Supreme Court of Canada
Eisenberg (formerly Walton) v. Bank of Nova Scotia and
Ridout et al., [1965] S.C.R. 681
Date: 1965-05-25
William Eisenberg
(formerly William L. Walton), Trustee of the Estate of Ridout Real Estate
Limited, a bankrupt, (Plaintiff) Appellant;
and
The Bank of Nova Scotia (Defendant) Respondent;
and
George H. Ridout,
and George H. Ridout and The Canada Permanent Trust Company, Executors of the
Estate of Ernest Ridout, deceased, (Third Parties) Respondents.
1965: February 19, 22, 23, 24; 1965: May 25.
Present: Cartwright, Martland, Judson,
Ritchie and Spence JJ.
ON APPEAL FROM THE COURT OF APPEAL FOR
ONTARIO.
Companies—Company pledging assets to bank as
security for loan to third parties—Transaction admitted to be intra
vires—Unanimous consent of all shareholders where given in fact as effective to
validate transaction as if given in formal meeting.
The plaintiff as trustee in bankruptcy of R
Ltd., a real estate company, brought an action to recover from the defendant
bank certain sums realized by the bank from assets which the said company had
pledged to the bank as security for a loan to one G R and his brother E R. G R
was a director and president and was the sole beneficial owner of all the
issued shares in the said R Ltd. E R had been such sole beneficial owner but
had transferred his shares to G R and at all relevant times was neither a
director nor shareholder of R Ltd.
The action was dismissed at trial and an
appeal from the judgment of the trial judge was dismissed in the unanimous judgment
of the Court of Appeal. In this Court counsel for the appellant took the
position that he was not alleging that the transaction in question was ulta
vires the real estate company but on the other hand admitted that the
transaction was one which could bind the company if it had been unanimously
approved by the shareholders in a meeting duly called for such purpose.
Held: The
appeal should be dismissed.
When a matter was intra vires of a
corporation, the corporation could not be heard to deny a transaction to which
all the shareholders had given their assent even when such assent was given in
an informal manner or by conduct as distinguished from a formal resolution at a
duly convened meeting. Since G R not only assented to the transaction but
instigated it, his assent, being that of the sole beneficial shareholder,
therefore bound the company.
[Page 682]
In re George Newman & Co., [1895] 1 Ch. 674; Re Publishers’ Syndicate, Paton’s Case (1903),
5 O.L.R. 392; Re Queen City Plate Glass Co. (1910), 1 O.W.N. 863, not
followed; Attorney-General for Canada v. Standard Trust Company of New York,
[1911] A.C. 498; Parker and Cooper Ltd. v. Reading, [1926] Ch. 975,
applied; Salomon v. Salomon & Co., [1897] A.C. 22; In re Express
Engineering Works Ltd., [1920] 1 Ch. 466; In re Oxted Motor Co. Ltd., [1921]
3 KB. 32; In re Almur Fur Trading Co., Bank of United States v. Ross, [1932]
S.C.R. 150; Allish v. Allied Engineering of B.C. Ltd. (1957), 9 D.L.R.
(2d) 688, considered.
APPEAL from a judgment of the Court of Appeal
for Ontario, affirming a
judgment of King J. Appeal dismissed.
Hon. R.L. Kellock, Q.C., and J.W. Garrow,
for the plaintiff, appellant.
C.F.H. Carson, Q.C., and Allan Findlay,
Q.C., for the defendant, respondent.
A.J.C. O’Marra, Q.C., for the third parties,
respondents.
The judgment of the Court was delivered by
SPENCE J.:—This is an appeal from the judgment
of the Court of Appeal for Ontario1 pronounced on March 16, 1964,
affirming the judgment at trial pronounced on March 15, 1963.
The action was brought by the appellant as
trustee in bankruptcy of Ridout Real Estate Limited to recover from the
respondent bank certain sums realized by the bank from assets which the said
company had pledged to the bank as security for a loan to one
George H. Ridout and his brother Ernest Ridout.
