Section 2.-Relation Between Creditor and Director.

A-AT COMMON LAW.

BATH v. STANDARD LAND COMPANY, LIMITED.

1911. (1911) I Ch. Div. 618.1

APPEAL from a decision of Neville, J. (1910) 2 Ch. 408.

The only question raised by this appeal which calls for any detailed report was whether a limited company which had undertaken the management of an estate upon certain terms was entitled to charge for the professional services of some of its directors who had been employed to do some part of the management.

Quarterly accounts were sent regularly to the plaintiff, but he did not agree to them, and eventually he brought the present action against the company claiming that the accounts might be taken under the directions of the Court on the ground that they contained improper charges.

It appeared that one of the directors, a Mr. May, was a solicitor and a member of the firm of May, Sykes & Co., and his firm were employed professionally by the defendant company in matters connected with the estates, and their bills of costs, which contained profit items, were paid by the company. Mr. Corke was an estate agent and surveyor and was employed by the defendant company at a salary of £200 per annum to manage certain sand and gravel pits comprising part of the estates, and the business in connection with these pits occupied a large portion of his time and was carried on at a considerable profit. The objection to this charge was not pressed on the appeal. Mr. Snelling was an auctioneer, and was always employed by the defendant company on all sales of the property and was paid the usual commission. Mr. Reeves was a chartered accountant, and, in addition to his salary as secretary of the company, was paid £80 per annum for keeping the books of account of the estates, which were very complicated. It was not alleged that Ala. 614, 10 So. 290, 36 Am. St. 251; Force v. Age-Herald Co. (1903) 136 Ala. 271, 33 So. 866; Pond v. Framingham etc. R. Co. (1881) 130 Mass. 194.

In the case last cited, Morton, J., said: “The bill is an attempt by a creditor to restrain his debtor (the railroad company) from making what is alleged to be an improvident contract. The rights of the parties are governed by the rules of the common law. The plaintiffs as creditors might by an attachment have obtained security which would take precedence of the contemplated lease; but if they could not, the court has no power to restrain the debtor from making a disposition of his property which is permitted by the common law, unless fraud or a breach of trust is alleged and shown. The allegation that the defendant corporation is insolvent does not aid the plaintiffs. In the absence of any statute giving the power, this court has no authority to act as a court of insolvency for the liquidation of the affairs of an insolvent railroad corporation." (p. 195).-Eds.

Statement abridged. Portion of Fletcher-Moulton's dissenting opinion omitted.-Eds.

51-PRIVATE Corp.

these payments were in themselves unfair or unreasonable, but it was objected that they could not be charged against the plaintiff.

COZENS-HARDY, M. R.-Neville, J., has declared that the company are not entitled to make any charge for or in respect of any profit or remuneration to the directors or to any of them, or to any firm of which any such director was a member for anything done by such directors or any of them, or by any firm of which such directors or any of them were members at the time of the doing thereof in relation to the agreement. Now it has not been disputed that the company stood in a fiduciary relation to the plaintiff, and in my view it is not very important to ascertain precisely the nature of that relation. During all the period in question the company were mortgagees in possession. They may also be regarded as managers of a joint adventure. However that may be, it is clear that not one penny of profit can be claimed by the company beyond that which is expressly provided for in the agreement. But I fail to see on what ground the company can be charged with profits which in fact the company did not receive, and which were received by the directors.

Directors stand in a fiduciary relation to the company, but not to a stranger with whom the company is dealing. It is of course true that a company acts through its directors. But that does not involve the proposition that if a breach of trust is committed by a company, acting through its board, a beneficiary can maintain any action against the directors in respect of such breach of trust. Of course I except the case where trust property can be followed into the hands of a director, or of any stranger with notice. No such point arises here.

It is argued that it was an implied term of the agreement that all the services of the directors should, as between the plaintiff and the company, be rendered gratuitously. Another way in which the same result was sought to be reached was by suggesting that, although solicitors and auctioneers might be employed by the company and paid for their services, it was an implied term that no director should be so employed. I can find no foundation for such argument. Moreover, a breach of such implied term (if any) would give rise to a claim for damages only, which would not be measured by the amount of profits earned by the director or his firm. On principle I think it is clear that, in an action of this nature to which the directors are not made parties, it cannot be right to treat their profits as sums improperly received by the company, or improperly paid away by the company.

But it is said that there are two authorities which justify the declaration appealed against. Nicholson v. Tutin (3 K. & J. 159.), before Wood V.-C., creates no difficulty, and indeed it seems to me to be a plain case. Tutin and Watson were trustees of a creditor's deed, the trusts of which were being administered under the decree of the Court. In the accounts carried into chambers by the trustees, a

