SALE OF SHARES

Otago Daily Times, Issue 22026, 8 August 1933, Page 5

SALE OF SHARES

PROVISIONAL DIRECTORS SUED RETURN OF PAYMENTS CLAIMED PLAINTIFFS NONSUITED The provisional directors of the Southern Pacific Shipping Company, a company which failed to go to allotment, were the defendants in an action brought in the Magistrate’s Court yesterday for the recovery of £l6O by three persons who claimed that they had bought shares in the company on conditions which were not carried out and who sought the return of the purchase money. The plaintiffs were Reginald Hanley Little, whose evidence had been already taken in Wellington, Henry George Strong, and Raymond Henry Strong, and the defendants were Charles Ernest Statham. James Ross Clarke, Walter Joseph Jones, of Invercargill, HughW aidemar Johansen, of Auckland, and Francis Charles Pulton Reid. , In the statement of claim it was alleged that Johansen was the agent of the directors and that the plaintiffs nacl bought shares in the company from him on the understanding that they were to be given positions with the company. Little was to be given a position in one of the boats, and his wife was to be employed as companion. Henry Strong was to be given a position as a storeman, and Raymond was to be employed as an engineer. They had not received these positions, and they, therefore, claimed the * return of the money which they had paid. The amount paid by Little was £7O. The Strongs, who had paid £l5O and who had had £6O returned to them, claimed the balance of £9O. Little wag represented by Mr C. L. Calvert and the Strongs by Mr E. J. Anderson. Mr J. B. Callan appeared for Sir Charles Statham, Mr J. S. Sinclair for Jones, Mr D. A. Solomon for Clarke and Reid, and Mr C. A. Hamer for Johansen. The magistrate (Mr J. R. Bartholomew, S.M.) said that he noticed that no notice of intention to defend had been filed on Johansen’s behalf. Mr Hamer said that he had been instructed by Johansen to consent to judgment but not on the terms set out in the statement of claim, which alleged that he received the money on behalf of the company and that he was under a duty to account for it to the company. He stated that he had received the money personally and was to sell his own promoter’s shares to the plaintiffs. He would consent on those terms. Mr Calvert said that he had no alternative but to accept. The terms were not material. Mr Hamer: But they are material.

The magistrate (to Mr Hamer); If you admit liability that is the end of the matter so far as the court is concerned. If you choose you can lodge a written consent setting out the position. Mr Calvert said that this was an action by provisional shareholders in the company to recover from the provisional directors the money paid by them for their shares. The case was covered by the Companies Act, which provided that if certain conditions were not complied with within 90 days after the issue of a prospectus all money received for shares should be repaid without interest. If it was not repaid the directors should be jointly severally liable to repay it with interest. It was provided, however, that they should not be liable if they proved that their failure to return the money was' not due to any misconduct or negligence on their part. The defendants, therefore, were liable to refund the whole of the money as the company did not go to allotment. There was a definite obligation on the defendants to escape if they could frdm the burden laid on them by the Act. For the purpose of convenience and the saving of expense the three plain.tiffs in this case had been joined together in one action. The plaintiffs purchased, as they thought, shares in the proposed company. The money was paid to Johansen, who received from Little £7O as purchase money for 70 fully-paid-up shares. The Strongs were in a similar position except in one case, one of the plaintiffs having obtained a receipt from Johansen on his own form and having later been issued with a receipt on the recognised form of the company. The directors of the company were all defendants, though William Chambers and W. H. Swanton had been omitted._ These two provisional directors lived in Australia. and the expense of joining them was too great, though their liability was the same as that of the directors in New Zealand. There would be a lot of conflicting evidence with respect to the company and the relations of the directors, but about one thing there was no dispute. Ail joined in saying that Johansen was primarily responsible for the whole thing, and that the greatest moral obligation was on him. Mr Callan said that Mr Calvert had not gone far enough. Instead of “primarily ” he should have said “ solely.” Mr Calvert added that in the prospectus it was provided that there should be a minimum subscription of 30,000 shares. Insufficient shares were sold to enable the company to go to allotment, and it therefore failed. With the exception of six applicants for shares, three of whom were before the court, all the rest had their money returned in full. Mr Callan: There were 42 applicants.

