Tracy v Mandalay Pty Ltd

The Court delivered the following written judgment: -

These are appeals by each of the defendants from a decree of the Supreme Court of New South Wales in its equitable jurisdiction (Roper C.J. in Eq.) in which the plaintiff was granted relief on the basis that all the defendants were its promoters and that certain contracts which they had made with the plaintiff had been entered into without proper disclosure to the plaintiff and were voidable and should be rescinded.

Before referring to the decree in more detail it will be convenient to refer to the material facts. They commence early in 1948. The defendant company was then in existence having been incorporated on 14th September 1945. But it was not carrying on any business. It had first carried on the business of making and selling toys and later of selling bricks, but it had disposed of the latter business to the defendant Willard at the end of 1947. Its authorized capital was £2,500 divided into 2,500 shares of £1 each. But only 1,002 shares had been issued. The defendant Salon held 668 of those shares and his wife, the defendant Mavis Lorraine Salon held 334. Salon had been a director of the company from its commencement. Mrs. Salon was appointed a director on 14th April 1948. Early in 1948 Salon had made a contract for the purchase of a block of land in Wylde Street, Potts Point, with a view to erecting thereon a modern building of ten storeys divided into a number of flats of different sizes. Salon made the purchase on behalf of the defendant company and intended to promote another company to which the defendant company would sell the land at a profit. The new company would then erect the building and sell the flats.

In June 1948, Salon persuaded the defendants Griffith and Miss Withy, who were associated in other business transactions, to purchase 250 shares each in the defendant company from himself and Mrs. Salon, at £10 per share, the inducement held out to them being that by so doing they would become in effect half owners of the land at Potts Point and would receive half the profit on the sale of that land to the new company. The price at which the land was purchased by Salon, according to the contract, was £6,000 but Griffith and Miss Withy said that he told them that he had paid £8,000, that he proposed to sell the land to the new company for £24,000, and that the profit would be £16,000 of which they would receive half, thereby making a profit of £3,000 on their investment of £5,000 in shares in the defendant company. Salon lent the £5,000 received from Griffith and Miss Withy to the defendant company and it was used towards payment of the purchase money for the land which was transferred to the defendant company towards the end of June 1948. Miss Withy received a minor post in the office of the defendant company at a salary of £5 a week less tax. The defendant Tracy was the secretary.

Salon went ahead with the preparations for the new building. He obtained the general approval of the City Council to sketch plans prepared by an architect and commenced negotiations with the Maritime Services Board either to purchase or obtain rights of light over a small adjoining piece of land necessary to the success of the scheme. The board eventually agreed to sell this land for £250. Towards the end of 1948 Salon wanted to raise some money on the security of the land at Potts Point, but Griffith and Miss Withy objected. Salon and Mrs. Salon then sold 250 of their shares in the defendant company to Willard for £10 each. Willard, like Griffith and Miss Withy, also knew of the proposed formation of the new company and bought his shares with a view to making a profit out of the sale of the land to the new company.

The plaintiff company was incorporated on 10th December 1948, as a proprietary company limited by shares under the provisions of the Companies Act, 1936-1940 N.S.W.. The land was not immediately sold to the new company. Salon conceived the idea that the profit on the sale might be taxable and proceeded to devise a new scheme by which the land would be sold by the defendant company to the plaintiff for £2,650, the amount required to discharge the debts of the defendant company, and the shareholders in the defendant company would sell their shares to the plaintiff at £8 12s. 0d. per share. Griffith and Miss Withy naturally objected to the new scheme, because under it they would not receive a profit on the transaction but would make a loss of £700. After some negotiations Griffith and Miss Withy said they would be satisfied if they got their money back, and Salon and Mrs. Salon agreed to give Griffith and Miss Withy promissory notes for £700 to make good the loss.

At a meeting of directors of the defendant company held on 29th December 1948, those present being Salon and Mrs. Salon as directors and Tracy as secretary, applications were received and accepted from Mrs Salon, Willard and Tracy for the issue of the whole of the unissued capital of the defendant company, namely 1,498 shares. These shares were allotted to the respective applicants at a subsequent meeting of directors held on 4th January 1949, Willard receiving 342, Tracy 66 and Mrs. Salon 1,090 shares.

