Scottish Co-operative Wholesale Society Ltd v Meyer

17 1954 S8.C. 381, 391-392.

A.C. AND PRIVY COUNCIL. 3387

July 24. Viscount Simonps. My Lords, in this appeal from H. L. (8c.)
an interlocutor of the First Division of the Court of Session I am
in such full agreement with their Lordships both in their findings
of fact and in their conclusions of law that I do not think it one
necessary to trouble. the House at such length as I otherwise WHowEesaLe
might. But, inasmuch as your Lordships have for the first time sie vals
to consider a new and important section of the Companies Act, Meyer.
1948, it is right that I should state my views upon it. ee

On May 7, 1946, there was incorporated as a private limited
company the Scottish Textile and Manufacturing Co. Ltd., which
I will call "' the company.'' It had an authorised share capital
of £25,000 divided into 25,000 shares of £1 each. Its substantial
object was the manufacture and merchanting of rayon fabrics.
The respondents, formerly of German but now of British
nationality, who had left Germany when the Nazis obtained
power in that country, had a large experience and extensive
connections in the continent of Europe in the rayon trade, and
one of them, Dr. Meyer, had already in 1945 been appointed
textile adviser to the appellant society. Into this trade the
society wished to enter and, though they would have preferred
to carry it on as a branch of their own business, this was for
more than one reason not practicable. The respondents were
unwilling to act merely as employees of the society and, since at
that time licences had to be obtained for the manufacture of
rayon, and were granted only to persons who could satisfy the
cotton control authorities that they commanded the necessary
skill and experience, it was mutually advantageous to the society
and the respondents that a subsidiary company should be formed
in which they should both be interested. The company was
accordingly formed and 7,900 shares were issued, 4,000 to the
society, 3,450 to Meyer, 450 to Lucas. Thus the society had
such control as a majority shareholding could give. Moreover, of
the five directors of the company three were at all material times
nominees of the society, the other two being the respondents,
who were the managing directors. Nor was there lacking control
by the society of a practical sort. For from the outset it was
contemplated that, at any rate until a factory could be built or
acquired for it, the company should be substantially dependent
for its supplies upon the society's mill at Falkland which in 1946
was partially idle. Accordingly, under arrangements with cotton
control, the production of a number of looms at Falkland was
allocated to the company and the looms were licensed for rayon
production. Dr. Meyer made arrangements for the supply of

1958

338 HOUSE OF LORDS [1959]

H. L. (8c.) rayon yarn to be used in the manufacture of the finished cloth,

1958 »the yarn being purchased by the society and invoiced to them at

4 Falkland Mill. There it was woven and the woven cloth sold to

Cones the company ready for dyeing and finishing. This was the plan,
WHOLESALE and from the beginning it flourished greatly.

moon saci But, my Lords, it was a plan which demanded the utmost
MEYER. good faith on both sides, and, as your Lordships will see, it was

Viscount the lack of it on the part of the society which led to this
Simonds. 5 :
discreditable tale.

I must hark back for a moment to the year 1947. It seems
that in March of that year an agreement between the parties was
made for what was curiously called a realignment of their share-
holding, so that, instead of approximately equal holdings, the
society should hold 70 per cent. and the respondents 30 per cent.
of the issued capital. That was in March 1947, but nothing was
done to carry the agreement into effect until the year 1951. In
November of that year, the company being then apparently very
prosperous, the nominee directors, as I will call them, under the
instructions of the board of the society raised the question:
numerous proposals were put forward, some of which involved
the purchase by the society of some of the respondents' shares.
It is unnecessary to go into the details of this episode, for in the
end nothing was done. The significance of it lay in the fact that
the society's representatives adopted the view that they were
entitled to acquire at par any shares they might get under the
so-called realignment and, upon a refusal of this unjust demand,
threatened that the society would liquidate the company if it was
not met. This and other threats led to legal advice being sought.
The solicitor to the society and the company advised that the
shares should be valued and bought at a valuation: they were
valued by the company's auditors at no less than £6 Os. 11d.
a share and thereafter the society proceeded no further in the
matter. It is impossible after reading the voluminous evidence
in this case not to see that the society, thus foiled in their attempt
to obtain a grossly unfair advantage of the respondents, deter-
mined to seize any opportunity of procuring for themselves the
benefit of the trade which had been largely built up by their
efforts.

It is at this stage convenient to refer to the section of the
Act under which the respondents petitioned the court for relief
and obtained the order, against which this appeal is brought, that
the society should buy their shares in the company at £3 15s. Od.
per share. It is, so far as relevant, as follows:

A.C. AND PRIVY COUNCIL.

339

[His Lordship read section 210 (1) and (2) and continued: ] H. L. (Se.)

It is common ground that at the date of presentation of the
petition on July 18, 1953, it was just and equitable that the]

company should be wound up. It could hardly be denied that to ¢

1958

ScorrisH
0-OPERATIVE

wind up the company would unfairly prejudice the respondents. Pe

The only question is whether its affairs were being conducted in a
manner oppressive to the respondents and, if so, whether the
court ordained the appropriate remedy.

My Lords, as I have already said, I do not propose to rehearse
the facts at length. The four learned judges of the First Division,
including Lord Carmont who was deputed to take the proof, were
unanimously of opinion that the society had conducted the affairs
of the company in a manner oppressive to the respondents. Each
of them gave a judgment which, I may perhaps be permitted to
Say, was a careful and exhaustive appraisal of the evidence, and,
even if I did not myself come, as I do come, upon an independent
reading of it to the same conclusion, I should be reluctant to
disturb their findings, particularly as Lord Carmont had the
peculiar advantage of seeing the witnesses. It cannot be ignored
that, wherever there was any dispute of fact, the testimony of
the respondents was preferred to that of the witnesses of the
society. Having myself only read the written word, I must say
that I was by no means favourably impressed by the evidence of
more than one of the latter witnesses,

It is, however, necessary, if section 210 is to be successfully
invoked, to show, not only that there has been oppression of the
minority shareholders of a company but also that it has been the

affairs of the company which have been conducted in an oppressive |

manner, and it was to this point that a large part of the appel-
lants' argument was directed. I must therefore state in broad
outline the course of events which led to the presentation of the
petition.

— The last event that I mentioned was the failure of the society
to acquire at par shares that were worth a far greater sum. This
was at a time of the company's great prosperity which, subject
to the ups and downs of the textile trade, might be expected to
continue. It was, however, followed by a recession in the rayon
trade, of which the dates of beginning and ending were a matter
of dispute. Such dates cannot be precisely determined and are
of no consequence. It is, however, to be noted that it was in the
course of it that rayon control came to an end, so that neither the
society nor the company any longer depended on the personality

ocrmty Litp.
v.

MEYER.

Viscount
Simonds.

840

H. L. (Sc.)
1958

ScorrisH

Co-OPERATIVE

WHOLESALE
Soorety Lip
v.
MEYER.

Viscount
Simonds.

-_

HOUSE OF LORDS [1959 |

of the respondents to get supplies of yarn. It was also in the
course of it that the respondent Meyer was anxious to visit
Germany with a view to increasing the company's trade in that
country but was prevented by his co-directors from doing so.
This was undoubtedly the cause of much ill-feeling and was itself
a matter of complaint in the original petition, but, as the aver-
ment in regard to it was struck out, I say no more about it.
During the same period other incidents occurred which aggravated
the hostile relations between Meyer and Schofield, the manager
of the society's Falkland Mill.

An important consequence of the removal of cotton control was
this. In or about June, 1951, a new department of the society
had been formed called the merchant converting department. It
was under the control of a Mr. Wand, the manager of the drapery
department, and its function was to convert loom state cloth by
dyeing, printing and finishing into material for manufacture into
garments. It therefore became possible upon the removal of
cotton control and upon a revival of the rayon trade for the
society to divert to their own converting department the product
of their Falkland Mill. It was the fact, as they were well aware,
that the company which had throughout been practically tied to
them for the greater part of its supplies, would have great diffi-
culty upon a revival of trade in getting them elsewhere.
Deliberately they supplied the necessary material to the con-
verting department but, in spite of Meyer's protests, declined to
supply the company except at higher and non-competitive prices.
An attempt to justify this discrimination was rightly regarded by
their Lordships of the First Division as unsatisfactory. I have no
doubt that at any rate by the end of 1952 it was the policy of the
society by one means or another to destroy the company it had
created, knowing that the minority shareholders alone would suffer
in that process. But it is, in truth, unnecessary to seek to draw
inferences from ambiguous facts. For in January, 1953, a Mr.
Robert Taylor, a director of the society and then chairman of the
company, had an interview with Meyer and Lucas. He cannot be
absolved from a share in the lethal policy of the society but is
entitled to what credit may be due for the attempt to make the
death as merciful as possible. He told them frankly that the
society was out to destroy the company, that they had no chance
against such a powerful organisation, and that they should make
their peace with the society by offering to sell their shares, and he
offered to draft, and, two days later, drafted, a letter for them
to send to the society. It is not surprising that Meyer wrote,

A.C. AND PRIVY COUNCIL.

341

though not in terms suggested by Taylor, offering on behalf of H. L. (Sc.)

