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The case was presented before the Divisional Court (12th February 1877) and then before the Court of Appeal (2nd June 1877) in the United Kingdom. In the Court of Appeal, the case was judged by:
- Bramnwell L.J
- Kelly C.B.
- Cockburn C.J. and
- Brett C.JJ.
The case dealt with Fraudulent Prospectus, Concealment of Contract and Responsibility of the Company to refund the price paid for the shares.The plaintiff sought to recover the amount paid by him for the shares in the company, namely the Lisbon Steam Tramways Company. His claim was based on Section-38 of the Companies Act, 1867.
Section-38 of the Companies Act provided that so as to invite persons for subscription to the shares, a notice calling for the same should specify the contracts entered into by the company or its promoter, director or trustees, including the names of the other party along with the date of such contracts. The section further provided that failure to comply with the requirement, would be deemed to be fraudulent on the part of the person who issued the notice of prospectus inviting for such subscription, whether the prospectus or notice were subject to adoption by the directors of the company or not.
The defendants, as promoters to the company, had failed to mention two of their contracts entered by them, in the prospectus of the company. One of the contracts was entered by defendants Clark and Punchard, for getting concessions for construction of tramways, which the company was to later incorporate and make work. The next contract was entered by defendants Clark and Punchard with another defendant Grant, which provided that Grant would be paid by Clark and Punchard if he obtained a contract from a company for construction of a tramway.
There were eighty-seven other actions brought against the same defendants by other persons who faced the same legal issue as the plaintiff. Their case would depend on the result of the present case.
Lord Coleridge, C.J., found that it was necessary to see if the contracts entered by the defendants were entered as promoters and also, it was necessary to see if it was intentionally concealed. He had also left some question to the jury which were as follows:
- Were the defendant’s promoters of the company?
- Were the contracts made by the defendants?
- Was the prospectus issued by the defendants?
- Did the plaintiff buy the shares depending on the statements of the prospectus?
- Did the defendants knowingly omit the mentioning of existence of such contracts?
- Were the contracts important for the plaintiffs to be known to?
- Did the contracts deal with affairs of the company?
- Did the defendants know that once the company was formed, it would pay from the company’s fund, for the expenses arising under the contract?
- Had the existence of contracts been disclosed, would it have affected the plaintiff in his decision to buy the shares?
- Did the plaintiff have any notice of existence of such contracts?
- Was the existence of fraud intentionally suppressed?
Contentions by the Plaintiff
The plaintiff contended that the contract with the company for subscription of shares could not be rescinded, as fraud was on part of defendants (promoters), citing a previous case. Further, the plaintiffs could not give back such shares to the defendants as the contract for shares were made between the plaintiff and the company. Therefore, the only way to undo the damage was to repay the plaintiffs. They additionally contended that had there been no concealment of such contracts, the company would not have been afloat in the first place. Therefore, the concealment on the part of the defendants (promoters) was the main cause of such damage being incurred, which meant, the plaintiff was entitled to recover whole amount they had invested for the shares. The plaintiffs contended that they were to be provided with compensation in full i.e. the amount paid to buy the shares.
Contentions by the Defendants
When it came to damages, the defendants contended that, the plaintiff’s themselves contended that the shares were worthless. Therefore, they could not have sustained damages from the concealment by the defendants. The plaintiff had bought shares which he himself categorized as worthless.
As to the damages, the undertaking being according to the plaintiff’s own contention, utterly impracticable and the shares worthless, he could not have sustained any damage by the concealment, of which he complains. If he was entitled to damages, it would not be the whole amount. He was only entitled to damages caused by the concealment i.e. the value of shares reduced due to the obligation on the company to pay from its fund the expenses incurred by the promoters. Even in case of fraud, one couldn’t recover damages more than the value of thing he wanted to buy minus the value of thing which he actually got. They contended for limited damages.
Issue number11 was not dealt by the court. Issue 10 however, was answered in negative while all other questions were answered in affirmative, by the court.It was decided by the Common Peals Division and the Court of Appeal that;
- The contracts entered by the defendants were to be disclosed in the prospectus. Therefore, the defendants were liable. (Kelly C.B. and Bramwell L.J. Dissenting)
- The use of thewords “knowingly issuing” as used by Section-38 of the Companies Act,wereinterpreted to mean intentionally issuing a prospectus without insertion of contracts and also was interpreted to include contracts omitted based on a bona-fide belief that such contracts were not needed to be mentioned.
- The shares were worthless and the defendant was entitled to recover whole of what he had paid for the purchase of the shares.
Lord Coleride C.J. had told the jury that the plaintiff is entitled to recover what the fraud had taken from him. The only question was if the jury thought the real damage to the plaintiff was the full amount or not.
The court heldthat the words “whether subject to adoption by the directors or the company or otherwise” cannot be taken to mean as “otherwise adopted” as contended by the defendants. The use of such words would mean that only contracts which were subject to adoption would be required to be mentioned in the prospectus while in the present case, the company was not in the process of taking such contract into adoption. The original meaning of the section was to provide information in the prospectus, of contracts which were adopted or not.
