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The Pamphlet Collection of Sir Robert Stout: Volume 74

Judge's Decision. — Proposed Sale not Sanctioned

Judge's Decision.

Proposed Sale not Sanctioned.

In the Supreme Court on June 16 Mr Justice Williams delivered his judgment on the application by the official liquidators of the Colonial Bank of New Zealand for the sanction of the court to an agreement made between them of the one part and Alfred Lee Smith and James Bennie Reid of the other part, for the sale and purchase of certain debts due to the bank and the securities for the same as mentioned in the agreement.

Mr Haggitt appeared at the hearing for the official liquidators, Mr W. C. MacGregor for the shareholders' committee, Mr T. Young (of Wellington) for Mr C. Fraser (a shareholder), and Mr Wood house for the persons named as purchasers (Messrs A. Lee Smith and J. B. Reid).

His Honor's judgment was in the following terms :—

"I agree with the liquidators, that upon the figures brought forward by Mr Cook the suggested purchase is a fair one, and that it would probably be more beneficial pecuniarily to the liquidation that the agreement should be carried out than that the Ward Farmers' Association should be compelled to liquidate. Mr Cook has baaed bin figures on what he considers would be realised if the association actually went into liquidation, and has taken his valuation as on the 20th of March last. Mr Cook does not, however, seem clear as to whether his values do or not allow for the cost of realisation. Mr Braund has made an analysis purporting to show the result of the agreement, based 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 £50,000 of the association's debentures, which, page 38 in the event of liquidation, are a first charge on its assets. Taking Mr Cook's figures, we find the whole of the assets, including the uncalled capital, to be £72,797. Deduct from that—say, £5000, the cost of liquidation, and (as suggested by Mr Haggitt) £1500 in respect of contingent liabilities, and a balance is left of £66,297. Of this £50.000 goes to satitsfy the debentures, and the balance (£16,297) is apportionable between the bank and the other unsecured creditors The total amount of unsecured debts is £62,797. Of this amount £42,179 is owing to the bank. It will be found that the bank's proportionate share of the £16,297 is £10,946, which, added to £50.000, makes £60.946. Add to this the value of the properties in Mr Ward's estate, set down as £4250. but realising, say £3000, and we have £63,946. As against this we have the purchase money of £62,750 and a guarantee to the extent of £5000 in respect of certain oats, the whole of which is stated to be now doe. On the above calculation the bank would receive £67.750 if the purchase were carried out, as against £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, however, valued as on the 20th of March. He states that oats have risen, and that in consequence, if he were now to value the book debts and uncalled capital of the association, he would value them at nearly £5000 more. Under the circumstances it would be unfair to refuse to sanction the agreement merely en account of this rise, but if the agreement is not sanctioned on other grounds the liquidation will get the benefit of it. The advantages of a present cash payment are obvious; interest is stopped, the claim of the Bank of New Zealand is settled, and the liquidators are relieved from uncertainty.

It was suggested that there were incidental objections to forcing the Farmers' Association into liquidation, one of them being that to adopt such a course would affect accounts upon the "B" list. This suggestion, though made by counsel, was 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. I do not think it has been shown that the result of the association going into liquidation would indirectly affect the liquidation of the Colonial Bank. On the whole, however, I think that 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 pecuniarily to the Colonial Bank. It was contended, however, that even if this were so there are other aspects of the case which the court is bound to consider. It was suggested that the evidence has disclosed such a state of things that an arrangement which would in substance compromise the debts both of the association and of Mr Ward, and which was intended to have, and would have, the effects of avoiding liquidation and bankruptcy, and so preventing their business transactions beeing investigated, ought not to be sanctioned. What, then, are the circumstances disclosed in evidence with respect, first, to the trading of the Ward Farmers' Association, of which Mr Ward was managing director, and, secondly, to the conduct of Mr Ward in relation to his separate transactions ?

