Hole v Garnsey

Lorp Buckmaster. My Lords, The
Wilts and Somerset Farmers, Ld., was registered under the
Industrial and Provident Societies Act of 1893 on March 23,
1910, and on January 30, 1923, it went into voluntary
liquidation, the respondent being appointed liquidator. In
the liquidation it was sought to place the appellant on the
list of contributories under the following circumstances.

The original rules fixed the shares at the nominal value
of ll. and provided by Rule 12 that individual members
should hold at least one share for every 20 acres or fraction
of 20 acres farmed by them up to 500 acres, and one share
for every 40 acres or fraction of 40 acres above 500. There
was also a provision fixing the shareholding of milk retailers,

475

H. L. (E.)
1930

Hoe
Vv.
GARNSEYs

476
H. L. (E.)
1930
HoLe
v.
GARNSEY.

Lord
Buckmaster.

HOUSE OF LORDS [1930]

which is not relevant. Rule 13 provided that the total
number of shares held by any member should not exceed
2001., and Rule 64 provided that the rules might be amended
by resolution of a three-fourths majority at a special general
meeting.

On November 14, 1921, the rules were amended so as to
provide that individual members should hold at least five
shares for every 20 acres up to 500, and three shares for
every 40 acres or fraction of 40 acres above 500 and that:
'Milk producers shall hold shares on the above acreage
basis or shall hold at least five shares for every dairy cow
owned by them whichever shall be the greater number of
shares."

On December 21, 1921, the rules were again amended in
the following way :—

"Rule 6.—Shares shall be transferable but not withdraw-
able. They shall be of the nominal value of 6s. 8d., which
shall be payable on application."

At the same time, the following new Rule was added :—

"Rule 6a.—The nominal value of each of the issued and
fully paid shares of the Society shall be reduced from the
sum of ll. to the sum of 6s. 8d. by cancelling the sum of
13s. 4d. upon each share. Each of the shares of the Society
which have been issued and are not fully paid shall
likewise be reduced to the nominal value of 6s. 8d., but so
that the existing liability in respect of unpaid capital on
such shares respectively shall not be extinguished or
reduced.

'Each person who since the Ist day of June last has made
to the Society an application for shares in the Society shall in
the event of his application being accepted by the Society
receive an allotment of three shares in the Society of the
nominal value of 6s. 8d. each in respect of every share of the
nominal value of 1l. applied for."

On March 25, 1922, Rule 12 of the original rules as amended
was further amended by substituting for the words "five
shares" in the two places in which they occur.the words
" shares of the nominal value of 51."

A. C. AND PRIVY COUNCIL.

In May of 1922 the Society issued to its members a letter
calling up the appropriate amount from each of the
1200 members to whom Rule 12 as amended appeared to apply.
These 1200 members, of whom the appellant was one, disputed
the demand to subscribe for further shares and alleged that
the rules which had been passed were ultra vires. Proceedings
were then taken against the Society, which were heard by
Lawrence J. (1), who decided that Rule 12 both in its original
form and as amended was ultra vires, the main ground of
his decision being that such rules interfered with the principle
of limited liability and was, therefore, void by analogy with
the Companies Act.

In 1925 a similar question arose in a case between the
Biddulph and District Agricultural Society, Ld., and the
Agricultural Wholesale Society, Ld. (2) This latter Society
was registered on September 14, 1914, and the qualifying
Rule there was one which provided that each Society or
Company which was a member of the Agricultural Wholesale
Society should hold one share for fifty, or any fraction of
fifty, of its members. The Biddulph Society became a member
and, having between 50 and 100 members, took up two shares
of 1l. each. At a later date, by a special resolution passed
on May 1 and May 16, 1918, the Agricultural Society amended
its rules and provided by a new Rule 6 that every existing
member should within three calendar months after June,
1918, take up such a number of shares as, together with the
existing shares of such member, would make up the number
which such society if a new member would have had to take
up, and it also provided that every society should within
six months after the end of each financial year apply for and
take up such further shares as would represent an increase
in membership and turnover over that on which its then
present holding of shares should have been calculated. The
effect of this alteration was that the Biddulph Society became
bound forthwith to take up additional shares and also within

six months after the end of each financial year to take up
(1) Dibble v. Wilts and Somerset Ld. v. Biddulph and District Agri-

Farmers, Ld. [1923] 1 Ch. 342. cultural Society, Ld. [1925] Ch. 769;
(2) Agricultural Wholesale Society, [1927] A. C. 76.

477
H. L. (E.)
1930
eed
Hoe
v.
GARNSEY.

Lord
Buckmaster

478 HOUSE OF LORDS [1980]

H.L.(E.) further shares representing its increase in membership and
1930 turnover.
Hous On August 12, 1918, the Agricultural Society brought this
Garnsey. alteration to the notice of the Biddulph Society, who there-
Lord upon asked for an estimate of the number of shares for which
oe it was liable, and, on being informed that this was 472, they
applied for these 470 additional shares. The shares were
issued and the amounts paid. As membership and turnover
of the Biddulph Company increased from year to year they
became bound, if the rules were valid, to take up a further
2211 shares, and this they refused to do. Proceedings were
then taken to compel acceptance of the shares. The case
came originally before Lawrence J., who followed his own
former case, and finally to the Court of Appeal, who reversed
his judgment. From the judgment of the Court of Appeal
an appeal was taken to this House. (1)

I have set out the facts in some detail, because the first
and, to my mind, the most difficult question in this case is
whether the decision that this House then reached does not
bind us on the present occasion. They dismissed the appeal,
and held that the Biddulph Company was liable to take the
shares, but, in order to ascertain exactly what was the
foundation and effect of this decision, it is necessary to see
what it was that had happened in the Court of Appeal. The
Agricultural Society presented their case before the Court
of Appeal upon two grounds : first, that an obligation to take
the 2211 shares arose under the rules and, alternatively, that
there was a contract to take them, which was to be implied
from the circumstances in which the Biddulph Company had
applied for the 472 shares. The Court of Appeal overruled
Dibble's case (2), and made a declaration in these words :
"that under and by virtue of the agreement under Rule 6,
1918, and in the events which have happened the defendants
became and were at the date of the issue of the writ in this
action liable to take 2211 shares of 1/. each in the plaintiff
Society."

