Morris v Kanssen

Viscount Simon. My Lords, the opinion which
Lord Simonds has prepared in this appeal and which he is
about to deliver covers the whole ground, and I need say no
more than that I concur in every respect with his conclusions.
As regards costs, the question which I should propose to put
to the House when the appeal is dismissed is: That the
appellant do pay the respondent Walker his costs in this House
and that the respondents Rialto (West End), Ld. do bear and
pay their own costs in this House. I move that the appeal be
dismissed.

LorD THANKERTON. My Lords, I also have had the
opportunity of considering the opinion about to be delivered
by my noble and learned friend, Lord Simonds, and I concur
in! tt:

Lorp Porter. My Lords, I have had the like opportunity
and likewise concur.

Lorp SIMONDS, having stated the facts, continued: I will
dispose at once and in a few words of the question of director-
ship. Though it appears not to have been realized until then,
it was in the course of the trial appreciated what was the
effect of art. 73 of Table A as varied by the company's art. 22,
and it was admitted then and at the bar of the House that
neither Cromie nor Strelitz has in any view been a director
since the end of 1941. The same consideration applies to

(1) [1895] 1 Ch. 629, 633. (3) [1936] 2 K. B. 403.
(2) (1880) 14 Ch. D. 660. (4) (4898) 1 Ch. 6, 15.

1946

Morris

v.
KANSSEN.

408

EL. (Bp)

1946

Morris
Uv.
KANSSEN.

Lord Simonds,

j HOUSE OF LORDS [1946]
Kanssen. Whether or not he ceased to be a director at an
earlier date, at any rate he did so at the end of 1941. Morris
rests his claim upon his appointment by Cromie and Strelitz
at the meeting of March 30, 1942. But, apart from the
considerations which apply equally to the allotment of shares
and to this appointment, it is, I think, clear that neither the
section of the Companies Act and the article, which I shall
have to consider, nor the general law can avail to establish
him in his office of director when he was not in fact appointed
a director. To Cohen J. and to the Court of Appeal this
seemed too plain for argument.

I turn then to the more difficult question of the shares. It
is clear that no shares were in fact validly issued except the
one share each held by Cromie and Kanssen, and Cohen J.
accordingly, having decided the long and hotly contested
question of fact in favour of Kanssen, ordered the register to
be rectified by striking out the name of Cromie as the holder
of any but one share and the name of Strelitz altogether. It
remained to consider the case of Morris. Morris, faced with
the fact that the shares were not validly issued, relied on
defences arguable by him but not open to Cromie or Strelitz.
He claimed the benefit of s. 143 of the Companies Act, 1929,
and of art. 88 of Table A. I do not pause here to set them out.
I will do so later. He further claimed under the general law
that, even if the shares were not validly issued, yet he was
entitled to treat them as validly issued, a claim that must have
been faintly pursued in the courts below, since it finds no
mention in any judgment. He further claimed that Kanssen
was debarred by his laches from alleging the invalidity of the
issue of shares. This last claim has no justification. I observe
that neither Cohen J. nor the Court of Appeal deal with it,
presumably because to them as to me it appeared upon the
facts to be incapable of serious argument.

At the hearing before Cohen J. and in the Court of Appeal the
major argument turned upon the section and article to which I
have referred, the defence on which Morris relied being met by
the plea that in the circumstances of the case neither section nor
article was relevant and, even if they were, they would not avail
him since he was put upon his inquiry and might, if he had
made proper inquiries, have discovered the truth. Several
questions of difficulty seem to be here involved ; first, whether
either section or article has any application to the present
case ; second, what amounts to discovery of a defect for the

A. C. AND PRIVY COUNCIL. 469

purpose of either section or article and whether any party is H. L. (£,)
debarred from its benefit unless and until he has himself
discovered the defect ; third (an elaboration perhaps of the
J second question) whether, if a party is put upon hisinquiry and 9 "08*'S

