COLONIAL BANK LIQUIDATION.

Poverty Bay Herald, Volume XXIII, Issue 7658, 17 June 1896, Page 2

COLONIAL BANK LIQUIDATION.

THE WABD FARMERS ACCOUNTS. JUDGE WILLIAMS' JUDGMENT. FALSE BALANCE-SHEETS AND RECKLESS TRADING. MR WARD'S RESPONSIBILITY. Dunkdin, last night. The full text of Mr Justice Williams' judgment iii the Supreme Court upon the application of the liquidators of the Colonial Bank for sanction of the Court) 'to the purchase by Messrs Reid and Lee Smith of the accounts of the Ward Farmers' Association and J. G. Ward's accounts is as follows : "I do not think it has been shown that 1 the result of the Association going into liquidation indirectly affects the liquidation of the Colonial Bank. On the whole, if the only alternatives are the carryiug out of the proposed agreement or for the Association to go into liquidation the former would be more benefiicial pecuniarily for the Bank. Ie was contended that if this were so, there are other aspects of the case which the Court was bound to consider. It was suggested that the evidence disclosed such a state of things that the arrangement proposed, which in substance would be a compromise of the debts both of the Association and Mr Ward would have the effect of avoiding # liquidation and bankruptcy, and so preventing their business transactions being investigated, and this ought not to be sanctioned.

" What then are the circumstances disclosed in the evidence ? wiili respect to the first, as to the trading of the Farmers 1 Association, of which Mr V\ ard was the managing director, and secondly, aB to hia conduct ia relation to his separate transactions. The attention of the Court was directed. to the balance-sheet of the Association for the year ended June 29, 1595. That balance-sheet was framed somewhat curiously. Among the assets is one item of £6130, bilU receivable. There is no (■• i ■ of bills under discount among the liabilities. This latter entry, however, appeared in former balance-sheets. Mr Ward explained this by saying that the system of dealing with bills under discount and bills receivable was changed. A sum of £6830 appearing among the assets of the Association was arrived at by deducting from an undisclosed amount of bills receivable an undisclosed amount of bills under discount. Any person with an elementary knowledge of accounts must see that this process is illegitimate. Bills under discount represent contingent liabilities. If they do not appear in the balance-sheet as an item of liability the effect is to suppress the fact that contingent ] liabilities exist, and the amount of such liabilities. That in itself is a falsification of the balance-sheet. If it were the case that when a man put his name on the back of bills and got money for it he had no more to do with it, the above system would do, but such is not true either in law or fact, as every trader knows by sad experience. That some traders may habitually make out balance-sheets in this way is possible, just as some traders may unfortunately be guilty of other dishonest practices, but notwithstanding that, the practice is obviously dishonest. "Furthermore it is almost certain that this process of previously deducting liability from assets and placing the difference only in the assets column has been followed with respect to other items. In the balance-sheet of 1894 appears an item among the liabilities of the Association — drafts against shipments .£51,043, and among the assets the item ' advances against produce,' loan and in store £73,929, In the balance-sheet for 1895 the former item does not appear, and an amount of £34,340 only appears in respect of the latter item in the assets column. The balance-sheet also shows a total liability to the Colonial Bank of £1085 only. Mr Vigers has told us how the Colonial Bank immediately before the Association's balancing day was induced by a fraud to reduce the account by £30,000. Mr Vigers went down to Invercargill to get the account reduced and discounted a draft on a London house for 430,000, and in support of the draft received warrants purporting to represent oats, which ultimately turned out to be nonexistent. This fraud was not discovered by the Bank till some months later. In the meantime the Association obtained a forebearauce from pressure by the Bank and the account was reduced by the above amount. " The balance-sheet was made up to June 2ud, but of course it was completed after that date, and it was not certified as correct by the auditor until August 13lh, nor wbb it laid before the shareholders until September 7th. ]f the account was, aa Air Vigors states, reduced by the fraud of some officer of the Association by' £3o,ooo at the end of June, it is exceedingly strange that the direotors of the Association should not by September 7th have discovered there was something wrong, and the Association had got credit for £30,000 which it had no business to got. The balance-sheet of the Association further represented £6516 to the credit of profit and loss account for the year after deducting bad debts, and the report of the directors recommends the payment of a dividend and bounses. The report was to be presented at a meeting on September 7th.