It is impossible to read this judgment and to follow what
took place in the Court of Appeal without seeing that their

(1) [1925] Ch. 769; [1927] A. C. 76. (2) [1923] 1 Ch. 342.

AoC. AND PRIVY COUNCIL.

conclusion was based entirely upon the view that the alteration
of the rule was within the powers of the Society. An agree-
ment "under the rule" cannot mean an agreement outside
the rule, and "the events which have happened" are the
increase in the turnover and membership of the Biddulph
Company. The alternative contention that there was a
contract to take shares outside the rules was not dealt with.
It is in the light of these facts that the opinions in the
House of Lords need to be regarded.

The Lord Chancellor treated the application for the
470 shares as effecting a contract, but a contract that was not
independent of the rules, for he said that, in his view, the
result of it was to compel the applicants, as by a covenant
under seal, to take the further shares—a result which could
only arise if the rules were valid. He, however, expressly
left open the question as to whether the alteration would be
binding on a member who had not assented. His view appears
to be that assent bound the member to accept the full effect
of the rule at all times in the future, and he treated this as
leaving open the question of the validity of the rule. Lord
Sumner regarded the evidence as establishing an actual
agreement to take further shares contingently on the
happening of the events mentioned in the amended rule or,
in other words, an agreement made as between the two parties
outside the rules that shares would be taken to the extent
to which liability would be imposed if the rule were valid,
thus avoiding altogether the question of deciding the validity
of the rule and expressly warning the House against the
danger in these circumstances of leaving the declaration
made by the Court of Appeal unamended. This judgment
leaves the ground quite clear for raising again the question
as to the validity of the rule, and I think that the effect of the
Lord Chancellor's opinion might fairly be so interpreted,
but the judgments of the other learned Lords appear to me
to prevent the possibility of accepting this view. Lord Shaw
said that the reasonings of the Court of Appeal were entirely
right. As those reasonings only affect the validity of the
rule, it must mean that, in his view, the rule was valid, and

479

H. L. (E.)
1930
HoLE
v.
GARNSEY.

Lord
Buckmaster.

480

H. L. (E.)
1930

us,
Hor
v.
GARNSEY.

Lord
Buckmaster.

HOUSE OF LORDS [1930]

nothing in the remainder of his judgment affects that opinion.
Lord Parmoor says: " Unless, therefore, it can be shown
that the rule in question is one which the respondent Society
had no power to make, the appellant would be bound to
comply with its provisions as a contractual obligation under-
taken by them," basing the contract on the validity of the
rule. Lord Blanesburgh expresses his agreement with the
Lord Chancellor, but says: "I am much struck by the fact
that a rule of the nature of that here under discussion
seems to be in common use in these societies... . I can well
believe that regulations of the kind are essential to the
successful working of such societies and it would be a serious
thing lightly to cast doubt on their validity." And he also
thought that the appeal should be dismissed.

The appeal was accordingly dismissed, and it is significant
that the qualification which Lord Sumner thought ought to
be introduced into the order of this House was omitted. The
order as found in the Journal of this House on July 29 is
that the appeal should be dismissed, and that left untouched
and indeed, in my opinion confirmed, the declaration of the
Court of Appeal, that the liability arose under and by virtue
of the agreement under Rule 6 of 1918. I find myself con-
strained in these circumstances to the view that the decision
of this House did involve that such an alteration of the rules
was valid, and it is so regarded by Lord Hanworth M.R. in
the present case; if that is so, it is unnecessary to examine
in detail the further arguments on this appeal, presented to
show the rules are invalid, because it cannot be disputed that
in these circumstances the present rules would be good,
subject only to the question as to whether they are void for
uncertainty. It is no doubt possible to show that some
confusion and difficulty might arise in ascertaining the strict
liability under these rules as they stand. That is not sufficient
to render them void ; I think the calculation could be effected
with a reasonable and sufficient certainty, and on that ground
I think the rules cannot be challenged.

The judgment of Romer L.J., who tried this case as a
judge sitting in the Court of first instance, has examined the

A. C. AND PRIVY COUNCIL.

whole question with such care and, in my opinion, such
accuracy, that I should be prepared to accept his judgment
as the expression of my own opinion. For these reasons
I think the appeal should fail.

ViscounT DUNEDIN [after a narrative of the facts.] My
Lords, the first question on the result of which the judgment
of the Courts below depend, is whether the present case is
ruled by Biddulph's case.(1) It is therefore necessary
carefully to consider what Biddulph's case (1) really was,
and to see whether the judgment of this House, which is
binding on your Lordships, really entails the necessary
consequence that the original judgment in Dzbble's case (2)
was wrong in every particular. In Biddulph's case (1) the
respondents in this House were a Society registered under the
same Act as the Society here—namely, the Industrial Act
of 1893—and the appellants were another Society also regis-
tered under the same Act. I will call them respectively
the A and B Society. Now the A Society in its rules con-
templated and provided for the case of one of its shareholders
being a Society and not an individual, and Rule 9 was
as follows: "' Shares to be held by members. Each Society
or Company which is a member shall hold at least one share
for each 50 or fraction of 50 of its members."

The B Company had between 50 and 100 members, and in
accordance with that rule took up two shares. There was
as here a power of amending the rules. Rule 59 was: " Mode
of amending rules. The rules may be amended by resolution
of a three-fourths majority at a special general meeting."

The rules were amended. It is not necessary to quote
the amendments which are lengthy, but they may be
summarized by saying that in the amended form instead of
the number of the shares of an admitted society being left
as they were on the calculation of the number of members
at the time of the admission, the admitted society in the case
of its membership being increased had to apply for such
extra shares as would make up the number which would

(1) [1927] A. C. 76. (2) [1923] 1 Ch. 342.

A.C. 1930. 3 2K

481

H. L. (E.)
1930

-——_
Hote

v.
GARNSEY.

—=

482

H. L. (E.)
1930
Hobe

= uU.

GARNSEY.

Viscount
Dunedin.

