The Liquidation of the Colonial Bank.

Southland Times, Issue 13483, 17 June 1896, Page 2

The Liquidation of the Colonial Bank.

J. G. WARD FARMERS ASSOCIATION

MR JUSTICE WILLIAMS DECLINES

TO SANCTION THE SALE,

(By^ Telegraph.)

Dunkdin, June 16.

Mr Justice Williams to-day delivered judgment in re the application of the liquidatois of the Colonial Bank for the sanction of the court to an offer of Messrs Lee Smith and J. B. Reid for the purchaae of the assets in the Ward Farmers Association »a followb : —

I ac;ree with the liquidators that upon the figures brought forward by Mr Cook, the suggested purchase is a fair one, and that it. would be more beneficial pecuniarily to the liquidation that the agreement should bo carried out than that the Ward Farmena Association should be compelled to liquidate. Mr Cook based his figures on wnat he considers would be realised if the Association actually went into liquidation, and taking his valuation as on the 20th 'March last, Mr Cook doe* not seem clear as to whether his values do or do not allow for the cost of realisation. Me Braund made an analysis purporting to show the result of the agreement, b^ed on Mr Cook s figures, but that analysis is incorrect ; the true figures being several thousand pounds more in favour of Mr Braund's view. Mr Braund was evidently unaware of the fact that the bank held L 50.000 of the Assocm tion's debentures, which in the event of liquidation are a first chatge on its assets. Taking Mr Cook's figures we find the whole of the assets, includiog the uncalled capital, to be L 72.797. Deduct from that, say LoOOO, the cost of liquidation and (as suggested by Mr HaggiU) LISOO in respect of contingent liabilities and a balance is left of L 66.000. Of this 1,50,000 goes to satisfy the debentures, and the balance (L.16,297) is apportionible between the bank and the other unsecured creditors. The total amount of unsecured debts is L 62.797. Of this amount L 42,179 is owing to the bank. Ie will be found that the bank's proportionate share of the L 16,297 is L 10.946, which, added to L 50.000, makes L 60.946. Add to this the value of properties in Mr Ward's estate, set down as L 4250, but realising, say, L3OOO, and we have L 63.946. Aa against this we have the purchase money of L 62,750, and a guarantee to the extent of LSOOO in respect of certain oats, the whole of which is stated to be now due. On the above calculation t,h« Bank would receive L 67,750, if the purchase were carried out as against L.63,946, if the association went into liquidation. This, however, is merely my own rough estimate. Anyone with the figures before him can make an estimate for himself. Mr Cook valued as on the 20th of March. He states that oats have risen, and that,- in consequence, if he wero now to value the book debts and uncalled capital of the Association, he would value them at nearly LSOOO more. Under the circumstances, it would be unfair to refuse to sanction the agreement merely on account of this rise, bat if the agreement ia not sanctioned on other grounds the liquidation will get the benefit of it. The advantages of the present cash payment are obvious. Interest is stopped, the cUim of the Bank of New Zealand is settled ; and the liquidators are relieved from nncertainty. It was suggested that there were incidental objections to forcing the Farmers Association into liquidation, one of them being that to adopt such a cotsTse would affect accounts upon the B list, xhis suggestion, though made by counsel, is hardly adopted by the liquidators. The hardship such a course would inflict on the shareholders or clients of the Association cannot fairly be considered. If the management of the Association has been such as to bring it to a condition of hopeless insolvency the shareholders have themselves to thank. Ido not think it has been shown that the result of the Association going into liquidation will indirectly affect the liquidation of the Colonial Bank. On the whole if the only alternative is either to carry out the proposed agreement or for the Association to go into liquidation the former would be more beneficial pe3uniarily for the bank. It was contended that if this were so, there are other aajfeots of the c&ae which the coutt is bound to consider. It was suggested that the evidence disclosed such a state of things that the arrangement proposed — which, in substance, would compromise the debts, both of the Association and Mr Ward, and which is intended to have, and would have, the effect of avoiding liquidation and bankruptcy, and so preventing their business transactions being investigated — ought not to be sanctioned. What, then, are the ciicumstances disclosed in the evidence with respect, hrst to the trading of the Farmeis Association, of which Mr Ward was managing director, and, secondly, as to his conduct in relation to his separate transactions. The attention of the court haa been first directed to the balance sheet of the Association for year ended on 29th June, 1895. That balance sheet was passed somewhat curiously, and amongst the assets is one item of L 6830, bills receivable. There is no entry of bills under discount among the liabilities. This latter entry, however, appeared in former balance sheet?. Mr Ward explained this by saying that the system of dealing with bills under discount and bills receivable was unchanged, and that the sum of L 6830 appearing among the assets of the Association was arrived at by deducting from an undisclosed amount of bills receivable an nndisclosed amount of bills under discount. Any person with an elemeatary knowledge of accounts must Bee that this process is illegitimate. Bills under discount represent con- ' tingent 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 falsification of the balance sheet. If it were the case that when a man puts his name on the back of a bill and gets money for it he had no more to do with it, the above system would bs safe, but such is not true either in law or in 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 practice is obviously a dishonest one. Furthermore, it is almost certain that this process of previously deducting liabilities from assets and placing the difference only in the aesets column had been followed with respect to another item. In the balance sheet of 1894 appears an item among the liabilities "Association drafts against shipments, L51,6J0 " and among the assets the item "advances against produce afloat and in store, L74,!)iJ9." In the balance sheet for 1895 the former item does not appear and the amount of L 34.430 only appears in respect of the latter item. In the ssseta column the balance sheet also shows a total liability to the Colonial Bank of LI 185 only. Mr Vigera has told us how the Colonial Bank, immediately before the "Association's balancing day was induced by a fraud to reduce the account by L 30.000. Mr Vigors went down to Invercargill to get the account, reduced, and discounted a draft on a London house for L 30,000, and, in support of the draft, received warrants purporting to represent oats to that value, which oats ultimately turned out to be non- existent. This fraud wasi not discovered by the bank till some months later. In the meantime the association obtained forbearance from pressure by the bank, and the account waa reduced by ths above amount. The balanoe sheet was made up to June 29th, but of course it was compiled after that date, and it was not certified as correct by the auditor until August 13th, nor was it laid before the shareholders until September 7th. If the account was, as Mr Vigors states, reduced by the fraud of some officer of the Association by L 30,000 at the end of June, it is exceedingly Btrange that the directors of the Association should not by September 7th have diacovered there waa something wrong, and that the Association had got credit for L 30.000 which it had no business to get. The balance sheet of the Association further represented L 6516 to the credit of profit and loss for the year, after deducting bad debts and the report of the directors recommends the payment of a dividend and bonuses. The report was to be presented At the, meeting on.

