COMPANY PROMOTER SUED.

New Zealand Herald, Volume LXI, Issue 18680, 9 April 1924, Page 11

COMPANY PROMOTER SUED.

tWATRAKET, LIMITED. CLAIM FOR £5857 MADE. .SHARES AND COMMISSION. CASE FOR THE COMPANY. DEFENDANT'S COUNTER-CLAIM. An important civil action, -with a counter-claim, in regard to Wairakei shares was opened before Mr Justice Herdman in the Supreme Court yesterday. Wairakei, Ltd. (Mr. Richmond and Mr. Northcroft), sought to recover from Arthur Cleave (Mr. Myers, K.C-, and Mr. Luxford), £8857, with interest. The amount was claimed under three separate heads. First, tire company sought to recover £2057, alleged to have been paid to Cleave by way of commission on shares in the company, for which he procured subscriptions, and which the company now alleged was not commission, but in the form of a gratuity and was ultra vires. The second head of claim was for £1275, money received in respect of an allotment of 5000 shares to one, L. C. Johnson, of Australia, who later became bankrupt. When Johnson became unfinancial, his shares were re-sold to third parties. The company claimed it was entitled to the £1250. The third section of claim arose out of the transfer of some 5550 shares, held by Cleave to third parties. The company alleged that Cleave, either himself or by his agent, procured applications for the company's contributing shares, and then transferred shares held by Cleave to such applicants, whereby the company was deprived of. the equivalent of such capital. The company claimed that Cleave should refund the moneys received for those shares.

C leave's defence was a complete denial of plaintiffs' allegations. Ho claimed that the commission was properly paid and was not ultra vires. As to the £1250 in respect of Johnson's shares, lie contended that that amount had been properly and legally refunded to him. in respect of the allegation as to diversion of capital, Cleave denied that there had been any fraud or deceit and he claimed that both the applicants for shares and the directors fully understood that shares held by Cleave were being transferred and that contributing shares were not being issued direct from the company. Cleave counter-claimed for £1606, which he alleged was due to him as balance of purchase money, and for a further £1000 as damages, or, alternatively, a declaration that the plaintiff company is bound to undertake a certain liability in respect of the purchase of 1000 shares. The company's defence to the counterclaim was a denial that any purchase money was due; as to the share transaction, the company contended that if any arrangement was made it was ' ultra vires.

Question of Commission. Mr. Richmond, in opening, said this was the first occasion on which the company had figured as plaintiff. In regard to tho contention that the payment of commission was ultra vires, counsel pointed out that it constituted a breach of Section 57 of the Companies Act. In no prospectus of the company was there, he said, any disclosure of commission being paid. Such payment to Cleave was not commission, nor, he submitted, was it brokerage it was purely a gratuity. Brokerage was never paid to anyone on his own application for shares, and over 13,000 shares were applied for by Cleave and Co., which firm, so far as the register showed, was simply Cleave. Applicant Who went Bankrupt. The second head of claim, continued counsel, for the refund of £1250, in respect of an application by L. C. Johnson for 5000 shares, stood entirely by itself. The contention of the company was that that men/y was paid by Cleave as agent for Johnson. Johnson's shares, for which Cleave secured the application, were part of the first 41,000 applications,, upon which the company went to allotment. The £IIZO was paid in by Cleave in June, 1919, as part of a general settlement. The company contended that the £1250 became its absolute property, and it could not be diverted from the company by any formalities in the nature of alteration of the register, or any other juggling. Shares were allotted to Johnson, and he got on to the register, and from that time there was nothing the directors could do which would divert the money from its proper owner, the company, to Cleave. The 5000 shares allotted to Johnson were, in 1920, by resolution of the company, and alterations' in its register, put into the name of the secretary, the latter apparently to act as trustee for Cleave, and the latter was allowed, to sell the shares and refund himself the £1250. Counsel contended that the action of the directors was ultra vires. He would ask the Court to look through the shell and inspect the kernel inside, and so understand the real intent of the operation. Mr. Myers: In other words, you want £6250 for these 5000 shares. Mr. Richmond: I do not know what you mean by that. The company wants its application money, and the register can be rectified in a suitable way. My friend knows perfectly well that we do not want that amount. To a question by His Honor, Mr. Richmond said that the company, without any real authority, had paid over £1250 to Cleave, and the company now claimed to be entitled to it. Mr. Myers: My friend ought to say that the company got £5000 for those shares, in addition to the £1250. Mr. Richmond said the Johnson shares could never be shifted from Johnson's name except by forfeiture. They did not claim £6250. New or Tranlerred Shares. Dealing with the third head of the claim, Mr. Richmond said the contention was that Cleave personally, or by his agent Crespin, secured subscription for 5550 of the company's unallotted shares, and that the applicants were deceived into signing transfer forms in the belief that 'it was some part of the company's procedure necessary for subscription for the company's contributing shares. They further contended that Cleave, had then deceived the directors into approving of those forms, as being transfers of Cleave's own fully-paid shares, concealing from the directors that the. so-called transfers had been obtained by subterfuge. The company claimed £5550, and a rectification of the register.

