Hardie v Hanson

High Court of Australia|1960-07-01|Before: Menzies JJ, Hill J

High Court of Australia Dixon C.J. Kitto and Menzies JJ. Hardie v Hanson [1960] HCA 8

ORDER Appeal allowed with costs. Order of the Supreme Court discharged. In lieu thereof application of the liquidator dismissed with costs. The costs of the liquidator in the Supreme Court and in this Court as between solicitor and client and the costs hereby ordered to be paid by the liquidator to be paid out of the assets of the company as part of the costs of winding up.

The difficulties of this case arise partly from the uncertainty of the facts and partly from the obscurity of the provision upon which the liability of the appellant depends.

The appellant was a director of a company now in voluntary liquidation and the respondent is the liquidator. The company, the name of which is Hardies and Thomsons Pty. Ltd., was incorporated under the Companies Act, 1943-1954 W.A. on 3rd May 1956 for the purpose of amalgamating certain business interests, a purpose which fell through, and it went into liquidation two years later, to be precise on 7th May 1958.

The order from which the appeal is brought was made on the application of the liquidator. It declares that the business of the company was carried on from the month of February 1957 to the date of the commencement of the winding up, namely, 7th May 1958, with intent to defraud the creditors of the company by reason of the fact that the company continued to trade and to obtain goods on credit and to incur other liabilities without any reasonable prospect of being able to pay or provide for the payment thereof. The order further declares that Hardie, the now appellant, is personally responsible without any limitation of liability for all the debts and other liabilities of the company to the extent of £15,000. These declarations are followed by certain specific orders, viz. (1) that Hardie pay to the liquidator the sum of £15,000; (2) that for the purpose of giving effect to the declarations the liability of Hardie thereunder shall be a charge on every debt and obligation due from the company to him. Of the remaining specific directions or orders it is unnecessary to say more than that they deal with costs, liberty to apply, and a stay of execution.

The foregoing decree is founded upon s. 281 of the Companies Act, 1943 (No. 36 of 1943) W.A.. Sub-section (1) of that section empowers the Court in a winding up, in the conditions it states, to impose an unlimited liability upon any of the directors for all or any of the debts or other liabilities of the company as the Court may direct. The conditions which must be fulfilled before this power of the Court arises are set out as matters or things which must appear in the course of a winding up. The first is that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose. It will be noted that the word "any" occurs before "business" which seems to suggest a somewhat different conception from that meant by the ordinary phrase "the business of the company", a phrase covering a company's external activities considered as a whole. Next it will be seen that words connoting a real intent to defraud are used. So far there is no reference to the officers of the company in whose minds the intent must exist but it is obvious that it is an intent that must accompany the carrying on of the business in question. The phrase "intent to defraud creditors of the company" suggests that present or future creditors of the company will, if the intent is effectuated, be cheated of their rights. An intent to defraud creditors has been described, for the purposes of bankruptcy legislation, as an intent by deceit to deprive creditors of something to which they are entitled: cf. per Hill J. in Reg. v. Ingham [1] . Under the bankruptcy laws there are offences in which fraudulently obtaining goods or credit forms the chief element, but that is quite a different conception: see Bankruptcy Act 1924-1955 Cth, s. 210 (3) (a) and (b) and s. 212 (1) and contrast par. (a) with pars. (b) and (c) of sub-s. (1). Still further removed is the ground for refusing or suspending a discharge from bankruptcy that the bankrupt after knowing himself to be insolvent continued to trade or obtained credit or the ground that he contracted a debt without any reasonable or probable ground of expectation of being able to pay it after taking into consideration his other liabilities at the time: Bankruptcy Act s. 119 (7) (c) and (d). Professor Wortley began a discussion of the provision ((1934) Law Quarterly Review, vol. 50, p. 405) by saying that unlike most parts of the Companies Act dealing with winding up, it has no exact counterpart in the Bankruptcy Acts. It is known that one purpose of s. 275 of the Companies Act, 1929 Imp., the section from which the Western Australian s. 281 was copied, was to meet the case of a director who holds a floating security over a company's assets securing the company's indebtedness to him and who before crystallizing the security causes the company to acquire on credit in the course of business stock in trade or other assets which would fall under the security (see (1934) Law Quarterly Review, vol. 50, p. 405, n.2). That would of course be an example of carrying on a business with intent to defraud creditors. It is not, however, self evident to what kind of practice the words which follow refer, namely the words "to defraud creditors of any other person". The fact that the application must be made in the liquidation and by the liquidator, a creditor or a contributory indicates what interests are affected and the words "without any limit of liability" show that what is intended is to deal with the responsibility of the director in disregard of the principles of limited liability.