HOUSE OF LORDS [1930]

have been necessary if the Society had then been admitted
to membership for the first time, and in addition for certain
shares calculated on the basis of the turnover of the admitted
Society. The result of the alteration was that the B Society,
in the terms of the new rules, became bound to apply for
470 extra shares. The new rules were brought to the notice
of the B Society by a letter from the A Society, and on receipt
of that letter, and after certain correspondence, the B Society
applied for the extra shares which were necessary on the
above calculation, and they were allotted to them and they
accepted the shares and paid up the amounts due upon them.
Three years later, the membership and turnover of the B
Society having further increased, the A Society called on
the B Society to apply for and take 2211 more shares. This
the B Society refused to do and the A Society raised action.
Now it will be at once observed that there was an obvious
difference between the facts of that case and this case. In
that case the B Society had accepted the situation of the
altered rules by applying for shares and accepting them
and paying for them. The shares were shares which they
needed to apply for either because the new rule was valid
or on the assumption that they accepted the alteration of
the rule as valid; in the present case no such application,
no such acceptance and no such payment was made. It
was therefore possible in the Biddulph case for A Society to
put its argument on two separate grounds. (1.) That the
rule as it stood was binding on the B Society, and (2.) that
even if it was not the B Society by application, acceptance
and payment under it had contractually adopted the rule
in question with the A Society. Now this double ground
was undoubtedly pleaded by the A Society, for on p. 772
of the report in the Court of Appeal (1) I find this as the
argument of the appellants. (The A Society were appellants
before the Court of Appeal, because Lawrence J.'s judgment
in the first instance had simply followed his own judgment
in the Dibble case.) "The appellants' claim is based on two
grounds, first that an obligation to take the 2211 shares
(1) [1925] Ch. 769.

A. C. AND PRIVY COUNCIL.

483

in question arose under the rules, and secondly, that there H. L. (E.)

was a contract to take them quite apart from the rules. If
we succeed in the first claim, the other will not arise."

1930

Hote

But when we come to the judgment of the learned judges Ginsene.

in the Court of Appeal the whole discussion turned on the
first ground—on that they were with the appellants—and
there is not a word about the second.

The first two judges pass over it in silence, and the third
only says he thinks it unnecessary to say anything about it,
so he hazards a doubt bearing on the fact of the application.
Not a word is said as to the alleged second ground of liability,
and not a word as to the possibility or impossibility of imposing
a liability not by original or adopted rules, but by rules
passed by a majority in virtue of mere power of amendment.
The whole argument in the case turned on whether such a
rule, i.c., a rule in certain events described imposing a
liability to take further shares was or was not struck at by
the limitation of liability provisions. Lawrence J. in Dzbble's
case had held that it was. And the whole gist of the judgment
in the Court of Appeal was simply this, that the statutory
limitation of liability only applies to the liability which
arises on a share in respect of that share, and the doctrine has
no application to a collateral contract to apply for extra
shares in certain events, the liability on those shares being
of course limited to the amount due on them. A very few
quotations will make this clear.

Sir Ernest Pollock M.R. (1) quoting Baird's case (2), says:
««*A member is only liable to be placed on the list of contri-
butories in respect of the amount which by the memorandum
of association of the company he has undertaken to contribute
in the event of its being wound up' upon his guarantee—it was
a company limited by guarantee— although he may be sued
for sums which he is only bound to pay under the articles
of association, he is not liable as a contributory in respect
of such sums.' There are two different liabilities; so far
as he is a shareholder he is placed upon the list of contri-
butories in respect of the unpaid balance due upon his shares ;

(1) [1925] Ch. 781. (2) [1899] 2 Ch. 593.
3 2K2

Viscount
Dunedin.

—

484

H. L. (E.)
1930
Hoe

v.

GARNSEY.

Viscount
Dunedin.

HOUSE OF LORDS [1930]

in so far as he has undertaken an extrinsic liability, he can
be sued in respect of that extrinsic liability."

Warrington L.J. says (1) that the judgment of the Court
below and the arguments adduced, "ignore the obvious
distinction between the limitation of liability in respect of
shares held, and an obligation collaterally imposed upon a
member to take up further shares which will themselves,
when taken up, be entitled to a similar limitation of liability."

Sargant LJ. says(2): "There may be some special
collateral liabilities attaching to a share by special contract
which are in no way touched or destroyed or affected by
the limitation of the liability of a member in respect of the
general engagements of the company such as can be enforced
in a winding up of the company."

Now I do not doubt that as it left the Court of Appeal
that case ruled the point, for it disposed once and for all of
the idea that limited liability had anything to do with the
question, and it assumed that the rules, unless they were
bad as infringing limited liability, were good and binding
on the B Company. But when that case came to your
Lordships' House all that was altered. Their Lordships
undoubtedly affirmed the proposition that the doctrine of
limited liability could not save the B Company, but beyond
that they did not go. They saw, or at least the majority
of them saw, that the question of whether you could impose
a liability such as this merely through a power of amendment
of the rules, was a very serious question indeed. I have
already noticed the arguments of the A Company before
the Court of Appeal when their counsel said there were two
questions: (1.) Liability in respect of the rules per se;
(2.) Liability under contract apart from the rules, and added
that if (1.) were solved in his favour (2.) did not arise. In
the very first sentence of the judgment of Viscount Cave L.C.
he puts the matter quite plainly as soon as he has stated the
facts (3) in precisely the opposite order : "It is unnecessary for
the purposes of this appeal to decide whether, having regard

(1) [1925] Ch. 786. (2) [1925] Ch. 794,
(3) [1927] A. C. 84,

A. C. AND PRIVY COUNCIL.

to the terms of the Industrial and Provident Societies Act,
1893, an alteration of the rules of a registered society requiring
members of the Society to subscribe for additional shares
would be binding on a member who had not assented to the
alteration ; for the case of the respondents rests, not on any
alteration of rules made after the appellants took up their
shares, but on the rules of 1918, which were in force when the
appellants subscribed for 470 shares. .... The respondents'
case rests on contract only. The appellants when they took
the 470 shares on the basis of the rules of 1918—and the
correspondence shows beyond any doubt that they did so"
(this quiets the hinted doubt of Sargant L.J.)—"' became
by virtue of section 22 of the Act of 1893 bound as by a
covenant under seal to take further shares in accordance
with the provisions of those rules; and there is nothing in
the Act of 1893 or to be inferred from that enactment which
invalidates such a covenant.'' And then at the end he does
not say that Dzibble's case (1) is overruled, which is what the
Court of Appeal said, but he says so far as Dibble's case (1) is
inconsistent with the decision (not, observe, the reasons) of
'the Court of Appeal in this case I think that it must be
deemed to be overruled. In other words what the Lord
Chancellor clearly held was this; the judgment below is
right in so far as it holds that a provision of this kind imposing
liability in certain events to take further shares is not
inconsistent with limited liability, and is therefore a good
provision in the original rules of any such society. And the
question does not arise whether it could be introduced under
cover of a mere right to amend because the appellant, having
seen the rules altered, did not say they are not binding on
him, but acquiesced and contractually bound himself on the
altered rules just as he would have been contractually bound
under the original rules.

