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Petitioner: JAMES JOSEPH GRAY VS Respondent: NEW AUGARITA PORCUPINE MINES LIMITED
P L D 1952 Privy Council 79
P L D 1952 Privy Council 79
Present : Viscount Simon, Lord Porter, Lord Oaksey, Lord Radcliffe, and Lord Asquith of Bishopstone
JAMES JOSEPH GRAY‑Appellant
versus
NEW AUGARITA PORCUPINE MINES LIMITED -Respondent
Privy Council Appeal No. 18 of 1951 decided on 24th March, 1952 from the Court of Appeal for Ontario.
(a) Company--------
----‑Director‑Obligations of, who places himself in position of contracting with his company‑General principle ‑Modification of incidence of general principle‑Companies Act (R. S. Ontario 1937, C. 251), S. 94.
There are certain special obligations upon a director who places himself in the position of contracting with his company. The general principle is that such a contract is not binding on the company, for a director is not entitled to place himself in a position which his interest is in conflict 'with his duty. The company has a right to the services of its directors as an entire board. Even if the contract is not avoided‑whether because the company elects to affirm it or because circumstances have rendered it incapable of rescission, the director remains accountable to the company for any profit that he may have realised by the deal. Subject to any statutory requirements that cannot be dispensed with, it is open to companies to make such provisions as they please for the purpose of modifying the incidence of this general principle.
A director is not permitted to vote upon a Board resolution dealing with such a contract or arrangement and he could only retain for himself any profit arising from the transaction if at the meeting which passed the resolution he had disclosed to his colleagues "the nature of his interest".
A director who wishes to keep for himself the benefit arising from some deal with his company has to establish that he has satisfied all necessary conditions. The onus is upon him.
There is no precise formula that will determine the extent of detail that is called for when a director declares his interest or the nature of his interest. Rightly understood, the two things mean the same. The amount of detail required must depend in each case upon the nature of the contract or arrange ment proposed and the context in which it arises. It can rarely be enough for a director to say " I must remind you that I am interested " and to leave it at that, unless there is some special provision in a company's articles that makes such a general warning sufficient. His declaration must make his colleagues "fully informed of the real state of things ". If it is material to their judgment that they should know not merely that he has an, interest, but what it is and how far it goes, then he must see to it that they are informed.
Imperial Mercantile Credit Association v. Coleman, L R 6 H L 189 per Lord Chelmsford at 201 ref,
If a trustee has placed himself in a position in which his interest conflicts with his duty and has not discharged himself from responsibility to account for the profits that this interest has secured for him; it is neither here nor there to speculate whether, if he had done .his duty, he would not have been left in possession of the same amount of profit. It has often been said that a trustee who is accountable is not the less accountable if he shows that the transaction impugned is both reasonable and fair and the principle is the same.
Parker v. McKenna L R 10 Ch. App. 96 ;Costa Rica Railway v. Forwood (1901) 1 Ch. 746 ref.
(b) Company----
----‑Suing director‑Pleadings based upon allega tions of fraud in the sense of positive deciet or misrepresentation ‑Statement of claim showing that special reliance was intended to be placed upon defendant's obligations as a director and upon his breaches of fiduciary duty‑Case treated as open on pleadings.
The case was rested upon allegations of fraud in the sense of positive deceit or misrepresentation and the Statement of Claim was primarily drawn so as to set up such a case. But enough was said in the Statement of Claim to show that special reliance was intended to be placed upon the (defend ant) director's obligations as a director and upon his breaches of fiduciary duty.
Held. that the claim based upon " equitable fraud " must be treated as open on these pleadings.
What matters is that a defendant should have had adequate warning by the pleadings as to the issues of fact that are to be raised against him.
Nocton v. Ashburton (1914) A C 932 rel.
Frank Gahan, Walter B. Williston (Ontario Bar), for Appellant.
Solicitors : Blake and Redden.
A. G. Staght Q. C., Conally Gage, for Respondent.
Solictiors : Hancock and Scott.
