The North-West Electric C. v. Walsh, (1898) 29 SCR 33

Supreme Court of Canada

The North-West Electric C. v. Walsh, (1898) 29 SCR 33

Date: 1898-10-13

The North-West Electric Company, Limited (Defendant)

Appellants

And

Mary C. Walsh (Plaintiff)

Respondent.

1898: Mar 3; 1898: Mar 4; 1898: Oct 13.

Present:—Taschereau, Gwynne, Sedgewick, King and Girouard JJ.

ON APPEAL FROM THE COURT OF QUEEN’S BENCH FOR MANITOBA.

Company—Directors—By-law—Ultra vires—Discount shares—Galls for unpaid balances—Contributories—Trustees—Powers—Contract—Fraud—Breach of trust—Statute, construction of—C. S. M. c. 9 Div. 7—R. S. M. с. 25, ss. 30, 33.

The directors of a joint stock company incorporated in Manitoba have no powers under the provisions of “The Manitoba Joint Stock Companies Incorporation. Act” to make allotments of the capital stock of the company at a rate per share below the face value, and any by-law or resolution of the directors assuming to make such allotment without the sanction of a general meeting of the shareholders of the company is invalid.

A by-law or resolution of the directors of a joint stock company which operates unequally towards the interests of any class of the shareholders is invalid and ultra vires of the company’s powers.

Where shares in the capital stock of a joint stock company have been illegally issued below par the holder of the shares is not thereby relieved from liability for саlls for the unpaid balances of their par value.

Judgment of the Court of Queen’s Bench for Manitoba (11 Man. L. R. 6293 reversed, Taschereau J. dissenting.

APPEAL from the judgment of the Court of Queen’s Bench for Manitoba ([1]) reversing the judgment of the trial court by which the plaintiff’s action was dismissed with costs.

The plaintiff brought suit claiming that she was the owner of a number of shares in the capital stock

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of the company which had been issued to her as fully paid up and non-assessable on payment of a sum less than the face value thereof under an agreement between her and the directors that the shares should be so issued to her at a discount, and asked for a declaration that certain calls made upon her said shares and the forfeiture thereof for non-payment of the calls were illegal and void, and alternatively that she should be reinbursed the actual sum paid by her for the shares in question. The case was tried before Sir Thomas W. Taylor, Chief Justice of Manitoba, who dismissed the action with costs, but on appeal to the full court, his judgment was unanimously reversed, and it was ordered that a judgment should be entered in favour of the plaintiff under certain terms and conditions and saving certain rights of persons therein mentioned.

A statement of the facts and questions of law at issue in the case appears in the judgment of the court as delivered by His Lordship, Mr. Justice Sedgewick,

Ewart Q.C. for the appellant. All the judges in the courts below found that the directors as promoters of the company acted fraudulently in allotting these shares at a discount and thereby giving an advantage over other shareholders. There was no express contract that the shares should be issued at the discount allowed, and the respondent who received them knew that the action of the directors was a fraud upon the company and that the company was not bound by their agreement. The transaction was managed by the plaintiff’s husband, who was her agent and at the same time a promoter, a director and the trustee of the company. This case is similar to Dr. Danielľs Case (1) which was followed in the case of McCraken v. Mclntyre (2), and reference, made to it at pages 494,