Lord Sumner held the same view after setting forth what
had taken place in 1918. He said (2): "I think that the
appellants impliedly accepted the amendment of 1918 and
agreed to perform it, as circumstances might arise from time

(1) [1923] 1 Ch. 342. (2) [1927] A. C. 88.

485

H. L. (E.)
1930
~_—
Hote
v.
GARNSEY,.

Viscount
Dunedin.

486

H. L. (E.)
1930

~~
Hoe
U.
GARNSEY.
Viscount
Dunedin.

HOUSE OF LORDS [1930]

to time, and that this obligation became contractually
enforceable upon them by action."

Lord Blanesburgh (1): "I too think that this appeal should
be dismissed, and I am in entire agreement with the reasons
for that conclusion which have just been given by the Lord
Chancellor."

It is true that in one of the three observations which he
permits himself to make it looks as if he might have been
content to rest his judgment on other grounds rather than
those of the Lord Chancellor, which he had formally accepted,
but that this is not so is I think shown by his very last
remark. When alluding to the arguments that in the case of
a limited company by means of an amendment in the articles
of association the door would be open to get round limited
liability in cases under the Companies Act, he says: "I
have no fears on that score. I cannot see that anything
now decided by your Lordships is even remotely connected
with these matters, or any of them." Now if the case had
been left as the Court of Appeal left it, this would
have been the inevitable result, and it is that which, to my
mind, makes this case so very important. For if the idea
that any alteration made under a power to alter constitutes a
collateral contract which has nothing to do with the principle
of limited liability is affirmed as it stands, then why should
not a limited company, having in its articles the power to
increase its capital, pass another article which provided that in
the case of, say, one-fourth of the capital being lost, it should
be incumbent upon the shareholders to apply for such a
number of shares as would make up their proportional share
of the capital lost, and this operation might be repeated
from time to time.

Lord Shaw's judgment is, with deference, lacking in the
usual precision of that learned judge. He begins by seeming
to reserve the general question, but he goes on to affirm
simpliciter, the judgment of the Court of Appeal.

Lord Parmoor clearly does the same, but these two are in
a minority as regards their reasons.

(1) [1927] A. C. 93, 94.

A. C. AND PRIVY COUNCIL.

My first point therefore is that the judgment of the Court
of Appeal was wrong in saying that this case was ruled by
Biddulph's case. (1) That leaves it open to discuss the case
on the merits, but first let me say what I think has been
decided by Biddulph's case (1) and the cases which were
cited in it.

First it was decided that a rule of this kind if it took its
place among the original rules, or was assented to as a new
rule, was not bad in itself as being struck at by the provisions
for limitation of liability, and secondly it was decided that
such a rule was not bad because it prescribed an expanding
liability to take extra shares, inasmuch as it gave a method
by which that expanding liability could be accurately
calculated. But when we come to the question of admitting
a rule of that kind for the first time only by virtue of a general
power of amendment, all seems to me to be altered. You
are then supposed to be under a contract to be bound by any
extension of your liability which a three-fourths majority
may enforce without any power of prescience as to what
form that liability may take. Take the present case. If,
instead of the 5/. nominal value the rule had said 100l., it
would be all the same. I therefore come most determinately
to the conclusion that a contract to take extra shares and
incur extra liability, which is not set forth but only introduced
through a general power of the amendment of the rules, is
too vague to be enforced and is bad at common law.

When the learned counsel for the respondents realized that
it was not at all certain that your Lordships would take the
same view of what was settled by Biddulph's case (1) as the
Court of Appeal had taken, he proceeded with great ability
and persistency to produce certain cases which he argued
supported the judgment even upon the assumption that the
matter was not concluded by Biddulph's case (1), and it is
right that I should deal with these authorities.

None of them, in my opinion, support what was here done.
None of them are actually binding on me, for they are not
judgments of this House, but being judgments of very

(1) [1927] A. C. 76.

487

H. L. (E.)
1930
——_

Hoe

Ve
GARNSEY.
Viscount
Dunedin.

488 HOUSE OF LORDS [1930]

H.L.(E.) eminent judges I would be loath indeed to say that such
1930 judges as Lord Lindley, Lord Bowen and Fry LJ. were
Horr wrong. At the same time I confess I find it difficult to

reconcile the cases I am going to quote with the case of

Vico Auld v. Glasgow Working Men's Building Society (1), and

Dunedin. the opinion of Lord Halsbury therein. But I need not further

inquire as to this as in my view they can be distinguished
from this case. Some of them, such as the pigeon shooting
case, are plainly inapplicable, for there is here no question of
changing the general nature of the society, so I go at once
to what, on the face of it, seemed the best authority—namely,
Rosenberg v. Northumberland Building Society (2), and the
case therein cited of Wilson v. Miles Platting Building
Society. (3) But before I discuss that case I would mention
a case which, though posterior in date, contains the principle
on which, in my opinion, the other case is decided. I mean
the case of Strohmenger v. Finsbury Permanent Investment
Building Society. (4) That was a case where a new rule
simply reduced the capital of the company. Lindley L.J.
says: 'The reason why that rule was passed is perfectly
intelligible. The Society had sustained a loss of about
30,000/. 2... The money had gone. How was the loss to
be dealt with? The members considered the matter, and
came to the conclusion that the most expedient way of
dealing with the case and the fairest way for everybody was
to reduce the shares. There is nothing dishonest about
that—no cheating of creditors."

Now it is apparent that this was merely doing at once
what would have been automatically done had the Society
been wound up. Each member of the Society is treated
alike. The capital in the Society was his capital and it was
partly gone. All that was done was to show at once by
restating the debt of the Society to each member, that the
capital had pro tanto been lost. Now that was to my mind
just what was allowed in a more complicated form in the
cases of Rosenberg (2); Wilson. (3) Both these cases dealt
with the rights of advanced members in a building society.

(1) (1887) 12 App. Cas. 197. (3) (1887) 22 Q. B. D. 38In.
(2) (1889) 22 Q. B. D. 373. (4) [1897] 2 Ch. 469, 477.

v.
GARNSEY.

