Elder's Trustee & Executor Co Ltd v Commonwealth Homes & Investment Co Ltd [1941] HCA 31; (1941) 65 CLR 603 (7 November 1941)

Elder's Trustee and Executor Company Limited Plaintiff, Appellant; and Commonwealth Homes and Investment Co Ltd Defendant, Respondent.

This is an appeal against a decision of the Full Court of the Supreme Court of South Australia by which judgment was entered for the defendant in the action. The writ was issued as long ago as 13th July 1934. The plaintiff claimed a declaration that an allotment of 2,040 shares to the plaintiff in the defendant company was not binding upon him, rectification of the register of members by removing his name, and consequential relief. Before the action was brought to a hearing the plaintiff died, but his executors have carried on the proceeding. The parties concurred in the statement of a special case, and the matter was treated as raising only questions of law.

The defendant is a company now in course of being wound up compulsorily. The date of the petition for winding up is 22nd August 1934. On 4th September 1926 the plaintiff applied for 40 shares in the company. His application bore a statement which ensured his right to take up further shares up to 500 before 1st March 1927. Upon his application for the 40 shares he paid in cash the sum of £20, or 10s. a share. These shares were allotted to him. On 4th October 1926 he applied for a further 2,000 shares. At the time of the application for the 2,000 shares he paid a sum of £50, or 6d. a share, and he gave a promissory note for £950, or 9s. 6d. a share. These shares were also allotted to him. The promissory note fell due on 3rd March 1927 and was honoured. The plaintiff made no further payments on account of either the 40 or the 2,000 shares.

Both applications were expressed to be made upon the terms of a prospectus dated 21st September 1925, which was in fact an abridged prospectus. By this prospectus 25,000 shares were offered for subscription, but no minimum number of shares was stated in the prospectus as a condition of allotment. The prospectus stated that 5s. a share should be payable upon application and 5s. on allotment.

The winding up of the company is governed by the Companies Act 1892 of South Australia, now repealed. Sec. 226 of that Act, so far as material, provided that, where an allotment of shares is made in pursuance of any prospectus, the allotment should not be binding upon the applicant unless (a) the minimum number stated in that behalf in the prospectus as a condition of allotment, or, if no minimum number is stated, the whole number of shares offered by the prospectus have been applied for at the time of allotment; (b) the minimum amount stated in that behalf in the prospectus as a condition of allotment, or, if no minimum is so stated, then one-tenth of the amount payable in cash in respect of each share has been paid at the time of allotment.

The section was considered by this Court in Commonwealth Homes and Investment Co. Ltd. v. Smith[1], where the majority of the Court decided that its effect was to make the contract of membership voidable, not void, if the company did not comply with its provisions. At the time when the 40 shares and at the time when the 2,000 shares were allotted to the plaintiff, the full number of 25,000 shares mentioned in the prospectus had not been applied for or allotted.

The promissory note given in respect of the 9s. 6d. a share for the 2,000 shares, until honoured, amounted to conditional payment only, and that is not payment within the meaning of sec. 226: See and compare Mears v. Western Canada Pulp & Paper Co. Ltd.[2] and In re National Motor Mail-Coach Co.; Anstis' and McLean's Claims[3].

Therefore at the time of allotment the amount stated in the prospectus as a condition of allotment had not been paid. Thus in respect of both the 40 and the 2,000 shares, on the ground that the full number of shares required by the section had not been applied for at the time of the allotment to him of the shares for which he applied, the plaintiff was entitled to disaffirm his contract of membership and treat the allotment as not binding upon him. In respect of the 2,000 shares he was entitled to do so on the further ground that the full amount of application and allotment money was not paid, that is, assuming that the section enables a shareholder to rely upon his own failure to pay the required amount of money, and does not refer only to the failure of the company to obtain payment from other shareholders.

The plaintiff did not in fact disaffirm or make any attempt to avoid his membership until he issued the writ in the present action. On the other hand, except for receiving and retaining the share certificates issued to him and paying the promissory note at maturity, and on 1st April 1934 joining an association for the protection of shareholders, he did nothing positive which could be referred only to his character of a member of the company. The Full Court held, however, that his conduct amounted to an election to affirm or at all events to laches and acquiescence precluding him from disaffirming.

In respect of the 40 shares the decision proceeded upon the ground that the note upon his application entitling him to take up a further 500 shares necessarily indicated to him that the full number of shares mentioned in the prospectus had not been and was not to be allotted on that occasion. For it is conceded that the 500 shares which he was entitled to take up and the 2,000 shares which in the result he took up were to form part and did form part of the 25,000 shares mentioned in the prospectus.

