David Clyne - Mr. J. Campbel - Dr. Lushington v. Robert Sclater, &c. [1831] UKHL 5_WS_625

UKHL
David Clyne - Mr. J. Campbel - Dr. Lushington v. Robert Sclater, &c.
[1831] UKHL 5_WS_625
Held (reversing the judgment of the Court of Session), that calling up payment of instalments on shares subscribed for in a joint stock company did not fall under “ordinary business,” and could not be effectually done by a quorum of the committee of management entrusted with the ordinary business of the company.In 1824 a joint stock concern was formed in Edinburgh, called the “Caledonian Iron and Foundry Company;” and it was proposed that their capital should be 100,000 l . sterling, divided into 4,000 shares of 25 l . each, and that of these no subscriber should hold more than twenty. David Clyne became an original subscriber to the extent of twenty shares. In October 1824 a meeting was held, and 246 individuals having obtained 3,676 shares of the stock, a committee of management was appointed, the draft of a contract of copartnery ordered to be submitted to counsel for revisal, a deposit of 1 l . per share called up, and directions given to the committee to look out for works, or ground for the erection of works, and to purchase the same forthwith. Clyne attended this meeting, paid his deposit on his twenty shares, and he was thereafter nominated a member of committee to revise the contract of copartnery, which was finally approved in December 1825, and signed by seventy-three shareholders; he also attended the various other meetings of the company. The contract of copartnery contains, inter alia, the following clauses (3d section):to advance by instalments, as herein-after provided, a sum of money corresponding to the number of shares of the value aforesaid, annexed totheir respective subscriptions. That the first instalment shall be 1 l . sterling per share, which shall be paid as upon the 9th day of November 1824; and the remainder of the said stock shall be advanced in such instalments, not exceeding ten per cent. each on the amount of the said capital, and at such periods, as the directors or committee of management herein-after named may appoint, notice in writing of each call for the instalments being always given by the manager or other person acting under the said committee of management to each partner, twenty-one days at least previous to the day of payment; and the said sums shall bear interest at the rate of five per cent. per annum, from and after the several periods of payment so fixed, until paid. And it is hereby declared, that each and every partner failing to make payment of any instalment within thirty days from the day fixed for making such payment, (notice in writing of the call having been given as herein-before required,) it shall be in the power of the committee of management, in all cases where the sum advanced by such defaulter or defaulters on his, her, or their share or shares or interest in the company does not amount to 20 l . sterling, to declare, as they are hereby authorized and empowered to declare, the same to be forfeited to the company, and to sell or otherwise dispose of the share or shares so declared forfeited, as they may consider most beneficial for the interest of the company, and that without any process of declarator or other legal proceeding whatever, but simply by recording such declaration of forfeiture in the minute book, to be kept by the committee of management, of the proceedings of the company. But in the event of such defaulter or defaulters having advanced a sum amounting to 20 l . or upwards on his, her, or their respective share or shares or interest in the concern, then and in that case the committee of management shall have no power of forfeiture, but shall be bound to bring the said share or shares to public roup and sale, on due advertisement to be given in one Edinburgh and one Glasgow newspaper, once a week in each, for three successive weeks prior to the day of sale, under such articles and conditions of sale, and at such upset prices as they shall deem expedient, with power to reduce the upset prices, and adjourn the sale from time to time; and they shall have full power and authority to convey the said share or shares which shall be so sold to the purchasers, and to receive and discharge the prices; the committee of management being, in all such cases, bound to account for and pay to the former partners, or those in their right, the surplus of the price or prices received, if any, after deducting interest, all charges and expenses, and whatever debts may be due by said partners to the company, which are hereby declared to be preferable claims against all such surplus prices, or to consign or deposit the same within the Bank of Scotland, Royal Bank of Scotland, British Linen Company, or other chartered bank in Edinburgh; and that for behoof of and at the peril of such former partners, or those in their right who shall be bound to receive the same, and to discharge the company accordingly.”
“For raising the said capital stock, the persons contracting and hereto subscribing do each of them bind and oblige themselves, their heirs and successors,