The share holdings in the defendant company were then as follows: Salon 218 shares, Mrs. Salon 1,124 shares, Willard 592 shares, Griffith and Miss Withy 250 shares each and Tracy 66 shares. At a meeting of directors of the defendant company held on 31st December 1948, at which Salon and Mrs. Salon were present as directors and Tracy as secretary, it was reported that all the members of the defendant company wished to offer their share holdings to the plaintiff at the price of £8 12s. 0d. per share in conjunction with the land at Potts Point at the price of £2,650 and the secretary was instructed to make that offer in writing to the plaintiff. Each of the shareholders about this time signed a letter offering his or her shares to the plaintiff at £8 12s. 0d. per share.

What purported to be a general meeting of the plaintiff was held on 7th January 1949. There were then only three shareholders, Willard, Salon, and Miss Withy, each of whom had signed the memorandum and articles of association of the plaintiff for one share. Willard and Salon were appointed directors and Tracy secretary of the company and the directors were instructed to negotiate for the purchase by the plaintiff of the whole of the shares in the defendant company at £8 12s. 0d. per share and also for the purchase of the land at Potts Point. A meeting of directors of the plaintiff was held on 10th January 1949, Willard and Salon being present as directors and Tracy as secretary. At this meeting the directors resolved to accept the offer of the shares in the defendant company at £8 12s. 0d. per share and to accept the offer of the defendant company to sell the land at Potts Point for £2,650. On the same day, presumably at another but later meeting of directors, at which the same persons were present, an application by one Greene for 1,800 shares in the plaintiff accompanied by a cheque for £900 was accepted and the shares were allotted.

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.

In the statement of claim the plaintiff sought relief on four alternative bases: -

(1) that the contracts of sale of the land and the shares were all part of one inseverable transaction, the whole of which was voidable and should be avoided, the contracts being cancelled and each of the defendants being held jointly and severally liable to repay the whole of the moneys paid by the plaintiff;

(2) that the defendants should be ordered to pay the plaintiff £18,932 16s. 0d. alleged to be the difference between the price charged to the plaintiff for the land and shares and their real value;

(3) that an account should be taken of the profits made by the sale to the plaintiff of the land and shares and that the defendants should be ordered to pay the amount of such profits to the plaintiff;

(4) that an inquiry should be had as to the damages suffered by the plaintiff by misfeasance, breach of trust, breach of duty or otherwise by reason of the act or default of the defendants as promoters, directors, officers or agents of the plaintiff and that the defendants should be ordered to pay to the plaintiff the amount of such damages when ascertained.

His Honour gave the plaintiff relief on the first of these bases and ordered that each of the contracts should be rescinded and that the defendants jointly and each of them severally should pay the sum of £22,482 16s. 0d. together with interest at four per cent, per annum upon the respective amounts constituting that sum from the respective dates of payment of those amounts by the plaintiff until repayment; that is to say upon £2,650 from 21st January 1949 (the amount paid to the defendant company); £1,866 4s. 0d. from 28th January 1949 (the amount paid to Salon); £5,091 4s. 0d. from 28th February 1949 (the amount paid to Willard); £567 12s. 0d. from 13th April 1949 (the amount paid to Tracy); £9,657 16s. 0d. from 26th April 1949 (the amount paid to Mrs. Salon); £2,150 from 17th May 1949 (the amount paid to Miss Withy); £500 from 19th August 1949 (the amount paid to Griffith).

His Honour also declared that (1) the defendants are jointly and each of them is severally liable to pay to the plaintiff all legal and other costs properly incurred by the plaintiff under or in connection with the contracts for the sale of the land and shares (2) the defendants are jointly and each of them 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 for or on account of the land or shares or the proceedings dealings and transactions relating thereto set forth in the statement of claim.

His Honour ordered that when the whole of the purchase money £22,482 16s. 0d. had been repaid with interest and these other liabilities had been discharged, the plaintiff should upon their request and at their cost transfer the shares to the respective defendants who transferred the same to the plaintiff.

His Honour ordered the defendants jointly and severally to pay the plaintiff's costs of the suit up to and inclusive of the decree. Further consideration of the suit and all further questions of costs were reserved.

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] ).

1. (1916) 1 A.C. 554. 2. (1887) 12 App. Cas. 589. 3. (1902) A.C. 83. 4. (1902) A.C. 83. 5. (1887) 12 App. Cas. 589. 6. (1916) 1 A.C., at pp. 563, 564. 7. (1913) 114 L.T. 640 (n). 8. (1913) 85 L.J. (P.C.) 167 (n).

