No. 11. June 22, 1876. The Phosphate Sewage Company appealed to the House of Lords against the interlocutors allowing a proof and the interlocutor on the merits. with interest at five per cent from 31st May 1871 to the date of the sequestration, amounting altogether to £70,529; and the affidavit on which this claim is made sets out that these sums are due and owing by the bankrupts under the circumstances set forth at length in a bill of complaint in Chancery, filed on the 19th April 1873, between the Phosphate Sewage Company and a variety of other persons therein named, and they further depone in common form that no part of this money has been paid or compensated to them in any way, and that they hold no security over the bankrupts' estate. This sum of £65,000 is said to be the price paid under a certain contract of sale in which the Messrs Lawson stood in the position of vendors and the directors of the company in the position of vendees, and the claim is made upon the footing that the sale is reducible and may be set aside upon the ground of fraud. Now, to deal satisfactorily with the question which has thus been raised it is necessary to attend to the history of the proceedings upon which this sale arose. It would appear that in the year 1868 a person of the name of Hartmontwhose name figures in the history of this case in a not very creditable way—had obtained a concession from the San Domingo Government of the phosphates and other similar substances in the island of Alto Vela; and the Messrs Lawson, who were naturally very much interested in all substances that could be used as manure, and who had at the time a great many speculations of their own of that description, came in contact with Mr Hartmont, and agreed with him to work those substances in the island of Alto Vela, and ship them to this country. The agreement which was made between those parties was on 1st December 1868, and the existing concession in favour of Hartmont was dated in the month of May preceding. But there was a new concession obtained in the following year, and it is not disputed that that concession fell under the agreement between Hartmont and the Messrs Lawson. The result was that Messrs Lawson worked the island of Alto Vela during the whole of the year 1870 and a part of the year 1871. They expended, undoubtedly, a very considerable amount of money upon it, and the returns do not seem to have been in proportion to the expenditure. In short, they were not making money by it, and they became desirous in consequence to dispose of their interest in the island, and to obtain in that way repayment of the large expenditure which they had made. It appears quite evidently from some of the letters, and also from the parole evidence, that at this time the Messrs Lawson were in difficulties. It does not appear that they were insolvent, but they were certainly in want of money, and therefore they found that the large expenditure which they had made on this Alto Vela undertaking was a very great inconvenience. I see that so early as 17th October 1870 Mr Graham Lawson had suggested the formation of a joint stock company to take up this concern, which he thought a very good concern, and one likely, by application of sufficient capital, to prove very profitable and advantageous. That is the first suggestion of a company being formed for that purpose, and I am bound to say that in that letter of 17th October, written by Mr Henry Graham Lawson, I do not see the suggestion of anything improper or fraudulent-the object being to get up a company for the purpose of taking over this undertaking upon fair and equitable terms. Mr Hartmont, however, had a very considerable interest and influence in this matter, because he was the person to whom the concession had originally been made by the San Domingo Government, and he still retained, under his agreement with Messrs Lawson, a considerable interest in the affair. And it becomes apparent, as we trace the history of those proceedings, that in the course of 1871 Mr Hartmont, either alone or with some of his other friends who are mentioned, conceived the project of getting this Alto Vela concern and the proposed company very much into his own hands; and I am very far from saying that, in the proceedings which followed, Mr Hartmont and some of his friends did not commit a very clear and gross fraud upon the public. But it rather appears to me that if it had not been for the ultimate object which Mr Hartmont had in view, and which he achieved LORD CHANCELLOR.-My Lords, the circumstances attending the litigation in No. 11. this case are undoubtedly somewhat peculiar. June 22, 1876. with great success-viz., bringing this company out with the requisite number Phosphate Sewage Co. v. of shares having been subscribed to entitle him to go into the market, and, by Molleson. misrepresentation, obtain from the Stock Exchange a settling-day and quotations, and then getting up the value of the shares in the market by fraudulent representations and deceit, and then selling out at a high price-if these things had not followed upon the history I am now tracing, I do not very well see there would have been any fraud upon the public at all; because merely to convert this Alto Vela undertaking into a joint stock company, got up in good faith and in regular form, would have been certainly nothing wrong in itself. The course of Mr Hartmont's proceedings may be seen very well from some letters which passed in the months of March and April 1871, in which he contrived to buy off Messrs Lawson, and certainly bought them off for no very large amount