George Ridout was a director and president and
was the sole beneficial owner of all the issued shares in the said Ridout Real
Estate Limited. Ernest Ridout had been such sole beneficial owner but had
transferred his shares to George Ridout and at all relevant times was neither a
director nor shareholder of the Ridout Real Estate company.
On July 18, 1955, the said Ernest Ridout
arranged with an officer of the defendant bank that it should loan to George
Ridout and to him the sum of $100,000 for the purpose of permitting the said
Ernest Ridout to obtain a release of his guarantee of the bonds of Taylor
Forbes
[Page 683]
Limited which were then in default. As security
for the loan, the bank was given a hypothecation of eleven promissory notes
made by the Irmac Construction Company Limited in favour of Ridout Real Estate
Limited and an assignment of the interest of Ridout Real Estate Limited in a
partnership known as the Town and Country Development. One McIntosh, the
supervisor of the Toronto
branches of the respondent bank, was directed to carry out the transaction on
behalf of the bank.
On the next day, July 19, 1955, Mr. McIntosh met Ernest
Ridout and talked over the matter arranging for completion of certain documents
which the bank required. After lunch, on the same day, Mr. McIntosh met,
by appointment, Miss M.E. MacDonald, who delivered to him an envelope
containing the following documents:
(1) Note for $95,000 signed by George
Ridout and Ernest Ridout.
(2) Assignment of the interest of Ridout
Real Estate Limited in Town and Country Development, executed on behalf of the
Ridout company by George Ridout and bearing the corporate seal.
(3) Copy of a resolution authorizing the
Ridout company to assign its interest in Town and Country Development as
security and authorizing George Ridout to sign the assignment, certified by
Miss M.E. MacDonald under the Ridout company’s seal, to be a true copy of a
resolution of the board of directors of the Ridout company, passed at a meeting
of directors on July 19, 1955.
(4) Hypothecation Agreement executed on
behalf of the Ridout company by George Ridout and Miss M.E. MacDonald under the
seal of the Ridout company, by which hypothecation agreement Ridout Real Estate
Limited hypothecated “all notes, cheques, drafts and other bills of exchange
now lodged and/or which may hereafter be lodged with the bank and any resultant
proceeds”.
(5) Copy of a resolution authorizing the
Ridout company to pledge the eleven Irmac notes of $10,000 each, and
authorizing George Ridout to sign such hypothecation, certified by Miss
MacDonald under the seal of the Ridout company to be a true copy of a
resolution of the board of directors of the Ridout company, passed at a meeting
of the directors.
(6) Direction from George Ridout requesting
the bank to issue the cheque for $100,000 to M.H Roebuck.
(7) The eleven notes of the Irmac company.
(8) Cheque of the Ridout company in favour
of the Bank of Nova Scotia for $5,000 signed by George Ridout and Miss M.E.
MacDonald.
Mr. McIntosh was familiar with the
signatures of George Ridout and Ernest Ridout and was satisfied with their
signatures on the document. Miss MacDonald represented
[Page 684]
that she was the secretary of Ridout Real Estate
and was entitled under the by-laws to execute the said documents. She was not
such secretary but she was the head office manager and was a signing officer of
the Ridout company in connection with its business with its ordinary bank which
was not the respondent. The secretary-treasurer of the company was one
Mr. Muir who was then absent on holidays.
The first three Irmac notes becoming due in
August, September and October, were paid and were credited against the loan of
$95,000, that is, the $100,000 less the $5,000 cheque.
In November 1955, $45,000 was received in
respect of the Ridout Real Estate interests in the Town and Country Development
and the respondent bank was also paid a cheque of the Ridout Real Estate
Limited for $10,000. This cheque was signed by George Ridout and Mr. Muir.
