NEW ZEALAND LOAN AND MERCANTILE AGENCY COMPANY.

Evening Star, Issue 9582, 31 December 1894, Page 4

NEW ZEALAND LOAN AND MERCANTILE AGENCY COMPANY.

PROPOSED ACTION AGAINST THE OLD DIRECTORS. \ ' MOTION TO STAY THE PROCEEDINGS.

[Specially Reported.]

London, November 16. This case came up for argument before Mr | Justice Yaughan Williams in the Court of Queen's Bench on Monday, having been adjourned from a previous sitting on Thursday, the Bth, to enable the. Official Receiver to amend his summons by the inclusion of the draft summons, definitely stating the cause of action against itho directors and the officers of the old" ; company to be for the recovery of a sum of £47,000 alleged to have been wrongfully paid away in dividends. The present argument was on a motion by the Official Receiver against the directors of the reconstructed company for an order of the Court to render them liable for the costs of the proceedings; against the old directors. Against this the new directors moved" that the Official Receiver be ordered to stay proceedings. Mr Latham, Q.C., appeared for the Official Receiver, and Mr Swinfern Eady for the directors of the new company. Mr Latham said the summons had now been amended for the express purpose of raising the two points which His Lordship had stated at the previous sitting should be kept apart—namely, whether, under the scheme, and the order confirming it, and the agreement upon it, under the true construction of these documents the new company are or are not liable to pay the costs of the specific proceedings now contemplated against the former directors and the officers of the old company, which contemplated proceedings were particularised in the draft summons exhibited in the proceedings. The second point was that, assuming the liability of the Board of the new company to pay the costs of such proceedings, whether or not, un.lcr iho circumstances which had arisen, the new company was in a position to stay or cheek such proceedings being taken and proceeded with, on the ground that they are the only persons really interested in the result of such proceedings, and consequently are entitled to say that they shall not take place, because they think it inexpedient. Mr Justice Vaughan Williams: Under the circumstances of this case ? Mr Latham : Yes, your Lordship; I think there is very little beyond what I said in opening the case before. The first part your . Lordship has already referred to under the clause in the agreement which provides that: " As a further part of the consideration of the transfer the new company shall satisfy all fees, charges, and costs and expenses incidental to the liquidation of the old company and the preparation and carrying out of the agreement, including matters and the proceedings consequent thereon." This might mean the proceedings consequent upon the agreement, but the other words were quite sufficient to cover such proceedings as the present, "all fees, costs, charges, and expenses of and incidental to the liquidation of the old company, and the costs of the plaintiffs and defendants in the action Shroeder versos the New Zealand (Loan and Mercantile Agency Company as between solicitor and client." In clause 10 it was further provided that the liquidator should have a lien upon the whole of the property thereby agreed to be transferred for all moneys payable by the new company under the scheme, and uniil the same shall have been paid the liquidator shall be at liberty to retain possession. After the scheme was issued there was a similar olause