A. C. AND PRIVY COUNCIL.

The scheme of a building society is that the contributions
form the building up of the share capital which then becomes
a debt to the member owning the shares. An unadvanced
member, if the matter is allowed to go on so to the end, gets
back his share in the shape of money and interest, but the
advanced member is one who gets an advance to build a house.
The advance is finally to be repaid by the maturing of his
share, but as security to the Society he executes a mortgage
on the house. These mortgages contain a covenant by the
mortgagor to pay to the Society all subscriptions, fines and
other moneys which, according to the rules for the time being
of the Society, and from time to time, become due and payable
by him in respect of the security or the shares by virtue of
which the advance was made to him. In the rules in force
at the time of the execution of the mortgage, there was no
provision that advanced members should bear their pro-
portion of any losses which the Society might sustain. This
was altered by a rule duly carried and the question was
whether the mortgagor could redeem without bearing his
proportion of the loss. It was held he could not. Now it
will be noted that the amount to be found in money in order
to redeem the mortgage was the total sum due minus the
value of the share at the moment of redemption. That
value was liable to be reduced by a rule allocating losses
against shareholders, and that is why I quoted the Strohmenger
case (1) first. The point of these cases was that the mortgagor
had no right to be treated as an ordinary mortgagor, that is
to say, at arm's length from the mortgagee, and that he was
primarily a shareholder and only secondly a mortgagor.
Fry L.J. says this definitely (2). "It is obvious that
the position of a mortgagor in the case of a mortgage to a
building society is by no means the same as that of an
ordinary mortgagor, and that his rights must be more or less
affected by the contract of membership, as well as by the
contract of mortgage. It is equally apparent, I think, that
the contract of membership carries in gremio the right on the
part of the Society to alter the rules from time to time."

(1) [1897] 2 Ch. 469. (2) 22 Q. B. D. 380.

489

H. L. (E.)
1930
Hoe
v.
GARNSEY.

Viscount
Dunedin.

490

H. L. (E.)

1930
—

Hote
v

GARNSEY.

Viscount
Dunedin.

HOUSE OF LORDS [1980]

And that alteration being an alteration of the character
which I have explained in the Strohmenger case (1), was a good
alteration. But that does not touch the general proposition
which we have here of an alteration being made which did not
simply affect the rights of the member in the capital of
the Society, but imposed a perfectly new and outside
liability upon him.

For these reasons I am of opinion that this appeal should
be allowed and I move accordingly.

Viscount SumMNER (read by Lorp Macmimian). My
Lords, the importance of this case in its legal aspect consists
in the question raised by the very able argument for the
respondent, which was virtually a claim, that an association,
registered under the Industrial and Provident Societies Acts,
can, by the exercise of its power to make regulations and to
alter or rescind them, compel members to invest capital in its
business against their will without, so far as I can see, any
limit at all.

The effect of the alterations made in the present case was
in substance (1.) to write down the nominal value of the
shares, which the appellant held and had paid up in full, to
one-third of their original value, and (2.) to require and oblige
him, if possible, to take from the Association and to pay
for a number of further shares depending on the acreage of
his holding or the number of dairy cows that he owned from
time to time, whichever might be more favourable to the
Association. Such a drastic reduction of capital shows how
severe and probably how irrecoverable the trading losses
of the Association had been in the past, and further writing
down of old shares and requiring members to take up new
ones were processes which, in case of need, might be repeated
as often as might be necessary in the future. The formidable
character of the power in question is manifest. Not only
is it an express discrimination between members of a greater
and members of a less apparent capacity to pay, but the
Association, faced with a declining business and pressing
creditors, would be enabled to extract from members, who

(1) [1897] 2 Ch. 469.

A. C. AND PRIVY COUNCIL.

happened to be milk producers and whose herds and
acreage were not declining, further and further sums until
they were reduced to extremity. It is true that the regu-
lations in question were all regularly and duly passed and
that the majority which the rules required must therefore
have been obtained; but in a Society, many of whose
members may have remained at least stationary in the size
of their farms and herds or who may not have been milk
producers at all, such provision, applied to such conflicting
interests, might be no protection to persons in the appellant's
position.

To support a claim to such a power either clear judicial
authority, clear legislation or clear principle and necessity
would seem to be required. In my opinion none were
forthcoming. Courts have naturally gone far to support
the autonomy of social clubs and their power to affect members
by rules and resolutions, passed regularly and in good faith,
but no case was cited even approaching a financial power of
this sort. Building society cases again were cited, of which
I think it is enough to say that none went so far as the present
case, precisely because none were characterized by the
peculiar features to which I have drawn attention. Neither
does the authority of cases as to mutual marine insurance
associations apply, for these are cases of collateral under-
takings ancillary to the regular business of the association
and bearing equally upon all members. The present case
is far otherwise. The scheme and structure of the Industrial
and Provident Societies Act, 1893, were rightly stressed,
for they are indeed important, and it may be truly said that
they appear in general to be designed to authorize the
formation of associations for the purposes described and
thereafter largely to leave them to manage their own affairs
as they might think fit, but even here s. 4 (a) and s. 60 (d)
seem to show sufficiently that the Legislature did not intend
members to be at risk in such a way as might result from
these amended regulations. As to finding a foundation for
the contention in principle or necessity, I think the matter
is quite the other way. I throw no doubt on the good faith

491

H. L. (E.)
1930

——

Hoe

v.
GARNSEY.

Viscount
Sumner.

492 HOUSE OF LORDS [1930]

H.L.(E.) either of those who managed the Association or of those
1930 who voted for these amended resolutions, but, speaking
Hom purely in a legal sense, I think the contention unprincipled.