he might if he made inquiry discover the defect, he can still Kanssen.
say that he has not discovered it, and fourthly, in the circum- fora simonas.
stances of the present case whether Morris was in fact put
upon his inquiry and, being so put, made the proper inquiry.
It seems that in both courts below it was on the first question
assumed (not indeed by counsel for Kanssen but in the
judgments of the court) that the section and article were
relevant. In both courts too, on the second question it was
decided that Morris could rely on them unless he discovered
the defect : it was immaterial that Cromie and Strelitz were
at all times well aware of it. On the third question both
courts decided that Morris was put on his inquiry, holding
that, if he relied on the section or article he must be subject h
to the same obligation as if he was relying on the general law
as stated in Royal British Bank v. Turquand (1) to which
I refer later. It was upon the fourth question that the courts
diverged, Cohen J. holding that, being put upon his inquiry,
he made the inquiries that the circumstances demanded, the
Court of Appeal holding that he had not made such inquiries
and therefore could not be allowed to say that he had not
discovered this defect. I have ventured to state in this com-
pendious form judgments which covered a wide field. I have
done so because the conclusion to which I understand that
your Lordships have unanimously come on the first question,
makes it unnecessary to consider the other questions. They
arise only if the circumstances of the present case bring it
within the scope of section or article.

Before I consider this first question I may dispose of two
other matters. First, I agree with the Court of Appeal that
in any view of the case Morris cannot maintain that the
seventeen shares allotted to Strelitz and by him transferred to
Morris were validly allotted. Strelitz at all times knew of
the defect and Morris could get no better title. Secondly I
observe that Lord Greene M.R. (2) dismissed Morris's plea on
the additional ground that either Cromie was a principal as
between himself and the company (in which case Morris was
merely a nominee between whom and the company there was
no privity) or that he was acting as agent for Morris in applying

(HPO BA& BS 327; (2) [1944] Ch. 346, 360.

1946

470

H. L. (E.)

1946

Morris
Uv.
KANSSEN.

Lord Simonds.

HOUSE OF LORDS [1946]

- for the shares allotted to him. I do not think that the first

alternative is on the facts a tenable view. But the Master of
the Rolls goes on to say that if the latter view is right the
knowledge of the defect which the agent had must be imputed
to the principal, Morris thus being affected with Cromie's
knowledge. My Lords, I would not be taken as assenting to
this view which appears to ignore both the capacity in which
Cromie acquired the relevant knowledge and the fact that
Cromie was acting fraudulently as well towards Morris as to
other parties.

The first question to which I return is whether (1.) s. 143
of the Companies Act, 1929, or (2.) art. 88 of Table A which was
adopted by the company has any relevance to the circum-

stances of the present case. Section 143 of the Companies Act,

1929, which is in the same terms as corresponding sections

in previous Acts, provides that: '' The acts of a director or

"manager shall be valid notwithstanding any defect that may
" afterwards be discovered in his appointment or qualification."
Article 88 of Table A, which does not materially differ from
similar articles in earlier Tables, provides that "' All acts done
"by any meeting of the directors or of a committee of directors,
"or by any person acting as a director, shall, notwithstanding
"that it be afterwards discovered that there was some defect
"in the appointment of any such director or person acting as
"aforesaid, or that they or any of them were disqualified, be
"as valid as if every such person had been duly appointed
"and was qualified to be a director.'' The section can be

' invoked only where there is a defect afterwards discovered in

the appointment or qualification of a director; in the article
the condition is that it is afterwards discovered that there
was some defect in the appointment of a director or person
acting as a director or that he was disqualified to act as a

_ director. Though the language of the section differs in some
respects from that of the article, it does not appear that the

difference is material for the purpose of the present case.

The facts relevant to the question now under consideration
have already been stated. I will very briefly tabulate them :
(1.) On February 1, 1940, Cromie and Kanssen were the only
directors and the only shareholders holding one share each.
(2.) On or about that date the fraudulent assumption of office
by Strelitz and a minute concocted to record an appointment
which did not take place. (3.) On April 9, 1940, an ineffective
attempt to expel Kanssen from his office. (4.) On April 12,

A. C. AND PRIVY COUNCIL.

1940, the ineffective allotment of one share to Strelitz and
seven shares to Cromie at a purported meeting of directors.
(5.) On April 26, 1940, an extraordinary poner meeting
of the company at which as I have pointed out nothing was
effectively done. (6.) At the end of r94z the determination
of the term of office of Cromie and Kanssen and of Strelitz, if
he was a director, and from that date no directors of the
company.