Mr Calvert added that mention was made in the prospectus of an agreement that Johansen was to receive from the company 3000 fully-paid-up shares and £3500 in cash. There was a supplementary agreement between Johansen and* Mr Ross, a solicitor, who was trustee for all the directors, under which Johansen agreed to iiay to each director £SOO for special services rendered in the formation of the company. Little and his wife were to get employment if they subscribed for shares, and they took up 70, and paid for them immediately. _ Johansen several times, Mr _ Calvert added, had departed from the strict truth in regard to the directors. Mr Callan: That is putting it mildly. Mr Calvert added that Johansen did not tell the truth when he told Little that the directors included Sir Thomas Sidey and Mr W. Downio Stewart. The Littles did not get their jobs and, after repeated applications had been made, it soon became evident that the company was going to fizzle out. They were referred to the Commercial Bank, and when they got there they found that they were not among those to whom the money was to be refunded. The position of the Strongs was different. They did get .some money back from Johansen. It appeared now that Johansen had not used the money as it should have been used. He had not put it into the trust account as he should have done. It now appeared that there was a suggestion made that the shares which the plaintiffs purchased were not shares in the company, but that they were Johansen’s own shares. “ We know nothing about that,” Mr Calvert continued. These people went into the office and bought shares as others did. Johansen now said that the shares were his own promoter s shares. It was perfectly obvious why he said that. It was because he had to explain not only a civil act, but a criminal The magistrate remarked that the money appeared to have been paid before the prospectus was issued. Mr Callan; And in one case before tne office was opened. _ Mr Hamer then handed in a confession in writing on behalf of Johansen. The magistrate said that it was merely a minute and had no legal effect. HEARING OF EVIDENCE.

Henry Strong then gave evidence with respect to the purchase of the shares from Johansen, who was a personal friend. He stated that he paid £SO to Johansen on each of two successive days in October. Johansen gave him his own receipt ana later, in March, a receipt on the company’s form. He was actually taken bV Clarke to the store where he was to work. Raymond Strong, a son of the previous witness, stated that he purchased oO shares from Johansen, who said that no was going to put the money in the bank. If the company did not go to allotment witness was to receive his money back Witness also gave evidence with respect to a meeting of the provisional directors to which he was called at a time when he was a salesman of the company. He there answered questions with respect to •tlie £SO which he had paid. Alfred George Neill, a solicitor, said that when Johansen first saw him about tlio company he said that £I2OO had been set aside for preliminary expenses. Witness, who was asked to prepare documents, stated that his fee would be £250,

£BO to be paid, covering stamp duty and filing expenses, before the documents were handed over. At a directors’ meeting the statement was made that Johansen might have entered into contracts affecting the directors. Johansen said that at that date there were no contracts affecting the company. It was then resolved that no contract was to be entered into or any liability incurred without the express consent of the provisional directors. When it came to his knowledge that the Strongs were not on the provisional list of_ allottees a full meeting was held to go into the matter. At that meeting Johansen said that he was selling shares of his own to the Strongs. Mr Anderson: I suppose it was pointed out to Johansen that he was promising something that he might never get. Witness replied that he did not think that question was discussed. Johansen made it clear that he would repay Strong, it was found that certain receipts were missing, and Johansen was asked if h® knew anything about them. He replied that he knew nothing about them. As a result of what took place he was asked to sign a few days later his resignation as a director and as a promoter. Witness was responsible to Johansen alone, and Johansen paid his costs, the receipt being in his own name. In reply to Mr Callan, witness stated that he had warned Johansen of the grave impropriety of in any way issuing the prospectus before it was registered. In'the course of cross-examination witness stated that ns a result of cer-tam doubts raised by Sir Charles Statham, who wished that everything concerned with his association with the company should be made perfectly clear, the P 1 ’ 08 ' pectus first prepared was recast. Mr J. M. Paterson was appointed bis solicitor and representative on the spot. It was not clear when Raymond Strong ap-