Lucas and himself to sell their shares at a negotiated price. This
letter having been referred to a joint meeting of the society's

finance sub-committee and the furnishing sub-committee, those ¢

1958

ScorTTisH
0-OPERATIVE

sub-committees met and agreed that the company had served its WHOLESALE

purpose and should be liquidated, if possible. At about the same
time the finance sub-committee interviewed the respondents, who
intimated that in their opinion a fair price for the shares was 96s.
per share and also that they were prepared after selling their
shares to stay on in the service of the company. The same sub-
committee recommended that Dr. Meyer should be informed that
the society did not wish to accept the offer to sell '' at the present
time.'' These recommendations were approved by the board of
the society on February 9, 1953, and a letter was duly sent to
Meyer informing him of the decision not to accept the offer to
_ sell '' at the present time.'' He was not told and did not learn,
until in these proceedings the minute was produced, that the
society had decided that '' the company had served its purpose "'
and should be liquidated if possible.

At this time the three nominee directors of the company were
aware (Taylor by his own confession) of the policy of the society.
It is undeniable that persons so placed may find themselves in a
difficulty. But in all the evidence I have not been able to find
the least trace that they regarded themselves as owing any duty
to the company of which they were directors. They were the
nominees of the society and, if the society doomed the company
to destruction, it was not for them to put out a saving hand.
Rather, they were to join in that work, and, when a frank and
prompt statement to their co-directors might have enabled them
to retrieve its fortunes, they played their part by maintaining
silence. That is how they conducted the affairs of the company,

"e

and it is impossible to suppose that that was not part of the'

deliberate policy of the society. As I have said, nominees of a
parent company upon the board of a subsidiary company may be
placed in a difficult and delicate position. It is, then, the more
incumbent on the parent company to behave with scrupulous
fairness to the minority shareholders and to avoid imposing upon
their nominees the alternative of disregarding their instructions
or betraying the interests of the minority. In the present. case

—

the society pursued a different course. It was ruthless and |

unscrupulous in design and it was effective in operation, and, as
I have said, it was promoted by the action or inaction of the
nominee directors. The company, which might have recovered

Sooty Lrp.

0.
MEYER.

Viscount
Simonds.

342 HOUSE OF LORDS [1959 |

2

H. L. (Sc.) its former prosperity, had '' served its purpose.'' It could con-
1958 veniently be liquidated. I have omitted much which reflects no
credit on the society and its officers, for I do not want to repeat

Prgpciaa co what has already been said, or to anticipate what will fall from
WHOLESALE some of your Lordships. I will only mention the final fact that
oa cana on August 24, 1953 (that is, after the presentation of the petition
MeryER. under section 210) Meyer and Lucas were given three months'
Viscount notice of termination of their appointments as managing directors,
Simonds. and Mr. Wand, the manager of the society's drapery department,

was appointed manager of the company.

My Lords, upon the facts, as I have outlined them and as
they appear in greater detail in the judgments of their Lordships
of the First Division, it appears to me incontrovertible that the
society have behaved to the minority shareholders of the com-
pany in a manner which can justly be described as "' oppressive."'
They had the majority power and they exercised their authority
/in a manner '' burdensome, harsh and wrongful ''—I take the

/ dictionary meaning of the word. But, it is said, let it be assumed
that the society acted in an oppressive manner: yet they did not
conduct the affairs of the company in an oppressive manner. My
Lords, it may be that the acts of the society of which complaint
is made could not be regarded as conduct of the affairs of the
company if the society and the company were bodies wholly
independent of each other, competitors in the rayon market, and
using against each other such methods of trade warfare as custom
permitted. But this is to pursue a false analogy. It is not

| possible to separate the transactions of the society from those of
| the company. Every step taken by the latter was determined

by the policy of the former. I will give an example of this. I
observed that, in the course of the argument before the House, it
was suggested that the company had only itself to blame if,
through its neglect to get a contract with the society, it failed in
a crisis to obtain from the Falkland Mill the supply of cloth that
it needed. The short answer is that it was the policy of the
society that the affairs of the company should be so conducted
and the minority shareholders were content that it should be so.
They relied—how unwisely the event proved—upon the good faith
of the society, and, in any case, they were impotent to impose their
own views. It is just because the society could not only use the
ordinary and legitimate weapons of commercial warfare but could
also control from within the operations of the company that it is

x illegitimate to regard the conduct of the company's affairs as a
matter for which they had no responsibility. After much

A.C. AND PRIVY COUNCIL.

consideration of this question, I do not think that my own views
could be stated better than in the late Lord President Cooper's
words on the first hearing of this case. '' In my view,"' he said,?
'the section warrants the court in looking at the business
"realities of a situation and does not confine them to a narrow
"legalistic view. The truth is that, whenever a subsidiary is
'' formed as in this case with an independent minority of share-
"holders, the parent company must, if it is engaged in the same
'"" class of business, accept as a result of having formed such a
"" subsidiary an obligation so to conduct what are in a sense its
"own affairs as to deal fairly with its subsidiary.'' At the
opposite pole to this standard may be put the conduct of a parent
company which says: '' Our subsidiary company has served its
'"" purpose, which is our purpose. Therefore let it die,'' and,
having thus pronounced sentence, is able to enforce it and does
enforce it not only by attack from without but also by support
from within. If this section is inept to cover such a case, it will
be a dead letter indeed. I have expressed myself strongly in
this case because, on the contrary, it appears to me to be a

343

Fie Lis (Se.)
1958

ScorrisH

CO-OPERATIVE

WHOLESALE

Society Lp.

glaring example of precisely the evil which Parliament intended

to remedy.

Some criticism was made of the relief given by the order of
the court. It was said that only that relief could be given which
had as its object and presumably its effect the "' bringing to an
''end cf the matters complained of'' and that an order upon
the society to purchase the respondents' shares in the company
did not satisfy that condition. This argument is without sub-
stance. The matter complained of was the oppression of the
minority shareholders by the society. They will no longer be
oppressed and will cease to complain if the society purchase
their shares.

Finally, it was said that the court had not properly exercised
its discretion in fixing a price of £3 15s. Od. per share. I see no
ground for interfering with this decision. Necessarily a price
cannot be scientifically assessed, but I heard no argument, nor
had any evidence called to my attention, which suggested that
their Lordships had acted on any wrong principle or adopted a
measure too generous to the respondents.

The appeal should accordingly, in my opinion, be dismissed
with costs.

Lorp Morton or Henryton. My Lords, I shall refer to the

11954 S.C. 381, 391.

~~"

v.
MEYER.

Viscount
Simonds.

344

H. L. (Sc.)
1958

ScorrisH
Co-OPERATIVE
WHOLESALE
Society Lip.
0.
MEYER.

Lord Morton
of Henryton.

HOUSE OF LORDS [1959 }

appellant society as '' the society,'' and to Scottish Textile and
Manufacturing Co. Ltd. as '' the company."'

I would accept the finding of fact by the First Division of the
Court of Session which the Lord President expressed as follows *:
'' Foiled in their attempt to secure the realignment of the share-
'' holdings by the purchase of shares from the petitioners at or
'« about par, the society as a matter of policy thereafter proceeded,
''as the subsequent events demonstrated only too clearly, to
''endeavour to force down the value of the company's shares,
''and in the process in effect to transfer the goodwill of the
'" company's business to the society itself.''

The conduct thus described was, no doubt, oppressive to
the company and to the respondents, minority shareholders in
the company. It is necessary, however, to consider what was the
nature of the steps taken by the society in furtherance of the
policy thus described, in order to see whether they bring the case
within section 210 of the Companies Act, 1948. The respondents,
as members of the company, can only succeed if they prove that
'"' the affairs of the company ''—and I emphasise the words "* of
'"'the company ''—were "' being conducted in a manner oppres-
"" sive to some part of the members,'' i.e., to themselves.

I cannot improve upon the learned Lord President's summary
of the steps taken by the society and I gratefully adopt it. After
referring to the fact that cotton control, and its attendant licensing
system, came to an end in June, 1952, the learned Lord President
continued $:

'""The door was then open for the department '' (that is, the
society's own merchant converting department) "'to utilise
"* Falkland Mill '' (which belonged to the society) '' for the manu-
'""facture of rayon and to merchant it themselves—thereby
'""by-passing the company altogether. The trade and the con-
""nections built up by the company could then be transferred to
'the society itself, and the goodwill of the company emptied
"of almost any content. No contractual arrangement had been
'""made between the company and Falkland Mill whereby the
"latter undertook to do the weaving for the former. All the
"members of the company's board knew that the facilities at
'' Falkland Mill were essential to the company, and no breach of
"any formal contract (as distinct from any question of fair
dealing) was therefore involved in Falkland Mill abandoning
'the customer who had employed it for so many years and

21957 S-C. 110, 121. $ Ibid. 122.

ALC. AND PRIVY COUNCIL. 345

" substituting the merchant converting department of the society H. L. (Se.)
"as its customer. But this is what was in fact done. 1958

" By the autumn of 1952 a temporary trade recession in rayon
"had passed; manufacturers were getting busy, and the market Petes
"was short of goods. It would not have been easy for the WHoLEsALE
" company in these conditions to secure its manufacturing require- po =
""ments in some other quarters. Now that the barrier created Meyer.
"by the existence of cotton control was removed, this was the Lord Morton
'moment selected for the gradual transfer of the society's yal
'interest in the merchanting of rayon from the company to the
'merchant converting department."'