The Company's History; "I propose to enter fairly fully into the history of the company," said Mr. Richmond. Continuing, he said that Cleave was now, and was when Wairakei had its birth, an experienced promoter of companies. Before Wairakei was brought into existence, he had been associated with a remarkable group of four companies, known as the Home Builders, Ltd., Security Underwriters, Ltd., Dominion Mortgages, Ltd., and Dominion Financiers, Ltd. Cleave had been through an intense course in company law in respect of those four companies, which culminated in the liquidation of Dominion Mortgages and Dominion Financiers,. oiid in an action against him which was settled in February, 1917. Mr. Myers: Is this relevant except for the press 1 Mi*. Richmond: It is not for the press. Mr. Myers: Then it cannot be relevant to this case. We cannot go into the trials and tribulations of four other companies; we have quite enough to do with the one in hand. Mr. Richmond, continuing, dealt with the agreement entered into by Cleave with Mrs. Grierson, the owner of the Wairakei property. Ha then referred to the articles of association of Wairakei, Ltd., directing

attention to the second article, which had a clause to the effect that " no objection shall be taken to the said agreement or to it being entered into by the director* of the company on the ground that the directors, or some of them, are interested in the purchase price or are nominees of the vendor, or promoters." Mr, Myers: That is quite usual. It was drafted by Lord Davey, and is known as Lord Davey's clause. Mr. Richmond, continuing, said that whether it were Lord Davey's clause or not, it seemed to him to be open to the gravest objection. To his mind it was not only dangerous, but suggested an intention in advance to bind a new-born company hand and foot without the advantage of an independent board of directors. Counsel drew attention to that as instancing the mentality of the principal promoter of the company. Mr. Myers protested against " this unfairness.' His friend, he said, knew the position. There were all sorts of charges of fraud, and he did not want statements to appear in print many hours before there was a possibility of refutation. His friend knew that Cleave was in Australia when the articles were prepared, and he (Mr. -Richmond) knew it was not the promoter who prepared the articles, but the solicitors acting for the company.

Form or Substance. Mr. Richmond: On the contrary, I know nothing of the sort. Continuing, counsel said that throughout the case he proposed to advance this proposition: that in all transactions that would be reviewed by the Court the object of Cleave had been, by putting the form for the substance, to cheat the. true intention of the law. Counsel submitted that Cleave had over-reached himself in so doing, and he would ask the Court to look through the shadow of what he described as pseudo transactions, and rectifications of the regis, ter and see what was the real purport underlying the transactions. The necessity aI r^? unng Ascriptions to the extent of W.OOO ShareS was clear, because McDonald, of Sydney, was a conditional applicant, his application being conditional on that number being secured. Cleave had an abundant inducement to secure 40,000 applications, and to that end he got his own ??EE? ny _ t0 put in an application for 13,000 shares, and he put in Johnson's «WO, but apparently without presenting Johnson s cheque. Up to the date of allotment Cleave did not appear in the picture as one entitled to receive commission. Tlie» first mention of any payment of commission to him was in a minute of the directors, dated January 27, 1919