peared before the directors whether he looked to the company or Johansen to repay him. He stated that he had paid Johansen four months previously. At that time witness knew ..nothing about Little. APPLICATION FOR NONSUIT. Mr Callan, on behalf of Sir Charles Statham, submitted that he was entitled to a non-suit. What he would say would possibly be applicable with equal force to other defendants. The case made by Mr Calvert in his opening statement (litfered from that made out in the statement of claim, the gravamen of which was that Johansen was alleged to have been held out as the agent of the other defendants to do all acts in connection with the company. What they had heard from Mr Calvert was section 95 of the Companies Act. Especially in view of the fact that he was appearing for a person in such a position as Sir Charles Statham he wished to meet the whole substance ot the claim, counsel added, but on any basis he was entitled to a nonsuit. Counsel argued that the Companies Act provided that, if a company were not formed the provisional directors should pay back money to those people who asked tor shares and paid for them on the faith or the prospectus. On their own evidence the plaintiffs did not come within that number. Whereas the prospectus had not been issued until March 24, 1932, Strong, sen., had paid Johansen £IOO in the previous October. How could that have been paid on the faith of the prospectus? Raymond Strong said that he paid his money over on March 4. there was very grave doubt whether that was an accurate statement, but it was certain that the money was not paid on the faith of the prospectus. Not one of the plaintiffs had suggested that he had read the prospectus before paying the money. That was a complete answer to the claim. If that money had been traced to the custody of any person, to Sir Charles Statham, or to any trust account, however, there would be an unanswerable case. They had the admission of counsel for the plaintiff Little that none of the money had been paid into a trust account. Where was the evidence that Johansen was the agent of the directors. There was no evidence that he had authority from the company to act as he did. • The payments had been too early, and they were of the wrong kind. No one had given Johansen authority to take the whole of the money for the shares. There could be no possible authority for payment in full before the company existed. Counsel added that a provisional director was merely a person who was prepared to put his name before the public as being willing to act as a director if company were formed. There was only one promoter of the company, but even if the directors were all promoters no one of them was responsible for money which another received. Mr Sinclair and Mr Solomon also sought nonsuits on the same grounds. Mr Calvert, in reply, claimed that Little was an applicant for shares in the truest sense of the word. He had applied at the company’s office, where, illegally, the word “limited” was displayed after the name of the company. It was true that this took place before the issue of a prospectus, but what had he known of a prospectus? He was one of a class which the Companies Act was designed to protect. Counsel argued that all of the defendants were promoters. They had signed the prospectus. The magistrate: When do you say liability attached to the respective defendants? Mr Calvert: As soon as Littles money was paid. Mr Callan pointed out that Sir diaries Statham had nothing to do with |he company until a later date. Mr Anderson also claimed that the directors were promoters, and pointed out that each was to have received £SOO. “ For what? ” he asked. “ For their work from February 10 until the company went to allotment a month or two afterwards.” As the agreement said, this money was to be promoters’ expenses. An effort was now being made, he suggested, to put the responsibility on “the good fellow Johansen,” who was to have given each of the directors £SOO. The magistrate: What authority had Johansen to receive the full amount? Mr Anderson answered that he had no authority, but whether it was right or wronp; he held the money. If he committed fraud, the directors could still be answerable for it.

Mr Anderson, on being informed that the money had not been put into the books, and that none of the directors knew what had become of it, replied: “ Johansen had, it, and he was one of the co-promoters.” THE MAGISTRATE’S DECISION. In giving his decision, the magistrate said that it was clear that the plaintiffs must be nonsuited. As to the claim under the statute, the prospectus was not issued before March 24, 1932, and the payments had been made before that time. Clearly, they had not been made in pursuance of the prospectus. The plaintiffs were, therefore, thrown back upon the question of authority—the question whether Johansen had authority to receive the money on behalf of the company, It was clear that he had no express authority, and there was no evidence to show that there was implied authority. The directors were not agents for each other. Johansen had certainly done some extraordinary things on his own motion, but others wore not concerned with those acts unless there was some authority, and that had not been shown. On the contrary, the other provisional directors seemed to have been very much on the alert. They had called upon Johansen to explain certain actions, and when he had failed to do so they had called upon him to resign, thus bringing an end to his career and preventing him from abusing his position as he had done with other people who had trusted him. The plaintiffs would be nonsuited. Judgment would be entered up against Johansen by consent for £IOO and costs (£lB 9s 6d). Mr Sinclair and Mr Solomon sought costs against the plaintiff's, Mr Callan stating that he did not ask for costs for Sir Charles Stathain. The magistrate stated that he would allow only one set of costs against the plaintiffs as the interests of the defendants had been practically identical. Costs amounting to £l2 were allowed, bis Worship stating that the parties could arrange among themselves as to their distribution.