(1859) Bell 181, at p. 185 [ 169 E.R. 1221, at p. 1222].

The second condition which must be fulfilled in order to enable the court to make a declaration under s. 281 (1) is that it must appear that a director or directors, whether past or present, were knowingly parties to the carrying on of the business in manner aforesaid. The last words, viz. "in manner aforesaid", must refer to the "intent" and not to any mode or method adopted for carrying on the business.

If these two conditions are established, then the Court, "if it thinks proper so to do", that is to say in its discretion, may declare any of the directors who were knowingly parties to "the carrying on of the business in manner aforesaid to be personally responsible", without any limitation of liability. But for what? In the words of the sub-section, "for all or any of the debts or other liabilities of the company as the Court may direct". To me it seems difficult to suppose that it was intended that the Court should in exercising this power of direction go outside debts and liabilities the existence of which was in some way attributable to the carrying on of the business with the requisite intent to defraud. Sub-section (2) then goes on to authorize the Court making a declaration under sub-s. (1) to give such further directions as it thinks proper for the purpose of giving effect to that declaration. In particular the Court may charge the director's liability under the declaration upon any debt due to him by the company or upon any mortgage etc. given in his favour by the company. The charge by the Court may affect an assignee from the director, unless he be an assignee taking for value in good faith and without notice. Sub-section (3) provides that where any business of a company is carried on with such intent or for such purpose as is mentioned in sub-s. (1), every director who was knowingly a party to the carrying on of the business in manner aforesaid shall be liable on conviction on indictment to imprisonment for a term not exceeding one year. This provision of course makes it quite certain, even if otherwise there could be any doubt, that the intent to defraud creditors must be express or actual and real: nothing constructive imputed or implied will do. As if still further to confirm the fact that the provision is directed against persons really actuated by a conscious fraudulent purpose, sub-s. (4) goes on to empower the Court making such a declaration and a Court before which such a conviction takes place to order that the party be disqualified for a period of not more than five years from acting as a director or manager of a company. Under sub-s. (5) persons directing a company so to speak de facto as well as directors de jure are included in the provisions of s. 281.

In an attempt to follow the original provision of the United Kingdom sub-s. (6) enacts that a declaration shall be a final judgment for the purposes of s. 52 (j) of the Bankruptcy Act Cth, a paragraph dealing with bankruptcy notices. Probably the operation of the federal provision cannot be affected by State law in this manner but the sub-section contemplates some use of s. 52 (j) against the director. By whom, it may be asked; the liquidator, the creditor or the contributory, whoever happens to obtain the order or declaration?

