MCARTHUR LIABLE

Nelson Evening Mail, Volume LXXI, 10 September 1937, Page 2

M C ARTHUR LIABLE

FOR SUM OF £19,090 GUILTY OF MISFEASANCE j I JUDGMENT DEFERRED | A finding that John William Shaw! McArthur, company director, of Wei- j lington, has been guilty of breaches of I 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 Wellington Supreme j Court yesterday. Judgment, however,; was deferred to allow counsel for Mc-| Arthur to raise further contentions if! desired. On one of the breaches of i trust alleged his Honour found for Me-; Arthur. At the hearing on June 10th. 11th, j 14th and 15th Mr E. P. Hay appeared! for the Public Trustee, who sought the j declarations, and Mr P. B. Cooke, K.C., with him Mr R. 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 25th February, 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 I him to the company; but being, in fact, fan invalid and improper consideration | designed to conceal the true nature of j the transaction, which, in the circum- | stances, represented a gift of 16,250 ! shares from the company to him. I That McArthur, having obtained an :allotment to himself of 193,400 ordin!ary shares of 2s eacli in the capital of j the company on or before 26th May, ; 1933 was a party to procuring the issue | of the shares to himself as fully paid, jand, 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 iilujsory consideration for the directors to accept for the shares instead of cash, or constituted such debentures an asset | acquired by him through the misuse land by the utilisation of the funds of ! the Investment Executive Trust, a : breach of trust that made him accounti able to the company for the debentures. A further declaration was sought that McArthur was liable to contribute £20,965 to the assets of the company as compensation for the breach of trust, and the Court was asked to order him 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 that 38,080 shares in the company (the balance of the parcel of 193,400 shares | still remaining in McArthur’s name), | credited in the'company’s books as ful- ; ly paid up, were contributing shares on i which no part of the capital represented by Jhem had been paid, and that | McAvthW was liable to be placed op 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 count, his Honour said that unfortunately the defendant —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 hold|ers. It might no doubt be said that I 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 'transacj tion. 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 k should not have been an exceedingly prosperous concern.” said his Honour. “I do not doubt that the defendant had acquired as the result of his research work and inquiries during the two years’ hiatus a great deal of knowledge and experience w'hich. 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 tc 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 I consideration was illusory, and the I r * is of showing this is upon him." I 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 nobody else, the purchase of the 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 the 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 liquida--1 tor. CONFLICTING CAPACITIES The defendant was on the one hand ; the applicant for the shares and the i holder of the debentures; on the other, |he was the managing director of the I Investment Executive Trust, with full j 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 ever having been dealt with by the directors, and the only inference he thought was that the whole of the busi- | ness was conducted by the defendant j alone, acting in two conflicting capaIcities. The transaction there was, in his | opinion, illusory. The consideration | constituted by the debentures in pay- | ment to the I.E.T. for the parcel. of 1 shares taken up by the defendant must be 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 deTegation 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 j received, he would be guilty of misj feasance 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 liable 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 views 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 £IO,OOO, divided into 7500 preference shares of £1 each and 25,000 ordinary shares of 2s each) was, on 2nd February, 1933, increased, or purported to be increased, to £IOO,OOO, 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 defendant, 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 conection 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”

“It is indeed theii;, duty to do so if the client so instructs, but I think I may properly adopt, in reference to the conduct of the client, an expression used by Lord Atkinson . . . repeated by Edwards J . . . ‘a proceeding more unmeritorious, 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 that I take of the matier is right, immunity from liability will not result.” His Honour found that article 44 of the 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.