considering the great expenditure they had made upon Alto Vela. It comes to this, that he pays them £10,000 in cash and £2300 in acceptances, and stipulates that they are to have in addition 500 shares in the company which is to be formed, representing £5000, in all £17,300; and for that amount he acquires the whole right and interest of Messrs Lawson in the concession. Subsequently, however, Messrs Lawson being much in want of money, the £5000 worth of shares which they were to have is also converted into cash, Mr Hartmont first of all advancing £3000 and then an additional £2000, and Messrs Lawson undertaking to hold the 500 shares, when they come to be assigned to them, for behoof of Mr Hartmont. After this, the sale takes place which is said to be fraudulent, and the deeds which pass between the parties are, in the first place, a deed dated 20th April 1871, in which Mr Hartmont and Mr Begbie assign the concession to Messrs Lawson, and then a deed of 28th April 1871, by which Messrs Lawson sell and assign to Engelbach and Keir, the persons who were promoting the company; and then afterwards, when the company is formed, there is a regular deed of transfer by the Lawsons to the company. Now, it is said that there is fraud in the way in which this transaction was carried through, because, in the first place, the subject of the conveyance had really no existence-it had been lost or forfeited before it was made the subject of conveyance. That appears to me to be entirely a misunderstanding of the position of affairs at the time this conveyance was made. No doubt in the concession the parties, the concessionaries, undertook to ship 10,000 tons of guano and other similar substances from Alto Vela in the course of every year, beginning on 1st January 1870, and the San Domingo Government stipulated that if that obligation was not performed they should have the option of declaring the concession void, and making it void. During the year 1870 there certainly were not 10,000 tons shipped, and therefore it may be assumed that at the end of that year the San Domingo Government had the option of declaring the concession to be void, and so putting an end altogether to the rights of the concessionaries. But they did not do so. On the contrary, they allowed the Lawsons to go on, after 1st January 1871, shipping material from this island of Alto Vela; and then, after the company was formed, and when the concession had been transferred to them, they also allowed them to go on shipping for a very considerable period. The amount shipped by the company was, I think, 5000 tons; and all that goes on without any attempt upon the part of the San Domingo Government to exercise their right of declaring the concession to be void, and without there being any remonstrance upon their part as to the small shipments which had been made, until somewhere about the month of October 1872. It appears to me, therefore, that at the date of the contract of sale in May 1871 this concession had certainly not been lost. I think it is extremely doubtful, to say the least of it, whether, after the San Domingo Government had allowed the concessionaries to go on shipping after 1st January 1871, and taken their royalties upon the cargoes shipped, they were entitled still to come forward and say-" Because of the deficiencies of shipments in the year 1870 we will now put an end to this f No. 11. The firm of Lawson and Son carried on business in Edinburgh and in London. They were sequestrated or became bankrupt in the beginning of the year 1873, and June 22, 1876. Phosphate Sewage Co. v. Molleson. concession." If it were necessary to go into that subject at all I should say most undoubtedly that they were not entitled to do so-that they had lost their opportunity by allowing the shipments to go on and taking royalties upon these shipments. Of course, if at the end of 1871 there was again a default in the amount of shipments they might again have the right or option of putting an end to the concession; but they could not, I think, after May 1871, when this sale took place, proceed upon the deficiencies of the year 1870 as a ground for annulling the concession. But even supposing that were not so clear in point of law as I think it is, there does not appear to have been any desire on the part of the San Domingo Government to exercise the right they had. On the contrary, from everything we see, they were very anxious to go on with the contract they had made with these English traders; and the communications which passed between the secretary of the Phosphate Sewage Company and the representative of the San Domingo Government shew that the San Domingo Government was very anxious that they should go on, and go on of course on the footing that for the future they should comply with the obligation in the contract of shipping the full amount of 10,000 tons a-year. So that the fraud said to have been committed in this transfer and sale, by selling a thing that had really no value in respect that it had been already forfeited, I think falls entirely to the ground. But still further, it must be observed that even if there had been more apparent doubt respecting the continuance or endurance of this concession, that was a matter which was made fully known by the vendors to the vendees. It is obvious, on the face of the deed and other writings, as well as from the parole evidence, that the whole parties who were concerned in this matter were perfectly aware of the real state of the facts. It is said that a fraud was committed upon the company. I confess I find it exceedingly difficult to understand