-

ABLE FIRE
INSURANCE
Co.,

In re.

Pollock M.R.

CHANCERY DIVISION. [1925]

Ellis & Co.’s hands for the purpose of the ranch, and he pointed
out that it exceeded the authorized amount by 11,000/., he
was then told either by Mansell or by Mr. Bevan that
under the circumstances Ellis & Co. would debit it to their
account. I suppose in business that meant this, that it was
not a matter of very great concern, if all had gone well,
whether this money was advanced to the ranch by Ellis & Co.
or a partner in Ellis & Co., or one of the persons concerned
in it. The sum of 11,000/. was comparatively not a very
large one, and whether it was debited to one account or
another was a matter of little moment. As a matter of fact,
in consequence of the information Mr. Lepine received, it
was debited to Ellis & Co., and at that time I think there is
no doubt from the evidence that Ellis & Co. could have
drawn, or certainly were supposed to be able to draw, a
cheque at any time for 11,000/., and that 11,0000. is found
included in the sums at call or short notice. But it is due to
Mr. Lepine to say that his diligence did bring him to discover
what at any rate was not presented to him in a light which
made it easy to discover, and which must have required some
accuracy or persistence on his part, first of all to discover,
and then to put right. I will mention another matter.
There were these so-called ‘“‘ window-dressing’’ schemes.
Here I think one has to be very careful, because at the end
of each year the auditor would discover what had happened
down to February 28, the date at which the accounts closed,
but he would not necessarily know what had happened in
that part of the subsequent year during which he was making
up the balance sheet, or rather conducting the audit. It
is true that if you take the three balance sheets together
and cast them in the form of a chart, you can see that an
increasing amount of window-dressing was going on, and on
the chart you will find that there is a rise in the figures which
are manipulated for the purpose of window-dressing, and
therefore it is easy to read a danger signal from such a chart.
No such chart was available to Mr. Lepine, and we have to
take the books singly which were before him and the books,
be it remembered, of the City Equitable Company only.

1 Ch. CHANCERY DIVISION.

It is not right to treat the evidence which is now before us
and its significance as being plain in the years 1919, 1920
and 1921 to Mr. Lepine. For my part, I desire to accept
the admirable summary which the learned judge has given
of the facts. I have only referred to those two or three out-
standing features because they are the salient points in
charges which are now made against the auditors.

Now the claim is brought in accordance with the procedure
which is rendered available by s. 215 of the Companies
(Consolidation) Act, 1908, and as an argument was presented
to us for which some foundation could be suggested based in
substance upon s. 215, I desire to say, though this is not the
first time that it has been said, that that section deals only
with procedure and does not give any new rights. It provides
a summary mode of enforcing existing rights; and I think
that is abundantly shown by Coventry and Dixon’s Case (1) ;
In re Brazlian Rubber Plantations and Estates, Ld. (2); and
Cavendish Bentinck v. Fenn.(3) In Cavendish Bentinck
v. Fenn (3) Lord Macnaghten gives in a sentence or so the
principle of which the other cases are illustrations. He says:
‘That section creates no new offence, and . . . . it gives
no new rights, but only provides a summary and efficient
remedy in respect of rights which apart from that section
might have been vindicated either at law or in equity.”
Then he goes on: “It has been settled that the misfeasance
spoken of in that section is not misfeasance in the abstract,
but misfeasance in the nature of a breach of trust resulting
in a loss to the company.” It is also true that the share-
holders of the company are entitled to the protection which
is given them by statute. Mr. Topham tried to suggest,
if I properly understood him, that some protection is
to be found in s. 215, and that for the purposes of the
article, which I shall have to deal with in a moment,
protection which is given by statute cannot be overcome
by an article. There is no doubt that shareholders are
entitled to protection, and illustrations of the protection

(1) (1880) 14 Ch. D. 660. (2) [1911] 1 Ch. 425.
(3) 12 App. Cas. 652, 669.

507

C. A.
1924

es,
Crry Equrt-
ABLE FIRE
INSURANCE
Co.,
In re.

Pollock M.R,

508

C. A.
1924

—

Crry Equrt.

ABLEY FIRE
INSURANCE
Co.,

In re.

Pollock M.Ry

CHANCERY DIVISION. [1925]

to which they are entitled may be found in In re Peveril
Gold Mines, Ld. (1); Payne v. The Cork Co. (2) ; and Newton v.
Birmingham Small Arms Co. (3) Taking that last case, as
to which I desire to say a word or two, it was there attempted
by means of an article to prevent a disclosure being made
of a reserve fund to which a portion of the profits of the
company was transferred, and it was held that this could
not be done by resolutions or by articles, because any such
resolution or article would be inconsistent with the obligations
imposed upon the auditors by s. 23 of the Companies Act,
1900, which was then the section in force. No doubt, there-
fore, we must take it, as in these cases and in a number of
other illustrations, that the shareholders are entitled to
receive the protection given to them by statute in the par-
ticular facts and by the particular section referred to in those
cases.

I come therefore to consider what is the protection in
relation to auditors which is given by statute, and that is to
be found in s. 113, sub-s. 2, of the present Companies Act.
By that sub-section it is provided that “The auditors shall
make a report to the shareholders on the accounts examined
by them, and on every balance sheet laid before the company:
in general meeting during their tenure of office, and the
report shall state—(a) whether or not they have obtained
all the information and explanations they have required ;
and (6) whether, in their opinion, the balance sheet referred.
to in the report is properly drawn up so as to exhibit a true
and correct view of the state of the company’s affairs according
to the best of their information and the explanations given
to them, and as shown by the books of the company.”” Now
the balance sheets for the three successive years I have referred
to in form complied with that section. They all contain
the usual statement made by auditors, so that prima facie
the auditors here have discharged their duty.

It is said that these auditors have failed, and failed
particularly in their duty in respect of three matters charged

(1) [1898] 1 Ch. 122. (2) [1900] 1 Ch. 308.
(3) [1906] 2 Ch. 378.

1 Ch. CHANCERY DIVISION.

against them. Those three matters are set out by the learned
judge in his judgment. They are: “(1.) Their misdescrip-
tions in the balance sheets of the debts of Ellis & Co. and
Mansell by including them under ‘Loans at call or short
notice ’ or ‘ Loans,’ or in the case of part of Ellis & Co.’s debt
under the heading of ‘ Cash at bank and in hand,’ and their
consequent failure to disclose to the shareholders the existence
of those debts. (2.) Their failure to detect the fact that
much larger sums were in the hands of Ellis & Co. at the
date of each of the balance sheets than were so included.
(3.) Their failure to detect and report to the shareholders the
fact that a number of the company’s securities, which were
in the custody of Ellis & Co., were being pledged by that
firm to its customers.”’

