➥ CASE SUMMARY OF:
Gluckstein v. Barnes [1900] A.C. 240
by “PipAr” Branham-Paul C. Chima.
➥ COURT:
House of Lords
➥ JUDGEMENT DELIVERED ON:
1900 April 5
➥ AREA(S) OF LAW
Disclosure by company executives.
➥ PRINCIPLES OF LAW
⦿ DISCLOSURE TO SELF IS NO DISCLOSURE
“Disclosure” is not the most appropriate word to use when a person who plays many parts announces to himself in one character what he has done and is doing in another. To talk of disclosure to the thing called the company, when as yet there were no shareholders, is a mere farce. To the intended shareholders there was no disclosure at all. — Lord Macnaghten.
⦿ THE DIRECTORS OF COMPANY ARE ITS EXECUTIVE ORGAN
The directors of a company are its executive organ; to them its interests are confided; and in the present instance the company, even in this, its inchoate stage, was identifiable through its executive. I hold that from the moment this step was taken the coming directors stood in a fiduciary relation to the company whose interests were to be in their sole hands. This conclusion rests not on technical rules of law, but on the dictates of fair play embodied in law. The people for whom these gentlemen were bound to act were their coming constituents, the persons out of whose money they proposed to make their gain. — Lord Robertson.
➥ LEAD JUDGEMENT DELIVERED BY:
Earl of Halsbury L.C.
➥ APPEARANCES
⦿ FOR THE APPELLANT
Swinfen Eady Q.C. and Muir Mackenzie.
⦿ FOR THE RESPONDENT
T. Lawrence Q.C. and A.R. Kirby.
➥ CASE FACT/HISTORY
In the year 1892 the freehold grounds and buildings known as “Olympia” were the property of a company which in that year was being wound up. That company had issued debentures to the extent of 100,000l. as a first charge and a mortgage as a second charge for 10,000l.
The four persons in question knew that the property would have to be sold, and they combined to buy it in order that they might resell it to a company to be formed by themselves. The combination, which called itself the Freehold Syndicate, but which, perhaps, the common law would have described by a less high-sounding title, proceeded to buy up so far as they could the incumbrances on the property called “Olympia.” They expended 27,000l. in buying debentures. These, of course, were very much depreciated in value, and they gave 500l. for the mortgage of 10,000l.
As soon as this transaction had been completed they, partners in it, proceeded to form a company, and it was of course necessary that the company should be willing to help, and accordingly the four persons in question were made by the articles of association the first directors. The property was sold on February 8 by the chief clerk of North J. for 140,000l., and the syndicate purchased nominally for that sum, but, by reason of the arrangement to which I have referred, that sum was less by 20,734l. 6s. 1d. than what they appeared to give.
On March 29 they completed as directors the purchase of the property for 180,000l., and they as directors paid to themselves as members of the syndicate 171,000l. in cash and 9000l. in fully paid-up shares – in all 180,000l.
The prospectus by which money was to be obtained from the public disclosed the supposed profit which the vendors were making of 40,000l., while in truth their profit was 60,734l. 6s. 1d., and it is this undisclosed profit of 20,000l., and the right to retain it, which is now in question.
➥ ISSUE(S) & RESOLUTION(S)
[APPEAL DISMISSED]
I. Whether four persons, of whom the appellant is one, can be permitted to retain the sums which they have obtained from the company of which they were directors by the fraudulent pretence that they had paid 20,000l. more than in truth they had paid for property which they, as a syndicate, had bought by subscription among themselves, and then sold to themselves as directors of the company?
RULING: IN RESPONDENT’S FAVOUR.
A. THE APPELLANT AND HIS ACCOMPLICE ACTED FRAUDULENTLY
“My Lords, I decline to discuss the question of disclosure to the company. It is too absurd to suggest that a disclosure to the parties to this transaction is a disclosure to the company of which these directors were the proper guardians and trustees. They were there by the terms of the agreement to do the work of the syndicate, that is to say, to cheat the shareholders; and this, forsooth, is to be treated as a disclosure to the company, when they were really there to hoodwink the shareholders, and so far from protecting them, were to obtain from them the money, the produce of their nefarious plans. I do not discuss either the sum sued for, or why Gluckstein alone is sued. The whole sum has been obtained by a very gross fraud, and all who were parties to it are responsible to make good what they have obtained and withheld from the shareholders.”
“These gentlemen set about forming a company to pay them a handsome sum for taking off their hands a property which they had contracted to buy with that end in view. They bring the company into existence by means of the usual machinery. They appoint themselves sole guardians and protectors of this creature of theirs, half-fledged and just struggling into life, bound hand and foot while yet unborn by contracts tending to their private advantage, and so fashioned by its makers that it could only act by their hands and only see through their eyes. They issue a prospectus representing that they had agreed to purchase the property for a sum largely in excess of the amount which they had, in fact, to pay. On the faith of this prospectus they collect subscriptions from a confiding and credulous public. And then comes the last act. Secretly, and therefore dishonestly, they put into their own pockets the difference between the real and the pretended price. After a brief career the company is ordered to be wound up. In the course of the liquidation the trick is discovered. Mr. Gluckstein is called upon to make good a portion of the sum which he and his associates had misappropriated. Why Mr. Gluckstein alone was selected for attack I do not know any more than I know why he was only asked to pay back a fraction of the money improperly withdrawn from the coffers of the company.”
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✓ DECISION:
“I move your Lordships that the appeal be dismissed with costs.”
➥ MISCELLANEOUS POINTS
➥ REFERENCED (CASE)
➥ REFERENCED (OTHERS)