COCKBURN v NEWBRIDGE SANITARY STEAM LAUNDRY COMPANY, Ltd, and LLEWELLYN. [ M. R Appeal.]

• Jurisdiction: Ireland
• Judgment Date: 13 November 1914
• Date: 13 November 1914
• Docket Number: (1913. No. 155.)
• Court: High Court

Cockburn

and

Newbridge Sanitary Steam Laundry Company, Limited, and Llewellyn.

M. R.

Appeal

(1913. No. 155.)

CASES

DETERMINED BY

THE CHANCERY DIVISION

OF

THE HIGH COURT OF JUSTICE IN IRELAND

AND BY

THE IRISH LAND COMMISSION,

AND ON APPEAL THEREFROM IN

THE COURT OF APPEAL.

1915.

Company — Shareholders — Action by, against Director and Company — Contract made by Director for Work to be done by Company — Retention of Moneys received — Agreement with Co-Directors not to account — Internal Management — Powers of Majority — Ultra Vires.

The managing director of a limited company carrying on a laundry business entered into contracts for laundry work in his own name on behalf of the company with a customer. The work was done by the company, and the director received the amounts due under the contracts, and paid over a portion to the company, but did not account for the amounts received by him. This was in consequence of an alleged arrangement with his co-directors that he was not to account for profits. The company declined to call upon the director for an account, whereupon two shareholders brought an action against the company and the director, claiming that the director was a trustee for the company of all moneys received under the contracts, and asking for an account. The company pleaded that the complaint was conversant with a matter of internal management over which the Court had no jurisdiction. The defence of the director was that if there was any cause of complaint against him, which he did not admit, it was only enforceable at the suit of the company.

Held, by the Master of the Rolls, that the complaint was a matter of internal management, and that the action could not be sustained.

Held, by the Court of Appeal, that the transaction was illegal and ultra vires, and (reversing the decision of the Master of the Rolls) that the action was maintainable, and the plaintiffs entitled to the relief sought.

Trial of Action.

The following statement of facts is taken from the judgment of the Master of the Rolls:—

“The plaintiffs in this action are shareholders in the Newbridge Sanitary Steam Laundry Company, Ltd. The defendants are the company, and Thomas J. Llewellyn, who is the managing director. The claim made by the plaintiffs is that the defendant, Llewellyn, is a trustee for, and bound to pay over to, the company all moneys received by him on foot of certain contracts made by him either in his own name or in the name of the company, the carrying out of which had been performed by the company; other consequential relief is also sought.

The allegations in the statement of claim are that Llewellyn is the managing director of the company, and since the inception of the company entered into contracts in his own name on behalf of the company, and in particular with the War Office, for laundry work which was performed by the company; and that Llewellyn had not returned and made over to the company the full amount received on foot of the contracts, but retained, and claimed his right to retain, for himself, such portion of the amounts received under such contracts as he thought fit, and converted the same to his own use. It is also alleged that before action the plaintiffs' solicitors wrote to the company calling on them to compel Llewellyn to give an account of all moneys received by him on foot of the contracts; that no reply was made to this request; and that notice was then given to the company that proceedings would be instituted by the plaintiffs.

To this statement of claim two separate defences have been filed, by the defendant company, and by the defendant Llewellyn. Both defendants have pleaded what is substantially the same legal defence, viz., that the action is not sustainable at the suit of the plaintiffs, who are only individual shareholders. The company puts this in the form of a plea that the complaint is conversant with a matter of internal management, over which the Court has no jurisdiction; while the plea of the defendant Llewellyn is that, if there is any cause of action against him, it is only capable of being enforced at the suit of the company.

Both defendants have also raised the defence on the merits that the defendant Llewellyn, though he entered into contracts in his own name, handed over the entire profits thereof to the company, and duly accounted for all such profits. This defence, if proved, would be a complete answer to the action.

The validity of the first defence might perhaps have been tested as on a demurrer. But, before considering it, it may be well to state shortly the main facts as proved in evidence.