g"g September 7th. This, therefore, implied the assertion not only that the balance sheaii m correct up to June 29th, but that th« circumstances of the Association on September 7ih, were such as to justify the distribution of the amount to credit of profit and lews in dividenJ3 and bonuses. In the balance sheet of June, 1895, the liabilities, ipart. from the paid up capital, amount to L 53.289, and the aseets, apart from goodwill, to L 72,555. In Mr Cook's statement as on March 20th the liabilities amount to LI 12,797. To tint, however, must be sdded L 55.130, which up to October 19tn, when Mr Ward gave a promissory note for it, was a liability of the Association. The total liabilities were therefore L 167.947, and the total assets were valued by Mr Cook on March 20th at L 64.341. The discrepancy between the balance sheet of Jane 29tli «.ad Mr Cook's valuation en March 20th, even apart from the fraudulent credit of L3(),000, is enormous. It certainly cannot be in any way accounted for by lobbos incurred between the two, dates. Furthermore, the los 3of L 55.150 was known to everybody on October 19th, when Mr Ward gave his promissory note for it. It ia impossible to suppose that the framers of this balance sheet of June 29th, when they put it forward on September 7th, were not awfcre it vca^ an utterly false one — Eomething going far beyond mere rosy statements which too sanguine directors occasionally put forward. If competent business men put forward a balance sheet of this kind the only inference is that (hoy do it for a sinister purpoae. What then is Mr Ward's connection with this balance she»t ? On June 29th, 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 tho fraud in respect to the oats was perpetrated. He relumed to New Zealand in July. Mr Ward says he waa absent from the colony when the oalance sheet w&a prepared. The balance sheet, however, was not signed by the auditor till August 13th, and was afterwards published with the report annexed to be presented at the annual meeting of shareholders on September 7th. This report is sign-d by Mr Ward, aa chairman of directors, and it recommends the appropriation oil the balance to creflifc fol profit and loss in 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 ho considered the matter all right or he would not havo signed it. He fays he cannot gire any deiaila, as he had nothing to do with them. He says he did not and could not give the business any large personal control ; that matters were pnt before him and he really depended on others who were responsible to him. Mr Ward, however, was managing director of the company at a salary of LSG0 1 a year. Out of L 27.450 total paid up capita,! in the company, he held L23.ooo— namely 3000 shares of a par value of L 15.000 bad been allotted to him as fully paid up, and 8000 shares on v> bich a pound per share had been paid. On these 8000 shares L 4 p«r share was not called up, so that he was subject to a contingent liability of L 32,000 ic. respect of them. Further than this, Mr Ward's private account with tho Association was largely in debit. Considering the position Mr Ward held as managing director of the Association, and the large stake h<i held in it, he seem <, according to his own statement, to have known uncommonly little about its affairs. If .the company becomes insolvent, and if it appears thi.t credit haa been obtained by fraud, and thai a false balance Bheet has bean pnt forward, it is fair to conclude 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 ths present case appears further from the evidnnce of Mr Cook, who investigated the affairs of the Association. He says in his examination that advances Were made that prndent men would have taken security for over crops, and that no security whs taken ; that this reckleas trading was going on over a period of about two years ;and that he found no securities after 1894. In his affidavit Mr Cook stated that out of LK5.070 of book debts he considered it necessary to write oil L 37.374 as absolutely bid and worthless. Me stated that he found that indiscriminate credit had been given and little or no security given. Nor can it be suggested that this state of things was caused by opposition of other freezing works. The freezing business and losses on consignments on it werj not the business or losses of the Association, but of Mr Ward, and were carried to the debit of Mr Ward's private account aa the profit* would have been carried to his credit. The Association also, after losing all itf paid-up capital, is L 4 8,456 to the bad according to Mr Cook's estimate, in addition to L 55.150, which was at Mr Ward's debit in its books. 