But are never entitled to indemnity where they travel out of the line of business. the time. Thus, where directors borrowed money on their own security to preserve mines belonging to a mining company from rapid deterioration and destruction, and afterwards repaid the same, they were found entitled to reimbursement from the company, though they had no power to borrow money on the credit of the company, and though it was admitted that the company would not have been bound to repay the money in a question with the public creditor (a). And, for the same reason, where, by the deed of settlement, it was provided that if additional funds were required, they should be raised by increasing the capital, or by borrowing on mortgage of the company's real property, and the directors notwithstanding borrowed the necessary sums from a bank, as required from time to time, they were found entitled to charge these advances against the company, although this rendered each shareholder liable to a considerable degree beyond his subscribed share (b). In Baker's case, 1 Dr. and Sm. 55, V.-C. Kindersley held, that though the director of a company was not entitled to stand as creditor against the company on a debenture issued to him by the company, because the contract wanted confirmation, still, that if he could show that the money had been duly applied in carrying on the business of the company, he should be entitled to recover it as an ordinary debt. The same view was taken in two subsequent cases (c). In these and similar cases the principle is, that directors being necessarily invested with greater discretionary powers than ordinary partners, are not to be subjected in personal loss when acting bona fide and to the best of their ability for the common interest. But, on the other hand, directors are not entitled to indemnity from the shareholders where they plainly contravene express conditions of the contract of association, or travel out of the scope of the company's line of business. Hence, where it formed a condition of the contract that no more than a certain fixed sum should be expended, and the directors thought fit to expend a much larger it was held that they had no claim of relief against the share(b) Ex parte Bignold, 22 Beav. sum, 143. (c) Troup's case, 29 Beav. 358; Hoare's case, 30 Beav. 225. holders quoad the excess (a). And where directors charged with the winding up of a company chose to expend considerable sums in supporting a public bill in Parliament for the better winding up of companies in general, they were found to have no claim against the company for such expenses, as the purpose was plainly beyond the sphere of their agency (b). Again, where the managing committee of a benefit society thought proper to purchase land, and borrow money to pay for it, it was found that they had no claim for reimbursement against the society, as purchasing land formed no part of its purposes (c). When partners act plainly beyond the limits of their agency, Homologation. or even in contravention of an express provision, they will nevertheless be entitled to contribution, if their proceedings have afterwards been approved of or homologated by the company; and ratification may be presumed by the company taking the benefit of such proceedings, or even by their silence (d). Hence, when the company do not intend to adopt the unauthorized act, they should at once object (e). The same rules apply as between directors and their companies (ƒ). Illegal acts done by a partner will entitle him to no indemnity Illegal acts. against the firm; for it cannot be presumed that such acts were either within the intended scope of the undertaking, or that they were approved of by the firm (g). If the purposes for which the company was formed were illegal, the case is all the stronger; for as the concern was ab initio contrary to law, the law will give no aid to work out its transactions or their consequences (h). (a) Gillan v. Morrison, 1 De G. and S. 421; Worcester Corn Exch. Co.'s case, 3 De G. M. and G. 180. (b) Cropper's case, 1 De G. M. and G 147. (c) Kent Benefit Building Soc., 1 Dr. and Sm. 417. See also Selwyn v. Harrison, 2 J. and H. 334. (d) See Story on Agency, c. vi.; ex parte Chippendale, 4 De G. Mac. and G. 19; ex parte Bignold, 22 Beav. 143 and 165. (e) Cragg v. Ford, 1 Y. and C. C. C. 280. (f) See M'Alister v. Alexander, 1843, 5 D. 580; Gillan v. Morrison, 1 (g) See Finlayson v. Braidbar (h) Gibson v. Stewart, 1835, 14 S. 166, 1 Rob. 260; Gibson v. Stewart, 1828, 6 S. 733, aff. 1 Rob. 260; Fraser v. Hill, 1852, 14 D. 335. See Gordon v. Howden, 1843, 5 D. 698; revd. 1845, 12 Cl. and Fin. 237, 4 Bell's App. 254. Loans. Debts. When the partnership is not illegal, but where one of the partners is subjected in the penalties or consequences of an illegal act committed by one or more of his copartners without his privity, he will be entitled to indemnity against the wrong-doers to the full extent of his loss (a). When, as before, the partnership is not contrary to law, but an unlawful act has been done by all the partners in the knowledge of its illegality, and the loss consequent thereon happens to fall on one of their number, it is the general opinion that he has no claim of contribution against his fellows (b). The opposite view, though it has some semblance of authority (c), would seem objectionable on the mere ground of public policy. Loans made by a partner to the firm are, if properly constituted, in the same position as loans made by third parties; for the firm is a quasi person, and may assume the character of debtor to its own members (d). Loans made by directors to the company, or advances made by