J. M. BROWN LTD.

Southland Times, Issue 23210, 27 May 1937, Page 9

J. M. BROWN LTD.

CLAIM AGAINST DIRECTORS LIQUIDATOR OF COMPANY In the Supreme Court yesterday, before his Honour Mr Justice Kennedy, George Edward Thompson Dorman, liquidator of J. M. Biown, Ltd., Invercargill, sought an order of the court asking that the directors, Andrew Hamilton Stobo Brown, John Morton McCrostie and William Alexander Brown, contribute £2804 19/11, paid or advanced to the trustees of the late J. M. Brown, and £1452 19/10 paid or advanced to A. H. S. Brown, to the assets of the company. Mr H. J. Macalister represented the liquidator, Mr B. W. Hewat appeared for defendants William Alexander Brown and John Morton McCrostie, and Mr J. C. Prain for Andrew Hamilton Stobo Brown. “This is a summons under Section 269 of the Companies Act by the liquidator of J. M. Brown, Ltd., against the three directors of the company, William Alexander Brown, John Morton McCrostie and Andrew Hamilton Stobo Brown,” said Mr Macalister in opening. “The summons as framed is an application by the liquidator to examine the conduct of defendants and order them to contribute such sums to the assets of the company as the court might think fit.” J. M. Brown, Ltd., was a company incorporated in 1919 or thereabouts to take over the business of wholesale merchants carried on by the partnership of J. M. Brown and Son. At the time the business was taken over shares were held by the Brown family and Mr William Quinn, a portion of the shares being held by the trustees of J. M. Brown, deceased. The company carried on until June 1936 when it went into voluntary liquidation. An investigation of the company’s affairs revealed that the company was hopelessly insolvent and that the bal-ance-sheets, prepared over some years, had given a false impression of the company’s business. At that time the last audited balance-sheet showed that there should have been a surplus of £9255, but the position was that there would really be a deficiency of approximately £9OOO. It was claimed, said counsel, that the directors had acted ultra 'vires in certain transactions and that they were negligent in making advances which they should have known were irrecoverable.

Liquidator’s Evidence

George Edward Thompson Dorman, liquidator of J. M. Brown, Ltd., produced the private ledger, a number of transfer sheets from the ledger, the minute book of the company and the balance-sheets and profit and loss accounts of the company from 1927 to 1935 inclusive. He said that in 1927 there was a profit of £882; in 1928, a profit of £1076; in 1929, a profit of £1564; in 1930, a profit of £955; in 1931 there was a loss of £405; in 1932 a loss of £1064; in 1933, a loss of £381; in 1934 a loss of £B4 10/6, and in 1935 a loss of £lOl2.

Since February 4, 1931, advances amounting to £1209 18/7 had been made to J. M. Brown and included in that period was a dividend of £lO5, leaving a net amount of £llO4 18/7. The special allowances were debited through the journal, but it was difficult to say to what accounts they were debited. To Mr Hewat: All credits in the J. Z M. Brown Trustee Account came out of the assets of the company. Mr Hewat: Have you found that any remuneration has been made to the directors W. A. Brown and J. M. McCrostie?—No. .7. To Mr Prain witness said that the amount of £7600 he had set down as bad debts extended over a period of about seven years. It was not a serious experience for a concern of the kind, but it was a serious entry at one time. There was a loss on the building of £2BOO. On October 15, 1925, there was a debit of £lOOO in A. H. S. Brown’s No. 2 account for calls on new shares. This was for the purpose of increasing the capital of the company and took place about the time of the debenture to the Bank of New South Wales. In reply to a question by Mr Hewat, witness said the transfer of profit to the “allocation” account was not the same as declaring a dividend. To Mr Macalister: On a turnover of £19,000 an amount of £244 written off for bad debts would be very low. Out of £12,000 in sundry debtors at October 1935, £7600 in bad debts was much too great a proportion . A number of the accounts was well known to have been bad years ago and should have been written off during the past seven years. Not many of the accounts were statute barred, although some of them were owing for more than six years.

