Tracy v Mandalay Pty Ltd

[1953] HCA 9

High Court of Australia|1953-07-01|Before: Taylor JJ

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Court

High Court of Australia

Decision date

1953-07-01

Before

Taylor JJ

Source

Original judgment source is linked above.

Judgment (37 paragraphs)

[1]

High Court of Australia Dixon C.J. Williams and Taylor JJ. Tracy v Mandalay Pty Ltd [1953] HCA 9

[2]

ORDER Order that decree below be varied by omitting that portion immediately after the order that the defendant company deliver up to the plaintiff to be cancelled the contract for sale dated 23rd December 1949 and the counterpart thereof down to the order for retransferring the shares and by substituting therefor orders that the defendant company pay to the plaintiff the sum of £2,650 together with interest at the rate of four per cent per annum from 21st January 1949, that the defendant Norman Salon pay to the plaintiff the sum of £1, 866 4s. 0d. together with interest at the rate of four per cent per annum from 28th January 1949, that the defendant Willard pay to the plaintiff the sum of £5,091 4s. 0d. together with interest at the rate of four per cent per annum from 28th February 1949, that the defendant Tracy pay to the plaintiff the sum of £567 12s. 0d. together with interest at the rate of four per cent per annum from 13th April 1949, that the defendant Mavis Lorraine Salon pay to the plaintiff the sum of £9,657 16s. 0d. together with interest at the rate of four per cent per annum from 26th April 1949, that the defendant Withy pay to the plaintiff the sum of £2,150 together with interest at the rate of four per cent per annum from 17th May 1949, and that the defendant Griffith pay to the plaintiff the sum of £500 together with interest at the rate of four per cent per annum from 19th August 1949; all the above sums to be paid on or before 30th April 1953; a declaration that each of the defendants is severally liable to pay to the plaintiff all legal and other costs properly incurred by the plaintiff under or in connection with their respective contracts for the sale of the land and shares; an order that it be referred to the Master in Equity to inquire what are the respective amounts of such costs; an order that each of the defendants severally pay the respective amounts thereof within fourteen days after the filing of the certificate of the Master in Equity in respect thereof; a declaration that each of the defendants is severally bound to indemnify the plaintiff against all debts and liabilities (if any) whether for Federal land tax, municipal or water rates or in respect of proceedings against the plaintiff or otherwise which the plaintiff has or may become liable to pay in the case of the defendant company for or on account of the land and in the case of the other defendants for or on account of the respective shares transferred by them to the plaintiff or the proceedings dealings and transactions relating thereto set forth in the statement of claim; an order that it be referred to the Master in Equity to inquire what is the amount of such debts and liabilities; an order that each of the defendants severally pay the amounts thereof to the plaintiff within fourteen days after the filing of the certificate of the Master in Equity in respect thereof; an order that the respective sums hereinbefore ordered to be repaid to the plaintiff by each of the defendants and interest thereon and the amounts of their said respective debts and liabilities be a charge upon the said land and a lien upon the said shares respectively as the case may be until payment of the respective amounts; an order that each of the defendants their servants and agents be restrained from selling mortgaging alienating or otherwise dealing with the land or shares in such a manner as to prejudice the charge or liens of the plaintiff; an order that upon payment by the defendants of the above-mentioned respective sums the charge upon the land and the respective liens upon the shares be discharged. Otherwise appeal dismissed. No order as to costs. Liberty to apply.

[12]

The result of accepting the offers of the defendants was, as his Honour pointed out, that a company with a capital of £3 had agreed to pay £24,150 for the land and shares. Obviously the money to pay this sum and to finance the erection of the building, estimated to cost about £140,000, had to come from outside sources. The plaintiff soon got busy. It had already received the above application from Greene and it placed the business of selling the flats in the building which had not been commenced and for which final approval had not been obtained in the hands of a company, L. J. Hooker Ltd., which carries on the business of real estate agents. Mr. Lightfoot, an associate director of that company, was in charge of the selling and he commenced operations early in January 1949. Inquirers were informed that the building was to be of ten storeys comprising basement, ground floor and eight upper floors each comprising seven self-contained home units of which the basement, ground floor and seven flats on the first floor would be let and the rent would pay the outgoings and running expenses of the building and the rest of the flats, forty-nine in all, would be sold as home units. It was said that it was expected that the building would be ready for occupation in January 1950, and that each unit would be sold separately and would be acquired by the purchase of £1 shares in the plaintiff company, payments to be 10s. per share on application and the balance by four equal quarterly instalments. The public, no doubt owing to the housing shortage, rose to the bait. Applications for 52,102 shares were received by the plaintiff and the shares allotted in the next few months. The sum of £29,958 was raised by the issue of these shares and was used very largely to pay for the land and the shares in the defendant company sold to the plaintiff. The defendant company was paid £2,650, Salon £1,866 4s. 0d., Mrs. Salon £9,657 16s. 0d., Willard £5,091 4s. 0d., and Tracy £567 12s. 0d. The dates these payments were made appear later. Griffith and Miss Withy were not so fortunate. They received nothing at first and had to commence actions against the plaintiff after which Griffith received £500 and Miss Withy £2,150. All these payments total £22,482 16s. 0d. The other shareholders have, but Griffith and Miss Withy have not, transferred their shares to the plaintiff. The contract of sale of the land to the new company was not signed until 23rd December 1949, although the defendant company was paid for the land on 21st January of that year. The building has never been erected. An amendment of the law on 1st January 1949 made it impossible to carry out the intended plans. It was hoped that the law would be altered so that the project could proceed, but in October 1949 the plaintiff received advice that nothing could be done.