in the agreement. There was a special exception from the general transfer of the , x property excepting any rights of action or " claims against the directors and officers of the old company. He (Mr Litham) submitted that this section of the agreement bound the new company to pay the costs of winding-up, and that in the costs of winding up would certainly be included proceeding* to recover a large sum of money from the old directors and officers, especially as these proceedings were being taken under a suggestion made by His Lordship and by the advice of counsel. Suppose there were any other proceedings in the matter he. (Mr Latham) submitted that under the clause the directors of the new company would be liable for the cost 3. With regard to the second point at the time when the scheme was before His Lordship, there was an examination of these directors and officers, and at that time it was contemplated that proceedings might possibly be taken against them. After the* scheme was sanctioned and the new company formed, the new company entered into an agreement especially' excepting the liability in the transfer; therefore the new directors were shut out by their own action in the clause of the transfer from any objection they might raise to payment of costs. •'' His Lordship : For whom did Mr Cozens Hardy appear in the application to sanction the agreement? Mr Swinfern Eady: For the Committee of . Creditors who framed the scheme. His Lordship: He said this scheme, if approved by the Court, would not in the least affect or prejudice any proceedings which might result from acts antecedent to that, these acts being the examination. Mr Latham : It was the statement made on behalf of the Committee which framed the- scheni3. At that time the new company was not in existence, and therefore it could not be bound. The Judge: The new company could not b3 bound, for they were not in existence — they could not ratify that which they had not done. But when they came to accept it they might take it upon the terms of the recommendations which had been made from the first. Mr Latham: I am a little reluctant to deal with that particular aspect of the question, because Mr Cozens Hardy is not present. It was a question between the Committee and the Court at that time, and I will leave it entirely in your Lordship's hands.- Suppose it was said that the exception is a matter of general contention? Under the agreement and the proceedings that have taken place since the new company would be entitled to all the benefit that might accrue from any proceedings like these. There are certain shareholders who have not yet come in. Certain dissentient shareholders might still have some interest in this excepted asset. There might be an interest to be decided, and therefore the new company could not claim the control of the whole proceedings as exclusive holders. Mr Eady: I have only one word to add! Assuming that under the terms of this agreement the new company is entitled to an interest in anything that may be recovered in the proceedings, is it right on the part of the directors to veto these procaedings? May it nob be that each shareholder in the new company would be entitled to share in the assets, and that the directors of the new company shoulekcall a general meeting before they assume the.right to abandon an asset upon which the shareholders have not been consulted ? . His Lordship: At the instance of the present Board of Directors I abstained from making any order as to a general meeting, bscause they urged that it would be a commercial injury to the new company. Mr Latham: I can understand -that it miy be a good reason {or not submitting the question to a general meeting; but-1 submit whether the new directors -are justified in abandoning a right which may be the right of every individual shareholder. Mr Swinfern Eady: The last proposition can be dismissed in "a word or two/ ThV assamption is that the shareholders- in the 1 new company took shares on the supposition that this is, "an asset of ,the new company, and, therefore, the Board ;have, no power to reject it Assuming thaV the directors are not under an obligation to pursue olairas which, whether well founded or, not, they honestly believe would be prejudicial to the. interests of the new company, and:that tney cannot refrain without the assent of the shareholders involved, is only t# state a Supposition whioh is,inconsistent upon the ace of it It would render it impossible' to carry on the affairs of any public company for a single day. The first question is one of construction, and the second deals whether the proposed ought-not to do taken. ''."<-■ -•>.** i * l His Lordihip: If. I were asked to decide! the question now whethar or. norths pro-i ceedijngs should Toe taken, 1 I x. ,-• / -v, •'.'--' ■ ■:

'arSfficulty, "because 1 have already made an order, but to stay, w~bich, practically, coihea to the same thing. T " * | Mr Swinfern Eady: A? to whether proceedings should be taken, I am not going to object to the form, but I cannot accept your Lordship's proposition that these proceedings i have been ordered. No doubt the order f was for proceedings to" be taken generally, such as the liquidator might be legally advised, but it cannot be dealt with on the footing that there is an order for these proceedings to be taken, but whether your -Lordship has jurisdiction upon the question whether the proceedings should-be continued. Those two questions raised upon the summons appear to become one. Because, assuming that the proceedings are proper for the purpose of winding up the old company, then I am not prepared to argue that they are not included in the scheme, agreement, and order. Then the question arises whether the expense ought to be borne by the directors of tho new company. Practically the point is whether the summons should go further and these proceedings be continued. His Lordship: lam inclined to think there is a further question. I may have to ask myself the question; Was the intention of this agreement and order that these particular proceedings against the directors and officers of tho old company, if taken, should be paid for out of the assets of the old company? You say you are not concerned to argue that question ought not to be answered .in the affirmative if the proceedings are proper. • Mr Swinfern Eady: By the mere fact of the scheme being confirmed the jurisdiction against the directors of the old company was gone. His Lordship: I did not know you proposed to argue that. What I want to know is whether you argue that, assuming the proceedings are proper, the costs of such proceedings should not be paid by the new directors.