The Lord President then went on to state that the prices
which Falkland Mill quoted for deliveries to the company, and
refused to lower, were quite uneconomic for the company and
were throughout consistently above market prices. He referred
to efforts made by the respondent, Dr. Meyer, to induce Falkland
Mill to do business with the company, and continued ¢:

'" Nothing came of these approaches, as the mill's prices
"remained far too high. Dr. Meyer reported the difficulties to
"" the board of the company, all the members of which must have
"" realised how serious an effect these high quotations were having
""on the operations of the company. But none of the members
"of the board appear to have given him any assistance or
"' explanation, nor taken any steps to try to remedy the situation
"" by raising his difficulties at any committee or board meeting of
"" the society.

'

'

'

<

''The reason is not far to seek. At the very time when Dr.
'' Meyer was finding the mill consistently quoting these high
'* prices to him, the society decided that the merchant converting
'' department should obtain deliveries of rayon goods from the
'" Falkland Mill. This was not a mere departmental matter
'' arranged between managers, but was raised to a policy level by
'* a direct approach to the merchant converting department by the
'* manager of Falkland Mill. This is clear on the evidence both
'*of Mr. Schofield and Mr. Wands. The board of the society
'' and the society's nominee directors on the board of the company
'' were, therefore, fully advised of the decision.

'' Moreover, the arrangement made was that the mill would
'' supply woven rayon cloth to the merchant converting depart-
'"ment and that the mill would ' accept the prices which the
'** department was prepared to pay, and see the manager of the

4 1957 S.C. 110, 123.

346 HOUSE OF LORDS [1959 }

H. L. (Sce.) ''' department about it later if the prices were not economical
1958 "© ones.' To start with, experimental orders only were given
''and accepted. But the manager of the department said in

Binet '' evidence that he gave Falkland Mill in 1952 enough orders to

Wuotesate '' keep the looms going for six months. In 1953 and 1954 all the
Socrrty Lrp. ,

'in 'rayon looms at Falkland were operating for the merchant con-
Meyer. '' verting department. This department was buying from the
Lord Morton '' mill at prices throughout substantially lower than those quoted

of Henryton.

'' by the mill to the company. Moreover, on the costing figures
'produced by the respondents, the prices at which the mer-
''chant converting department were buying were completely
'"" uneconomic.

'"Tt was contended that there was nothing wrong in the mill
''changing over from one customer to another, particularly if
'the mill could not arrange a mutually satisfactory price with
'"the company. This would no doubt be so if both customers
'"were treated alike, or if it could be maintained that the com-
'pany was holding out for an unduly low price. But this was
'""not the situation. The policy adopted involved starving the
'"company of deliveries and diverting the production to the
'"merchant converting department at substantially lower prices
'"' with the understanding that the department would see about
"' it later if the prices turned out too small. It involved a clear
"violation of the elementary principles of fair dealing which
""normal commercial standards require."'

My Lords, it is, I think, manifest that the oppressive opera-
tions so clearly described were all operations in the conduct of
the society's affairs, not in the conduct of the company's affairs.
The society so conducted its affairs as to oppress the company
by shutting it off from its previous source of supply. By so
doing the society did, I think, oppress the minority shareholders
in the company; but, as I have already pointed out, the respon-
dents can only bring themselves within section 210 of the Act
of 1948 if they prove that the affairs of the company whereof
they are members are being conducted in a manner oppressive
to themselves as minority shareholders. They cannot succeed,
in my opinion, merely by proving that the affairs of another
company are being so conducted, even if that other company
holds the majority of the shares in the company whereof the
petitioners are members, and nominates the majority of its
directors. It may be unfortunate that this form of oppression
is not covered by the section; but this is, to my mind, the inevit-
able result of the words '' the affairs of the company are being

A.C. AND PRIVY COUNCIL. 347

" conducted.'' For this reason, my Lords, I should have held H. L. (8c.)
the appellant society entitled to succeed if the only evidence of 1958
oppression had been evidence that the society deliberately so

conducted its own affairs as to cause hardship to the company ocean
and to force down the value of its shares, however regrettable WHOLESALE

such conduct may be, and whether or not it may be actionable. eee ae

MEYER.

I turn now to consider whether there is any other ground
upon which the present case comes within section 210. Counsel A uemetcn
for the respondents contend that certain directors of the com-
pany, nominated by the society and constituting a majority of
the company's directors, or the society acting by these directors,
" conducted '' the affairs of the company '' in a manner oppres-
"sive '' to the respondents. As these directors of the company
were also directors of the society, they must, no doubt, be treated
as parties to the oppression by the society in the conduct of its
own affairs; but I have had great difficulty in arriving at a con-
clusion upon the question just posed, which is directed only to
the affairs of the company. The inaction of these directors at
a critical time was pointed out by the Lord President in a
passage which I have already quoted from his judgment, and
their conduct throughout the relevant period is open to severe
criticism. My difficulty is that the conduct of which complaint
is made consists rather of sins of omission than of sins of com-
mission, and the day to day affairs of the company appear to
have been "' conducted '' by Dr. Meyer and Mr. Lucas without
any active interference by the other directors, except, possibly,
on two occasions, which the First Division excluded from proof
on the ground of irrelevancy, and except that notice of dismissal,
on the ground of saving expense, was given to the respondents
after they had presented the present petition. I shall not detain
your Lordships by referring in detail to the evidence. Suffice it
to say that in the end I have reached the conclusion that there
is evidence to justify the view that the affairs of the company
were '' conducted in a manner oppressive '' to the respondents.
I am not disposed to give a narrow meaning to these words,
having regard to the manifest object of section 210. I am
naturally assisted to my conclusion by the fact that the decision
of the four learned judges of that Division (including Lord
Carmont, who had the advantage of seeing and hearing the
witnesses) was unanimous, and by the fact that your Lordships
are all of the same opinion.

I agree that this appeal must be dismissed.

348

Hts 1(8c)
1958

ScorrisH
CO-OPERATIVE
W HOLESALB
Socirty Lrp.
v.
MEYER.

HOUSE OF LORDS [1959 |

Lorp Keita or Avonnotm. My Lords, this appeal arises out
of a petition presented by the respondents (whom it, will be con-
venient to refer to as '' the petitioners '') against, inter alios, the
appellants (whom I will call '' the society '') under section 210
of the Companies Act, 1948. Under the procedure of the Court
of Session such a petition must be presented to the Inner House
and, unless it is remitted to the Outer House, is dealt with and
disposed of by the Inner House. Where in the Inner House
inquiry into the facts through the mouths of witnesses is thought
necessary, evidence is taken in the presence of one of the judges
of the Division of the Inner House before whom the petition
comes and the hearing on the evidence thereafter takes place
before the full Division, including the judge who saw and heard
the witnesses. This judge gives no opinion until, after the
hearing, he takes part in the judgment of the court. This was
the procedure followed in the present case.

This petition was presented as far back as July 14, 1953, and
after a hearing on relevancy the court, on June 1, 1954, gave a
judgment allowing parties a proof before answer of their respec-
tive averments, excluding certain averments of the petitioners
from probation, and appointed the proof to proceed before Lord
Carmont, one of their number. The proof, which commenced on
March 25, 1955, was lengthy and voluminous and extended, with
many interruptions, for a period of over a year, though the actual
number of days occupied was only 12. After a hearing lasting
13 days, the First Division gave judgment on March 20, 1957,
ordaining the society to purchase the shares of the petitioners in
the Scottish Textile and Manufacturing Co. Ltd. (hereinafter
called '' the company '') at a price of £3 15s. per share.

It is difficult to compress the salient features of the case even
in broad outline. The petitioners, who were originally of German
nationality and are now naturalised British subjects, came to this
country in 1939. Through an advertisement Dr. Meyer (one of
the petitioners) got into touch with the society in 1945 and got
employment from them as textile adviser. He had considerable
knowledge of rayon trade and production and conceived the idea
that one of the society's weaving mills at Falkland could be
profitably employed in the weaving of rayon goods, which would
be for it a new line of manufacture. He had great experience
of the processes involved and had formulae of his own. He also
had trade connections abroad and he succeeded in establishing
relations with the cotton control board who controlled the supply
of yarn and manufacture of the cloth. Ultimately it was agreed

A.C. AND PRIVY COUNCIL.

between the society, Dr. Meyer and the other petitioner Mr.
Lucas, who had been associated with Dr. Meyer in the textile
business in Germany before the war, that a company should be

349

Heese)
1958

ScortisH

formed on certain terms for the purpose of manufacturing and Co-operative

dealing in textile fabrics of all descriptions. The company called
the Scottish Textile and Manufacturing Co. Ltd. was incorporated
on May 7, 1946, with an authorised capital of £25,000 in one
pound shares. Thereafter in March, 1947, a second agreement
was entered into between the parties which gave effect largely to
what had been agreed before the incorporation of the company.
The terms of this agreement are important in the light of what
follows. I recite the greater part of this agreement:

"FIRST. The share capital of said company is £25,000
'' divided into 25,000 shares of £1 each and subject to the provi-
'' sions of clause 10 hereof the [society] shall subscribe and hold
"in their own right up to 17,500 of said shares, [Dr. Meyer]
'shall subscribe and hold in his own right up to 5,250 of said
"shares and [Mr. Lucas] shall subscribe and hold in his own
'right up to 2,250 of said shares the said shares to be allotted
'"'and issued from time to time as the directors of the Scottish
"" Textile and Manufacturing Co. Ltd. may decide.