These payments reduced the loan to $10,000. The bank then made a further
advance of $70,000 to George Ridout and took another promissory note signed by
George Ridout and Ernest Ridout for that amount. This increased the total loan
to $80,000 and the bank issued a cheque for the amount of $70,000 to George
Ridout who deposited it to the credit of the trust account of Ridout Real
Estate Limited in its regular bank. The loan in the sum of $80,000 was
discharged by applying against it the proceeds from the eight Irmac notes, and
the final payment was on June 5, 1956.
On December 1, 1956, Ernest Ridout deposited
to the credit of the trust account of the Ridout company in its regular bank
the sum of $58,416.25. A receiving order was made on January 3, 1957. The
appellant was appointed trustee in bankruptcy of Ridout Real Estate Limited.
The appellant commenced this action by a writ
issued on June 3, 1959.
At trial, the action was dismissed by King J.
and the appeal from the judgment of the learned trial judge was dismissed in
the unanimous judgment of the Court of Appeal.
In this Court, able argument was made by counsel
for both the appellant and the respondent bank, counsel for the third parties
adopting the latter argument. Counsel for the
[Page 685]
appellant took the firm position that he was not
alleging that the transaction was ultra vires the real estate company
but on the other hand admitted that the transaction was one which could bind
the company if it had been unanimously approved by shareholders in meeting duly
called for such purpose.
It is admitted that no resolution of directors
was passed and that no meeting of directors took place. However, the “inside
management rule” enunciated inter alia in The Royal British Bank v.
Turquand, would
apply to protect an innocent third party dealing with Ridout Real Estate Ltd»
without notice of those facts and that Miss MacDonald was not the secretary of
the company.
In the Court of Appeal for Ontario, Schroeder J.A. said:
Since I have come to the decision that the
doctrine of estoppel operates in favour of the defendant it follows that I also
take the view that the defendant comes within the protection of the principle
of The Royal British Bank v. Turquand (1856), 6 E1 & B1. 327, and William
Augustus Mahony v. The East Holyford Mining Company (Limited) (1875), L.R.
7 H.L. 869.
I have come to the conclusion that, in this
Court, it is not necessary to investigate whether the respondent bank is
entitled to rely on the “inside management rule”. Whether or not it were able
to do so, it is plain that the transactions were not only approved by the sole
beneficial owner but he was the chief instigator of the transactions and
directed them throughout. It is true that no meeting of shareholders was ever
held to approve the transactions. If there had been a directors’ meeting, fully
attended, the directors were George Ridout, Mr. Muir and two other
employees. None of the latter three held any shares beneficially, and all were
mere nominees of George Ridout. Therefore, the result of either the
shareholders’ meeting or the directors’ meeting would have been a foregone
conclusion. If any director had seen fit to oppose George Ridout’s wishes, he
could be removed from his position as director with the utmost celerity and, of
course, George Ridout was the sole beneficial owner of all the shares and his
wishes would have been the unanimous decision of the shareholders’ meeting.
Under these circumstances, the problem of what
kind of unanimous authorization of shareholders is sufficient becomes important.
[Page 686]
In re George Newman & Co.,
in the Court of Appeal, the chairman of a company in which substantially all
the shares were held by him and his family, purchased on behalf of the company,
the right to a building agreement. Upon the vendor’s objection to accepting the
company as a tenant, the chairman sold the benefit of the agreement to the
company at an advance of £10,000 of which £7,000 was spent on commissions and
otherwise to obtain the agreement and £3,000 was applied by the chair» man for
his own use. A further sum of £3,500 was spent by the chairman out of the
assets of the company upon his private home. These payments were made out of
money borrowed by the company for the purpose of the business. They were
sanctioned by resolutions of the directors and were approved by all the
shareholders. Held, that the chairman was liable for the £3,000 out of the
purchase price, which he devoted to his own use, and the £3,500 which he took
from the company’s coffers for repairs to his own home. Held, that there was no
power in the shareholders to authorize the making of “presents to directors out
of the money borrowed by the company” and if there had been such a power it
could only be exercised by general meeting. Lindley J. delivered the judgment of
the Court and at p. 685 said:
But in this case the presents made by the
directors to Mr. Newman, their chairman, were made out of money borrowed
by the company for the purposes of its business; and this money the directors
had no right to apply in making presents to one of themselves. The transaction
was a breach of trust by the whole of them; and even if all the shareholders
could have sanctioned it, they never did so in such a way as to bind the
company. It is true that this company was a small one, and is what is called a
private company; but its corporate capacity cannot be ignored. Those who form
such companies obtain great advantages, but accompanied by some disadvantages.