A General Settlement. In June, 1919, there was, continued counsel, a general settlement between the company and Cleave, and- the latter was paid a cheque for purchase monev and commission to date, and Cleave gave back to the company a cheque of equal amount, representing application moneys he had received or made himself accountable for. The company only claimed commission up to the date of that resolution. Counsel, proceeding, dealt at length with the claim for the refund of £1250 in respect of the shares applied for by L. C. Johnson. It was, he said, a reasonable inference that Cleave knew that Johnson would not pay for the shares, but Cleave put in the application to swell the total to 40,000. Counsel referred to the correspondence that had passed between the company and the official assignee in Australia, who was handling the bankrupt estate of Johnson. Counsel, continuing, said that the company went from the time of allotment in December, 1918, to August, 1919, before a register book .was bought. . Mr. Myers : You cannot blame Cleave for that. Mr. Richmond, continuing, said that when there was a forfeiture of the Johnson shares, the application money became absolutely the company's property and could not belong to anyone else. The shares also passed to the company, and became available for re-issue. The"' transactions seemed to have involved almost every irregularity in company law that could be imagined. But he did not say they were done in a sinister way. Mr. Myers : It is difficult to find anything done regularly. But we do not want to have any misunderstanding. The fact of irregularity does not, in itself, suggest impropriety. Mr. Richmond : I am not saying that any of these iregularities are necessarily sinister in any way. as to the directors as a whole. Continuing, he Baid that plaintiff was entitled to £i 250, and also was entitled to sell the 5000 shares at par.

"A Powerful Personality." Counsel, when suggesting, a' little later, that in certain circumstances the company would be entitled to call upon Cleave for an account of certain moneys connected with Johnson's shares, said that they had taken the point of view that the directors were under the sway of a very able anu powerful personality, a man who, he remembered, had been described as being one of the most prominent and successful commercial men in Auckland. Counsel had no doubt that Cleave was both prominent and successful. He had used that influence and that personality and in some way. or other had "bamboozled" the directors. Mr. Myers: That is not paying a very high compliment to the directors. Mr. Richmond, referring to a block of 9525 shares which were transferred from the secretary to various applicants, said the money, prior to a certain meeting, had been paid into the company's bank account, and'had been "aid out again to Cleave before the meeting. Mr. Myers: It was in pursuance of an arrangement made long previous with the directors. Mr. Richmond, in concluding his remarks about this head of the claim, said that, instead of the company getting the £1250 as forfeiture money, plus the value of the shares, it simply got the £5000, and made Cleave a present of the £1250. The proceeding of the directors was absolutely irregular, and bad, and, p.irticularly in view > of Cleave's then position of managing director, such a transaction could not stand. They asked to recover the £1250 on the ground that Cleave received it entirely without consideration, and that it was not in the power of the directors to give it away. __ Shares Sold in Cambridge. Mr. Richmond then set forth the company's case in regard to the alleged diversion of capital through the-transfer by Cleave of shares owned by him to applicants for company shares. In 1919, he said, the company owed Cleave £8000, balance of purchase money, which was not payable till 70,000 shares had been allotted. It was arranged he should receive £3000 in cash and 5000 fully-paid-up shares, but the shares were not actually allotted till January, 1921. His canvasser, Crespin, visited the Cambridge district and said he had the last of the Wairakei * shares to dispose of. As a printer, Cleave had an ample supply of the company's forms at his disposal, and shares were applied for on the company's printed application forms. In only two instances, counsel believed, was the name of Cleave mentioned. The canvasser got subscribers to sign an application, form headed, To the directors of Wairakei, Ltd.," and the receipt given stated: "Receipt Form: Wairakei, Ltd., p.p. F. Crespin, 'secretary, Wairakei, Ltd.," which position added counsel, Crespin never occupied. The matter was put to people as applications for the company's original allotted shaies. People would apply for contributing shares, and they would receive fully-paid-up shares. Crespin later took blank transfer forms to Cambridge, and the evidence would be that Crespin said: " I shculd have got this form signed when you applied for shares." The forms did not bear the name of the transferer or transferee. Witnesses would be unanimous in saying that Cleave's name was not on them. Counsel submitted that the Court, in it's equitable jurisdiction, should take notice ot \>hat were the true intentions of the parties, and should say that the applicants were on the register by agree ment with the company itself, and not by any transfer from Cleave, and also that the register should be rectified accordingly, omitting the bare formalities of a transfer that had no basis in truth . The applicants still had faith in Wairakei, Ltd., under proper management, •and claimed that the company, and not Cleave, should have the benefit of tht» capital they had subscribed. ' Samuel Hardy, farmer, of Cambridge, gave evidence that Crespin, in offering Wairakei shares in November, 1920* as-