Some of the difficulties of the provision were pointed out by the editors of Buckley on Companies , 11th ed. (1930) pp. 564, 565. In In re William C. Leitch Brothers Ltd. [1] an application was made by a liquidator for a declaration under the provision and also for orders based on specified acts of misfeasance. The relief was sought against a former governing director who had taken a debenture for £4,000 secured by a charge over all the assets present and future including uncalled capital. After the company had to his knowledge become unable to pay its debts he ordered goods to the amount of £6,000 for which the company was unable to pay. These goods became subject to his debenture. Maugham J. found that the governing director, knowing what the position was, deliberately went on trading in the name of the company in order as he hoped to safeguard his own position and without any regard to the interests of the creditors. In that view his Lordship considered that the section meant that the amount of the declaration simply rested in the discretion of the Court and he made a declaration that the governing director was personally liable (without any limitation of liability) in that sum being part of the debts or other liabilities of the company. His Lordship left it to some further application to determine the persons who were to have the benefit of anything that might be recovered as a result of that application. In fact an amount of £3,360 was recovered under the declaration made by Maugham J. How the amount was to be dealt with was decided by Eve J. in In re William C. Leitch Brothers Ltd. [No. 2] [1] . His Lordship held that the amount so recovered formed part of the general assets of the company available for all purposes and was not to be exclusively applied to any restricted class of creditors, such as the creditors the debts to whom were contracted while the business was carried on with intent to defraud creditors. This conclusion was based in part upon the extreme difficulty of working out any other plan of application of the moneys, in part upon the absence of any machinery in the section and in part upon the analogy provided by Webb v. Whiffin [2] . Inevitable as the reasoning of Eve J. makes this result appear, it is impossible to resist the conclusion that the purpose of the provision has miscarried. That purpose surely must have been to enable the Court to remove the protection of the no liability system in the case of directors who had been parties to carrying on any part of the business of the company before liquidation with intent to defraud creditors of rights, privileges or advantages they would obtain or enjoy whether in the winding up or otherwise and to require such directors to indemnify the creditors defrauded to any extent left to the discretion of the Court. Now, however, in England the word "persons" has been substituted for "directors", a step which doubtless makes such an explanation of the provision much less cogent, if any longer tenable, in the country of its origin: s. 332 of the Companies Act, 1948 and Buckley on Companies , 12th ed. (1948) p. 673. But the question of the application of the proceeds of the declaration is not a matter arising upon this appeal. The real importance for present purposes of the case of In re William C. Leitch Brothers Ltd. [1] lies in a dictum of Maugham J. The dictum is this: "In my opinion I must hold with regard to the meaning of the phrase carrying on business "with intent to defraud creditors" that, if a company continues to carry on business and to incur debts at a time when there is to the knowledge of the directors no reasonable prospect of the creditors ever receiving payment of those debts, it is, in general a proper inference that the company is carrying on business with intent to defraud" [2] . It may be noticed that this passage substitutes "carry on business" for "carry on any business" but perhaps that is of no importance. What is important is that the dictum states a proposition of evidence or proof, not one of substantive law, and states the proposition only as one in general true. One may be permitted to doubt whether the section is really aimed at the incurring of debts without reasonable prospect of payment and perhaps to suspect that it was this kind of bankruptcy delinquency that influenced the expressions used by Maugham J. But be that as it may, the dictum appears to me to have provided a basal consideration in the decision of Virtue J. in the present case. At the outset of a long passage in his Honour's reasons which states the ultimate grounds for his conclusion his Honour says: "The question then is whether the facts support the making of a declaration under the section. Applying the test proposed by Maugham J., I have to ask myself whether, from 1st February 1957 to the date of the winding up order, the company was being carried on without any reasonable prospect of the creditors ever receiving payment of their debts, and whether the defendant knew there were no such prospects. I have no doubt whatsoever that throughout the relevant period there was no reasonable prospect of this company ever paying its debts." Now in In re Patrick and Lyon Ltd. [3] Maugham J. had said: "I will express the opinion that the words "defraud" and "fraudulent purpose", where they appear in the section in question, are words which connote actual dishonesty involving, according to current notions of fair trading among commercial men, real moral blame. No judge, I think, has ever been willing to define "fraud", and I am attempting no definition. I am merely stating what, in my opinion, must be one of the elements of the word as used in this section" [4] .

(1932) 2 Ch. 71. 2. (1933) Ch. 261. 3. (1872) L.R. 5 H.L. 711. 4. (1932) 2 Ch. 71. 5. (1932) 2 Ch., at p. 77. 6. (1933) Ch. 786. 7. (1933) Ch., at p. 790.

Virtue J. had referred to this decision of Lord Maugham and was mindful of the necessity of proof of actual fraudulent intent. His Honour takes up the necessity of its being a proper inference from the facts that the director has been guilty of dishonest fraud and of the strict onus lying on the liquidator. His Honour then proceeds to state the factors in Hardie's situation and in his conduct which led his Honour to a conclusion against him. For myself, I do not think this conclusion is warranted.

No doubt between February 1957 and 7th May 1958 (the commencement of the winding up) he struggled on with the business after a time when in fairness to others and in wisdom he should have wound up the business and placed the company in which it had come to be vested in liquidation. It would serve little or no purpose to recount the history of Hardie's business or businesses and the manner in which it came about that he found himself left carrying on what had been a personal business in the name of a company formed as part of an abortive amalgamation with the Thomson interests. But this history, together with the earlier organization by himself in 1954 of the company taking over the Bunbury shop and undertaking manufacture at Hilton, all form a background against which his conduct during the final fourteen months must be judged. It included the closing of shops, the transfer of stock, the reorganization of methods of trading, continued attempts to effect the amalgamation, and then so to speak Hardie emerges with the full responsibility upon him. It may be conceded that that resonsibility had come to rest upon him some time before February 1957 but the point is that he was confronted with a very confused situation which he would be apt to regard from the point of view of the proprietor of a business and not from that of a company director. The question is not whether he dealt in all respects honestly with the situation or with all the creditors or other persons involved. The question is whether he carried on the business, which in effect means the trading business of the company, during the final period with intent to defraud creditors. That question cannot, in my opinion, be resolved by considering whether he knew of the weakness of the company's finances, of its lack of capital, of its inability to meet its debts as they became due and of the poorness of its immediate future prospects. These may be evidentiary matters but in all the circumstances they are not persuasive of the conclusion. Yet according to the very decree itself the intent to defraud creditors of the company is "by reason of the fact that the company continued to trade and to obtain goods on credit and to incur other liabilities without any reasonable prospect of being able to pay or provide payment therefor". This reads much more like an offence under bankruptcy law. It would be quite another thing if the motive or purpose was to relieve Hardie of liabilities or obligations under which otherwise he would lie or recoup his position and to do so at the expense of, that is to say in fraud of, creditors. I have read the evidence and studied the somewhat confusing exhibits in the transcript-record and I am reasonably satisfied that no such purpose entered into the reasons why trading was continued.