A registered company cannot do anything which all its members think expedient, and
which, apart from the law relating to incorporated companies, they might
lawfully do. An incorporated company’s assets are its property and not the
property of the shareholders for the time being; and, if the directors misapply
those assets by applying them to purposes for which they cannot be lawfully
applied by the company itself, the company can make them liable for such
misapplication as soon as any one properly sets the company in motion…
Directors have no right to be paid for their services and cannot pay themselves
or each other, or make presents to themselves out of the company’s assets,
unless authorized so to do by the instrument which regulates the company or by
the shareholders at a properly convened meeting… But to make presents out
of profits is one thing and to make them out
[Page 687]
of capital or out of money borrowed by the
company is a very different matter. Such money cannot be lawfully divided
amongst the shareholders themselves, nor can it be given away by them for
nothing to their directors so as to bind the company in its corporate capacity.
But even if the shareholders in general meeting could have sanctioned the
making of these presents, no general meeting to consider the subject was ever
held. It may be true, and probably is true, that a meeting, if held, would have
done anything which Mr George Newman desired; but this is pure speculation, and
the liquidator, as representing the company in its corporate capacity, is
entitled to insist upon and to have the benefit of the fact that even if a
general meeting could have sanctioned what was done, such sanction was never
obtained. Individual assents given separately may preclude those who give them
from complaining of what they have sanctioned; but for the purpose of binding a
company in its corporate capacity individual assents given separately are not
equivalent to the assent of a meeting. The company is entitled to the
protection afforded by a duly convened meeting, and by a resolution properly
considered and carried and duly recorded.
(The italicizing is my own.)
It will be seen, therefore, that Lindley J.
finds in favour of the liquidator on two grounds. Firstly, that the transaction
was ultra vires of the company and could not be validated even by a vote
of the shareholders at a meeting, and, secondly, that even if they were not ultra
vires and could have been validated by such a vote, there must be a meeting
and a vote, not a mere approval by individual shareholders.
Re Salomon v. Salomon & Co. in the House of Lords. This case turned on
the recognition of the corporate identity as distinguished from the identity of
the owner of all shares except qualifying shares. But at p. 57, Lord Davey said
this:
Nor was the absence of any independent
board material in a case like the present. I think it an inevitable inference
from the circumstances of the case that every member of the company assented to
the purchase, and the company is bound in a matter intra vires by the unanimous
agreement of its members. In fact, it is impossible to say who was defrauded.
As pointed out by counsel for the appellant,
there was in fact a meeting. See Broderip v. Salomon, per Kay L.J. at p. 343, where he said:
The proceedings were faultless in point of
form» On August 2, 1892, all the seven shareholders—i.e., Mr. Salomon, his
wife and children—held a general meeting of the company. They appointed
Mr. Salomon and two of his sons directors, and these directors appointed
Salomon managing director with a salary of £500 a year, and two of the sons to
other offices with £148 a year each. They formally adopted the agreement of
July 20, and agreed with the nominal trustee to take over the property on
the terms arranged with him. The same day seven shares were allotted to the
seven subscribers to the memorandum.
(The italicizing is my own.)
[Page 688]
However, Lord Davey’s statement quoted above, supra,
makes no reference to a meeting and it would seem to be a simple statement
that in intra vires transactions a bare assent by all shareholders is
sufficient to validate a transaction as against a company. As I shall show,
that view has been taken of Lord Davey’s statement in later cases.
