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1937 Supreme(SC) 55
Privy Council At Ontario
Macmillan, Russell of Killowen , Justice Lords Blanesburgh, JJ.
E.B.M. Company Ltd. -Appellant
Versus
Dominion Bank -Resopndent
Appeal No. 134 of 1936
Decided On : 11-06-1937
Jones and Co., Lawrence, Redden, Blake , W.N. Tilley, G.G. Slack, Marcel Marcus, Stafford Cripps
A company is a separate legal entity from its shareholders. Directors owe a fiduciary duty to the company and cannot use company assets to secure personal debts; such transactions are unenforceable unless formally ratified by shareholders in a general meeting, regardless of any perceived benefit to the company.
Headnote:(A) Dominion Companies Act - Sections 32 and 103 - Separate legal entity of a company - Distinction between the assets and liabilities of an incorporated company and those of its shareholders - A company is a separate legal entity and cannot be regarded as a sham or an agent of its shareholders merely because a few individuals hold the majority of the shares. (Paras 15-20)
(B) Directors' Fiduciary Duties - Use of company assets for personal benefit - Directors are agents with fiduciary duties to promote the interests of the corporation - A director is precluded from entering into engagements where they have a personal interest conflicting with the interests of the company - Any transaction where directors misuse their powers to apply company property for their own advantage is unenforceable against the company, regardless of whether the company derived any benefit from the transaction. (Paras 31-33)
(C) Ratification of Unauthorized Acts - Requirement for approval by shareholders in a general meeting - A transaction involving a conflict of interest for directors cannot be ratified by the mere agreement of some shareholders without a formal resolution of the company in a general meeting, especially where not all beneficial interests in the shares are represented. (Paras 28-30)
Facts of the case:
A company deposited bonds with a bank to secure a potential government tax claim. Three directors and majority shareholders of the company had personal debts to the same bank. To secure these personal debts, the directors executed a document using the company's seal, assigning the company's interest in the bonds and their proceeds to the bank. The bank subsequently applied the surplus funds from the bonds to satisfy the personal debts of the directors. The company sought the return of these funds.
Findings of Court:
The transaction was an improper use of the directors' powers for their own personal benefit. The bank was not entitled to rely on the document as a binding charge on the company's assets because the directors had acted in breach of their fiduciary duties and the transaction had not been properly ratified by the shareholders.
Issues: Whether a company could be treated as an agent or sham for its majority shareholders and whether directors could validly pledge company assets to secure their own personal debts without formal shareholder ratification.
Ratio Decidendi: The court held that the separate legal personality of a company must be maintained. Directors owe a fiduciary duty to the company and cannot use its assets for personal gain. Such acts are outside the scope of their authority and are unenforceable unless ratified by the company in a general meeting. The court will not inquire into the fairness or the potential benefit to the company if the directors have a conflicting personal interest.
Result: Appeal allowed.
Legal Category Hierarchy
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company law
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corporate personality
- separate legal entity
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directors' duties
- fiduciary duties
- conflict of interest
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corporate governance
- shareholder ratification
- ultra vires acts
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corporate personality
Lord Russell of Killowen:-
In this case E. B. M. Company Limited (a company incorporated by Dominion Letters Patent dated 8th May 1922, and granted under the Dominion Companies Act ) appeals from a judgment and order of the Court of Appeal for Ontario which affirmed a judgment or order of Kelly, J. in favour of the respondents, the Dominion Bank. The relevant facts which led up to the litigation in which this appeal arises must first be stated; the appellant Company being referred to as the old Company, and the respondent Bank being referred to as the Bank. The old Company (whose name was originally "Carling Export Brewing and Malting Company Limited", the change of name being effected by Supplementary Letters Patent dated 24th October 1930), was formed for the purpose and with the object of carrying on the business of brewers and maltsters in all its various branches, and for other purposes and objects enumerated in the Letters Patent. It also possessed all the powers conferred by S. 32, Dominion Companies Act . The old Company carried on its business as brewers until June 1927. Its share-holders at all relevant times were five in number, viz., Charles Burns, Marco Leon, his wife Freda Leon, Harry Low and his wife Norah Low. All five were also the directors of the Company. The ladies each held one share. The rest of the issued capital (over $726,00000) belonged to the three men in equal shares. The old Company had banking accounts with the Bank at the latter's London (Ontario) and Windsor (Ontario) branches.
By an agreement dated 14th June 1927, the old Company sold its undertaking and assets to a Company called Carling Breweries Limited, which may be conveniently referred to as the new Company. At that time a claim was pending against the old Company by the Dominion Government in respect of certain taxes under the Special War Revenue Act 1915 . The new Company was protected against liability in respect of this claim by the old Company depositing $400,000 Dominion of Canada Victory Loan Bonds with the Bank to meet any judgment which might be obtained against the old Company with respect to the taxes. The bonds were lodged with the Bank, and the terms upon which they held them are shown in a letter of 26th October 1927, from the old Company to the Bank's head office in Toronto, which runs thus :
Messrs. Roadhouse and McTague have handed you today $400,000 of Canada Victory Loan 5½ per cent. Bonds due 1st November 1934.
These are to be held by you to meet any final judgment that may be obtained by the Dominion Government against Carling Export Brewing and Malting Company Limited, in respect to action now pending with reference to sales and gallonage tax on export sales.
In view of the fact that this Company and Messrs. Low, Leon and Burns have agreed to indemnify Carling Breweriers Limited, in respect to such arrears of gallonage and sales tax, we would ask you to write a letter to Carling Breweries Limited, advising them that you hold the sum of §400,000 to meet any judgment that may be obtained against this Company with respect to such taxes.
It is understood that you are to hold said bonds until any action by the Government with respect to sales and gallonage tax on export is finally disposed of by judicial decision or settlement.
The coupons on the bonds are to be clipped by you and cheque for interest payments is to be remitted to this Company from time to time during the period the bonds are held by you.
As from the date of the sale to the new Company, the old Company ceased to carry on any business; its only assets consisted of shares in the new Company, cash produced by sales of such shares, and its interest in the Victory Loan Bonds. In May 1928, the Bank, being duly authorized in that behalf, sold $300,000 worth of the said bonds, and credited the proceeds ($313,250'69) to a special savings account in the name of the old Company. The Bank continued to hold the remaining $100,000 worth of the said bonds. In addition to thei