"The attention of the court was first directed to the balance sheet of the association for the year ended the 29th of June 1895. That balance sheet is framed somewhat curiously. Among the assets there is one item of £6830, bills receivable. There is no entry of bills under discount among the liabilities. This latter entry had, however, appeared informer balance sheets. Mr Ward explains this by saying that the system of dealing with bills under discount and bills receivable was changes. He says: 'As I understand it, in the usual way bills under discount are looked upon as bills sold, and are deducted from bills receivable. That is the ordinary thing to do, and ought to have been dons from the start.' He goes on to say: 'It is quite usual for bills discounted to be regarded as sold, and instead of the total amount appearing the difference between bills discounted and bills receivable to be shown.' The sum of £6830 appearing among the assets of the association was therefore 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 an illegitimate one. 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 is in itself a 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 the money for it he had no more to do with the bill the above system would be justifiable; but of course, 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, the 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 assets column has been followed with respect to another item. In the balance sheet of 1894 there appears the item among the liabilities 'association's drafts against shipments, £51,643," and among the assets the 'advances against produce afloat and in store, £74,929." In the balance sheet for 1895 the former item does not appear, and the amount of £34,430 only appears in respect of the latter item in the assets column. The balance sheet also shows a total liability to the page 39 Colonial Bank of £1185 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 £30,000, and in suppport of the draft received warrants purporting to represent oats of that value, which oats ultimately turned out to be non-existent. This fraud was not discovered by the bank till some months later. In the meantime the association obtained forbearance from pressure by the bank, and their account was reduced by the above amount.

The balance sheet was made up to the 29th of June, but of course it was compiled after that date and it was not certified as correct by the auditor until the 13th of August, nor was it laid before the shareholders until 7th of September. If the account was, as Mr Vigers states, reduced by the fraud of some officer of the association by the sum of £30,000 at the end of June, it is exceedingly strange that the directors of the association should not by the 7th of September have discovered that there was something wrong, and that the association had got credit for £30,000 which it had no business to get. The balance sheet further represented the sum of £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. This report was to be presented at the meeting on the 7th September. This, therefore, implies an assertion not only that the balance sheet was correct up to the 29th june, but that the circumstances of the association on the 7th of September were such as to justify the distribution of the amount to credit of profit and loss in dividends and bonuses. In the balance sheet of June 1895, the lisbilities, apart from paid-up capital, amount to £53,289, and the assets, apart from goodwill, to £72,555. In Mr Cook's statement of assets and liabilities, as on the 20th March last, the liabilities amount to £112,797. To that, however, must be added the sum of £55,150, which, up to the 19th of October, when Mr ward gave his promissory note for it, was a liability of the association. The total, therefore, of liabilities was £167,947. The total assets as valued by Mr Cook as on the 20th March amounted to £64,341. The discrepancy between the balance sheet of the 29th June and Mr Cock's valuation on the 20th March, even apart from the fraudulent credit of £30,000, is enormous. It certainly cannot be in any way accounted for by losses incurred between the two dates. Furthermore, the loss of £55,150 was known to everybody on the 19th of October, when Mr Ward gave his promissory note for it.