The Attorney-General for the Dominion of Canada v. The Standard Trust Company
of New York. There, four
members of a syndicate purchased the outstanding bonds which were in default of
a company known as the Montreal
and Sorel Railway Company. The four members then incorporated a company and
each of the four subscribed $75,000, i.e., a total of $300,000, being
all the issued shares of the company. They then sold to this company (the South
Shore Railway Company) the whole of the assets of the Montreal and Sorel Railway Company of which they had taken possession as
bond-holders, for $648,000. Of that sum, $300,000 was paid by paying the money
subscribed by the four members for the shares and the company acknowledged an
indebtedness to the four members of the balance of $348,000. There had been a
meeting of the shareholders of the new company (the South Shore Railway
Company) at which the directors who were these four members of the syndicate
and their three nominees, were authorized to enter into agreements with railway
companies and other persons in accordance with the provisions of the Act which
had incorporated the company. Shortly thereafter, a meeting of the board of
directors agreed to transfer the railway enterprise to the South Shore Railway
Company at a purchase price to be settled at a later period. Some three months
thereafter, the directors fixed the sale price at $648,000. Viscount Haldane,
giving judgment for the Judicial Committee, said at p. 504:
If, therefore, what the directors did is to
be impeached, it must be on the ground, not of its having been ultra vires of
the company, but of its having been a breach of duty by the directors. Now,
although, the capital of the company was $1,000,000, the only stock issued was
to the amount of $300,000, and this was taken up and owned by the members of
the syndicate and no one else. They and they alone were interested in the
capital of the company. This is not a case of winding up, but even if it were,
it would make no difference. In proceedings of the character of the present the
title of a liquidator as representing
[Page 689]
creditors cannot be higher than the title
of the company against whom the creditors claim. In this case the interests of
the company and of the syndicate were identical. The only persons beneficially
interested in the company were the four members of the syndicate. The law gave
them the complete control of its action. Under that control the company gave
effect to the policy of the only persons who had any beneficial interest in its
capital. The case is not one in which the apparent procedure can be said to
have been unreal, or to have been a cloak under which a conspiracy to defraud
was concealed. Under these circumstances, their Lordships are of opinion that
the company, notwithstanding that no general meeting, apart from the meeting of
directors, appears to have been held for the purpose, was completely bound by
the transactions sought to be impeached, and that the appellant, who has
certainly no title higher than that of the company against the assets of which
he claims, is bound likewise.
Viscount Haldane cites Salomon v. Salomon in
the House of Lords, supra.
It will be seen, therefore, that this is an
example of a unanimous approval of shareholders where there has been no meeting
of shareholders to approve the actual transactions. The shareholders had in
meeting, approved generally the entering into of agreements to purchase
railways, but the actual agreement to purchase this particular railway and the
purchase price at which it had been purchased was made by the action of the
directors alone. Those directors were, or represented, all of the shareholders.
The case would seem to be of close application to the present.
In re Express Engineering Works Limited.
This was a decision of the Court of Appeal. Here, a syndicate of five persons
formed a private company of which they were the sole shareholders, and they
sold to that private company for £15,000 in debentures property which they had
a few days previously purchased for £7,000. The contract for sale and the issue
of the debentures for payment was determined upon at a meeting of the same five
persons described as a directors’ meeting. At the same meeting, they appointed
themselves directors. The articles of the company prohibited a director voting
in respect of any contract or arrangement in which he might be interested. In
an action by the liquidator for a declaration that the issue and transfer of
the debentures were invalid and should be set aside, Astbury J. dismissed the
action on the ground that every member of the company having assented to the
transaction, the company was bound in a matter intra vires by the
unanimous
[Page 690]
agreement of its members. On appeal, Lord
Sterndale, M.R., noting that the appellants relied on In re George Newman
& Co., supra, said at p. 470:
There were, however, two differences
between that case and the present one. First, the transaction there was ultra
vires, and, secondly, in that case there never was a meeting of the
corporators. In the present case these five persons were all the corporators of
the company and they did all meet, and did all agree that these debentures
should be issued. Therefore it seems that the case came within the meaning of
what was said by Lord Davey in Salomon v. Salomon & Co., [1897] A.C.