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and 527. See also Welton v. Saffery ([2]), per Macnaughten L. J. at page 321; Re Western of Canada Oil Co.; Carling Hespeler & Walsh’s Cases ([3]), per Mellish L. J. and James L. J.; Leeke’s Case ([4]); Re Disderi & Co. ([5]); Re Canadian Oil Works Corporation; Hay’s Case ([6]); Re Railway Time Tables Publishing Co. ([7]), per Lindley L. J. at page 115, and Bowen L. J. at page 117; Re Cachar Co.; Lawrence’s Case ([8]); Re Madrid Bank; Wilkinson’s Case ([9]); Re Addlestone Linoleum Co. ([10]), and Oakes v. Turquand ([11]) at pages 851 and 352. The plaintiff, through her agent, had full knowledge of the circumstances, and chose to place herself in a position to take advantage of any benefits that might be obtained, and as holder of the stock she should be compelled to bear the burthens of it. See remarks of Richards C. J. in McCraken v. Mclntyre ([12]) at pages 495 and 510. See also In re Reese River Silver Co.; Smith’s Case ([13]) and The Central Railway Co. of Venezuela v. Kisch ([14]) at page 125; Preston v. Grand Collier Dock Co. ([15]) It was a surreptitious and fraudulent dealing; Panama & S. Рас. Tel. Co. v. India Rubber, etc. Co. ([16]), per James L.J. at page 527. See Lindley on Companies (5 ed.) at page 781 and the cases cited in support of the statement there made as to contributories.

The issue of shares at a discount is illegal under English law; Welton v. Saffery; it is also illegal under Canadian law, McCraken v. Mclntyre at page 509, and the Manitoba statute, R.S.M. c. 25, ss. 30 and

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33, gives no power to make by-laws contrary to law, even by implied construction. See Mollwo, March & Co. v. Court of Wards (1), followed in Pooley v. Driver (2). A misapprehension of the law by the Legislature does not make that the law which it has erroneously, assumed the law to be: Earl of Shrewsbury v. Scott (3) at page 53.

In this case it is not pretended that any general meeting of the company ever dealt with this issue of the stock at a discount. The discount resolution was in February, 1890, but in October, 1889, the company had covenanted with the Edison Electric Light Company that all shares (save their 200) “shall be of the par value of $100 each * * * and shall be issued for full payment in cash only.” A general meeting of the company was held between these dates, and it is fair to assume that the agreement was then either expressly, or impliedly, approved by the company; Re British, Provident Life & Fire Assur. Co.; Coleman’s Case (4) at page 503; and if so the company had (within the precise wording of section 30) “at a general meeting of the company” absolutely declared that the shares should not be issued at a discount. It was, therefore (upon any construction of the statute), impossible for the directors to issue the shares below par. Even if this cannot be assumed the company had under its seal made the requisite declaration, and the directors had no power to disregard what the company had thus done.

The director’s resolution was ultra vires, because it was unreasonable—this, apart from any statute. Shareholders are entitled to be treated equally and fairly by the directors. Even majorities of shareholders have no power to infringe that equality.

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Lindley on Companies (5 ed.) 396; Brice on Ultra Vires (3 ed.) 195-196; Menier v. Hooper’s Telegraph Works ([17]), at page 353; Ex parte Cowen ([18]); Beatty v. Northwest Transportation Co. ([19]); Hutton v. Scarborough Cliff Hotel Co. ([20]). Issuing shares at a discount, even to all the shareholders, is a breach of the equality— for some shareholders may possibly not be able to take them. Guinness v. Land Corporation of Ireland ([21]); Ashbury v. Watson ([22]).

The plaintiff cannot complain of any misrepresentations by the company as to the character of the shares, or its power to allow the discount because the scheme was a fraud perpetrated by Walsh himself, and in any case, the company, as distinguished from individual directors, is not chargeable with such misrepresentations. Houldsworth v. City of Glasgow Bank (7); Re Addlestone Linoleum Co. (8); Lynde v. Anglo-Italian Hemp Spinning Co. (9).

As to the alternative claim the plaintiff never has repudiated the shares, and does not now claim to do so; upon the contrary she has obtained a judgment declaring that she is the owner of fifty-three of them. She is therefore not in a position to claim rescission. Lapse of time alone would be a sufficient bar to any such claim. Clarke v. Dickson (10); Sharpley v. Louth & East Coast Ry. Co. (11).

J. Stewart Tupper Q.C. for the respondent. This case cannot be governed by English cases decided under the English statute, which contains a clause respecting breaches of trust upon which those cases rely. The

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statute which determines the powers and rights questioned here has no such clause. There was no fraudulent intention in respect to the issue of the stock in question in this case; it was honestly made in the belief that the power to do so existed, however, incidentally, the trustees may have erred in their duties.