The company carries on the business of a laundry in Newbridge, a garrison town, and naturally looked to the War Office for an important part of its custom. The company did, in fact, do considerable work for the War Office, but, for some reason not satisfactorily explained, the contracts with the War Office were not made with the company, but ostensibly with the defendant Llewellyn in his private capacity, although he was not the owner of the laundry, being only the managing director of the laundry company.

The contract prices were not disclosed to the company by Llewellyn, nor was be asked to disclose them. He never rendered any account of the moneys received by him on foot of the contracts, nor was he asked to do so. He simply credited the company with certain sums, which, admittedly, were not the full amounts received, and these were accepted by his co-directors without question as the moneys coming to the company on foot of the contracts.

It was hinted rather plainly by counsel for the defendants that the explanation of this extraordinary way of doing business was the practice of giving secret commissions to army officials, who either had the disposal of contracts, or were in a position to influence those who had the disposal of them. There was, however, no evidence as to this, because the defendant Llewellyn, the only person who could give information as to the reason for not accounting for the full moneys received, refused to state what moneys he received and what moneys he deducted, claiming privilege on the ground that he might criminate himself. To say the least of it, this leaves the matter in a very unsatisfactory condition.

Llewellyn's co-directors, who were the proper persons to call on him for an account, were the plaintiff, Louisa Cockburn, and a Mr. Thornton. Louisa Cockburn became a director because her deceased husband had been one, and for no other reason. She certainly did not in any way control the affairs of the company, and never inquired into them. She was a mere dummy. Thornton, the other director, was pretty much of the same character. He seems to have left everything to Llewellyn, and apparently he discharged no duty to any person but himself, because, as a director, he got a reduction of 30 per cent. on his washing-bill, and even with that reduction paid only a composition on the amount which he owed the company.

This is a picture in outline of what has been described as the internal management of the company.”

The capital of the company consisted of 1990 ordinary shares of £1 each, and ten founders' shares of £1 each. There were only twelve shareholders. The plaintiff, Alexander Cockburn, held 100 ordinary shares, and the plaintiff, Louisa Cockburn, held 540 ordinary shares and four founders' shares. The defendant Llewellyn held 275 ordinary shares and two founders' shares, and members of his family held 475 ordinary shares.

Serjeant Matheson K.C., and Dickie, for the plaintiffs:—

No relief is asked against the company; it is only Llewellyn who is asked to refund and pay over money to the company. The company need not have taken up a hostile position; if they will not take action, the plaintiffs may. The plaintiffs want to get money for the company. This is not a question of internal management: Burland v. Earle (1); Menier v. Hooper's Telegraph Works (2); Alexander v. Automatic Telephone Co. (3).

The question is, Was the arrangement alleged to have been made at the meeting of directors valid? Clearly not. Llewellyn was disqualified to act as director, as he was concerned in the profits of a contract with the company, and thereby vacated his office: Table A of Companies Act of 1862, Article 67. There was no power to make any contract with him. Even if there was power, he was an interested party, and could not vote: In re Greymoath Point Elizabeth Railway and Coal Co. (4); In re The British America Corporation, Limited (5). Thornton was the only other director present, and one person cannot form a quorum: Sharp v. Dawes (1). A meeting of the company would have been of no

use here, because the majority of the shareholders would have been against the plaintiffs. Llewellyn and Thornton had the control of the shareholders. The majority could not bind the minority in a case of this kind. Burland v. Earle (1) is an authority that it is for the Court to decide whether the contract with Llewellyn was a valid contract. The correspondence shows that the company would not say whether they would call a meeting or take proceedings against Llewellyn.

The plaintiffs' action cannot be sustained, if it is a case of internal management, unless fraud or ultra vires can be shown; if necessary, that can be shown. But if it is not a case of internal management, and if the company will not bring the action, the plaintiffs can bring it. Otherwise the majority of the shareholders could deprive the minority of profits by handing over certain sums of money to individual members. See Campbell v. The Australian Mutual Provident Society (2) and In re Consolidated South Rand Mines Deep, Limited (3). Even if it were a case of internal management, the act done by Llewellyn in April, viz., entering into the contract, was ultra vires, and the action is sustainable. An agent must account to his principal for profits. If he makes a contract for his principal, he cannot...