Earl of Halsbury, Viscount Mersey, Lord Kinnear, Lord Atkinson, Lord Shaw of

Dunfermline, Lord Parker of Waddington, Lord Sumner, and Lord Parmoor.

LORD PARKER OF WADDINGTON.

My Lords, the judgment I am about to read has been prepared with the assistance and collaboration of Lord Sumner, who authorizes me to state that he agrees with it.

My Lords, in my opinion this appeal ought to be allowed.

When the action was instituted all the directors of the plaintiff company were Germans resident in Germany. In other words, they were the King's enemies, and as such incapable of exercising any of the powers vested in them as directors of a company incorporated in the United Kingdom. They were incapable, therefore, of authorizing the institution of this action. The contention that the secretary of the company could authorize such institution is untenable. The resolution by which he was appointed secretary would confer on him such powers only as were incident to the performance of his secretarial duties. It is true that the directors of the company might by a proper resolution in that behalf have conferred on him a power to authorize the institution of proceedings in the company's name, but they did not do so. Their conduct in holding him out as a person having this power, if they in fact so held him out, may in particular cases have operated to estop the company from denying the authority of a solicitor whom he retained, but it could not confer the power in question.

It follows that this action was instituted without authority from the company, and in my opinion the Court having notice of the fact should have refused relief. It is true that a question whether the plaintiff's solicitor has or has not been validly retained is in general brought before the Court by motion to which the solicitor is made a party. But when the Court in the course of an action becomes aware that the plaintiff is incapable of giving any retainer at all, it ought not to allow the action to proceed. It clearly would not do so in the case of an infant plaintiff, and I can see no difference in principle between the case of an infant and the case of a company which has no directors or other officers capable of giving instructions for the institution of legal proceedings. This is more especially so when, by reason of all the shareholders (with one exception) being the King's enemies, no agent or officer capable of giving such instructions can be validly appointed. It was suggested that the secretary, being the only shareholder who is not an enemy, could in some way or other call and hold a meeting of the company at which he might appoint himself to be a director or agent of the company with such powers as he might think fit. He has not attempted to do so, and after a careful examination of the articles I think it reasonably clear that any such attempt would fail.

Further, it is quite clear that the articles of association of the company do not contemplate or provide for the continuance of the company's trading without any directors at all, nor is a secretary of a company an official who virtute officii can manage all its affairs, with or without the help of servants, in the absence of a regular directorate.

My Lords, under these circumstances, it is, strictly speaking, unnecessary to consider whether a company incorporated in the United Kingdom can under any and what circumstances be an enemy or assume an enemy character. The question has, however, been so elaborately argued both here and in the Court of Appeal, and is of such general importance, that it would not be right to ignore it.

The principle upon which the judgment under appeal proceeds is that trading with an incorporated company cannot be trading with an enemy where the company is registered in England under the Companies Acts and carries on its business here. Such a company it calls an "English company," and obviously likens to a natural-born Englishman, and accordingly holds that payment to it of a debt which is due to it, and of money which is its own, cannot be trading with the enemy, be its corporators who they may. The view is that an English company's enemy officers vacate their office on becoming enemies and so affect it no longer, and that its enemy shareholders, being neither its agents nor its principals, never in law affect it at all.

My Lords, much of the reasoning by which this principle is supported is quite indisputable. No one can question that a corporation is a legal person distinct from its corporators; that the relation of a shareholder to a company, which is limited by shares, is not in itself the relation of principal and agent or the reverse; that the assets of the company belong to it and the acts of its servants and agents are its acts, while its shareholders, as such, have no property in the assets and no personal responsibility for those acts. The law on the subject is clearly laid down in a passage in Lord Halsbury's judgment in Salomon v. Salomon & Co. "I am simply here," he says, "dealing with the provisions of the statute, and it seems to me to be essential to the artificial creation that the law should recognise only that artificial existence - quite apart from the motives or conduct of individual corporators. ... Short of such proof" -- i.e., proof in appropriate proceedings that the company had no real legal existence -- "it seems to me impossible to dispute that once the company is legally incorporated it must be treated like any other independent person with its rights and liabilities appropriate to itself, and that the motives of those who took part in the formation of the company are absolutely irrelevant in discussing what those rights and liabilities are." I do not think, however, that it is a necessary corollary of this reasoning to say that the character of its corporators must be irrelevant to the character of the company; and this is crucial, for the rule against trading with the enemy depends upon enemy character.

