COLONIAL BANK LIQUIDATION.

Press, Volume LIII, Issue 9445, 17 June 1896, Page 2

COLONIAL BANK LIQUIDATION.

THE APPLICATION REFUSED.

A TRENCHANT JUDGMENT.

(ritKSS ASSOCIATION TSLKQRAM.)

DUNEDIN, June 16. Mr Justice Williams to-day delivered the following judgment:—

I agree with the liqnidafcore, that upou the figures brought forward by Mr Gookt the suggested purchase is a fair one, and it wanld bs more beneficial pecuniarily to the liquidation that the agreement should be carried out than that the Ward Farmers' Assoc:ahoa should be compelled to liquidate. Air C'jok l-a«ed liis figures oa what he considers would be realised if the Association actually weut into liquidation, and had takeu bis valuation as oa the 20th March last. Mr Cook does net accra clear ac to whether his values do or do not allow for the cost of realisation. Mr Bra,uud made au analysis purporting to show the result of the agreement based on Mr Cook's figures, but that analysis is incorrect, the true figures being several thousand pounds more in favour of Mr Braund'a-vievr. Mr Braund was evidently unaware of the fact that the Bink held £50,000 of the Association's debentures which, in the event of liquidation, are a first charge on its asset?. Taking. Mr Cook's figures, we find the whole of the assets, including the uncalled cipital, to be £72,797. Deduct from that, say, £5000, the cost of liquidation and (as suggested by Mr H*g«itt) £1500 in respect of contingent liabilities, and a balance w left of £66,000. Of this £50,000 goes to satufy the (iebenturea and the baUnce (£16,297) is apportionable between the Bank and the other uuseaured creditors. The total amouut of unsecured debts is £62,797, and of thU amount £42,179 ia owing to the BJmk. Ifc will be found that the Bank's proportionate share of the £16,297 is £10 946, which added to £50,000, mates £60,916. Add to this the value of properties iv Mr Ward's estate, set down as £1250, but realising say £3000, and we have £63,916. As ngiiinsc this we ' have the purchase money of £62,750 aud t» guarantee to the extent of £5000 in respect of certain oats, the whole of which is stated to be now duo. Oa the above calculation tUe Baak would receive £67,750 if the purchase were carried out, as against £53,916 if the.Association weutiuto liquidation. This, however, ia merely my own rough estimate.- Anyone with the figures'before him can m*ke an estimate for Mmself. Mr Cook, valued as on the 20th of March, states that oats have risen, and that in consequence if he were now to value the book debts and uncalled capital of the Association, he would value them at nearly £5000 more. Under the circum3tauces it would be unfair to refuse to sanction the agreement merely oa account of this rise, buc if the agreement is not sanctioned on other grounds the liquida* tion will get the benefit of it. The advantages of the present cash paymeut are obvious. The interest is stopped, the claim of the Bank of New Zealand is settled, and the liquidators are relieved from uncertainty. It was suggested that there were incidental objections to forcing the Farmers' Association into liquidation, one of them being that to adopt such a course would affect the ruicouata upon the B list. This suggestion, though made by counsel, would hardJy be adopted by the liquidators. The hardship such a inflict on the share- < holders! or clients of the Association .cannot fairly be considered. If the management of tl'.e Association has been such aa to bring it, to thto condition of hopslees insolvency the shareholders have themselves to tbauk.