Mr Swinfern Eady: Wc say these proceedings should not go on because they will injure the new company. * His Lordship: You will introduce that other question. The question whether these proceedings should be continued is wholly another question. It is a question as to who shall provide the costs ifthey do go on. That is the first question which I think should be settled. If it is assumed that the costs should be borne out of the assets of the old company, then I need not argue any further about it. The only question will then be whether the proceedings shall go on. Mr Swinfern Eady : 1 do not admit that in any case they should fall on the new company, because I assume that the proceedings cannot benefit the new company, and therefore, whatever the terms of the agreement may be, the Court should not allow the proceedings to go on except at the cost of the persons who claim to benefit by them. Mr Latham has admitted that there may be some dissentient shareholders; but I say these persons have no interest in the Jues'tion, and, assuming that they have, still say these proceedings ought not to go on at the cost of the new company if they are for the benefit of shareholders in the old, but those who are interested should put their hands in their pockets. Now, who are the persons interested ? I say the new company, because any assets recovered would belong to them. But I say the Court should stay the proceedings when it is manifest that the evil to the new company would be greater than any benefit that might result. The Court should consider the best interests of the persons or company for whose supposed benefit the proceedings are taken. The question is also beyond that possible sacrifice there is some public right or public justice to be vindicated; but that is a proposition which I dispute altogether. His Lordship : W T hat I have tried to call your attention to is this : If you were dealing with a liquidator, I think the courts'have asserted again and again that where the Legislature gave the control of the liquidation to the creditors that does not give the creditors a right to deal with the liquidation in a mode that would be inconsistent with publio jußtice and morality. The question has arisen ofteuer than once—sometimes under the Act of 1869, sections 125 and 126, which gave to the creditors power to deal with the liquidation, the liquidation being sometimes by arrangement and sometimes by composition. The courts have, 1 think, uniformly refused to be bound by the mere fact that a majority of the creditors voted in favor of any particular scheme. That question was raised under the Act of 1883. There the affairs of a bankrupt are relegated occasionally to the creditors. Then, again, the Court has refused to allow the proceedings in all cases to be bound even by a.statutory majority of the creditors who have passed certain resolutions. We have to consider whether the arrangement under the Act of 1870, which you will remember requires that there should be a liquidation in some form in official progress, whether the principles of this do not apply to the case of a scheme which is sanctioned under that Act, and especially so in the case where the scheme is sanctioned from the representations and subject to the provisions which this scheme was subject to. Mr Swinfern Eady: That involves different considerations. Going back to sections 125 and 126°, in that case the alternative which the Court had to consider was whether the scheme should be sanctioned.

His Lordship: In a great many cases it was so, but 1 think if you examine the cases you will find some of them referred to the action-of the directors in tho scheme that was sanctioned.

Mr Swinfern Eady: Suppose tho Court sanctioned the scheme, the liquidator failed to see that it was his duty to sacrifice the assets of the creditors by taking proceedings which would seriously prejudice their interests?

His Lordship: Of course, it is impossible that there should be a case on all fours with this. In the case under the 125 th section the question was whether a debtor should receive his discharge. There is no such alternative in the present case. But'even where there is not an alternative the Court does not relegate the entire control t,o the liquidator. Mr Eady : The new company do not claim the. sole control of the proceedings under the scheme, but we consider the proceedings should not go on. His Lordship: Do you claim a right of veto on the ground that it is not to the pecuniary interest of these persons that the proceedings should go on. Mr Eady : We do not claim any veto at all. I say when it is demonstrated to the Court that it would be against the pecuniary interest of the persons for whose benefit the proceedings purport to be taken it is a reason for the Court to veto these proceedings. His Lordship: Then it is abundantly clear, if the Court has that power, that no liquidator can forego the proceedings at his own discretion on any such ground. If he is advised by counsel that he has a right to recover property of value, I doubt whether the liquidator would have the right to say "I will release that property, because I doubt whether it will repay the costs involved in recovering it." That is a matter upon, which the liquidator should take the opinion of the Court, and not exercise his own discretion.

Mr Eady; Under the scheme there is an exception from the assets of the new company of claims against the old directors. His Lordship: I should be advised what is the nature of the claims the offioiai liquidator was advised he* had against the directors and officers of the old company. Mr Eady : We say the - attention of counsel was not drawn to a material fact. The opinion was based upon the question of 1 the true financial position of the oompany, a misleading balance-sheet, and payment of a dividend which was not justified. It is alleged that three items were brought to profit and loss which ought not to have been taken into account,, amounting to £47,000, and that the money was paid out of capital. But I say there is ho proof that it was paid out of capital. • His Lordship: The first matter which the new company nave a right to take into consideration is what is result, or pFobable, legal result, of certain acts and laets. ' Is not'.that a matter outside their jurisdiction;?! ; If the liquidator is advised to fcvko "these proceedings, and that they are Stoper proceedings, he must act upon his jpsfcretioV Loan quite understand the new odmpahy flaying that it "will cost moire ''wJSqvW' this -claim than it is worth. But |have. they & right to come to me and say K. v ' , j;> * '-C' .i ,.••■-