22, 57.
“I think it an inevitable inference from
the circumstances of the case that every member of the company assented to the
purchase, and the company is bound in a matter intra vires by the unanimous
agreement of its members.”
It is true that a different question was
there under discussion, but I am of opinion that this case falls within what
Lord Davey said. It was said here that the meeting was a directors’ meeting,
but it might well be considered a general meeting of the company, for although
it was referred to in the minutes as a board meeting, yet if the five persons
present had said, “We will now constitute this a general meeting”, it would
have been within their powers to do so, and it appears to me that that was in
fact what they did. The appeal must therefore be dismissed.
This case stands for the validating effect of
the approval of all shareholders and limits the In re Newman doctrine to
ultra vires transactions. It seems, however, to stress the necessity of
a meeting and simply excused an irregularity, i.e., the failure to
designate the meeting as that of shareholders rather than directors. Of course,
the directors, as such, could not validly make the agreement as they were
interested parties.
In re Oxted Motor Company, Limited
was an appeal before Lush and Greer JJ. from the decision of a County Court
judge. In this case, there were only two shareholders and the two shareholders
were the sole directors. The two shareholders met and passed a resolution that
the company should be wound up voluntarily. There had been no notice of
intention to propose an extraordinary resolution to such effect given to the
shareholders and s. 182(3) of the Companies (Consolidation) Act, 1908,
provided:
A company may be wound up
voluntarily—* * * (3) if the company resolves by extraordinary
resolution to the effect that it cannot by reason of its liabilities continue
its business, and that it is advisable to wind up.
[Page 691]
And by s. 69(1):
A resolution shall be an extraordinary
resolution when it has been passed by a majority of not less than three-fourths
of such members entitled to vote as are present in person or by proxy… at a general
meeting of which notice specifying the intervention to propose the resolution
as an extraordinary resolution has been duly given.
Lush J. said at p. 37:
It is contended that unless the notice
contemplated by that section has been given a resolution is invalid as an
extraordinary resolution; and it is said that notwithstanding that all the
shareholders in the company were present and were dealing with a matter which
was intra vires, and notwithstanding that there was no fraud, still the
resolution was invalid on that account… In my opinion the shareholders are
entitled to waive the formality of notice. In re Express Engineering Works, [1920]
1 Ch. 466, is an authority in
support of the view that the statutory requirements as to notice can be waived.
Greer J. said at p. 39:
The creditors of the company have no voice
in the matter, they cannot object to the validity of a resolution to wind up
voluntarily by saying that the proper notice to pass that resolution as an
extraordinary resolution has not been given, if all the shareholders have
agreed to the resolution and waived the want of notice. This view is supported
by the decision of the Court of Appeal in In re Express Engineering Works, [1920]
1 Ch. 466.
This case, therefore, is authority for the
proposition that the unanimous approval of shareholders, validates the
transaction. But again there was a meeting, in this case even a meeting of
shareholders, and the only defect alleged was lack of proper notice of that
meeting.
In Parker and Cooper, Limited v. Reading, Astbury J, considered the issuance of a
debenture for £2,000 by the company in favour of the director. No fraud was
involved. As a matter of fact, the director and secretary of the company had
been improperly elected due to failures in procedure by those who had sold
their interest in the company to the new group, and then the arrangement was
carried out at a board meeting where the improperly elected directors alone
were present. There never had been any meeting of shareholders authorizing or approving
the transaction. The shareholders, however, of whom there were only four,
discussed the matter one with the other and all individually assented.
Astbury J. held that the company was bound by the transaction and the debenture
was valid, citing Lord Davey in Salomon v. Salomon, supra, and In re
Express Engineering Works Ltd. At p. 984, he said:
[Page 692]
All three judges [in the Express
Engineering case] no doubt refer to the fact that there had been a meeting.