" It is therefore a false assertion not only that the balance-sheet was correct up to June 29th, but that the circumstances of the Association on September 7th were such as to justify the distribution of tho amount shown to the credit of profit and loss in dividends and business. In the balance-sheet of 3 une, 1895, the liabilities, apart from the paid-up capital, amounted to £53,289. The assets, apart from the goodwill, are shown to be £72,555. In Mr Cook's statement, as on March 20Lh, the liabilities amounted to £212,797. To that, however, must be added £55,130, which up to October 18th, when Mr Ward gave a promissory note for it, was the liability of the Association. The total liabilities, therefore, were' £167,947. The total assets valued by Mr Cook on March 20th were £64,341.

"The diacrepanby between the balancesheet of June 29tb and Mr Cook's valuation oa March 20th, even apart from the fraudulent credit of £30,000, is enormous, and certainly cannot be in any way accounted for by the losses incurred between the two dates. Furthermore, the loss of £55,150 was known to everybody on October 19th, when Mr Ward gave his promissory note for it. It is impossible to suppose that the framers of this balance-sheet of June 29th, when they put it forward on September 7th, were not aware that it was an utterly false one, something going far beyond a mere rosy statement which too sanguine directors occasionally put forward. If competent business men put forward a balance-sheet of this kind the only inference is that they do it for sinister purposes.

" What then is Mr Ward's connection with this balance-sheet? On June 29, the date to which it was made up, he was on his way out to New Zealand. He was therefore absent from the colony at the time the fraud in respect to the oats was perpetrated. Ho returned early iv July. Mr Ward says he was absont from the colony when the balance-sheet was prepared. The balancesheet, however, was not signed by the auditors till August 13, and was afterwards published with the report annexed to be presented at the annual meeting of shareholders on September 7. This report is signed by Mr Ward as chuirman of directors, and it recommends the appropriation of the balance to credit of profit and loss in the payment of dividends and bonuses. Mr Ward says that the balance-sheet was submitted to him for signature on his return from England and that he considered the matter all right or he would not have signed it. He says he cannot give any details, as he had nothing to do with them. He says be did not and could not give the business any large personal control ; that matters were put before him, and he really depended on others who were responsible for him. Mr Ward, however, was managing director of the Company at a salary of £500 a year. Out of the £27,450 total of paid-up capital of the Company he held £23,000, namely, 3000 shares of the par value of £15.000, which had been allotted to him as fully paid-up, and 8000 shares on which £1 per share had been paid. Of these 8000 shares £4 per share wus not called up, so that he was subject to a contiugent liability of £32,000 in respec' of them. Further than this, Mr Ward's private account with the Association was largely in debit. Considering the position Mr Ward held aB managing director of the Association, and the large stake he held in it, he seema, according to his own statement,, to have known uncommonly little about its fttfairfl, *