that those proceedings wiU not "be - successful ? I'Sataidt allow-a?disousslon*ion this, so long as there is a prima facie oase. Mtffiady: I don't ask you'to decide that question. I say even if these proceedings should succeed they ought not to be' taken. The question arises in the Chancery Court every day as to whether certain proceedings should' or should not be taken against particular persons. Then it is proper to consider the question-of probable success or failure.

, His Lordship: One does not know what may happen at the trial. One or two people may exonerate themselves, and three other people may be shown to be liable. I do\qot think I can allow you to discuss now anything that involves a decision on my part as to the probable liability of the new company. Mr Eady : The question is whether these proceedings should go on, and the Court is bound to take into consideration what difficulties may be in the"way of success. His Lordship: I am not bound to discuss the details. / Mr Eady: The draft summons asks for a settlement by the persons liable for the sum of £41,216. It is practically a summons to compel the directors and officers of the old company to repay money alleged to have been wrongly paicf away. It does not allege 'fraud against them, but that they paid away money which was not available for dividends. The directors say there was at the time £400,000 to the credit of the company on dividend account, and you willliave to account for the whole of that very large sum. They say money stood to the credit of the income account which was available for dividend. The proceedings will involve an examination of tlje whole of the assets. The grounds upon which the new company state these proceedings should not bo allowed were stated by Mr Martin in several'affidavits he has filed. Shortly, the opinion of counsel is this: that whilst agreeing that one item of £11,419 cannot be justified as being treated as profit and loss, with regard to the other two items there is some difficulty. Part ot the items may be justified, and with regard to the other parts there may be a difficulty in showing that the directors were aware of the facts which made it improper to include them as profit and loss. But even assuming that particular parts of it cannot be justified, it by no means follows that the directors are under any liability whatever. There was a sum of £300,000 or £400,000 standing to the credit of reserve fund, the whole of which was available to payment of dividend, and the whole of that fund must be got rid of and exhausted before it can be predicated-that the directors paid a dividend out of capital. This would involve an examination of the company's assets, and a commission to take evidence in Australia would be necessary. His Lordship : Upon that there is a difference of opinion. The counsel for the Official Receiver do not think a commission should be granted, as it would not rebut the case against the directors. The existence of that reserve fund was a matter which the directors and officers dealt with on their examination. Their own views would affect the question of the existence of the money. Mr Eady: That is an issue upon which both parties would be entitled to produce evidence. But the directors of the new company wore not involved in that question. There was a proposed compromise, but the old directors refused to agree to any compromise, which would imply that they had done wrong His Lordship : At the present time you must use your own discretion. Some of the correspondence consists of comments upon my judicial conduct, and it is not easy for a judge to deal with matters which affect him personally in that way. Mr Eady : I only wish to show that at the eleventh hour an attempt was made to settle the matter, but the old directors not ouly declined the proposal, but expressed their determination to resist to the utmost. In a letter of June 12 by Mr Martin to the Official Receiver he stated that a meeting of the directors was held to consider his proposals. While they were anxious to find a way out of the difficulty, and regarded the matter as a business and not a personal question, they considered that further proceedings would be detrimental to the new company, and the costs and injury, would greatly exceed the money value of anything likely to