I have also had the advantage of reading the judgment prepared by Menzies J. and I agree in the reasons he has given for holding that upon a proper interpretation of the facts the finding of Virtue J. ought not to be upheld.

I think that the appeal should be allowed and the order of the Supreme Court discharged. In lieu of that order the application of the liquidator should be dismissed.

This appeal is from an order made by Virtue J. in proceedings in the Supreme Court of Western Australia which arose out of the winding-up of a company named Hardies and Thomsons Pty. Ltd. The proceedings took the form of an application by the respondent, as liquidator of the company, for a declaration under s. 281 of the Companies Act, 1943 W.A. making the appellant personally responsible, without any limitation of liability, for some or all of the debts and other liabilities of the company, on the ground that the business of the company had been carried on with intent to defraud creditors of the company and that the appellant was knowingly a party to the carrying on of the business in that manner. The order makes the appellant responsible to the extent of £15,000.

The company was formed in May 1956. Until February 1957 its business was carried on by a board of directors which included the appellant and associates of his and also representatives of a company called Thomsons Pty. Ltd. The company was formed for the purpose of taking over the business of Thomsons Pty. Ltd. and two businesses in which the appellant was the person principally interested. To an extent, and without much attention to formal steps, this purpose was pursued for a few months; but late in 1956, when accounts made it clear that overall losses were being incurred, the project fell through, and the representatives of Thomsons Pty. Ltd. withdrew from all participation in the affairs of the company. A resolution accepting their resignations from the board was passed on 1st February 1957. From that time until May 1958, when the company went into liquidation, the whole direction of its business was in substance in the hands of the appellant. Another person, a Mr. Temple, remained an active director with the appellant until April 1958, but he seems to have been largely subservient to the appellant.

From its very formation the company suffered from insufficiency of capital, and its business never began to make a profit. Virtue J. was satisfied that it had not been formed with any sinister motive, and that in the early stages, that is to say until the withdrawal of the Thomsons' representatives, it may have had some prospects of success. So much the liquidator concedes, and indeed he has never sought to establish that the carrying on of the company's business up to 1st February 1957 was accompanied by any intent to defraud creditors. But his Honour concluded that by the end of 1956 it had become apparent that there was no real future for the company. His view was, and the appellant's counsel has not sought to contravert it, that at that point of time it was quite evidently the prudent course to put the company into liquidation. The central point in his Honour's reasoning, explained as it is in a full and careful judgment, is that at least by 1st February 1957 the stage had been reached when an observance of proper standards of commercial morality would have lead the appellant to take the normal steps to make what assets the company possessed available for the satisfaction of its debts.

The appellant was fully aware of the state of the business. Nevertheless he refrained from taking the obvious course, and he persisted in carrying on the business for another fifteen months. During that period the situation grew continuously worse. The explanation that he has offered is that he was always hoping for a reversal of fortune, looking particularly to the advent of television in Perth to give the company's business a much-needed fillip. It is conceded on his behalf that his optimism was unjustified, but he insists that it was genuine. About this the learned judge had his doubts. He observed of the appellant: "He was a man not lacking in experience, having spent some twenty years previously in this type of retail trade, and it is very difficult to credit that with the situation as he knew it, he could have had any real belief in the future of the company or in its prospects of making good".

