MCARTHUR LIABLE

Evening Post, Volume CXXIV, Issue 61, 9 September 1937, Page 11

M CARTHUR LIABLE

FOR SUM OF £19,000

GUILTYQF MISFEASANCE

JUDGMENT DEFERRED

A finding that John William Shaw McArthur, company .director, of Wellington, has been guilty of breaches of trust—or misfeasance—while a director of the Investment Executive Trust of New Zealand, Ltd., now in liquidation, and was therefore liable to account for £19,340 to the assets of the company, was reached by the Chief Justice (Sir Michael Myers) in a reserved judgment delivered in the Supreme Court today. Judgment, however, was deferred to allow counsel for McArthur to raise further contentions if desired. On one of the breaches of trust alleged his Honour found for McArtjhur. At the hearing on June 10, 11, 14, and 15 Mr. E. P. Hay appeared for the Public Trustee, who sought the declarations, and Mr. P. B. Cooke, K.C., with him Mr. H. E. Tripe, for McArthur. The following declarations were sought:— . That McArthur, having obtained an allotment to himself of 16,750 ordinary shares of 2s each in the capital of the company on February 25,:f:1931, was a party to procuring the issue to himself of 16,250 of the shares as, fully paid, for a consideration purporting to be money paid to him out of the funds of the company for service., rendered by him to the company; but being, in fact, an invalid and improper consideration designed to conceal the true1 nature of the transaction, which, in the circumstances, represented a gift of 16,250 shares from the company to him. That McArthur, having obtained an allotment to himself of 193,400 ordinary shares of 2s each in the capital of the company on or before May 26, 1933, was a party to procuring the issue of the shares to himself as fully paid, and, in breach of his duty, accepting on behalf of the company as the ostensible consideration therefor certain debentures held by him in the British National Trust, Ltd., the circumstances of the issue of which either rendered such debentures an improper and illusory consideration for the directors to accept for the shares instead of cash, or constituted euch debentures an asset acquired by him through the misuse and by the utilisation of the funds of the Investment Executive Trust, a breach of trust that made him accountable to the company for the debentures. A further declaration was sottght that McArthur was liable to contriWte £20 965 to the assets' of the company as compensation for the breach of trust, and the Court was asked to order rHm to pay that sum, or whatever the Court directed, to the Public Trustee as liquidator of the company. Alternatively the Court was asked to declare th&t 38 080 shares in the company (the balance of the parcel of 193,400 shares sti]l remaining in McArthur's name), credited in the company's books as fully, paid up were contributing shares ot* which no part of the capital represented by them had been paid, and that. McArthur was liable to be placed on the "A" list of contributories of the company in respect of them. His Honour said it would probably., be unnecessary, in the view he took in the case, to consider the last alternative concerning the placing of McArthur on the "A" list of the contributories of the company: ; '; ■ -Dealing with- the first.:.counfe his Honour said that unfortunately the de^ fendant— although apparently not until: about two years later—had misapplied . the knowledge and experience gained by him by using it to secure his own advantage instead of that of the company and its debenture holders, it might no doubt be said that what happened two years afterwards should make one suspicious of the bona fides of what was done in February, 1931; but he was bound to look at the position regarding the 1657 shares as it existed at the time of the transaction. HONESTY OF PURPOSE. "There is nothing to show that at that time the defendant had in mind anything else than the honest carrying on of the company's business, and, if that business had been carried on prudently and honestly for the benefit solely of the company and its debenture holders, I see no reason why it should not have been an exceedingly prosperous concern," said , his Honour. "I do not doubt that the de T fendant had acquired as the result of his research work and inquiries during the two years' hiatus a great deal of knowledge and experience which, honestly applied, .should have been of the greatest value to the company. If his services were required as managing director he was in a position to state his terms, and he was not bound to accept the position except upon such terms. If the company or the directors desired to secure his services for a term as managing director and he required as consideration for his doing so, in addition to his salary, a cash payment in advance, I see no reason why such a bargain should not properly be made: and, if the defendant's knowledge and experience had been honestly applied, I should think that the bargain would have been a very good one for the company. "The liquidator is entitled to succeed on this particular count only if he shows that there was no consideration given for the shares, or that the consideration was illusory, and the onus of showing this is upon him." . His Honour said he was not concerned with the company's claims (if any) against other persons, but only ;with the claim against the defendant; and he thought that so far as he was concerned it had been shown that substantial consideration had been given for the shares. If that was so, and the agreement could not be impeached for fraud, the value of such consideration could not now be inquired into. He held, therefore, that on the first count the case for the liquidator failed. The consideration of the second count involved the transactions of a number of related or interlocking companies, continued his Honour. "I may say at once that, so far as ,the interests of the Investment Executive Trust, or any of its allied companies are concerned, I can see no useful purpose that the British National Trust was to serve. It could be, however, and'it was, used by the defendant for the purpose, of manipulating to his own advantage, and to the advantage of KObody el.se, the purchase of tfie Trust building. I find it difficult to think that the British National Trust was really formed by the defendant with any other object. It. also, prior to the transactions of March, 1933. was a company without assets." After tracing the history of various financial transactions, his Honour said it was appropriate to say that even if the defendant did pay cash for th ; ? shares, and the debentures were his own property which he sold to the company for cash, he might still be guilty of misfeasance and breach of trust in taking the company's £22,000 for an asset which was either worthless or illusory. The liquidator claimed a declaration that the defendant was liable to contribute to the assets of the_ company as compensation, £1625 in respect of the first count, and £19,340