'""SECOND. The [society] shall purchase as they do hereby
"" purchase from [Dr. Meyer] all his formulae for the manufac-
"ture of textile fabrics for the price of £3,000 which formulae
"" (Dr. Meyer] has now delivered to the [society] and as to pay-
'"* ment of said price [Dr. Meyer] hereby requests and authorises
"the [society] to pay the same to the said Scottish Textile and
'* Manufacturing Co. Ltd. to be held for his account and applied
'towards settlement of the amount due by [Dr. Meyer] to said
'* company for shares allotted to him.

'"THIRD. The [society] in addition to being otherwise en-
'* titled to use said formulae shall place the same at the disposal
''of said Scottish Textile and Manufacturing Co. Ltd. which
'' shall have full liberty and licence to use the same without

' restriction.

'"FOURTH. The [society] are entitled and shall continue
'to be entitled to nominate three persons to act as directors of
'the said Scottish Textile and Manufacturing Co. Ltd.. along
"with [Dr. Meyer] and [Mr. Lucas] who already have been
'' elected directors of the company and appointed managing
'' directors thereof.

A.C. 1959. 28 (1)

WHOLESALE

Socrery Lp.

0.
MEYER.

Lord Keith of
Avonholm.

350

H. L. (Sce.)
1958

ScortTisH
CO-OPERATIVE
WHOLESALE
Soorsty Lrp.
0.
MEYER.

Lord Keith
of Avonholm.

HOUSE OF LORDS [1959 |

"SEVENTH. [Dr. Meyer's and Mr. Lucas's] appointments
'"ags joint managing directors shall subsist for a period of three
'years as from May 7, 1946, notwithstanding the date hereof,
'and on the expiry of said period unless terminated as herein-
'' after provided, or unless renewed for a further period, shall
'' thereafter continue from year to year. [Dr. Meyer's and Mr.
'' Lucas's] appointments as managing directors or one or other
'' of them may be terminated by the company on three months'
'' previous notice in writing being given to that effect, but said
''notice shall not prejudice their status to act as ordinary
'* directors of the company if so elected.

'""KIGHTH. [Dr. Meyer and Mr. Lucas] in the perform-
'ance of their duties as joint managing directors shall promote
'"and safeguard the company's interests faithfully and with due
'* diligence and they shall devote their whole time to the manage-
'"ment and supervision of the company and in particular they
'' shall apply without reservation in any respect their specialised
'' knowledge and experience in the textile trade to the advantage
"and benefit of the company. [Dr. Meyer and Mr. Lucas]
"shall also use every endeavour to renew or to re-establish all
'former trade connections held by them with customers and
"agents both in Great Britain and abroad with the purpose of
""enhancing and developing the company's interests to the best
"* extent.

''NINTH. [Dr. Meyer and Mr. Lucas] shall make full dis-
'" closure for the use benefit and advantage of the company of all
"formulae, processes and inventions which they may discover
'"" during the tenure of their appointments. They shall also place
'at the disposal and use of the company all patent rights (but
'" excluding trade names previously held by them) of which they
'""are the present owners or of which they may come to be
'' possessed during the period of their respective appointments
"and that all free of charge. Further [Dr. Meyer and Mr.
'"" Lucas] or either of them bind and oblige themselves not
"to transfer or make known to any other person or company
'any formulae (including the formulae sold to the [society] by
'"" (Dr. Meyer]) processes, patent rights or inventions held or to
'""be held by them or to become known to them respectively
'"' without the written consent of the company. Neither shall
"they grant licences to any other person or company to use
'such formulae, processes, patent rights or inventions without
"" the written consent of the [society].

A.C. AND PRIVY COUNCIL. 351

"TENTH. In the event of this agreement coming to an end H. L. (Se.)
"or in the event of [Dr. Meyer's and Mr. Lucas's] appointments 1958
"" with said company being terminated from any cause whatever
"" {Dr. Meyer and Mr. Lucas] shall have the option to sell their Pies ae

"' shares in said company to the [society] who shall be bound to WHOLESALE
Socrzry Lrp.

"purchase said shares and that at a price to be fixed by the ms
"auditors of the company, said auditors' decision as to price Mevzr.
'" being final and binding; . . ."' Lord Keith

of Avonholm.

Of the authorised share capital of the company only 7,900
shares were actually issued, of which 4,000 were held by the
society, 3,450 by Dr. Meyer, and 450 by Mr. Lucas, all fully
paid. This was not according to the proportions contemplated
by the agreement, which were in the ratio of 70 to 21 to 9, and
although this disproportion was accepted and apparently desired
by the society at the beginning, it carried with it later, as will
be seen, the seeds of dissension between the society and the
petitioners.

To commence operations it was necessary for the company to
secure three things—sources of supply of rayon yarn, a licence
from cotton control to obtain and weave the yarn, and a place
at which to weave it. Dr. Meyer was the chief, if not the sole
instrument, in obtaining the first two of these things and he was
largely responsible for securing the third. It was contemplated
apparently that the company might obtain a factory of its own.
On December 29, 1945, before the company was incorporated,
the society minuted approval of a recommendation by its furnish-
ing sub-committee '' that steps should be taken without delay to
rent a suitable factory. When we are successful in obtaining
'"" premises, sub-committee would consider transferring to them
"" {the company] several looms (say 24) from the linen works at
'* Falkland. Until such time as a factory becomes available,
'* production would be carried on at Falkland and elsewhere."'
At a meeting of the company's board on January 14, 1947, Dr.
Meyer reported disappointment that the 24 looms promised at
the outset had not been altogether made available and that not
more than 10 looms were running on the company's behalf at
Falkland. He stressed the fact that '' sales total was entirely
'* dependent on the supply of cloth received from Falkland and
'that the rapid progress of the company was only possible by
'means of increased production.'' The board, which included
the society's nominee directors, resolved that the report be
accepted and the society be approached to ascertain a date when
the company might expect the 24 looms to be in operation on its

A.C. 1959. 23 (2)

352

HOD KSe)
1958

ScorTTisH
Co-OPERATIVE
WHOLESALE
Society Lrp.
0.
MEYER.

Lord Keith of
Avonholm.

HOUSE OF LORDS [1959 |

behalf. Dr. Meyer had in fact by this time obtained a licence
from cotton control for these looms, and in March, 1948, he
received a revised licence to operate 40 looms at Falkland Mill
with effect from March 1, 1948. It is only necessary to add that
rayon production at the mill increased from some 23,000 yards
in 1946-47 to over 475,000 yards in 1949-50, showing to the mill,
in money, an increase from £3,087 to £39,532. The relationship
observed between the company and the mill was that Dr. Meyer
procured the rayon yarn, which was invoiced to the mill and paid
for by the society, and the company paid the mill for the cloth
produced for it. The cloth was then dyed, dressed, or otherwise
treated and sold by the company to its customers. The idea of
setting up an independent factory by the company faded into the
background and after a short initial period, when the mill was
being equipped and its workers trained for rayon production, the
mill, on the rayon side, became the company's chief supplier
and the mill wove rayon exclusively for the company.

The rest of the story is an unfortunate one. The company
prospered for some five years and more, made considerable
profits, paid large dividends and accumulated substantial reserves.
The rayon looms at Falkland Mill were, during the same period,
fully employed. About September, 1951, however, trade began
to slacken. To Dr. Meyer it appeared that a recession was
approaching, not unconnected with rumours about changes in
purchase tax. He wished to hold back supplies ordered from
Falkland Mill until he saw how things were going to develop and
what customers wanted. This did not please Mr. Schofield, the
manager of the mill, who wished to keep his workers engaged on
the looms. He had large quantities of yarn in stock obtained
through the efforts of Dr. Meyer. I have little doubt that Dr.
Meyer's policy was sound, looking to the close relations between
the mill and the company. If there was no market for cloth,
there was no point in the mill making cloth to be accumulated
by the company with no orders in sight and with no money
coming in to pay for it. The last bulk order for cloth given by the
company to the mill in 1951 was on August 22, 1951, and a dis-
pute arose about the mill continuing to weave to this order, which
was not settled till April, 1952. There are indications in the evi-
dence that even before this Mr. Schofield was not particularly well
disposed to Dr. Meyer and I think that from this time onwards his
attitude unjustifiably hardened against him.

