253

Vol. LXXI.] REPORTS OF PATENT, DESIGN, AND TRADE MARK CASES [N'o. 13.

Fine Industrial Commodities Limited v. Powling,

IN THE HIGH CoURT OF JUSTICE, CHANCERY DIVISION~

Before MR. JUSTICE DANCKWERTS.
9th, 10th, 11th, 12th, 15th, 16th, 17th, ISth and 26th March, 1954.
FINE INDUSTRIAL 'CoMMODITIES LIMITED v. PaWLING.

5 Patent-s-Master land servant-Director trustee for his company for share of patent-

Downloaded from https://academic.oup.com/rpc/article/71/13/253/1589988 by guest on 20 August 2021

Agreement. for payment to director for purchase of shares in company controlling patent
set aside-Relief.
P., the Managing Director of P.I.C., and ,B. applied in August, 1943, for a patent (577,533)
for a process for the extraction of Agar from kelp ; a portion oi the cost of obtaining such
10 patent' being debited to F.I.iC. At this time F.I.C. was proposing to manufacture Agar,
but had not yet started commercial production. In 1948 P. and B. registered a company,
V. Ld., each taking up £100 of shares for cash, and granted to V. Ld. an exclusive licence
under the patent.
Discussions took place as to the grant to F.I.C. of a sub-licence, but in place of this
15 F.II~C. acquired the 200 shares in V. Ld, held by P. and B., which constituted the whole
. paid up capital of V. Ld. After long discussions the price was agreed at £44,000, £12,000
being paid in, cash to B. and the remaining £32,000 (~of which P. was to receive £22,000)
being secured by a debenture. As a term of the sale P. entered into a covenant not to
compete for 5 years with any business of F.I.C.
20 The terms for the acquisition of the shares in V. Ld. were. discussed at a number of
meetings, of directors of F.I.C. at which P. and two other directors were present. By the
Articles of Association of F.I.IC. two directors [ormed a quorum, and P. contended that as
the other two directors were acquainted with. the circumstances under which the patent had
been taken out, the requirements of the Articles and 01 the Companies Act as to contracts
25 between a director and his company had been satisfied.
. Subsequently the Company went into liquidation and the Liquidator brought an action
against P., claiming in effect that P. held his share of the patent (and of all corresponding
foreign patents) as a trustee for F.ll.C., and that the debenture was of no effect in so far
as it covered a payment to P. for his shares in V. Ld.
30 Held (1) That P. had joined in the experiments which led to the making of the invention
the subject matter of the patent in his capacity as Managing Director of F.I.IC., and held
his share of the patent as trustee for F.I.C.
(2) That the agreement for the purchase oi the shares in V. Ld. had proceeded on the
assumption that P. was the beneficial owner of his share in such patent.
3.5 (3) ThatP. had not discharged the burden, lying on a director contracting with his
company, of showing that, the agreement was a fair one, and was entered into by the
company with competent advice and full knowledge of all relevant circumstances.
(4) That consequently the debenture must be declared to be invalid in so far as .it
purported to secure the payment of £22,000 to P.
40 Declarations were granted as to (1) and (4) and P. was further ordered to authorise the
Receiver to pay over to the Liquidator the £22,000 retained for the purpose of- discharging
the debenture.
No. '·13.~ REPOlrrs OF PATENT~ DESIGN, AND TliADE MARK CASES [Vot LXXI.

Fine Industrial CommoditiesLimitedv, ·'Powling.

In the course of his judgment ·Danckwerts, J., referred to the following authorities:
Worthington Pumping Engine Coy. v. Moore (1902) 20 ·R.P.C. 46; British Reinforced
Concrete Coy. Ld. v. Lind ~1917) 34 IR.'P.C. 101 ; Triplex Saiet» Glass Cory. Ld. 'Y. Scoran
[1938] C.D. 211 ; 55 R.P.C. 21 ; Cook v. Deeks [1916] 1 J\r.c. 654; Regal (Hastings) Ld.
v. Gulliver [1948] 1 All E.R. 378; Imperial Mercantile Credit Association: v. Coleman 5
(1873) L.R. 6 Ch. 558.
This action came on for hearing before Danckwerts, J., on 9th March, 1954. The facts,

Downloaded from https://academic.oup.com/rpc/article/71/13/253/1589988 by guest on 20 August 2021