But the onus lay on the respondent to prove affirmatively that the carrying on of the company's business during the relevant fifteen months was characterized by an intent - which in the circumstances means an intent on the part of the appellant - to defraud creditors of the company. An actual purpose, consciously pursued, of swindling creditors out of their money had to be established against the appellant before a declaration under the section could be made. It was not enough for the respondent to prove that the appellant acted with blameworthy irresponsibility, knowing that he was gambling (in effect) with his creditors' money as well as his own, and with much more of their money than of his. And the respondent's case was still not made out by proof of the additional facts that the appellant, while thus indefensibly hazarding the assets available for the payment of debts, was drawing from the business for his own use substantially more than he was putting into it and must have realized that the excess would turn out to have been drawn at the expense of the creditors unless the business should be more successful than he had any right to expect. The evidence did not justify a finding that it was in order to draw out more than he paid in that the appellant continued to carry on the business. The circumstance that he did draw out more than he paid in demonstrates the unfairness, not to say the utter wrongness, of the course he pursued; but with what intent he pursued it is the question; and in my opinion the only answer which can be given on the material adduced is that although he was clearly unjustified in his chasing of the rainbow, he is not shown to have had any more sinister intent than an intent to try, however despairingly, to carry the business through its difficulties to a success which, if it had been reached, would have benefited the creditors as well as himself. In whatever terms his conduct may be condemned, his intent is not, I think, to be described as an intent to defraud the creditors.

The learned judge reached his conclusion on the basis of a general proposition which was enunciated by Lord Maugham in the case of In re William C. Leitch Brothers Ltd. [1] . His Lordship said: "In my opinion I must hold with regard to the meaning of the phrase carrying on business "with intent to defraud creditors" that, if a company continued to carry on business and to incur debts at a time when there is to the knowledge of the directors no reasonable prospect of the creditors ever receiving payment of those debts, it is, in general, a proper inference that the company is carrying on business with intent to defraud" [2] . With very great respect, I think that this generalization ought not to be sustained as providing a valid starting point for the consideration of the evidence in a case arising under the section.

(1932) 2 Ch. 71. 2. (1932) 2 Ch., at p. 77.

This appeal is against declarations and orders made by Virtue J. pursuant to s. 281 of the Companies Act, 1943-1957 W.A. whereby upon application made by the liquidator of Hardies & Thomsons Pty. Ltd. it was declared that the business of the company was from February 1957 to 9th May 1958, carried on with intent to defraud the creditors of the company, and that the appellant, being a director knowingly a party thereto, was personally liable for the debts and other liabilities of the company, to the extent of £15,000. This sum the appellant was ordered to pay to the liquidator. The intent to defraud, which the learned trial judge found to have been established, consisted in continuing to trade and to obtain goods on credit and to incur other liabilities without any reasonable prospect of being able to pay or to provide payment therefor.

Section 281 is full of difficulties. It was copied in 1943 from s. 275 of the Companies Act Imp., into which it was introduced in 1928 upon the recommendation of the committee on Company Law Amendment 1926, of which Mr. Wilfred Greene K.C. was chairman, to deal particularly with the case of a person in control of a private company holding a floating charge, who, knowing that the company is on the verge of liquidation, "fills up" his security by means of goods obtained on credit and then appoints a receiver. The committee considered that any person found guilty of fraudulent trading should not only "be subjected to unlimited personal liability but any security over assets of the company held by him or on his behalf or previously held by him or on his behalf and assigned to anyone save a bona fide holder for value should be charged with the liability."

In 1932, in In re William C. Leitch Brothers Ltd. [1] , Maugham J. decided that a company which is carrying on business and incurring debts, when to the knowledge of the directors there is no reasonable prospect of the debts being paid, might in general be properly inferred to be carrying on business "with intent to defraud creditors", within the meaning of the section. This was the case directly within the evil which the section was designed to meet because the director found knowingly party to the carrying on of business with intent to defraud creditors, had formed the company, taken a debenture in his own favour, ordered goods for the company when there was no prospect of the company paying for them, and "deliberately went on trading in the name of the company in order to safeguard his own position and without any regard to the interests of the creditors" [2] . His Lordship also decided that the declaration made under the section need not limit the liability of the director to the amount of the debts due to the creditors held to be defrauded within the meaning of the section. In the same year, and in relation to the same proceeding in In re William C. Leitch Brothers Ltd. [No. 2] [1] , Eve J. decided that moneys payable by the director against whom a declaration had been made were not to be exclusively applied for the benefit of creditors whose debts were contracted during the period when the business of the company was being carried on with intent to defraud creditors but should form part of the general assets of the company.

(1932) 2 Ch. 71. 2. (1932) 2 Ch., at p. 77. 3. (1933) Ch. 261.