But I cannot think that they came to their decision because the five
shareholders happened to meet together in one room or one place, as distinct
from agreeing to the transaction inter se in such manner as they thought fit.
Warrington L.J. said: “It was competent to [the shareholders] to waive all
formalities as regards notice of meetings, etc., and to resolve themselves into
a meeting of shareholders and unanimously pass the resolution in question.” He
is there speaking of the actual facts before him.
Now the view I take of both these decisions
is that where the transaction is intra vires and honest, and especially if it
is for the benefit of the company, it cannot be upset if the assent of all the
corporators is given to it. I do not think it matters in the least whether that
assent is given at different times or simultaneously.
This action does not seem to have gone farther.
It is a valid authority in favour of the approval of all shareholders even if
no meeting takes place, and it is exactly applicable to the present situation.
It should be noted that the board of directors’ meeting cannot be considered as
being the same thing as a shareholders’ meeting as only two of the four
shareholders were present and they were not even properly qualified as
directors. The only validating thing must have been the informal approval of
the individual shareholders.
In In re Almur Fur Trading Company, Bank of United States v. Ross,
the company was incorporated by Dominion letters patent. All the shares were
owned beneficially by one Licht of New York. The president was one Smith of
Montreal. When Smith was en route to Europe through New York,
Licht sent his secretary to see Smith and to present to him for signature five
blank promissory note forms. Smith swore that he executed these notes in order
to pay for goods which he had already purchased and which would be invoiced to
Licht in New York and for
further goods which Licht intended to purchase. Licht filled in the name of the
payee in the five notes, one as his own company and the others in the name of
another company controlled by him. These notes were endorsed to the bank and it
was admitted that the bank was the holder in due course. The company’s by-law
provided that notes should be signed by such officer or officers and in such
manner as may be from time to time determined by the resolution of the board of
directors. The resolution of the board of directors was to the effect that such
notes should be signed by the president and countersigned by the auditor. The
notes in question bore no such
[Page 693]
counter signature by the auditor. Lamont J,
giving judgment for the Supreme Court of Canada, held that the notes were made
in general in accordance with the authority of the president under the by-law
and that it was not necessary for the bank to inquire into the authority of a
president to sign as set out in any resolution; that persons who were dealing
with a company were presumed to have notice of what was contained in the Act,
and in a case like the present where the Act refers specifically to the by-laws
were bound to ascertain from the by-laws but were not obliged to go further and
inquire into whether the directors passed the resolution giving the one officer
specific authority. At p. 158, Lamont J. said, perhaps obiter:
Even if Smith had not any authority to sign
the notes who, in this case, can question his right to do so? Certainly not the
liquidator, for he stands simply in the place of the company. Now the man who
had acquired all the shares in the company at the time the notes were made, and
who was in fact the company, not only approved of their being made, but it was
at his request and under his direction that they were made. Where all the
shareholders of the company have ratified or are estopped from objecting to the
making of the notes by the president, it is not, in my opinion, open to the
liquidator to question his authority.
This case is indeed like the present one in that
there was only one beneficial shareholder in the company and that one
shareholder, as did George Ridout in this case, not only approved the
transaction but instigated it throughout.
Re Allish v. Allied Engineering of B.C. Ltd., B.C. Court of Appeal. In this case, a
managing director, upon a new group taking over the company, was discharged and
he sued for damages for illegal dismissal. The company counter-claimed for
amounts which had been paid to him on account of salary on the ground that such
amounts had never been properly authorized. At trial, the action was dismissed
and judgment was given upon the counterclaim. The plaintiff appealed. At pp.