It is in these pine iaee ince: that the question arises
whether the section or article can be called in aid by
Morris in order to validate the transactions of March 30, 1942,
namely, the allotment to him of shares or the appointment of
him as a director. Do the facts that I have stated establish

a defect in the appointment or qualification of Cromie or

Strelitz ? There is, as it Epes to me, a vital weeeeee

in ther words, a defective appointment, and (b.) no appoint-"
ment at all. In the first case it is implied that some act is
done which purports to be an appointment but is by reason of
some defect inadequate for the purpose ; in the second case
there is not a defect, there is no act at all. The section does
not say that the acts of a person acting as director shall be
valid notwithstanding that it is afterwards discovered that
he was not appointed a director. Even if it did, it might well
be contended that at least a purported appointment was
postulated. But it does not do so, and it would, I think, be
doing violence to plain language to construe the section as
covering a case in which there has been no genuine attempt to
appoint at all. These observations apply equally where the
term of office of a director has expired, but he nevertheless
continues to act as a director, and where the office has been
from the outset usurped without the colour of authority.
Cromie's acts after the end of 1941 were not validated by the
section : Strelitz's acts were at no time validated. I have so
far dealt with defect in '' appointment '' and what I have said
in regard to the section covers the article also where the same
words are repeated. Some argument was founded by counsel
for the appellant upon the words in the section " or qualifica-
"tion"? and in the article " disqualified."' This argument is
not easy to follow. So far as both Cromie and Strelitz were
concerned, there was no defect in their qualification after the
end of 1941. They were not disqualified. They were, so far
as I know, qualified to act, but they had not been appointed.

471

H. L. (E.)

1946

Morris
v.
KANSSEN.

Lord Simonds,

472
H. L. (B)

1946

Morris
v.
KANSSEN.

Lord Simonds,

HOUSE OF LORDS [1946]

I do not suggest that qualification refers only to the holding
of qualification shares. But whatever extended meaning
may be given to "' qualification" or " disqualified " I find it
impossible to say that it covers the case of Cromie or of
Strelitz. The point may be summed up by saying that the
section and the article, being designed as machinery to avoid
questions being raised as to the validity of transactions where
there has been a slip in the appointment of a director, cannot
be utilized for the purpose of ignoring or overriding the

substantive provisions relating to such appointment.

I have come to this conclusion unaided by authority, but lam
glad to find that it is supported by clear and cogent authority.
In Tyne Mutual Steamship Insurance Association v. Brown (1),
the meaning of the corresponding section of the Companies
Act then in force and of a strictly comparable article had to be
considered, where the facts were that directors had continued to
act after their term of office had expired, and Lord Russell of
Killowen C.J., having read the article, thus expressed
himself (2): "' What does this provide? It provides for the
" cure of defects in the appointment or qualification of directors.
"Here there has been no appointment at all." He held,
therefore, that the article had no application to the case.
This authority has stood unchallenged for fifty years, and,
though on two occasions since its decision the whole law
relating to limited companies has been reviewed by expert
committees and amended by the legislature, it has in this
respect remained unaltered. This affords strong support
for a construction which in any case appears to me to be the
correct one. I would add that, though no other express
authority has been called to the attention of the House, yet
the language of Lord Lindley M.R. and Chitty L.J. in Dawson
v. African Consolidated Land and Trading Co. (3), of Farwell J.
in British Asbestos Co. Ld. v. Boyd (4) and of Lord Cozens-
Hardy M.R. and Swinfen Eady L.J. in Channel Collieries
Trust, Ld. v. Dover, St. Margaret's and Martin Mill Light
Ry. Co. (5), clearly indicates that in the opinion of those
learned judges the section and article alike deal with slips or
irregularities in appointment not with a total absence of
appointment, and still less with a fraudulent usurpation of
authority. Coming to this conclusion, I do not find it neces-

(1) 74 LT. 283. (4) [1903] 2 Ch. 439.
(2) Ibid. 285, (5) [1914] 2 Ch. 506.
(3) [1898] 1 Ch. 6.

A. C. AND PRIVY COUNCIL.

sary to express any opinion on the question what is the
meaning of the words "' afterwards discovered "' in the section.
I would not be taken as either assenting to or dissenting from
the proposition, which appears to have been accepted in the
courts below, that the section or article can be called in aid

473

H, L. (E.)

1946

Morris

Ve
KANSSEN.

by a third party unless and until he has himself discovered ord simonas.

the defect'in the appointment or qualification of a director.
Nor would I express any final view on what for this purpose
amounts to " discovery,'' and in particular whether the rule
as to inquiry is to be imported into the consideration of it.