I do not think it has been shown that the result of the Association going into liquidation will indirectly affect the liquidation oi the Colonial Bank. Oα the whole if the only alternative is either to oarrjfcout the proposed agreement, or for the Association to go- io*f>, liquidation the former would be more beneficial pecuniarily for the Bunk. It wascontended that if this were so there are other aspects of the caso which the Court ia bound to consider. It war Suggested that the evidence disclosed such a state of tilings that the arrangement prvpoaed, which in substance wonld coittpiomise the debts both of the Assooitttiyn aud Mr Ward, atid which it'was intended to have, aud would have, the offecb of avoiding liquidation and bankruptcy, and an preventing iiieir business transactions being investigated ought not to be sanctioned. What then are the ciruumataucea disclosed in the evidence with rotip.'ct, first, to the trading <jf the Farmer** , Association, of which Mr'Wartl waa the managing Director j and, secotytly, as bo hie conduct in relatiou to his sopuute tr&na&etioa. The attention of the Coui'b was first directed to the balance eheet of the Association for the year ended June 29ch, 1395. That balance sheet was framed somewh*t curiously. Among the assets is one item of £6830, bills receivable. There is no entry of bills under disoouut among the liabilities. This latter entry, however, appeared in the former balance-sheets. Mr Ward explained this by saying that the system of 'dealing with the bills under discount and , bills receivable was uuchanged, and that 'the sum of £6830 appearing among the assets of the Association was arrived ab by deducting from an undisclosed amount of bills receivable au undisclosed amoutic of bills under discount. Any person with an elementary knowledge; of accounts must see that this process ia ■ illegitimate. Bills under discount represent contingent liabilities, and if they do'not appear in the balance-sheet as an item of liability tho effect is to suppress the fact that contingent liabilities exiec and the amount of each liabilities. That in itself is a falsification of a balance sheet. If it were a case that when a man pats his name on the back of a bill and gets money for it, he has no- more to do with it, the above system would do, but such is not true either iv law or in, fact, as every trader knows by sad experience. That soma traders may - habitually, jnake out balance sheets in this way is possible, just as some traders may unfortunately be guilty of other dishonest practices. JBut notwithstanding that the practice is obviously a dishonest one. Furthermore, it is almost certain that this process of previously deducting a liability from the assets, and placing the difference only in the assets column, has been followed with respect to -auother item. In t the balance-sheet of 1834 there appears an^ r item among the liabilities of the Association "Drafts against shipments, £51,643," and among the assets' the item " Advances against produce afloat and ia store, £74,929." In the balance-sheet for 1895 the former item does not appear, and an amount of £34,450 only appears in respect of the latter item in the assets column. The~balance-sheet also sliowe a total liability to the Colonial Bank of £1185 only. Mr Vigors has told us how the Colonial Bank, immediately before the Association's . balancing day, was induced by a fraud to ieduce the account by £30,000. Mr Vigera went down to Invercargill to get the account reduced, and discounted a draft on a London , house for £30,000, and in support of the draft received warrants purporting to represent* oate to that value, which ultiI mately turned, out to be non-existent. This fraud was not discovered by the Bank till some months; later. In the meantime the Association obtained forbearance from pressure by the Bank, and the account was reduced by the above amount. The balance sheet was made up to Jnne 29th, but, of course, it was compiled after that date, and it waa not certified as correct by the Auditor until August 15fcb, nor was ife laid before the shareholdera until Sept. 7th. If tho account was, aa Mr Vigera states, reduced by the frand of some officer of the Association by £30,000 at the end of June, it is exceedingly strange that the Directors of the Association should not by September 7th have discovered, that there was something wrong, and that the Association had got credit for £30,000 which it had no business

to get. The balance sheet of the Association farther represented £6516 to the credit of profit and lose far the year, after deducting bad debts, and the report of the Directors .•recommends the payment o< a- dividend and : bonuses. The report was to be presented at a meeting on September 7th. This, therefore, implied the aaeertion uot only that the balance sheet was correct np to June H9tb, but the circam-.tancss of the