"it is impossible to suppose that the framers of this balance sheet of the 29th of June, when they put it forward on the 7th of September, were not aware that it was an utterly false one—somthing going far beyond the mere rosy statements which too sanguine directors occaslonally put forward. It competent business men put forward a balance sheet of this kind the only interence is that they do it for a sinister purpose. What, then, is Mr Ward's connection with this balance sheet? On the 29th June, the date to which it was made up to, he was on his way out to New Zealand. He was, therefore, absent from the colony at the time the fraud in respect of the oats was perpetrated He returned to New Zealand, however, in July. Mr Ward says he was absent from the colony when the balance sheet was prepared. The balance sheet, however, was not signed by The auditor till the 13th August, and was alter wards published with a report annexed to be presented at the the annual meeting of share holders on the 7th of September. This report is signed by Mr Ward as chairman of directors, and it recommends the appropriation of the balance to credit of pront 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. He says he cannot give any details, as he had nothing to do which them. He says he did not and could not give the business any large personal control, that matters were pat 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 £27,450, the total paid-up capital of the company, he held £23,000—viz, 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 a share had been paid. On these 8000 shares £4 a share was not called up, so that he was subject to a contingent liability of £32.000 in respect of them. Further than this, Mr Ward's private account with the association was largely in debit. Considering the position Mr Ward held as managing director of the association and the large stake he held in it, he seems, according to his own statement, to have known uncommonly little about its affairs. If a company becomes insolvent, and if it appears that credit has been obtained by fraud, and that a false balance sheet has been put forward, it is fair to conclude that the losses which led to 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 his examination that advances were made that prudent men would have taken securlty for over the 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 his affidavit Mr. Cook states that out of caseappears furtherfrom the evidence of Mr Cook, who investigated the affairs of the association. He says in his examination that advance were made that prudent men would have taken security for over the 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 his affidavit Mr Cook states thatoutof £85,070 of book debts he consideredit necessary to write off £37,374 asabsolutely bad and worthless. He stated thathe found indiscriminate credit had been given and little or no security taken. Nor can it be page 40 suggested that this state of things was caused by the opposition of other freezing works. The freezing business and the 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. The association, also, after losing all its paidup capital, is £48.456 to the bad, according to Mr Cook's estimate, in addition to the £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 £20,000 on a guarantee for the association given by him, £16,340 on a draft secured by shares of Nelson Bros. (Limited), which at the time the draft was given are stated to have been a sufficient security for it, but have since depreciated in value. In addition to this there is the promissory note for £55,150 given on the 19th October. The contingent liabilities of Mr Ward amount to £38,513, the principal ones being £32,000, the £4 per share uncalled on 8000 shares held by him in the association, and £4900 guarantee on account of the Hokonui Coal Company. As against these liabilities, the assets consist of the equity of redemption of certain properties estimated to be 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 would thus realise under a 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—the promissory note for £55.150—represented the balance to his debit in the books of the association. So far as I can 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 latter, Mr Ward states, turned out unfortunately, and that if there had been any profits they would have gone to the association, but that as he did not wish the association to speculate he took the losses on himself. This liability of £551150 of Mr Ward to the association originally formed part of the liability of the association of the bank, but on the 19th of October 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 this was done I do not quite understand, as the promissory note could be of little or no value to the bank. There is nothing to show that Mr Ward had been any property whch is not included in the present list of assets. He states that he the considered hoi shares in the association, however, was then, to Mr Wars's Knowledge, in difficulties, and these shares carried a contingent liability of £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 another amount. Mr Ward's liabilities therefore, with trifling exceptions, all incurred in connection with the association of which he was managing director. Here, then, is a company, or 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 lost and the association has become hopelessly insolvent, showing a deficiency of £100,000. 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 a reckless disregard of ordinary business principles. Of this association Mr Ward was managing director. Of the £12,450 of paid-up capital he held £8000, which carried with it a contingent liability of £32.000. He also held 3000 shares of the par value of £15000, which had been allotted to him as fully paid-up. His private account with the association was in debit £55,150. showing that he freely used the credit of the association for his own private ventures. In such circumstances it is hardly too much to say that in substance Mr Ward and the association must for most business purposes have been identical. Mr Ward is now hopelessly insolvent. A few pence in the pound is the utmost that his estate can be expected to realise. What, under ordinary circumstances, would happen would be that the association would go into liquidation and that Mr Ward would 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 management should no longer be permitted to roam at large through the business world, is a result so obviously desirable in the interest to commercial morality that it ought if possible to be attained.