Promoters may sell their property to the new company but they are under a fiduciary duty to disclose to the new company that they are doing so and under a duty to place it in a proper position to decide whether to accept the offer or not by appointing an independent board and fully disclosing the whole position to that board.

In Erlanger v. New Sombrero Phosphate Co. [6] Lord Penzance said: "It was the vendors, in their character of promoters, who had the power and the opportunity of creating and forming the company in such a manner that with adequate disclosures of fact, an independent judgment on the company's behalf might have been formed. But instead of so doing they used that power and opportunity for the advancement of their own interests. Placed in this position of unfair advantage over the company which they were about to create, they were, as it seems to me, bound according to the principles constantly acted upon in the Courts of Equity, if they wished to make a valid contract of sale to the company, to nominate independent directors and fully disclose the material facts" [7] . Lord Cairns, L.C. said: "it is now necessary that I should state to your Lordships in what position I understand the promoters to be placed with reference to the company which they proposed to form. They stand, in my opinion, undoubtedly in a fiduciary position. They have in their hands the creation and moulding of the company; they have the power of defining how, and when, and in what shape, and under what supervision, it shall start into existence and begin to act as a trading corporation. If they are doing all this in order that the company may, as soon as it starts into life, become, through its managing directors, the purchaser of the property of themselves, the promoters, it is, in my opinion, incumbent upon the promoters to take care that in forming the company they provide it with an executive, that is to say, with a board of directors, who shall both be aware that the property which they are asked to buy is the property of the promoters, and who shall be competent and impartial judges as to whether the purchase ought or ought not to be made" [1] . See also Omnium Electric Palaces Ltd. v. Baines [2] .

1. (1878) 3 App. Cas. 1218. 2. (1878) 3 App. Cas., at p. 1229. 3. (1878) 3 App. Cas., at p. 1236. 4. (1914) 1 Ch. 332.

It is clear from these passages, and there are many others to the same effect, that in the absence of approval by an independent board after full disclosure sales by a promoter of his property to the new company are in the same position as any other sales by a trustee of his property to a person towards whom he stands in a fiduciary relation. That is to say they are voidable at the mere option of the purchaser. But if the purchaser decides to affirm the transaction he must affirm it according to its terms. He cannot ask the Court "to fix a proper price between vendor and purchaser, and estimate the damage with reference to such price. This the Court cannot do" per Lord Parker of Waddington in Marler's Case [3] .

1. (1913) 114 L.T. 640 (n), at p. 641; 85 L.J. (P.C.) 167 (n), at p. 168.

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.)

1. (1879) 4 C.P.D. 396. 2. (1877) 2 C.P.D. 469. 3. (1877) 6 Ch. D. 371. 4. (1878) 3 App. Cas., at p. 1236. 5. (1879) 4 C.P.D., at pp. 407, 408.

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.

The stage was then set for the intended profits to be made. The plaintiff had no real shareholders. Yet over £24,000 had to be subscribed to pay the total purchase moneys. An application had been received from Greene for 1,800 shares on 20th December 1948. His cheque had been received on 22nd November 1948, but no allotment of shares was made to him until the directors of the plaintiff met for the second time on 10th January 1949. The only reasonable inference from these facts is that the persons floating the plaintiff were determined that the plan for the sale of the land and the shares to the plaintiff should be perfected and the plaintiff saddled with this huge obligation before the shareholders whose money was to be used to discharge it were introduced into the company.

There followed the series of directors' meetings of the plaintiff subsequent to 10th January 1949, at which applications from the general public anxious to acquire flats in the new building were disposed of; substantial parcels of shares were allotted and the allotment moneys applied not to pay for the new building or held in trust for that purpose but used to pay for the land and the shares in the defendant company. Willard, Salon and Tracy were the persons present at all these meetings. Salon was admittedly a promoter of the plaintiff, Willard took an active part in its promotion. By purchasing 250 shares from Mr. and Mrs. Salon at £10 each he paid a substantial sum to be let into the scheme. These shares were transferred to him at a meeting of directors of the defendant company on 29th December 1949, and at the same meeting he was allotted the 342 further shares. He became chairman of directors of the new company and played a leading part in accepting the new capital and disposing of it. He saw to it that he was paid the purchase money for his own shares and made the intended profit. He was implicated in the scheme up to the hilt.