In 1933, Maugham J. in In re Patrick and Lyon Ltd. [2] , decided that actual dishonesty involving real moral blame on the part of the director charged had to be established before the section applied. He refused to find that proved in that case although the circumstances might have led to the conclusion that a director who held debentures had prolonged the life of the company for his own advantage. His Lordship, in stating that he was not justified in coming to the conclusion that the company had been carried on for a fraudulent purpose said: "The business of the company, so far as it was carried on during the latter part of its career, was carried on in order to clear up the position by getting in debts and by effecting sales of stock, and not with a view to securing by purchases on credit assets available as security for debentures. I am not clear in my mind that the first respondent was deliberately intending to carry out any fraudulent purpose or to defraud creditors. That is a matter which cannot be left to conjecture. I must be perfectly satisfied that there is enough evidence to justify the charge" [3] .

Virtue J. found that to the knowledge of the appellant, the company was trading unsuccessfully, that it was unable to pay its creditors' accounts as they fell due and doubted whether the appellant had any real belief in the future of the company or in its prospects of making good. His Honour however, was not prepared to find "dishonest fraud" (see In re Patrick and Lyon Ltd. [4] ) on the basis of these findings by themselves and in this, in my judgment, he was right. To obtain goods on credit with the intention of not paying for them is dishonest; to obtain goods on credit when it is known that there is no chance of paying for them may amount to much the same thing; in either case the unpaid creditors could be said to have been intentionally defrauded. It is different however if no such intention can be imputed to the buyer or if he does intend to pay for goods but in the event fails to do so. In such a case the degree of fault depends upon the buyer's estimate of the probability or improbability of payment at the time when the goods were purchased, but even if the chances of payment of all creditors in full were so remote that it belonged to the realms of hope rather than belief, it seems to me that the fault, grievous though it may be, falls short of fraud unless it is coupled with something else, such as misrepresentation of the position or an intention to use goods purchased on credit for the purposes of dishonest gain, which gives it a fraudulent character. It was contended for the liquidator, in this case, that there were such additional features, and those his Honour examined. In the first place it was said that it could be inferred that in forming the company there was, on the part of the appellant, the desire to rid himself of personal liability for debts which the company took over. This argument, Virtue J. was not prepared to accept and his Honour said: "No doubt the actual result of the formation of the company has been that the defendant has rid himself of personal liabilities of some £30,000 or thereabouts owing to the bank and trade creditors of his firm, which the assets of the firm were quite unable to cover and some substantial portion of which had been secured by the mortgage of his private assets. On the other hand, too much weight should not be given to this as a motive because I have no reason to conclude that the original motives for the amalgamation or the formation of the company were in any way sinister If his motive was to avoid personal liabilities, then he went about it in a very inefficient manner." To this it could be added that assets worth some £25,000 were taken over as well as liabilities of some £30,000 and that although the company was incorporated on 3rd May 1956, the declaration sought related to the carrying on of business after February 1957 showing that fraud in the formation of the company was not charged.

Another matter pressed on behalf of the liquidator but discounted by Virtue J. was that to obtain further credit, the defendant had made untrue statements to creditors concerning the position of the company and its future prospects and their prospects of being paid. His Honour said: "I have no doubt this evidence is to be accepted although I must say I do not give it much weight in coming to a conclusion on this matter." The reason for this was, no doubt, that his Honour regarded the appellant as over optimistic rather than fraudulent and considered those who supplied the company with further goods on credit did so because they were anxious to sell goods even at some risk rather than because they were induced to do so by the appellant's misleading estimate of the company's prospects.

Virtue J. was, however, persuaded to make the finding of fraud by reason of two considerations - the rate at which the appellant drew moneys from the company and what were described as misappropriations by the appellant of assets belonging to the company. To appreciate the significance of these matters it is necessary to state the facts shortly.