"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 transaction, where the purchasers expect to make a profit, but that they were buyiug out of friendship for Mr Ward, in the hope of being able to put the association upon its feet again—that is to say, that a rel veil will be deliberately drawn, so as to hide the past as far as possible; that Mr Ward's bankruptcy will be purposely prevented; and that things generally will be made pleasant. That the trnsfer of the liability of the association to the banks into the hands of persons admittedly friendly to the former management will tend to stifle any inquiries into the proceedings of the association is manifest. If anyone had purchased the debt of the association as a business speculation, and for his own business purposes wished to keep the association going, that would be a different matter. In that case there page 41 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 is lumped in one purchase with the debt of the association, though Mr Ward's debt will yield but an inflnitesimal dividend. 'We only buy the association's debt on condition that you thrown in all Mr Ward's debts' 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 the purchasers were themselves actuated only by the honest motive of friendship for Mr ward.

"I am satisfied that the court, in considering wether 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 is to prevent investigation into discreditable transactions the sanction should be refused, even if the agreement is the most beneficial for the pecuniary interests of the liquidation. This principle is perfectly well recognised by the courts in similar and analogous cases. (Thring's Joint Stock Companies, p. 383; re Strawbridge 25, Ch. D 266; re Burr ex parte Board of Trade. 1892, 2 Q B 467; ex parte Reed re Reed, 17 Q.B.D., 251.) That the proposed arrangement though in form a purchase of assets is in effect a compromise is plain. It comes to the same thing whether a debtor to the bank offers to compromise a debt for so much in the pound or gets a friend to comeforward and buy it for the same amount, and the like considerations should apply in each case. I have no hesitation whatever, therefore, in refusing to sanction the agreement. In so refusing I do not for a moment mean to say that the liquidators were wrong in entering into it and bringing it before the court, or that they are entitled to anything but credit for doing so. I base my decision upon what was disclosed at the hearing. Reference was made in one of the affidavits to Mr Ward's political conduct, and some similar refrence was made at the hearing. With Mr Ward in his political capacity I have nothing to do. I look upon the case from its commercial aspect, and upon Mr Ward in his business relations. That Mr Ward is a member of Parliament and holds a political office is, from the point of view I have considered the case, an irrelevant accident. The summons will there-fore be dismissed."

Mr W. C. MacGregor then stated that there Was on the list for the day a summons in the same matter issued by him on behalf of Mr William Brown. After his Honor's judgment, just delivered, it might prove unnecessary to proceed with that summons.

His Honor: Why ?

Mr W. C. MacGregor said that, in terms of the agreement, the J. G. Ward Farmers' Association would now have to be wound no by the Bank of New Zealand He would ask that Mr Brown's summons stand over for the present.

His Honor said that be had no objection to the summons standing overas suggested.

Mr W. C. MacGregor asked his Honor whether he proposed to deal now with the question of the cos's of the summons.

His Honor replied that the Hon. J. MacGregor (for Mr Young) wished that the question of costs should staud over in the .meantime.

Mr W. C. MacGregor replied that he was quite agreeable to that course being adopted.

Mr Haggitt said that he presumed the liquidators would take their costs out of the assets.

The following is the report and balance sheet referred to in his Honor's judgment, issued to the shareholders in the J. G. Ward Farmers'Association of New Zealand (Limited), and submitted at the general meeting held in Invercargill on Saturday, 7th September 1895:—

The directors are please I to place before the shareholders the annual balance sheet.

The year just closed has bem one of general depression in almost all classes of commerce, and more especially in all produce trades.

Growers generally throughout the colony have had a hard and anxious time and very low prices for their productions. The prospects however, are very much more encouraging and the increased value of stock, wool, and grain will materially assist in restoring prosperity.

The depression has been feit by the association, in sympathy with kindred institutions; but notwithstanding this, the directors are pleased to report a balance of profit for distribution of £b51 17s 3d, which it is recommended to be divided as follows :—To payment of dividend of 7 per cent, on paid-up capital. To payment of bonus of 3 percent. to shareholders on goods purchased. To refund of 10 per cent, on commission paid by shareholders on sales (this is in addition to rebate of 25 per cent, already made on wool commission). To payment of bonus of 3 per cent, on salaries.