What is the standard of duty which is to be applied
to the auditors? That is to be found, and is sufficiently
stated, I think, in In re Kingston Cotton Mill Co. (No. 2). (1)
As I have already said it is quite easy to charge a
person after the event and say: “ How stupid you were
not to have discovered something which, if you had discovered
it, would have saved us and many others from many sorrows.”
But it has been well said that an auditor is not bound to be a
detective or to approach his work with suspicion or with a
foregone conclusion that there is something wrong. “ He is
a watchdog, but not a bloodhound.” That metaphor was
used by Lopes L.J. in In re Kingston Cotton Mill Co.
(No. 2). (2) Perhaps, casting metaphor aside, the position
is more happily expressed in the phrase used by my brother
Sargant L.J., who said that the duty of an auditor is
verification and not detection. The Kingston Cotton Mill
case (1) is important, because expansion is given to those
rather epigrammatic phrases. Lindley L.J. says (3): “It
is not sufficient to say that the frauds must have been
detected if the entries in the books had been put together
in a way which never occurred to any one before suspicion was
aroused. The question is whether, no suspicion of anything

(1) [1896] 2 Ch. 279. (2) 1bid. 288.
(3) Thid. 287.

509

C. A.
1924

Ses
Crry Equrit-
ABLE FIRE
INSURANCE
Co.,

In re.

Poliock M.R.

510

C. A.
1924

——
Crry Equit-
ABLE FIRE
INSURANCE

Co.,

In re.

Pollock M.R.

CHANCERY DIVISION. | [1925]

wrong being entertained, there was a want of reasonable
care on the part of the auditors in relying on the returns
made by a competent and trusted expert relating to matters
on which information from such a person was essential.”
The judgment of Lopes L.J. as well as that of Kay L.J. may
be looked at in support of the words of Lindley L.J., and
also in support of what I have called the epigrammatic way
of putting the auditors’ duty. Now let us apply that to
the present case. Mr. Lepine went in and spent six or eight
weeks with his clerks upon these books. In many ramifica-
tions of the City Equitable Company he finds, on the whole,
that all the entries are properly made and all the accounts
are in order. He finds in particular that a larger sum has
been lent to Mansell than was authorized, but he finds
that apparently it was the practice of the directors to pay ©
cheques to him. He finds that the amounts of the cheques
which were drawn in his favour were entered up. It is not a
case in which the cheques had been drawn and not entered or
found in the books in which they ought to have been found,
but the sum was not the sum authorized, though it was all
there in the books, and he turns for guidance and advice to
those persons from whom he is entitled to receive guidance
and advice. He turns to the chairman, whose position at
that time I have described, and he turns to Mansell, who is
obviously a man of commanding position, and on all occasions
on which he does so he gets from them satisfactory answers or
satisfactory promises, and then one applies this test at a time
when no suspicion of anything wrong was entertained—was
there a want of reasonable care on the part of the auditors in
relying on facts given by competent and trusted experts relating
to matters in respect of which information from such persons
was essential? I think you can put it interrogatively in
this way : Who could be trusted, who could give the informa-
tion, where would you seek for it more authoritatively than
from Mr. Bevan and Mansell? It seems to me that when
you apply the standard of care to be exercised, you find
that in the course of the audit Mr. Lepine has prima facie
applied or conformed to the right standard as laid down

1 Ch. CHANCERY DIVISION. 511

by the Court of Appeal, a standard to which, on the facts, ©. A.
Romer J. says he did conform. His diligence is undoubted, 1924
and for my part, as I have said, I think that you ought to omy Equrr-
give weight to what Mr. Lepine in fact did discover as indicat- 42°" P@=
ing that he was on the path to discover, if he possibly could, Co.,
anything that was awry, and that so far from showing negli- Ea
gence or carelessness or not caring how the thing was done am
and simply trusting wholly to the books, and to Mansell
and to Mr. Bevan, you do find in the cases where he was
successful in detecting something that was awry, illustration
of his diligence and determination to discover what was
discoverable.

Now, dealing therefore with the first two claims—that is the
claim in respect of the loans at call or short notice—Mr. Lepine
had, it seems to me, information which would justify him
in putting down those items as loans, and I agree with the
learned judge that the putting in of the words “at call or
short notice’ really was not misleading, and did not cause
any wrong result. The learned judge says: ‘If the descrip-
tion of them in the balance sheet as ‘loans’ would have induced
any director or shareholder to make some inquiry as to their
nature, which he was induced to refrain from making by
reason of their description as ‘loans at call or short notice,’
the matter would be different. But not only is this inherently
improbable, there is actual evidence that it was not so.”
Then he points out that there was a variation between “ loans
at call or short notice’ and ‘‘ loans,” and that the attention
of Mr. Milligan, one of the respondent directors, was called
to it, and he made some inquiries about it upon which some
plausible explanation was received from Mr. Bevan merely
on the point as to why the loans were so large, not as to what
their character was, and whether they were at call or short
notice, because be it remembered at that time the company
was in good credit, and I do not suppose that the idea that
they would ever be pressed or be in any embarrassment if
they required money, and had to turn outside their own circle
for it, would have created any difficulty at all in the minds
of those who either were directors or were constantly dealing

512 CHANCERY DIVISION. [1925]

Cc. A. with them. It seems to me, therefore, that the learned judge
1924 is quite right in the way he deals with the first claim. Then

——

Crry Equir- I come to the second. ‘‘ Their failure to detect the fact that
eee much larger sums were in the hands of Ellis & Co. at the date
and _ of the balance sheet than were so included.” I will come to
Pollok mr, the question of the signed certificates in a moment, but the
= mere fact that Ellis & Co. at that time owed 73,000/., or that
they put down 11,000/. to Ellis & Co. does not seem to me to
indicate a danger signal at all. So far as any answers were
to be received, or likely to be received, they would be favour-
able both to Ellis & Co. and to the City Equitable Company,
but where you have an atmosphere of complete confidence,
indeed of a confidence based on success up to that time in
financial matters, it seems to me that there is no reason to
hesitate about accepting the view which the company at that
time presented to them in their draft balance sheet, that this
was a way, and a legitimate way of dealing with the over-
plus of money due on the Brazilian ranch account, or money
due at that time from Ellis & Co., and the fact that
Mr. Lepine was unsuccessful in detecting the cunning is
quite another matter from saying that he failed to use com-
petence and intelligence in conducting his duties.

