H.L. (Sc.) Tennent v. City of Glasgow Bank. 1879 meeting to be held on the 22d of October with a view to wind up the bank. On the 18th of October a report on the state of the bank's affairs which had been obtained from independent investigators, was sent to all the shareholders, and was published in the newspapers on the 19th of October. This report disclosed, what the directors had known before, that the bank as a corporation was irretrievably insolvent, and could only pay its debts by making large calls. On the 21st of October the appellant raised in the Court of Session an action against the City of Glasgow Bank, and also against Matthew and Bell, concluding for reduction of the transfers, entries in the bank books and stock certificates in his favor as holder of the above stock on the ground of fraud. He reserved right of action for the price paid for the stock. The summons in this action was served on the bank on the same day, the 21st of October, which was one day before the passing of the resolution to wind up voluntarily. On the 22d of October an extraordinary resolution was passed to wind up the bank voluntarily; and liqui- [617 dators were appointed. Subsequently a list of contributories was made up, in which the appellant's name was placed. On the 27th of November the voluntary liquidation was placed under the supervision of the court in terms of the Companies Acts, 1862 and 1867. On the 8th of December the appellant raised a supplementary action of declarator, and damages against the liquidators and the bank for, inter alia, removal of his name from the lists. The liquidators having refused to remove the appellant's name froin the list of contributories, he, on the 13th of December, presented a petition to the Court of Session for rectification of the bank register, the removal of his name. from the list; and to stay proceedings for enforcement of calls. In the action for reduction and in the petition the appellant substantially averred that he was induced to become a partner of the bank and to purchase all the three parcels of stock by the false and fraudulent representations, and the fraudulent concealment made by the City of Glasgow Bank. That at and prior to the time of the respective dates of the transfers and purchases, the bank was in a state of absolute and hopeless insolvency, the debts of the company enormously exceeding its assets; but the bank regularly issued reports or balance-sheets falsely stating that it was in a con 1879 Tennent v. City of Glasgow Bank. H.L. (Sc.) dition of great prosperity, and fraudulently concealed its true condition from the appellant. That the shares transferred by James Matthew and Dugald Bell, though nominally held by them, truly belonged to the bank itself; and it was for the bank that they held them in trust and transferred them to the appellant. Also that it was the practice of the directors, for the purpose of concealing the fact that the bank was a large holder of its own stock to take transfers for behoof of the bank in favor of Matthew and Bell, and that these transfers were expressed to be taken "in trust," but the trust for the bank was not disclosed on the face of the transfers, or of the stock ledger. The appellant further alleged that he had no means of discovering the fraud practised on him by the bank until its stoppage. The liquidators contended that, whatever might have been the appellant's rights had he taken steps to avoid his contract while the City of Glasgow Bank was a going con618] cern, he could not be allowed to do so when he took no steps to avoid the contract till after the known irretrievable insolvency of the bank; the rights of innocent third parties had intervened; and restitutio in integrum was no longer possible. On the 22d of January, 1879, the First Division of the Court of Session, refusing the prayer of the petition, held that the action raised on the 21st of October came too late after the bank had stopped payment and had declared its insolvency ('). On appeal. April 4. Mr. Southgate, Q.C., Mr. Macnaghten, and Mr. Whitehouse, for the appellant, contended that there was no question as to the facts, and it was not disputed that the appellant was induced to purchase the shares by fraud, the only question to decide was simply the time when the action could be successfully brought for rescission of the contract. They maintained that a person induced by the fraud of a company to become a member of that company was entitled to be relieved from the contract of membership, although the company might be in liquidation, provided he had rescinded the contract, and rescinded his shares, on discovering the fraud, and had actually commenced legal proceedings to enforce the rescission of the contract before the commencment of the winding-up. And here the appellant at the earliest moment after the discovery of the fraud practised on him, took action to rescind the contract, and (1) Scot. Law Rep., vol. xvi, p. 238; Court Sess. Cas., 4th Series, vol. vi, p. 554. H.L. (Sc.) Tennent v. City of Glasgow Bank. 1879 this he did before the commencement of the winding-up, which commenced at the date of the resolution. From the passing of the resolution only the right of creditors accrued as against equally innocent shareholders. [They relied on In re Reese River Company, Smith's Case(); they also commented on Oakes v. Turquand ('); In re Smith, Knight & Co., Weston's Case ('); opinion of Lord Justice Brett in Stone v. City and County Bank ('); Webb v. Whiffin ('); Henderson v. Lacon (); Henderson v. Royal British Bank ('), *which did not apply here; [619 In re Whitehouse & Co. (); Addie v. Western Bank of Scotland ('); Re Cleveland Iron Company, Ex parte Stevenson (1); Companies Act, 1862, ss. 18, 38, 129, 130, 131.] Mr. E. E. Kay, Q.C., Mr. Benjamin, Q.C., Mr. Davey, Q.C., and Kinnear, for the respondents, contended that it was undoubtedly the law in England and Scotland that a contract induced by fraud was not void but voidable, and the rights which exist in favor of the defrauded party to avoid the contract might be defeated by (1) his own delay in exercising the right; (2) the intervention of the rights of innocent third parties, as here; and (3) such a change of circumstances as render it impossible to restore matters to their former position: see Clarke v. Dickson ("); Oakes v. Turquand ); Reese River Company v. Smith ("). Oakes v. Turquand did not lay down the