be recovered, even if the proceedings were successful. The Board considered that as the new company owned the present assets, and any further assets that might be recovered, their views were entitled to the first consideration. The mere issue of a summons would of itself cause mischief, and depreciate the business. The question was purely one of business. The Board thought it would not be justified in devoting a sum of money for legal proceedings of a prolonged and doubtful character, which might result in no benefit. There was another affidavit by Mr Martin, in which he said that the creditors had ceased to be creditors of the old company, and therefore they had no claim upon the money which the liquidator might recover. In paragraph six of a subsequent affidavit Mr Martin said the objections of the new company to the proposed proceedings were that the expense likely to be involved, the length of time, and the serious injury to the business of the new company, and the great pecuniary loss and damage, would be greater than any sum that might possibly be recovered if the proceedings were successful. Such proceedings would be strenuously resisted by the directors and officers of the old company, and would not be decided without inquiry in the colonies, which would involve a commission in Australia and New Zealand to take evidence upon the points. Such inquiry must necessarily be of a protracted and expensive character. The inquiries would involve an investigation into the value of properties mortgaged and the ability or inability of the mortgagors to make up the difference. A valuation would have to be made of the value of the'properties at the time the dividend was declared with regard to the injury to the company's business. Some of the operations of the company in the colonies are in more or less remote districts, where everything published against the old company would be used by interested parties against the new company. As an example, there was the case of a gentleman named Radd, whose business was worth £I,OOO a year to the company, but who transferred his business to Goldsbrough and Mort in consequence of the reports of the examination of tho directors and officers of the old company. This was one case out of many that had happened or were likely to happen. It would be part of the Official Receiver's case to show that the Australian properties had greatly depreciated in value in 1893, which would injure the new company. The pecuniary position of past borrowers would come under review, and would prevent other persons from borrowing, and as a large part of the company's business consisted of advances in stock, etc., this would result in serious injury. These were the views of men of business, and they were entitled to great weight. The new directors had probably excepted these claims because they did not wish to be mixed up in any proceedings.* His Lordship: tdo not think the arrangements made at the time the Court sanctioned the scheme could have been carried through without some such reservation! Mr Eady: Tho agreement was not even drafted at that time. Under the scheme the creditors were' to hold their claims in trust for the new company. Until the claims are paid to the old company, the dissentient shareholders "have no claim. I dispute the contention that there is any public interest involved or to be considered in determining this question against the old directors. The Court must have regard to the interests of thebenefioiariea, who are the new oompany. , The Court'has no right to allow proceedings 1 to be taken with a -view to serving the publio interest.by punishing the directors of the,mew company. We say the evidence is overwhelming, that no benefit can result, from .the proceedings, but that injury will be inflioted on the new company 4 It is'the boupden duty of the Court to protect the the shareholder interested in the winding up,, lam not suggesting that the Official Receiver was not justified, but, - with regard to the proceedings down to the present moment, I ftmnot in 0 position to offer any opposition. I only Contend .thatthey shouldnotbe allowed to proceed, „ Mr Latham 'Under the .agreement the. new company is to acquire tthe'in'teTCßtß|6fjj the old company and provide toiuttfrAVUa/ bitttiesj but therein no exptes^'fclanll^l&'tlie