the issues in the case, and the arguments of Counsel upon questions of company law and
the like, appear sufficiently from the' judgment,
Jennings, Q.IC., and C. A. Settle (instructed by Herbert Oppenheimer, Nathan & Vandyk) 10
appeared for the Plaintiffs.
Edwards,Q.!C., and Maurice Berkeley (instructed by Norton, Rose, Greenwell & Coy.)
appeared for the Defendant.
Jennings, Q.C., opened.e--The first question is whether the Defendant held his half-share
of the patent as trustee for the Plaintiff Company or as beneficiary. If he was trustee, then 15
the sale of his share to the Company was a sale: by a trustee of the trust property toa
beneficiary and cannot be sustained. If he was not, he still ought to account for the
purchase price to the Company, as a profit made by reason of his office' as managing
director: .Regal (Hastings) Ld. v, Gulliver [1942] 1 All E:.R. 378 at 382, 387. As to
whether he was a trustee of his share: When an invention is made and patented by a 20
servant, it depends on all the circumstances whether or not he holds it in trust for his
master. But if the' servant is a manager or managing director it is virtually impossible
for him to set up his personal interest against that of his employer, [Counsell referred
to Worthington Pumping Engine Coy. v. Moore (1903) 20 R.P.C. 41 at 45-6.1 The rule there
laid down applies a fortiori Ita. a managing director. [Counsel also referred to: Triplex 25
v. Scorah (1938) 55 R.P.C. 21 ; British Reinforced Concrete t~oy. v. Lind (1917) 34 R.P.C.
272 ; British 'Celanese v. Moncrief] [:1948] !Ch. 564, 65 'R.P.C. 47, 165.]
Evidence was called for the Plaintiffs and the Defendant.
Edwards, Q.C., summed up for the Defendant.e-On the question whether the Defendant
held his share of the patent in trust for the Plaintiff Company: The criterion is whether, 30
at the moment when there was first something sufficiently more than a mere idea in
existence to be capable of being property, the Defendant was trustee : itf he was not, only
by a declaration of trust can he have become a trustee. The' test is whether, at that
moment, in taking part in the experiments which led to the invention, he was acting in
the course of the execution of his office 'as Managing Director of the Plaintiff Company: 35
Regal (Hastings) Ld. v. Gulliver, supra. Since he took part in those experiments on the
invitation of his co-patentee, Byrne, the question is whether in accepting Byrne's invitation
to join tin those experiments die was acting in the course of il1h'e execution 01£ Ihis office, On
the evidence, he was not so acting. If he was not a trustee of hi'S share of the patent, the
sale to the Plaintiff Company was a (proper one. But even tit he, was a trustee, the 40
agreements of 1948, by which the joint venture was put to an end and the patent sold,
operated to discharge him from his fiduciary duty to the Company.
Jennings, Q.IC., was not called on to reply on the issue whether the Defendant was a
trustee of his share of the patent. On the remaining points.e-Regarded as a sale by a
trustee, for his own benefit, of the trust property to the beneficiary, the sale agreement 45
cannot stand. But even if the Defendant was not a trustee, he must account to the Company
for the purchasepfice, for as: Managing Director he was in a fiduciary position towards
the Company, and having caused the Company to turn the patent into a saleable asset by
spending money upon developing the process from a laboratory process into a commercial
process, he cannot take a personal benefit from thlis. A director who has "so arranged 50
"matters as to obtain an advantage . . . to himself personally through the: execution"
of hi'S office cannot retain that benefit: Regal (Hastings) Ld. v, Gulliver, supra, at 389.
Alternatively, this is a benefit accruing to him only by reason of the fact that he was a
director: ibid., at 387.
 .
255

Vol. LXXI.] REPORTS OF PATENT, DESIGN, AND TRADE MARK CASES [No. 13.

Fine Industrial Commodities Limited v. Pow ling.

Settle followed on the question of company law involved.

Danckwerts, J.-This is an action by a Company 'which is now in liquidation against the
Company's former Managing Director, the Defendant, for relief in regard to the Defendant's
interest in certain Latters Patent, and a purchase by the Company from the Defendant of
5 shares in a company oalled Vejeloid Ld.
The Plaintiff Company was formed on the 10th August, 1931. The name of the Company

Downloaded from https://academic.oup.com/rpc/article/71/13/253/1589988 by guest on 20 August 2021

was then" Farm Ice Creamery Ld. " ,. the objects stated in the Company's Memorandum
of Association were concerned with dealing with foodstuffs; and the Company's business
was the manufacture and sale of ice-cream, This business continued until the, difficulties
10 caused by the late war restricted such activities and finally compelled their abandonment
in the year 1941. This compelled the Company to seek other activities in order to maintain
the Company in business, and the Company took up the processing of animal glands and
liver for medicinal purposes, and the 'production of rosehip syrup, and finally the production
of a gelatinous substance called Agar Agar from seaweed. It is with the: last-mentioned
15 product that this action is primarily concerned. In connection with these activities the
Company in 1941 became engaged in a joint arrangement with Paines & Byrne Ld.,
manufacturing chemists, of which one Joseph Francis Byrne was the Managing Director.
These joint activities continueduntil the arrangement 'was determined lin 1948 by agreement
between the Companies as from the Ist Octobr, 1947.
20 At the material times, the Directors of the Plaintiff Company 'were, in addition to the
Defendant (the Managing Director), a Mr. Stone (the Chairman, who had been appointed
in 1934 as the representative of a Rowntree family companyand was a chartered accountant)
and Mr. James Macdonald, an elderly man who had been at some time sales manager
for a Liverpool firm which made feeding cake for animals. Another chartered accountant
25 oalled Green was a Director from 1941 until May, 1948, but he took no part in the
events which are the subject of this action. The Company's Production Manager, a Mr.
Appleyard, was appointed a director in October, 1949, after the material period. For
the purposes of this action at the material period there were three directors and no more.
As a result of the change in the Company's activities the Company's objects were 'altered
30 with the confirmation of the Court on the 15th -March, 1943, and the Company's name
was changed 'With the approval of the Board of Trade to Fine Industrial Commodities Ld.
on the 17th January, 1946. At all times, therefore, an appropriatc ebbrevrauon of the
Company's name was F.I.C.".
H