The company allowed the respondent to exercise her full privileges as owner of the shares, and to attend the next annual meeting of the company and to vote thereat by her attorney, and also to transfer two of the shares to her husband, which transfer was duly registered by the company, and the shares transferred in the books. See In re British Provident Fire & Life Assurance Co.; Lane’s case ([23]); Re British Provident Fire & Life Assurance Co., Grady’s Case ([24]); Phosphate of Lime Co. v. Green ([25]); clear evidence of the adoption of the contract is also found in the action of the appellant in making calls upon the shares and in taking proceedings to forfeit the shares for non-payment of calls. The husband was managing director until March, 1890, but he had no connection with the company as shareholder or director for eight months previous to the issue of the share certificate to the respondent on the 24th of February, 1891.

The Manitoba Act provides for the creation of corporations, and the liability of shareholders to creditors is expressly declared by section 44. Their liability to the company and to each other is by section 49 “ for all sums of money by them subscribed.” Not only is there no prohibition against issuing shares at a discount, but sub-section (b) of section 30 and sub-clause (d) of section 72 are clear recognitions of such a power. See the language of Maclennan J.A. in Re Ontario Express and

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Transportation Company (1) at page 661. There are no such provisions in the English Act under the provisions of which (secs. 7, 8 and 11) the Court of Appeal in England reversed the decision of Mr. Justice Chitty, who, so recently as 1888, held that a company could issue its shares at a discount: In re Almada and Tirito Co. (2). See also In re Addlestone Linoleum Co. (3); Ooregum Gold Mining Co. v. Roper (4); In re Railway Time Tables Publishing Co. (5).

In the Manitoba Act, by section 30, the directors are empowered “ to administer the affairs of the company,” and to make any description of contract which the company might, by law, enter into, also to make bylaws, not contrary to law or to the Letters Patent of the Company to regulate the allotment of stock; and by section 33 it is declared that, if the Letters Patent make no other definite provision, the stock of the company shall be “ allotted” when and as the directors by by-law or otherwise may ordain.” It seems quite clear that the appellants had power to sell the respondent the shares in question at a discount, and that the proviso (b) to this section is intended to limit the powers of the directors only when a price, either at a premium or discount has been fixed by the shareholders for the shares. As a matter of fact, however, the shareholders had authorized the transaction in question by by-law No. 2, in which authority was conferred on the trustees to dispose of the stock on such terms as they saw fit. In any event the respondent was entitled to assume that the sanction of the shareholders had been obtained so as to make the issue legal; Royal British Bank v. Turquand (6); Lindley on Companies 166; County of Gloucester Bank v. Rudry Merthyr

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Steam etc. Co. ([26]). The onus was on the appellants to show that the action of the directors was unauthorized by the shareholders, and no such evidence was given. This subsequent ratification is equivalent to prior authorization; Irvine v. Union Bank of Australia ([27]).

The use of the word “ bonus” does not prevent the sale of the shares in question being a sale at a “discount,” as it is the substance of the transaction which governs, not the language with which it may be clothed: In re Licensed Victuallers Mutual Trading Association ([28]); In re Faure Electric Co. ([29]); In re London Celluloid Co. ([30]); In Re New Chile Gold Mining Co. ([31]).

The agreement with the Edison Company could not confer authority on the appellants to make the calls. At most that transaction would merely give a right of action to the Edison Company against the appellants. Nor need there be any serious discussion respecting the appellants’ novel contention that they can “ approbate and reprobate.” It has been decided again and again that this cannot be done. The contention that the sale of the stock at a discount was proof of fraud is idle in view of the fact fact that there was no evidence to show that the stock was worth more than the respondent gave for it. But even if there had been fraud, the appellant company had to repudiate or affirm the contract. It was bound to accept or reject it as a whole. The contract was to pay $3,200, and it cannot be turned into an agreement to pay $16,000. Currie’s Case ([32]); DeRuvigne’s Case ([33]); Anderson’s Case ([34]); Waterhouse v. Jamieson (10).