A natural person, though an English-born subject of His Majesty, may bear an enemy character and be under liability and disability as such by adhering to His Majesty's enemies. If he gives them active aid, he is a traitor; but he may fall far short of that and still be invested with enemy character. If he has what is known in prize law as a commercial domicil among the King's enemies, his merchandise is good prize at sea, just as if it belonged to a subject of the enemy Power. Not only actively, but passively, he may bring himself under the same disability. Voluntary residence among the enemy, however passive or pacific he may be, identifies an English subject with His Majesty's foes. I do not think it necessary to cite authority for these well-known propositions, nor do I doubt that, if they had seemed material to the Court of Appeal, they would have been accepted.

How are such rules to be applied to an artificial person, incorporated by forms of law? As far as active adherence to the enemy goes, there can be no difference, except such as arises from the fact that a company's acts are those of its servants and agents acting within the scope of their authority. An illustration of the application of such rules to a company (as it happens a company of neutral incorporation, which is an a fortiori case) is to be found in Netherlands South African Ry. Co. v. Fisher.

In the case of an artificial person what is the analogue to voluntary residence among the King's enemies? Its impersonality can hardly put it in a better position than a natural person and lead to its being unaffected by anything equivalent to residence. It is only by a figure of speech that a company can be said to have a nationality or residence at all. If the place of its incorporation under municipal law fixes its residence, then its residence cannot be changed, which is almost a contradiction in terms, and in the case of a company residence must correspond to the birthplace and country of natural allegiance in the case of a living person, and not to residence or commercial domicil. Nevertheless, enemy character depends on these last. It would seem, therefore, logically to follow that, in transferring the application of the rule against trading with the enemy from natural to artificial persons, something more than the mere place or country of registration or incorporation must be looked at.

My Lords, I think that the analogy is to be found in control, an idea which, if not very familiar in law, is of capital importance and is very well understood in commerce and finance. The acts of a company's organs, its directors, managers, secretary, and so forth, functioning within the scope of their authority, are the company's acts and may invest it definitively with enemy character. It seems to me that similarly the character of those who can make and unmake those officers, dictate their conduct mediately or immediately, prescribe their duties and call them to account, may also be material in a question of the enemy character of the company. If not definite and conclusive, it must at least be prima facie relevant, as raising a presumption that those who are purporting to act in the name of the company are, in fact, under the control of those whom it is their interest to satisfy. Certainly I have found no authority to the contrary. Such a view reconciles the positions of natural and artificial persons in this regard, and the opposite view leads to the paradoxical result that the King's enemies, who chance during war to constitute the entire body of corporators in a company registered in England, thereby pass out of the range of legal vision, and, instead, the corporation, which in itself is incapable of loyalty, or enmity, or residence, or of anything but bare existence in contemplation of law and registration under some system of law, takes their place for almost the most important of all purposes, that of being classed among the King's friends or among his foes in time of war.

What is involved in the decision of the Court of Appeal is that, for all purposes to which the character and not merely the rights and powers of an artificial person are material, the personalities of the natural persons, who are its corporators, are to be ignored. An impassable line is drawn between the one person and the others. When the law is concerned with the artificial person, it is to know nothing of the natural persons who constitute and control it. In questions of property and capacity, of acts done and rights acquired or liabilities assumed thereby, this may be always true. Certainly it is so for the most part. But the character in which property is held, and the character in which the capacity to act is enjoyed and acts are done, are not in pari materia. The latter character is a quality of the company itself, and conditions its capacities and its acts. It is not a mere part of its energies or acquisitions, and if that character must be derivable not from the circumstances of its incorporation which arises once for all, but from qualities of enmity and amity, which are dependent on the chances of peace or war and are attributable only to human beings, I know not from what human beings that character should be derived, in cases where the active conduct of the company's officers has not already decided the matter, if resort is not to be had to the predominant character of its shareholders and corporators.