Garxsry. It remains to refer to the decision in the Biddulph case (1),
Viscount by which, of course, your Lordships are bound. I concur
"—" in the opinion, which I understand to be that at which all

your Lordships have arrived. Your Lordships dissented
from the ground on which Dibble's case (2) had been decided
in the Court of first instance and put that case aside, but in
so doing did not decide that the actual rules there impugned
and others like them must therefore be unexceptionable. It
appears to have been the opinion of the majority that, even
apart from an express bargain, evidenced in the correspondence
and taking the form of an offer and an acceptance of the
new shares, the rules then in question had received such
a measure of assent from the complaining shareholder as
prevented him from refusing to comply with them. To
make this decision of use to the respondent in the present
case, where it is clear that no assent was ever given by the
appellant either originally or at all, it was contended that
their Lordships' ratio decidendi was that the rules in question
belonged to a class (not anywhere described or elsewhere
even suggested), intermediate between rules ultra vires and
rules intra vires simpliciter, which though valid in themselves
were conditional, for their operation as rules, on some assent
given by the individual shareholder. This condition, it was
said, having been satisfied in fact, the rules, which in
themselves were good throughout, became also operative
and then stood on the same footing as all other valid rules.
I have not been able to persuade myself that such was the
real meaning of any of their Lordships. Nothing in the
language of the rules in question suggested any such condition
or indicated any such ambiguous category. On their face
they were unconditional and stood or fell like all other rules
by the extent of the Association's power. If the ratio
decidendi was that the respondent's present contention,
which was then also advanced and on the same grounds,
(1) [1927] A. C. 76. (2) [1923] 1 Ch. 342.

A. C. AND PRIVY COUNCIL.

ought to be supported, not only would this have been said
in clear terms but there would have been no need and no
inducement to have said anything more. I do not think
that the Biddulph case (1) binds your Lordships in any
degree to support the respondent's present argument; on
the contrary, so far as it affects this case, it shows that no
noble and learned Lord then concerned could find it
supportable.

For the other points raised I may say briefly that the rule
attacked as uncertain and void seems to me to be clear enough,
subject to proof of some simple facts in each case, though in
its operation it may be arbitrary and unreasonable. It may
be a bad rule but it is not a void one. As to the question,
whether the contention of the respondents should not have
been raised in an action for damages against the appellant
for not applying for shares to be allotted by the Association,
instead of on a liquidator's summons to place him on the list
of contributories in respect of shares that he never held,
I think, in the view I have already taken, that it is unnecessary
that this point should be considered, all the more because
it is not one that the respondent could have gained any
advantage by urging in the first instance, or that interferes
with a decision now on other grounds.

I think that the appeal should be allowed.

Lorp Arkin. My Lords, I have had the opportunity of
reading the judgment delivered by Lord Dunedin and that
about to be delivered by Lord Tomlin, and I agree with the
reasons contained in them. I content myself, therefore, with
a statement of my principal ground for differing from the
decisions below.

Apart from any decision which binds your Lordships to
the contrary view, I should have thought on principle that
the matter was fairly plain. If a man enters into association
with others for a business venture he commits himself to
be bound by the decision of the majority of his associates
on matters within the contemplated scope of the venture.

(1) [1927] A. C. 76.

493

H. L. (E.)
1930

w
HoLe
v.
GARNSEY.
Viscount
Sumner,

494

H. L. (E.)
1930

ats
Hour
v.
GARNSEY.

Lord Atkin.

—

HOUSE OF LORDS [1930]

But outside that scope he remains dominus, and cannot be
bound against his will. The principle is seen in its simplest
form in connection with partnership. I quote from the
edition of Lindley on Partnership, 5th ed., in 1888, published
before the Partnership Act, at p. 315, Bk. III., c. 2, s. 3:
"Passing now to the second class of differences, namely, those
which relate to matters with which the partnership was
never intended to concern itself, it has been over and over
again decided that no majority, however large, can lawfully
engage the partnership in such matters against the will of
even one dissentient partner. Each partner is entitled to
say to the others: 'I became a partner in a concern formed
for a definite purpose and upon terms which were agreed
upon by all of us, and you have no right, without my con-
sent, to engage me in any other concern, nor to hold me to
any other terms, nor to get rid of me, if I decline to assent
to a variation in the agreement by which you are bound to
me and I to you.' Nor is it at all material that the new
business is extremely profitable. This principle is applicable
to all partnerships and companies, whether great or small,
and is evidently one which requires only to be stated to be
at once assented to as being just." The author proceeds to
cite Natusch v. Irving from Gow on Partnership, ed. 3,
App. 398. In that case a company formed for carrying on
the business of fire and life insurance proposed on the with-
drawal of a statutory prohibition to engage in marine insur-
ance. The plaintiff held 15 shares out of 50,000 and
objected, and Lord Eldon granted him an injunction. With
respect to the powers of a majority, Lord Eldon said: "If
six persons joined in a partnership of life assurance, it seems
clear that neither the majority nor any select part of them,
nor five out of the six, could engage that partnership in
marine insurances, unless the contract of partnership expressly
or impliedly gave that power: because if this was otherwise,
an individual or individuals, by engaging in one specified
concern, might be implicated in any other concern whatever,
however different in its nature, against his consent.' He
went on to say that if, however, the proposed change was

A. C. AND PRIVY COUNCIL.

made known to the others, and he acquiesced, he would be
bound. As to partnership the principle is now expressed in
ss. 19 and 24, sub-s. 8, of the Partnership Act, 1890.
Amongst the matters in respect of which the individual does
not agree to be bound in invitum appear to me to be the
purposes of the association, and the amount of money which
he will contribute to his associates for those purposes. I
am not, of course, dealing with liability to third parties.
These matters, generally speaking, I regard as fundamental.
And unless there is reasonably clear indication in contractual
terms, or statutory provisions that the individual member is
to be bound in these respects against his will, his right to
remain unaffected will continue. There may, therefore, be
important distinctions between the binding force of original
stipulations to which the member has assented, and of pur-
ported alterations of the original stipulations to which altera-
tions he has refused assent. I venture to think that the
judgments of the Court of Appeal in Biddulph's case (1)
have not paid sufficient attention to this distinction, and
have relied too much on authorities which, so far as they
do support the decision, are instances of original stipulations
to which the party in question had given his assent. No
doubt need be thrown upon the proposition that a member
of an association may undertake, in addition to his
contribution to the joint venture, collateral obligations such
as are involved in a mutual insurance of such of the
members' chattels as they individually are allowed to bring
into the scheme. The Master of the Rolls finds some analogy
in the present case to such an obligation. With respect
there is nothing here corresponding to such mutual obliga-
tions. The society no doubt buys from outside and sells
to its members; buys produce from its members and sells
outside; it may also buy from one member and sell to
another ; but all these transactions are different in principle
from mutual insurance, and in any case involve no obligation
on a member to buy or sell anything against his will, still
less to apply and pay for a share which he does not desire.
(1) [1925] Ch. 769.