The 'history of the Agar Agar business began through the introduction by a Dr Kennedy
35 of the Ministry of Supply of the Defendant, Mr. Powling, to Mr. Joseph Francis Byrne at
some time in 1941 at the Dorchester Hotel in 'London. Supplies of Agar' Algar, made
from seaweed, before the War had come from Japan, and at some subsequent date
Dr. Kennedy asked Mr. Byrne to go into the matter of producing Agar from seaweed in
England, as Byrne's Company, Paines ,& Byrne Ld., had laboratories and a factory as
40 manufacturing chemists. Byrne, with the assistance of Dr. Orr and Dr. Marshall (of the
Scottish Marine Biological Association), who had been engaged on studies in connection
with seaweed and marine Iife and had some knowledge of the jiroduction of Agar from
seaweed, and with the assistance of chemists employed by Paines & Byrne Ld., began
experiments in the laboratories of Paines& Byrne Ld. At some time later Byrne invited
45 the Defendant (who had had experience of boilers and machinery in the course of studies
of scientific agriculture and dairy 'Work) to join him in the experiments for the: production
of Agar from seaweed. F.I.C. (the Plaint~ffCoI?pany of which the Defendant ~aS' Managing
Director) had machinery a!1dplant WhICh ml'gh.t be useful for the production of Agar,
and at some stage the experiments [or the production of Agar. fro:m seaweed 'w,e~e transferred
50 to the factories of F.I.C. On the 10th August} 1943, an application was made In the names
of Bvrne and the Defendant for a patent for" Improvements in or relating to the Extraction
"and Preparation of Agar" and it w,as de,~laifed that. Byrne. and the Defendan.t w~re the
true and first inventors thereof. . Difficulties .of varIOUS kinds were,. met WIth In the
production of Agar fro~ seaweed In the factories o~ F.I.~. and some time elapsed before
55 there was any substantIal output. A complete specification of the patent was left at the
'256

'No. 13.] REPORTS OF PATENT, DESIGN, AND TRADE MARK>CASES IVo~. L·XXI.

Fine Industrial Commodities Limited v, Powling,

Patent Office on the Ist June, 1944, and the complete specification was accepted on the
22nd May, 1946. The number of the patent, which is in the names of Byrne and
the Defendant, is 577,533.
The sales of Agar by F.I.C. were as follows:
£ s. d. 5
Year ended 31st March, 1945 value 308 4 8
Year ended 31st March, 1946 value 90 16 6

Downloaded from https://academic.oup.com/rpc/article/71/13/253/1589988 by guest on 20 August 2021

Year ended 31st 'March, 1947 value 1,107 6 10
Six months ended 30th September, 1947 value 2,138 1 1
Year ended 30th Septemlber, 1948 value 44,3348 10 10
Yearended 30th September, 1949 value 79,660 19 8
Year ended 30th September, 1950 value 55,050 11 4
On the2:Lst January, 1948, Byrne and the Defendant formed a Company called Vejeloid
Ld., in the capital Of which they were each allotted 100 shares for cash, and on the 27th
lilly, 1948, they granted to Vejeloid Ld. an exclusive licence to use and exercise the 15
invention in Great Britain and a number of other countries.
During 1948 there were discussions and negotiations between Paines& Byrne Ld. and
F.I.C. for the determination of the joint arrangement between the two Companies. On the
16~ December, 1948, an agreement was entered into between the two Companies under which
the joint arrangement was terminated as from the 1st October, 1947 (so far as the 20
manufacture of Agar was concerned). The production of proteolysed liver was taken over
exclusively by Paines & Byrne Ld., and the production of Agar was taken over exclusively
by F.I.C., but the production of Rose Hip Syrup continued as a joint venture.
During the same period discussions took 'place between the Defendant and Stone and
solicitors instructed by them respectively, and also between the Directors of F./.C., in regard 25
to the production of Agar under the patented process. The Defendant's 'ambiguous position
as Managing Director of F./.C. and as one of the patentees was realised, and at one period
Stone was contending that the Defendant held his interest as patentee and inventor on behalf
of F./.C. The Defendant contended that F./.C. had no 'beneficial interest in the patent,
though. at one time he seems to have been suggesting that he would 'make some concession 30
to F./.C. about royalties received by him. No negotiations took place with Byrne directly;
apparently communication with him 'was through the Defendant. Eventually Stone aban-
doned his contention that F./.C. had an Interest In the patent, and snubbed Macdonald,
his Co-director, when he expressed anxiety about the Defendant's position. The proposal
for the grant of a licence by Vejeloid Ld. in return for royalties was abandoned, and a 35
purchase of -the 200 shares of that Company from Byrne and the Defendant by F./.C. was
arranged instead. The price, which 'was reached by doubling the amount required by
Byrne for his half-interest, 'was fixed at £44,000. A contract of sale at this price was
executed under seal on the 9th March, 1949. £12,000 of the-price had been paid in cash
as a deposit, which was received by Byrne, and the balance of £32,000 (of which £22,000 40
was supposed to go to the Defendant) was secured by a debenture issued by F./.C. A
supplementary agreement of the same date, besides dealing with certain matters of detail,
contained a covenant by the Defendant not to compete with any business of F./.C. durins
the following 5 years.
These arrangements were concluded in an atmosphere of the greatest optimism on all 45
sides. Disaster followed before long. In substance F./.C. had only one customer for their
production of .Agar.Th,is. 'was .Creamol~, Ld., a ~,Qim,pan'y which m~rkerted (materials Tor
things known In the American dialect as desserts, but In the English language, I think,
more commonly called" puddings". Creamola Ld. had b·een taking 100 per cent. of F./.C.'s
output and had been urging them. to increase production. The release by the appropriate 50
Government department of supplies of cornflour caused Creamola Ld. to abandon their
policy of purchasing Agar from F./.C. Steps to. provide against trouble of this kind by the
directors of F./.C. had not yet produced effective results, .and the Company was soon in
financial straits. An application by the Company to Byrne and the Defendant for indulgence
in regard to their debenture was rejected. In November, 1950, both the Company's 55
 257

Vol. LXXI.] REcPORTS. OF PATENT, DESIGN, AND TRADE MARk ,CASES [No. u
Fine Industrial Commodities Limited v.. Powling.