Now I come to the last point, part of which is contained in
the third charge, and that is the failure to detect that much
larger sums were in the hands of Ellis & Co. at the date of the
balance sheet, and the failure to detect and report that the
securities were in the hands of Ellis & Co. Upon that matter
I wish to say a word or two as to the evidence. In fact
Mr. Lepine inquired of the bank and obtained a certificate
from it that a certain number of securities were in its hands,
and he then turned to Ellis & Co., and he received from them,
under the signature of Ellis & Co., a certificate attached to
the document, apparently not by Mr. Bevan, but by one of
the partners, that a number of securities were in the hands,
of the stockbrokers. It is said it was quite wrong to accept
the certificate of the stockbrokers, and we are asked to accept
the evidence of Mr. Cash and Mr. Van de Linde as meaning
this, that you may accept the certificate of a bank apparently

1 Ch. CHANCERY DIVISION.

in all cases, but you may never accept the certificate of stock-
brokers. I cannot agree that the evidence is to be so read,
or was intended by the witnesses to be so understood. What
I think the witnesses meant to express was this: Banks in
ordinary course do hold certificates of securities for their
customers ; it is part of their business to do so, and therefore
certificates in the hands of bankers are in their proper custody,
and if a bank is a reputable bank, you may legitimately
accept the certificate of that bank, because it is a business
institution in whose custody you would expect both to find
securities, and also it is respectable; but the fact that it
calls itself a bank does not seem to me to conclude the matter,
either one way or the other. On the other hand, it may be
said that it is the duty of an auditor not to take a certificate
as to possession of securities, except from a person who is
not only respectable—I should prefer to use the word “ trust-
worthy ’’ —but is also one of that class of persons who in the
ordinary course of their business do keep securities for their
customers. It may be said that a stockbroker does not in
the ordinary course of his business keep securities for his
customers, and therefore he is ruled out because the auditor
ought not to accept from a person of that class, whether he
be respectable or not, a certificate that he has securities in
his hands. Now, accepting the rule as so stated, that it is
right to find the securities in the hands of a bank, whose
business it is to hold securities, and applying the proviso
that the bank must be one that is trustworthy, it seems to
me that the rule may prima facie be a right one to follow ;
but it is going too far to say that under no circumstances
may you be satisfied with a certificate that securities are in
the hands of a stockbroker, because it seems to me that: in
the ordinary course of business you must from time to time,
and you legitimately may, place in the hands of stockbrokers
securities for the purpose of their dealing with them in the
course of their business. With a large institution like the City
Equitable Company, having a very considerable number of
investments to make and securities to sell, it may well be that
for the convenience of all parties it may have been a useful

613

C. A.

1924
~—
Crry Equit-
ABLE FIRE

Pollock M.R.

514

Cc. A.
1924

3
Crry Equitr-
ABLE FIRE
INSURANCE
Co.,

In re.

Pollock M.R.

CHANCERY DIVISION. [1925]

method of business even if examined with the most exiguous
care, for the directors to have decided that they would in the
interests of their business leave securities of a considerable
amount in the hands of their stockbrokers, who, I suppose,
at that time held a position not less trustworthy or
respected than the City Equitable Company itself. I do not
wish in any way by anything that I say to discharge the
auditors from their duties as laid down in the Kingston
Cotton Mill case (1), far less do I wish to discharge them from
their duty of seeing that securities are held and accepting
the certificate that they are so held only from a respectable,
trustworthy and responsible person, be that person a bank
or an individual; but in applying my mind to the facts of
this case I am not content to say that simply because a
certificate was accepted otherwise than from a bank therefore
there was necessarily so grave a dereliction of duty as to make
the auditors responsible. In my opinion it is for the auditor
to use his discretion and his judgment, and his discrimination
as to whom he shall trust; indeed, that is the right way to
put a greater responsibility on the auditors.

If you merely discharge him by saying he accepted the
certificate of a bank because it was a bank you might lighten
his responsibility. In my view he must take a certificate
from a person who is in the habit of dealing with and holding
securities, and whom he, on reasonable grounds, believes to
be, in the exercise of the best judgment, a trustworthy person
to give such a certificate. Therefore I by no means derogate
from the responsibility of the auditor, I rather throw a greater
burden upon him; but at the same time, I throw a burden
upon him in respect of which the test of common sense and
business habits can be applied, rather than impose on him
a rigid rule which is not based on any principle either of
business or common sense.

So we come to the responsibility which the learned
judge finds, and I think rightly, falls upon Mr. Lepine. Now
what is that? He finds that in respect of these securities
Mr. Lepine did what he ought not to have done by accepting

(1) [1896] 2 Ch. 279.

1 Ch. CHANCERY DIVISION.

from Ellis & Co. a statement of the securities which they, at
that time, declared that they held. The learned judge says:
“In my judgment, not only did Mr. Lepine commit a breach
of his duty in accepting, as he did, from time to time the
certificate of Ellis & Co. that they held large blocks of the
company’s securities, but he also committed a breach of his
duty in not either insisting upon those securities being put
in proper custody, or in reporting the matter to the share-
holders.” As I have said, the learned judge also finds that
in what he did Mr. Lepine acted honestly and in all good
faith, “‘ holding the mistaken belief as to what his duty was.”
I agree with the learned judge. It seems to me that
Mr. Lepine has made a mistake, and a grave mistake. In
justification of him it may be said that every artifice was
brought into play in order to deceive him, and to maintain
the apparent responsibility and trustworthiness of Ellis & Co.
But that does not discharge him from having put aside what
I described to Mr. Topham as the rule of the road applied
with the proviso as to business rules and common sense.
Mr. Lepine would, prima facie, be liable in respect of that
dereliction of duty. But then we find that art. 150
contains important words limiting the responsibility of the
officers of the company, including the auditors, who are not
to be liable for any “loss, misfortune, or damage which may
happen in the execution of their respective offices or trusts,
or in relation thereto, unless the same shall happen by or
through their own wilful neglect or default respectively.” I
do not agree with the argument that that article is ultra
vires. It does not, in my opinion, offend at all against s. 113
in the sense that it is a contradiction of it. Sect. 113 in
laying statutory duties upon the auditors calls on them to
exercise those duties, according to the best of their informa-
tion and the explanations given to them and as shown in the
bocks of the company. Once you have any duty to be
performed according to the information given, and explana-
tions offered, you obviously have introduced matters in which
discretion is to have play, and it seems to me that the article
may quite properly be valid in the sense that it is to discharge

515

C. A.
1924

acs,
Crry Equrt-
ABLE FIRE
INSURANCE
Co.,
In re.