The appellant having failed, for the reason that I have
indicated, to establish his case upon the section or the article,
was allowed by the indulgence of the House, although he had
not raised the point in his formal case, to contend that he was
in any case entitled to succeed by virtue of the rule of law which
is conveniently called the rule in Turquand's case (Royal
British Bank v. Turquand) (rt). On this contention the House
has not the benefit of the opinion either of Cohen J. or the
Court of Appeal, before whom the point, if taken at all, appears
not to have been pressed. The claim under this head refers
only to the allotment of the thirty-four shares which were
allotted to Morris on March 30, 1942. On this contention
two questions appear to arise: (z.) whether Morris can in
the circumstances invoke the rule and (2.) whether, if he can
otherwise do so, he is nevertheless debarred from relief under
it upon the ground that he was put upon his inquiry and
might, if he had made proper inquiries, have learned the truth.
The first question involves, first, a consideration of Morris's
position when the shares were allotted to him, and secondly
an examination of the rule in order that it may be determined
whether Morris comes within its scope. Though little credence
could be attached to the uncorroborated testimony of Cromie
or Strelitz, Morris was accepted by Cohen J. as a witness of
truth, and his evidence agreed with that of the recorded
minute of March 30, 1942, which itself is made prima facie
evidence by s. 120, sub-s. 2, of the Companies Act, 1929. It
appears then that the board meeting held on that day fell
into two parts. There were first present as directors Cromie
and Strelitz, with the company's solicitor in attendance.
Cromie '' told the directors '' (so runs the minute) " that he
"had received certain proposals from Mr. Lewis Morris which
" would enable the Rialto cinema to be reopened and he, as

(1) G7Ey &iB: 327,

474

H. L. (E,)

1946

Morris
Vv.
KANSSEN.

'Lord Simonds.

HOUSE OF LORDS [1946 |

"a shareholder, proposed to write a letter to Mr. Morris
"setting out the terms of the arrangement. The letter was
'produced and read." Upon this it was resolved that Morris
be appointed a director of the company and that he be made
managing director of the company. Morris, it is recorded,
then joined the board. What I must regard as the second
part of the meeting with the new board then began, and the
minute records that an application from Cromie for ninety
shares of 1J. each in the capital of the company together with
his cheque for 90/1. was received and that at his request the
application asked that the shares be allotted thirty-four to
Morris, thirty-two to Strelitz and twenty-four to Cromie,
and that it was resolved that the shares be so allotted (the
numbers of the shares being given) and that it was further

*-resolved that share certificates be issued for all the shares

| ¢

which had been allotted in the company. There were certain
further proceedings to which I need not refer. From this _
narrative it is clear that Morris himself acted as a director.
"in the allotment and issue of the shares, including those allotted
"and issued to himself, It is, I think, an irrelevant considera-
tion that he had only become a director immediately before
that event. On this I will say something later. He in fact
acted as a director and was the officer and agent of the company
in the allotment and issue of shares. ,,That neither his acts
nor those of his colleagues were valid is for the purpose of
this argument assumed. The question is whether he can
nevertheless under the rule in Tuvquand's case (1) claim that
he is entitled as between himself and the company to treat that
act as done with the authority of the company, which was in
fact and in law done without its authority.

My Lords, I think that this question admits of an easy
answer. The so-called rule in Tuvquand's case (x) is, I think,
correctly stated in Halsbury's Laws of England, 2nd ed.,
vol. V., at p. 423: " But persons contracting with a company
"and dealing in good faith may assume that acts within its
'constitution and powers have been properly and duly

_ "performed and are not bound to inquire whether acts of

€

'internal management have been regular."" It was competent
for three directors of the company to allot its shares; three
persons purporting to act as directors did allot its shares ;
therefore Morris, who acted in good faith, was entitled to
treat the shares as validly allotted. Thus runs the argument.
(i). 6-B &?B! 327.