rule that the winding-up order, or the presentation of a petition to wind up, was the punctum temporis at which the rights of creditors intervene; on the contrary, in that case Henderson v. Royal British Bank () was expressly adopted, in which Lord Campbell said it would be monstrous if a person became a partner, and having so remained until the stoppage could afterwards repudiate liability; he also said that the rights of creditors became inchoate when the bank stopped payment; and that was the opinion of all the conferring judges of the common law courts. It could not be denied that at least on the 6th of October it was in the power of any creditor to file a petition for judicial winding-up, and prevent that which was now attempted. The circular convening the meeting was an acknowledgment in the words of the 79th () Law Rep., 4 H. L., 64; Law Rep., 2 Ch., 604. (3) Law Rep., 2 H. L., 325. (3) Law Rep., 4 Ch., 20. (4) 3 C. P. D., 282, p. 309; 30 Eng. R., 156. (5) Law Rep., 5 H. L., 711, at p. 734. (5) Law Rep., 5 Eq., 249. (7) 7 E. & B., 356, at p. 364; 26 L. J. (Q.B.), 112. (*) 9 Ch. D., 595, 599; 26 Eng. R., 372. (9) Law Rep., 1 H. L., Sc., 145. (10) 16 W. R., 95. (1) E. B. & E., 148. (12) Law Rep., 4 H. L., 64. (18) 7 E. & B., 356; 26 L. J. (Q.B.), 113. 1879 Tennent v. City of Glasgow Bank. H.L. (Sc.) section of the Companies Act, 1862, that the company was unable to pay its debts. The creditors had not lost their rights because they held their hand on the assurance of the directors. [They cited also Kent v. Freehold Land and Brickmaking Company (); Allin's Case (). 620] *Mr. Southgate, Q.C., in reply. May 20. EARL CAIRNS, L.C.: My Lords, the facts of this case lie in a very narrow compass. The appellant is the holder of £6,000 stock in the bank; £5,000 of this stock he bought in the years 1872 and 1873 from trustees who held it for the bank, and £1,000 was allotted to him by the bank in 1873. After the bank stopped payment, as your Lordships have heard in the other cases, the directors employed accountants to make a report on the affairs of the bank. This report was made on the 18th of October, 1878, and was on that evening sent by post to the shareholders. The appellant received his copy of the report on the 19th of October, and thereupon he discovered, as he alleges, that he had been induced to take the stock in the bank by fraudulent misrepresentations of the directors. The 20th of October was a Sunday, and on the 21st of October he commenced an action in the Court of Session for reduction of his contract as a shareholder with the bank. The resolutions to wind up the company voluntarily were passed on the following day, the 22d of October; and on the 13th of December, the name of the appellant having been put by the liquidators on the list of contributories, he presented a petition to have his name removed, which petition. was refused, and hence the present appeal. My Lords, I ought to assume, and will assume for the present purpose, that whatever difficulties arising from lapse of time and other circumstances might, as between the appellant and the bank, lie in the way of his succeeding in the action of reduction he has instituted, he would have been entitled, had the bank been a going concern, to have succeeded in the action. The question is, can he succeed in rescinding his contract after the bank has stopped payment? The Lord President (') states that the law upon this subject is contained in three propositions. In the first place, a contract induced by fraud is not void, but only voidable at the option of the party defrauded; secondly, this does not mean that the contract is void till ratified, but (1) Law Rep., 3 Ch., 493. (1) Scotch Law Rep., vol. xvi, p. 241; (*) Law Rep., 16 Eq., 449, at pp. 454, Court Sess. Cases, 4th Series, vol. vi, 455; 6 Eng. R., 805. p. 558. Tennent v. City of Glasgow Bank. H.L. (Sc.) 1879 it means that the contract is valid till rescinded; and thirdly, the option to void the contract is barred *where inno- [621 cent third parties have, in reliance on the fraudulent contract, acquired rights which would be defeated by its re scission. Upon the two first of these propositions there cannot, I should think, be any dispute, and none was raised in the argument at your Lordships' bar. Nor was there any dispute as to the principle of the third proposition. The only question was to its precise wording, and the extent and mode of its application. The case of Oakes v. Turquand (') in this House has established that it is too late, after winding-up has commenced, to rescind a contract for shares on the ground of fraud. This, no doubt, is on the grounds stated by the Lord President, that innocent third parties have acquired rights which would be defeated by the rescission. The case of Oakes v. Turquand, however, while it decided negatively that a contract could not be rescinded on the ground of fraud after a winding-up had commenced, did not decide affirmatively the converse proposition, that up to the time of the commencement of a winding-up a contract to take shares could be rescinded upon the ground of fraud. Whether it can or not be so rescinded up to that time must, I think, depend upon the particular circumstances of the case. In an ordinary partnership, not formed on the joint stock principle, it is impossible, as a general rule, for a partner at any time to retire from or repudiate the partnership without satisfying, or remaining bound to satisfy, the liabilities of the partnership. He may have been induced by his copartners by fraud to enter into the partnership, and that may be a ground for relief against them, but it is no ground for getting rid of a liability to creditors. This is the case whether the partnership is a going concern, or whether it has stopped payment or become insolvent. In the case of a joint stock company, however, the shares are in their nature and creation transferable, and transferable without the consent of creditors, and a shareholder, so long as the company is a going concern, can, by transferring his shares, get rid of his liability to creditors, either immediately or after a certain interval. The assumption is that, while the company is a going concern, no creditor has any specific right to retain the individual liability of any particular shareholder. *It is on the same or on a similar principle that, so [622 long as the company is a going concern, a shareholder who |