sum of £450 was charged by Watson as commission for collecting the rents. Watson alleged that, after the execution of the creditor's deed, he was appointed agent of mortgagees, who had no express power to appoint a receiver, to receive the rents. But this was held no justification for a charge of the £450 against the plaintiff Nicholson, between whom and Watson there was a direct fiduciary relation. It has no bearing upon the present case. The case of Kavanagh v. Workingman's Benefit Building Society ([1896] 1 L. R. 56) is no doubt directly in point. The defendants were mortgagees in possession, the mortgage deed containing a power to appoint a receiver. The defendants appointed one of their directors receiver to collect the rents. The appointment was by deed under the seal of the corporation, in pursuance doubtless of a resolution of the board of directors. Under a redemption decree, the defendants charged commission at 5 per cent. for collecting the rents. Court of Appeal in Ireland held that the company could not claim any commission paid to the director. Lord Ashbourne thought the director could not claim commission against the mortgagor, because he might have voted for his own appointment. FitzGibbon, L. J., thought the disability arose from inconsistency between duty and interest. He is reported to have used these words ([1896] 1 L. R. 58): "Public policy and equitable doctrine are both against allowing the claim, which could only be made for the pecuniary benefit of one director through the action of the board of directors, against the interest either of the company or of the mortgagor, to both of whom every director stands in a fiduciary relation." Barry, L. J., said it made no difference that the director was not the mortgagee himself, but a "part of the corporation." And Walker, L. J., substantially agreed with FitzGibbons, L. J. With all respect to the very learned judges who decided that case, I am unable to follow their reasoning. It seems to me fallacious to say that every director stands in a fiduciary relation to the mortgagor. The conflict between interest and duty only arises where a fiduciary relation exists between the parties. Reference was also made to Powell & Thomas v. Evan Jones & Co. ([1905] I K. B. 11), but I am unable to discover that it in any way assists the plaintiff in his contention. I base my decision upon the broad principle that directors stand in a fiduciary position only to the company, not to creditors of the company, not even to individual shareholders of the company, still less to strangers dealing with the company. This principle applies equally whether the relation between the company and the stranger is one purely of contract, such as principal and agent, or is one of trustee and cestui que trust. To speak of directors as the "brains" of the company or the "hands" of the company is only to use words which have no definite meaning in this connection.

With great respect to Neville, J., who followed the Irish decision, I am unable to concur in his view. I think the declaration as to the profits received by directors should be struck out. But in order to

avoid mistakes it is desirable to add words to the following effect: "But the omission of this declaration is without prejudice to any question as to the propriety of employing any such director or his firm, or any other person in any particular transaction, or as to the amount of remuneration paid in respect thereof."

As the appellants have partly failed and partly succeeded, I think there should be no costs of the appeal.

FLETCHER MOULTON, L. J.- * * * There is no lack of boldness in the propositions contended for by the appellants. They contend that the directors of a company which is acting in a fiduciary relation to an individual-in short, in the position of a trustee towards him—are merely in the position of agents of a trustee, and that it is a settled principle of English law that an agent of a trustee is not in any fiduciary relation to the cestuis que trust. Accordingly they say that the directors of the defendant company had no duty whatever to the plaintiff. They admit that the company of which they were directors was in the position of a mortgagee in possession, and I do not think that they dispute that its position under the agreement of April 20, 1893, also was one of such a fiduciary character that it was liable to account to the plaintiff and could make no personal profit out of its actual administration of the estate. But they maintain that these facts entail no consequences so far as the directors of the company are concerned, that their position was simply that of agents for the company, and that, provided the company itself did not object, they might sell the trust property to members of their body, allow to one another commissions in respect of sales, etc., of the trust, property, and employ one another for reward on such terms as they should think proper in respect of the development and realization of that property. They contend that the fiduciary relations existed between the company and the plaintiff only, and that the directors were entirely unaffected by the existence of those relations, by the fact that they were administering the property for the company as a trustee, and by their complete knowledge both of the position of the company and the relations in which it stood to the plaintiff.

It would be difficult to exaggerate the importance of the questions thus raised, especially at a time when there is an increasing tendency to employ corporate bodies in the execution of trusts. The strength of the position of cestuis que trust hitherto has been that no profit could be made by those administering the trust out of such administration, so that no question of self-interest could divert the trustee from the duty to use his powers solely in the interests of cestuis que trust. But if such principles are wholly inapplicable to the individuals who, in the case of a trustee company, are the persons really administering the trust, i. e., the directors, and if they can use the powers which are thus in their hands to their own personal advantage without incurring any liability to the cestuis que trust, the whole security of the position is gone. Yet this is what is contended

for by the appellants. Suppose that in such a case there is a sale to the directors or some of them. The appellants argue that inasmuch as the company does not pocket the profits made by the directors there is no breach of trust. So far as the directors themselves are concerned it is contended that they have no duty whatever to the cestuis que trust, who cannot therefore impeach the sale even though the purchasers have a hand in fixing the price. They contend that the directors are liable to the company and to it alone, and hence that if the company does not complain (and the directors will decide whether it shall do so or not) the cestuis que trust are helpless except so far as they can make out a case of negligence leading to damagea very poor substitute for the protection afforded by the principle of equity that no one may allow himself to be in a position in which his interest conflicts with his duty.

It is needless to say that if propositions of so wide a character as those contended for by the appellant can be established the declaration appealed against is wholly wrong. But in my opinion they cannot be established. There is, in my opinion, a fundamental fallacy in the whole of the argument addressed to us by counsel for the appellant on this part of the case. It is that they have confounded the proposition that a man does not come into fiduciary relations with the cestuis que trust merely by becoming an agent of the trustee (a proposition of undoubted validity) with the proposition that an agent to the trustee cannot stand in a fiduciary relation to the cestuis que trust. This is to my mind as grave an error as for a criminal lawyer to maintain the proposition that a fact that is not sufficient to secure a conviction is sufficient to necessitate an acquittal. In order to establish a fiduciary relation between the cestuis que trust and an agent of the trustee you must look at the facts of the case and see whether they establish such a relationship. It is impossible to say generally whether an agent of a trustee is in a fiduciary relation to the cestuis que trust, but it is not only possible, but correct, to say that if nothing is present but the fact that he is an agent of the trustee, that alone does not suffice to make him responsible to the cestuis que trust. In such matters a man's responsibilities depend on the acts which he does and the knowledge that he possesses at the time when he does them. This is true whether a man be an agent of a trustee or not. His being such agent does not shelter him from the responsibilities flowing from the knowledge he actually possesses, whether that knowledge has come to him by virtue of his position or aliunde. If it is such that it would suffice to make a third person liable to the cestuis que trust for the acts done by him, his being an agent to a trustee is no defence against his being held to be so liable. *

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