BURLAND V. EARLE (1902) AC 83

 BURLAND V. EARLE (1902) AC 83

 

FACTS

• The appellants and respondents are alike in a joint stock company called the British American Bank Note Company. The company was incorporated on 16 June 1866 in Canada.
• The objects for which the company was formed were “to engrave and print banknotes, debentures, bonds, postage and bill stamps, and bills of exchange, and to carry on all other branches incidental thereto.”
• The company was formed by the union of two groups. One represented by the appellant, George Burland and the other one by the respondent, Earle.
• The company’s business was successful. As a result, it paid dividends exceeding 100%. Also, the company accumulated undivided profits in the amount of $ 264,167.
• In 1897, the respondents initiated an action. They sought a declaration that the accumulated surplus or reserve fund was either ultra vires or fraudulent, claiming immediate division and distribution amongst the shareholders.

 

ISSUE

• Whether the undivided portion is retained to credit of profit and loss or carried to credit of a reserve?
• Whether the majority of the shareholders have a right to retain the balance of profit and loss available for dividends instead of distributing the same as dividends, and as a consequence of such retention to invest such balance in shares and bonds of joint stock companies and other investments foreign to the business of the company?

 

HELD
The Privy Council did not find the existence of fraud in the transaction in which the director had sold the property purchased by him to the company. The other directors were fully aware of the transaction and the price was fair. The Privy Council made it clear that this was a matter where the court would not interfere.

• The court reasoned that the directors acted within their powers as provided by the company’s Act of Incorporation and bylaws.
• They were given broad authority to administer the company’s affairs and had the discretion to make decisions about the company’s profits, including setting aside a reserve fund.
• The judgement took into account the directors’ adherence to the company’s governing documents and any relevant statutory provisions, ensuring their actions were not contrary to law or the company’s interest.
• On the consideration of all the circumstances, their Lordships thought that justice will be met by (1) discharging all orders as to costs made in the courts below; (2) directing the plaintiffs to pay to the defendants two-thirds of their costs of the action up to and including the trial; (3) directing the defendants to pay to the plaintiffs two-thirds of the costs of the plaintiffs’ appeal to the Court of Appeal, which rightly succeeded as to Burland, but ought to have failed as to J. H. Burland, and the plaintiffs to pay to the defendants two-thirds of the costs of the defendants’ appeal to the Court of Appeal, which ought to have succeeded except as to the directions for Burland accounting.

 

COMMENTARY
“Where a director is instructed to purchase some property for the company, and he purchases the same for himself and then sells it to the company at a profit, he is clearly liable to account for the profit so made. As he was under an obligation to acquire the property for the company, the same belonged in equity to the company from the moment he purchased it and he could not have made a profit on its resale. Supposing now that he is not under any such direction to purchase for the company, but purchases some property on his own account which is subsequently sold to the company at a profit. Is the company entitled to this profit also? This was precisely the question in Burland v Earle which the Judicial Committee answered in the negative. It is one thing if a director sells a property to the company which in equity as well as at law is his own. It would be quite another thing if the director had originally acquired the property which he sold to the company under circumstances which made it in equity the property of the company…Their Lordships of the Judicial Committee of the Privy Council set aside this decision and observed, there is no evidence whatever of any commission or mandate to Burland to purchase on behalf of the company, or that he was in any sense a trustee for the company for the purchased property. It may be that he had an intention in his own mind to resell it to the company, but it was an intention which he was at liberty to carry out or abandon at his own will.”-