Tracy assumed the role of secretary throughout, first of the defendant company and later of the plaintiff. As secretary it was his duty to give many instructions, such as the instructions to Mr. Lightfoot about the manner in which the flats were to be sold, which could be attributable wholly to this office. But the inference was clearly open to his Honour that he was taking an active part in forming and floating the new company. He received 66 shares in the defendant company on 29th December 1948. It was suggested by his counsel that at that time his salary was in arrears to the extent of £624, and the profit he expected to make on the shares when they were sold to the plaintiff was to be the means of recouping his salary. On the other hand, it was contended for the respondent that he was paid these arrears. It is not clear from the evidence whether the arrears were paid or not. Assuming they were not, Tracy's interest in the sale of the land and shares to the plaintiff was even greater than if they were. Undoubtedly he became a shareholder in the defendant company so that he would have an interest in the profit to be made out of the promotion and formation of the new company. If his activities were merely ministerial he was at least ministering to two boards the members of which were actively engaged on his behalf as well as their own in seeing that the scheme was carried through and he was fully aware and assisted in the means by which that purpose was achieved. Nor can there be any doubt that Salon was acting on behalf of his wife with her knowledge and consent. As for the defendant company, it was a mere puppet in the hands of Salon and Mrs. Salon. It was bound by the steps they took on its behalf to sell the land to the new company. In our opinion his Honour was justified in holding that Mrs. Salon and the defendant company were promoters of the plaintiff.

The liability of Griffith and Miss Withy requires more consideration. Originally they purchased their shares in the defendant company from Salon and Mrs. Salon with a view to making a large profit when the land at Potts Point was sold to the new company. But this scheme was not carried out. A new scheme was substituted for it. Under the new scheme they would have sold their shares to the new company at a loss if they had not been recouped by the promissory notes. They were left out of the distribution of the balance of the capital of the defendant company on 29th December 1948. There is no evidence that either of them took any active part in the formation of the plaintiff or in the attraction and disposition of the new capital. Miss Withy held a minor position in the office of the defendant company, but she only had a hazy idea of what was going on. She does not appear to have realised that she was taking part in a meeting of shareholders of the plaintiff on 7th January 1949. They were not paid for their shares or on the promissory notes until they resorted to litigation. Even then Griffith only received £500 of his £2,150. But it is clear that they agreed to participate in the scheme to promote the plaintiff and sell the land and the shares to it provided Mr. and Mrs. Salon gave them the promissory notes so that they would not lose on their investment by selling their shares at £8 12s. 0d. In the end they had to be content to get their money back and the only way that they could do so was by accepting the new scheme and standing behind Salon in the operation. They were joint adventurers in the new scheme. As Salon and the other active promoters failed to discharge the fiduciary duties which that operation involved to make it legally binding on the new company, the transaction must be voidable not only against Salon but also those on whose behalf he was acting.

For these reasons we are of opinion that his Honour was right in holding that the plaintiff was entitled to have the contracts of sale of the land and shares set aside. But we cannot agree that all the defendants should be made jointly and severally liable to repay the whole of the purchase moneys amounting to £22,482 16s. 0d. Nor can we agree that the defendants should be made jointly and severally liable to pay all legal and other costs properly incurred by the plaintiff under or in connection with the contracts for the sale of the land and shares. Nor can we agree that the defendants should be bound jointly and severally 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 for or on account of the land or shares or the proceedings dealings and transactions relating thereto set forth in the statement of claim.

The contracts for the sale of the land and the shares were interdependent in the sense that the promoters did not intend to allow the plaintiff to purchase the land unless it also purchased the shares. But each is a separate contract for the purchase of separate assets and there is no principle of law or equity of which we are aware which would justify more than separate orders for the rescission of each contract and separate orders for repayment of the purchase money paid to the respective vendors. Each of these defendants should be ordered severally to repay to the plaintiff the purchase moneys which it or he or she has received with interest at four per cent from the date the payments were respectively made. The declarations to which we have referred should also be varied so that each defendant will be made severally liable to repay to and bound to indemnify the plaintiff in respect of legal and other costs and rates and taxes &c. relating to their respective contracts of sale. The decree should give each defendant the right to have the property he or she sold and transferred to the plaintiff retransferred to him or her at their respective costs upon payment to the plaintiff of their respective liabilities. The decree below should be varied accordingly. Otherwise the appeal should be dismissed. But the appellants achieved a substantial measure of success and there should be no order as to the costs of the appeal.