Another event took place about this time which is crucial in
this case. The society, stimulated presumably by the prosperity

A.C. AND PRIVY COUNCIL. 353

of the company and desiring to have a share interest in the com- H. L. (Sc.)
pany corresponding to what they were entitled to under the 1958
original agreement, decided to seek what was described as a proper
alignment of the shareholding. The matter came before the 6 ee
society first on August 20, 1951, and their representatives on the WHowEsaLe
company's board were thereafter asked to raise the matter with baie ae
the company. Ata board meeting of the company on November MEYER.
5, 1951, proposals were continued for further consideration at a Lora Keith of
meeting to be held on November 22. Inthe meantime, on Novem- *'o™0l™
ber 15 an informal meeting took place between Messrs. Nicholson,
Patterson and Dow, the society's nominees on the company's
board, and Dr. Meyer and Mr. Lucas, at which Mr. Douglas, the
company's secretary, was also present. No minute was taken
of this meeting and what transpired can be got only from the
evidence given in this case. The judges of the First Division,
including Lord Carmont, who saw and heard the witnesses, have
accepted the account given by Dr. Meyer and Mr. Lucas, and I
find it impossible to take a different view. At the meeting dis-
cussion took place on certain proposals for rearrangement of the
share capital. The society's representatives insisted that they
should acquire the shares at par. Dr. Meyer and Mr. Lucas
objected. Discussion got heated and the petitioners say threats
were made that if they did not agree the society would liquidate
the company. When Dr. Meyer pointed out that this was im-
possible as the society did not have a three-quarter majority of
shareholding, another threat was made that '' we will increase
'' the capital to £25,000 and that will put you in a pickle.'' The
shares of the company were at this date of considerable value.
But Mr. Nicholson, one of the society's representatives, who was
present at the meeting, agrees that the society was determined
- to realign the shares at par value.
Following this meeting Dr. Meyer put forward certain pro-
posals in writing to the society, one of which was that 5,100 new
shares should be allotted to the society at a value to be ascer-
tained by the auditors of the company. The society resolved to
ascertain the decision of the auditors before coming to a decision.
The auditors fixed a value of £6 Os. 11d., and on February 18,
1952, the society's board resolved that this be noted and com-
municated this decision to the company. No further action was
ever taken in the matter of realignment of shares by the society.
From this date till the end of the tale it is, I think, clear that
there existed in the company an atmosphere of hostility on the
part of the society's nominees on the board to the petitioners,

354

H. L. (Se.)
1958

ScorrisH
CO-OPERATIVE
WHOLESALE
Soorrty Lrp.
v.
MEYER.

Lord Keith of
Avonholm.

HOUSE OF LORDS [1959 |

except in the case of Mr. Taylor, who was not at all times on
the board. Even Mr. Schofield seems to have been aware of
the fact, and Mr. Taylor recognised it, as will be seen in the
events of a year later. It is to be remembered that the directors
of the company were personally or as representatives of the
society the whole shareholders and that the company was a
private company. No appeal to a shareholders' meeting would
alter the situation because the composition of board and share-
holders' meeting would be the same.

The recession deepened through the major part of 1952 and
manufacture by the mill for the company was non-existent. It
would seem likely that the recession was felt by other mills of
the society than Falkland Mill, but a veil is drawn over much
of the society's and the petitioners' activities in 1952 by the
exclusion from probation by the Court of Session of inquiry into
certain happenings of which complaint was made by the peti-
tioners in their pleadings.

In June, 1952, cotton control was abolished. This has a
material effect on what followed for it left the society free to
procure rayon yarn and weave rayon cloth without any licences.
No orders had passed from the company to Falkland Mill since
1951. But trade began to pick up in the autumn of 1952 and it
is clear that Dr. Meyer was anxious for the mill to resume
weaving for the company. The mill itself was at a low ebb.
There were no looms working on rayon cloth. It was impossible,
however, for Mr. Schofield and Dr. Meyer to come to terms on
prices. On November 15, 1952, Dr. Meyer writes to the mill:
""We feel most unhappy to place our order somewhere else
'"" while not all of your looms are working. Please do recalculate
'""your prices again.'' On November 20, he writes: '' We are
""very reluctant to place an order with some other firms while
"your looms are standing idle,'' and suggests a small order of
some 16,000/17,000 yards '' so that we can start business again
""and then we can review the position from time to time and
'"" see if we can carry on or not. This would at least, even if we
"both worked without any profit at all, mark the beginning."'
Mr. Schofield quoted prices of 1s. 7d. a yard and 1s. 93d. a yard
for two qualities of cloth, which Dr. Meyer was unable to accept,
and on December 4 Dr. Meyer is writing again: ''I feel very
"sorry indeed that you are unable to accept an order from us
'"' after so many years of co-operation.'' On the same date Mr.
Schofield was writing to the convener of the drapery and
furnishing committee of the society, following on an interview

'

A.C. AND PRIVY COUNCIL.

with them two days earlier, in which he presents the mill's
point of view and concludes: '' We are in desperate need of
'"" work for these rayon looms at the present time, and in view

355

H. L. (Sc.)
1958

ScorrisH

"of the foregoing circumstances, we consider that we are (o-oprrative

"' receiving unfair treatment from the Scottish Textile and Manu-
"facturing Co. Ltd.'' This letter was never disclosed to the
petitioners, though it may well have been known to the com-
pany's society nominees, and it is, I think, significant that it
should have been written at a time when other plans were
maturing. Shortly before this date the drapery department of
the society had put Mr. Schofield in touch with a department of
the society, formed about a year before, known as the merchant
converting department. This was a department which carried
on a business similar to that of the company. In other words, it
included the business of buying materials and dyeing, finishing
or otherwise processing them for sale to customers. The proposal
was that the mill should supply the merchant converting depart-
ment with a variety of woven goods for converting, including
rayon cloth. This idea came to fruition and the first experi-
mental order for rayon cloth was placed on December 11, 1952,
and the first bulk order in April, 1953. For the year 1953 £2,167
worth of rayon cloth was supplied by the mill and for the year
1954 £11,776 worth. From transfer invoices produced for these
years it is shown that a line of rayon cloth known as 1009 was
throughout debited by the mill to the merchant converting
department at 1s. 64d. a yard. The lowest price quoted by Mr.
Schofield to the company for this quality on November 24, 1952,
was ls. 7d. a yard, and Dr. Meyer was never able to secure a
better quotation. Indeed, much later, in July, 1953, when the
society was not prepared to provide cloth for the company except
on a weaving commission basis, Mr. Schofield was quoting prices
which, on a manufacturing basis, worked out as high as 1s. 93d.
a yard. In December, 1952, when Dr. Meyer was endeavouring
to resume business with the mill he was able to buy this quality
cloth from other sources at about ls. 58d. and from a merchant
converter at 1s. 61d. In these circumstances, the judges of the
First Division all took the view that there was a policy on the
part of the society to starve the company of cloth, and I do not
find it possible, in the circumstances proved, to differ from. this
view. It is said that during 1953 and 1954 the society made a
contribution to the mill to make up for the alleged uneconomic
price charged by the mill against the merchant converting depart-
ment. But, like Lord Sorn, I find the evidence on this very

W HOLESALE
Sociery Lip.
oD.
MEYER.

Lord Keith of
Avonholm,

356

H. L. (Se.)
1958

ScorrisH
CO-OPERATIVE
WHOLESALE
Socizety Lrp.
v.
MryeEr.

Lord Keith of
Avonholm.

HOUSE OF LORDS [1959]

unsatisfactory and unconvincing. The allowance, for which no
specific figures can be shown in the books of the society, would
seem to have been given, if at all, in respect of the conversion at
the mill of looms that had nothing at all to do with the weaving
of rayon. Likewise, I discard the costing evidence given to
support the prices quoted by Mr. Schofield to the company. It
falls with the other evidence and it seems that, in any case, it is
based on reduced production at the mill, whereas Dr. Meyer was
anxious to get the mill back to a state of full production. I find
it difficult to appreciate how, if Dr. Meyer was unable to compete
on the mill's quotations in a competitive market, the society
would be able to compete, unless it be that the society enjoyed
a quasi monopoly in the retail co-operative world.

The next chapter in this unfortunate history opens with the
month of January, 1953. In that month Dr. Meyer and Mr.
Lucas had a meeting with Mr. Taylor, one of the society's repre-
sentatives and fellow director, with whom Dr. Meyer was on
friendly personal and social relations. Dr. Meyer says Mr.
Taylor told him: "' They want to get you out and to destroy the
'" company and you have no chance at all,'' and Mr. Lucas gave
evidence to the same effect. Though Mr. Taylor denies using
this language, Lord Carmont accepts it as true, and it certainly
fits in with the surrounding facts and circumstances at the time.
About the same time Mr. Taylor drafted a letter which he sug-
gested the petitioners should send to the society. It was not
sent, as will be seen, but it shows Mr. Taylor's recognition of the
existing situation. It opens: "' I explained to you [the society's
'" secretary] on Friday afternoon how unhappy Mr. Lucas and I
'"have been recently because of the strained relations in our

'"bpoard.'' After a reference to the impossibility of re-estab-
lishing harmony and offering their shares to the society it
proceeds: '' You will understand how reluctant we are to take

'this step as we have been together associated with Scottish
'"' Textiles since it was formed and we feel we are making it a
'"success as the records will show. However, it is quite
'""impossible to carry on in the present atmosphere and this
'decision is forced upon us.'' The letter, dated January 27,
1953, that was sent by Dr. Meyer was couched in somewhat
different language and in particular refers to a price to be
negotiated for the petitioners' shares. It runs:
"* Dear Mr. Stirling,

'"TIn our conversation last Friday we covered all events from
" the negotiations regarding the ratio of shareholding up to today.

AC. AND PRIVY COUNCIL.

"I explained to you how the very harmonious and friendly
"relations which were the guiding principle in all our dealings
"started to deteriorate rapidly, and certain actions taken during
"the last fifteen months did serious harm to our prosperity and
** goodwill.

""Mr. Lucas and myself regret this turn of events most
"deeply as it affects not only our livelihood which we built up
""with so much pain and labour, but also our sentiment and
"affection which we gave wholeheartedly to the co-operative idea
""jn spirit and actions.

""In spite of all these happenings we still feel that a friendly
"settlement is very much desired at least from our side and
'we have therefore decided to offer to you our shareholding of
"* 3900 shares at a price to be negotiated between us.