'bankers, and Byrne and the Defendant, appointed receivers and a petition for the winding-up
.of the Company was presented by a creditor. On the 11th December, 1950, a winding-up
order was made,
The present action is brought at the instance of the Liquidator for a declaration that the
5 Defendant holds his interest in Patent No. 577,533 and all foreign patents relating to
the invention as trustee for the Plaintiff Company; fora declaration that the Defendant
acquired and held 100 shares of Vejeloid Ld., as trustee for the Plaintiff Company ; and

Downloaded from https://academic.oup.com/rpc/article/71/13/253/1589988 by guest on 20 August 2021

for a declaration that there was no consideration for the debenture and that it is invalid so
far as the' sum of £22,000 payable to the Defendant is concerned. There is also a claim
10 for rectification of the sale agreement and the debenture, and a claim for breach of trust
and misfeasance in regard to the procuring of the Company to enter into the sale agreement
and the debenture, and for certain other consequential relief.
The first question is whether, in the circumstances of the case, the Defendant became a
trustee of the invention relating to the extraction and preparation of Agar and any Letters
15 Patent relating to it.
The law' relating to the position of officers or employees who make an invention affecting
the business of the company which they serve is well settled. The principles applicable are
stated in Worthington Pumping Engine Company v. Moore (1902) 20 ,R.IP.C. 41 ; Britisli
Reinforced Concrete Company v. Lind (1917) 34 R.,P.C. 101; and Triplex Safety Glass
20 Coy. v. Scoran f1938] 01. 211.* The mere existence of a contract of service does not in
itself disqualify the officer or employee from taking out a patent for an invention made by
him during his term of service, even though the invention may relate to subject matter
germane to, and useful for, his employers in their business, and even though the employee
may have made use of his employer's time and servants and materials in bringing his
25 invention to completion, and may have allowed his employers to use the invention while
he was in their employment. But all the circumstances rnust be considered in each case.
It is very [material to see what is the nature of the inventor's position in regard to the
business, and it may be a term of his employment, apart altogether from any express
covenant, that any invention or discovery made in t:he course of the employment of the
30 employee in doing that which he was engaged and instructed to do during the time -of his
employment, and during working hours, and using the materials of his employers, should
be the property OIf the employers and not of the employee, and that, having made a
discovery or invention in the course of such work, the employee becomes a trustee for
the employer of that invention or discovery, so that as a trustee he is bound to give the
35 benefit of any such discovery or invention to his employer.
On behalf of the Defendant stress was laid on the experiments conducted by Byrne
before Powling was invited to join him, and it was contended that Byrne was the true
inventor, and that the bringing in of the Defendant as one of the twcpatentees was purely
an act of generosity on the part of Byrne. It [was claimed that 'both Byrne and the Defendant
40 worked on the invention after office hours and at weekends. So far as the experiments
and expenditure conducted on the premises of. F./.C. are concerned,. it was contende~ that
this was merely the working up of an mvention already perfected In a laboratory Into' a
process c~pa~le o.f commercial application. As to this i~ must (be borne in mind that the
invention WhICh IS the subject of Patent No. 577,533 IS not a chemical product but a
45 process, and a. process whic~ represents "Tmprovements in or relating to the Extraotion
"and Preparation of Agar .
I find no difficulty in believing that 'at the time of his discussion with Stone the Defendant
thought that his share in the invention and patent belonged to him, and not to the Company
of which he was Managing Director; it was easy for him to convince himself of. this,
50 because (as appeared ~ro~ his evidence) he k!1ew nothing .of the le
9al obligations rele~~nt
to circumstances of this kind and he has, I think, that business man s standard of morality
which easily blinds the possessor of it to the distinction be~weenright and wrong where
the interests of the possessor are affected. I feel bound to treat the evidence of the
Defendant and Byrne with considerable reserve in regafod to the matters affecting the
* 55 n.r.c 21.
No. 13.] REPOR.TS 'OF PATENT, DESIGN, AND TRADE MARK CASES [Vol. LXXI.

Fine Industrial Commodities Limited v. Pawling.

invention; in the case of the Defendant, because I think that his evidence was coloured
by his own interests in this case; in the case of Byrne, because he appears to be a bad-
tempered man who had conceived a vindictive resentment against Stone and Macdonald
when they attempted to protect the interest of the: Company of which they were Directors.
I do not believe that Byrne was the sole inventor. The Defendant certainly contributed 5
some ideas, as for instance the effect of heating under pressure, and, runless both Byrne
and the Defendant were the inventors, they made a false declaration for the Letters Patent.