So far as I can find, this precise question has been asked heretofore once and once only, namely, in argument in the case of Bank of United States v. Deveaux. The judgment of Marshall C.J. did not answer it, though he decided the case in favour of the party whose counsel suggested this point as part of a wider argument. Accordingly all that can be said is that the suggestion cannot have shocked that great jurist, and his actual decision proceeds upon the assumption that for certain purposes a Court must look behind the artificial persona -- the corporation - and take account of and be guided by the personalities of the natural persons, the corporators.

In the Court of Appeal the Lord Chief Justice expressed the opinion that the judgment of Marshall C.J. had not been approved in later cases before the Supreme Court of the United States. I have examined the cases in question (Louisville, Cincinnati and Charleston Rail-road Co. v. Letson and St. Louis and San Francisco Ry. Co. v. James), and have come to the conclusion that, so far as is material to the question in hand, they do not bear out this criticism. This is how the matter stands. Under the Constitution of the United States jurisdiction is given to Federal circuit Courts to decide controversies between "citizens" of different States. In the case in question Marshall C.J. held that an artificial person could not be a citizen for this purpose, but, not to deny justice to a corporation, he took cognizance of the corporators, and, finding them all to be citizens of the State which had incorporated the plaintiff bank, he admitted jurisdiction, treated the bank like a citizen of that State, and entertained the suit. It was afterwards contended, and for some time with success, that this decision applied only when all the corporators were citizens of that State, and that it required a refusal of jurisdiction when some of them were citizens of another State. It was in this stage that he expressed the doubts referred to in the judgment below. Long after his time the matter was at last see at rest in the case of the St. Louis Railway, when the Court surveyed all the different phases of the controversy. What is remarkable is the way in which this was done. The Federal Courts did not ignore the existence of the corporators and fix their attention on the place where the corporation was chartered, or the State under whose laws it was registered. They continued to fix their attention on the citizen corporators, but they conclusively and incontestably presumed that they were all citizens of the State of the incorporation. Such bearing, therefore, as these cases have on the present question is in favour of the appellants, for it is plain that great judges, trained in the principles of the English common law, have not found it contrary to principle to look, at least for some purposes, behind the corporation and consider the quality of its members. A somewhat similar observation arises upon Janson v. Driefontein Consolidated Mines. The question fought throughout in that case was whether it was against public policy for English underwriters to indemnify a company, registered in the Transvaal, against losses inflicted upon it just before the outbreak of war by the Government of the South African Republic in order to strengthen its resources in the impending conflict with this country. The case was tried before the conclusion of peace, but on the common footing that it should be taken that the war was over. The mere suspension of an enemy's right of suit during war never was relied on at all, and the plea that payment on the policy would be an act of trading with the enemy was dropped. The only case made was that payment would relieve enemies of the Crown from losses which the public policy of this country, applicable to war and warlike conditions, required that they should bear themselves. It was the underwriters who insisted on the enemy character of the company, for the company itself denied it. As I read the judgments of the noble Lords, none purported to decide that the company must be an enemy corporation for all purposes by reason of its registration in the Transvaal. They held that even if that assumption were made in the underwriters' favour, yet their appeal must fail. The Lord Chancellor expressly stated that the question might be debateable, as it is now actually being debated, and other noble Lords concurred. Lord Lindley, whose observations alone are expressed at length, could not, I think, have meant to intimate thereby that, in such a case as the present, he would decide for the respondents. What really is significant in that case is this: few, if any, of the shareholders in the company were in fact subjects of the South African Republic. The vast majority were subjects of various European States. The company's argument was, "How can it be contrary to British public policy that individual Frenchmen and Germans or Italians should get the practical benefit of this policy?" In the Court of Appeal Sir A. L. Smith M.R. expressly accepted this argument. To him at least there was no impenetrable screen, interposed by registration, between the company and its shareholders. Beyond this I think for present purposes the case does not go. Further, the cases of the English Roman Catholic colleges in France, cited to your Lordships from 2 Knapp, pp. 23 and 51, do not seem to me to be in point. They turn on the meaning to be attributed to the expression "British subjects" in a particular treaty. If anything, the reliance placed on the fact of the French Government's control over the colleges and on the existing state of English legislation towards Roman Catholic ecclesiastics would militate against the respondents' argument. As an illustration of the view which has been taken (under the Income Tax Acts it is true) of the control which one trading company exercises over another company through the ownership of a controlling interest in the latter's shares, I would refer to St. Louis Breweries v. Apthorpe and Apthorpe v. Peter Schoenhofen Brewing Co. In the latter case, in deciding that an English company, which held a controlling interest in the shares of a United States company, carried on business for income tax purposes in the United States by virtue of that holding and of its control over the business of the latter company, Collins L.J. expressly said that he was not deterred from so deciding by the decision of your Lordships' House in the case of Salomon v. Salomon & Co., which was so much relied on in the Court below. I think this analogy not without importance. In the case of The Roumanian it is to be remembered that the Prize Court was dealing with a matter in which the enemy character of goods is by settled rule determined by ownership, and when that case was affirmed in the Privy Council no decision on this point was invited or given.