If the company had no power to issue shares at a discount we should recover the money paid on the

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ground that there was an entire failure of consideration. In re Ince Hall Rolling Mills Company ([35]); In re Railway Time Table Publishing Company; Ex parte Sandy’s ([36]). Lindley on Companies, (5 ed.) pp. 189, 235. Mere laches do not disentitle the holder of shares to relief against an invalid forfeiture. Garden Gully United Quartz Mining Co. v. Mc Lister ([37]). Besides such a defence is not open to the appellants, as it is not raised in the pleadings: Clarke v. Hart ([38]).

TASCHEREAU J. (dissenting).—I would dismiss this appeal. The reasoning of Mr. Justice Killam seems to me unanswerable.

The judgment of the majority of the court was delivered by ะ

SEDGEWICK J.—The respondent’s husband was a promoter and corporator and the original managing-director of the appellant company. The company was incorporated on the fifteenth of June, 1889, by letters patent, issued under the provisions of the Manitoba Joint Stock Companies Incorporation Act, (Consolidated Statutes of Manitoba), ch. 9, div 7, with a capital of one hundred thousand dollars divided into one thousand shares of one hundred dollars each, the object of the company being the carrying on of an electric lighting and power business in the province.

The applicants were George H. Strevel, Frank J. Walsh, Jefferson Davis, James w. Johnston and Henry J. Dexter, each of whom had subscribed twenty shares of the capital stock of which they at first had paid ten per cent and eventually the remaining eighty percent.

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The applicants were the provisional directors of the company.

On the fifteenth of July, 1889, the provisional directors passed the following resolution ะ

That whereas an agreement was entered into by this provisional board with the negotiators and the persons by whom money is advanced on mortgage bond security for the establishment of the business of the company, which agreement requires the handing over to trustees the amount of all unsubscribed stock fully paid up and non-assessable, to be disposed of as such trustees see fit, on the production of the necessary cash surrender value of mortgage bond or bonds, be it resolved therefore that this Board hereby nominate F. G. Walsh and H. J. Dexter, trustees, and direct the issue to them of nine hundred (900) shares of this company, fully paid up and non-assessable for the above purposes.

It may be here noted that as a matter of fact there was no agreement ever come to or even contemplated such as was that referred to in this resolution. Nor was any money advanced by any person whatever for the purpose mentioned and no one has ever yet been able to give an intelligent or reasonable account of its meaning or object. However at a meeting of the shareholders of the company subsequently held this resolution was confirmed and incorporated in the by-laws of the company as follows:

BY-LAW NO. 2.—Be it enacted that the remainder of the capital stock, to wit, nine hundred ‘ (900) shares be issued to enable this company to carry out the spirit of resolution passed on the fifteenth day of July, 1889, which reads as follows: “ That whereas an agreement was entered into by this provisional board with the negotiators and the persons by whom the money is advanced on mortgage bond security for the establishment of the business of the company, which agreement requires the handing over to trustees the amount of all unsubscribed stock fully paid up and non-assessable to be disposed of as such trustees see fit on the production of the necessary cash surrender value of mortgage bond or bonds, be it resolved therefore that this board hereby nominate F. G. Walsh and H. J. Dexter, trustees, and direct the issue to them of nine hundred (900) shares of this company, fully paid up and non-assessable for the above purposes.”

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This by-law likewise is as inexplicable as the resolution upon which it was based, but the directors acting upon it issued to F. G. Walsh and Henry J. Dexter, as trustees, the remaining nine hundred outstanding shares of the company in the following form :

THIS CERTIFICATE entitles F. G. Walsh and Henry J. Dexter, trustees, to nine hundred (900) shares in the capital stock of the Northwest Electric Company (Limited), fully paid up and non-assessable, and transferable in the books of the company in person or by attorney on surrender of this certificate.