Downloaded from https://academic.oup.com/rpc/article/71/13/253/1589988 by guest on 20 August 2021

There is in fact some doubt whether they were the true and, first inventors. Almost at the
very last moment before the trial of the action began the Defendant produced a memorandum
of Mr. J[" E. Dommett, a patent adrviser to the Ministry of Supply, dated the 30th July, 10
1945, and a minute ora meeting on the 27th November, 1945:, with IMr. Dommett, at which
Byrne and the Defendant were present, which the Defendant is said to have found among
some old papers. It is suggested in the memorandum that Dr. Orr was the true inventor, and
the minute records an agreement that the Defendant and Byrne should assign 50 per cent.
of their right to the Minister of SUPP'ly. The contents of these documents are not in 15
themselves evidence against the Defendant, but the Defendant admitted his knowledge
of the contents of the memorandum and that the meeting took place; he alleged that there
had been 110 agreement but only negotiation, Byrne did not deny the accuracy of the
minute, but merely said he was glad to have such a powerful partner as the Minister of
Supply. The agreement recorded in the minute does not appear to have been pursued, 20
but owing Ito the late hour at which these documents 'were produced the matter 'was never
properly investigated, Dr, Orr and Marshall may have had a lot to do 'with the invention,
and in refusing to take any steps to patent it they may have been actuated by public duty.
This incident does not prove that Byrne and the Defendant .were not the inventors, but it
may have some relevance on another aspect of the case. 25

As I have already said, I do not accept the view that Byrne was the sole inventor. I do
not believe that the Defendant was brought in by Byrne merely by reasons of personal
regard. I am satisfied that the Defendant was brought lin by Byrne because the Defendant
was the 'Managing Director of F.I.C. Byrne was doing his work in the laboratories of
Paines & Byrne Ld. (which he did not own personally) because he 'was the Managing 30
Director of Paines& Byrne Ld. It may well :be that the benefit of Byrne's share in the
invention belonged to Paines & Byrne Ld. and not to Byrne personal:ly,but that is not an
issue in the: case. The Defendant (Was the Managing Director, and it was his duty to
exercise all his endeavours for the purpose of forwarding the interests of F./.C. At this
time Parnes & Byrne Ld. and F.I.C. were collaborating in regard to the production of other 35
products, and as the manufacture and sale of ice-cream either had been stopped, or was
about to be stopped, by Government action, the directors of F./.C. were looking about
desperately for some other commodity to which the Company's factories could be applied,
and by which its business could (be kept in existence. This disposes of the argument
that.. as the production of Agar may not have been within the terms of the objects of F./.C. 40
until the Memorandum was altered in March, 1943, it could not have been intended
that in collaborating with Byrne in experiments for the production of Agar the Defendant
was acting for F.I.C. It was the duty of the 'Defendant to exploit every opening for business
to which the Company's resources could be applied, even if it involved alteration of the
Company'sMelmoran~,um in acc?rdance with the ~achinery. of :c~mpany law. It appears 45
that the early expenditure by Paines ,& Byrne Ld. In connecnon WIth the Agar experiments
was brought into account in the course of the j?int .ventu~e of that IC0!lipany and F.I.C.
Stone said so in evidence and I see no reason ito disbelieve him, Byrne said some thousands
had been spent by Paines & Byrne Ld., and Stone's evidence was in agreement with this.
He said about £10,000 was spent byPaines & Byrne Ld. and £10,000 by F.I.C., as the 50
total of about £20,000 was equally divided I~etween t~em. .1rhe Defendant attempted to
show that he had borne: half of the expenses In connection with the patent and that Byrne
bore the other half. The Defendant appears to have paid some small items of patent
fees amounting in the aggregate to some £50 which (according to him) v.cre never reimbursed
to him. But when larger sums amounting together to about £212 for patent fees were 55
demanded from him the passed them on to Byrne to pay. They were paid not by Byrne
 259

Vol. LXXI.] REPORTS OF PATENT, DESIGN, AND TRADE MARK CASES [No. 13.

Fine Industrial Commodities Limited v. Powling.

but by Paines & Byrne Ld. and half of the amount, that is £106, was debited by Paines
& Byrne Ld. to F.l.C. in their reconciliation accounts, and appeared in the
accounts of F.I.C. as expenditure by that Company, I am satisfied that Stone was perfectly
correct when he was claiming in 1948 that half the expenditure in connection with the, work
5 leading up to and producing the Letters Patent appeared in the accounts of F.I.C. as having
been borne by that Company. In my view the irresistible conclusion in the circumstances
of this case is that the Defendant held the benefit of his share in the invention and all
Letters Patent relating to it on behalf of F.l.C. and not for his own personal benefit.

Downloaded from https://academic.oup.com/rpc/article/71/13/253/1589988 by guest on 20 August 2021