that statement. When the first deed was made between the Messrs Lawson, and Engelbach and Keir, who were getting up this company, there was no company to deceive; and after the company was formed, the directors, who were the only parties who could have been deceived in the transaction-for they were of course the parties who made the purchase and received the title from the Messrs Lawson-were not deceived, because they also, as it appears, were fully aware of the precise state of the facts. Therefore, there appears to me, in the first place, to have been nothing to conceal; and in the second place, that which was said to have been concealed was in point of fact not concealed but fully disclosed. But then it is said, that a fraud was practised by making it appear that the Messrs Lawson were the vendors in this transaction, and that Mr Hartmont was kept out of sight, his name not being disclosed as having any interest in the transaction. And the reason for doing that, it is said, was to impress people's minds with a sense of the good faith and straightforwardness of the transaction, by shewing that the sellers in the transaction were so respectable a firm as the Messrs Lawson. The Messrs Lawson, so far as I can see, had no object in parading their names, or in lending their names to any fraud. They had made their bargain with Mr Hartmont; they were bought off by the payment of £17,000, and really had no further interest in the matter. But I think it is not difficult to see why Messrs Lawson appear upon the face of the conveyance as the sellers of this concession. Although Mr Hartmont had been the original concessionary, the Messrs Lawson had in point of fact worked the whole concern during the year 1870, and were known to the San Domingo Government as the persons who were working the Alto Vela product; and the San Domingo Government would have been very loath, I should think, to recognise any one who had not obtained a title from Messrs Lawson. Therefore it was, I presume-for I can see no other good reason for it-that three deeds were executed at the time, instead of one deed directly, as has been suggested might have been done, by Mr Hartmont to the purchaser. Mr Hartmont, or rather Hartmont and Begbie, assigned in the first place to Messrs Lawson, to enable them to give a title to the company, and I think, without No. 11. the trustee of the sequestrated estate was chosen in the usual manner in Scotland. The Phosphate Sewage Company, who are the appellants at your Lordships' bar, that circuity which has been described, it would not have been very easy to have made a perfectly satisfactory and good title in the person of the company Molleson. or its directors. Therefore I cannot say I see any fraud in using the names of the Lawsons in this transaction. It is further said that in the prospectus of the company, which was issued upon 10th May, after the company had been registered, there is a false statement introduced, to the effect that the Messrs Lawson had expended £39,000 upon the island of Alto Vela. "In connection with the island of Alto Vela" is the expression; and it certainly turns out, from the evidence of the trustee, that they had expended at least £39,000 in connection with the island of Alto Vela, so that there was in point of fact no mis-statement there at all— no false allegation or suggestion. It is not said in the prospectus that the value of that £39,000 would be found upon the island. That would be a very different statement indeed. The statement is made only for the purpose of shewing that the Messrs Lawson had had so much confidence in the undertaking in which they were engaged that they had expended that large sum of money upon it. But even if there had been any exaggeration or misstatement in regard to the amount expended as stated in the prospectus, I do not see that the Messrs Lawson should be made answerable for that, or that they were parties to the preparing or issuing of this prospectus. But in truth the whole fraud really occurs after the time when the sale was made. The sale itself was the sale of a subject which had a real existence, and was of value,— whether over-estimated at £65,000 we have no occasion to consider. It is not said that £65,000 was too much for it if it was a real transaction; but that it was a really existing subject, and a subject of value, and was sold for the price specified is quite clear upon the face of these documents. And up to this point I confess I do not see any indication or symptom of fraud on the part of Messrs Lawson. It is very difficult to understand why a respectable firm of that kind should have lent themselves to a proposed fraud. I do not see what they were to gain by it; and I do not very much see, on the other hand, what Mr Hartmont, who is at the bottom of the fraud which was committed, had to gain by implicating the Lawsons in that fraud. And, therefore, unless there were clear proof that the Messrs Lawsons really were implicated in the fraud at the date when this sale was made, I do not think we could possibly sustain this claim, which depends entirely for its soundness upon the proof of fraud in connection with the contract. But, no doubt, after the sale was completed, and after the company was brought into existence, the price was paid of £65,000; and instead of being paid in cash, it was paid entirely in what are called "paid-up shares" of the company. This is made clear by the evidence of Mr Ogle. No doubt he says he received cash; but upon cross-examination it comes out quite clearly that by receiving cash he meant there were cross-entries made in the book