Evidence of Directors

John Morton McCrostie, one of the defendants, said he was a director of the company until practically the time of the liquidation proceedings. The whole position became apparent about that time. He had not taken any special steps to inquire into the business. He knew Mrs J. M. Brown was drawing £4 a week. Mrs Quinn, widow of a deceased shareholder, was drawing dividends and interest on deposit. He took the payment of the annuity to be a continuation of the arrangement made in the lifetime of Mr Quinn. It was the matter of the dividend not being enough to cover the allowance that was discussed at a meeting. In June 1929 a dividend of 7 J per cent, was credited to the trustees. This amounted to £157 10/-. He was told this had been going on for some years. He was present at the annual meeting in May 1929. The company was then making a profit. He disowned the writing off of the amount of the wages account, for such a procedure would not have been right. From 1931 a heavy loss was shown, but he felt that there were ample reserves to continue paying the amount to the trustees’ account. If the business was sold there was provision in the articles that any sum owing by the shareholders could be set off. He knew the payment of the annuity could be costing the company only £4 a week. He did not know until late in 1925 that the trustees owed money to the company for shares. He presumed that the sundry debtors were all trade accounts and what was written off was bad. He presumed that what was left was good. He made no special investigation into any of the book debts, and was in a hopeless position to take any steps when he found the company was making a loss, for in Mr Quinn’s lifetime he gave an undertaking to the debenture-holder that his deposit would not be interfered with. He thought the losses were just what were to be expected. The condition of the business was ir keeping with the times, and he felt that Mr Brown was doing his best. Had he known of the amounts earlier the position would never have got where it did. To Mr Hewat: In April 1936 he attended a meeting of directors as a director, but at that time the receiver was in control and the directors could only act as the receiver permitted. William Alexander Brown, a jeweller, a son of the late J. M. Brown, said that he and his brothers, James and Andrew, were the trustees in his father’s estate. His mother was to receive an annuity of £4 a week, and that had been carried on since the time of the firm known as J. M. Brown and Son. He understood he was a

trustee until his brother, James, left in 1924. He did not suggest that he was not a director. He was aware that they were paying out some of the time to Mrs Brown more than should have been coming to her. The annuity probably exceeded the dividends. He was told that there was ample in the reserves to cover the payments. Not at any time did he know how actually the trustees’ account stood. He was led to believe that the shortage was being paid out of reserves. He did not take an active part in the company, although he attended the meetings and carried out the functions of a director. Each year he received a copy of the balance-sheets, and he realized that the company was making a loss. There were ample reserves shown in the bal-ance-sheets. There was little he could do about the losses that were accruing. Trustees’ Account

Andrew Hamilton Stobo Brown, one of the defendants, said he was managing director of J. M. Brown, Ltd. The previous witnesses knew of the ex '_ s_ tence of the accounts, but not of the amounts. The trustees account was discussed at the meetings. Mr McCrostie was aware that the books showed that the trustees owed a considerable sum to the company. Mr McCrostie never visited his office to discuss the business of the company with him. His brother would know the exact amounts owing at different times, but not within the last few years. He could not agree that the provision for bad debts over the past seven years was inadequate. None of the bad debts in the books which had been owing for some years was totally bad. He did not at any time before 1936 disclose to his codirectors the amounts of the accounts. They knew of the share transfer account. After Mr McCrostie had agreed to become a director, he discussed the affairs of the company with him. To Mr Hewat: He considered there were ample reserves to cover the drawings to meet the payments of the annuity. This was communicated to his brother at various times over a period of years. To Mr Prain: The books of the company were audited regularly once a month. He was never told at any time that his method of keeping the accounts was wrong. He had no experience other than that gained in the firm. About 1924 he re-arranged his mortgages and mortgaged his life policy and paid the funds into the. company. About that time his liability had mounted up and he took the steps mentioned to reduce that liability. Addressing the court, Mr Hewat said that the defendants W. A. Brown and McCrostie took no part in the management of the company until after the bank took control; they did not authorize the advances which were the subject of the summons; they were not responsible for the acts of their codirector; they had no knowledge of the position but relied on audited balancesheets; and further they relied on the protection of the Statute of Limitations. Mr Hewat was proceeding with his address when the court adjourned till 10 o’clock this morning. Receiver’s Remuneration In the case in which the liquidator of the company of J. M. Brown, Ltd., sought to have the receiver’s remuneration fixed, his Honour heard counsel and said he would take time to consider his decision. Mr H. J. Macalister appeared for the liquidator and Mr N. L. Watson for the receiver (Mr L. A. Blackmore ). DECISION RESERVED In the Supreme Court yesterday in the case in which George Maddams, of Rangiora, proceeded against Millers, Invercargill, Ltd., seeking an order to declare certain resolutions and transfers of shares invalid, his Honour, after hearing Mr H. J. Macalister, counsel for plaintiff, said he would take time to consider his decision.