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 dissever Mr Ward's private transactions from the transactions of the Association. Mr Ward's direct indebtedness to the bank consists of L 20.000 on a guarantee for the Association given by him, L 16,340 on draft secured by shares of Nelson Bros., Ltd. which at the time the draft was given are stated to have been sufficient security for it, but have uince deprsciated in value, and, in addition to this, is the pro* missory note for L 55 ,150, given on Qctober 19th. The contingent liabilities of Mr Ward amount to L 38.513, the principal ones being L 32.000 on the L 4 pec uhare uncalled, and 8000 shares held by him in the Association and the L 4900 guarantee on account oi the Hokonui Coal Co. As against these liabilities the assets consist of the equity of redemption of certain properties estimated as worth L 3850 ; of shares in companies of the value of LIOO ; of household furniture of the value of L3OO, and of other shares worth nothing. Mr Ward's estate will thus realise under a shilling in the LI. Nearly tke whole, therefore, of Mr Ward 'a liabilities have been incurred in connection with the Association, and the largest of them, the promissory note for L-55,150 — represented the balance to his debit in thu book* of the Association. So for as I 3an make out this large indebtedness arose partly from losses incurred in his own private business of freezing sheep, and partly from speculations in grain. These litter, Mr Ward's states, turned out unfortunately, and that if there had beon any profits they would have gone to the Association, but that us be did not wish the Association to speculate he took the losses on himself. This liability of L 55.150 of Mr Ward's to the Association originally formed part of the liability of the Association to the bank, but, on October 19th, Mr Ward, at the request of the general manager of the Colonial Bank, gave his promissory note for that amount, and the bank accepted his liability on the promissory note in lieu of the liability of the Association. Why tbis Mas done I do not quite understand, as the promissory note would be of lil;tle or no value to the bank. There is nothing to show that Mr Ward had then anj' property which waa not included in the present list of assets. He Btates that, he then ooniidered his shares in the Association worth their par value of L 23,000. The 1 Aiaociation, however, was then, to Mr Ward's knowledge, in difficulties, and tbeiie shares carried a contingent liability of L 32.000. I can hardly therefore accept Mr Ward's statement as correct. Mr Ward's shares: in Nelson Bros', were then pledged for their full value to secure mother amount. Mr Ward's liabilities were therefore, with trifling exceptions, all incurred in connection, wich the Association, of which he waa managing director. Here then, is a company ot association, with a capital actually paid up in cash of H2.450 j when it has been only three years in existed § that capital has been lost and thu Association has becoma hopelessly insolvent, «howing a deaiciency of over LIOO.OOO. It has been shown that the Association obtained credit for a large amount by fraud ; that it put forward an utterly false balance sheet, and that its affairs were managed with recki less disregard of ordinary business principles Of this Association Mr Ward waa managing director ; of the L 12,450 of paid tip capital he held LBOOO, which carried with it a contingent liability of L 32,00 0; he also held dOOO shares of a par value of L 15.000 which had been allotted to him aa fully paid up • and hw private account with the Association was in debit L 55.150, showing he freelj used the credit of the Association for his own puvate ventures. In suoh circumstances »t is hardly too moeb. to say that in substance Mr Ward and the Association mußt for moat business parposes have been identical. Mi Ward is HOW hoaeleMly JnsQlvOßt, A, fo^ %