Now the agreement which is contained in the agreement under seal of the 9th March
10 1949, and the issue of the' debenture was concluded on the footing that the Company had
no beneficial interest in the invention of the patent at all. Resolutions authorising this
agreement and the negotiations which led up to it were passed at meetings of the Board
on which ~he Defendant, though, present, did not vote. There were for the purposes of
these meetings only two other DIrectors, Stone and Macdonald. If therefore the require-
15 ment of a quorum of three directors was operative by virtue of Article 95 of the Company's
Articles no effective resolutions could have been passed for the purposes mentioned above.
It was contended, however, on behalf of the Defendant that about 1934 there had been
a resolution passed by the directors, at the time when the Board became reduced in
number from 7 or 9 to 3 or 4, determining that the quorum should be two. Evidence
20 was given that the Company's books and records had been destroyed about 1941 in Stone's
office in the City of London by enemy action. A Minute Book recording meetings of
directors (including a certain number of meetings at which only two directors were present)
had been reconstructed from minutes in the possession of directors for the years 1936
and onwards. Unfortunately nothing was forthcoming in respect of the earlier years.
25 Stone and Edward Frank Western, theC'ompany's Secretary at the time, testified to the
passing of .the resolution for the reduction of the quorum to two. I think that I must accept
their evidence, having regard to the probability of the inconvenience of the qUOI1um to
three being obvious to the Board. Stone, whatever his limitations may have been in
regard to the practical business affairs of the Company, does seem to have had reason
30 to study the Articles of the Company at the time in question.
There was then a sufficient number of independent directors to contract on behalf of
the Company with the Defendant for the purposes of Article 82. This article, in quite
usual form, disqualified the Defendant from voting in regard to contracts in which he was
interested, and required him to state the nature of his interest at them,eeting of the
35 directors at which the question of entering into the contract or arrangement was first
taken into consideration. This artiole was strongly relied upon on behalf of the Defendant,
and it was contended that as ,the position of the: Defendant as Managing Director and the
owner of a half share in the patent, as well as the holder of 100 shares of Veieloid Ld.,
had been known to the other two directors throughout the negotiations, the provisions of
40 . A
. rticle 82 had been observed and the contract of the 9th March, 1949, was, therefore,
valid. The Article is, lin fact, in accordance with the provisions of Soc. 199 of the
Companies Act, 1948, which in similar manner requires the interested director to declare
the nature of his interest in the proposed contract. I find it not at all easy to see whether
in the present case such disclosure as the Defendant made complied with the requirements
45 of the section and the Article. It was obvious, of course, that the Defendant was Managing
Director of the Company, and it was well-known to the other directors that he was one
of the two patentees. His ownership of the 100 shares of Veieloid Ld. was revealed, and
also the existence of the licence granted to that company by the patenteeswas disclosed.
But the Defendant was claiming at the time that the Company had no beneficial interest
50 in the patent, and he was not saying "II claim that I am not a ,trustee, but~~ere is the
" arguable point that I mayor may not !be a trustee of my share In the patent · (I have,
of course, now decided that the Defendant's claim was mistaken.) However, I think it is
not necessary for me to decide whether the nature of the Defendant's interest was sufficiently
disclosed because I think Mr. Jennings's contention that compliance with the section and
55 the Arti~le merely removes the difficulty of a ?~rector contracting with the Compan~,
and does not confer upon him any higher position than any other outside person, IS
oorrect. Mr. Jennings contended that once it is established that the Defendant held the
80037 2A.
260

No. 13.] REPORTS OF PATENT, DESIGN, AND TRADE MARK CASES [Vol. LXXI.

Fine Industrial Commodities Limited v. Pawling.

half-interest in the invention and the patent on behalf of the Company, he' was faced
with all the difficulties that farce, a trustee in making a <lea] with one of his beneficiaries.
He said, furtherv that as, on this footing, there was no beneficial interest in the property
concerned in the trustee, there was nothing which the trustee had to sell to his beneficiary,
who has got a beneficial interest. Furthermore, he said, once it isestablisbed that the 5
Defendant was, in respect of the invention and the patent, in a fiduciary position to
the Company, the onus is on the Defendant to justify the transaction so that it can stand.

Downloaded from https://academic.oup.com/rpc/article/71/13/253/1589988 by guest on 20 August 2021

This part of the case troubled ,me considerably because it appears that in the negotiations
which led up to the agreement on the 9th March, 1949, the parties were at arm's length in
that there were two independent directors to deal with the Defendant, and they and he 10
were each represented by their solicitors. There were no negotiations directly with Byrne,
His views, or orders, were transmitted to Stone, and the solicitors instructed by him on
behalf of the Company, by the Defendant. Macdonald, the other director, was content
for the greater part to leave the matter simply to Stone to deal with.
It is necessary now to deal with the manner in which the matter was handled, which was 15
peculiar and far from satisfactory. There were discussions at directors' meetings on the
20th May and the 14tJh October, 1948, and the 21st January, 1949. But the important
proceedings for the present purpose took place outside the directorsvmeetings, On the
29th June, 1948, Stone wrote to IMr. Maddox of Callingham, Griffith & Bate (the Company's
solicitors) a letter in which he states that half the costs and expenses of getting the patent 20
registered in England and elsewhere had been borne by F.I.C:. and had 'been shown as an
asset in that Company's balance sheet for the years ending on the 30th September, 1946,
and the 30th September, 1947, and from which Jetter it appears that Stone was under the
impression (mistakenly, in my view) that the Defendant adm-itted that his half share
belonged to F.I.C. A meeting with the Defendant's solicitor, Mr. Gould, of Norton, Rose, 25
Greenwell d~ Company, took place on the Ist September, 1948, and it is apparent that the
assistant solicitor who took the plaice of Mr. Maddox, who was on holiday, must have
misread Stone's letter, as apparently he thought that Stone was only referring to rights
under a British patent, and had stated that the half share of the patent appeared as an
asset in the accounts of F./.C. (which was not at all what Stone had said). It appears 30
that Mr. Gould repudiated any agreement by the Defendant to account to F./.C. for his
share in the patent, and the assumption that F.I.C. was only to have rights under the British
patent suggested to Mr. Gould difficulties in accounting, but he did say the Defendant was
anxious not to derive a profit at the expense of F./.C. If that desire ever existed, it 'was
soon abandoned by the Defendant. The next event was a meeting on the 29th September, 35
1948, between Stone and Mr. Maddox, and the Defendant and Mr. Gould. Apparently,
at this meeting the Defendant stated definitely that the Company had no interest in the
patent and this 'was accepted by Stone. The previously suggested arrangement of the
licence by Vejeloid Ld. in return for royalties was abandoned, and the negotiations proceeded
on the basis of the 200 shares in Vejeloid Ld. being purchased by F./.C. from Byrne and 40-
the Defendant. What was it that caused Stone's complete abandonment of his previorus
olaim that the Defendant held his half share in the invention and the patent on behalf 01
F.I.C-., and his surrender to the Defendant's contention that he was the beneficial owner?
The irresistible inference is that in the interval between the Ist and the 29th September,
1948, Stone received advice fro m the solicitors advising him which confirmed uhe fears 45
which Stone had already conceived as to the possible conduct of the Defendant and Byrne.
It is only fair to say that there is no evidence that the Defendant made any threats
of 'hostile' action whatever, and Byrne took no direct part in the negotiations, But Stone
evidently thought that, unless he were placated by F./.C., the Defendant would be able
to prevent that Company carrying on the ~anufacture, of Agar, ~nd he was plainly in terror 50'
of Byrne, whom he regarded froll~ experience as .a man of violent temper, Throughout
the negotiations Stone was stipulating that Byrne was not to be told of the deal that was
to be made between F.I.C. and the Defendant (when it was supposed that the Defendant
was to account in some way).
That this is the correct inference is, in my view, proved [by the way in which Macdonald 55:
was treated by Stone (his Co-director) when Macdonald expressed doubts as to the propriety'
of the transaction between F./.C. and the Defendant. Macdonald received a circular letter
 261