scfieme whicja'says that' the whole of the The < agreement expressly excludes this particular 1 claim. THerioutside-thai the ttew oSmpany i beoome entitled to the.benefit of these claims ( by reason of the creditors of the old com- ( pany holding their claimß in' trust for the * new company. That is to say, the creditors must come in front of shareholders. But ] the term's of the agreement distinctly ex- 3 cepted these claimtrin order that they should be reserved for the official liquidator to deal ) with them. In the course of the examina- < tion this question of the reserve fund, which ( might be applicable to make up the dividend, was distinctly dealt with and referred to by your Lordship. Tho result is that on one of ( the three items there is no defence whatever,and as to two others there is a defence. Mr Eady: No. Mr Latham : It was stated that £II,OOO i had been misapplied. Having regard to the opinion of counsel and of the liquidator these proceedings ought not to be set aside. The Court had, in fact, made an order covering these proceedings. Against that was the opinion of the new directors that their prospects would be injured. His Lordship: The opinion of Mr Bray was upon the evidenco before me. I see that in the opinion of Mr Swinfern Eady, in order to enable counsel to come to a judgment upon these points, they thought that it would be necessary to ascertain from the company's officers the reasons why the three items should be included in profit and loss account. At the date when the dividend was declared they say there was £165,000 upon loan and mortgage, and that credit might properly have been taken. This contingent reserve fund belonged partly to Australia and New Zealand; but of £21,000 of the dividend it was claimed that £5,000 was undivided profits from the previous year. £16,000 was made up in this way; The directors thought they; were justified in taking.credit for improvements in the value of certain properties upon which advances had been made. -There was also a small sum from bad debts since recovered. They argued they had a right to treat the accounts as a whole, and ifthey considered there was a surplus in New Zealand it would balance the deficits in Australia, and the directors were entitled to take credit in that way in the, accounts for the purpose of the dividend. As to the £II,OOO, the directors took credit for interest accruing from the Land Company, which had changed the date of declaring its dividend to 31st March. The directors also took credit for improvements in the value of properties in New South Wales. It was alleged that the balance showed £300,000 available' for dividend, and it would be incumbent on the Official Receiver to show that this enormous reserve fund had been exhausted. Therefore counsel were of opinion that the liability of the directors of the old company was by-no means clear. Mr Latham:. The directors and officers were fully examined, and the Official Receiver had a right to argue that all the facts of the case had been stated. lam not in a position to comment upon the statement now made, but after the examination your Lordship stated that if the proper amounts had been written off the company's assets the reserve fund would not only have disappeared, but the balance would bo the other way. 3 His Lordship : This is a case of general importance, and I will take time to consider my judgment. THE JUDGMENT. Mr Justice Vaughan Williams delivered judgment on Thursday. The attendance in court was very small, and it was remarked that none of the persons directly interested in the result of the judgment put in an appearance, though they were represented by counsel —a fact which seemed to indicate that the failure of the proceedings had been foreseen. The judgment occupied upwards of an hour in ,the delivery, and the main points are fairly summarised in the following digest:—The directors of the new company, His Lordship said, were of opinion that the proceedings under it would be so costly and so uncertain in their result that as prudent administrators they opposed the proposed expenditure, having regard to the damage which protracted proceedings against the directors and officers of the old company, from whom the new company purchased their business, would cause to the commercial credit of the new company. The important question was whether the proceedings should be stayed or discontinued because the directors had —and it might be assumed honestly—come to that conclusion. Tho opinion of counsel on the question of tho liability of the old directors and officers was to the effect that some of the old directors were jointly and severally liable in respect of dividends improperly paid and other matters, but the cases were not qi'itc clear, and the difficulty of proving the necessary facts and the expense of a commission to Australia and ftew Zealand was to be considered. Having shown how far this view was supported by the facts of the case, the judge said the question arose whether generally, and whether in this particular case, proceedings by summons, under section 10 of the Act of 1890, to enforce a prima facie case of misfeasance or breach of trust, ought to be continued in face of the opposition of the new company, to whom any sum recovered by the proceedings would have to be paid. Section 10 was not punitive. Its object was not the punishment of the delinquents, but the recovery of assets. If there was a prima facte case it was his duty not to permit tho abandonment of the proceedings if the object was shown to be, in the smallest degree, to screen anyone from the consequences of his misfeasance. However, he did Hot think he should do anything to injure the commercial interests of the new company. If he was satisfied that the course taken was honest and not tainted with corruption he ought to give effect to the conclusion arrived at by the new directors. He thought he ought to assume the honesty of the new'company, and that their resolution was free from taint. The evidence showed such was the case, and the Official Receiver did not suggest anything to the contrary. Having regard to these, considerations, He thought he ought not to authorise the continuance of these,proceedings. He felt that the result of this judgment was most unfortunate. The examination disclosed a prima facie case, and but for the reconstruction scheme it would have been heard on a misfeasance summons, and the directors found liable or declared free from liability—exculpated or condemned. It was'sa matter of regret in every way, and from every point of view, that the case should never be disposed of'one way or another, but he did not know how it could be avoided. In coming to the conclusion he did he was acting on the commercial opinion of the new directors. This was a matter on which he was bound to give more weight to their opinion than his own. He might be, and was, of opinion that in the long run it might be better for the interests of the new company that the most disagreeable facts connected with the past history of the old company should be disclosed. Truth and light never did much harm, even in commercial matters; But he had no right to act on his own opinion against that of the directors of the new company, to whom the company entrusted its interests. He hoped that the conclusion at which he had reluctantly arrived .might do no man any injustice. With regard to the costs of the summons, Mr Eady said that the company was willing to pay them. That was right. The summons was a necessary step in the course of the liquidation, and the new company undertook to pay the costs. The result is that the proceedings under the summons are stayed.