Date of hearing : 28th January 1952.
JUDGMENT
LORD RADCLIFFE‑This is an appeal from a judgment of the Court of Appeal for Ontario dated 3rd March, 1950, a warding damages for fraud against the appellant and directing an enquiry under a number of heads for the purpose of ascer taining those damages. The judgment of the Court of Appeal was itself made by way of variation of a judgment of McFarland, J., dated 15th October, 1949, and given in the Supreme Court of Ontario, by which he had held the appellant account able to the respondent in respect of dealings between them and had ordered the return to the respondent of several blocks of shares of their equivalent value.
The bare outline of the facts out of which the case arises is as follows. Much of it has already been recited in the Court of Appeal's judgment. The respondent, New Augarita Porcupine Mines, Ltd. (hereinafter called "the Company") was founded in May, 1936 as a mining company with a capital divided into 3,000,000 shares of one dollar each and with power to issue all but five of its shares at a discount of 99 per cent. From the month of October, 1936 until the month of March, 1941 the Company was entirely in the hands of the appellant Gray, who was Vice‑President and Chairman of the Board : its only other acting director during this period was a Mr. Bourne (now dead) who was an accountant employed in the law office conducted by Gray. Another employed, a typist, Miss Lord, was elected a director in October, 1936, but she can have maintained no more than a shadowy connection with the Company, for she is not recorded as having attended a Board Meeting between that date and the month of Novem ber, 1941. The Company had no establishment of its own, its affairs being conducted from Gray's own office. Except for the share register, which was in the hands of the Premier Trust Company as Registrar and Transfer Agent, the Company can hardly be said to have had any books or records of its own. If it ever had an auditor, no auditing was done. No meeting of share‑holders was held between the month of May, 1936 and the month of July, 1943.
During the years when the Company was thus at the mercy of Gray he entered into a number of purported trans actions between it and himself. Since the By‑laws required a Board of five directors, of whom three should form a quorum, and precluded a director from voting on any contract or arrangement in which he was interested, it is obvious that these transactions, which had no other warrant than the authority of Gray and Bourne, were incapable of constituting a valid commitment between Gray and the Company, whatever rights they might create in innocent third parties whose innocence entitled them to remain ignorant of the invalidity of the Company's proceedings. Thus Gray appointed himself the Company's Solicitor as from December, 1936. He issued to himself or to his nominee Bourne very large blocks of the Company's shares as fully paid up, taking them at a discount of 80 per cent. He committed the Company to purchasing from him various mining claims in consideration of fully paid shares and sums of cash, the amounts being determined by himself and Bourne. He treated himself as having sold to the Company for cash holdings of speculative shares in other mining ventures in which he was interested, although, as he conducted in the Company's name a voluminous account with a firm of brokers on the Toronto Stock Exchange in which many share dealings are recorded, it is not possible to deduce from the evidence with any certainty what exactly was the Company's ostensible title to these holdings. More will have to be said about them later. This is by no means an exhaus tive list of transaction with the Company in which Gray had implicated himself : but it is necessary to add to them his frequent drawings upon the Company's bank account for his own purposes. For he does not seem to have felt any need to distinguish between the Company's property and his own, nor, perhaps logically, did he take any steps to see that accounts or records were kept which would at least make it possible to measure the extent of his misappropriations.