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(7th section.) “That the business and affairs of this company shall be conducted under the superintendence of a board of directors, to consist of a chairman, deputy chairman, and fifteen ordinary directors, who shall form the committee of management, and shall be named and elected by the company at the aforesaid stated general meeting to be held annually, as herein-before mentioned. That any five of their number shall be a quorum for ordinary business, and shall have full power to purchase or sell any heritable property, to feu or take in lease lands or houses connected with or which may be necessary for the foundry department; but declaring that the committee of management only, or a majority of their number, shall have power to enter into any agreement regarding the purchase or sale of any heritable property, feuing or taking in lease lands, mines, metals, or minerals, for the smelting department; providing always, that such agreement shall not be binding on the partners, unless approved of at a general meeting to be called for that purpose. And it is further declared, that the committee of management, or the majority of their number, shall have power and they are hereby authorized to nominate and appoint a manager, agents, and other officers for the company, and generally all clerks and servants whom they may deem necessary for the business of the company, with power also to

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Clyne, on the 12th January 1826, signed one of the sheets for twenty shares. A manager and directors were appointed, and ground and a foundry purchased for carrying on the operations of the company. The speculating fever of the day speedily however abated, and comparatively few of the original subscribers came forward to sign the contract. The affairs of the company were carried on with indifferent success; various calls were made by the committee of management upon the subscribers for instalments, and in particular a call of 5 l . per cent., then two for 10 l ., and one for 9 l . per cent. on the shares subscribed for. But at the several meetings at which these calls were made there were never more than seven directors present, which, though a quorum, was not an absolute majority of the committee of management. Clyne refused payment of these instalments on his twenty shares; he did not, however, express disapprobation of the proceedings, or give any intimation that he no longer held himself bound by the contract. An action was raised against him by seventy-two of the subscribers.

The Lord Ordinary (9th June 1830) issued the following interlocutor:—

Finds, that the sums now concluded for consist of the instalments of the defender's subscribed share of the company's stock, called for in terms of the clause libelled; and therefore repels the defences, and decerns in terms of the libel: Finds the defender liable in expenses; allows an account thereof to be given in, and remits the same to the auditor to tax, and to report.”
“In respect that the action is brought against the defender, as the partner of a company, for performance of obligations set forth as arising under the contract of copartnery, and is raised and insisted in by the whole of the numerous individual partners, with a comparatively very few exceptions —repels the objections to the title of the pursuers: Finds, farther, that the defender did become a party to the contract libelled, and is consequently bound by the provisions therein contained: Finds, that the contract expressly provides, ‘that the 26th day of October 1824 shall be held, notwithstanding the dates hereof, to have been the commencement of this copartnery,’ and that the copartnery must consequently be held to have been constituted and in operation from that date: Finds, that by the said contract each member became bound to pay his subscribed share of the stock ‘in such instalments not exceeding 10 per cent, each on the amount of the said capital, and at such periods as the directors or committee of management herein-after named may appoint.’

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And his lordship added the subjoined note. *

