Liability of promoters to return deposits. Promoters cannot benefit to a company in the course of formation, he can maintain an action against any of the promoters who may have caused such representations to be published (a); and that it is not necessary to prove any direct communication between the plaintiff and the defendants (b). upon If, In virtue of this contract with the public, promoters are bound to apply deposits for the purposes only for which they were made. Hence, in the case of abortive companies, it has been held that the promoters were not entitled to retain any portion of the deposits or subscriptions, as having been laid out in expenses incurred in attempting to start them. See the case of Nockels v. Crosby (c), which is valuable as containing the judgment of Littledale, J., this point, and numerous other cases noted below (d). however, it appears from the contract, or subscribers' agreement, that the deposits were intended to be applied to cover the expenses necessary for starting the company, they will not be held returnable, if de facto they were employed in this manner (e). But it will be observed, that as promoters are not partners, and consequently not liable for the acts of each other, the action for recovery of deposits on any of the grounds above referred to must be directed against such of them as really received the money, or authorized its being paid into a particular bank (ƒ). Upon the same principles, it follows that promoters cannot make at the expense any profit by transactions into which they enter on behalf of the of the company. future company. In the case of Hichens v. Congreve (g), the three principal promoters of a mining company purchased the lease of a mine at £10,000, and afterwards re-sold it to the company for £25,000. They were compelled to pay into court the balance that remained in their hands. Upon this subject, the English cases of Fawcett v. Whitehouse (h), and Beck v. Kantorowicz (i), may be consulted with advantage. (e) Garwood, 1 Ex. 264; Vane v. Cobbold, ibid. 798; Baird v. Ross, 2 M'Queen 61; Jones, 2 Ex. 52; Clements, 1 Ex. 268. See Lindley 66. (a) Gerhard v. Bates, 2 E. and B. 476. (b) See Bedford v. Bagshaw, 4 H. and N. 538; Lindley 726. (c) 3 B. and C. 814. (d) Clarke v. Chaplin, 1 Ex. 26; Mowatt v. Londesburgh, 3 E. and B. 307; Vollans, 1 Ex. 20; Steadman, 15 M. and W. 587; Willey, 3 Ex. 211; Walstab v. Spottiswoode, 15 M. and W. 501. (f) Watson v. Charlemont, 12 Q. B. 856; Drouet v. Taylor, 16 C. B. 671 ; Burnside v. Dayrell, 3 Exch. 224. (g) 1 R. and M. 150. In both these cases, companies were got up for the purpose of working mines, and the promoters contracted for the purchase of the mines, on what was represented as favourable terms. But after the formation of the companies, it was discovered that a private agreement existed with the sellers of the mines, whereby the promoters received a part of the purchase price as a premium or bonus for carrying through the transaction. In both cases the Court held that the promoters were to be regarded as trustees for the company, and as such liable to account to it when formed, for any advantages they might have received in the management of its affairs during its inchoate state. bound by acts of its pro Although, as we have just seen, promoters are in some re- Company not spects to be regarded as trustees for the future company, yet this must be understood only in a passive sense, or as the exponent of moters. the principle that they cannot be benefited at the expense of the future company. So far from having any active title as trustees, it may now be laid down as the general rule, that promoters have no power by their acts and deeds to bind the company when it comes into existence. This doctrine may be rested on the technical ground, that no corporate body can undertake obligations until it has a legal being; but its intrinsic justice and propriety become more apparent when we reflect that the public are led to become shareholders on the faith of the instrument, whether deed, charter, or special act, by which the company is constituted; and if they were to be held bound by stipulations or liabilities other than those appearing on the face of such instrument, the most iniquitous consequences might ensue. The law of Scotland, when properly understood, appears to have given full effect to this equitable doctrine. Thus, in the case of the Monklands Railway Company v. The Glasgow, Airdrie, and Monklands Railway Company (a), it was held that an agreement entered into by the provisional committee of a contemplated railway company to lease the line was not binding upon the company when incorporated by the special act-the act containing no such provision. At a subsequent period, impressed seemingly with the hardship arising in particular cases, the Court was led to relax the stringency of the rule, to an extent that was not altogether com(a) 11 D. 1395 (1849). patible with public safety or confidence. Thus, in the case of The Trustees of the Harbour of Helensburgh v. The Caledonian and Dumbartonshire Railway Company (a), it was held that the company when formed was bound to implement the contracts which had been entered into by its provisional committee, when these had for their object the interests of the company in the matter contemplated by the special act, when without them the act would not have been obtained, or when the contracts were such that the company, if in existence, could competently have gone into them. In that case, the stipulation