SUPREME COURT Company Liquidator Seeks Ruling

Press, Volume CVIII, Issue 31780, 10 September 1968, Page 14

SUPREME COURT Company Liquidator Seeks Ruling

Mr Justice Macarthur was asked in the Supreme Court yesterday to rule that a charge by Farmers’ Finance, Ltd, for more than $129,568 against the assets of A. R. Mackay, Ltd, now in liquidation, is invalid. Mr D. H. Godfrey, appearing for the liquidator of the motor firm, told the Court that if the charge was a valid one, it would use up all the remaining funds, and 390 unsecured creditors would get nothing. Alternatively, the liquidator sought an order determining the amount owing to the finance company under the charge. Farmers’ Finance, Ltd (Mr P. T. Mahon), opposed the application. Mr R. L. Kerr appeared for the receiver of Farmers’ Finance, Ltd. Mr Godfrey submitted that the debenture, which the finance company claimed secured the $129,000, had been created in the 12 months before the winding up of A. R. Mackay, Ltd. Under the Companies Act it was invalid unless it could be proved that immediately after the creation of the charge the company was solvent. Mr Godfrey said that no money or goods were supplied in consideration for the charge, and any moneys involved were not further advances under the debenture. Furthermore, said Mr Godfrey, because the debentureholder was not registered as a money-lender, the whole transaction was illegal and void. Mr Mahon told his Honour that all the directors of Farmers’ Finance and A. R. Mackay, Ltd, were the same, except for one. Financial Purchases From 1953 the finance company had discounted hire purchase agreements of A. R. Mackay, Ltd, and from 1958 it had also financed the purchase of vehicles by A. R. Mackay, Ltd. He said the finance company became a public company and proceeded to obtain money from outside, which was secured by a debenture.

Financing of A. R. Mackay, Ltd, reached considerable proportions, and by March last year the amount due by A. R. Mackay, Ltd, on the discounting of hire purchase agreements was about $96,000. The amount outstanding in regard to advances for the purchase ot vehicles was about $166,000. In December, 1966, A. R. Mackay, Ltd, gave the finance company the debenture in question, which ranked second to a debenture held by the National Bank. At the same time the method of financing A. R. Mackay Ltd’s purchases of vehicles was amended to give the finance company greater protection. Mr Mahon said the other directors of the finance company at that time had no knowledge of the financial trouble which was shortly to overtake A. R. Mackay, Ltd. On June 20, 1967, Mr A. R. Mackay told his fellow directors that his company was now unable to meet its obligations because he had misappropriated an estimated $BO,OOO of Company funds. The directors would say they had no previous knowledge that that state of affairs existed. System Changed Mr Mahon said the purchase financing method had been changed because it was felt that for a 30-day period of each transaction the finance company’s advances were unsecured. It was changed so that A. R. Mackay, Ltd, sold vehicles to the finance company, which resold them to A. R. Mackay, Ltd, as soon as a buyer was found. Mr Mahon said that the second debenture was taken out to protect the finance company after it was defrauded of $lBOO by a public accountant acting for E. A. Wilson, Ltd. He had submitted hire purchase agreements to Farmers’ Finance to be discounted when they had already been paid in full. Mr Mahon said the finance company realised that if a similar thing occurred with A. R. Mackay, Ltd. or if for any other reason hire purchase agreements were defective, they would be in the same position. The second debenture would protect them. After Mr Mackay's disclosure of his misappropriation, it became apparent that a very large sum of money was owing to the finance company and that questions might arise as to how much of those amounts was due and owing under the debenture. Mr Mahon said the question of a debenture had been raised some years before, but it had been decided not to go ahead. Mr A. I. Cottrell, one of the directors, had advised that if A. R. Mackay, Ltd, did not pay for a car when it was sold, it could be seized from the purchaser by the finance company. “Whether or not that was right is a matter on which there might be more than one opinion,” said Mr Mahon. Under the altered system of payment, the finance company’s ownership of the vehicles was not registered. Mr Mackay took the view, said Mr Mahon, that it was not practical to register another owner when a car might be sold within a day of arrival. Company Not Paid When Mr Mackay reported his defalcation, the finance company found that a number of cars had been sold for which Farmers’ Finance had never been paid. The company later received two cheques for those cars, but they were dishonoured. Another group of vehicles had been sold without any notification to the finance company. The finance company’s main losses arose from the loss incurred on the sale of 74 vehicles, and from a cash advance of $32,000 made to Mr Mackay early last year. Mr Mahon said that when the finance company put itself in the position of being the owner of the vehicles being bought by A. R. Mackay, Ltd, it never contemplated the possibility of making a loss on the sale of them. They knew they were not entitled to the vendor's profit, but had not considered being totally liable for a loss. The directors of the finance company decided, in the interests of their own deben-ture-holders and depositors, to advance the view that their, company did riot have to stand the loss on the! sale. That view could be supported only by contending that the financing system was one of advances to a client. Their earlier view was they had bought the vehicles, which would protect them from a receiver. When the receiver was appointed, the finance company took steps to have the vehicles registered in their nameshortly after Mr Mackay’s disclosure. Mr Mahon said that the company secretary, Mr E. C. Searell, then wrote up the company register on the basis that the amounts concerned had been advances. “That ought not to have been done,” said Mr Mahon, “but it does not affect these proceedings.” On July 8, 1967, the directors had recorded their views that the payments were advances. Details Of Claim Mr Mahon said that the $129,568 was made up of $32,000 in cash advances, $28,520 for dishonoured cheques for goods sold and not accounted for, $6558 for the vehicles sold which the com-

pany was not told abn $13,445 for money receh from buyers and not paid ovl $35,774 for the loss on vehicle in stock, and $13,271 for advances on documents forged by Mr Mackay. All of these amounts were claimed as advances under the debenture. Ernest Carlyle Searell, a public accountant, said he was the secretary of Farmers’ Finance, Ltd, which was formed primarily to finance A. R, Mackay, Ltd. In outlining the arrangements between the two companies, he said that another director, Mr H. E. Otley, had lent Farmers Finance, Ltd, $36,000 in April last year. On the same day Farmers’ Finance advanced Mr Mackay $32,000 at 7 per cent. This had not been repaid, and in the directors’ minds it had been advanced under the debenture. When Mr Mackay made his disclosure, he said $BO,OOO had gone. He said he had put it into Mackay Marine. Mr Searell said he stopped Mr Mackay’s sole signing authority at the bank and tried to raise money to keep the companies going. When the extent of the defalcations was discovered together with the forgeries in books and documents the directors and Mr Mackay agreed that the National Bank should appoint a received.