It is indeed one of the features of this case that, despite the researches made by the respondent's counsel, only a few of the relevant facts can be stated in anything but general terms. For instance it is far from clear how many of the Company's shares Gray did procure to be allotted to himself or his nominees. The trial judge treated him as liable to the Company for 252,850 shares of their value, apart from another block of 7,700 shares which is involved in a separate issue. The minutes of a Board meeting on 17th November, 1941. speaks of 216,550 as having been allotted in this way by that date. During the hearing of the appeal the respondent's counsel produced an analysis of the evidence which showed Gray as having taken from the Company and disposed of a total of 358,519 of its shares. Their Lordships are content to accept this figure as the best that can be arrived at on the available information, but it is not necessary to make any conclusive finding on the matter at this stage. Similarly, it is quite certain that Gray disposed of the shares he took on a very large scale ; but it is not possible to say precisely how many he sold or what prices he realised on the various sales. It does appear that in July, 1939 he sold a block of 500 at 26 per cents per share,. that 281 cents. was the average market price of the Company's shares on the Toronto Stock Exchange during the period November, 1939 to November, 1941 when many of Gray's operations were carried out, and that between December, 1940, and January, 1941 a firm of brokers bought 100,000 shares from Gray at prices ranging from 27 to 30 cents per share. These facts are quite sufficient to establish that over a long period he was making very large profits at the expense of the Company by obtaining shares with Bourne's connivance at a fixed discount of 80 per cent. and then retailing them to his own advantage at much higher prices. When examined on discovery Gray made no secret that he regarded this as being the effective arrangement :‑"I was to get the stock at a price and I was to pay the expenses and I was to get difference . . . Bourne and I arranged that for the Company." The "expenses" seem to have been represen ted in the main by a '`mail order campaign" which he conducted for the purpose of enlarging upon the Company's prospects. At more than one point of his examination he invoked these expenses as having eliminated any net profit from his dealings ; but as he never at any time made any analysis of the expenses or indeed appears to have seen any record of them it would strain the credulity of any Court too far to allow this pessimistic impression to outweigh the ascertained fact that he did realise much higher prices for the shares than he ever gave for them.
In 1944 certain changes in the Board began to take place. The facts concerning them share the haze that obscures most of the Company's history up to this date. At a meeting held on 17th March, 1941 Gray and Bourne purpoted to elect two new Directors. Tovell and Buchanan, to fill existing vacancies. Since the By‑laws required that Directors should be share holders of the Company and neither of them was, according to Gray, a shareholder at that date, their election could not have been validly made; but both of them are recorded as having attended a meeting on 29th October, 1941. On 17th November Gray, Bourne and Miss Lord (now Mrs. Bauman) held a meeting, at which, after numerous decision of no possible validity, they elected Buchanan and Tovell to the Board of Directors. Buchanan was by that time a holder of 1,000 shares and therefore qualified : Tovell, to whom 500 shares had been transferred but who was not yet then registered in respect of them, was a share‑holder in the sense that he was a member of a firm, Wilson, Gregory, Liphardt & Co., who were registered as share‑holders under that name. On 19th November, Gray, Bourne and Mrs. Bauman met again. Mrs. Bauman proceeded to affix her signature to the records of all (except one) Director's meetings held since October, 1936 to show that she "approved of and consented of everything done at those meetings." Even this comprehensive, though belated, endorse ment was incapable of adding anything to the validity of such proceedings. Opportunity was also taken to correct the minutes of previous meetings by eliminating from the records of "Directors present" the name of Napier Weir, a gentleman who had at no time been either a Director or a share‑holder of the Company but who had made occasional appearances in Gray's law office. No .explanation was forthcoming why these appearances had led Gray and Bourne to mistake him for a colleague on the Board. If he existed at all, a "man of medium height and medium build . . . not a very 'big man," he disappears as completely from the case as his name dis appeared from the Minute Book of Director's meetings. Bourne and Mr. Bauman then resigned and, Tovell and Buchan an taking their seats, a vacancy was filled by the election of Seguin: He again was not then registered in respect of an individual holding, but was a member of a firm, Barrett, Seguin & Co., who were registered under that name. The only further changes in the Board that need to be mentioned are that at a Board meeting on the 9th December, 1941, a fifth Director, Bouck, was elected. Thus at the date, the crucial one for the purposes of this action, there were in office, ostensibly at any rate, five directors, Gray, Tovell, Buchanan, Seguin and Bouck.
