LA THE LAW MAGAZINE AND REVIEW. No. V.-VOL. III.-JUNE, 1874. I-LEGAL POSITION AND LIABILITIES OF DIRECTORS OF JOINT STOCK COMPANIES. JOINT stock enterprise is a tree of modern growth, which, at first regarded with disfavour by the courts of law, then taken under the protection of the legislature, has attained in this country unparalleled proportions. Railways, docks, canals, bridges, the working of mines, the supply of gas and water-all great works, in short, beyond the resources of individuals—have been achieved by the combination of individuals in companies. And there is scarcely any branch of trade, commerce, or manufacture, to which the principle of association has not been similarly applied. In numerous cases great advantage to the general public has been accompanied by that remunerative return to the subscribers of capital which is promised in all. On the other hand, the failures of joint stock enterprise are no less conspicuous than its successes. The crash of companies and the ruin of their members is a sufficiently familiar feature of modern times. True it is that since the passing of the Limited Liability Acts individuals recommended by their solvency are no longer singled out and stripped to the skin by the creditors of a company-the fate of many in the days when the ordinary partnership law was equally meted out to firms of half-a-dozen partners, and to associations of many hundred members. Yet, under the impulse given by those Acts, certain vaticinations of experienced judges have been fulfilled. Within the last twenty years, though it may well be that, "not limited liability but unlimited fools are to be blamed," fewer shareholders may have been ruined, but more have suffered. Looking, then, to the magnitude of the interests involved, the law relating to the position and liabilities of those entrusted with the management of joint stock companies, whether towards third persons dealing with them, or towards the members of their companies, must necessarily be of the highest importance. The present state of this law it is now proposed briefly to examine. To a certain extent the legal position of directors of a company is readily defined. They are agents of the company. But two kinds of agents are known to the law, namely, general and particular or special agents. The distinction, as is well known, is that the former are deemed to have a general authority to bind their principal in all matters within the scope of the business for which they are agents; the latter can only bind their principal within the limits of the particular authority delegated to them. A partner in a firm and a master of a ship, for example, are general agents, with authority to bind other partners and the owners of the ship respectively; a person employed to buy a horse at a certain price is a particular agent. Directors are treated as particular agents,* and from this doctrine important consequences flow. For it follows that third persons dealing with directors must, in order to be safe, ascertain the limits of the authority conferred on them by the constitution of their company; since, if they exceed that authority, such persons will be left without any remedy against the company, their principal. The justice of this doctrine has been questioned, though the powers of directors can always be ascertained. Practically, no doubt, in the hurry of business this precaution is very often neglected, and in some cases even a careful perusal of a deed of settlement, or memorandum and articles of Association, may fail to con Ernest v. Nicholls, 6 H. L. C., 401, &c. vey a correct idea of their real effect. It might be argued, also, that those who deal with directors ought to be entitled to rely on the nature of the business of the company, no less than in dealing with a partner they can rely on the nature of the business of the firm; and that, if this were so, companies would be more careful in choosing their directors, to the benefit alike of themselves and of the public. But a person who is not obliged to go near the fire has not much right to complain of burnt fingers. If, under the present law, hardship is occasionally inflicted on third parties, there would, it is conceived, be greater hardship in holding shareholders in a company, whose constitution expressly restricts the authority of its directors, bound by bad bargains made by those directors in defiance of the restrictions imposed on them. Nor is it to be inferred, that by the escape of the company, such third parties have no remedy at all. The principle that persons professing to act with authority on behalf of others impliedly warrant their authority, and if it turns out that they have no such authority, are liable in damages to parties thereby damnified, is clearly established.