Footnote

* The Lord Ordinary has formed the following opinion, on the various and complicated pleas maintained by the defender:—The company here consists of between seventy and eighty individuals, and of these nearly seventy concur in the present action. Even if it had been an action directed against a third party, for the performance of obligations contracted towards the company, this concurrence of the great body of the partners would have been sufficient to support it; but for some such equitable modification of the ordinary rule, a company, consisting of so many individuals, would be practically incapable of either asserting or defending its rights. Accordingly, the principle seems to have been expressly recognised in the case of the Shotts Iron Company against Hopkirk, in which the disclamations of the action, by “a comparatively small number of the partners,” were disregarded. The English cases referred to by the pursuers afford instances of the adoption of a similar course, and upon the same ground, in the law of England. But there is the less room for difficulty here, as the present action is brought, not properly speaking by the company against a third party, but by the great body of the partners against one of their own number, for the performance of obligations contracted by him to his copartners, and concludes for payment of the sums to the pursuers, “or the manager of the company for behoof of the company;” an action which appears to the Lord Ordinary to be maintainable, not only at the instance of the great body of the partners against a few recusants, but at the instance of any number of the partners, however small, as every one of them has a legal interest to insist that the articles of the contract shall be fulfilled. 2dly, The defender's objection to the execution of the contract is inadmissible, by way of exception. The contract in process presents the appearance of a complete and formal deed, bearing the subscription of the defender, with a certain number of shares added, in his own handwriting, and that subscription is set forth in due form in the testing clause. The defender does not deny his subscription, and does not aver that it had any other object than that of attesting his accession to the contract. In these circumstances, his allegation that the sheet of parchment on which he signed was separate at the time of his signature, and his plea thence arising, form an objection to the execution at variance with the present appearance of the deed and with the testing clause, which ought to be made good in a reduction. 3dly, The circumstances of the present case do not admit of the objection, that the copartnery contemplated by the defender was substantially different from that to the support of which he is now called upon to contribute. It is true the contract provides that the capital stock of the company shall be 100,000 l ., divisible into 4,000 shares of 25 l . each; and such a clause might, in some supposable cases, bear the construction, that the completion of the subscription formed the condition of the contract taking effect. But that construction is inadmissible here, because the printed prospectus, referred to in the original subscription paper, signed by the defender in

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The Court (11th January 1831) adhered, and found additional expenses due. *

Footnote

October 1824, expressly provides, that, “as soon as 2,000 shares are subscribed for, the company shall be held as constituted; and the partners shall be then called together for the purpose of adjusting the articles of partnership, electing office-bearers, and giving directions for carrying the objects of the company into effect;” because, at a general meeting of the subscribers of the 26th of October 1824, at which the defender was present, and when little more than 2,000 shares were subscribed for, directions were given to the committee to inquire after and purchase the ground and buildings necessary for carrying on the works; and at subsequent meetings, at which also the defender was present, certain purchases of ground and works actually made were approved of; and because the contract itself expressly provides, “that the 26th day of October 1824 is hereby declared, notwithstanding the dates hereof, to have been the commencement of this copartnery,” &c. In these circumstances it appears to the Lord Ordinary impossible to consider the provisions as to the number of shares as a condition of the contract taking effect, or in any other light than that of a prospective declaration of the amount to which the company's stock and the number of copartners might possibly be increased. 4thly, As, by the terms of the contract, the shares are transferable, and as it contains a provision regarding the descent of the shares of deceasing members to their executors, there is no ground for holding that the copartnery was dissolved by the death or the bankruptcy of some of the individual members. 5thly, The alleged acts of mismanagement and violation of the terms of the contract by the directors, or the other individuals who took an active share in the administration of the company's affairs, however relevant they may be as grounds of action against the parties concerned, do not appear to the Lord Ordinary to afford a defence against the present action. The mismanagement of the affairs of the company, and even the violation of the terms of the contract in some particulars, do not necessarily void the contract between the whole copartners, and certainly do not authorize the defender to plead, by way of exception, his non-liability for his subscribed shares of the company's stock in an action at the instance of the great body of his copartners, who, if any injury has been sustained by the alleged acts of mismanagement and violation of the contract, are as great sufferers as himself. 6thly, The provision in the third section of the contract, empowering the directors to declare the forfeiture of the shares of the partners who shall fail to pay the instalments within a certain period, is clearly an option in favour of the company, and does not bar an action for the actual performance of the obligation by the defaulter. 7thly, There seems no good objection to the form in which the calls were made. They are to be made by the directors or the committee of management; and it is declared, by the 5th clause, “that any five of the number shall be a quorum for ordinary business.” What shall be considered as “ordinary business” seems a point which admits of being determined by the practice of the company, and according to that view the calls for instalments seem to have been understood as falling under that description. Besides, the 7th clause evidently includes, as falling under the powers of a quorum, various acts which seem, to say the least, as important and extraordinary as that of calling up the instalments of the subscriptions. Lastly, The plea urged in the defender's case, that the contract bound the parties to submit all disputes to arbitration, is one which admits of being waived, and the Lord Ordinary holds it to have been waived, as it is not stated on the part of the defender in the record.* 9 Shaw and Dunlop, p. 248.