My Lords, the truth is that considerations which govern civil liability and rights of property in time of peace differ radically from those which govern enemy character in time of war. Joint-stock enterprise and English legislation and decisions about it have developed mainly since this country was last engaged in a great European war and have taken little, if any, account of warlike conditions. The ideal of joint-stock enterprise, that with limited liability the more unlimited the trading the better, is an ideal of profound peace. The rule against trading with the enemy is a belligerent's weapon of self-protection. I think that it has to be applied to modern circumstances as we find them, and not limited to the applications of long ago, with as little desire to cut it down on the one hand as to extend it on the other beyond what those circumstances require. Though it has been said by high authority (see M'Connell v. Hector and Esposito v. Bowden to aim at curtailing the commercial resources of the enemy, it has, according to other and older authorities, the wider object of preventing unregulated intercourse with the enemy altogether. Through the Royal licence, which validates such intercourse and such trade, they are brought under necessary control. Without such control they are forbidden. To my mind the rule would be deprived of its substantial justification, and be reduced to a barren canon, if it were held, in circumstances such as these, that it had no application by reason of the mere fact that the company is registered in London.

My Lords, having regard to the foregoing considerations, I think the law on the subject may be summarized in the following propositions:--

(1.) A company incorporated in the United Kingdom is a legal entity, a creation of law with the status and capacity which the law confers. It is not a natural person with mind or conscience. To use the language of Buckley L.J., "it can be neither loyal nor disloyal. It can be neither friend nor enemy."

(2.) Such a company can only act through agents properly authorized, and so long as it is carrying on business in this country through agents so authorized and residing in this or a friendly country it is, prima facie to be regarded as a friend, and all His Majesty's lieges may deal with it as such.

(3.) Such a company may, however, assume an enemy character. This will be the case if its agents or the persons in de facto control of its affairs, whether authorized or not, are resident in an enemy country, or, wherever resident, are adhering to the enemy or taking instructions from or acting under the control of enemies. A person knowingly dealing with the company in such a case is trading with the enemy.

(4.) The character of individual shareholders cannot of itself affect the character of the company. This is admittedly so in times of peace, during which every shareholder is at liberty to exercise and enjoy such rights as are by law incident to his status as shareholder. It would be anomalous if it were not so also in a time of war, during which all such rights and privileges are in abeyance. The enemy character of individual shareholders and their conduct may, however, be very material on the question whether the company's, agents, or the persons in de facto control of its affairs, are in fact adhering to, taking instructions from, or acting under the control of enemies. This materiality will vary with the number of shareholders who are enemies and the value of their holdings. The fact, if it be the fact, that after eliminating the enemy shareholders, the number of shareholders remaining is insufficient for the purpose of holding meetings of the company or appointing directors or other officers may well raise a presumption in this respect. For example, in the present case, even if the secretary had been fully authorized to manage the affairs of the company and to institute legal proceedings on its behalf, the fact that he held one share only out of 25,000 shares, and was the only shareholder who was not an enemy, might well throw on the company the onus of proving that he was not acting under the control of, taking his instructions from, or adhering to the King's enemies in such manner as to impose an enemy character on the company itself. It is an a fortiori case when the secretary is without authority and necessarily depends for the validity of all he does on the subsequent ratification of enemy shareholders. The circumstances of the present case were, therefore, such as to require close investigation and preclude the propriety of giving leave to sign judgment under Order XIV., r. 1.