sored him that only 50 per cent, of this amount would be called np. Witness RJgnecl aw application for 200 shares, which was to the directors of the company. Both the application and the receipt were on Wairakei Company forms. There was then no suggestion that the shares belonged to anyone other than tha company. Had Cleave's name been men tioned, witness would not have taken up tho shares, after the experience of a friend of his with the Home Builders* scheme. When he signed the transfer he took it to be a transfer from the company to- himself. Had it shown on its face that it was a transfer from Cleave, or from any individual person, he wornd not have signed it. When witness received cali notices »;nv were on the Wairakei Company's official paper, which were signed by the secretary. So also were tho receipts sent to him; but the receipt for the second call bore the words, " Transferred from A. Cleave." Thereupon, he thought, he wrote to the secretary, stating that he would have nothing to do with Cleave's vendor's shares. When he got the third and subsequent notices of calls he ignored them, as he had already paid up the 50 per cent, that he had been told was to be called up. When he received solicitors' letters demanding payment of £100 as being due to Mr. Cleave he replied that the shares had been "rung in" to him, and he had concluded his obligation in regard to Wairakei shares. He was never sued for the calls.

To Mr. Myers, witness said that when he signed the transfer it was in blank. Apart from dairy companies, this was the only company in which he had had shares. Crespm explained that he ought to have got the transfer signed at the time the application form was signed. Ho took it to be a transfer from the company to himself. When he received a receipt, dated February 25, 1921, ne noticed the words " transferred from A. Cleave." He told Crespin, who said ne " was in a hurry," that he was not going to have any of Cleave's shares palmed off on to him. To Mr. Richmond, witness said he had known Crespin for about oO years. If a stranger had presented the transfer he would not have signed without reading it through. An illness he had had since seeing Crespin had affected his eyesight. Thought Shares were from Company John A. H. Bell, farmer, of Cambridge, said that Crespin called on him at Cambridge, and spoke of Wairakei's great future. Witness, who agreed to take 500 shares, understood that Crespin was selling the shares for the company. Twenty-five per cent, was to be paid on application, and he understood there would be a call of another 25 per cent. Crespin reckoned that in about two years the shares would be worth about £5 each. Cleave's name was not mentioned. Some time later he signed a transfer form, without reading it. Crespin said it was an " application for shares." He did not see the name " Cleave " on it. Later, after receiving notice of a call, witness wrote to the company asking it to sell his shares. The reply was that if he desired to sell he must himself find a purchaser, as the company did not deal in its own shares. Witness came to Auckland, saw Crespin, and was introduced to the secretary. He had then no suspicion that he was not getting shares direct from the company. Later, after a conversation with Hardy, ho called at the company's office, and said that the shares he bought " were Wai rakei shares and not Oleave's shares." He was told he had put in an application for Cleave's shares, and witness denied that. He told them he did not know he had signed an application for Cleave's shares. Had he known they were Cleave's shares he would " have looked further into the matter." To Mr. Myers, witness said his attitude toward the shares might have been influenced by what Hardy told him. The case was adjourned till to-day.