€

"As we have to take certain important decisions very soon
"we would be grateful if you could let us have your views as
""soon as possible.

'

"Yours truly,
""(Sgd.) Grorce MeyeEr."'

Following on this letter Dr. Meyer and Mr. Lucas had a
meeting with the society's finance sub-committee, when it was
indicated to them that as they wished to give up their interest
in the company it might be voluntarily liquidated. Dr. Meyer
stated that in that case the goodwill would be lost, that they
had had no desire to bring about the present position and they
were not going to give up their shares at a liquidation value and,
in their opinion, they should be paid 96s. a share. They were
prepared to stay on after selling their shares to the society. Ata
meeting of the society's board on February 9, 1953, it was
minuted that the finance sub-committee and the furnishing com-
mittee had met and agreed that the company "had served its
'" purpose '' and should, if possible, be put into voluntary liquida-
tion. The interview with Dr. Meyer and Mr. Lucas was then
referred to and a recommendation of the finance sub-committee
approved that a reply be sent to Dr. Meyer indicating that the
society did not wish to accept his offer to sell the shareholding
of Mr. Lucas and himself "' at the present time.'' The purpose
which the company had served was plain. It was introducing
rayon production to the society, as Mr. Nicholson, one of the
society's directors, himself said in evidence.

The petitioners knew nothing of the terms of this minute or
of the decision by the two sub-committees that the company had

357

Het. (S8e-)
1958

ScorrisH
CO-OPERATIVE
WHOLESALE
Socrery Lrp.
0.
MEYER.

Lord Keith of
Avonholm.

358

H. L. (Sc.)
1958

ScorrisH
CO-OPERATIVE
WHOLESALE
Society Lp.
v.
Meyer.

Lord Keith of
Avonholm,

HOUSE OF LORDS [1959]

served its purpose. But they did receive a letter dated February
9, 1953, stating that the society did not wish '' at the present
'time '' to accept the offer to sell to them the petitioners' shares.
After that, according to Dr. Meyer, the petitioners were refused
access to the company's books. There followed a letter from the
petitioners' solicitors to the society, dated February 19, threat-
ening proceedings under section 210 if the petitioners' shares
were not taken over at £6 Os. 1ld. a share. 'The petitioners
continued to carry on in the company while attempts were made
to resolve the differences between the parties. These, however,
came to nothing and the present proceedings were commenced
on July 14, 1953. The petitioners still remained with the com-
pany. Business, however, was at a low ebb, and on August 24,
1953, the board passed a resolution that their employment as
managing directors should terminate on November 30, 1953.
They were, I think, still anxious to do what they could to pro-
mote the trade of the company and conserve its goodwill and
did in fact do some business through other sources than the mill.
Under their agreement, they were in any case bound to do so and
had been told to do so at a board meeting on August 24, 1953.
But excessively high commission weaving rates quoted by Mr.
Schofield prevented business on any scale being done with the
mill and disputes arose also with regard to a special order where
the price charged was of no consequence. The evidence suggests
to me the continuance of a policy of hostility to and discourage-
ment of the petitioners by the society. This period produces an
instance of support of the petitioners by their fellow directors.
Following a meeting of the company's board on October 5, 1953,
at which Dr, Meyer complained of the rates quoted by the mill,
the company's secretary, on the board's authority, wrote to the
society's secretary that '' my board would like to inquire if there
"is any possibility of the quoted commission weaving charges
'"'from the linen works, Falkland, being reduced,'' an inquiry
which produced a reply in the negative. But this, it seems to
me, was but an idle gesture. Litigation was in progress, the
company's conduct was under the scrutiny of the court, and the
mill, to the knowledge of the society's representatives, was now
in active production for the merchant converting department.
My Lords, all the judges of the First Division take the view
that it was the deliberate policy of the society in the later years
of its history to depress the value of the company's shares by
starving it of supplies and some of them would date the genesis
of this policy from the events at the end of 1951 and beginning

A.C. AND PRIVY COUNCIL.

of 1952, when the society found itself unable to obtain an adjust-
ment of its holding at par. There is, I think, no positive conduct
proved to support that view before June, 1952, when cotton
control was abolished, but from that date there was an oppor-
tunity afforded to the society to pursue such a policy, if they had
already entertained it, and I think, as events showed, they did in
fact then adopt such a policy. The crucial evidence is that
bearing on the trading relations between the mill and the
merchant converting department, on the one hand, and the mill
and the company, on the other. I have already narrated the facts
and, in my opinion, there was started in the autumn of 1952 a
policy which took effect in 1953 of utilising the rayon looms in
the mill for the production of cloth for the merchant converting
department and shutting off the company from its ordinary source
of supply. This was done, not by refusing orders from the
company, but by quoting to the company prices at which it could
not hope to compete in the selling market. While the society
were at pains to show that because of the costs of production
they could not quote lower prices, the fact remains that through-
out the whole of 1952 and 1953 cloth was being passed from the
mill to the merchant converting department at prices which, for
at least bookkeeping purposes, were being noted at a figure per
yard materially lower than that quoted to the company. It is in
evidence that the various trading departments of the society were
regarded as separate entities expected to show results on a com-
mercial basis. If that meant that the society was content that
the mill should work at a loss in order that the merchant
converting department should work at a profit, that only means
that it allowed the mill to show favour to the merchant convert-
ing department which it could equally have shown to its old
customer the company. But I prefer the view that the mill was
giving the merchant converting department rayon cloth at prices
which it was prepared to quote on an ordinary commercial and
competitive basis. I have already dealt with the evidence by
which the society seeks to escape this natural inference. Mr.
Schofield's own evidence was that he was expected to show a
profit at his mill. It is to be remembered that the company was,
shortly before, giving full employment to the rayon looms and
that, if it had been allowed the opportunity to place orders after
the recession passed, there was every reason to think it would do
so again. According to the evidence trading prospects were good
and the results shown in the production of rayon for the merchant
converting department bear out this evidence. According to a

359

H. L. (8c.)
1958

ScorTisH
CO-OPERATIVE
WHOLESALE
Society Lrp.
v.
MEYER.

Lord Keith of
Avonholm.

360 HOUSE OF LORDS [1959 |

H. L. (Se.) report of the manager of the drapery department dated August 8,
1958 1953, the cost prices of the mill were based on covering overheads
on reduced production and it was anticipated ''that if full

ScorrisH ie : ' A ; s
Co-opgrative | Productive capacity can be obtained mill cost prices will be
WHOLESALE '' Jowered."'

ae ae From the company's point of view, the position was very

MEyvER. serious. It had become dependent on the mill for its supplies of
Lord Keith of Cloth. At the height of its prosperity 94 per cent. of its cloth was
Avonholm. obtained from the mill. When trade revived in 1958 other sources
on any scale were not available to the company. Manufacturers
were busy supplying their regular customers. The position was
so minuted by the company as the opinion of the managing
directors on August 24, 1953. Mr. Schofield agrees that it was
difficult for the company to obtain woven cloth in any quantities
outside Falkland and that the company had been tied to Falkland
for its rayon cloth. On the other hand, the society had the
formulae, connections, and technical knowledge introduced to the
mill by the company through Dr. Meyer, and the equipment and
workers to manufacture the cloth free from any controls. For
practical purposes the mill had started as being, on the rayon
weaving side, the company's mill, a substitute for a mill owned by
or leased to the company. The rayon weaving looms had now
been diverted to the purposes of the society which was enjoying
the monopoly which had previously belonged to the company.
In the circumstances prevailing, this spelt death to the company.
A very significant situation arose in August, 1953, when Dr.
Meyer found the commission weaving rates quoted by Mr. Scho-
field impossible of acceptance. When the secretary of the
company wrote on August 19: "' As a result of this no produc-
"tion is being undertaken on behalf of this company and its
'activities are brought almost to a standstill,'' the society, at a
board meeting on August 24, decided to make no reduction in the
commission charge. In their minute there appears this passage:
"Another factor which affects the situation is that increasing
'' orders are being received from the merchant converting depart-
"ment of the drapery department, and an increasing number of
'' looms are being devoted to that work so that our manager does
'""not feel himself pressed to cut his price to the limit as he was
"towards the end of last year when work was very difficult to
eigetit
Lastly, on the facts, it is to be noted that while the society's
directors of the company, who were also directors of the society,
knew all that was happening within the society, Dr. Meyer and

A.C. AND PRIVY COUNCIL. 361

Mr. Lucas knew nothing apart from what they could infer from H. L. (Se.)
the communications, verbal and written, which they had received, 1958
with reference to the alignment of the shareholding and the
taking over of shares from the petitioners, and the general one
attitude of the society's directors on the company's board. On WHoresate
the vital matters affecting the company's prosperity known to the sae wD:
nominee directors these directors remained silent, concealed the Mevzn.
facts from the petitioners and took no action and gave no advice Lora Keith of
helpful to the company. As Lord Sorn put it, their conduct as alia,
directors was a negative one to '' let the company drift towards
'* the rocks."'