495

H. L. (E.)
1930
HoLEe
Vv.
GARNSEY,.
Lord Atkin.

496

H. L. (E.)
1930

ee
Hote
v.
GARNSEY.

Lord Atkin.

HOUSE OF LORDS [1930]

The only relevant question in this case appears to me to
be whether r. 64 giving the power to a three-fourths majority
at a special general meeting to amend the rules confers a
power to amend those rules in respect of the fundamentals
above mentioned so as to bind a dissenting member. I
think that the consent of a member to such a rule as r. 64 is
not an assent to have the purposes of the society or the
amount of his share subscription altered against his will.
Full effect is given to the rule by limiting its operation as
against dissentients to matters which are within the scope
of the administration of the venture as originally framed.
I should myself regard as within this definition such matters
as the annual subscription to a social or other club which
may fairly be regarded as a matter of internal administra-
tion. But an increase in capital contribution is something
quite different. I reserve the question whether an amended
rule so passed is ultra vires the society so as to be entirely
void and therefore not binding on even the assenting
majority. It may well be that a society under this Act
can only express in rules what I may call offers of funda-
mental change, and that such rules so far as they are
assented to, but only so far, bind assenting members. This
seems to be the view entertained by Lord Cave in Biddulph's
case. (1) If such amendments are indeed enforceable to
the full extent the present case shows the far-reaching conse-
quences. So far as I can see it would be within the power
of an optimistic majority to continue indefinitely to trade
at a loss. Each time the Society approaches insolvency it
need only write down its shares to a nominal sum and by
amending the rules impose obligation upon all the members
to make further contributions of share capital. As long as
the obligation did not exceed 2001. per member this process
in theory could continue without limit. I do not find it
necessary to discuss similar problems arising under the
Companies Acts or other statutory enactments regulating
such association. It will, I think, be found that the funda-
mental matters I have referred to are carefully guarded by

(1) [1927] A. C. 76,

A. C. AND PRIVY COUNCIL.

interposing the consent of the Court or otherwise. Certainly
I should be surprised to find that by amendment of the
articles of association existing members could be compelled
to subscribe to further issues of authorized capital. Such
a simple device appears to have escaped the attention of
company financiers. But it will only be necessary to consider
such a proposal when, if ever, it is made.

The only remaining question is whether we are precluded
by the decision of this House in Biddulph's case (1) from
giving effect to these conclusions. My Lords, for the reasons
given in the judgments to which I have referred, especially
of Viscount Dunedin, I am myself satisfied that the reason
for the decision of the majority of the House in that case
was that the appellants were bound by actual assent to the
proposed alteration of the rule. I might add to what has
been said that I can only construe a passage in Lord Shaw's
judgment at p. 86 in which he says that "the appellant
society stood bound since March, 1919... . to the rules of
the society in force at that date " as an indication that he also
rested on express contract, for the amendment in question
had been made in May, 1918; and the date of March, 1919,
is the date on which additional shares had been allotted to
the appellants on their application made with notice of the
amended rule. I am not pressed with the fact that the
House did not alter the declaration made in that case by
the Court of Appeal. I am inclined to think that the terms
of the declaration support either view; but in any event I
conceive that your Lordships are bound not by the precise
form of a judgment which is indeed conclusive between
parties, but by the reasons given declaring the law upon
which the formal judgment is drawn up.

I desire to add that I share the doubts expressed by
Lord Tomlin as to the procedure adopted in this case, and
as to the suggested measure of damages.

For these reasons, my Lords, I agree that the appeal should
be allowed, and the order made in the form proposed by
Lord Tomlin.

(1) [1927] A. C. 76.
A. C. 1930. 3 2L

497

H. L. (E.)
1930
HoLE

v.
GARNSEY.

Lord Atkin.

498

H. L. (E.)
1930

"
Hoe

v.
GARNSEY.

HOUSE OF LORDS [1930]

Lorp Tomy (read by Lorp THANKERTON). My Lords,
the question to be answered in this case is whether the
appellant by reason of amendments in the rules of the
Society not assented to by him is liable to be placed
upon the list of contributories in the winding up of the
Society.

To answer the question it is necessary, first, to consider
what is the bearing on the matter of (a) the decision of
Lawrence L.J. (then Lawrence J.) in Dibble v. Wilts and
Somerset Farmers, Ld. (1), and (b) the conclusion of your
Lordships' House in Biddulph and District Agricultural
Society v. Agricultural Wholesale Society. (2)

Upon these topics there has been much debate before
your Lordships and I desire only to say that my understanding
of the latter case is that in it a majority of your Lordships'
House reached a conclusion to the following effect—namely
(1.) that the appellant in that case was bound by a contract
personal to himself to take up additional shares so that the
necessity for passing an opinion upon the validity of the
amendments of the rules did not arise, and (2.) that Dzbble's
case (1) was overruled so far only as it was therein held that
an obligation under the rules to take up further shares is
necessarily bad having regard to the statutory limitation
of liability to contribute in a winding up.

It follows in my view that it is open to your Lordships
in the present case to consider how far the amended rules
are valid and binding on the appellant.

My Lords, the analogy which in the course of the argument
was sought between a limited company under the Companies
Acts and a society registered under the Industrial and
Friendly Societies Act, 1893, is apt to be misleading.

A limited company is created and regulated by statute.
Its capital is fixed and cannot be reduced except on special
grounds and with the sanction of the Court. Its powers are
circumscribed by the terms of the memorandum of association.
The memorandum cannot be altered except for certain
purposes and then only with the sanction of the Court, which

(1) [1923] 1 Ch. 342. (2) [1927] A. C. 76.

A. C. AND PRIVY COUNCIL.

is bound to consider the interest of the members. Nor can
any alteration of the articles of association be made so as
to enlarge the powers conferred by the memorandum. The
company's continuance on the register is necessary to its
existence.