It was provided that, it was not important for an ordinary purchaser to know what the vendor would do with the money provided. Once such transaction was done, the purchaser held no interest upon the vendor. But, when it came to subscription of shares, one was entitled to know how his money was going to be used.
Further, it was said that contracts to be disclosed were those which directly or indirectly affected the internal or external affairs of the company. The provision was also said to prevent all kinds of frauds that might hamper an investor. The ordinary language of the provision must not be interpreted such that it left out a larger portion of frauds from being prevented. The court inferred that the words were left as general as possible so as to include all of the frauds that took place. The same reason was why the courts and the legislature had not mentioned types of contracts to be revealedin the provision.
It was also decided that the Gover’s Case as cited by both the parties didn’t have any of the parties in that case as promoter, director or trustee. Therefore, the case cited was irrelevant to the present case.
Analysis by Bramwell L.J.
Bramwell LJ, who provided that the contracts were not required to be mentioned in the prospectus, also provided opinions on the case if he was wrong aboutthe contact not falling within Section-38.
He agreed that the defendants were promoters and they issued the prospectus “knowingly” as required by Section-38. They had issued whole of the prospectus and didn’t limit themselves to some prospectus.Nevertheless, he said that the word “knowingly” didn’t mean fraudulently. Omission of such contracts was not deemed to be fraudulent. Even then, if the contracts fell within the said section, the defendants must be made liable.
Nevertheless, he was of the opinion that the contracts didn’t fall under the provision as he interpreted that the use of the word “any contract entered into by the company” must mean that the contract should be bindingon the company, which is not the case when it comes to promoters.
Analysis by Kelly C.B.
Kelly CB provided dissenting opinions when it came to damages and disclosure of contract under Section-38.
The judge opined that Section-38 was not applicable to the contracts entered by the promoters as the contract must be formed with the company or its promoters, directors or the trustees, provided that the company would later form a corresponding contract to the contract entered by the promoter. Therefore, it was essential for the company to ratify the acts of the promoter before the company was formed, which was not the case in the present dispute.
It was opined that clause “the promoters, directors, or trustees” are used to indicate plurality, and therefore, acts by a single promoter couldn’t be included under Section-38. Further, the section didn’t use the phrase like “either or any of them”. Therefore, a company could only later accept the contract entered by its persons such as promoters, directors, and trustees (plural) and not a promoter, director, and trustee (singular). Additionally, it was said that the contract between promoters is not required to be disclosed. Therefore, it was decided that the contracts did not fall under the said provision. It was also said that the damages, if any, were to be provided not in the whole of what was paid but with regards to actual damage caused i.e. value lessen by the concealment.
Analysis by Cockburn C.J.
The jury had found that the defendants were infact, promoters to the company. Further, the contacts were related to the affairs of the company. Such contracts were also found to be necessarily made known to the people interested in the shares of the company. It was also found that the shares were bought by the plaintiff, depending on the prospectus provided to him and its statements and that he would not have done so had the prospectus not concealed the contracts. Additionally, the jury decided that the omission wasdoneknowingly rather than in bona-fide belief.
There was a scheme between the owner of the concessions and the promoter. It was agreed that if the company was to be formed in the future, the company would pay the principal promoter a sum of 52,000 and 6,000 to the directors and only 10,000 would be spent to give value to the shares. This was stated while the capital of the company was 200,000 and the borrowing power was 150,000. In reality, the borrowing amount was less by 72,000. It was said that 310,000 would be the expenditure on preliminary expenses. Here, it was seen that the 52,000 would take one sixth of the total 310,000. Further, the borrowing power wasvery less. Such activities could have created distrust and would have changed a person’s decision to be involved with the shares. Therefore, the concealment, if had not taken place, would have changed and even reversed the decision of the plaintiff to buy the shares.It was decided that it was of no use for Mr. Grant to contend that his demand of 10% of the capital was justified. The only issue was concealment of such contracts and the reward thatthe promoters would get thereof.
The judge referred to the case of Cornell v. Hay, in which it was contended that the legislature had failed to point out the contracts required to be disclosed as under Section-38. It was also contended that the events of immense importance were to be disclosed by the company and its representatives in the prospectus, and the contract not disclosed in that case was not of such importance to the shareholder. Justice Blackburn, Mellor and Lush, JJ. haddenied this contention.
A wider view to the section was provided by Brett LJ, in the present case. He held that the section was remedial and must be provided with larger interpretation rather than a limited literal one. It was intended to protect a shareholder and his investments.
The defendants contended heavily on the meaning of the terms “issuing” and “promoter”. It was contended that issuance of prospectus meant a publication made by directors of a company. It was further contended that the one who gives effect to the prospectus must be made liable, alone.