The directors further recommend that the £2000 presently standing at reserve fund account, together with £2000 to be allotted from profit and loss account be utilised in reduction of goodwill account, whicn will then stand at £11,000 instead of £15,000.

During the year the directors issued £50,000 of 0 per cent, debentures, with a currency of 14 years, of which £40,000 has been sold, and the balance of £10,000 is open fir purchase. These debentures are recommended to shareholders and clients as offering a first-class investment.

Early in theyear it was found necessary to obtain further storage accommodation, and arrangements were made with the Hon, Mr Ward to erect a new wool store at Invercargill, which is capable of holding all the wool likely to be handled by the association at Its annual sales for some years ahead; and owing to the pressure upon our Gore stores the capacity there was more than doubled as well.

The total storage room of tbe association has been utilised to the full during the past grain page 42 season, and a large number of our shareholders have found the benefit of this, as upon our recommendation they stored their grain to await a rise, which fortunately came and has been maintained, representing an advance of fully 50 per cent., which hag been very acceptable.

Our stores, which are the most capacious in the colony, have all the modern facilities, and inquiries are being made with a view to fitting them with hydraulic power.

Mr Thomas Green retires from office as director by rotation, and being eligible offers himself for re-election.

It will also be necessary to elect an auditor.

Nominations for directors other than the above must be lodged at the office of the association in writing in Invercargill seven clear days before the annual general meeting on Saturday, September 7, 1895.

Shareholders unable to attend the meeting can record their vote by proxy, forms of which are enclosed.

Proxy forms must be lodged at the office of the association in Invercargill 48 hours before the time of the meeting.

J. G. Ward, Chairman.

Balance sheet of the J. G. Ward Farmers' Association of New Zealand (Limited), for 12 months ended June 29, 1895:—

Liabilities.
Capital, £250,000 in 50,000 shares of £5 each. 3,000 shares fully paid up to £5 £15,000 0 0
12,230 shares upon which is called up £12,230 0 0
34,770 unsubscribed
50,000 £27,155 10 0
Less unpaid calls 74 0 0
£27,155 10 0
Plus calla paid in advance 295 0 0
£27,450 10 0
Debentures 40,000 0 0
Amount at credit of shareholders' and clients' current accounts 10,103 8 2
Bank accounts 1,185 4 1
Reserve fund 2,000 0 0
Profit and loss accont 6,516 17 3
£87,255 19 6
Assets
Advances against produce afloat and in store £34,430 9 9
Bill receivable 6,830 7 5
Current accounts 10,468 17 0
Stocks of good on hand and afloat 17,840 2 8
Goodwill account 15,000 0 0
Working plants, office furniture, books, and stationery 2,638 5 2
Shares in saleyards 47 16 6
£87,255 19 6
Profit and Loss Account for 12 months [unclear: ends] 19th June 1895.
Salary and wages paid £4,886 18 5
Books, stationery, and advertising 539 10 11
Rents, postages, cables, insurance, and depreciation 1,827 10 7
Income tax and licenses 329 0 9
Directors and auditor 22 7 8
Incidental expenses 290 0 1
Balance profit and loss account 6,56 17 3
£14,652 5 8
Profit and loss account, 30th June 1894 £7,777 19 8
Less—
Carried to reserve fund £1,000 0 0
Goodwill United Farmers' Agency Company 1,278 3 6
Dividend and bonus paid 3,219 4 7
5,497 8 1
£2,280 11 7
Profit for year ended 27th June, 1895, after deducting bad debts—On Merchandise and produce sold 5,541 8 8
Commission and storage 6,217 15 0
Discounts and interest 612 10 5
£14,652 5 8

J. G. Ward, Manager Director.

John Fisher, Manager.

R. A. Anderson, Secretary.