A society registered under the Act of 1893 is in a different
position. The Act confers, subject to certain conditions and
so long as registration lasts, corporate existence and other
privileges upon a society formed for carrying on any industries,
businesses or trades specified in or authorized by its rules.
The preamble to the earlier Act of 1852 indicates the kind
of societies for which the Legislature was seeking to provide.
The Act of 1893 does not require that the constitution of the
society should, on registration, be regulated more closely than
may be done by including in the registered rules provision
for certain matters specified in that behalf in the Act. The
specified matters do not contain any reference to the amount
of capital or the manner in which the rules may be altered.
They include, '' Determination of the amount of interest not
exceeding 200/. sterling in the shares of the society which
any member other than a registered society may hold." 'The
rules of a registered society bind the society and all members
thereof as if each member had subscribed his name and
affixed his seal thereto and there were contained in such rule
a covenant on the part of such member to conform thereto
subject to the provisions of the Act: see s. 22. The
registration of a society may be cancelled or suspended.
Such cancellation or suspension does not destroy the society,
but only deprives it of and relieves it from the privileges and
obligations which follow from registration. It can continue
its existence so long as it does not infringe the provisions of
s. 1, sub-s. 2, of the Companies Consolidation Act, 1908.

It results from these differences between a limited company
and a registered society that the considerations which
determine the question whether a member is bound by altera-
tions in the constitution are not identical in the two cases,
at any rate where as here the matter does not depend upon the

element of fraud or bad faith.
3 2L2

499

Bir ES
1930

—"——

Hoe
v.
GARNSEY.
Lord Tomlin,

500

H. L. (E.)
1930 —

—
Hoe
Vv.
GARNSEY.

Lord Tomlin.

HOUSE OF LORDS £1930)

In the case of the limited company the answer will be found
when it has been ascertained whether or not the limitations
and formalities imposed and required by the Acts have been
adhered to and complied with.

In the case of a registered society, inasmuch as the
operation of the statute is limited, it is necessary to consider,
first, whether the amendments offend against any of the
statutory provisions and, secondly, whether, having regard
to the general principles governing contracts inter partes,
the amendments are effective as against members who have
not assented to them.

An examination of the relevant amendments in the present
case does not in my opinion disclose anything obnoxious
to the statute. If the amendments had stood as part of the
original rules they could not I think have been impeached,
and from the point of view of the statute that which would
be innocent as an original rule cannot be invalidated merely
because it is embodied in an amendment.

There is however the second consideration. Does a power
enabling a majority to amend the rules justify as against a
dissenting member any alteration whatever, where, as here,
neither by the statute nor by the rules themselves is any
one rule expressed to be more fundamental and unalterable
than any other ?

The answer in my judgment must be in the negative. In
construing such a power as this, it must, I think, be confined
to such amendments as can reasonably be considered to have
been within the contemplation of the parties when the contract
was made, having regard to the nature and circumstances
of the contract. I do not base this conclusion upon any
narrow construction of the word "amend" in Rule 64, but
upon a broad general principle applicable to all such powers.

If no such principle existed I see no reason why a dairy
society in Wiltshire should not by means of the exercise of
such a power as the one under consideration find itself
converted into a boot manufacturing society in Leicester
with an obligation on the members to contribute funds to
the new enterprise.

A. C. AND PRIVY COUNCIL.

What changes then do the amendments in the present
case effect ?

In the first place they impose for the first time upon a new
and limited category of members—namely, milk producers,

501

H. L, (E.)
1930
"a
Hotz

UV.
GARNSEY.

a special liability to hold shares in the society. In the second ora tomlin.

place their effect in substance if not in form is to compel the
members within the first part of Rule 12 to pay over again
for two-thirds of the nominal value of their original shares
and at the same time, while depriving them of their right
to interest under Rule 15 on their original payment of such
two-thirds, to keep within the letter of Rule 13 in the case
of members whose original shares already amount to 2001.
in nominal value. It is also to be observed that the alteration
made in Rule 23 on November 14, 1921, renders it impossible
for any member without the consent of the committee of
management to escape from the obligations imposed by the
other amendments.

If the scheme embodied in these amendments for extracting
money from the members is legitimate, the potential liability
of each member in a society registered under the Act of 1893
is without limit and has no relation to what was within his
contemplation at the moment of joining the society.

It is said that the society is free to reduce its capital and to
increase its capital and that this is what it has done.

It has in fact done much more. It has discriminated
between members and has laid on members an obligation to
hold more shares. It has no special statutory authority to
do this. It can only do it if the power to amend the rules
justifies it as a matter of contract.

In my opinion the power does not justify it. I do not
think that it is within the contemplation of the parties to a
bargain of this kind that they should be made liable for a
compulsory levy or expenditure over and above the contri-
butions payable or to become payable under the original
terms. On the contrary I think the basis of such a bargain
is that the extent of the member's liability is limited by the
original terms and that it cannot be enlarged by any
amendment of the rules.

502

H. L. (E.)
1930

Hoe
v.
GARNSEY.

Lord Tomlin.

HOUSE OF LORDS [1980]

My Lords, I desire to add one further word by way of
caution. As at present advised I am not prepared to accept
the view that the amended rules as to holding further shares
even if binding upon the appellant entitle the liquidator to
place the appellant's name upon the list of contributories
or that, if the Society's remedy is by way of action for
damages, the measure of damages would necessarily be the
nominal amount of the shares which ought to have been
acquired.

Having regard, however, to the view which I take of this
case these questions do not call for answer.

My Lords, for the reasons which I have endeavoured to
indicate, I think that the appeal should be allowed and that
so far as they affect the appellant, the orders of the Court of
first instance and of the Court of Appeal, except in respect of
the costs in the Court of first instance, should be discharged
and that it should be declared that the amendments, so far
as they purport to impose upon the appellant an obligation
to hold further shares of the Society, are not binding upon
him and that he ought not to be placed upon the list of
contributories. The appellant's costs here and in the Court
of Appeal should be paid by the liquidator. The costs of
the liquidator, including any costs payable by him to the
appellant should be provided for out of the assets of the
Society so far as they are sufficient for that purpose.

Order of the Court of Appeal, and judgment of
Romer J., in so far as the said judgment
relates to the appellant, reversed except so far
as regards the terms of the said judgment as
to costs. Declare that the amendments to the
rules of the Wilts and Somerset Farmers, Ld.,
so far as they purport to impose upon the
appellant an obligation to hold further shares
of the Society, are not binding upon him and
that he ought not to be placed upon the list of
contributories. The respondent to pay the
costs in the Court of Appeal, and also the

A. ¢. AND PRIVY COUNCIL.

costs of the appeal to this House. The costs
incurred by the respondent, as liquidator, in
and incidental to these proceedings as well
before the Court of Appeal as before this
House to be his costs in the liquidation. Cause
remitted back to the Chancery Division
(Compantes) to do therein as shall be just and
consistent with this judgment.

Lords' Journals, March 25, 1930.