It was decided that a prospectus was a public official publication which was authorized by the government of the company, which, in this case, were the directors. Therefore, by simple logic that a principle is liable for the acts of his agent, the contention was true. Nevertheless, if an agent was wrongful it made the agent himself liable. It was thought by the Justice that if the prospectus issued by the promoter was in violation of the statue, the party issuing the prospects itself would be liable.
Further, it was decided that Mr. Grant, distributed the prospectus in large amount, and had even undertaken its printing and publication. But, there was proof that other defendants were also involved. When it came to the interpretation of the word “knowingly issuing”, it was decided, based on a basic knowledge of law that ignorance or mistake can’t be an excuse to disobey law.
An interesting analogy was made by C.J. Cockburn which was as follows:
“If a man buys a horse, as a racehorse, on the false representation that it has won some great race, while in reality it is a horse of very inferior speed, and he pays ten or twenty times as much as the horse is worth, and after the buyer has got the animal home and it dies of some latent disease inherent in its system at the time he bought them, may claim the entire price he gave; the horse was by reason of the latent mischief worthless when he bought; but if it catches some disease and dies, the buyer cannot claim the entire value of the horse, which he is no longer in a condition to restore, but only the difference between the price he gave and the real value at the time he bought.”
In the present case the shares were worthless before it had been bought by the plaintiff. It was not known to the plaintiff that the shares were “worthless” when he bought it. Therefore, the contention by the defendant that the plaintiff knew of such “worthlessness” and yet bought the shares is not viable.
It was noted that the term “promoter” was not well defined by the legislature.The definition given by Cockburn CJ of a promoter is, “the one who undertakes to form a company with reference to a given project and to set it going and who takes the necessary steps to accomplish the purpose.” The definition has been provided with more clarity in the case of Whaley Bridge Calico Printing Co v. Green. Bowen J. in the case said that “The term promoter is a term not of law, but of business, usefully summing up in a single word a number of business operations familiar to the commercial world by which a company is generally brought into existence.”Further,in the present, concepts of passive promoter can be seen therefore, expanding the scope of the section.
In the case of Probin Kumar Misra v. Ramani Ramaswamy, the Madras High Court had provided that signature of a promoter was not necessary on Memorandum of Association or Articles of Association. Guilt on a promoter is based on his conduct during pre-incorporation stage. Further, as per Companies Act of India, 2013, promoter can be declared guilty and be sued for false statements in a prospectus.
Here, the argument forwarded by Kelley CB, based on a literal interpretation of Section-38, is harmful to the functioning of law. Such grammatical/literal interpretation would provide a single promoter to exploit the loophole created by Kelly CB. Therefore, the decision of the majority and more specifically, the decision of Cockburn CJ is to be understood and implemented. As Section-38 was a relief provision, broad interpretation was provided. Further, the requirement as to the adoption of the promoter’s contracts by the company was not required. The main purpose of the Section was to preserve the rights of the shareholder. The case has also been able to put a light on the importance of full disclosure in the prospectus, inviting for shares. The case has been referred by other cases, so as to determine the liability of promoters, who had entered into contracts on behalf of the company.
The case has helped to prove that a promoter holds a stringent fiduciary duty to the company.For a company, which is insolvent during the issuance of shares, the measure of damages to be provided to the shareholders, is not seen to be the full purchase price,even in the present, provided that the person was provided with all important information and still chose to buy the shares. But, when shares are taken fraudulently, by concealment of contracts entered into by the company, directly or through promoters, the damages provided are in full of the payment made for the subscription of shares. Therefore, the case at hand has paved a path from other cases to correctly interpret Section-38 and protect the interests of the shareholders from fraudulent activities.
Twycross v. Grant 2 CPD 469 (Eng.)
Companies Act §38 (1867).
 United Settlement, Twcross v. Grant and Others, (July 7, 2020), http://www.uniset.ca/other/cs3/2CPD469.html
 Gover’s Case  1 Ch D 182 (Eng.).
Companies Act §38 (1867).
Gover’s Case  1 Ch D 182 (Eng.).
Cornell v. Hay  Law Rep. 8 C. P. 328 (Eng.).
 J.H. Gross, Who is a company promoter?, Law Quarterly Review, 1970
 Whaley Bridge Calico Printing Co v. Green 5 QBD 109(Eng.).
 Tracy v. Mandaly  88 CLR 215 (Eng.).
 Probin Kumar Misra v. RamaniRamasyamy(2010) 154 Comp Cas 658 (Mad) (India).
 Companies Act §32, 33(1867).
ASIC v. Young and Ors.  QSC 029 (Austl.); Independent State of Papua New Guinea v. PNG Sustainable Development Program Ltd  SGHC 19.
Aequilas v. AEFC  19T ACLC 1006 (Eng.);Erlanger v. New Sombrero Phosphate Company 3 App Cas 1218 (Eng.).
 Broome v. Speak  1 Ch. 586 (Eng.); Fawcett v. Johnson  15 N.S.W. State Rep. 51 (Austl.); Burke v. Cory  19 DLR (2d) 252 (Can.).