A. C. AND PRIVY COUNCIL.

475

I leave aside the question what in the application of the rule H. L. (©)

is the meaning of " good faith '' and whether Morris, according
to the true meaning of those words, acted in good faith, and
ask whether Morris can in any event bring himself within the
'scope of the rule. My Lords, I think it is clear on principle

1946

Morris

KANSSEN,

that he cannot. In the transaction which he would sustain 4,4 simones,

and Kanssen seeks to impeach, he was himself acting as

-adirector. I asked learned counsel for the appellants whether

there was any authority for the proposition that a director or
de facto director could invoke the rule so as to validate
ae transaction which was in fact irregular and unauthorized.
He could point to none. My own researches, though in such
a matter they cannot 'easily be complete, have disclosed no
case in which such a proposition has been affirmed. Nor
have I met any case in which such a person has without
discussion of the principle obtained such relief. Nor had
I even heard the proposition put forward until I heard it at
the bar of the House in this case. The reason is not far to
seek. One of the fundamental maxims of the law is thé_
maxim "omnia praesumuntur rite esse acta,' It has many
applications. In the law of agency it is illustrated by the
doctrine of ostensible authority. In the law relating to
corporations its application is very similar. The wheels of.
business will not go smoothly round unless it -may_be assumed!
that that is in in "order" which appears to be in order. ' But
the maxim has its proper limits. An ostensible agent cannot
bind his principal to that which the principal cannot lawfully |
do. The directors or acting directors or other officers of
a company cannot bind it to a transaction which is ultra vires.

designed for the protection of those who are entitled to assume,
just because they cannot know, that the person with whom |
they deal has the authority which he claims. This is clearly |

Se P shown by the fact that the rule cannot be invoked if the

'condition is no longer satisfied, that is, if he who_would invoke
yit_is put upon his inquiry. He cannot presume in his own}

favour that things are rightly done if inquiry that he ought!
to make would tell him that they were wrongly done. What
then is the position of the director or acting director who
claims to hold the company to a transaction which the
company has not, though it might have, authorized? Your
Lordships have not in this case to consider what the result
tight be if such a director had not himself purported to act

—

Nor is this the only limit to its application. It is a rule

|

|

(Aa

476

H. Ly (E,)

1946

Morris

KANSSEN,

Lord Simonds.:

HOUSE OF LORDS [1946]

on behalf of the company in the unauthorized transaction.
For here Morris was himself purporting to act on behalf of the
company in a transaction in which he had no authority. Can
he then say that he was entitled to assume that all was in

order. § ? My Lords, the old question comes into my mind,

"' Quis custodiet ipsos custodes ?'' It is the duty of directors,
and equally of those who purport to act as directors, to look
after the affairs of the company, to see that it acts within its
powers and that its transactions are regular and orderly. To
admit in their favour a presumption that that is rightly done
which they have themselves wrongly done is to encourage
ignorance and condone dereliction from duty. It may be
that in some cases, it may be that in this very case, a director
is not blameworthy in his unauthorized act. It may be that
in such a case some other remedy is open to him, either against
the company or against those by whose fraud he was led into
this situation, but I cannot admit that there is open to him the
remedy of invoking this rule and giving validity to an otherwise
invalid transaction. His duty as a director is to know ; his

_interest, when he invokes the rule, is to disclaim knowledge.

Such a conflict can be resolved in only one way.

It was urged upon your Lordships that the purported appoint-
ment of Morris as a director having taken place immediately
before the unauthorized allotment of shares, he had in fact no
opportunity of learning the true state of affairs, and it was
pointed out that, had the proceedings at the meeting of
March 30, 1942, been taken in the reverse order first the allot-
ment of shares, then the appointment of Morris as a director,
the result would be different. And then it was said that it was so
absurd that there should be a different result according to the
order of proceedings that the original conclusion could not
be accepted. This argument has for me no weight or
substance. Admit, as to my mind one must admit, that
a director is not for the purpose of the rule in the same position
as a Stranger: then it is as immaterial how long he has been
a director, as it is whether he is an idle or diligent director or
a robust or sick director.

Concluding as I do that Morris is not a _ person
who in respect of this transaction comes within

| the scope of the rule, I do not find it necessary to consider the

further question whether in any case he would be deprived of
its benefit by reason of the fact that even regarded as an
outsider he was put upon his inquiry and did not make the

|
|

lo-t&

A. C. AND PRIVY COUNCIL.

inquiry that he should have made. This is a question of fact
on which different views have been, and may well be, enter-
tained. In my opinion the appeal should be dismissed.

Lorp UtHwatTt. My Lords, I agree.
Appeal dismissed.