TEST CASE

Southland Times, Issue 20538, 14 July 1928, Page 8

TEST CASE

BUTTER FAT PAYMENTS

GROVE BUSH DAIRY FACTORY FORMER SHAREHOLDER’S CLAIM An interesting test case in which the question of the powers of directors as against the wishes of the shareholders was prominent, was heard before Mr. G. Cruickshank, S.M., yesterday. The plaintiff was Albert Samuel McNaught, a farmer of Rakahouka, who proceeded against the Grove Bush Co-operative Dairy Factory, Ltd., on a claim to recover £25 13/9, the balance due to the plaintiff for 4,9321bs of butterfat sold by the company on behalf of the plaintiff during the season 1926-27. The plaintiff was represented by Mr. Eustace Russell and defendant company by Mr. J. Robertson. Mr. Russell gave a resume of the facts of the case. The case was a test one, he said, and concerned more than the one supplier. At the annual meeting of the 1926-27 season, when Mr. McNaught was president, the annual report and balancesheet was presented. The Dairy Control Board had been instituted only that year and in making up the balance, it was mentioned that the actual returns for the year, could not be stated because a further payment from the Control Board was expected. It was decided that all further payments from the board should be paid out to subscribers. The treasurer estimated that about £3OO was to come in but instead it turned out that nearly £6OO was further paid in. However, thia money never reached the subscribers of the 192627 season, but was paid in the bank. There was no need for that. The arrangements with the bank was that £9O per year should be paid in for depreciation costs and 3-4 d per lb. of butter fat towards paying off the overdraft which in any case amounted only to £l5O or £l6O. The bank was not at all worried about the overdraft for as well as the joint and several guarantees of the subscribers, there were £6OO or £7OO of available assets at the factory. There was therefore no need to create a reserve fund. On the 1927-28 balance-sheet, there was mentioned an amount of £7O as owing from the past year’s workings. Even presuming that these figures were correct and there was about £7O owing the 1926-27 shareholders were still owed a further lid. lb of butterfat. He then quoted legal authority to the effect that all profits to the fullest possible extent should be distributed among subscribers, the payments to be made in proportion to the amount of milk* supplied. He therefore held it illegal to put away money as had been done: Since the year had been a lean one, there was even more reason that they should be paid as much as possible. At the annual meeting, this leanness was mentioned and it was moved that the factory should close down. There were 15 shareholders present and the voting was eight to carry on and seven to -close down. An extraordinary change of policy was suddenly adopted by Mr. Ross. Although he had first moved that they should carry on, he suddenly changed his mind and with two others went to the Woodlands factory to supply their milk there. On the return journey, they called in at Mr. McN aught’s to let him know their decision so that he would not engage a manager for the ensuing year. Seeing that it was a case of every man for himself, Mr. McNaught forthwith arranged to supply his milk to the Kennington factory. At a meeting of directors on September 20, the resignations of Mr. McNaught and two others were accepted, the motion to accept it being seconded by Mr. Ross. An extraordinary meeting of directors called for that night apparently decided to carry on. The new president at once went to the bank to make necessary arrangements. They had got control of the nice little nest egg of later Dairy Board returns and what did they do ? They paid off the bank overdraft of £l5O and transferred the balance of the money to the reserve fund account at the expense of the 1926-27 shareholders. Altogether nearly £4OO had been lost to them. At the time w’hen Mr. Ross told Mr. McNaught not to engage a manager, there were in the factory lOOlbs of material left over from the 1926-27 season and with them, the year’s work could be run cheaply and the pockets of the 1927-28 shareholders could be well filled. Mr. Russell contended that there was an absolute contract made at the public meeting of shareholders to pay all surplus to shareholders, save what was absolutely necessary to the good working of the company. There was no need for a reserve fund; the company was not there to amass capital—it existed to pay as much out to the subscribers as possible. Albert Samuel McNaught, the plaintiff, in his evidence said that he was a supplier to the Grove Bush Dairy factory for the seasons 1925-26-27. In 1925 he became a director and he was elected chairman of directors in the 1926-27 season. There was an arrangement with the bank whereby td per lb. of butter-fat was paid per year to reduce the working overdraft; £96 was also paid per year as depreciation. As the previous year had been a lean one, it was arranged that only 4d per lb. should be paid into the banks. He then gave evidence which coincided with Mr Russell’s exposition of the resigning of the chairmanship. The 1926-27 balance-sheet showed an estimate of £430 due for that season from the Dairy Control Board. The actual amount received from the board was £699 15/-. According to the arrangement he made when a director, a further payment of one penny per pound out of the Control Board’s moneys was to be made to the suppliers when the money came to hand. He accordingly claimed the lid. per pound as due to him for the season. Reginald Binney, the secretary and treasurer of the company in the 1925-26 season, gave a resume of the 1926-27 season’s working. Detailed figures which concerned a mistake which had occurred in the bal-ance-sheet during Mr McNaught’s chairmanship and which made the case more involved were quoted but no satisfactory agreement could be reached.

William Carswell, the present secretary, also questioned by Mr Robertson and Mr Russell concerning the balance-sheets, admitted that it was a common practice for dairy companies to operate bn an overdraft. He had never heard of a case where the whole of the surplus had been set aside for the turning of an overdraft into a credit balance.

Mr. J. Robertson, summoning up the case, said that on the grounds of law, there was no legal claim on the money seeing that McNaught had been chairman for two previous years when similar appropriations had been made. It was quite obvious that in the previous year, £365 had been put aside. In 1925-26, there had been £927 10/- overdraft, in 1926-27, £571 so it was clear that about £350 had been set aside for the purpose of reducing the overdraft. He submitted that directors had absolute authority to declare dividends. Mr. Russell expressed the opinion that the real basis of the case was that a contract had been entered into between the directors and the suppliers of the company at the adoption of the 1926-27 annual report which stated, inter alia:— “When the final payments come to hand from the Dairy Control Board and sundry debts, your directors expect to make a furtheir payment of Id. per lb. butter-fat.” It was only necessary to look back on the history of the company to see that no dissentient voices had been ever raised prior to the 1927-28 season. It was not till, under the circumstances mentioned, Mr Ross was made chairman, that the trouble began. He hoped that the court was driven to the irresistible conclusion that something very unusual, very sinister, had caused the action of the directors to be taken. There was no reason in the world why their actions should have been taken —the company was on velvet. He want-

ed to prove that the present shareholders would benefit by their action and if he did not, he was prepared to receive an adverse judgment. The position was that Mr Ross had got rid of Mr McNaught and put himself in his position; he had got £lOO of last year’s money available for running this year’s work; he had decreased the number of shareholders among whom to divide the dividends; he had got rid of paying the manager a bonus; and at the same time he had wiped off the debit balance and substituted a reserve fund for the present year. His client was not alone, but there was almost £4OO concerned.

Mr. Cruickshank, giving judgment, said he could not see exactly anything “sinister” in the actions taken. It was very unfortunate that Mr McNaught had been caught in the way he was. He seemed to have been led into resigning his chairmanship. He could not see that he had any power, however, to interfere with the action of the directors unless there was proof of absolute fraud. Judgment would be given for defendant, with costs £3 6/-.