Association on September 7ih were such as to justify the distribution of the amount to the credit of profit aud loss in dividends and bonuses. In the balancesheet -of June, 1895, the liabilities apart from the paid-up capital amount to £53,289, and the assets apart from the goodwill to £72,555. In Mr Cook's statement as on March 20th the liabilities amount to £112,797. To that, however, must be added £55,150, which np to October 19fch, when Mr Ward gave a promissory nove for it, wa9 a liability of the Association. The total liabilities, therefore, ware £167,947, and the total assets valued by Mr Cook on March 20lh, were £64,341. The discrepancy between the balance sheet of June 291h and Mr Cook's valuation on March 20th even apart fio:n the fraudulent- credit of £30.000, is enormous, and certainly cannot bs in auy way accounted for by losses incurre-i between the two datea. Furthermore, the lose of £55,150 was known to everybody on October 19th, whe.i Mr \V*rd gave hia promissory note for it. Is is impossible to suppose that the framers of this balancesheet of Juus 29th whon they pvib it forward on September 7th were not aware th it it'was an utterly false one, and something going far beyond the mere rosy statements which too sanguine Directors occasionally put forward. If competent business men put forward a balance-sheet of this kind, the only iufereuce is that they do it for a sinister purpose. What, theu; is Mr Ward's connection with this balancesheet ? Ou June 29th, on the date to which it was made up, he was on his way out to New Zealand. He waa, therefore, absent from the colony at the time the fraud in respect to the oats was perpetrated. He returned to New Zealand in July. Mr Ward says he was absent from the colony when the balance-sheet was pre pared. The balance-sheet, however, was not signed by the Auditor till August 13th, and was afcerwarde published with the report anuexed to be presented at the annual meeting of shareholders on September 7th. This report is signed by Mr Ward as Chairman of the Directors, and it recommends the appropriation of the balance to the credit of profit and loss aud in payment of dividends and bonuses. Mr Ward says that the balance-sheet was submitted to him for signature on his return from England, and that he considered the matter was all right, or he would not have signed. He says he cannot give any details, as he had nobbing to do with them. He says he did not and could not give the business any large personal control, and that matters were put before him, and he really depended on others who were responsible for him. Mr Ward, however, was Managing Director of the Company at a salary of £500 par year. Out of £27,450, the total paid-up capital of the Company, he held £23,000, namely, 3000 shares of par value of £15,000, which had been allotted to him as fully paid up, and 8000 shares on which £1 psi- share had been paid. On these 8000 share £4 per share, was not called up, so that he was subject to a contingent liability of £32,000 in respect of them. Further Chan this Mr Ward's private account with the Association was largely in debit. Considering the position Mr Ward held as Managing Director of the Association and the large stake he held in it he eeetns, according to his own statement, to have known uucommonly little about it 3 affairs. If a Company becomes insolvent, and it it appears that credit has boon obtained by fraud, and that afulse balance sheet has been pub forward, ib is fair to conclude that the losses which led to the insolveuoy were not the result of legitimate trading. That they were not the reaulfc of. such trading in the preaenfc case appe&ra further from the evidence of Mr Cook, who investigated the affairs of the Association. He cays in examination, that advances were made that prudent man would have taken security for over crop?, and that'no securitywas taken ; that this reckless trading wae going on over a period of about two yoara, and that he found no securities after 1894. In hia afli Uvifc Mr Cook stated that out of £83i070 of book debts he considered it neoesmy to write off £37,374 as absolutely bad and worthless. Hβ stated that he found that indiscriminate credit had been given aud little or no security taken. Nor can it be suggested that this state of things was caused by the opposition of other freezing work 3. The freezing business and losses consequent on it were not the buiiness or losses of the Association bub of Mr Ward, and word carried to the debit of Mr Ward's private aecouut, as the profits would have been carried to his credit. The Association, also, after losing all ita . paid-up ..capital,;, is £48,456 to the bad, according to Mr' Ouok'st estimate, in a'ldiliou to £5b,150, which waa at Mr Ward's debit in its books. This result has been arrived at in the short period of threo years during which the Association has been in existence. It is difficult to dissever Mr Ward's private transactions from the transactions of the Association. Mr Ward's direct indebtedness to the Bank consists of £20,000 ou guarantee for ,the Association given by him, aud £16,340 on a draft secnved by sh*vea of Nelson Bros., Limited, which at the time the draft was given are stited to have been sufficient security for it, but have siuci depreciated in value. In addition to this is a promissory note for £55,150 given on October 19th. The contingent liabilities of Mr Ward amouub to : j638,513, the principal ones being £32,000, the £4 per share uocallsd on 8000 shares held by him in the Association, aud £4900 guarantee on account of the Hokonui Coal Company. As against these liabilities the assets consist of the equity of redemption of cat tain properties, estimated to be worth £3850; of shares in Companies of the value of £100; of household furniture of the value of £300; and of other shares worth nothing. Mr Ward's estate will thus realise under a shilling in the pound. Nearly the whole, therefore, of Mr Ward's liabilities have beau incurred in connection with the Association, and the largest of them a promissory note for £55,150, represented the balance to his debit; on the books of the Association. So far as I can make out this large indebtedness arose partly from losses incurred in hie own private business of freezing cheep and partly from speculations in grain. These latter, Mr Ward states, turned out unfortunately, and that if there had been any profits they would have gone to the Association.; bat that, as he did not wish the Association to speculate, he took the losses ou himself. This liability of £55,150 of Mr Ward to the Association originally formed part of the liability of the Association to ..the Bank, but, on October 19 bh, Mr Ward, at the 1 request of the General Manager of the Colonial Bank, gave hie promissory note . for that amount, and the Bank accepted his liability on a promissory note in lien of the 1 liability of the Association. Why this waa done , I do not quite understand, I as a promissory note, would be of 1 little or no value to ■• the Bank. There is nothing to show that Mr Ward had then any property which was not included in the present list of assets. He states that he then considered his shares in the Association worth the then par valne of £23,000. The Association, however, was theu, to Mr Ward's knowledge, in difficulties, and these shares carried a contingent liability of £32,000. 1 can hardly, therefore, accept Mr Ward's statement as correct. Mr Ward's shares in Nelson Bros, were then pledged for their full value to secure another amount. Mr Ward's liabilities were, therefore, with trifling exceptions, all incurred in connection with the Association of which he was Managing Director. Here, then," is a Company or Association, with a capital actually paid np in cash of. £12,450. When it has been only three years in existence, that capital,has been lost, and the Association has become hopelessly insolvent, showing a deficiency of over £100,000. It has been shown that the Association obtained credit for a large amonnb by fraud; that it pnt forward an utterly false balance sheet and that its affaire were' "managed with reckless disregard of ordinary business principles. Of this Association Mr Ward was Managing Director ; of the £12,450 of paid-up capital he held £8000, which carried with it a contingent liability of £32,000- Healeoheld 3000 shares of par value of £15,000, which had been allotted to him as fully paid up. His private account with the. Association was in debit £55,150, showing that he freely used the .credit of the Association for his own private ventures. In each circumstances it Is hardly too much to say. that in substance Mr Ward and the Association most for inoet business purposes have been identical. Mr Ward is now hopelessly inBolveafc. A fow pence in. the pound is the utmost hie estate can be expected to