in the £ is the utmost his estate can be expected to realise. What, under ordinary •ircumstances, would happen would be that the Association would go into liquidation and that Mr Ward wou d become bankrupt. That the career of the Association should be brought to an end and its proceedings investigated, and that those who were responsible for its manegement should not longer be permitted to roam at large through the business world, is a result so obviously desirable in the interests of commercial

morality, that it ought, if possible, to be obtained. Now it is with the avowed intention of preventing this result that the purchasers under the present agreement have come forward. Mr Woodhouse states

that it is not like an ordinary business trans-

action, where the purchasers expect to make a profit ; they were buying out of friendship for Mr Ward, in the hope of being able to put the Association on its feet again — that is to say that a veil wiil be deliberately drawn so as to hide the past as much as possible; that Mr Ward's binkrupty will pc purposely prevented, Mid things generally will be made pleasant. That the transfer of

the liability of the Association to the bank

the hands of persons admittedly friendly to the former management will tend to stifle

any ' inquiry into the proceedings of the Association is manifest. If anyone had purchased the debt of the Association as a business speculation and for his o<vn business purposes wished to keep the Association going that would be a different matter. Jn

that case there would be no need for him to have purchased the debts of Mr Ward. By the present agreement every debt of Mr Ward's on every account is purchased and ia lumped in one purchase with the debt of the Association, though Mr Ward's debt will yield bub an infini'esimal dividend. "We only buy the Association's debt on condition that you throw in alj Mr Ward's debt," is evidently the attitude of the purchasers. 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 a man who ought not to escape them. This is in effect an offer of hush money. Although I quite understand that thepurchassnrwere themselves actuated only by an honest motive of friendship for Mr Ward lam satisfied that the court, in considering whether it shall Banction 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 reaT* object is to prevent investigation into discreditable transactions, its sanction should be refused even if the agreement is most beneficial for the pecuniary interests of liquidation. This principle ia perfectly well recognised by courts in similar and analagnus cases — Throng's Joint Stook Company (page 383) Strawbridge, 325 Chancery Division ; 266 re Barr, ex partelßo&rd of Trade, 1892 ; 2, Queen's Bench, 467, ex parte Reed v. Reed ; 17, Queen's Bench Division, 251. That the proposed arrangement though in the form of a purchase of the assets is in effect a oompromise is plain. It cornea to the same thing whether a debtor to the bank offers to compromise a debt for so much in the pound or get a friend to come forward and buy it for the same amount, and like considerations should apply in each case. X have no hesitation whatever, therefore in refusing to sanction the agreement. In so refusing Ido not for a moment say that the liquidators were wrong in entering into it and bringing it before the conrt, or that they are entitled to anything but credit for doing so. I base my decision upon what was diclosed at the hearing. Reference was made in one of the affidavits to Mr Ward's political conduct, and some similar reference was made at the hearing. With Mr Ward in his political capacity 1 have nothing to do. I look on the case from its commercial aspect only, and on Mr Ward la. his business relations. That Mr Ward is a member of Parliament and holds political office is away from the point of view from which I have considered the case and is irrelevant to the action. The summons is therefore dismissed.