[22]

We are of opinion that the basis on which his Honour granted relief was the proper basis. The land and shares sold to the plaintiff were assets owned by the respective vendors at law and in equity. They were not assets which the vendors held on trust for the plaintiff. They were the absolute property of the defendants. The plaintiff could not affirm the contracts of sale and at the same time ask for an account of profits or for damages as this would be, in effect, asking the court to vary the contracts of sale and order the defendants to sell their assets at a lesser price. In Cook v. Deeks [1] Lord Buckmaster, L.C., delivering the judgment of the Privy Council said: "In their Lordships' opinion the Supreme Court has insufficiently recognized the distinction between two classes of case and has applied the principles applicable to the case of a director selling to his company property which was in equity as well as at law his own, and which he could dispose of as he thought fit, to the case of a director dealing with property which, though his own at law, in equity belonged to his company. The cases of North-West Transportation Co. Ltd. v. Beatty [2] and Burland v. Earle [3] both belonged to the former class. In each, directors had sold to the company property in which the company had no interest at law or in equity. If the company claimed any interest by reason of the transaction, it could only be by affirming the sale, in which case such sale, though initially voidable, would be validated by subsequent ratification. If the company refused to affirm the sale the transaction would be set aside and the parties restored to their former position, the directors getting the property and the company receiving back the purchase price. There would be no middle course. The company could not insist on retaining the property while paying less than the price agreed. This would be for the Court to make a new contract between the parties. It would be quite another thing if the director had originally acquired the property which he sold to his company under circumstances which made it in equity the property of the company. The distinction to which their Lordships have drawn attention is expressly recognized by Lord Davey in Burland v. Earle [1] and is the foundation of the judgment in North-West Transportation Co. Ltd. v. Beatty [2] and is clearly explained in the case of Jacobus Marler Estates v. Marler (House of Lords, April 14th, 1913) a case which has not hitherto appeared in any of the well-known reports" [3] . (It is now reported in [4] and [5] ).

[29]

The word "promoter" has been said on many occasions to be a word which has no very definite meaning. It is sufficient to refer to the discussion of its meaning in Emma Silver Mining Co. Ltd. v. Lewis & Son [4] . There Lindley J., as he then was, said: "With respect to the word "promoters", we are of opinion that it has no very definite meaning: see Twycross v. Grant [5] . As used in connection with companies the term "promoter" involves the idea of exertion for the purpose of getting up and starting a company (of what is called "floating" it) and also the idea of some duty towards the company imposed by or arising from the position which the so-called promoter assumes towards it. It is now clearly settled that persons who get up and form a company have duties towards it before it comes into existence: see Bagnall v. Carlton [1] and per Lord Cairns C., in Erlanger v. New Sombrero Phosphate Co. [2] . Moreover, it is in our opinion an entire mistake to suppose that after a company is registered its directors are the only persons who are in such a position towards it as to be under fiduciary relations to it. A person not a director may be a promoter of a company which is already incorporated, but the capital of which has not been taken up, and which is not yet in a position to perform the obligations imposed upon it by its creators. The defendants say they owed no duty to this company. But in our opinion this contention cannot be supported. In the first place, the defendants left Park to get up the company upon the understanding that they as well as he were to profit by the operation; they were behind him; they were in the position of undisclosed joint adventurers; and in respect of their interest his obligations and theirs are in our opinion undistinguishable. The defendants in fact were, partly by assisting Park and partly by leaving him to do the best he could for them as well as himself, in the position of promoters of the company " [3] . (The italics are ours.)

[31]

In the present case Salon was admittedly a promoter of the plaintiff. He was directly responsible for its incorporation. It was on his instructions that the memorandum and articles of association were prepared and registered and incorporation effected. Some of the other defendants also took an active part in the promotion of the plaintiff, and we shall refer shortly to some of these activities. But it is not only the persons who take an active part in the formation of a company and the raising of the necessary share capital to enable it to carry on business who are promoters. It is apparent from the passage cited that persons who leave it to others to get up the company upon the understanding that they also will profit from the operation may become promoters. Salon, Griffith and Miss Withy gave evidence; Mrs. Salon, Willard and Tracy did not do so. Willard, Tracy and Mrs. Salon were, in our opinion, all promoters. Willard bought his original parcel of 250 shares from Salon and Mrs. Salon with a view to sharing in the profit expected to be made out of the incorporation of the new company. On 29th December 1949, the balance of the capital of the defendant company was allotted at par, when Willard received 342 shares, Mrs. Salon 1,078 shares and Tracy 66 shares. The whole purpose of this allotment was to enable the recipients to resell the shares to the plaintiff at £8 12s. 0d. each. The meeting of directors of the defendant company followed on 4th January 1949, when it was resolved to offer all the shares to the plaintiff. The next step was the purported general meeting of the plaintiff on 7th January 1949, when Salon and Willard were appointed directors and Tracy secretary, Willard being appointed to the chair. The unanimous resolution was passed that the directors should be instructed to negotiate for the purchase of the share holdings in the defendant company and for the purchase of the land. But no negotiations were necessary because the shares and the land were already under offer at prices which had been fixed and the same persons who had fixed the prices at which these assets were to be sold intended to decide that these prices were acceptable to the new company. There followed the directors' meeting of the plaintiff on 10th January 1949, Willard, Salon and Tracy being present, when it was resolved to purchase the land and the shares.