My Lords, if the society could be regarded as an organisation
independent of the company and in competition with it, no legal
objection could be taken to the actions and policy of the society.
Lord Carmont pointed this out in the Court of Session. But
that is not the position. In law the society and the company —_
were, it is true, separate legal entities. But they were in the
relation of parent and subsidiary companies, the company being
formed to run a business for the society which the society could
not at the outset have done for itself, unless they could have
persuaded Dr. Meyer and Mr. Lucas to become servants of the
society. This the petitioners were not prepared to do. The
company, through the knowledge, the experience, the connec- |
tions, the business ability and the energies of the petitioners, had
built up a valuable goodwill in which the society shared and
which there is no reason to think would not have been maintained,
if not increased, with the co-operation of the society. The
company was in substance, though not in law, a partnership
consisting of the society, Dr. Meyer and Mr. Lucas. Whatever
may be the other different legal consequences following on one
or other of these forms of combination one result, in my opinion,
followed in the present case from the method adopted, which is
common to partnership, that there should be the utmost good
faith between the constituent members. In partnership the
position is clear. As stated in Lindley on Partnership, 11th ed.,
p. 401: ''A partner cannot, without the consent of his co-
'' partners lawfully carry on for his own benefit, either openly or
'' secretly, any business in rivalry with the firm to which he
''belongs.'' It may not be possible for the legal remedies that
would follow in the case of a partnership to follow here, but the
principle has, I think, valuable application to the circumstances

of this case.
In these circumstances, I have no doubt the conduct of the

|

362

H. L. (Sc.)
1958

ScorrisH
CO-OPERATIVE
WHOLESALE
Society Lp.
v.
MEYER.

Lord Keith of
Avonholm.

HOUSE OF LORDS [1959 |

society was oppressive. The only question is: was it oppressive in
the affairs of the company? At a previous stage of this case when
relevancy was under consideration the late Lord President
Cooper said®: '' The truth is that, whenever a subsidiary is
''formed as in this case with an independent minority of share-
'holders, the parent company must, if it is engaged in the same
''class of business, accept as a result of having formed such a
'' subsidiary an obligation so to conduct what are in a sense its
'' own affairs as to deal fairly with its subsidiary.'' I would adopt
this statement with this expansion, that conducting what are in a
sense its own affairs may amount to misconducting the affairs of
the subsidiary. It is difficult to say that misconduct in the affairs
of the subsidiary is not conduct in the affairs of the subsidiary
and that, I think, is what Lord Cooper had in mind. Misconduct |
in the affairs of a company may be passive conduct, neglect of its
interests, concealment from the minority of knowledge that it is-
material for the company to know. That, in my opinion, is what
happened here. Nor do I think what I have said is materially
different from the views expressed by all their Lordships in the
Court of Session. The Lord President considered * that there was
a policy by the society's nominees on the company's board of
uniform silence '' in face of the progressive deterioration in
the company's activities; of failure to disclose to the petitioners
the explanation of the deterioration; unwillingness to encourage
the company to seek other manufacturers, leading to the conclu-
sion that the society was extending to the conduct of the affairs
of the company the same policy that was being operated by the
society itself. Lord Carmont considered that the society's
nominees conducted the affairs of the company oppressively as
from the time when being aware of the society's policy they
continued to sit on the company's board and to control its affairs.
'"They could not,'' he says," ''in the circumstance of their
'" relation to the society be anything other than active, or at best
'" passive, supporters of the society's policy when dealing with the

ce

"company's affairs, and even their continuance in office as
"directors of the company put an obstacle in the way of the
'minority taking early and perhaps some timeous action to save
"the company, or at all events to maintain in whole or in part
"the value of the company's shares.'' Lord Russell held ® that
they '' acted in the interests of the society and against the

5 1954 §.C. 381, 391. 7 Thid. 186.
6 1957 S.C. 110, 186. 8 Tbid. 145.

A.C. AND PRIVY COUNCIL. 363

"interests of the company by adopting a policy of masterly Is L. (Sc.)
"inactivity and allowing the company's trading activities to | 1958
"decline to vanishing point.'' Lord Sorn's view was® that the

society as majority shareholders controlling the company '' made oo
"use of its control to.ensure that the company remained passive WHOLESALE -
"under the attack and did not have an opportunity to struggle saris —
" for its existence ''; that they failed in their duty of raising '' the | Mevzr.
"question of looking for another source of supply as an urgent ford Keith of
'' question of policy ''?; and that, when the policy of liquidation "'tol™
had been expressly approved by the society's board, '' the

"nominee directors still did nothing and let the company drift

'" towards the rocks."'

My Lords, these views indicate that the conduct of the society
on the company's affairs was negative conduct. That, in a sense,
is true, for it is just the other side of the shield from that which
displayed the society acting positively to destroy the company.
But I cannot think that where directors, having power to d
something to save a company, lie back and do nothing, they are)
not conducting the affairs of the company, perhaps foolishly,
perhaps negligently, perhaps with some ulterior object in view.
They are certainly conducting the affairs of the company in*
breach of their duty as directors. In the present case I would
go further, for I think that the production of rayon cloth at the
mill was an affair of the company and that the society being
majority shareholder in the company cannot claim that in divert-
ing this production to itself and obstructing supplies to the
company it was acting for itself and not conducting the affairs
of the company in a manner unfair and oppressive to the minority
shareholders. It was said that the company should have secured
its rayon cloth from the mill by a contract. But that is beside
the point, looking to the special relationship between the company
and the society. A partner who starts a business in competition |
with the business of the partnership without the knowledge and
consent of his partners is acting contrary to the doctrine of utmost
good faith between partners. He is also acting in a manner |
which, I think, may be regarded as oppressive to his partners for |
he is doing them an injury in their business. In the same way
there was here, m my opinion, oppression by the society of aa
minority shareholders and it was, I consider, oppression in the
conduct of the affairs of the company. Oppression under
section 210 may take various forms. It suggests, to my mind, as

9 1957 S.C. 154-155.

364

H. L. (Sc.)
1958

ScorTisH
CO-OPERATIVE
WHOLESALE
Socirry Lip.
v.
MEYER.

Lord Keith of
Avonholm.

HOUSE OF LORDS [1959 |

I said in Elder v. Elder and Watson,' a lack of probity and fair
dealing in the affairs of a company to the prejudice of some
portion of its members. The section introduces a wide power to
the court to deal with such a situation in an equitable manner
which it did not have in the case of a company prior to the
passing of the Act of 1948. The court has here acted, in my
opinion, within the powers conferred upon it.

It was said that appeal could not be made to section 210
unless the company had a continuing life ahead of it and here it
was clear that the company would have to be wound up. But
that means that if oppression is carried to the extent of destruc-
tion of the business of the company no recourse can be had to
the remedies of the section. This would be to defeat the whole
purpose of the section. The present position is due to the
oppression and but for the oppression it must be assumed that
the company would be an active and presumably flourishing
concern. The section is, in my opinion, very apt to meet the
situation which has arisen.

It was contended that the value of £3 15s. put upon the
shares was excessive. I see no reason for altering this figure.
Lord Sorn has, in my opinion, approached this matter on a
correct principle, by considering what would have been the value
of the shares at the commencement of the proceedings had it not
been for the effect of the oppressive conduct of which complaint
was made. This is clearly not a matter on which a calculation
can be made with mathematical accuracy or by the application
of strict accounting principles and the figure fixed by the court
is well below the figure fixed by the auditors in February, 1952,
and the price suggested by Dr. Meyer in February, 1953.

I would dismiss the appeal.

Lorp Drnninc. My Lords, I had myself prepared a sum-
mary of the material facts in this case but, in view of the com-
prehensive statement by my noble and learned friend, Lord Keith
of Avonholm, I will not burden your Lordships with what I had
written. I would only say that I am sorry that the events of
1952 were excluded as irrelevant. Dr. Meyer and Mr. Lucas from
the very beginning put those events in the forefront of their
complaints. They did so in the first letter of their solicitors
dated February 19, 1953, and in the original petition lodged on
July 14, 1958. The burden of their complaints was that, when

10 1952 8.C. 49, 60.

A.C. AND PRIVY COUNCIL.

365

there was a recession in 1952 in the rayon trade, they—Dr. |H. L. (Sc.)
Meyer and Mr. Lucas—tried, on behalf of the textile company, |

to develop trade in other goods: particularly in the export of

i

1958

ScorrisH

woollen materials to Germany (where they had valuable trade Qo-opgrarive

connections) and in a large export order for £60,000: but that
they were thwarted in their efforts by the actions of two of the
nominee directors, who tried to get the trade for the Scottish
Co-operative Wholesale Society itself. Whether these complaints
be true or not your Lordships cannot know—because these allega-
tions were excluded from probation. But your Lordships have,
I think, sufficient material to decide the case on the other facts
which were proved.

