Case Study: Ruben and Anr v. Great Fingall Consolidated and Ors
Citation: (1906) AC 439
Court: House of Lords
Date of Judgement: July 19, 1906
Bench: Lord Loreburn, Lord Atkinson, Lord Robertson, Lord James, Lord Davcy, Lord Macnaghten
Facts
- Rowe, serving as secretary of the defendant company, sought a loan of £20,000 from the plaintiffs, who were stockbrokers, to purchase 5000 shares in the defendant company. The plaintiffs arranged for a firm of bankers to provide the loan upon the condition that the shares would be transferred to the plaintiffs’ names.
- Rowe, however, forged a transfer in the name of Storey as the transferor.
- This transfer was executed by the bankers as transferees, and the plaintiffs subsequently handed it to Rowe in exchange for a certificate, which falsely indicated that the bankers were the registered proprietors of the 5000 shares.
- The certificate bore the purported signatures of two directors, but Rowe had forged these names. Furthermore, Rowe fraudulently affixed the company’s seal and counter-signed the certificate as secretary, solely for his own benefit and purposes.
- Subsequently, the bankers provided the £20,000 loan. Upon discovery of the fraud, the plaintiffs were compelled to reimburse the bank the £20,000, leading them to bring legal action against the defendant company.
- They argued that the company was liable for Rowe’s fraudulent actions. The lawsuit sought damages for the defendant company’s refusal to register the plaintiffs as the owners of the shares.
Decision of the Court of Appeal
The court of appeal held that, in the absence of any evidence that the company over held out the secretary as having authority in this behalf to do anything more than the mere ministerial act of delivering share certificates, when duly made, to the owners of shares, the company were not estopped by the forged certificate from disputing the claim of the appellants, or responsible to them for the wrongful action of their secretary.
Key legal issues discussed
- Whether the company is liable for the fraudulent actions of its secretary?
NO
“The forged certificate is a pure nullity. It is quite true that persons dealing with limited liability companies are not bound to enquire into their indoor management and will not be affected by irregularities of which they have no notice. But this doctrine which is well established, applies to irregularities, which otherwise might affect a genuine transaction. It cannot apply to Forgery.”[1] Lord Loreburn held that the doctrine of indoor management can be applied only if there is an irregularity within the company. This doctrine, however, cannot be applied in a case of fraud and Forgery and the company shall not be held liable for the forgery or fraud committed by the secretary or a member of the company. In the case of Limpus v. London General Omnibus Co.[2], it was held that a company cannot be held liable for a fraud committed by its officer for meeting his own private ends and personal benefit.
- Whether the deliverance of the certificate by Rowe imported a representation or a warranty that the certificate was genuine?
NO
Rowe had not, nor was held out as having, authority to make any such representation or to give any such warranty. And certainly, no such authority arises from the simple fact that he held the office of secretary and was a proper person to deliver certificates. Lord Loreburn stated that the defendant company shall not be estopped from disputing the genuineness of this certificate. He also stated that from beginning to end the company itself and its officers, with the exception of the secretary, had nothing to do either with the preparation or issue of the document. Lord Macnaughten also stated that the secretary of the company, functioning as a mere employee, may indeed be responsible for distributing certificates issued by the company in the regular course of business. However, he holds no authority to guarantee the authenticity or legality of a document that does not represent the company’s official deed. In the case of Shaw v. Port Philip Gold Mining Co.[3], it was held that unless it has been specified that a secretary’s presence shall be taken as guarantee of the genuineness of the certificate it shall not be assumed.
- Can a company be held liable for forged share certificates?
NO
“Every statement in the document is a lie. The only thing real about it is the signature of the secretary of the company, who was the sole author and perpetrator of the fraud. No one would suggest that this fraudulent certificate could itself give rise to any right or bind or affect the company in any way. It is not the company’s deed,and there is nothing to prevent the company from saying so. Then how can the company be bound or affected by it? The directors have never said or done anything to represent or lead to the belief that this thing was the company’s deed. Without such a representation there can be no estoppel.”[4] Lord Macnaghten also stated that the mere fact the fraudulent certificate was concocted in the company’s office and was uttered and sent forth by its author from the place of origin cannot give it an efficacy which it does not intrinsically possess. In the case of Whitechurch v. Cavanagh[5], it was held that a company cannot be held responsible for forged certificates.
- Can the company be held responsible for not guarding its official seal?
NO
In the case of Bank of Ireland v Trustees of Evans’ Charities[6], the court held that a company cannot be held responsible for not locking up its seal and guarding it as a dangerous beast and it is not the culpable carelessness on the part of directors to commit the care of the seal to their secretary or any other officials.
Judgement
Lord James of Hereford stated that a company cannot protect itself against the frauds of the secretary. Even though transferees are not required to take the trouble to inquire of directors whose signatures appear on certificates whether those signatures are genuine or not, but at any rate there is that power if they choose to exercise it. The order of the court of appeal was affirmed and the appeal was dismissed with costs. Lord Robertson and Lord Atkinson also concurred with the judgment.[7]
[1] Lord Loreburn H.L. (E.) 1906 P.443
[2] (1862) 1 H. & C. 526.
[3] 13 Q.B.D. 103.
[4] Lord Macnaghten H.L. (E.) 1906 P.444
[5] [1902] A.C. 117.
[6] 5 H.L.C. 389
[7] Lord’s Journal, July 19, 1906