Another extraordinary thing had occurred before the issue of this certificate. On the seventeenth of October, 1889, the company entered into a contract with the Edison Electric Light Company, by which the latter company was to transfer the use of certain patents relating to electric light in consideration of which and of the sum of four thousand dollars in cash the company agreed to deliver to the Edison company two hundred fully paid up shares of its capital stock, agreeing at the same time that the remaining six hundred shares should be issued only after full payment in cash.

At a meeting of the directors of the company held on the 3rd February, 1890, the following resolution was passed:

That whereas by-law No. 2 appointed Frank G. Walsh and Henry J. Dexter trustees of nine hundred shares of the capital stock of this company for the purposes set forth in the by-law; and whereas the said trustees have reported the allotment of certain portions of trust stock in the following manner, to wit: James McNaught, St. Paul, one hundred and sixty shares; Joseph M. Graham, Winnipeg, Man., one hundred and sixty shares; Edison Light Company, New York, two hundred shares on the conditions that a bonus be received from each of the allottees, as follows: From James McNaught, the sum of $3,200 cash; from Joseph M. Graham, the sum of $3,200 cash; Edison Electric Light Company, the sum of four thousand dollars cash; and have further allotted of such stock to Mary E. Dexter and Mary

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C. Walsh of Winnipeg, in consideration of and in the following manner, viz.: Mary E. Dexter, one hundred and sixty shares, and Mary C. Walsh, one hundred and sixty shares of fully paid up and non-assessable stock, for which each of them is to pay a bonus, within twelve months from the date hereof, the respective sums of $3,200. Be it resolved that the board hereby ratifies and confirms the same and directs the secretary and president or vice-president to issue certificates subject to such conditions and allow the necessary transfer to be made in the transfer books.

Certificates were accordingly issued to McNaught, Graham and Mary E. Dexter, for one hundred and sixty shares each and to the Edison Electric Light Company for two hundred shares, and on the 3rd of February following, Walsh, the husband of the respondent, paid to the company $3,200, and on its receipt she was entered upon the lists of the company’s shareholders and received a certificate that she was the owner of one hundred and sixty shares, fully paid up and non-assessable in the capital stock of the company. The respondent subsequently transferred two of these shares to her husband.

It is not contended that Mrs. Walsh was a purchaser for value without notice, or that she has any greater rights than her husband would have had had he issued the shares to himself, so that for the purposes of this opinion I propose to treat him as the real plaintiff and not his wife.

So far it would seem that all the stock of the company had been disposed of, and that seven hundred of these shares had realised not 170,000 as they would have, had they been sold at par, but only $14,000, the holders of the other shares having paid for them $30,000.

It might here be observed that whether this transfer to the directors and their wives at eighty per cent below par was legal or not, it was especially flagititious because of the existence of the agreement to

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which I have referred between the appellant company and the Edison Electric Light Company. Doubtless the consideration which influenced the Edison Electric Light Company in making their venture was the fact that the whole of the capital stock would be subscribed and paid for in full, it being evident that nothing would be more likely to impair the success of the concern than any serious curtailment of the statutory capital.

And so it happened sometime previous to the 10th of September, 1891, that the company became seriously involved in financial difficulties. The debts amounted to about $98,000, a judgment had been recovered for $1,100, and other creditors were pressing for payment of their claims. The then shareholders of the company made an investigation into its affairs when the manipulations above stated in regard to the stock became known and the company was advised that the directors and shareholders who had received the seven hundred shares at less than par were liable to pay the balance. On the 10th of September, 1891, a resolution was passed authorizing the company to make two calls of twenty per cent each upon the stock. These calls were duly made, and all of the shareholders except Mrs. Walsh and her husband, who held the two shares, paid the eighty per cent, they alone refusing to do so. Their stock was thereupon declared forfeited, and certain portions of such forfeited stock were subsequently sold by the directors at eighty cents, fifty-three shares still remaining in the treasury undisposed of, although this was not known to the plaintiff at the commencement of the action.