"The complaints which were established were, I think, these:
The co-operative society set up a competing business. It estab-
lished its own merchant converting department, engaged in the
rayon trade itself, and quoted more favourable terms to its own
department than it did to the textile company. It is said that
the co-operative society did this with intent to injure the textile
company—to depress the value of its shares-so that the co-opera-
tive society could get them cheap—but I would not myself go as

far as this. It seems to me that the co-operative society all the |

time was seeking to promote its own interests. It was ready in
1946 to enlist the co-operation of Dr. Meyer and Mr. Lucas when
they were useful to it—so as to get an introduction into the rayon
trade—but it was ready to throw them over when they were no
longer useful. By which I mean that it was ready to withdraw
all support from them. That was, I think, the state of mind of
the co-operative society right from the moment in November,
1951, when Dr. Meyer and Mr. Lucas refused to realign the shares
at par. At that time the rayon trade was in a recession and Dr.
Meyer and Mr. Lucas were not of so much use to the society as
they had been. By the time the rayon trade revived, the con-
trols were off and the co-operative society was able to engage in
rayon production itself—and it had no further need of Dr. Meyer
and Mr. Lucas or of the textile company. It had its own depart-
ment for rayon. So the textile company could go to the wall.
Tt had '' served its purpose ''—or rather the purpose of the co-
operative society—and could be let go into liquidation. The
co-operative society had not the voting power to put it into
voluntary liquidation. But liquidation might come about by
sheer inanition. So it came about that, when Dr. Meyer and
Mr. Lucas in January, 1953, offered to sell their shares to the
co-operative society at a price to be negotiated (mentioning %6s.),

1

WHOLESALE
Socirty Lip.
v.
MEYER.

Lord Denning.

366 HOUSE OF LORDS [1959]

H. L. (Sc.) the co-operative society refused '"' at the present time.'' The
1958 co-operative society thought, perhaps, that, if they waited,
sooner or later liquidation would come about, or that terms of
ee purchase would be arranged later more favourable to the
WHOLESALE co-operative society than paying 96s. a share.
Society Lrp. ' ,
v. Such being '' the matters complained of '' by Dr. Meyer and
MEYER. Mr. Lucas, it is said: '' Those are all complaints about the
Lord Denning. '' conduct of the co-operative society. How do they touch the
=e: 'real issue—the manner in which the affairs of the textile com-
'"" pany were being conducted? '' The answer is, I think, by their
/ impact on the nominee directors. It must be remembered that
' we are here concerned with the manner in which the affairs of the
textile company were being conducted. That is, with the con-
duct of those in control of its affairs. They may be some of the
directors themselves, or, behind them, a group of shareholders
who nominate those directors or whose interests those directors
serve. If those persons—the nominee directors or the share-
holders behind them—conduct the affairs of the company in a
manner oppressive to the other shareholders, the court can
intervene to bring an end to the oppression.
What, then, is the position of the nominee directors here?
Under the articles of association of the textile company the
co-operative society was entitled to nominate three out of the
five directors, and it did so. It nominated three of its own
directors and they held office, as the articles said, '' as nominees '"'
of the co-operative society. These three were therefore at one
and the same time directors of the co-operative society—being
three out of 12 of that company—and also directors of the
textile company—three out of five there. So long as the
interests of all concerned were in harmony, there was no diffi-
culty. The nominee directors could do their duty by both com-
panies without embarrassment. But, so soon as the interests of
the two companies were in conflict, the nominee directors were
* placed in an impossible position. Thus, when the realignment of
shareholding was under discussion, the duty of the three directors
to the textile company was to get the best possible price for any
_ new issue of its shares (see per Lord Wright in Lowry v. Consoli-
dated African Selection Trust Ltd.'), whereas their duty to the
co-operative society was to obtain the new shares at the lowest
possible price—at par, if they could. Again, when the co-opera-
tive society determined to set up its own rayon department,

11 [1940] A.C. 648, 679; 56 T.L.R. 785; [1940] 2 All H.R. 545.

"
A.C. AND PRIVY COUNCIL.

competing with the business of the textile company, the duty of
the three directors to the textile company was to do their best
to promote its business and to act with complete good faith
towards it; and in consequence not to disclose their knowledge
of its affairs to a competitor, and not even to work for a competi-
tor, when to do so might operate to the disadvantage of the
textile company (see Hivac Ltd. v. Park Royal Scientific Instru-
ments Ltd.'*), whereas they were under the self-same duties to
the co-operative society. It is plain that, in the circumstances,
these three gentlemen could not do their duty by both com-
panies, and they did not do so. They put their duty to the
co-operative society above their duty to the textile company in
this sense, at least, that they did nothing to defend the interests
of the textile company against the conduct of the co-operative
society. They probably thought that '"'as nominees'"' of the
co-operative society their first duty was to the co-operative

society. In this they were wrong. By subordinating the),

interests of the textile company to those of the co-operative
society, they conducted the affairs of the textile company in a
manner oppressive to the other shareholders.

It is said that these three directors were at most only guilty
of inaction—of doing nothing to protect the textile company.
But the affairs of a company can, in my opinion, be conducted
oppressively by the directors doing nothing to defend its interests |

when they ought to do something—just as they can conduct its

affairs oppressively by doing something injurious to its interests
when they ought not to do it.

The question was asked: What could these directors have
done? They could, I suggest, at least on behalf of the textile
company, have protested against the conduct of the co-operative
society. They could have protested against the setting up of a
competing business. But then it was said: What good would
that have done? Any protest by them would be sure to have
been unavailing, seeing that they were in a minority on the board
of the co-operative society. The answer is that no one knows
whether it would have done any good. They never did protest.
And it does not come well from their mouths to say it would
have done no good, when they never put it to the test. See the
decision of this House in Morison, Pollexfen & Blair Ltd. v.
Walton, as described by Scrutton L.J. in Coldman v. Hill.'

12 [1946] Ch. 169; 62 T.L.R. 231; 14 [1919] 1 K.B. 448, 457; 35
[1946] 1 All E.R. 350. T.L.R. 146.

13 (1909) May 10 (unreported); see
f1915] 1 K.B. 90.

367

Ee Sse)
1958

ScorrisH
CO-OPERATIVE
WHOLESALE
Sooizty Lrp.
v.
MEYER.

Lord Denning.

368

HOUSE OF LORDS [1959 |

H. L. (Sce.) Even if they had protested, it might have been a formal gesture,

1958

ScorrisH
CO-OPERATIVE
WHOLESALE
Society LTp.
v.
MEYER.

Lord Denning.

ostensibly correct, but not to be taken seriously.

Your Lordships were referred to Bell v. Lever Brothers
Ltd.,1®> where Lord Blanesburgh said that a director of one com-
pany was at liberty to become a director also of a rival company.
That may have been so at that time. But it is at the risk now

.of an application under section 210 if he subordinates the

interests of the one company to those of the other.

So I would hold that the affairs of the textile company were
being conducted in a manner oppressive to Dr. Meyer and Mr.
Lucas. The crucial date is, I think, the date on which the
petition was lodged—July 14, 1953. If Dr. Meyer and Mr. Lucas
had at that time lodged a petition to wind up the company
compulsorily, the petition would undoubtedly have been granted.
The facts would plainly justify such an order on the ground that
it was ''just and equitable '' that the company should be wound
up: see In re Yenidje Tobacco Co. Ltd.'® But such an order
would unfairly prejudice Dr. Meyer and Mr. Lucas because they
would only recover the break-up value of their shares. So
instead of petitioning for a winding-up order, they seek to invoke
the new remedy given by section 210 of the Companies Act,
1948. But what is the appropriate remedy? It was said that
section 210 only applies as an alternative to winding up and that
an order can only be made under section 210 if the company is fit

_ to be kept alive: whereas in this case the business of the com-

pany was virtually at an end when the petition was lodged, and
there was no point in keeping it alive. If the co-operative society
were ordered, in these circumstances, to buy the shares of Dr.
Meyer and Mr. Lucas, this would amount, it was said, to an
award of damages for past misconduct—which is not the remedy
envisaged by section 210.

Now, I quite agree that the words of the section do suggest
that the legislature had in mind some remedy whereby the com-
pany, instead of being wound up, might continue to operate.

But it would be wrong to infer therefrom that the remedy under

section 210 is limited to cases where the company is still in active
business. The object of the remedy is to bring "' to an end the
''matters complained of,'' that is, the oppression, and this can
be done even though the business of the company has been
brought to a standstill. If a remedy is available when the!

15 [1932] A.C. 161, 195; 48 T.L.R. 16 [1916] 2 Chi 426; 32 T.L.R. |
133. 709.

A.C. AND PRIVY COUNCIL.

oppression is so moderate that it only inflicts wounds on the
company, whilst leaving it active, so also it should be available
when the oppression is so great as to put the company out of
action altogether. Even though the oppressor by his oppression
brings down the whole edifice—destroying the value of his own
shares with those of everyone else—the injured shareholders
have, I think, a remedy under section 210.

One of the most useful orders mentioned in the section—
which will enable the court to do justice to the injured share-

holders—is to order the oppressor to buy their shares at a fair,

price: and a fair price would be, I think, the value which the
shares would have had at the date of the petition, if there had
been no oppression. Once the oppressor has bought the shares,
the company can survive. It can continue to operate. That is
a matter for him. It is, no doubt, true that an order of this kind

369

H. L. (8c.)
1958

ScorrTisH
CO-OPERATIVE
WHOLESALE
Society Lp.
v.
MEYER.

Lord Denning.

Petes

gives to the oppressed shareholders what is in effect money

compensation for the injury done to them: but I see no objection
to this. The section gives a large discretion to the court and it
is well exercised in making an oppressor make compensation to
those who have suffered at his hands.

True it is that in this, as in other respects, your Lordships
are giving a liberal interpretation to section 210. But it is a new
section designed to suppress an acknowledged mischief. When
it comes before this House for the first time it is, I believe, in
accordance with long precedent—and particularly with the
resolution of all the judges in Heydon's case 17—that your Lord-
ships should give such construction as shall advance the remedy.
And that is what your Lordships do today.

I would dismiss the appeal.

Appeal dismissed.