them on its behalf, are in a somewhat different position. Directors are special officers partaking of the nature of trustees, and it is not for the interest of the concern that they should stand to it in the relation of creditors. If the loan is one which, if it had not been made by the directors, must have been obtained from strangers, it will entitle them to reimbursement (e); yet, as the transaction is open to suspicion, authority should always be obtained from the shareholders before it is entered into (ƒ). When a partner is compelled to pay a debt constituted against the firm, he is always entitled to the benefit of contribution, unless the claim has been fixed against the firm, in consequence of his own improper conduct, as e.g. exceeding his agency, or having been guilty of fraud or culpable negligence (g). But a partner who (a) Campbell v. Campbell, 1834, 12 S. 573, 7 Cl. and Fin. 166, 1 Rob. App. 1; Pearson v. Skelton, 1 M. and W. 504. (b) A. G. v. Wilson, Cr. and Ph. 1, per Lord Cottenham. (c) Baynard v. Woolley, 20 Beav. 583; ex parte Longworth, 1 Johns 465. (d) Keith v. Penn, 1840, 2 D. 633; Sturrock v. Thoms, 1851, 13 D. 762. (e) Ex parte Sedgwick, 2 E. Jur. N. S. 949; ex parte Bignold, 22 Beav. 143. (f) Bluck v. Malalue, 5 E. Jur. N. S. 1018; compare Murray's Execu tors, 5 De G. Mac. and G. 750; and Teversham, 3 De G. and S. 296. (g) Gordon v. Howden, 1849, 12 D. 253; Prole v. Masterman, 21 Bear. 61; M'Owen v. Hunter, 1 Dr. and Wal. 347; Robinson's Executors, 6 De G. Mac. and G. 572; Evans v. Yeatherd, 2 Bing. 133; Richardson, etc., v. Gavin, etc., 1853, 15 D. 434. pays a debt claimed, but not due, has no right to indemnity against the firm (a); and where a partner departed from a debt judicially found due to the firm, he was found liable to indemnify his copartners (b). When losses arise to the firm, in consequence of the conduct of Fault of one one partner rather than of the others, the contribution will still be partner. equal, unless that which caused the loss is attributable to culpable negligence, or something more than mere error in judgment (c). The same rules apply to directors (d). It is a principle of the law of partnership, that a partner is not Services. entitled to any remuneration for services rendered to the firm, or for loss of time incurred by him in carrying on the common business (e); and a managing partner is in the same position (f). No claim of indemnity, therefore, lies against the company on this score. The exceptions are where, after dissolution, the business of the firm is carried on by one of the partners for the benefit of the others or their representatives (g), and where an express agreement has been made to give remuneration (h). Directors of companies are in the same position, and are entitled to no claim for their services without express agreement, under any pretence whatever (i). But partners as well as directors are always entitled to charge the company with expenses bona fide laid out or incurred in the conduct of its business (k). When by agreement the directors are to receive payment, they are entitled to their fees even if the concern proves a failure (1). (a) Re Webb, 2 B. Moore 500; M-Ilreath v. Margetson, 4 Doug. 278. See Cavan v. Mackie, 1832, 10 S. 550. (b) Brand v. Kennedy, 1710, Robert. App. 8. (c) Ex parte Letts and Steer, 26 L. J. Ch. 455; Cragg v. Ford, 1 Y. and C. C. C. 280; Lingard v. Bromley, 1 V. and B. 114. (d) Evans v. Coventry, per V.-C. Kindersley, 2 E. Jur. N. S. 557. (e) M Whirter v. Guthrie, 1822, Hume 760, and 1 S. 295; Beath v. Campbell, as revd. 1826, 2 W. and S. 25; Hunter v. Cochrane's Trs., 1831, 9 S. 477, and 5 W. and S. 639. (f) Hutchison v. Smith, 5 Irish Eq. (g) Brown v. De Tastet, Jac. 284; (h) Berry v. Lamb, 1832, 10 S. 792. (k) Geddes v. Hamilton, 1801, aff. 1805, 4 Pat. App. 657; Duncan v. Union Canal Co., supra. (1) Ex parte Johnson, 27 L. J. Ch. 803. CHAPTER VIII. Nature of. General principles of. Does not operate ipso jure. COMPENSATION. ACCORDING to the law of Scotland, where two parties are mutually debtors and creditors, their claims, if equal, extinguish each other; and if unequal, leave only the balance due. This is called compensation, or set-off. It is founded on, and is indeed nothing else than, a special application of the equitable principle which operates in retention, though here as well as in England it has been to a certain extent regulated by statute (a). Before considering the application of this doctrine between partnerships, their members, and the public debtor or creditor, it is desirable to obtain a distinct conception of the rules by which, in Scotland, its practical operation is regulated. In order to found compensation, it is necessary,-1. That the parties be debtor and creditor each in his own right. Thus an agent cannot set off a debt due to his principal against a debt due by himself as an individual. 2. That the parties be mutually debtors and creditors at the same time; so that it has no place where one has assigned his claim before concourse. 3. That the claims be both liquid and exigible; hence there can be no compensation between a present debt and one that is future, much less contingent. Compensation does not operate ipso jure, but must be pleaded by way of defence; yet, when sustained, it operates retro to the time of concourse (that is, when both claims first co-existed), and stops the currency of interest from that time downwards. Though, properly speaking, there is no room for compensation while one of the debts is not yet constituted, yet when this can be instantly (a) In Scotland by 1592, c. 41; in England by 2 Geo. II. c. 22, and 8 Geo. II. c. 24. |