realise. What under ordinary oiroumstances would happen would be that the Association would go into liquidation and that Mr Ward would become bankrupt. That the career of the Association should be brought to an end aud ita proceedings investigated, and that those who were responsible for its management! should no longer ba permitted to roam at large through the business world. is a result bo obviously desirable in the interests of commercial morality that it ought, .if possible, to be attained. Now, it ia with the avowed intention of preventing this result, thab the pureluaef* uuder the present agreement. have come forward. Mr Woodhouee states it is not. like an ordinary bn9ines3 transaction, where the purchasers expect to make a piofi"-, but they were buying out of fmudship for Mr Ward, in the hope of being able to put the Association on its feet again. Thab is to say tlsat a veil will be deliheratuly drawn so as to hide the past as far as possible ; that Mr Ward's bankruptcy will be purposely preveotsd, and thab things generally will be m&'le ple*<s*ut. That tlie transfer of the liability of the Association to the Bank into the hands of persons admittedly friendly to the former management will tend to atifia any inquiry into the proceedings of the Association ia manifest. If any one had purchased the debb of the Association as a business speculation, and for his own business purposes wished to keep the Association going, that would be a different; matter. Iv thab case there would be no need for them to have purohaeed the debts of Mr Ward. By the present agreement every debb of Mc Ward's on' every account is purchased, and is lumped in one purchase with the debt of the Association, though Mr Ward's debt will yield bub an infinitesimal dividend. " We only buy the Association's debt on the condition that you throw in all Mr Ward's debb "is evidently the attitude of the purchasere. The whole action of the purchasers was thus taken, as Mr Woodhouse candidly admitted, oubof friendship for Mr Wtvr.l, and, of course, in order to avert the necessity for his bankruptcy. Ib is thus an offer to buy off from bankruptcy and its consequences a man who ought not to escape them. This is in effect au offdr of hush money, although I quite understand that the purchasers were themselves actuated only by the honest motive of friendship for Mr Ward. I am satisfied that the Court, ia considering whether ib shall sanction an agreement of this kind, is bound to a certain extent to look at the moral aspect of the case, and if it sees that the real object is to prevent an inveabiga tton into discreditable transactions its sanction should be refuted, ewm if the agreement Iβ the moat beneficial for the pecuniary interests of the liquidation. This principle is perfectly well recognised by Courts on eimilar and analogous cases.—Throng's Joinb StockCompanyipagfl 383. reStrawbridge32s, Chancery Division,. 266. ro Burc ex parte Board of trade, 1.892, 2 Queen's Banch, 467, ex parte Rsed v ilieetl, 17 Queen's Bench division 25. That tho proposed arrangement though iv the form of a purchase of assets is in effocb a compromise id plain. Ib comes to the same thing whether a debtor to the Bank offers to compromise the debt for so much in the pound, or to get a friend to come forward and buy ib for the same amount, and like considerations should apply in each case. 1 have no hesitation whatever, therefore, in refusing to sanotion the agreement; In so refusing, I do nob for h> moment mean to say that the liquidators were wrong. •; in entering into it, and bringing it before the Court, or thab they are entitled to anything but oredib for doing so. I base my decision upon what was disclosed ab the hearing. Keferenoe was made on one of the affidavits to Mr Ward's political conduct, and some similar reference was made ab the hearing. With Mr War J in hib political capacity I have nothing to do. I look on the oaae from its commercial aspect ouly,and upon Mr Ward in his business relatiSns. Thab Mr Ward is a mamber of Parliament and holds a political office is, fi'om the point of view I have considered the case, irrelevant to the action. The summons is therefore dismissed.

