Tomlinson v Liquidators of Scottish Amalgamated Silks Limited

A company director’s indemnity against expenses incurred by reason of an act done in the discharge of duty does not cover the cost of defending allegations that the director committed acts which he did not commit and which, if committed, would have breached his duty. An acquittal does not convert the alleged misconduct into an act performed in the discharge of duty.

Where expenses fall outside the contractual indemnity on that basis, the common law of principal and agent does not provide a wider right to reimbursement merely because the accusation concerned the company’s affairs.

A director and chairman of a company was prosecuted for issuing a fraudulent prospectus and fraudulently misapplying company money. He was acquitted, with verdicts of not proven on the first count and not guilty on the second. Related civil proceedings brought by the liquidators also failed.

The director claimed more than £11,000 from the company in voluntary liquidation for his criminal defence expenses. The liquidators rejected the claim, and the Inner House affirmed that decision. Following the director’s death, his executor pursued the appeal to the House of Lords.

The claim rested on article 160 of the company’s articles of association and, alternatively, the common law of principal and agent. The central issue was whether defence expenses arising from allegations of conduct which would have breached the director’s duties were incurred by reason of an act done in the discharge of those duties.

1. Appeal dismissed with costs. Lord Tomlin held that article 160 did not entitle the director’s executor to recover the criminal defence expenses from the company’s assets.
2. Article 160 indemnified a director against costs, losses and expenses incurred by reason of a contract entered into, or an act or deed done, as director in the discharge of his duties. The relevant expenses arose from allegations that the director had issued a prospectus fraudulently and had fraudulently misapplied company money. Those alleged acts were not proved, and, had they occurred, they would have breached rather than discharged his duties.
3. The fact that the allegations concerned activities associated with the company did not bring the expenses within the indemnity. The relevant question was whether they arose by reason of an act actually done by the director in the discharge of duty. Expenses caused by an accusation that he performed different and unauthorised acts did not satisfy that requirement.
4. Lord Tomlin distinguished The “James Seddon”. There, a shipmaster’s prosecution followed immediately from discipline which he had administered in performing his duty, and defending him also benefited the owners by avoiding the disruption caused by his incarceration. In the present case, the charges were brought after considerable delay by the Lord Advocate in the interests of public justice and concerned alleged conduct contrary to duty.
5. Lord Tomlin explained the Court of Appeal decision in Famatina Development Corporation, Limited as concerning liability arising directly from an agent’s performance of the task assigned to him. The officer had made a bona fide report sought by the board, and the Court of Appeal regarded his conduct as performed pursuant to his agency. That reasoning did not assist a director prosecuted for alleged acts which he neither committed nor had a duty to perform.
6. The common law claim also failed. Once the expenses fell outside article 160 because they did not arise from an act performed in the discharge of duty, no principle of agency supplied a wider right to indemnity on the facts.
7. Lord Tomlin declined to decide whether the claim was independently affected by the company having entered liquidation before the expenses were incurred.

1. House of Lords: The executor’s appeal was dismissed with costs, and the liquidators’ rejection of the claim was upheld.
2. Inner House: The director appealed by note against the liquidators’ rejection of his claim. The liquidators’ decision was affirmed.
3. Liquidators: The claim for reimbursement of criminal defence expenses was rejected.