The decision in respect of the 2,000 shares proceeded upon the ground that, as the plaintiff did not pay in cash the amount of the application and allotment money, he was aware of facts which rendered the allotment voidable. Needless to say the plaintiff did not know, at all events until about the time of the issue of his writ, of the terms of sec. 226, and he could not have known of the effect of that section. At the time of the allotment of the 2,000 shares he did not know that the whole of the 25,000 shares were not to be allotted, and there is no reason to suppose that he learned that they had not been allotted. In our opinion the plaintiff, in the absence of proof of this knowledge, cannot be regarded as having elected to affirm the allotment of the 2,000 shares or his contract of membership in respect of them, or as being guilty of laches and acquiescence. We do not think that it is enough to say that he was aware of other facts which, on distinct and different grounds, entitled him to disaffirm the allotment. The fact that he knew he had not paid the full amount of the allotment and application money in cash is not, in our opinion, material. If there are two breaches of condition in a lease, a landlord who, knowing of one of them only, does an act unequivocally recognizing the continuance of the lease, is not precluded, on afterwards discovering the other, from re-entering: See per Parker J. in Matthews v. Smallwood[4].

Where there are two independent grounds entitling a party to rescind or disaffirm, we do not think that, because a party having knowledge of the facts giving rise to one of them so conducts himself that he must be taken to have affirmed, he therefore is precluded on discovery of the other from rescinding or disaffirming. We are not dealing with a case where there is an actual decision taken to adopt or affirm the contract of membership by a person who knows that he may if he choose avoid it. The plaintiff did not actually know that an election was vested in him by reason of the fact of his failure to pay the full amount of allotment and application money in cash.

It is unnecessary to discuss the question what, if any, distinctions may exist in cases where the party, having in fact two grounds for rescission, but being ignorant of one and aware of the other, decides to affirm, knowing that he is entitled in point of law to elect. In such a case the question whether, notwithstanding his election to affirm, afterwards on discovering the second ground he may resile from his former election and rescind, may depend on the reasons for his decision and the influence which full knowledge might have had as a reason for deciding differently. It is enough to say that a party who is ignorant of his right to elect, although he knows of facts which would in law afford a ground for rescission, cannot, because he failed to avail himself in due time of the first ground, be precluded from relying on a second ground of rescission, which he was then unaware of but afterwards discovers. Nor in our opinion will he be precluded by laches or acquiescence. His conduct cannot affect his right to avail himself of the newly-discovered ground.

With respect to the 40 shares, however, the position is somewhat different. The plaintiff made no actual election, because he was ignorant that he had a right of rescission. He had reason for knowing the facts which conferred a right of rescission upon him, and over a long period of time he failed to repudiate the shares. It is not shown that he actually grasped the fact that the full number of shares mentioned in the prospectus were not to be allotted, but the terms of the prospectus and the terms of his application considered together and combined with the fact, which he must be taken to have known, that the further shares formed part of the 25,000 shares, provided him with information from which the decisive fact was a clear if not a necessary inference.

The decision of the Full Court in respect of the 40 shares is based upon the view that the plaintiff could not rely upon his ignorance of the existence and effect of sec. 226 as an answer to what otherwise would be the legal consequence of his conduct. The doctrine upon which the Court acted is that, as a general rule, in order that a party may be precluded by his conduct from exercising an election, it is not necessary that he should have knowledge of the existence of his right to avoid the transaction, as well as of the facts upon which that right arises. This accords with the opinion of Jordan C.J. expressed in the course of his judgment in O'Connor v. S. P. Bray Ltd.[5], where the general subject of election is discussed in a very full and informative manner. His Honour said:—"It has been urged that there must also be knowledge of the legal consequences of the facts and of the legal rights involved; but this is not borne out by the authorities, and the contention is, I think, based upon an attempt to import into ordinary cases of election rules which are peculiar to the equitable doctrine of election. This doctrine is referable to the principle that a person is not permitted both to approbate and to reprobate an instrument."