Pollock M.R.

516

©. A.
1924

Crry Eaurt-

ABLE FIRE
INSURANCE
Co.,
In re.

Pollock M.R.

CHANCERY DIVISION. [1925]

the auditor from what may be called technical errors, defaults
for which he may be held liable in law, but which he may
unconsciously have committed.

Now what do the words of the article mean? First of all
it is to be observed they are in respect of neglects or defaults,
and it is not unimportant to observe that the words are not
“acts or omissions,” but they are “neglects and defaults,”
and the observations of Bramwell L.J. in Lewis v. Great
Western Ry. Co. (1) ought to be borne in mind, where he deals
with the case of wilful misconduct, calling attention to the
fact that it is not wilful conduct, but wilful misconduct.
We have here to deal with a case where there has been neglect
or default, and then to see whether or not it is wilful.
I come, therefore, to consider the meaning of the word
“ wilful.”” Now in In re Young and Harston’s Contract (2)
there is a well-known passage in the judgment of Bowen L.J.,
in which he says: “It (ie., the word ‘ wilful’) gene-
rally, as used in Courts of law, implies nothing blameable,
but merely that the person of whose action or default the
expression is used, is a free agent, and that what has been
done arises from the spontaneous action of his will. It
amounts to nothing more than this, that he knows what he
is doing, and intends to do what he is doing, and is a free
agent.” There are numerous other cases to which we have
been referred, but in Jn re Lord Mayor of London and Tubbs’
Contract (3) it is to be observed that Lindley L.J. says: “I
confess that I am more disposed to concur with Lord
Bramwell’s observations on the term ‘ wilful misconduct’ in
Lewis v. Great Western Ry. Co. (4) They are, in my opinion,
quite consistent with Lord Bowen’s observations in In re Young
and Harston’s Contract (5), if it be borne in mind that Lord
Bowen presupposed knowledge of what was done, and intention
to do it, and was not addressing himself to a case of an honest
mistake or oversight.”’ Lopes L.J. (6) in dealing with Jn re
Young and Harston’s Contract (5) and Lewis v. Great Western

(1) 3Q. B.D. 195. (4) 3Q. B.D. 206.
(2) 31 Ch. D. 168, 175. (5) 31 Ch. D. 168.
(3) [1894] 2 Ch. 524, 536. (6) [1894] 2 Ch. 524, 539.

1 Ch. CHANCERY DIVISION.

Ry. Co.(1) says: “It is difficult to lay down any general
definition of ‘ wilful.’ The word is relative, and each case
must depend on its own particular circumstances”; and he
also says: “If the neglect or default in this case arose from
the voluntary act of the parties, either awake or asleep with
reference to their rights and interests, and did not at all arise
from the pressure of external circumstances over which they
could have no control, I apprehend that the neglect or default
was wilful.” He is there quoting from the judgment of
Shadwell V.-C. in Elliott v. Turner. (2) Lord Alverstone
in Forder v. Great Western Ry. Co.(3), a later case»
adopting the definition given in an Irish case, with
which he expressed his agreement, says: “‘ Wilful mis-
conduct in such a special condition means misconduct to
which the will is party as contradistinguished from accident,
and is far beyond any negligence, even gross or culpable
negligence, and involves that a person wilfully misconducts
himself who knows and appreciates that it is wrong conduct
on his part in the existing circumstances to do, or to fail or
omit to do (as the case may be), a particular thing, and yet
intentionally does, or fails or omits to do it, or persists in the
act, failure or omission regardless of consequences.’ The
addition which I would suggest is, ‘or acts with reckless
carelessness, not caring what the results of his carelessness
may be.’” For my own part, I agree with that definition
quoted by Lord Alverstone, with the addition he proposes to
make to it. It seems to me in close accord with the previous
decisions to which I have already referred, and to give a proper
meaning to the words which are before us.

I then come to consider whether or not within that meaning
of “ wilful,” the conduct of Mr. Lepine was wilful so as to
render him responsible, or is he relieved by the terms of
art. 150% The auditor was confronted with a lot of deceit.
Year by year he fulfils his duty in a manner which has certainly
received the praise of those who have given evidence about
it, and of the learned judge who heard the whole of the facts.

(1), 3 Q. B. D. 195. (2) 13 Sim. 477, 485.
(3) [1905] 2 K. B. 532, 535.
Vou. I. 1925, 2&8 I

517

Cy AG
1924

—
Crry Eaquir-
ABLE FIRE
INSURANCE
Co.,

In re.

Pollock M.R.

518

C. A.
1924

ee
Crry Equrt-
ABLE FIRE
INSURANCE
Co.,
In re.

Pollock M.Ré

CHANCERY DIVISION. [1925]

On a number of occasions he was successful in putting what
was wrong, or attempting to put what was wrong, right,
and therefore so far as his will and volition went, he was
attempting to do his duty. In those circumstances, when
you find a default which has been made, and an error of
judgment in accepting as trustworthy what is now proved
to be untrustworthy, can you say, within the definition,
that he has been guilty of wilful neglect or default ? For
my part, for the reasons I have indicated, and upon the
evidence to which I have called attention, it seems to me
impossible so to characterise Mr. Lepine’s conduct. He did
not, to my mind, shut his eyes to conduct which he thought
needed criticism; what he did was that, in common with
a great number of other persons, he thought the persons
with whom he was dealing were trustworthy, and, as
pointed out again and again in the cases cited to us, in such
circumstances he was entitled to accept the statements which
were made to him by those whom he was entitled to trust
when he had no reason or call for suspicion. In my opinion
the learned judge has quite rightly and accurately applied
the law to the facts when he says: “If in certain matters he
fell short of his real duty, it was because in all good faith,
he held a mistaken belief as to what that duty was.” He
committed an error of judgment, an error which might have
caused the company, or its directors, to take a different
course, and might have possibly saved some portion of the
disaster, but in what he did I cannot find he was guilty of
wilful misconduct. Therefore it appears to me art. 150
protects him.

In those circumstances I am of opinion that the learned
judge was right in the judgment which he has given, and
that this appeal ought to be dismissed with costs.

