Peninsular and Oriental Steam Navigation Company v Johnson [1938] HCA 16

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duties and shall observe all such directions and restrictions as the board of directors may from time to time confer or impose upon them but in default thereof the managers shall control the general management of the business of the company and shall have power to appoint and dismiss all clerks and servants of the company and to enter into any trade contracts on behalf of the company in the ordinary way of business and to do all other acts and things which they may consider necessary or conducive to the interests of the company." Clause 4, in actual practice, gave Johnson personally (after Lynn's death) complete control of the relations between the company and Johnson & Lynn Ltd. as well as between the company and other persons to whom it sold or from whom it bought anything. Clause 5 (a) of the managers' agreement provided that during their employment it should be the duty of the managers to keep proper record books and books of account and to make (inter alia) therein true entries of all moneys received or paid by them in the course of the business of the company. Thus, it is plain that under the managers' agreement there is an obligation resting upon Johnson in respect of the period while he was manager, that is, up till 16th September 1929, and of Johnson & Lynn Ltd. at all subsequent times, to render true accounts of their dealings in and about the moneys of the company. Further, clause 5 also provides that it shall be the duty of the managers to pay all moneys except petty cash into the West Australian Bank daily to the credit of the account of the company there and to make every payment in excess of £1 requiring to be made in the business by cheque drawn upon that account. This obligation was not performed. By the direction of Johnson a system of journal entries was used which made it possible to pass credits to Johnson & Lynn Ltd. or to Johnson or to other persons in such a way that the list of cheques drawn which was submitted to the board of directors would convey no idea whatever of the real transactions which lay behind the figures which alone the directors were permitted to see. Accordingly, an examination of the minutes of directors' meetings and of the lists of cheques drawn which were submitted to them and approved by them does not make it possible to obtain any just or proper view of the actual transac- tions of the company.

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company informed the plaintiff's solicitors that the directors had dealt with the various payments offered and in respect of that in question had decided to accept the sum of £2,458 18s. 8d. in settle- ment of the claim set out in the particular paragraph of the state- ment of claim. They accordingly gave a receipt to the defendants Johnson & Lynn Ltd. expressed to be in satisfaction of that claim. Northmore C.J. decided that there was no evidence that the throwing of all the charges mentioned on the Amalgamated Collieries company had been by the direction of the defendant Walter Johnson for the purpose of advantaging himself and Johnson & Lynn Ltd. or of defrauding the Amalgamated Collieries company, but that the settlement of the claim in the manner described did not afford any - obstacle to the plaintiff's claim for relief. He declared that the defendants Walter Johnson and Johnson & Lynn Ltd. were liable to refund to the Amalgamated Collieries company all moneys paid by it in respect of rent, electric light, power, water and municipal rates, stationery, cleaning and clerical work which should have been paid by the defendant Johnson & Lynn Ltd. or the oT Power Co. Ltd. or the Worsley Timber Co. Ltd. and ordered an inquiry and an account to determine the amount. I find it difficult to understand the basis of this declaration and order. If the defendant Walter Johnson had been found guilty of a breach of his duty as a director of the Amalgamated Collieries company consisting in the procuring or causing the discharge of the outgoings and expenses in question for the benefit of Johnson & Lynn Ltd. or either of the two other companies, he clearly would have been liable in damages the measure of which would perhaps be consistent with | the declaration. But he does not appear to have been found guilty of a breach of duty. The liability of the defendant Johnson & he Ltd. in respect of the period after 16th September 1929 might con- ceivably be put upon the ground that, as general sales manager governed by the terms, so far as applicable, of the managers' agree- ment, the obligation fell upon it of supervising and controlling expenditure upon matters like office accommodation and services and it had been guilty of a breach of duty. Before that date 1 cannot see how it would be liable except possibly in a common count