The plaintiff thereupon brought this suit claiming that she was the owner of one hundred and fifty-eight shares of $100 each of fully paid up and non-assessable stock of the company, and that the defendant’s action

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in making said calls and forfeiting said stock was illegal, and that the company’s register be amended so as to show the plaintiff the holder of said stock; asking in the alternative, for a declaration that the defendants were indebted to the plaintiff in the sum of $3,200, and that they may be ordered to pay the same, etc.

The case was tried before Sir Thomas Taylor, Chief Justice of Manitoba, who dismissed the plaintiff’s claim. But his judgment was unanimously reversed upon appeal before Dubuc, Killam and Bain JJ.

The first question to be determined is as to the legality of the issue below par of these one hundred and sixty shares, above referred to, to Mrs. Walsh.

I am of opinion, as in fact all the judges below in dealing with the case seem to have held, that they were illegally issued and that the by-law and resolution upon which such issue purported to be based were absolutely void in so far as they authorized the issue of stock for a sum of money below par.

Three considerations lead me to this conclusion.

In the first place it is elementary law that no joint stock company can issue stock below par unless authorized to do so by the legislature under whose authority it was created. A joint stock company is as a rule a trading association, and except for the limitations of its charter or of the creating statute each of its members would be liable to the uttermost farthing for every obligation of the association. The legislature however gives immunity to the shareholders either in whole or in part in consideration of each member paying in to the company’s treasury a fund which in the judgment of the legislature will be sufficient protection to the public against its probable liabilities. In other words the company on behalf of its members contracts for their immunity from obligation in consideration of their providing a fund which the legislature

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on behalf of and for the protection of the public considered sufficient for that purpose, the dominant and cardinal principle being that the investor purchases immunity from liability beyond a certain limit on the terms that there shall be and remain a liability up to that limit. The principle that no joint stock company unless expressly authorized can issue its stock below par is taken for granted by this court in the case of McCraken v. Mclntyre ([39]), and has been reiterated over and over again in the House of Lords and Privy Council, notably in the recent cases of Ooregum Gold Mining Company of India v. Roper ([40]), and in Welton v. Saffery (3), so that so far as the general principle is concerned there can be no question of controversy. But it is contended that under the special provision of the Manitoba Joint stock Companies Incorporation Act, now chapter 25 of the revision of 1891, such special authority has been given or may be inferred as being possessed by companies incorporated under it. Section 30 is mainly relied upon in support of this contention. After providing that the directors may make any description of contract which the company might by law enter into and make by-laws not contrary to law or to the letters patent of the company to regulate the allotment of stock, the making of calls thereon, the payment thereof, the forfeiture of stock for non-payment and the disposal of the forfeited stock, etc., etc., it contains the following proviso.

Provided also that no by-law for the allotment or sale of stock at any greater discount or any less premium than that which had been previously authorized at a general meeting or for the payment of the president or any director shall be valid or acted upon until the same has been confirmed at an annual meeting or a special general meeting.

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This proviso doubtless gives rise to some difficulty and at first sight would seem to lead to the conclusion that the legislature did suppose that the company might sell its stock at a discount without special authorization and enacted this particular clause under the impression that such was the law. There is no other provision in the statute indicating this intention except as may be inferred from the power of allotment. But the word “allotment” has no connection whatever with the amount to be paid for stock, but only with the number of shares which may be issued to this or that individual altogether irrespective of the consideration to be paid for it. So that there being no conveyance of direct power to the directors, the proviso must refer either to cases where possibly the letters patent themselves give authority to issue, stock below par (on the legality of which I do not express an opinion), or to cases where the company incorporated under the general Act may have had special power conferred upon it by special Act, or it may possibly refer to cases where before issue of stock a general meeting has determined upon the amount beyond par at which the stock should be sold, and the proviso limits the power of the directors to issue below that amount except under the specified conditions. But whatever the draftsman of this clause or the legislature which passed it had in view, I am perfectly satisfied that it cannot be held to authorize the directors of the company to destroy its capital stock, as they have here to some extent attempted to do, and thereby nullify the checks and guards which the legislature has wisely provided in order to the protection of the public interest