(5.) In a similar way a company registered in the United Kingdom, but carrying on business in a neutral country through agents properly authorized and resident here or in the neutral country, is prima facie to be regarded as a friend, but may, through its agents or persons in de facto control of its affairs, assume an enemy character.

(6.) A company registered in the United Kingdom but carrying on business in an enemy country is to be regarded as an enemy.

My Lords, the foregoing propositions are not only consistent with the authorities cited in argument, and in particular with what was said in this House in Janson v. Driefontein Consolidated Mines, but they have, I think, the advantage of affording convenient and intelligible guidance to the public on questions of trading with the enemy. It would be a misfortune if the law were such that during war every one proposing to deal with a British company had to examine the character of its shareholders and decide whether the number of the enemy shareholders coupled with the value of their holdings were such as to impose an enemy character on the company itself. It would be still more unfortunate if this question were a question for the jury in each particular case. No one could maintain that a company had assumed an enemy character merely because it had a few enemy shareholders. It might possibly be contended that it assumed an enemy character when its enemy shareholders amounted to (say) one-half, three-fifths, or five-eighths of the whole, but how if the one-half, three-fifths, or five-eighths held only one-sixth, one-fifth, or one-fourth of the shares? The Legislature might, but no Court could possibly, lay down a hard and fast rule, and, if no such rule were laid down, how could any one proposing to deal with the company ascertain whether he was or was not proposing to deal with the enemy?

My Lords, I desire to add this. It was suggested in argument that acts otherwise lawful might be rendered unlawful by the fact that they might tend to the enrichment of the enemy when the war was over. I entirely dissent from this view. I see no reason why a company should not trade merely because enemy shareholders may after the war become entitled to their proper share of the profits of such trading. I see no reason why the trustee of an English business with enemy cestuis que trust should not during the war continue to carry on the business, although after the war the profits may go to persons who are now enemies, or why moneys belonging to an enemy but in the hands of a trustee in this country should not be paid into Court and invested in Government stock or other securities for the benefit of the persons entitled after the war. The contention appears to me to extend the principle on which trading with the enemy is forbidden far beyond what reason can approve or the law can warrant. In early days the King's prerogative probably extended to seizing enemy property on land as well as on sea. As to property on land, this prerogative has long fallen into disuse. Subject to any legislation to the contrary or anything to the contrary contained in the treaty of peace when peace comes, enemy property in this country will be restored to its owners after the war just as property in enemy countries belonging to His Majesty's subjects will or ought to be restored to them after the war. In the meantime it would be lamentable if the trade of this country were fettered, businesses shut down, or money allowed to remain idle in order to prevent any possible benefit accruing thereby to enemies after peace. The prohibition against doing anything for the benefit of an enemy contemplates his benefit during the war and not the possible advantage he may gain when peace comes.

I need only briefly refer to the argument submitted on the effect of the recent statutes against trading with the enemy and the Royal Proclamations connected with them. I have carefully considered them, and do not think that they limit or exclude common law rules or principles or, in the case of corporations, restrict the trade which is unlawful to trading with such corporations as are incorporated under the laws of an enemy country. Equally little can the Proclamations be read as licences to do anything that they do not in terms prohibit. No suggestion has been made that the position of the respondent company is that of an alien enemy commorant within the realm sub protectione regis, or that the Royal licence has specifically been extended to trading with it.

My Lords, I feel some little difficulty as to the precise form which your Lordships' order ought to take. The action is altogether irregular and should be struck out, all orders made therein being of course discharged. But there is no one before the House who can be made liable for costs or who can be ordered to replace in Court the moneys paid out to the secretary. There can therefore be no order as to costs, and the appellants must be left to pursue any remedy they may have against the secretary personally in respect of the money which was erroneously paid to him.