Public Examination of the Board Opposed.

Star (Christchurch), Issue 4938, 30 April 1894, Page 1

Public Examination of the Board Opposed.

Scenes in Court. [from oub london correspondent.] Mabch 24. Notices were issued at the end of laßt week for the public examination of the directors and officials of the New Zealand Loan and Mercantile Agency' Company, the citation being specially directed against Mr Thomas Russell. But these gentlemen, who had professed at recent meetings to desire nothing so much as a " thorough investigation," now set the machinery of the law m motion to discharge the order for their examination, and the argument was heard before Justice Sir Vaughan Williams, in the High Court of Justice, Chancery Division; Sir Henry James, Q.C., M.P. (late Solicitor-General) appearing for the Board, which, as you know, consists of Sir J. Fergusson, Sir J. Gorst, Sir W. E. Stafford, Mr Mnndella, Mr Bristow and Sir George Bussell. Mr Finlay, Q.C., M.P., opposed the discharge of the rule. Sir Henry James, who from the outset showed very strong feeling, considering the nature of the case, argued that the official receiver's « report, to justify a public examination, must contain a direct allegation of fraud, whereas it merely set forth facts, leaving fraud to be inferred and he accused Mr Stewart, the receiver, with cowardice or a want of moral courage . in adopting that course. His Lordship dissented from this view, and eaid that the statement of facts had been necessary to the granting of the order. Sir Henry James, while courting the fullest examination, objected to the impression created by the order, which should have been made under Seotion 115 of the Act of 1852. Hiß clients declared that no fraud had been committed. His Lordship said the implication of fraud was general, and was not distinctly alleged against tbe persons cited. Mr Howard Wright (who is, with Mr Finlay, for the official receiver) argued that only a reasonable presumption of fraud and not a specific charge was necessary. Hia Lordship said there must be a reasonable suspicion of fraud to form a primd facie case, but though the receiver did not specify fraud against any individual director, it did not follow that none of the directors had been guilty of fraud. A rather heated argument ensued between the learned Judge and connsel for the Board on this point, the former holding that concealment of facts in the prospectus or positive misrepresentations were sufficient to imply fraud in the legal sense. Sir H. James: Your Lordship is emphatic. Mr Justice Vaughan Williams replied warmly that for the reßt of the argument h- would not trouble counsel with any observations as to the view which the Bench took of his remarks. He had only been endeavouring to assist the Bar to arrive at the truth, but if criticism was to be offered as to the style of hiß remarks, no useful purpose wonld be served by any assistance from the Bench. Sir Henry Jameß disclaimed intentional discourtesy, but said his Lordship had combatted all his arguments one by one as he had advanced them, and it would be vain, therefore, to prolong the discussion. His Lordship said a Board of Trade report (of which body Mr Mundella, one of Sir H. James's clients, waß president) had laid down the procedure which the receiver had -followed in this case. , ' His lordship gave judgment on March 19. He reiterated his opinion that a specific charge of fraud was not necessary in the receiver's report, whioh was made in the ordinary form, and of whioh no disapproval had ever been expressed by the Board of Trade, which claimed to control the action of official receivers in this respect. Under the Companies Winding-up Act, 1890, the receiver, need only state facta which raised a presumption of fraud, leaving the public examination to establish the point whether actual fraud was committed. His only criticism on the receiver's report was that it had been too long delayed. Sir Henry James's offer that the Board should submit themselves for examination, under Section 115 cf the Act of 1862, was beside the mark, because such an examination would not be pnblic, and the depositions would be accessible to the receiver only. It was obvipuß that the report m the present case suggested two distinct •frauds— (l) That the directors, or some of them, from time to time issued prospectuses which were mislpadiner, and kr*<o'Wn -to : b i ■imele-.ciiii-y; (2) fiat the direc'ere, cr •*■•*>?■ -e of ~i>-' , u.i b-half of the .New Z. aland Lj»a Company, entered into a series ot transactions with the New Zealand Land Company, lo ibe.na fide in U;e iu.t.rest .0' the Loan Company, but in some otber intarest and to its detriment. The annual prospectuses isju-d from 1865 indicated that the debentures would give a charge the as-eli. .of tbe company, whereas they gave none wiiatfever. Jn 1879, the <diM2_-ors obtained counsel's opinion, which wai to tbe efidofcifcbat bhedssue of these debentures, when tfcey fell due, should not be rev-wed, but new ones i.eaed in a revised form. But dowa to 1891, the directors continued to issue -debentures in the old for in, merely substituting the word " by " for •" upon," and in some of the later years " secured " for "amply secured." In 1888, when issuing a prospeotuß.to obtain subscriptions for .6250,00© .debenture stock, the .-state- , ment waß repeated that the debentures: and debenture otoek were. " secured 011 tho: capital investments and general acsets,": which exhibited a total of upwards of; £5,000,000, though clearly advised .by', counsel tbat such «tateme__t waß unteue.i Moreover, the debenture stock certificates isquad by the company under this, proapeqtus stated that " the stock is constituted and Bccured by teas, deed," ; although no euch trust deed existed. In iaot, no .lebeatures or debenture gtr-fk issued by the company gave tho ho'/Je's r r.s'.'W-criberf 1 any security on the as-^t.3. In 1853 a fresh prospectud i's3ued ti Onft-ia subscription'- for j6550,000 dsbeu-tu-erXo-Jf, fitted that ,63, 137,357 of thia Bt <;k vv/13 to be isaae*^. of wh f c ! i all^L. r the Jci ',0,000 f/.-s lo be giiV^n a_ far %,* nec_a- : _*. y : 1 holders of oi_t.:s.t«ui&£ dp.icubtTZr isj... d*?t < .fli{. r g fi- 1 !- in fate-titutioi- tor

