Fol v Residues

Fol v Residues - [1937] HCA 42 - HCA 1937 case summary — Zoe

[35]

Puce, the defendant Herbert Price and Frederick William Dorhauer ; =a (viii) £250 to Frederick William Dorhauer; and (ix) £250 to the defendant Otto Christian Dorhauer. Of these all except that numbered (vii) were issued as securities for loans previously made to the company at short call ; and that numbered (vii) was to secure Herbert Price and Frederick William Dorhauer in respect of a guarantee given by them to the Bank of New South Wales in respect of the company's overdraft with a limit of that amount. The joint debenture of £5,000 was accompanied by a collateral agree- ment of even date between the company of the one part and Herbert Price and Frederick William Dorhauer (therein called the guarantors) of the other, one clause of which provided that should the guarantors desire to sell the whole or any part or parts of the said debenture the solicitors of the company should prepare the transfer and any subdivided debentures rendered necessary, and that the company should execute any such subdivided debentures and issue them " to the purchasers from the guarantors." Other clauses of that agreement provided that the purchase money of any such sale or sales should be paid into an account in the name of the company with the bank, to be known as the debenture account, and that such moneys should be used for the payment off of the overdraft by the company, and that until the guarantors were called upon to pay the overdraft to the bank the interest payable under the debenture should be paid into the same account to be used for paying the interest payable to the bank on the overdraft. "Pursuant to such collateral agreement a transfer of £250, portion of the joint debenture, was executed in favour of the defendant Herbert Robert Holt on or before 16th February 1932, although it does not appear whether the relative debenture was issued by the company, and on 13th May 1932 a further subdivided debenture for £150 was issued by the company to John Brady, who on 24th June 1932, purporting to exercise the powers thereby conferred upon him, appointed the defendant Herbert Price and Frederick

[153]

on behalf of the appellant that no effective resolution had been passed to authorize the issue of the debentures, firstly, because no competent quorum was present at the meeting of 3rd November, and secondly, because the resolution passed at the meeting of 17th November was merely ancillary and incidental to that of the previous meeting. The first resolution can only be considered for the purpose of interpreting the second resolution. The second resolution so construed represents that the series of debentures has been prepared and is in order awaiting authority to issue the series and then proceeds to determine upon and authorize its issue. The last objection to the judgment under appeal was that the power had not been exercised by the directors "' bona fide for the benefit of the company as a whole." At the hearing before the learned judge the plaintiff accepted the onus of proving this proposition. The phrase " bona fide for the benefit of the company as a whole " no doubt tends to become a cant expression in these matters but is not yet a shibboleth. Many of the cases which illustrate this "phrase" relate to the alteration of articles of association by shareholders in general meeting. No court "should consider itself fettered by the form of words, as if it were a phrase in an Act of Parliament which must be accepted and construed as it stands" (Shuttleworth v. Coa Brothers & Co. (Maidenhead) (1) ). But the learned judge found that " the evidence as a whole preponderates in favour of the view that in regard to the issue of debentures the directors acted in the interests of the company and of the general body of shareholders and not in the interests of the proposed debenture holders " and found this issue of fact against the plaintiff. In order to succeed in a case like the present the plaintiff must prove the equivalent of fraud or bad faith. In Hirsche v. Sims (2) the Earl of Selborne formulated a test which seems applicable to the present case as follows: " If the true effect of the whole evidence is, that the defendants truly and reasonably believed at the time that what they did was for the interest of the company, they are not chargeable with dolus malus or breach of trust merely because in promoting the interest. of the company they were also promoting their own." Upon such a question an opportunity of seeing the parties concerned is a matter

[183]

respect of liabilities already incurred for the benefit of the company and it is evident that the circumstance that such a director is thereby placed in a better position and given priority to other creditors is not in itself necessarily an objection to the exercise of the power. The allegation is that, when the debentures were issued in respect of the deposits at call amounting to £5,150 and the guaranty for £5,000, the purpose of the transaction was nothing but conferring upon lenders and guarantors who themselves were directors, or were represented by directors, all the advantages given by such a security. The company was in difficulties. A liquidation might be found unavoidable and, it is said, they simply wished to secure the debts in question. There are many circumstances supporting this view of the transaction. But, on the other side, there is a body of evidence explaining the issue of the debentures on the ground, stated briefly, that it was part of an arrangement by which none of the depositors or guarantors was to call in his debts or liability for twelve months, in order to give the company an opportunity of improving its position without any one of them following the example of the director who had called in his £250 and so, perhaps, precipitating a collapse. On the whole evidence, Long Innes O.J. in Eq. was not satisfied that the sole purpose of issuing the deben- tures was to benefit the depositors and guarantors. He said: "TI have come to the conclusion that the plaintiff has failed to discharge the onus which rests upon it in regard to this issue of fact; and I think, on the contrary, that the evidence as a whole preponderates in favour of the view that in regard to the issue of debentures the directors acted in the interests of the company and of the general body of shareholders and not in the interests of the proposed debenture holders. I find this issue of fact against the plaintiff." It is, in my opinion, impossible to reverse this finding. It is founded upon the learned judge's interpretation of oral evidence, much of which consisted of confused explanations, and upon his estimate of the characteristics and honesty of the witnesses who gave the evidence and attempted the explanations. Moreover the question is not whether the operation of the transaction was or might give a preference over ordinary creditors or benefit those receiving debentures at their expense, but whether the object was

At a glance

Court

Decision date

Before

Source

Judgment (188 paragraphs)

Parties

Cited By (7)