" If the Company becomes insolvent, and if it appears that credit has been obtained ■ by fraud and that a falije balance-sheet has been put forward, it i 3 fair to conolude that ■ the losses which led to the insolvency were not the result of legitimate trading. That they were not the result of such trading in the present case appears further from the evidence of Mr Cook, who investigated the affairs of the Association. He says in hia examination that advances were made thjft prudent men would have taken security for over crops, and that no security was taken ; that this reckless .trading was going.on over a period of about two years, and that he found no securities after 1894, In hia affidavit Mr Cook stated that out of £85,070 of book debts he considered it neoessary to write off £37,371 as absolutely bad and worthless. He stated that he found indiscriminate credit had been given and little or no security taken. Nor can it be suggested that this state of things was caused by the - opposition of other freezing works. The freezing business and losses consequent on it were . ' not the business or losses of the Association but of Mr Ward, and were carried to the debit of Mr Ward's private account as the^ profits would have been carried to his credit " As the Association, after losing all HaV-paid-up capital, is' £48,456 to the bad, " according to Mr Cook's estimate, in addition to £55,152, which was at Mr Ward's debit in the books, and this result has been arrived at in the short period of three years during which the Association has been in existence, it is difficult to disßever Mr Ward's private transactions from the transactions ' of the Association. Mr Ward's direob indebted- * ness to the Bank consists of £20,000 on a guarantee for the Association given by him, £16,340 on a draft secured by the shares of Nelson Bros., Ltd., which at the time the draft was given are. stated to have been sufficient security for' it, but which nave since depreciated in value. In addition to .- • ■ this is hia promissory note for £55,150 given, on October 19th. The contingent liabilities ' of Mr Ward amount to £38,513, the principal ' • ones being £32,000, the £4 per share un- . ' called on 8000 shares held by him in-t^gf Association, and £4900 guarantee oh accoutre ' f the Hokinui Coal Company. As against! these liabilities his assets consist of equity of redemption of certain properties estimated as worth £3850, of shares in companies of ■ the value of £100, of household furniture of the value of £300, and of other shares worth nothing. Mr Ward's estate thus realises . " under one shilling in the pound. Nearly the whole, therefore, of Mr Ward's liabilities have been incurred in connection with the Association, and the largest of them, promissory notes for £85,150, represented the balance to his debit on the books of the • Association. So far as I can make out, this charge of indebtedness arose partly from losses incurred in his own private business of freezing sheep, and partly from speculations : in grain. These latter, Mr Ward states, turned out unfortunately, and that if there - ' had been any profits they would have goney&j to the Association, but that as he did notifY wish the Association to speculate he' took the losses on himself. " This liability of £55,150 of Mr Ward to , •" the Association originally formed part of the - liability of the Association to the Bank, but - - on October 19 Mr Ward, at the request ofthe general manager of the Colonial Bank, ' gave his promissory note for that, amount, • aud the Bank accepted his liability on' the promissory note in lieu of the liability of the ' Association. Why this was done Ido nob quite understand, as the promissory note would be of little or no value to 'the Bank. There is nothing to show that Mr Ward had „ then any property which was not included in the present lists of the assets. He states ' that he then considered his shares in the Association worth their par value of £23,000. v" The Association, however, was .then to Mr ■ V Ward's knowledge in difficulties, and then- '- -.£ the shares carried a contingent liability of •.' £32,000. I can hardly, therefore, accopt Mr "S Ward's statement as correct. Mr Ward's shares in Nelson Bros, were even pledged - for their full value to secure another amount. • Mr Ward's liabilities were, therefore, with a '.■; trifling exception, all incurred in connection .'' with the Association of which he was 1 ' managing director. ' . ■' _" Here, then, is a Compandor Association ' -- with a capital actually paid up in cash' of - ■ £12,450. When it has ,; been ; only three years in existence that capital has been loßb ' and the Association has become hopelessly .,' ' insolvent, showing a, deficiency of over £100,000. -•■ - ; r . ';.* ; "It has been shown that the Association " obtained oredit for a large amonnt by fraud, • "■? that it put forward an utterly false balance- '. . sheet, and that its affairs were . managed '■'■'■ with reckless disregard of ordinary business ~si principles. Of this Asfociation Mr Ward wast J managing director. Of the £12,450 of paid-up^, capital ha held £8000, which carried mtßfw?|s' a contingent liability of .