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scil., for its directors, to accept the sum of £2,458 18s. 8d. in full settlement of the claim. Prima facie it is in the power of the board of directors to fix a sum as the appropriate amount to discharge an unascertained liability and to accept it by way of accord and satisfac- tion discharging the cause of action vested in it. The pendency of suit does not take the management of the affairs of the company out of the hands of the directors. It does not operate like a common decree for administration in relation to an executor or administrator. Ina suit in which a shareholder or a minority of shareholders alleged an abuse of power on the part of the directors or a majority of share- holders and a mala-fide attempt to act not in the interests of the company but for the private advantage of a person under a liability to the company, the court could and, prima facie, would intervene to restrain such a settlement pendente lite as that now relied upon until the issue had been tried. If before the court could intervene such a settlement were entered into and it appeared that the directors had acted mala fide, the court would set aside the attempted settle- ment or treat it as void in granting the relief claimed by the plaintiff. But the peculiarity of this case is that notwithstanding the nature of the action no allegation has been made or evidence tendered for the purpose of impeaching the good faith of the directors. The correspondence in which the settlement was arrived at bears on its face all the appearance of an attempt to arrive fully and fairly at the amount properly payable in respect of the liability of the defen- dants Walter Johnson and Johnson & Lynn Ltd. or either of them to the Amalgamated Collieries company in respect of this and the other matters of which the plaintifi's statement of claim complains. So far as the defendant Walter Johnson is concerned it is not hard to believe, in all the circumstances of the case, that, in his anxiety to cut the ground from under the plaintiff's feet and for the very purpose of obtaining an answer to the action, he or his advisers should prefer to take a course the bona fides and correctness of which

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cost borne by that company in the purchase, handling, transporta- tion and delivery of the assets sold by the receiver appears to have been £7,643. In the early part of 1930 Johnson & Lynn Ltd. attempted to resell various parts of the machinery they had bought by communicating with persons whom they regarded as possible buyers, including secondhand-machinery merchants in Melbourne. The evidence is not very distinct as to the nature or quantity of the machinery sold to strangers nor as to the amount realized nor the time of such sales. But it appears that a considerable sum was ultimately obtained by Johnson & Lynn Ltd. by sales to strangers. At or towards the end of 1930, however, a larger quantity of the machinery which Johnson & Lynn Ltd. had bought from the receiver was resold by that company to the Amalgamated Collieries company. 'The transaction was never brought before the board of directors of the Amalgamated Collieries company, at all events in any formal manner. The transaction was conducted on both sides entirely by the defendant Walter Johnson, with the help of Lumb, who, at that time, was an officer and director of Johnson & Lynn Ltd. as well as a director and assistant general manager of the Amal- gamated Collieries company. In the cross-examination of Lumb on the part of the defendants, a suggestion was made that the superintendent of the Amalgamated Collieries company's mine approved of the purchase and of the value placed upon the machinery by Dunstan, presumably on the resale. But this gentleman was not called as a witness to support the suggestion. Lumb gave evidence to the effect that he was sent down to Ravensthorpe to inspect the machinery before Johnson & Lynn Ltd. bought it and that the defendant, Walter Johnson, told him that it was to be sold or resold to the Amalgamated Collieries company and, on another occasion, that Dunstan was to receive some part of the profit. It is apparent, however, that the learned Chief Justice attached little credit to Lumb's evidence and, as the shorthand notes show, his 'statement that he had gone to Ravensthorpe before the purchase in December 1929 was completely rejected.

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at the time when Johnson & Lynn Ltd. bought the plant of the Ravensthorpe mine from the receiver the purchase could be con- sidered as made on behalf of the Amalgamated Collieries company or for any other reason the assets bought could be impressed with an equity in favour of the latter company, there would be no difficulty in making Johnson & Lynn Ltd. accountable for the profit made upon the transaction. But, in my opinion, no facts have been established which would support the conclusion that Johnson & Lynn Ltd. acquired the assets from the receiver in such circum- stances that they became trustees thereof for the Amalgamated Collieries company. Shortly before the time of the purchase, the defendant Walter Johnson had been appointed, at all events de facto, managing director of the Amalgamated Collieries company and Johnson & Lynn Ltd. had become " general sales manager " of that company. No doubt it was within the scope of the managing director's authority to buy secondhand mining machinery for the company if he considered that it was required. If, therefore, he had determined that the Ravensthorpe machinery was needed and should be acquired by the Amalgamated Collieries company and had caused Johnson & Lynn Ltd. to buy simply for the purpose of intercepting an intermediate profit upon the acquisition of the machinery by the former company upon which he had so determined, it may well be that, inasmuch as Johnson & Lynn Ltd. were repre- sented in the transaction by the defendant Walter Johnson, they would be saddled with a constructive trust arising from his abuse of his authority as managing director of the Amalgamated Collieries company. But there is no satisfactory proof, direct or circumstantial, that in December 1929 the defendant Walter Johnson had deter- mined that the machinery should be acquired by the Amalgamated Collieries company, and there is some ground for the view that he then intended that it should be resold in other quarters. Johnson & Lynn Ltd. were perfectly at liberty to buy and sell secondhand machinery, and the mere fact that their managing director, the defendant Walter Johnson, was also managing director of the Amalgamated Collieries company could impose no fetter upon the former company's right of doing so. Once the view is adopted that Johnson & Lynn Ltd. were at liberty to resell the machinery to H. C. or A. 1937-1938.