in respect of the second. The first claim had already been decided against the liquidator. CONFLICTING CAPACITIES. The defendant was on the one hand the applicant for the shares and the holder cJC the debentures; on the other, he was the managing director of the Investment Executive Trust, with full delegation of all the powers of the directors; and the transaction must be regarded as having been entered into by the I.E.T. through the defendant acting in that capacity. There was no record in the minutes of the acquisition by the company of the debentures over having been dealt with by the directors, and the only inference he thought was that the whole of the business was conducted by the defendant alone, acting in two conflicting capacities. The transaction there was, in his opinion, illusory. The consideration constituted by the debentures in payment to the I.E.T. for the parcel of shares taken up by the defendant must b. regarded as valueless, or, at least, illusory and colourable. "He was not only a director of the company, but the managing director," said his Honour, "with a delegation of all the powers of the company; and if, in his fiduciary capacity, he purchased on behalf of the company, or was a party to the purchase of, something of his own consisting of paper which was either worthless or, if worth anything, was worth nothing like the amount he received, he would be guilty of misfeasance and breach of trust; and if, as I think, the debentures were valueless and illusory as a piece of property, then in respect of such misfeasance or breach of trust the defendant would be liabl: in the sum (I should think) of £22,000, though on the second count of the summons the sum claimed as compensation is £19,340. That is why I say that even on his own view of the nature of these transactions the defendant's position is in no way improved. BREACH OF TRUST SHOWN. "It follows, therefore, in my judgment, that on any view of the case (subject only to consideration of the question- as to the validity of the increase of capital), misfeasance or breach of trust on the defendant's part has been shown, and that the company has suffered loss from that misfeasance or breach of trust to the extent of £19,340." : . Early in his judgment his Honour said the nominal capital of the company (originally £10,000, divided into 7500 preference shares of £1 each and 25,000 ordinary shares of 2s each) was, on February 2, 1933, increased, or purported to be increased, to £100,000, consisting of 75,000 preference shares of £ 1 each and 250,000 ordinary shares of 2s each. 'He came to the final question. It was contended by Mr. Cooke that the increase of capital and the allotment of any portion thereof were alike invalid, and a complete nullity. That was contested by Mr. Hay, who said that in any case the defendent, by his conduct, was estopped from alleging that the allotments were invalid. "Now on this summons, for the first time, the defendant, having been foiled in his schemes to secure for himself, at the expense and to the loss of the companies that he had himself brought into being, any profits that might have been made from the operations in connection with, or from the ultimate disposal of, the Trust building, raises,the question of invalidity in the hope of thus escaping liability," continued his Honour. "There can, of course, be no reflection ■upon counsel—nor can they be blamed in any way—for raising a point of ■this kind. "CYNICALLY AUDACIOUS." t:"It is indeed their duty to do so if the; client sq; instructs, -but I think • I may properly adopt, in reference to t^e conduct of the client, an expression used- by Lord Atkinson ... repeated by Edwards J . . . 'a proceeding more unmeritdrious, more cynically audacious, could not well be conceived.' Still, if the law says that the defendant may nevertheless escape liability, escape he must. But this Court will certainly not be astute to find loopholes for escape in such circumstances, and happily, if the. view thati I take of the matter is right, immunity from liability will not result."

His Honour found that article 44 of th> company's articles of association had been complied with, so that the increase in capital was validly made.

Entering of judgment was deferred to enable counsel to be heard on certain further contentions. '