This reinforcement of the Board could not have been wholly unconnected with the attention that the Ontario Securities Commission had begun to pay‑to the manner in which the Company's affairs were being conducted. About the 17th November Gray was interviewed by on official of the commission and shortly afterwards Bourne placed in the hands of the commission such of the Company's books and docu ments, including the Minute Book, as may then have existed. It seems clear that a report was in course of being prepared. On the 28th November a separate investigation was started by Bouck, a lawyer by profession and not then a director of the Company. His commission to make the investigation came from a Mr. Bishop who was interested in the Company's shares but he worked with the approval and to some extent with the assistance of Segun, Buchanan and Tovell. His work included a study of the Minute Book, some cancelled cheques and certain unidentified records, and the sight of a statement that had been prepared by the Securities Commission. He also had an interview with two officials of the commission from whom he obtained some, again unidentified, figures. From this material Bouck drew up a document which he "though was fairly representing the position of the company at that time." This document (Exhibit 14) was shown by him to and discussed with Gray on the 4th and 8th December or on one of those days, at any rate before the Directors meeting that took place on the 9th. Exhibit 14 was the basis of the arrangement that was come to at that meeting and both it and a shorter version (Exhibit 8) were then before the Board. One was styled an "approximately correct statement of the Company," the other "Financial Statement." Their purpose was to clear up the obscure question, what was the Company's true financial position ; but this question really depended on the answer to another, hardly less obscure, what was the state of account between itself and Gray.
In the result the statement showed Gray as owing the Company 518,765,29, subject to certain assumptions, The crucial assumptions was that he ought to be charged with approximately 20 cents every share that had been issued for cash. Starting with this charge against him, which made up a figure of 597,745,20, there were then set off against it what were described as "payments properly made," in other words payments which had been made or were to be treated as having been made out of the Company's funds and to which no exception 'was to be taken. The included two sums which were not, really payments at all, a sum of 515,000 allowed to Gray for services, rents, office expense, to date" and a sum of 510,200 in respect of "Preston stock on hand." This sum was in fact equivalent to about twice the amount of money that had been paid for the stock and represented more nearly its then market value. A second important assumption was that the Company was not going to accept any responsibility for the acquisition of certain blocks of shares in which Gray was interested and which he had purported to sell to it or to cause it to buy. These shares, 56,300 shares of Bear Exploration and. Radium Ltd. 25,000 shares 'of Yellow knife Gold Mines Ltd., and 2,500 shares of Hugh Pam Porcupine Mines Ltd., as well as 7,700 shares of the Company itself, were to be trans ferred to Gray, but as a consequence the "payments properly made" in the account with him were not to include any sums that might have been paid out of the Company's funds or on its behalf to words the making of these acquisitions.
Thus the Company's financial statement was drawn up on the basis that Gray had been treasurer of all that the Company had received in cash for its shares, assuming the issue price to be 20 cents per share, and he could receive credit only for such sums (part from the two special items just mentioned) as had been properly spent on the Company's behalf. That is an intelligible conception, even if it was not consistently applied ; but by itself it does not explain why Gray should only be charged with 20 cents per share when his allotments to himself had realised for him, apparently, a much larger average figure per share. The explanation is not‑easily extracted from such evidence as is available. Apart from Gray only two of the Directors gave evidence, Bouck and Tovell. According to Tovell, who evidently knew much less than Bouck as to what the real basis of the calculation was, the $97,745 represented monies that Gray had paid into the Company's treasury against the 500,681 shares in all which had been issued for cash during the preceding years. But in fact Gray had not taken, by him self or by nominees, anything like all these 500,681 shares it seem possible to suppose that he had paid up even the 20 cents, per share that he and Bourne had decided to regard as the issue price to him. Bouck's explanation was quite different. The 20 cents, he said, were not related to Gray's ostensible price of issue : they represented more nearly an estimation of the value of the shares as at 9th December 1941. "I think Mr. Bishop was prepared to take down some treasury stock as soon as the Company was in a position to sell, at 20 cents a share, and I figured that was the proper price to charge Gray for these 'shares which had been taken out of the treasury". If Gray was to be charged at all with the monies which the Company had received or ought to have received on the issue of its shares during the preceding five years, there was no good reason for fixing the charge on the basis of the price obtainable at the time of settlement. But then neither Bouck nor Tovell knew at the time that Gray had been selling the shares which he had taken at prices showing a substantial difference in his favour. Bouck had no reason to know and did not enquire : Tovell could have known something about it because of the option which has firm had taken up during the preceding December/January. But each stated explicitly in his evidence that he did not know of this important circumstances on the 9th December.