693-4, Sheppard J.A. said:
It is common ground that there was no
formal resolution to fix the plaintiff’s remuneration. However, the payment of
those monies to the plaintiff for his services was an internal matter: Houston
v. Victoria Machinery Depot Ltd., [1924] 2 D.L.R. 657 at p. 658, et
al. There was no suggestion of fraud and the payment was not out of capital and
not ultra vires of the company. The payment was an internal matter and
was within the powers of the company and although made without the formal
resolution required by Arts. 11 and 57, and therefore ultra vires of the
directors, nevertheless such payment may be ratified by the
[Page 694]
majority of the shareholders…, and the
plaintiff as shareholder is not debarred from using his voting power to carry
such resolution… Further, such ratification does not require a formal
resolution but may be implied from all the circumstances: Parker &
Cooper Ltd. v. Reading, supra.
In the case at bar the evidence establishes
that the shareholders had full knowledge of all the material facts and that the
plan of payment was fully understood by them and approved… The shareholders in
taking the benefit of the plaintiff’s services with full knowledge of the facts
must be taken to have approved of the crediting of such sums to his account and
of the placing of such funds at his disposal.
And at p. 695:
Further, as the credits of salary to the
plaintiff’s account were made with the consent of all the shareholders and with
their full knowledge of the material facts, there is applicable the following
statement in A.-G. Can. v. Standard Trust Co. of New York, [1911] A.C. 498, by Viscount Haldane
at pp. 504-5…
(See above.)
The learned judge in appeal again distinguished In
re George Newman & Co. on the ground that it dealt with an ultra
vires transaction. The counterclaim for return of salary was dismissed.
It is true that in the Courts in Ontario in two
cases, Re Publishers’ Syndicate, Paton’s Case, and Re Queen City Plate Glass Co., the Court held to the principles outlined
in In re George Newman & Co., supra. Those cases, however, long
pre-dated the decision of the English Courts in Re Express Engineering Works
Ltd. and Re Oxted Motor Company Ltd. and Parker & Cooper Ltd. v.
Reading, as well as the decision of this Court in Re Almur Fur Trading
Co. and the Judicial Committee in Attorney-General for Canada v.
Standard Trust Co. of New York.
Therefore, upon a consideration of the above
authorities, I have been led to the conclusion that a corporation, when a
matter is intra vires of the corporation, cannot be heard to deny a
transaction to which all the shareholders have given their assent even when
such assent be given in an informal manner or by conduct as distinguished from
a formal resolution at a duly convened meeting. Since, of course, George Ridout
not only assented to the transaction but instigated it, his assent being, as
admitted, that of the sole beneficial shareholder therefore binds the company.
Before parting with the matter, I wish to make
it clear that I am not deciding that the transaction between Ridout
[Page 695]
Real Estate Limited, hereafter referred to as
“the Company”, and the respondent bank was one which it was lawful for the
company to enter into. It is unnecessary to express an opinion on this question
because it was conceded that the transaction was one within the powers of the
company and capable of ratification by the shareholders in general meeting. I
have already indicated my view that in such circumstances the unanimous consent
of all the shareholders given in fact is as effective to validate the
transaction as if given in a formal meeting.
It was also conceded (i) that George Ridout was
the beneficial owner of every issued share of the capital stock of the company,
and (ii) that the appellant did not stand in any position different from that
of the company in regard to this transaction. I mention this to make it plain
that we were not called upon to decide either of these matters.
The appeal should be dismissed and the judgment
of the Court of Appeal for Ontario affirmed. The appellant should pay the costs of the respondent Bank
of Nova Scotia. The said respondent the Bank of Nova Scotia should pay the
costs of the (Third Parties) respondents George H. Ridout and the Canada Trust
Company, executors of the estate of Ernest Ridout, deceased. Upon the
respondent the Bank of Nova Scotia paying the said costs of the said (Third
Parties) respondents, it should recover such costs from the appellant.
Appeal dismissed with costs.
Solicitors for the plaintiff, appellant:
Blake, Cassels & Graydon, Toronto.
Solicitors for the defendant, respondent:
Tilley, Carson, Findlay &
Wedd, Toronto.
Solicitors for the third parties,
respondents: O’Marra & O’Marra, Port Credit.
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