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v. Knee Bros. (1) and Nitedals Taenstikfabrik v. Bruster (2) the principle is explained under which an entire remuneration for an inseparable service is forfeited for misconduct in the course of an agency. Befpre the remuneration can be held forfeited, an inter- dependence must be found to exist between the act of misconduct and the performance of the work or the fulfilment of the condition upon which the right to remuneration arises. In the present case the only matter in which such an interdependence or connection may plausably be suggested is in the overcharge of 2s. 6d. a ton upon coal sold to the various harbour authorities. But even there the connection does not appear sufficiently close. The overcharge is, so to speak, an ex post facto attempt to obtain an excessive remunera-_ tion from the principal after the real remuneration of 3d. a toa has been earned. In my opinion the plaintiff has not show that either of the two defendants has forfeited any of his or its - remuneration. In any case I do not think the statement of claim covers the forfeiture of remuneration. The second contention remaining is that there should be an order | for a general account. The plaintiff has not made clear what pre- cisely it means by this claim for relief. As I have already pointed out, the defendant Walter Johnson, as a director and a general manager, is not an accounting party. Under the management agreement up to 12th September 1928 he and Lynn were accounting parties and then, until 16th September 1929, he became one. There- after Johnson & Lynn Ltd. was the accounting party. Under the selling-agency agreement, it had been an accounting party since 12th January 1921. The suggestion is that such a case of dishonest practice has been made out that some form of general inquiry is - required into the dealings of the defendant Walter Johnson and Johnson & Lynn Ltd. with the affairs of the Amalgamated Collieries company. If that company by a proceeding in its own name applied for such an account, I think that, subject to the discretion of the court as to the manner of taking the account and the terms upon which it should be ordered, the circumstances are such as, prima facie, to entitle the company to some order which would result

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such remuneration and let the plaintiff during the course of such reference make such periodical or other payments to the referee on account of remuneration as the Supreme Court may direct by the order of appointing him or by orders made from time to time. Let the remuneration of the referee so paid form part of the costs of the reference and be subject to the reservation herein contained of costs for the Supreme Court. Refer to such referee the taking of the accounts and the making of the inquiries which by the judgment of Northmore C.J. as hereinbefore varied are ordered to be taken before the Master and let the said judgment be varied accordingly by substituting such referee for the Master. Refer to such referee for inquiry and report the question whether in the course of in connection with in consequence of or incidentally to the execution of the powers, duties and functions which under the "management agreement" belonged to the defendant Walter Johnson from 12th September 1928 until 16th September 1929 and belonged thereafter to the defendant Johnson & Lynn Ltd., and of those which under the " selling-agency agreement" belonged to Johnson & Lynn Ltd., those defendants or either of them have since 12th September 1928 obtained, received retained or procured any moneys, credits or other benefits to which such defendants were not or such defendant was not entitled as against Amalgamated Collieries of W.A. Ltd. without duly accounting therefor to such company ; eacepting, however, the matters specifi- cally dealt with by the declarations and orders contained in the judgment of the Chief Justice as hereinbefore varied. Let the referee be at liberty for the purpose of such refer- ence to take such account or accounts as he may think necessary and to give any directions to the parties or either of them as to bringing in accounts or otherwise that may appear desirable or requisite for the proper taking of such accounts. Let the accounts ordered to be taken by the judgment of Northmore C.J. as hereinbefore varied and any account directed by the referee be taken without verification or vouching except in so far as for any reason the referee shall otherwise direct and both in

Peninsular and Oriental Steam Navigation Company v Johnson [1938] HCA 16 - HCA 1938 case summary — Zoe

At a glance

Court

Decision date

Before

Source

Judgment (369 paragraphs)

1937-1938.