The Board meeting of the 9th December is recorded in the Company's minutes. It was attended by all the Directors, and the fist business was the election of Bouck. The result of the meeting was that, after discussion, an agreement was come to on the lines of Bouck's recommendations, as put forward in his memorandum (Exhibit 14). Gray was to pay the Company the $518,765,29 shown as due, the payment to be secured by depositing for sale 93,816 of its shares : he was to take back the Bear stock, the Giant stock, the Hugh Pam stock and the 7,700 shares previously mentioned : the shares deposited were to be taken "in full settlement of the liabilities" of Gray to the Company : Grap was to release the Company from all claims to date. Gray is recorded as having declared his interest "in all matters in which he was interested" and refrained from voting. '
The crucial question in the case is to determine what is the validity and what are the consequences of this agreement arrived at in this way. But before doing so their Lordships ought to notice a point that was argued before them to the effect that two of the Directors, Seguin and Tovell. were ‑not qualified to be elected Directors at the date when their osten sible election was‑made (ignoring for this purpose the abortive election of 17th March), and that therefore there was not on the 9th December any quorum competent to bind the Company to any agreement. Reliance was placed upon the statutory requirements as to Directors' qualification which were ob tained in section 87 (1) of the Companies Act then ruling (R. S. Ontario 1937, c. 251). The appellant's counsel answered this point by maintaining that each of them, Seguin and Tovell, was at the date of his election a member of a firm then regis tered as share‑holders in the Company's books and was as such "a shareholder absolutely in his own right" within the meaning of section 87 (1) and so as to satisfy its requirements. Their Lordships do not propose to decide this point. It is not noticed in the judgment of the Trial Judge and the Court of Appeal only noticed it in order to put it aside, being content to assume that the Board was properly constituted, since they regarded Gray as liable in any event. Their Lordships also regard him as unable to escape liability and they will therefore make the same assumption. To hold that these Directors were not qualified would make it necessary to consider two further points which have not been dealt within the Courts below : one the effect of By‑Law 62 which gives validity to the acts of de facto Directors despite a subsequent discovery of invalidity in their appointment, a provision which, though commonly found in the Articles of Association of companies in the United Kingdom, was, it was argued, ultra vires this Com pany having regard to the Companies Act and to its constitu tion ; the other, the effect of a resolution passed at a general meeting of share‑holders on 28th July 1943. ratifying the acts of the then Board of Directors as evidenced by the Minutes and records of the Company. The determination of these points involves matters of general importance to the law governing the administration of limited companies, although the Ontario statute itself has since been changed and now requires no more than that a Director should be "a share holder of the Company" (R. S. Ontario 1950, c. 59, section 87 (1). Their Lordships will however' observe in passing that it is by no means to be assumed that the well known English decisions that one of two joint holders of shares has a holding of those shares (Dunster's case (1894) 3, Ch. 473) and that. a registered share‑holder who is in fact a trustee is nevertheless a registered member in his own right" (Pulbrook v. Richmand Consolidated Mining Co., 9 Ch. D 610) and other decisions that have followed and elaborated upon them offer any direct guidance as to the construction of such a provision as that contained in the Ontario statute which was in force at the relevant date. This is a view that has already been suggested in Canada (see for instence Ritchie v. Vermillion Mining 4 Ont. L R 588 at 597) and in so far as the particular point may still have practical importance in Ontario or else where it would need very careful consideration.
How then does the agreement of 9th December stand in law ? A variety of answers has been returned to this ques tion. To Gray, of course, it is a valid and binding compromise of all claims then outstanding and is a bar to any action that seeks to reopen them. That has been his…
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