£32,000. He alsd'.-- r held.3ooo shares of the par value of £15,008,' -V' which had, been allotted to him as fully .">. paid-up. His private account with ,tMo".;-i Association was in debit £55,150, s ahowiag-';^ that he freely used the credit, of the '•..-'■-■ Association for his own private ventare»/;i : In such circumstances it is hardly too rauoh •■^■; to say that in substance Mr .Ware), and, the./:?"; Association must for moat! business pnrposeal have been identical. Mr "Ward is now-i£' hopelessly insolvent. A few pence' in -the? pound is the utmost his estate can be expected to realise. . /_. -- T-;s'' " What under ordinary oirpumstances :" : would happen would be that the Association ■ would go into liquidation, and 'that Mr • Ward would become bankrupt.^Thatifihe. ",; career of the Association should fie brought „^; to an end and its proceedings investigated, .' and that those who were responsible for its management should no longer be permit'tedjk^ to roam at large through the business wqrldi/"j is a result so obviously desirable' in ',{ the^vv interest of commeroial morality that it ought js; if possible to be attained. Now 'it* ,ur with! ;-v!the avowed intention of preventing l : this sv^ result that the purchasers under the. present- ..^ agreement) have come forward. ' Mr Wood- Z house states that it is not like any, ordinaVy • ■ business transaction where the parpfiasersr^'f: expect to make a profit, bub they were - ■' buying out of friendship for Mr Witd io." '•'-'. the hope of being able to put the Association ' on its feet again. That is to say, tbaVftV;';', will be deliberately done so as to hide the . - past as far as possible, that Mr -Ward'a V bankruptcy will be purposely prevented,' H and that things generally will be made , pleasant. That the transfer of the liability '•'■ j of the Association to the Bank into the : hands of persons admittedly friendly to the - former management will tend to stiflo any „-: enquiry into the proceedings of the AssooiivJ ation is manifest. If anyone had purchased**^ the debt of thn Association a 8 a business \V speculation, and for his own business, pur- ■"■'■ poses wished to keep the Association going /' that would be a different matter. -la that case there would' be no need for him to have purchased the debts of JWr Ward. l.By" the present agreemenb every : debb of .Mr? / Ward's on .every account is purchased, and ' ■' is lumped in one p'urohase with the debts of ■ the Association, though Mr Ward&M? 6 *''' ' will yield but an infinitesimal dividend.' "We only buy the Assooiation's.^dtiob on /: . condition that you throw in all Mr Ward's . ' ( -. debt,' is evidently the attitude of the »nr- •'.'.' chasers. ' "'.- ■■ . " The whole action of the purchasers. Was. '-■'■- thus taken, as Mr Woodhouse candidly admitted, out of friendship for Mr Ward, and of course in order to avert the necessity for ' his bankruptcy. It is thus an offer to buy- }.\ off from bankruptcy and its consequences : *taMjj man who "ought not to escape them. . This i? <^ in effect an offer of hush money. ; ." ■ - ' . ■ - "Although I quite understand .that ".the i: V purchasers were themselves actuated joaly'by. . ■ honest motives of friendship for Mr Ward, I -J am satisfied that the Court, in considering '■'- whether it shall sanction an agreement of -. this kind, is bound to a certain extent to ; look at the moral aspect of the case, and if it sees that the real object ia to prevent an - > investigation of discreditable transactions, its sanction should be refused! Then if the' agreement is moßt beneficial for the peoahiavy. . • interests of the liquidation, this principle Is perfectly well recognised by the Courts -int . "; similar and analogous cases — Throng's Joint Stock Co., page 383; re Btrawbridge, 325~. ; Chancery division, 266; re Burr ex parti ,- Board of Trade, 1892, 2 Queen's Benoh.dßjT; ex parte Reed v. Reed, 17 Qneen's.Besjfr "-• division, 15. That the proposed arrange- . . ment, though in the form of a purchase of ••- assets, ism effect a compromise is plain.. '.lt) . < comes to the same thing whether \debtor.to, '; a bank offers to compromise a ~4ebtJ.or.jia v ■ much iv the £ or get a friend to pome forward-} ; and buy it for the Bame araounVand'.UkexV: considerations should apply in jwoh a case. - ■.-:■ " I have no hesitation whatever, therefor© .« in refusing to sanction the agreement. ..■ In^ so refusing I do not for a moment mean to .'4 A say that the liquidators were wrong in enter- i# 1 iDg iuto it ana briDgiog ft before. t&8 OoHj^|| .'. •■* : "- - :^M

:<- 7 r 'or th'afe.theyf.are" entitled to anything but ■ ■ for doing bo; I base my decision upon : "what was disclosed at the hearing. ';';=''. " Reference was made on affidavit to Mr :-,:'■; j-Wwtd'B apolitical conduct, and some similar | the hearing. With Mr Ward V in his political oapacity I have nothing to 1 .do. : ■ I look* oh the case from its commercial aspeot only and upon Mr Ward in hiß busi- , ness relations. That' Mr Ward is a member of , Parliament and holds' political office is, - - from the point of view I have considered the ■ case, irrelevant to the aotion. The summons is therefore dismissed."