But in addition to this it may be observed that any enactments of the legislature as to what the law is, is not of itself equivalent to the making of the law. The

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enactment is no doubt of great weight as evidence of the law, but it is by no means conclusive, and when the existing law is shewn to be different from that which the legislature supposed it to be, the implication arising from the statute cannot operate as a negation of its existence. Mollwo March & Co. v. Court of Wards ([41]).

A misapprehension of the law by the legislature would not have the effect of making that the law which the legislature had erroneously assumed it to be. The Earl of Shrewsbury v. Scott ([42]).

In the second place the by-laws and resolutions are bad because, assuming the proviso to authorize the issue of stock below par, the issue in the present case was not confirmed at any annual or special meeting of the company.

And in the third place the by-laws and resolutions were bad upon the general common law principle that a by-law must not be unreasonable or work unequally towards members of any one class affected by it. In the case of the present by-law there are many flagrant inequalities. McNaught and Graham were to get their stock upon payment of twenty per cent cash down. The Edison Electric Light Company were to get their stock upon payment of twenty per cent cash down, but in addition they were to hand over valuable patents in connection with the work of the company, while Mrs. Walsh and Mrs. Dexter, the wives of the two trustees specially charged to protect the interests of the company, were not required to pay cash down but were allowed a whole year to pay the twenty per cent.

This clear, manifest and gross favouritism stamps the by-law upon its face as invalid.

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 I take it then to be clear for these reasons that the issue of the stock was illegal and ultra vires of the company.

I am further of opinion that the company, so soon as they were aware of the fact that the directors had illegally issued the stock in question, not only had a perfect right but it was their duty not to repudiate the bargain but to enforce it by making the necessary calls.

The fact that the respondent held a paper which upon its face, stated that she held so much stock paid in full, while evidence of the statement, was not conclusive evidence of it. As a matter of fact, the stock was not fully paid up and the existence of the certificate could not by any possibility be equivalent to full payment. The statute gives power to the directors to call in and demand from the shareholders all sums of money due for payment of stock and to enforce all calls for interest thereon by action in a competent court.

Apart from the operation of the doctrine of estoppel I know of no reason why any holder of stock which has not been paid for in full should not be liable for the balance due in respect of it. The latest case dealing with this particular phase of the question is Bloomenthal v. Ford (1). That was a case where the appellant lent money to a limited company upon the terms that he should have as collateral security fully paid up shares in the company and the company handed to him certificates as of fully paid up shares. No money had in fact been paid upon the shares, but the appellant did not know this and believed the representation that they were fully paid up shares. It was held by the House of Lords that he was not liable to contribute in respect of these shares, but solely

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upon the ground of estoppel. Had he taken the shares as security for the loan knowing the fact that they had never been issued at all and had come direct from the company’s treasury to him, it is clear that the House of Lords would have held him liable as a contributory.

Then in the Ooregum Case ([43]), it was decided that the liquidator of the company should call upon the shareholders of the shares such as these in the present case for the balance due upon them for the purpose of paying the creditors of the company; while in Welton v. Saffery ([44]), carrying the doctrine to its fullest extent, it was held that shareholders might be called upon to contribute not only enough to liquidate the company’s debts and the costs of winding up, but also a sufficient amount to adjust the rights of all the company’s contributories inter se.

It is argued that inasmuch as there was a contract between the respondent and the company in respect to these shares, the company must confirm the contract in toto or not confirm it at all. I do not think that doctrine applies to a case such as this. This is not so much the case of a contract, the case of one party making a proposition and another accepting it in good faith. It is the case of a director having in his possession or under his control the treasury of the company and of his fraudulently, or to say the least, for his own personal advantage, helping himself to its contents at the expense of those whose interest he was bound to conserve and whose property he was obliged to protect.