which were intended to represent cash, but what he actually got delivered to him were paid-up shares of the company to the amount of £65,000, and these he divided amongst the parties concerned-Mr Hartmont, and Messrs Engelbach and Keir, who were the promoters of the company, and Messrs Lawson to the extent of the £5000 worth of shares which they were to take as part of their payment from Mr Hartmont, but which, as I said before, was afterwards converted into a payment to them in cash. Again, I do not know that there is anything illegal in persons who sell a valuable commodity to a company that has just been formed taking payment for that commodity in paid-up shares of the company. The illegality and the fraud consisted, I think, entirely in the use which was made of those paid-up shares, and in the manner in which Mr Hartmont and his friends went about the sale of those shares. In the first place, it was by fraudulent representation they got the shares of this company into the market at all,-by imposing upon the authorities of the Stock Exchange, and obtaining a settling-day and quotations. It is alleged very decidedly in the record here that the Messrs Lawson were participant in that Phosphate No. 11. conceived that they had a right to make a claim against Messrs Lawson and Son or their estate in bankruptcy, on the ground that they had a right as against June 22, 1876. Phosphate fraud. Then the holders of those shares took means to raise their value in the Sewage Co. v. Molleson. market to an entirely fictitious amount by misrepresentation and by fictitious sale; and again, it is alleged on the record very strongly that the Messrs. Lawson, and particularly Mr Henry Graham Lawson, who is specified by name as being engaged in this transaction, were largely implicated in this fraudulent sale, and had made large profits thereby. Now, there is not one single word of evidence from beginning to end to connect any of the Messrs Lawson either with the imposition practised upon the Stock Exchange or with the subsequent fraudulent transactions in the stock market. The evidence upon that point is an entire blank, and the Messrs Lawson themselves, who were examined, declared that they never held a share for their own behoof, and never sold a share of the stock. In these circumstances I confess I think the appellants have entirely failed to make out their case against Messrs Lawson. What case they may have against other parties, or in any other form, or in any other Court, it is not for me to say; but in order to success as claimants in this sequestration upon the estates of Messrs Lawson it was indispensable that they should shew that the £65,000 which they claimed was a debt owing by Messrs Lawson to them because it was the price which they had been paid under a fraudulent contract of sale,— a contract of sale which they had been induced to enter into by the fraud of the Messrs Lawson. But there are difficulties in the case, if it were at all necessary to enter into them. I confess I do not very well see upon what ground it is the appellants' company think that that £65,000 is to be paid in cash upon the annulling of this sale. That £65,000 in cash never was paid by the company. What they actually delivered as the price of the concession of Alto Vela was 6500 shares of the company,-paid-up shares, no doubt; but were these shares ever worth £65,000 at any time? Were they worth £65,000 at the time of the sale, or were they ever really of that value? That the shares were nominally of that value at one time in the market, and of much higher value, is no doubt true. But that was brought about by the fraud of parties with whom the Messrs Lawson have nothing to do,-I mean by proceedings with which the Messrs Lawson have nothing to do; and therefore it would be a very great difficulty and obstacle in the way of these appellants, even if they had succeeded otherwise in the foundation of their case, to shew how this debt, for it is claimed as a debt, of £65,000, can possibly be owing. Again, if the sale is to be annulled, even on the ground of fraud, there must be, I apprehend, a restitutio in integrum, and if there is to be a restitutio in integrum on one side, there must be equally so on the other. Now, is this company in a condition to retransfer the concession of Alto Vela to the Messrs Lawson or to anybody else representing the vendors in that transaction? They certainly are not, because it is abundantly clear that by their own proceedings and transactions with the San Domingo Government they have now finally lost this concession. But really these subordinate considerations I do not dwell upon, because I think the true ground of judgment here is that the appellants have entirely failed to bring home to the Messrs Lawson that fraud of which they complain, and which, they say, induced the company to enter into this contract. I think it is very much to be regretted that we have not had the advantage of a judgment of the Lord Ordinary upon this question. It is a case of very considerable importance, and although I confess I do not entertain any doubt about the conclusion to which I think we should arrive, it has required a very considerable amount of consideration. LORD DEAS.—I so entirely concur in the observations of your Lordship that it is not necessary for me to add almost anything. The leading ground of this claim is fraud upon the part of Messrs Lawson, and the character in which they are said to have committed that fraud is that of vendors of the concession of the island of Alto Vela, the party or parties upon whom the fraud is said to have |