Before the incorporation of any of the companies in which he was concerned, the appellant had been a shop-keeper selling electrical equipment, including wireless sets. He traded under the name Hardies Radio and Electrical House. In 1954 he established J. E. Hardie Pty. Ltd. which took over part of his business and later began manufacturing at Hilton Park. In this company, the appellant was the principal shareholder. One of the appellant's competitors was Thomsons Pty. Ltd. and in the beginning of 1956 an amalgamation was proposed of Hardies Radio and Electrical House, J. E. Hardie Pty. Ltd. and Thomsons Pty. Ltd. to take effect from 1st March 1956. On 3rd May 1956, Hardies and Thomsons Pty. Ltd. was incorporated to carry on the amalgamating businesses. The amalgamation, however, did not eventuate. It is pointless to trace just what occurred from the time when negotiations began between the Hardie and Thomson interests, but by October 1956 at the latest, they were finally abandoned, although directors of Hardies and Thomsons Pty. Ltd. to represent the Thomson interests did not resign until 1st February 1957. From that time the whole management of Hardies and Thomsons Pty. Ltd. lay with the appellant and what he did was to continue as though the company had taken over the business of Hardies Radio and Electrical House. A transfer of the business was, it seems, made in the early part of 1956 but there was no formal document recording the transaction and it is difficult how to spell out what did happen. Virtue J. found that the company took over from Hardies Radio and Electrical House assets to the total value of £25,000 or thereabouts and liabilities of £29,000 or thereabouts, leaving, as he found, a deficiency of £4,577 4s. 7d. in what was described as the capital of the company at its commencement. There was, however, a difference of opinion about the value of stock taken over at £6,525 which may well have been too low. No value was placed on goodwill and valuable leases held by the appellant himself were seemingly not transferred to the company. The issued capital of the company was £2,502 of which £2 was subscribed by four shareholders on 20th June 1956 (whether it was paid is another thing), 2,000 shares of 10s. each were issued to Ernest H. Roche on 12th October 1956 and 3,000 shares of 10s. were issued to the appellant on 1st March 1957. The minutes stated that these applications for shares were supported by cash, but the liquidator said that he found no record of any cash having been paid for the shares. Had the appellant paid £1,500 in cash for shares on 1st March 1957, which is within the period in respect of which fraud was charged, it would have been an important consideration in his favour, but it seems likely that all that happened was that his account with the company was debited with £1,500. The company did not at any time trade successfully and although its accounts at 30th June 1957 showed but a small loss of £320 on the previous year's trading, current liabilities totalling £34,261 exceeded current assets totalling £26,501. Of the latter sum, £11,257 was shown as owing by Hardies Radio and Electrical House. Of current liabilities, £23,680 was owing to sundry creditors and £5,831 to the bank. When the company went into liquidation on 9th May 1958, its debts totalled about £35,000 which, it may be observed, is little more than was owing on 30th June 1957. The assets, however, were worth nothing like book values. It seems realizations totalled some £3,000 and although assets unrealized are shown at £18,000, of this £7,000 is owed by J. E. Hardie Pty. Ltd. which is also in liquidation and is likely to pay only a few shillings in the pound. The sum of £11,000 shown as owing by the appellant is in dispute.

That the company was insolvent from the beginning now seems clear enough but the appellant's case generally was that although things were bad over the last year of the company's trading, it was hoped that the advent of television would make all well and this was expected in time to make the company a success. As I have already said, the learned trial judge did not base his finding of fraud merely upon what must be condemned as an improvident way of carrying on business in the hope that something would turn up. It was only when to this there was added the conversion of the company's assets and the withdrawal of large sums of money for his own purposes, that his Honour was satisfied that the appellant had been guilty of dishonest fraud, and it is now necessary to turn to these so-called misappropriations and withdrawals.

Although Virtue J. did find that there had been two cases of misappropriation, he indicated that too much should not be made of these matters "in the case of a man who is in substance the only shareholder of a proprietary company and as such possibly inclined to overlook the distinction between the property of the company and his own", but said that in acting as he did, the appellant would, however, have realized that he was taking money out of the pockets of creditors. Of the two transactions, the first concerned insurance moneys paid in respect of a ring which was accepted as a trade-in upon the sale of a piano. This ring, it seems, the appellant was wearing whilst he was in the witness box. It had been insured with the Caledonian Insurance Co. in the appellant's name, and had been damaged. The sum of £150 received from the Insurance Co. had been paid into the appellant's own account on 7th June 1957. The evidence about this ring is sketchy in the extreme. Whether it was repaired and who paid for this repair are matters not elucidated. The appellant was wearing the ring openly and it is not surprising that in all the circumstances, his Honour did not place great reliance upon that transaction as indicating fraud. The other misappropriation Virtue J. did regard more seriously, partly because it occurred in 1958 when the affairs of the company were quite hopeless. It concerned a Pontiac motor car. The appellant, in January 1958, bought the car for himself and to pay the deposit he drew £400 from the company and later on two instalments of £80 or £90 were paid by the company. These amounts were debited to his account with the company. When the Pontiac was sold on 9th June 1958, the proceeds, £776 10s. 0d., were paid into the appellant's own account with the E. S. & A. Bank. His Honour describes these transactions in these terms: "He appropriated £600 of the company's funds for the purpose of making a personal purchase of a motor car. This he sold a few months later and pocketed the proceeds." It is clear that the transaction was open to just criticism, but in the circumstances I do not regard it as anything more than an instance of a practice which the appellant followed throughout of drawing upon the company to discharge his own debts and having his account debited with the amount of his drawings. Looked at in this way it is just one item of what his Honour has regarded, in aggregate, as excessive and dishonest drawings for his own personal expenditure.