Wareincton L.J. This is an appeal from an exceedingly
clear, careful and thorough judgment of Romer J., and as
I agree with the conclusions at which he has arrived, it is
unnecessary to deal in detail with many of the features that
have been the subject of discussion here, but there is at least

Ch. CHANCERY DIVISION.

one question of general interest and importance on which
I think it is desirable in deference to the arguments which
have been addressed to us that I should express my own
views in as few words as possible, and that question is the
construction of art. 150, which is to say the least of it not
uncommonly found in articles of association, and its effect
(if any) in modifying or otherwise the ordinary legal obligations
of an auditor, especially having regard to s. 113 and s. 215
of the Companies (Consolidation) Act, 1908.

The ordinary duties and obligations of an auditor without
reference to this or any other special article or stipulation
as to the terms of his employment are stated by Lindley L.J.
in full in In re London General Bank (No. 2).(1) It is
unnecessary to read the whole of that part of his judgment
which deals with the point, but I think it is perhaps desirable
to read the following passage: ‘It is no part of an auditor’s
duty to give advice, either to directors or shareholders, as
to what they ought to do. An auditor has nothing to do
with the prudence or imprudence of making loans with or
without security. It is nothing to him whether the business
of the company is being conducted prudently or imprudently,
profitably or unprofitably. It is nothing to him whether
dividends are properly or improperly declared, provided he
discharges his own duty to the shareholders. His business
is to ascertain and state the true financial position of the
company at the time of the audit, and his duty is confined
to that.” He then proceeds to discuss in what way he is
to perform that duty in reference to examining the books
of the company and verifying the statements contained
therein in order that he may be able truly to certify that
which he has to certify under the Companies Acts. Then
he goes on-to point out that an auditor is not an insurer ;
that he is not bound to do more than exercise reasonable
care and skill in making inquiries and investigations, and
further that what is reasonable care in any particular case
must depend upon the circumstances of that case.

Again in In re Kingston Cotton Mill Co. (No. 2) (2)

(1) [1895] 2 Ch. 673, 682. (2) [1896] 2 Ch. 279, 284.
2R2 1

519

C. A.
1924

SS
Crry Eeurt-
ABLE FIRE
INSURANCE

Co.,
In re.

Warrington L.J.

|

|

520

C. A.
1924

Oe:
Crry Equrt-
ABLE FIRE
INSURANCE
Co.,

In re.

Warrington L.J.

CHANCERY DIVISION. [1925]

Lindley L.J. in dealing with one particular point that arose
in that case says: ‘‘It was further pointed out that what
in any particular case is a reasonable amount of care and
skill depends on the circumstances of that case; that if
there is nothing which ought to excite suspicion, less care
may properly be considered reasonable than could be so
considered if suspicion was or ought to have been aroused.
These are the general principles which have to be applied
to cases of this description. I protest, however, against
the notion that an auditor is bound to be suspicious as
distinguished from reasonably careful.” In that case it
was accordingly held that the auditor was entitled to accept
the certificate of the company’s manager, though on subsequent
investigation it turned out that the manager had been for
some years defrauding the company and that his certificate
was intended to cover up those frauds. The duty of the
auditor is to verify the facts which it is proposed to state
in the balance sheet, and in doing so to use reasonable and
ordinary skill. I need say no more about the general duties
of an auditor.

The next question is to consider what is the true construc-
tion of art. 150, and whether that article bears upon or
modifies what would, in the ordinary course, be his prima
facie duty and responsibilities—not so much his duty as
his responsibilities. The article, so far as it is material,
is in these terms. I am not going to read the first part of
it, which provides for the indemnity, but the last paragraph
only. ‘None of them”—that is, certain directors and
officers who have been enumerated, including the auditors—
“shall be answerable for”’—amongst other things—“ any other
loss, misfortune or damage which may happen in the execution
of their respective offices or trusts, or in relation thereto,
unless the same shall happen by or through their own wilful
neglect or default respectively.” In the first place, I think
that that article, as the learned judge has held expressly
in the case of the directors and impliedly, if not expressly,
in the case of the auditors, does in such a case as the present
form part of the contract between the company and the

1 Ch. CHANCERY DIVISION.

auditors, and for the reason that auditors are engaged without
any special terms of engagement. When that is the case,
then if the articles contain provisions relating to the per-
formance by them of their duties and to the obligations
imposed upon them by the acceptance of the office, I think
it is quite plain that the articles must be taken to express
the terms upon which the auditors accept their position.
Of course, if the terms of their employment are expressed
in a separate document, then that. document must be taken
to define the conditions of their engagement, and it would
not be proper to assume any implied terms either from the
provisions of the articles or elsewhere. But in the present
case I think it is quite plain that the terms of art. 150 do,
according to their proper construction, whatever that may
be, effect a modification in what would prima facie be, but
for that article, the obligation and liability of the auditors.
What, then, is the effect of the article ? It is, I think, plainly
in some way, whatever that may be, when you ascertain
its true construction, to excuse the auditors from being
answerable for loss occurring in relation to their office, except
in the particular events which are therein specified—namely,
those which happen by or through their own wilful neglect
or default—and that it would be improper to describe as a
misfeasance any act or omission of the auditors which, having
regard to that article, would not result in their being answer-
able for the loss which may be occasioned thereby. That
last remark becomes important when one has to deal with
the argument addressed to us on the construction of s. 215.
What then is the meaning of a loss which happens by or
through their own wilful neglect or default ? Bear in mind
that the words are not ‘“ by or through their own wilful act
or omission.”” We have, therefore, not merely to look at
the act or omission in itself and see whether there was a
conscious will impelling the person in question to commit
that act or to omit to do the thing which is suggested to be
wrongly omitted, but we have to consider whether the neglect
or default was or was not wilful. In saying that, I am only
really repeating what was said in much better language

521

CreAe
1924

Rees
Crry Equit-
ABLE FIRE
INSURANCE
Co.,
In re.

Warrington L.J.

522

G3 A;
1924

=
Crry Equit-
ABLE FIRE
INSURANCE
Co.,
In re.

Warrington L.J.