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Clyne appealed on various grounds, but it is only necessary to particularize one, viz. that the call for the instalments was not authorized, and was not made agreeable to the conditions and provisions of the contract of copartnery, calling up payment of instalments on the shares subscribed for, did not fall under “ordinary business,” and therefore would not be effectually done by a quorum of the committee of management entrusted with the ordinary business of the company.Respondents .—The instalments sued for were duly called up by the directors in terms of the contract, and according to the true meaning and reading of the clauses of the contract relating to that point, and therefore the appellant is liable in payment of them.Lord Chancellor .—My Lords, I should be guilty of a waste of your Lordships' valuable time, and that of the suitors, if I were to call upon the learned counsel to argue any other point than the main objection to this judgment, and on which I feel it to be my duty to advise your Lordships. It is not correct to state that where a party is indebted by a natural obligation as well as civil—of paying his debts or performing his obligation—questions of law ought not to be nicely raised when he is called upon to pay that debt or to perform that natural obligation. It is the undoubted right of the individual to maintain that the obligation is not cast upon him in the manner or to the extent contended for—that he is not liable to the process, because the debt does not lie upon him in the way in which the obligation is endeavoured to be enforced, or to the amount sought from him; and of his taking those objections, if he can sustain them, the other party unquestionably has no right to complain. Bearing in mind this general remark, the present is the simplest and clearest case, if you look at the circumstances, that can possibly come before a court of justice, of a contract between two parties. The one person calls upon the other to perform his part of the contract; and the simple question is, whether the party so calling has a right to that performance? In a word, whether the defender has contracted to do that which the pursuer calls upon him to perform? The appellant has contracted to pay a hundred per cent. on certain shares, but the company on the other hand have contracted, and he is entitled to the benefit of the stipulation, that this hundred per cent. shall be obtained from him on those shares only according to

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“That the first instalment shall be 1 l . sterling per share, which shall be paid as upon the 9th day of November 1824,”
that is for the expenses, “and the remainder of the said stock shall be advanced in such instalments, not exceeding ten per cent. each on the amount of the said capital, and at such periods as the directors or committee of management herein-after named may appoint,” notice in writing being given.I should have said it would have been clearly an evasion of the plain intent, almost of the letter of this stipulation, which the shareholder may be said to have made by the third article, if two instalments of ten per cent., each having been ordered on the same day,—they should have been both payable also on the same day. I should have reckoned that a clear evasion of this condition, because it would have been doing that which they were not warranted by the meaning of parties to do, and doing it as it were surreptitiously and evasively, the directors being allowed only to

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“The business and affairs of this company shall be conducted under the superintendence of a board of directors, to consist of a chairman, deputy chairman, and fifteen ordinary directors, who shall form the committee of management, and shall be named and elected by the company at the aforesaid stated general meeting to be held annually, as herein-before mentioned.”
Now, there is no doubt that it must have been done by the majority of those, if there had been no other regulation; but then there comes a condition that any five of their number shall be a quorum for ordinary business; and my observation in respect of quorum clauses generally is, that they are of strict and not of lax construction, and for this most obvious reason, that if it were not so, you enable a small number to bind the majority, you enable a few to deal as for the whole, and you take the power out of the whole body, in whom generally it ought to rest, and in whom, but for the quorum clause, it does rest; for which reason a quorum clause, both in articles of partnership and in matters of a similar kind, must be of strict construction—“That any five of their number shall be a quorum for ordinary business.” By ordinary business I understand business of inferior importance, those common transactions without the doing of which the concern could not go on, and which may be as well done by five as by nine, or by the whole seventeen. It is quite clear that it would be impossible to carry on the business of any concern, if you were obliged to procure the attendance of great numbers for every matter of minor importance, and which may be as well done by five as by a larger number. But then it is said (and upon this an argument at the bar in support of the judgment below has been raised), that what follows is to be the only limitation of the business, and the only exception, and that the words “ordinary business” are to be either rejected altogether or to be qualified by the words which follow, and that that which is specified is the only business which is to be called