In the present case the transaction would have been no different had these directors placed in the treasury an amount sufficient to pay for the stock they issued to themselves and then immediately taken out of it the eighty per cent, of their deposit. That is practically the present case. And to me it is impossible to conceive

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that when they are called upon to refund the eighty per cent dishonestly or illegally abstracted they can raise the defence which is made in the present case.

What Lord Justice Turner said in the Daniell Case ([45]) is extremely applicable here.

But it was argued on Mr. Daniell’s behalf that the shareholders could not claim against him except on the footing of the resolution and that if they claimed against him on that footing they must take the resolution as it stands, and treat him as a holder of shares in respect of which five pounds had been paid; that the contract into which he had entered could not be severed. This argument, however, rests as it seems to me upon this basis, that in determining this case we are to look to contract and to contract only, and I think that that basis is unsound. There was, in truth, no contract in this case. These shares were placed in the name of Dr. Daniell under no contract with the shareholders, but by the mere unauthorized act of the directors, of whom Dr. Daniell was one, and we are bound, I think, to consider this in determining the question before us. Taking then this consideration into account, how does this case stand ? These two thousand four hundred shares were assets of the company. Dr. Daniell appropriated two hundred of them to himself. By that appropriation they were prevented from being disposed of for the benefit of the company. Can trustees (and directors of companies are trustees, or quasi-trustees) appropriate the trust property to themselves, and then say to their cestuis que trustent: “We took this property on the terms that we should not be liable for any loss which might arise upon it ?” I think a court of equity would not permit this, but would view the matter in this light; there is a double breach of trust, a breach of trust in taking the property at all, and a further breach of trust in introducing this stipulation into the contract, and the cestuis que trustent must have the option of affirming the one breach of trust and disaffirming the other.

And so Lord Macnaghten in Welton v. Saffery (2), already referred to, says:

There, as it seems to me, lies the fallacy. How was the supposed contract made ? Who gave the requisite authority for making it ? Not the company, nor yet the shareholders. It is beyond the power of a limited company to limit the liability of the shareholders in a, manner inconsistent with the memorandum of association. The directors therefore had no authority from the company to issue shares at a discount, or on any terms relieving the shareholders from liability to pay in full.

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If the directors acted without authority, how can their action bind those who are supposed to have given them authority, but who, in เ fact, gave them none? The truth is, as it seems to me, that there never was a contract between the company or the shareholders on the one hand and the persons to whom these discount shares were offered on the other. There was an offer by the directors, purporting to act on behalf of the company, but it was an offer of that which the company could not give, because the law does not allow it. There was an acceptance by the discount shareholders of that offer. But that offer and acceptance could not constitute a contract. Both parties acted under a misconception of law, and the whole thing was void. The company, however, placed the names of the discount shareholders on the register; they allowed their names to remain until their remedy against the company was gone, and now they cannot be heard to say that they were not shareholders.

I could have understood that argument if I could have found a contract. It may be well that one party to a contract cannot escape from his obligations by pleading incapacity to perform them in full if the other party is willing to take something less than that which is bargained for. But if there is no contract 1 cannot see what equity there is to compel a principal to submit to one set of conditions because his agent had attempted ineffectually to bind him to another and a different set.

I take it that the maxim “approbo non reprobo” does not apply to or enure to the benefit of a trustee in transactions between him and his beneficiary when he has illegally attempted to secure a benefit for himself.

The beneficiary undoubtedly can approve and take advantage of all benefits accruing from his transactions and at the same time hold him responsible for all losses suffered therefrom.

I am of opinion that the ground taken by the respondent, and upon which the learned judges in the court of appeal reversed the original judgment, are untenable.

I think therefore that the appeal should be allowed and the judgment of the learned Chief Justice of Manitoba restored.

Appeal allowed with costs.

Solicitors for the appellant: Ewart, Fisher & Wilson.

Solicitors for the respondent: Macdonald, Tupper, Phippen & Tupper.