CHANCERY DIVISION. [1925]

than I can find to use by Bramwell L.J. in Lewis v. Great
Western Ry. Co.(1) He was there dealing with a case of
wilful misconduct with reference to a business document—
a contract by a railway company for the carriage of goods
by railway—and he says: “‘ Wilful misconduct’ means mis-
conduct to which the will is a party, something opposed to
accident or negligence; the misconduct, not the conduct,
must be wilful. It has been said, and, I think, correctly,
that, perhaps, one condition of ‘ wilful misconduct’ must
be that the person guilty of it should know that mischief
will result from it. But to my mind there might be other
‘ wilful misconduct.’ I think it would be wilful misconduct
if a man did an act not knowing whether mischief would or
would not result from it. I do not mean when in a state of
ignorance, but after being told, ‘Now this may or may not
be a right thing to do.’ He might say, ‘Well I do not
know which is right, and I do not care; I will do this.’ I
am much inclined to think that that would be ‘ wilful mis-
conduct,’ because he acted under the supposition that it
might be mischievous, and with an indifference to his duty
to ascertain whether it was mischievous or not. I think
that would be wilful misconduct.’”’ Then he goes on at the
end of his judgment to deal with the facts of the case, and
says (2): “I cannot think that there was evidence in this
case to shew, or on which the learned judge could properly
find, that the men who packed these cheeses—who were in
London, a place from which much Cheshire cheese is probably
not exported—knew that they were doing wrong, or, at all
events, that they were aware that mischief might result,
and that they, improperly, failed to inform themselves as to
whether mischief would or would not result from it.’ Then
Brett L.J. says (3): “In a contract where the term ‘ wilful
misconduct ’ is put as something different from and excluding
negligence of every kind, it seems to me that it must mean
the doing of something, or the omitting to do something,
which it is wrong to do or to omit, where the person who is

(1) 3Q. B. D. 195, 206. (2) 3Q. B. D. 207.
(3) 3Q. B.D. 210.

1 Ch. CHANCERY DIVISION.

guilty of the act or the omission knows that the act which
he is doing, or that which he is omitting to do, is a wrong
thing to do or to omit ; and it involves the knowledge of the
person that the thing which he is doing is wrong; I think
that if he knows that what he is doing will seriously damage
the goods of a consignor, then he knows that what he is doing
is a wrong thing to do; and also, as my Lord has put it, if
it is brought to his notice that what he is doing, or omitting
to do, may seriously endanger the things which are to be
sent, and he wilfully persists in doing that against which he
is warned, careless whether he may be doing damage or not,
then I think he is doing a wrong thing, and that that is mis-
conduct, and that, as he does it intentionally, he is guilty of
wilful misconduct ; or if he does, or omits to do something
which everybody must know is likely to endanger or damage
the goods, then it follows that he is doing that which he
knows to be a wrong thing to do. Care must be taken to
ascertain that it is not only misconduct but wilful misconduct,
and I think that those two terms together import a knowledge
of wrong on the part of the person who is supposed to be
guilty of the act or omission.”” Now Romer J. dealing with
that point says: “ But if that act or omission amounts to
a breach of his duty, and therefore to negligence, is the person
‘guilty of wilful negligence? In my opinion that question
must be answered in the negative unless he knows that he
is committing and intends to commit a breach of his duty,
or is recklessly careless in the sense of not caring whether
his act or omission is or is not a breach of duty.”

- With that summary of the result of the authorities I agree.
Tt is said that that view of the meaning of the words “ wilful
neglect or default ”’ is inconsistent with what has been decided
by the Courts in certain cases with reference to the duties
of trustees, and also with the judgment, or what is supposed
to be the true effect of the judgment, of Bowen L.J. in a
vendor and purchaser’s case: In re Young and Harston’s
Contract. (1) With all respect to counsel who cited those
trustee cases to us, I think there is great danger of being

(1) 31 Ch. D. 168.

523

CAS
1924

Sas
Crry Equit-
ABLE FIRE
INSURANCE
Co.,

In re.

Warrington L.J.

—_

524

C. A.
1924

——
Crry Equit-

ABLE FIRE
INSURANCE

Warrington L.J.

CHANCERY DIVISION. [1925]

misled if we attempt to apply decisions as to the duties of
trustees to a case as to the conduct of persons in the position
of the auditors in this case. In the case of trustees there
are certain definite and precise rules of law as to what a
trustee may or may not do in the execution of his trust,
and it is no answer for a trustee to say, if, for example, he
invests the trust property in his hands in a security which
the law regards as an unauthorized security: ‘‘I honestly
believed that I was justified in doing that.” No honest
belief will justify him in committing that which is a breach
of such a rule of law, and therefore the question which we
have to determine in expressing a view on the construction
of such words in a contract like the present is not solved by
seeing how the question has been determined in a case relating
to the duties of a trustee. With regard to In re Young and
Harston’s Contract (1), when the judgment of Bowen LJ.
is read in connection with the facts of that case it seems to
me that it is not inconsistent either with the decision in
Lewis v. Great Western Ry. Co. (2) or with that at which
Romer J. has arrived in the present case, and for this reason :
in In re Young and Harston’s Contract (1) the default in ques-
tion was that the vendor being under an obligation to execute,
on September 8, a conveyance of property which he had
agreed to sell to the purchasers, went abroad two days before,
leaving no address, so that it was impossible for him to
execute the conveyance on that day. Now it was plainly
a default not proceeding from ignorance, but plainly a wilful
default, because the vendor had himself put it out of his
power, and apparently deliberately, to do that which he was
bound to do on that day, and that was held to be wilful
default. Then the words of Bowen L.J. must be read with
reference to the facts before him, and there is nothing in his
analysis of the meaning of the word “ default’’ and the
meaning of the word “ wilful’? which in any way conflicts
with what I venture to think is the true mode of dealing
with the construction, not of either word by itself, but of
the entire expression ‘“ wilful neglect or default.” I think,

(1) 31 Ch. D. 168. (2) 3 Q. B. D. 195.

1 Ch. CHANCERY DIVISION.

therefore, that Romer J. was quite right in arriving at the
conclusion that a person is not guilty of “‘ wilful neglect or
default ’’ unless he is conscious that in doing the act which
is complained of, or in omitting to do the act which it is said
he ought to have done, he is committing a breach of his duty,
and also, as he said, recklessly careless whether it is a breach
of duty or not.

But then it is said that if the article has that effect, and
if, as I think it does, it modifies the prima facie obligation
of the auditors, it is contrary to the provisions of s. 113 and
s. 215 of the Companies (Consolidation) Act, 1908. With
all respect I cannot agree. Sect. 113 does not lay down any
rule at all as to the amount of care, or skill, or investigation,
or anything of that kind, which is to be brought to bear by
the auditors in performing the duties which are imposed
upon them. All that the section imposes upon the auditors
is the duty of making a report to the shareholders upon the
accounts which they examine, and upon every balance sheet
laid before the company in general meeting during their
tenure of office, and to state in their report whether or not
they have obtained all the information and explanations
which they have required, and whether, in their opinion,
the balance sheet referred to in the report is properly drawn
up so as to exhibit a true and correct view of the state of the
company’s affairs, according to the best of their information
and explanations given to them and as shown by the books
of the company. It says nothing as to what they are to do
in order to form that opinion, or to ascertain the truth of the
facts to which they are to certify. That is left to be deter-
mined by the general rules which, in point of law, are held
to govern the duties of the auditors, whether those rules
are to be derived from the ordinary law, or from the terms
under which the auditors are to be employed. Art. 150,
therefore, in no way conflicts with s. 113 of the Act.