Virtue J. considered this overdrawing to be of decisive significance in deciding whether or not the appellant was guilty of dishonest fraud. From February 1957 until 24th March 1958, the appellant drew, for various purposes of private concern including the purchase of the Pontiac car, some £3,400. He also drew £1,830 for wages and between 6th July 1957 and 30th March 1958, he drew £585 as car and entertainment allowances - although the drawing of the wages and allowances was not effectively authorized. In all then, for a period of fifteen months, he drew about £5,800. However, it is clear that during the same period he paid to the credit of the company's account either £3,832 15s. 9d. or £4,832 15s. 9d. Exhibit 7, (which is called a dissection of Hardies Radio and Electrical House, J. E. Hardie, Account with Hardies and Thomsons Pty. Ltd.), shows the following payments to the company: -

1957 April 30 M.L.C. Assurance £701 2 3 Feb. 28 Commonwealth Bank £1,400 0 0 Cash from Hardies Radio and Electrical House £1,000 0 0 May 31 Cash Receipt £1,381 13 6

The same figures appear in exhibit 4a. The liquidator gave the following evidence about these payments: "Hardie also paid £701 to credit of Hardies Electrical and Radio House on April 26th 1957. Also paid to company amounts of £900 and £500 from his Commonwealth Savings Bank account. Also paid to company's bank account £1381 13s. 6d. from his E. S. & A. Bank account." This evidence covers three of the items in exhibits 7 and 4a but does not cover the £1,000 which is shown as cash from Hardies Radio and Electrical House. Even if the last mentioned amount were to be left out of account, it appears that the liquidator concedes that during the period for which the appellant was charged with carrying on business with intent to defraud creditors, he paid some £3,500 into the company's account and that he realized assets of his own in order to do so. When to this there is added the fact that in December 1956 the appellant borrowed £6,000 and paid it into the company's account in reduction of the company's indebtedness to the bank, it becomes clear that Virtue J. had an incomplete picture of what occurred when he said: "Despite the unsatisfactory financial position of the company as he throughout knew it to be, despite the clamourings of his creditors whom he was throughout able to fob off rather than satisfy, he was, during the whole of the relevant period, drawing from the company for his own personal expenditure at the rate of no less than £5,250, a rate of drawing which he made no real attempt to justify. There was ample motive here for him to continue the company when there was no real prospect of paying his creditors." Once it is seen that what the appellant was doing was not only drawing money from the company but raising money by realizing his own assets and putting it into the company to keep it going, it becomes apparent that the charge of dishonest fraud based upon large scale withdrawals is not one that can be sustained. It was said that the appellant got credit for all that he put into the company, but what is important for present purposes is that he was parting with valuable assets to obtain money to deposit with the company. This is the very antithesis of keeping a company going for the purposes of dishonest gain. It was also said that in providing the £6,000 to reduce the company's overdraft, he was merely serving his own ends because the company's account was supported by his liability and backed by his own securities, so that it was to his interest to see that the bank was paid off before there was a liquidation. This is a criticism which reduces the payment of the £6,000 to a matter of small importance for present purposes but it leaves untouched what is, after all, the most significant matter, namely that during the period in which fraud was found because he was taking large sums of money out of the company principally as it seems to me by way of loan, he was supporting the company with substantial deposits; and when what he put in is set off against what he took out, his net drawings do not exceed what seems to be a not excessive, albeit an unauthorized, remuneration. The appellant's net drawings give no support to the charge of fraud and therefore the finding of fraud which, as I have shown, was based upon excessive and dishonest drawings cannot stand.

This conclusion makes it unnecessary to consider whether any declaration of unlimited liability made under the section should be of liability in respect of a sum of money with an order for payment to the liquidator to form part of the general assets of the company as was made by Virtue J., following Maugham J. and Eve J., or a declaration of unlimited liability in respect of particular debts or liabilities with an order for payment to the liquidator for the benefit of the persons actually defrauded. The language of the section might be thought to suggest the latter but if so there would still be the important consideration that the section was introduced into the Companies Act of Western Australia in terms corresponding with the English section after that section had been given the former interpretation.

For these reasons I consider the appeal should be allowed.

At a glance

Court

Decision date

Before

Source

Judgment (39 paragraphs)

Parties