In his book entitled Waiver Distributed among the Departments Election, Estoppel, Contract, Release, at p. 72, the late Mr. J. S. Ewart deals with the subject. He wrote: "The necessity for knowledge as an element in election may be treated under the following headings: 1. Knowledge as to the existence of a right to elect. 2. Knowledge as to the happening of the circumstances which warrant the exercise of the right. 3. Knowledge as to the existence of circumstances which would affect the choice. Subject to certain qualifications, we may say that knowledge of all three kinds is a necessary prerequisite of conclusive election between two estates, but that in the law of contracts, election is irreversible although knowledge of the first and third kinds was absent." But a distinction must be drawn between cases where the party's conduct is unequivocal in its effect and cases where this conduct does not necessarily amount to a waiver but is merely some evidence that he has in fact elected to affirm. Where rights are exercised, either in virtue of an estate or interest in property, or by virtue of a contract, which would not exist unless the estate, interest or contract endured or remained in force, it may well be that the party exercising them loses the right to determine the estate or interest on breach of condition or the contract for breach of some term going to the root of it, unless he is able to show not merely that he was unaware of the existence of his right but of the facts amounting to breach of condition or of contract. But in the present case the plaintiff did not exercise any rights adversely to the company. He did nothing inconsistent with renunciation or disaffirmance. He merely acted as if he were a shareholder and failed to disclaim that character. He so conducted himself that it might be considered a natural inference, if he knew that he had a right of election, that he had resolved to affirm. Further, it is possible that his conduct, if he had had that knowledge, might be regarded as raising an equity against allowing him to rescind at so late a stage. But in the absence of knowledge of his rights we do not think that in the actual circumstances any equity arose from his conduct, and clearly it could not be inferred that he made an actual election.

For these reasons we are unable to agree in the decision of the Full Court. The respondent, however, relied upon a further ground for denying to the appellant a right to rely upon sec. 226. It is said that at the time when the writ was issued the liquidation of the company had virtually commenced and that the case fell within the principle of Tennent v. City of Glasgow Bank[6].

In our opinion the facts do not bring the present case within that decision. It is true that the company never had anything but a shadowy business and was in a state almost of inactivity and that its affairs were hopeless, but that is not enough. Tennent's Case[7] was decided upon peculiar and extreme facts. The bank had shut its doors and a meeting to place the banking company in voluntary liquidation had been summoned and the writ was issued only the day before the meeting. In other words the commencement of the actual legal winding up was only a formality; for all practical purposes the "bank" had gone into liquidation. In the present case the writ was issued some six weeks before the petition for winding up was lodged. The plaintiff was not personally aware of the financial position of the company, though possibly the active members of the association of shareholders which he had joined, and their solicitor, were so aware.

The company held a meeting, presented a balance-sheet, and one of the directors, on the day before the issue of the writ, wrote a circular letter to shareholders announcing what he called "the winning of the battle of reorganization," and the constitution of a new board. The limits of Tennent's Case[8] are always hard to fix. They have been discussed in Re London and Leeds Bank; Ex parte Carling[9] and In re Lucks Ltd.[10]. But the facts of this case fall well outside the application of the principle.

The judgment of the Supreme Court should be discharged and in lieu thereof it should be ordered that the question in the special case should be answered that the now plaintiffs are entitled to an order that the share register of the defendant company be rectified by removing the name of the deceased as holding therein 2,040 shares, and that judgment should be entered in the terms agreed upon by the parties contingently upon the Court being of that opinion.

Appeal allowed. Judgment of the Supreme Court discharged. In lieu thereof order: (a) that the question in the special case be answered that the plaintiffs are entitled to an order that the register of members of the defendant company be rectified by removing therefrom the name of the deceased as holder of 2,040 shares therein, (b) that the register of members of the defendant company be rectified accordingly by removing the name of the deceased therefrom as the holder of 2,040 shares therein, (c) that the defendant company do repay to the plaintiffs the sum of £1,020, being the amount paid by the deceased in respect of such shares together with interest thereon at the rate of £4 per cent per annum as to the sum of £20 from 4th September 1926 and as to the sum of £50 from 5th October 1926 and as to the sum of £950 from 3rd March 1927 up to the date of this order respectively, (d) that there be a stay of execution of the order contained in paragraph c hereof to enable the plaintiffs to prove in the winding up of the defendant for the amount payable under such order and that upon the plaintiffs' proof being admitted such stay be continued, (e) that the parties be at liberty to apply as they may be advised. The appellant to be paid the costs of this appeal and of the action out of the assets of the company.

[1] [1937] HCA 73; (1937) 59 C.L.R. 443.

[2] (1905) 2 Ch. 353.

[3] (1908) 2 Ch. 228.

[4] (1910) 1 Ch. 777, at pp. 786, 787.

[5] (1936) 36 S.R. (N.S.W.) 248, at p. 263.

[6] (1879) 4 App. Cas. 615.

[7] (1897) 4 App. Cas. 615.

[8] (1897) 4 App. Cas. 615.

[9] (1887) 56 L.T. 115.

[10] (1928) V.L.R. 466.

High Court of Australia

Elder's Trustee & Executor Co Ltd v Commonwealth Homes & Investment Co Ltd [1941] HCA 31; (1941) 65 CLR 603 (7 November 1941)

HIGH COURT OF AUSTRALIA