Vol. LXXI.] REPORTS OF PATENT, DESIGN, AND TRADE MARK CASES [No. 13.

Fine Industrial Commodities Limited v. Pawling.

about the matter from Stone on the 12th November, 1948. On the 13th November Macdonald
wrote to Stone expressing his doubts, and it is clear that he was justified in what he said.
Stone's. reaction was to write to Mr.:Maddox on .the 17th November, repeating an oral
compl~lnt that. Macdonald w~s making t~ouble an the matter of Agar supplies, and
5 regretting that rt was not possible to get rid of Macdonald as a director. Stone, in the
witness box, attempted to argue that his letter could not bear this construction ; but that
is quite untenable. In my view, Macdonald was treated very unfairly !by Stone, who cuts

Downloaded from https://academic.oup.com/rpc/article/71/13/253/1589988 by guest on 20 August 2021

a poor figure in this transaction. Stone consulted Mr. Maddox about the fOIiID of his reply
to Macdonald, and on the 23rd November, 1948, Mr. Maddox wrote to Stone a letter in
10 which the following passage appears: "I think that it should be made clear to Mr.
"Macdonald that if the Company is not prepared to accept the fact that the patent belongs
"to Messrs. Byrne & Powl:ing solely, and deal with them on this basis, it would mean a
"breach with :both of them followed by possible litigation, and almost certain loss of
"the business in regard to Agar Agar." This advice 'was readily accepted by Sf/one, but
15 it was not until the 4th January, 1949, that Stone wrote to Macdonald a long letter off
discouragement of his objections. It is probable that Stone's attitude was influenced by
the general air of optimism as to the prospects of Agar production-for which. the Defendant
was largely responsible-e-but it is plain to me that Mr. Maddox and Mr. Stone allowed
themselves to be bluffed by the Defendant ,into accepting his claim, and to be intimidated
20 by their own visions of the dangers of any other course. IOf course, it is easy to be
wise after the event, but I was not impressed by the readiness of Mr. Maddox and Stone
to aver in the witness box that they would act in a similar manner again, It is clear
that Mr. Jennings was right in contending that there was no attempt at a compromise-s-
there was simply la surrender to the claim put forward by the Defendant.
25 Meanwhile the fixing of the price for the 200 shares of Vejeloid Ld. was proceeding.
A suggestion 'was made by Mr. Maddox that patent Agents should be asked to advise as to
the validity of the patent and the proper price. Eventually patent agents did report
favourably on the whole on the validity of the patent, but neither they nor the-Company's
accountant 'would hazard a figure for the price. Byrne (through the Defendant) rejected
30 £20,000 for his share and said his accountants advised him to ask £30,000, but he was
in the end willing to accept £22,000 for his share. Sometime shortly before the 12th
October, 1948, Stone and the Defendant arranged (the price at a meeting or conversation,
and .presented it as final to the other persons concerned with the matter. The price was
treated as £44,000, being as to £24,000 "three years !purchase of established existing
35 "royalties ", and as to the remaining £20,000 for the world rights. The figure' had been
reached simply by doubling the sum required by Byrne for his share. The, Defendant
was to get the same amount and thus was selling his share for the full value. It was
contended by Mr. Edwards that the Defendant's price must be discounted by the restrictive
covenant entered into by him in the supplemental agreement of the 9~h March, 1949,
40 but I am unable to attach much .jim'portance to that. The reference to "three years
"purchase of established existing royalties" is of interest. This was discussed at. the
director's meeting on the 14th October, 1948. A sum of about £89 had in fact been plaid
earlier for royalties. It was estimated that the figure for royalties according to the
Company's output would be £800 for the quarter ending on .the 30th Iu.ne: ! 948, .which
was equivalent to a figure of £3,200 for a full year. By virtue of optmustic estimates
45 for the future it was stated that the future figure for royalties would be £8,000 a year
and might reach £11,000 a year .. It appe,~red t~at the discussion was based on figures
supplied (by the Defendant. It IS quite Impossible to understand how the statement
"three years purchase of established existing royalties" can be justified.
50 It remains to consider whether in these circumstances the transaction can stand. First
of all there is Mr. Jennings's contention (which has considerable force) that the Defendant
'had nothing to sell, and, so far as he is concerned, the Company bought its owriproperty.
It might wellbe said that. the transaction was based on a mis:t~ke as. to the ~ue situation,
But in any case, ilt is plain th~! the D~fendant was, ,~as Managl!l~ Dl~ec~or, In . a fiduc~ary
55 position Ito the Company. In Underhl~l ?n!r~sts (IOth"l?d~tl~n) it !lsstated,that if .a
transaction between a trustee and beneficiaries IS impeached It IS Incumbent on the, trustee
262