* This liability arises, not on the contract, but on such warranty, and if the persons liable are not solvent, those dealing with them must, of course, bear the loss. From this personal liability for unauthorized acts, directors, like other agents, may be absolved by a ratification by their principal-the company. Two classes of cases must be here distinguished. If the act be not only beyond the powers of the directors, but beyond the powers, or (as it would usually be more accurately put) outside the objects, of the company, also, any supposed ratification by the company is unavailing. That a so called ratification by any body of an act which that body has no power to perform, must be a nullity, scarcely needs comment.t But if the act done, though beyond the See, e.g., the recent case of Williamson v. Lawson, L.R. 6, Q.B. 276. † A confirmation doth not strengthen a void estate, for confirmation may make a voidable or defeasible estate good, Lat it cannot work upon an estate that is void at law. Co. Litt. 269 b. powers of the directors, is yet within the powers of the company, it is competent for the company to ratify that act in the same manner in which they could have performed it. The difficulties in these cases arise partly in determining the the nature of the act in question; partly in determining the completeness and validity of the alleged ratification. Another mode in which directors may render themselves personally liable for large sums of money is by the careless execution of promissory notes, or similar instruments, on behalf of their company. The rule is, that a person signing a contract in his own name, without qualification, is primâ facie to be deemed to be contracting personally, and to prevent his liability attaching, the document must shew that he did not intend to bind himself as principal.* No doubt it is most important that an instrument should shew unequivocally who are the real parties to it, but there are instances in which this rule may possibly be thought to have been carried to a somewhat extreme length. As to the liability of directors, both at Law and in Equity, for fraudulent misrepresentations made by them in that character, there is no more doubt than in the case of other people. The nature of this liability at law is thus expressed in Gerhard v. Bates,† by Lord Campbell. "If A fraudulently makes a misrepresentation which is false, and which he knows to be false, to B, meaning that B shall act upon it, and B, believing it to be true, does act upon it, and thereby suffers a damage, B may maintain an action on the case against A for the deceit." Nor is there any doubt as to the concurrent jurisdiction of Courts of Equity on a bill for indemnity by the party damaged. The law would, indeed, be short-armed if it failed to reach such a case as that put by Lord Campbell. Unfortunately other cases are less simple. The whole subject is in practice entangled with difficulties as to what amounts to fraudulent *Notes to Thomson v. Davenport, 2 Smith, L.C. p. 344, 6th Edition. Lindus v.Melrose, 3 H. & N. 177. Price v. Taylor 5 H. & N. 540. +2 Ell. and Bl. 476, 17 Jur. 1997. misrepresentation, as to the intent of the party making the misrepresentation, as to its materiality, and as to whether the other party was in fact induced to act on the credit of it. Moreover, an element of confusion has been introduced through the attempts made in several of the cases to obtain relief under circumstances which afforded no real ground for imputing deceit.* These questions it is impossible within the present limits to enter into, but a few words may be said on one important point, namely: Whether a person who makes or is party to an untrue representation, which he does not know to be untrue, is to be held liable thereon. It was decided in Chandelor v. Lopus,t (the Bezoar stone case), that no action would lie unless it be shewn that the maker of the untrue representation knows it to be so; and this doctrine has been repeatedly affirmed. In a late case in Equity, for example, ViceChancellor Wood laid it down that in order to make a director personally liable for a false representation you must fix him with a guilty knowledge—" with what is technically called the scienter upon an action for deceit." On the other hand, in the case of Evans v. Edmons,|| Justice Maule observed, "I conceive that if a man, having no knowledge whatever on the subject, takes upon himself to represent a certain state of facts to exist, he does so at his peril; and if he does so, either with a view to secure some benefit to himself or to deceive a third person, he is, in law, guilty of a fraud." The high authority of Lord Cairns goes further: "I apprehend it," he said, in delivering his opinion in Reese River Mining Company v. Smith,§ "to be the rule of law that if persons take upon themselves to make assertions as to which they are ignorant, whether they are true or un *See, e.g., Stewart v. Austin, 3 Eq. 299. Ship v. Croskill, 10 Eq. 73. Henderson v. Lacon, 5 Eq. 249; and see Attwood v. Small, 6 Cl. and || 13 C.B. 777. See also Taylor v. Ashton, 11 M. and W. 401. $ L.R. 4 H.L. 64. The same view was expressed by the L. J. J., in the well known case of Rawlings v. Wickham, 3 De Gex and Jones 304. |