Smith v Chadwick (1884) 9 App Cas 187

Company law – Sale of company – Fraudulent misrepresentation

Facts

The prospectus of a company, which was created for the purposes of a takeover of an ironworks enclosed the following statement: ‘the present value of the turnover or output of the entire works is over £1,000,000 sterling per annum.’ This meant that if the works were capable of turning out this volume of produce, the statement was true. The plaintiff was not asked his understanding of the phrase throughout proceedings. The plaintiff brought an action for deceit on the basis that the company had made a fraudulent misrepresentation that had induced him to purchase shares. The Court of Appeal had reversed the decision of the trial judge which found in favour of the plaintiff. This case was an appeal by the plaintiff of that decision.

Issue

The court was required to establish whether the company had made a fraudulent statement, in its prospectus, with regards to the value of the company. If this was the case, it was also for the court to consider whether this false statement had been relied upon by the plaintiff when he purchased his shares. If so, it could be possible for the plaintiff’s claim to succeed.

Held

The court found that the statement in the prospectus was unclear and that it was capable of more than one meaning. However, they found that the burden rested with the plaintiff to show that he had taken the words in a sense that meant that they were false, which had influenced his decision to purchase the shares in the company. The plaintiff could not show this and therefore the plaintiff’s action was not successful.