Then with regard to s. 215, if I am right in what I have
already said, it is quite plain that nothing is referred to in
that section as a misfeasance, except an act or default which
would, having regard to the relations between the auditors

525

Cx AS
1924

—s
Crry Equrt-
ABLE FIRE
INSURANCE
Co.,

In re.

Warrington L.J.

526

C. A.

1924
~~
City Equrr-
ABLE FIRE
INSURANCE
Co.,
In re.

Warrington L.).

CHANCERY DIVISION. [1925]

and the company, be a misfeasance or a breach of trust,
causing a loss to the assets of the company, and if therefore
there is some act or omission on the part of the auditors
which, having regard. to the provisions of art. 150 in the
present case, or to a similar article in any other case, does
not give rise to any liability to the company, then in my
opinion it gives rise to no liability under s. 215. I think
that is made perfectly plain, especially by the speech of
Lord Macnaghten in Cavendish Bentinck v. Fenn. (1) I
need not read it again, it has been read very often, and it
has already been accepted as stating, and accurately stating,
what was the settled law with regard to the construction
of the section corresponding to s. 215 of the present Act.
It seems to me, therefore, that art. 150 has such effect as,
according to its true construction, it ought to have on the
obligations and liabilities of the auditors, and that Romer J.
was quite right in the conclusion at which he arrived in that
respect.

That being the true construction and the actual effect
of art. 150 was there anything which the auditors in the
present case either did, or omitted to do, which was such
an act or omission, wilful default or neglect on their part ?
I do not: propose to go through the evidence upon that
point. It is enough for me to read what Romer J. says
and to say that I thoroughly agree with his conclusion. He
says: “I have heard Mr. Lepine’s evidence in the witness
box, and I have inspected many of the numerous documents
prepared by him for the purposes of the audits which he
conducted. I am convinced that throughout the audits that
he conducted he honestly and carefully discharged what he
conceived to be the whole of his duty to the company.
If in certain matters he fell short of his real duty it was
because, in all good faith, he held a mistaken belief as to
what that duty was.” It seems to me that, agreeing with
that view, I must agree with the conclusion at which
Romer J. has arrived, that the application of the Oficial
Receiver against the auditors fails.

(1) 12 App. Cas. 652.

1 Ch. CHANCERY DIVISION. 527

I only desire to add this. Romer J. came to the conclusion ©. A.
that, but for art. 150, he would have held, and did hold, that 1924
there was negligence on the part of the auditors in regard Crry Equrr.
to the inspection of the securities which were, in fact, in ante ie
the possession, or ought to have been in the possession of ne
Ellis & Co., and as to which that firm gave a certificate
which was accepted by the auditors. With regard to that,
I will only say this: We have not heard Mr: Stuart Bevan
on that point, and it is at least arguable, I will not say more
than that, that in the particular circumstances of the present
case there was not, in fact, negligence on the part of the
auditors, even without reference to art. 150. I do not say
that I differ from Romer J., I only think it fair to Mr.
Lepine to say that, Mr. Stuart Bevan not having been heard
on that point, the matter is one which is at least worthy
of argument.

On the whole, therefore, I agree that the appeal must be
dismissed with costs.

Warrington L.J.

Sareant L.J. I will examine the questions here in a
different.order from that in which they were presented to us.
I will take first the question whether the terms of art. 150
are effective to limit or restrict the extent of the prima facie
liability of the auditors. As to this the decisions in Coventry
and Dizxon’s Case(1) and Cavendish Bentinck v. Fenn (2)
conclusively established that s. 215 of the Companies (Con-
solidation) Act, 1908, which corresponds in almost precise
words with the old s. 165 of the Act of 1862, is a procedure
section only, and merely provides a summary remedy for
enforcing in the liquidation of a company such liabilities as
might have been enforced by the company itself, or by its
liquidator, by means of an ordinary action. It is not
immaterial to observe that in view of the fact that this
principle had been clearly laid down in the Court of Appeal
in the year 1880 with reference to s. 165 of the Companies
Act, 1862, the provisions of that section with no sub-
stantial change are re-enacted by s. 215 of the Companies

(1) 14 Ch. D. 660. (2) 12 App. Cas. 652:

528

C. A.
1924

aes
Crry Equit-
ABLE FIRE
INSURANCE
Co.,
In re.

Sargant L.J.

CHANCERY DIVISION. [1925]

(Consolidation) Act, 1908. In so re-enacting this section it
is impossible to suppose that the Legislature meant to give
to the re-enacted section a meaning different from that so
authoritatively attributed to the similar section which it
replaced.

We have therefore to consider whether if the company
here had brought an action against the auditors for neglect
or default the defendants would have been entitled to avail
themselves of the protection given to them by the article
in question. I can see no reason why they should not do so.
The article does not limit the nature or extent of the auditor’s
duties under s. 113. It is in no way contrary to the scheme
of the Act, and such cases as In re Peveril Gold Mines, Ld. (1)
and Payne v. The Cork Co. (2) seem to me to have no applica-
tion whatever to this case. The article merely operates to
limit the liability of the officers of the company by relieving
them from the consequences of certain kinds of neglect or
default. It might as well be said that a clause of this kind
in trust deeds should be inoperative, because it would tend
to induce trustees to be negligent of the interests of their
cestuis que trust. The truth is that such restrictions on
liability may, and I think often do, operate to protect rather
than harm beneficiaries, because they prevent honest and
responsible persons from being frightened away from accepting
an office which might otherwise involve them in various
unmerited and unexpected losses notwithstanding perfect
honesty on their part.

That being so, we have to consider how the matter would
stand if the company itself was suing the auditors, and for
this purpose we must deal with the question as to what is
the extent of the protection given to the auditors by reason
of the latter half of art. 150. What is the meaning of the
exception “wilful neglect or default” in that article ?
Romer J. has analysed with great care the cases on the
subject, and in my opinion he has, as a result of that
analysis, come to a correct conclusion. I think that

(1) [1898] 1 Ch. 122. (2) [1900] 1 Ch. 308.