No. 13.] REPORTS OF PATENT, DESIGN, AND TRADE MARK CASES [Vol. LXXI.

Fine Industrial Commodities Limited v. Pow ling.

"to prove affirmatively and conclusively (a) that he and the 'beneficiaries were at arms
"length and that no confidence was reposed in him; (b) that the transaction was for the
" advantage of the beneficiaries; and (c) that full information was given to the beneficiaries
" of the value of the property, of the nature of their interest therei n, land of the circum-
"stances of the transaction." In" Kerr on Fraud and Mista;ke" (6th Edition) at p. 160 5
it is said: "The burthen of proof lies lin all cases upon the party who fills the position
"of active confidence to show that the transaction has been fair. If it can be shown
"to the satisfaction of the Court that the other party had competent and independent

Downloaded from https://academic.oup.com/rpc/article/71/13/253/1589988 by guest on 20 August 2021

" advice, or that hie performed that act or entered into the transaction voluntarily, deliberately
"and advisedly, knowing its nature and effect, and that his consent was not obtained by
"reason of the power or influence to which the relation gave rise, the transaction will be 10
"supported." See also ," Halsbury's Laws of England" (2nd Edition) Volume 33, p. 2181,
Para. 497.
Further, it lis well established that a director may not take advantage of his position
to gain a pecuniary advantage for himself at the expense of the company whose interests
it is his duty to protect; see Cook v. Deeks, [1916] 1 A.IC. 654; and Regal (Hastings) Ld. 15
v. Gulliver, [1942] 1 All E.R. 378, in which case (at p. 388) Lord Russell oi Killowen quotes
with- approval the statement of Vice-Chancellor Mullins in Imperial Mercantile Credit
Association v.Coleman, (1873) L.IR. 6 Ch. 558, at p. 563: "It is of the highest importance
"that it should be distinctly understood that it is the duty of directors of companies
" to use their best exertions for the benefit of those whose interests are committed to their
"charge, and that they are bound to disregard their own private interests whenever a 20
"regard to them conflicts with the proper discharge of such duty."
That statement 'was definitely not observed by the Defendant in the present case. It was
due to his advice and optimistic statements that the Company was induced to put practically
all its eggs in the Agar basket; having got the Company into that position, the Defendant 25
purported to sell to the Company an interest in the patent under which the Agar must
be produced, which he did not own beneficially (though he may have thought he did),
at the highest price that he could get, through directors who were never in a position
properly to deal with him. Stone through his own fears and bad advice was neverfree
from the influence gained by the Defendant over his co-directors, Macdonald, owing to
his treatment by Stone, was nerve! given a fair chance to appreciate the situation properly. 30
The price paid was explained by reference to misleading statements. I am not satisfied
that a full and frank disclosure of al~ the relevant facts was made by the Defendant.
This includes that curious transaction with the Ministry of Supply in 1945. In my view, .
the Defendant fails to sustain the onus which his positionoast upon him and the transaction 35
cannot stand.
There is one small point that requires further notice. Technically I think that the
Defendant was not originally a trustee of the 100 shares held (iby him in Vejeloid Ld. But
when he chose to join in the grant of a licence to that company contrary to the interests
of F.I.C., on whose behalf he held the half interest in the Letters Patent, lit became difficult 40
to disentangle the shares .from ~he iJ?-terests of F.I.C., and, therefore, I ~hink that the remark
with which II began ithis subject IS merely a matter of academic Interest. The shares
should be retained by F.I.C.
Yes, Mr. Settle, you ask [first. of jaIl for" a. Declaration t~at the Defendant .aoquired and
"has at all times held and still holds all his share and interest In the said Patent"- 45
that is Patent No. 577,,533-" and the said foreign patents and the said future foreign
" patents as trustee for the Plaintiff Company." Yes. Then I will d~cl.are that Debenture
" is invalid in so far as it purports to secure the payment by the Plaintiff Company to the
., Defendant of the sum of £22,000".
An order was also made that the Defendant should authorise the Receiver to pay over 50
to the Liquidator the £22,000 retained by the Receiver to meet the debenture together with
any accrued interest; the Liquidator undertaking, in the event of an appeal, not to make
distribution of this sum until the appeal had been determined.
The Plaintiff Company was given the general costs of the action.
(80037) Wt. 8258-4527 K9 5154 Dl/TR/6