sought to be enforced was in fact the price at which the promoters obtained the support of the pursuers to their projected scheme. The case of Rutherford v. The North British Railway Company (b) was soon after decided on the same grounds, and avowedly on the authority of the Helensburgh case. There a body of road trustees had been got to withdraw their opposition to the bill of a projected railway company, by the promoters agreeing to pay a certain proportion of liabilities for which the trustees were responsible. The bill passed, and the undertaking was purchased by another company. The Court held that the purchasing company was bound to implement the obligations undertaken by the promoters of the first company. Similar decisions had been also given in England. The most celebrated of these was the case of Edwards v. The Grand Junction Railway Company (c), in which it was held that a company was bound by an agreement made with its promoters, in consequence of which opposition to its special act had been withdrawn. But the authority of the Scotch cases, and of this as well as of all the other English cases proceeding upon a similar principle, must now be held to be overruled by the judgment of the House of Lords, reversing the finding of the Court of Session in the Helensburgh case (d), on the broad ground that those who take shares on the faith of a company's special act cannot be subjected to any liabilities not embodied therein. The same decision had been given by the House of Lords in the previous English case of Preston v. Liverpool and Manchester Railway Company (e). In both these (a) 1852, 15 D. 148. (d) 19 D. H. L. 6; 2 Macq. 391 (1856). (e) 5 House of Lords Cases 605. cases the decision in the case of Edwards was founded in both its authority was disregarded (a). upon, and It is, however, to be observed, that the expression of Lord Chancellor Cranworth, in giving judgment in the Helensburgh case, must be taken in a reasonable sense; for his Lordship afterwards remarks, that if the agreement with the promoters, though not incorporated in the Act, had regard to something, the doing of which fell within the powers and objects of the Act,' a different decision might be expected. be bound by The company, when formed, may of course always render itself Company may liable for the acts or engagements of its promoters by homologation. homologation. Thus, in the subsequent English case of Williams v. The St George's Harbour Co. (b), this element was made the ground of decision. There an owner of land agreed to withdraw his opposition to the bill, in consideration of the promoters undertaking that the company should purchase his land on certain terms. On obtaining the special act, the company refused to fulfil the contract made with its promoters, but was compelled to do so, in respect that it had recognised the validity of the contract by allowing judgment to be entered up against itself in an action for its alleged breach. There can be little doubt that effect would be given to this principle were a similar case to occur in this country. The following may therefore be stated as the general result of the decisions hitherto pronounced. A company is not bound by the acts, stipulations, or engagements of its promoters, unless these be distinctly set forth in its special act or other instrument of constitution, be obviously implied therein, or have been in some unmistakeable manner homologated or adopted by the company after its formation. General rule as to liability of company for moters. acts of pro pany not It need scarcely, perhaps, be remarked, that though the com- When company when formed may not be found liable for implement of the engagements of its promoters, this has no effect to release the promoters, or such of them as have incurred liability (c). (a) See Lindley 321, whose views on this subject are somewhat different from those submitted in the text. But see Spackman v. Lattimore, 3 Giff. 16. (b) 2 De G. and I. 547; S. C., 24 Beav. 339. See Browning v. Grt. Cen. Min. Co., 5 H. and N. 856. (c) Cal. and Dumb. R. Co., ut supra. bound, the proliable. moters remain Number of members. Three kinds of companies. CHAPTER XI. FORMATION OF REGISTERED COMPANIES UNDER THE SINCE the second day of November 1862, no company, association, or partnership consisting of more than ten persons can be formed for the purpose of carrying on the business of banking, unless it is registered as a company under 'The Companies Act, 1862,' or is formed in pursuance of some other Act, or of letters patent; and no company, association, or partnership consisting of more than twenty persons, can be formed for the purposes of mercantile gain, unless so registered, or formed under some other Act, or by letters patent, or in England be a mining company within the jurisdiction of the Stannary Courts of Cornwall and Devonshire (sec. 4). But any seven or more persons associated for a lawful purpose may, by registration in accordance with the provisions of the Act, form an incorporated company (sec. 6). The company may be formed with or without limited liability; and in the former case, the limitation may be either by shares or by guarantee (secs. 6, 7). The statute therefore contemplates three kinds or classes of associations, viz. : 1. Companies limited by shares. 2. Companies limited by guarantee. 3. Companies with unlimited liability. It is important to keep these distinctions in view, as they materially affect the formation and the subsequent management of the company. |