their balding. These holders took up the new _tock to the amount of -8642,134, leaving - outstanding -31,787,936 issued to subscribers, and, bb the directors knew, altogether unsecured. The Btock issued u__i_r the prospectus of 1892 was secured by a trust deed by a mortgage on the uncalled capital and a floating charge on the undertaking of the company, but the outstanding debentures and debenture ■ otock were wholly unsecured, and the pre--1 sent holders now found themselves postponed in the liquidation to the holders of the 1892 stock. Thepe facts, if left unexplained, raited the inference that the subscribers for Btock between 1879 and : 1892 were deceived, and that a prima facie case of fraud had been made out. After referring to the New Zealand Land Company, formed in 1879, and its connection with the Loan and Mercantile Agency Company, the . Judge remarked that it wonld be seen that the Land Company had lost half its capital, and was unable to pay more than half its fixed charges, including interest on debentures. Four shareholders had forfeited, Mr Rubbgll borrowed £45,000 to meet the call of 1891, and the Land Company had borrowed £30,000 from the Loan Company to pay interest on debentures issued to the amount of .6200,000. Of a total liability of the Land Company of £97,000, Mr Bussell owed £61,000 and Sir James Fergusaon and Mr Mundella £5625 each. All three were directors of both Companies. Mr Russell _ total indebtedness to the Land Company was £75,000, for which it held securities ; the Land Company owed the Loan Company in 1891 £90,000, having increased since 1890 by £55,000. It was in these circumstances that Mr Russell and his codirectors transferred to the Loan Company 16,507-haree, carryinga liability of £75,000, and got in exchange deferred shares, carrying no liability whatever; and Mr Bussfll, who was at one time the holder of 11,000 ordinary sbareß in the Loan Company, with a liability of £10 each, now held only 22,387 £1 fully oaid deferred shares, carrying no tiaSility whatever. The Loan Company had become possessed of all the ordinary shares in the Land Company except about l-35tb. It seemed obvious- that the result of these transactions was extremely beneficial to Mr Eussell, for he had thereby got rid of a liability for calls to the extent of £61,000 and an indebtedness to the Loan Company of £75,000, bat it was difficult to see what benefit the Loan Company derived from it. His Lordship concluded his judgment as follows •—" Sometimes it is "worth the while of a creditor to take over the property of hia debtor as the only mode of obtaining payment of a large debt, but no suoh consideration will account for the transactions between the Loan Company and the Land Company, for at the date of them the total indebtedness of the Land Company to the Loan Company was only £90,000, and the assets of the Land Company, including uncalled capital, if realised immediately, would probably have gone far to pay itß then liabilities, even though one may place very little confidence in a valuation made under Buch extraordinary conditions as Mr Aitkin's valuation mentioned in paragraphs 41 and 42 seems to have been. In my judgment, ib is impossible to avoid the conclusion that, as against Mr Bussell at all events, the facts stated in the report aB they stand raise a prima facie presumption of fraud that he at least on behalf of the Loan Company entered into transactions with the Land Company, not bona fide in the interest of the Loan Company, but in his own interest. With regard to the other directors who have been ordered to be examined, I cannot but hope that the result of the public examination may be entirely to clear them. It may be that, in the result, Mr Ru&sell will be able to clear himself. But the great advantages which he personally obtained upon the transactions impugned make a prima facie case of fraud against him which is not made against the other directors. The interest -of the other directors in the Loan Company largely exceeded their liability for calls in the Land Company. It is in the highest degree improbable, therefore, that they wilfully risked a liability for calls of £12,000 ia the Loan Company to avoid even an immediate liability of £5000 in the Land Company, to say nothing of the improbability that distinguished men, bearing the highest possible character, should be wilfully parties to injuring the interest, of the Company of which they were directors. Bub it is sufficient to justify my order if a prim& facie case of fraud is made against one director. That fact makes it right that all the directors and officers of the Company should be examined ; and I cannot help thinking that — now that discussion in open court must bare shown to these distinguished men that, whether or not the report makes out a primO. facie case of fraud, and I think it clearly does, it at all events showa a state of things demanding ing rigid investigation — they themselves will earnestly desire, conscious of their own. innocence, that there shall be an immediate public inquiry. No&.esse oblige." Application dismissed with co&ts.