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“That the committee of management, or the majority of their number, shall have power and they are hereby authorized to nominate and appoint a manager, agents, and other officers of the company, and generally all clerks and servants whom they may deem necessary for the business of the company, with power also to fix the salaries, allowances, or wages of such persons, and to dismiss all or any of them whenever they may think proper.”
Now, can any person read this section without being convinced that what follows the words “ordinary business” is intended to limit ordinary business, and that all which is not strictly within the limit is comprehended in the subsequent part as extraordinary business. In the first place, can any person, consistently with the common rules of construction, say that that which has been suggested from the bar is the sound mode of interpreting these words? One answer is decisive. If this is intended to limit the description of ordinary business, that which follows must also, by parity of reasoning, limit the expression of extraordinary business. If, taking this as the foundry department, the ordinary business is confined to that, so the words relating to the smelting department, and so forth, must, in exact parity of reason, be taken to be only description and definition of extraordinary business; and what follows must be considered as having the highest degree of importance, namely, the dismissing a common servant, or the saying whether he shall have twelve or eighteen pounds. Now, it is useless to observe that that would be the wildest construction to be put upon these words, and accordingly no person has maintained that construction, though it has been argued that the words “ordinary business” are to be taken as mere tautology, for that ordinary

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“There seems no objection to the mode in which the calls were made;”—

the question is, whether there is not an objection? “They are to be made by the directors or committee of management;” so they are. The question is—how? “And it is declared by the fifth clause, that any five of the number shall be a quorum for ordinary business. What shall be considered as ‘ordinary business’ seems”—(now that is just the point in the cause)—“a point which admits of being determined by the practice of the company; and, according to that view, the calls for instalments seem to have been understood as falling under that description.” Now, who “understood” it so, or in what way we find that any one so understood it, I cannot tell. It is said the appellant attended a meeting at which the fact of calls having been made was reported, but there is not a tittle of evidence of his having attended that meeting, except the production of the minute; and when you look at the minute, it does not appear

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The House of Lords ordered and adjudged, That the interlocutor complained of be reversed.Appellant's Authorities .—Carey on partnership, 1825, p. 595, 160–1.; Wms. Saunders, 1. p. 291; 2. p. 116; Gow, ed. 1825, p. 109, Appendix, 404; 2 Ersk. 3, sec. 25; 1 Montagu, p. 89; 2 Bell's Com. pp. 634, 641, 2, 4, 8; 2 Merivale, p. 614; Marshall, 26th Jan. 1815; Bell's Principles (and cases there quoted), p. 91–2; Portable Gas Company, 13th Feb. 1829, (S. & D.); Moore v. Hammond , 30th April 1827; 6 Barnwell and Cresswell, p. 456; stat. 1696, c. 15; 1592, c. 179; 1593, c. 175; 1681, c. 5; 1540, c. 117; 1579, c. 80; 1680. c. 5.

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Respondents' Authorities .—Shott's Iron Company, 19th Jan. 1828 (6 S. & D. p. 399); Culereuch Cotton Company, 27th Nov. 1822 (2 S. & D. p. 47.); Adair v. New River Company , 2 Vesey, p. 429; Cockburn, Vesey, 16, p. 321; Cheyne, 2d Dec. 1828 (7 S. & D. p. 110.); Somervail, 22d Feb. 1830; Fife Bank, 7 Shaw and Dunlop, p. 60; 3 Ivory's Ersk. 2, 614.Solicitors: Spottiswoode and Robertson— Moncrieff, Webster, and Thomson,—Solicitors.