1 Ch. CHANCERY DIVISION.

the word “wilful” in this phrase is of importance, and
means that the officer in question is consciously acting, or
failing to act, in a reprehensible manner. It may no doubt
be for him to show that this is not so, and I do not think
he would be protected if he simply failed to give any con-
sideration at all to the question of his duties, if he acted
recklessly and without caring whether he was fulfilling them
or not. But, in my judgment, these words excuse an officer
if through mere inadvertence or error of judgment, and while
endeavouring honestly to carry out his duty he does or
omits to do something which apart from these words might
have rendered him liable. I need not carry the definition
further, for as will be seen this is enough, having regard to
the view I take of the facts.

As to the facts it seems to me that there is little, if any,
dispute. They have been most carefully and exhaustively
stated by Romer J. in his admirable judgment, and it is
unnecessary to recapitulate them. But there are two
circumstances on which special stress should be laid. The
first is the very great care exercised by Mr. Lepine in the
performance of his duties, a circumstance to which marked
attention is drawn in the judgment of the learned judge.
There was obviously on the part of the auditors an honest
and diligent performance of their duties to the best of their
ability, and that is a fact of the utmost importance. The
second is this, that in this particular case Mr. Lepine was
in fact dealing with a most unusual state of things, a
combination in Mr. Bevan of exceptional ability, exceptional
reputation and quite exceptional roguery. Mr. Bevan had
succeeded in deceiving not only all the other directors of
the company, but all his numerous partners in the firm of
Ellis & Co.; and he was able on behalf of Ellis & Co. to cause
corroboration to be given to statements made by the company,
independent corroboration by innocent persons, his own
partners, although those persons had in fact derived their
information from Mr. Bevan himself.

Mr. Bennett in his concise argument, none the less
meritorious because of its conciseness, suggested that the

529

C. A.
1924

ah;
Crry Equit-
ABLE FIRE
INSURANCE
Co.,
In re.

Sargant L.J.

530

C. A.
1924

Ree
Ciry Equit-
ABLE FIRE
INSURANCE
Co.,

In re.

Sargant L.J.

CHANCERY DIVISION. [1925]

statements in the balance sheet made a gradual and inereasing
divergence from the truth, and in so doing were inspired by
some one in the background who was trying more and more
to conceal the real state of things. I suppose he meant
Mr. Bevan, or possibly Mr. Mansell. But I think that
this circumstance is rather in favour of the auditors than
against them. If these statements had been made on the
initiative of the auditors themselves there might have been
some ground for some suspicion; but when what they do is
to adopt the phraseology of a rogue and fail to detect the
implications arising from that phraseology, it seems to me
that the circumstance that that is all they are doing is one
very definitely in their favour.

Now the heads under which the auditors were sought to
be rendered liable are summarised very clearly by Romer J.
in his judgment. As regards the first two heads I do not
propose to say anything. I only deal with the last head—
namely, that connected with the leaving of the securities in
the custody of the brokers. In the first place, I think that
the strict rules as to trustees do not necessarily apply to
limited companies in all their rigour. Trustees are dealing
with other persons’ property. Limited companies are dealing
with their own funds. It may well be that certain companies
may find it advantageous to allow brokers or agents to hold
or to have free access to securities which trustees are not
entitled to do. That is a matter, in my opinion, for the
internal regulation of a company, having regard to the
character of its business. Speaking generally, I should have
thought it was inadvisable to leave marketable securities
with brokers or other persons not accustomed, like bankers
or safe deposit companies, to hold and keep securities as
part of their ordinary business; and in any ordinary case
I think it would be desirable that auditors should call
attention to and require some justification for a practice
of this kind. But the matter seems to me to be essentially
one of degree, and one which is not regulated by the definite
and strict rules which govern the conduct of trustees in
such matters.

Ch. CHANCERY DIVISION.

In the next place, I desire to say this, that in my opinion
it would not be right that auditors should deliberately adopt
a standard of verification below the ordinary standard,
because the persons with whom they are dealing are persons
of specially high reputation. It would be dangerous to
adopt any such lower standard on account of that circumstance.
But I cannot find that the auditors here did deliberately
adopt any lower standard of that kind. Mr. Lepine was,
in my view, adopting the standard which he thought was
the proper standard, and one which was not definitely below
any standard to which he was accustomed in ordinary trans-
actions. Here I wish to express my opinion, that undue
stress was laid by counsel for the appellant on the effect of
the evidence of Mr. Van de Linde and Mr. Cash. They
seemed to treat the practice of those persons as if it had been
embodied in a written or printed code. I think that is to
treat the matter altogether too rigidly, and even taking the
practice of Mr. Van de Linde and Mr. Cash as they stated
it before the Court, there was a considerable borderline of
undefined territory, in which the auditor had to be guided
by his own personal view of what was sufficient in all the
circumstances of the case. In my judgment, therefore, it is
impossible to treat Mr. Lepine as having gone contrary to
a well defined or well recognized practice in such a way
as could only have been justified in most exceptional
circumstances.

I desire to add this on a matter to which Warrington L.J.
has referred. I do not wish definitely to say that I agree with
the view that has been taken by Romer J., that apart from
art. 150 the auditors would have been liable. We have not
heard on that point any argument on behalf of the auditors,
and I can quite see that an argument of considerable force
might be addressed to us to prevent our holding that they
were neglectful or were in default apart from the special
provisions of that article. But having regard to the provisions
of that article, and having come to the conclusion that the
very most that can be said against Mr. Lepine is that he
committed an honest error of judgment, I am clearly of

531

C. A.
1924

eed
Crry Equrt-
ABLE FIRE
INSURANCE
Co.,
In re.

Sargant LJ.

532

C. A.
1924

Roxie
Crry Equit-
ABLE FIRE
INSURANCE
Co.,
In re.

Sargant L.J.

CHANCERY DIVISION. [1925]

opinion that he is protected, even if he were otherwise liable,
by the special and concluding words of art. 150.

Appeal dismissed.

Solicitors for the Official Receiver: Linklaters & Paines.

Solicitor for the respondent, The Earl of March: Atherton
Powys.

Solicitors for the respondent, Peter Haig Thomas : Corbould-
Ellis & Mitchell.

Solicitors for the respondent, Henry Ralph Grenside:
Lingards, Browne & Myatt.

Solicitors for the respondent, Lord Ribblesdale : Treherne,
Higgins & Co.

Solicitors for the respondents, Sir Douglas Dawson and
David M. M. Milligan: Downing, Middleton & Lewis.

Solicitor for the respondent auditors, Langton & Lepine:

W. 8. Pennefather (Stoneham & Sons).
Wii CR