(FKOM OUR OOanKSPONDBNT.) DUNISDINT, Jane 19. Tiie Star s*ye :—" The judgment is most, lucid and incisive, and fully borne out by the evideucs, and comprehensive to a degree, leaviug uo point of Any importance unsettled. It is characteristic of, Mc Justice Williams to view with the strictest fair-, ness and without a shadow of partiality all questions submitted to lite decision. That he has followed this couree in the present inatanca is nothing to be surprised at. The judgment bears internal evidence of a most, laborious consideration ot circumstances of unusual complication, presenting difficulties which it required high intellectual qualifications to overcome. Out of a veritable chaoe of conflicting testimony aud perplexing' figureehis Honour evolved a clear statement of the essential facts, and upon this has based opinions which he bo plainly expresses. As to the conduct of the business of the Association and the person responsible, lisa Honour very properly repudiated the idea introduced into some of the affidavits, that the political potiition of Mr Ward should have any influence whatever in the case. , He regarded it from a commercial aspect only, and deolined to discuss Mr Ward other thau in hie business relations. . Mr Ward has been a useful and popular Minister, and the country owes him much for his admirable administration of the Postal and Telegraph Department. We are grieved to have to admit that the disclosures upon which ' his ~ Honour comments with bo much severity, and the geueral circumstances of this most unfortunate business,' render his retention of office practically impossible, and that the abrupt close of his public career, which seemed not long ego so promising, would seem to be inevitable. Mr Justice Williams must have been deeply paiued in having to condemn Mr Ward's conduct in respect to the Farmers' Association in suoh unmaasured terms, bub he has earned the thanks of the country for advocating principles ot oorameroial morality which, unhappily, are too .frequently ignored.. His Honour does not comment directly on the action of the Colonial Bank through its responsible officers in its dealings with the Association and with Mr Ward. We predict that a good deal will be heard of this, and that the Govern* ment will be called upon to justify certain appointments, and the maintenance of certain offioials in-cercajn positions."