2192S THT W1GH COURT OF AUoTa\LIA. SYDNSY heuLSTRY. t= eeseeelanacs Je liggins 3. Barr ov. Trevilt. Rich J. Starke J. ORLER Os COURT: Appsa.l. ith Costs. JULGMSHUT delivered in Sydney this 17th day of Lecember 1925, BARR Ve TREVITT. JUDGMENT. RICH J. BARR vs TREVITY. JUDGMENT. RICH J. Ths proceedings in this case were taken under section 162 of the N.S.W. Companies Act, 1899, whic} provides a summary teme dy against the persons named in the section where misfsasance results in damage, It was not suggested before us or as I und@ratand in the Court below that set-off 1a available to the. party attacked under this Section. Mr. Browne admitted that tlere had been misfeasance on the part of hia client but he contended that it had not resulted in lose to the funds and assets of the company. Any other matter igs wholly irrelevant. As I mof opinion that the matter should be remitted for further hearing it would be inexpedient to discuss the facts of the case. It would ap- pear that at the general meeting of the company held on the Soth. Aug. 1922 the whole matter was discussed and the following questions were asked by counsel for the appeliant ~ "At that meeting was there anything "said about the payments to Mre Barr?" (objected to). "What was said ct "the meeting" ~ objected to ~ rejected. This evidence was I. think wrong- Be ly rejected. The isaue being whether there had been repayment to the company of the amount for which the appellant had become liable so that no logs resulted to the company Cavendish Bentinck va Fenn, 12 teCe at po 662 it is material to know what explanation was given to the shareholderg of the transaction whereby what Maughan 4s. has described as mechanical] entries (and all entries of figures are in one sense mechanical) became translated into a statement of the actual facta elucidating the truc position of the company's affairs. I "gree that the omission to give notice of motion by way of cross appeal does not dbar the Court from extending an appeal to some matter part of the subject of the original prooseding not covered by the notice ef appeal. But the circumstanoss of this case dy not, I consider, warrant the Court in extending the discretion conferred by the rule in question. BARR = -Y_. PRaVIET. ad to me that this ease called for nothing more than the congifaration of @ aonaratively short and simela question of law oy mixed fact ani law, ae to vhathar upon cireumstanees not really in Gispate,one olda or othor was technically in the right. Jat as the metter progesded, and more vartioularly &s the relevant evonts and transactions were : resented aud elaberatad hy the learned Counsel for the Appellant, it became perfectly avidont iat the learned primary duige rightly treated it ag involving soma very sericus que ions material y affeoting Conany Jaw and administration in bow south Wales. "specially do thosw questions conearn the vrotection of trade evaditors dealing with limited companies both at the hands of comrany @ireetora, ang at the hanta of a Court of justice when ite remedial powars under the Jjiatute are invoked, I have no hesitation in say- «lng that if migfsasances of directors in dealing with the funts of tha companies in whose interasts they are supposes to act, could ho justified or their consequengas evaded as easily as is contented for in this case, there woald be vary Litiie srotection loft for outside Greditors. The learned erimary Ju itr Acting Justice Maughan, de- disagcted , -cléed against the appellent. fie Riaeeket the facta ant evantunlly cone! uded(1) that meh of the documentary avidonca wis suspicious and untrustworthy (2) that verbal exelanations wore not to he beliaved and (3) that thore ag on absonge of propar evide eo of agresmont to exonerate the appellant. J hava carefully examined the evidence and thoroughly agres with aJl tho Laarnad Judge sald, ------~--~--- The application before the learned primary Judge wag made by ieslio Loftus Urbvitt, the liquidator of Xing and Company himited,for an ordar directing the apps:lant Josaph Verglval Barr, who had bean @ Qlrostor of the company, to repay with intorest 211 sume of money paLd to him out of the comany's moneya in respect of @ purchase of his 500 shres in the company by tha two other directors, Harold Hewton King and. Gwendoline Morrison(since Mrs King) under an agreo- ~noent dated 1 Kay 1922. Ag to £250 of those monoys tha Court under see 162 of the Comanies Act 1899 held there was a misfeasance and ordered Barr to raplaeca the money so taken f om tho company. 'his 1s an appeal from that decigion, and in my onlnion, ones the facta are understood, it 18 and always was an utierly hopeless appeal. Mach reliance wag phaced by learned Counsel for Barr on cartain hook nbinagh indesd the whole caso for exculpation depends on book entries. for reagons 1 shall state | am clear that evon if entries those extixem gtood unaffected by anything els2,they would in fact ana in Law, a2 short of the suggaated offtect. But Maughan J in his very careful review of the facts cama to the conclusion in which I agrae that what he called "the mechanical entering up of the debits "and eredits™ in the relevant follos of tha iadger, would not bo suffleloent suffielent to exonerate tha appells nt, O17 tO saoply the place of an agrecnon! that would do sa. His & early mant @n agreament amounting im law to Bj went. "he proved circumstances of this case render it aspecially nee zs my opinion to require strist proof of exonorption, they are a¢ follow:- King and orrison, had been earrying on & Imittine businesa in cartnorship,2nd in Anguet 192) a corporation ealled Hing & Comany iimited vag formea to take aver the buulness, fing receiving 890 and Korrilgon 700 £1 shares fully paid up in the new company. Uarr signed tho memorandum as a subscriber for ons share sdescribing himcalf as "accountant". Jie then amael'ana was @llotted 500 shares and paid £500 to the comeany. There ware some signatory ghares issued to other persons who by subscribing in the first inot@nea made up the nocossary statutory number for incorpora- "tion. There were aluo issued 4 few other shares perhaps 200 partly paid for, But it is euffioiont to say that in substance 1.2.King, iiss Horrison ané Barr controtiea the affsire of the comeany, and were formally appointed and acted au directors. iassing over for the 'iveet subject of onr momont tha Intermediate avents which are {% gonsideration, Li should bo noted bow tho presont question cams to arise. On 19 becembear,192%, the Company vent into voluntary Liqul- station. The sosets have been raaliasd and have roducod £444 /6/6 with a possible but not very hovefal chance of obtaining 229 more. The liabilities at ilqnidation were £1195 /8/1. bo that even elimina -ting costs and expanses thera lc a Rittexmrt deficiency of noarly 2760 os 8 rasult of about two yaars duinesa existence. « the debtors to the eonsany ae appvars in the vrivate ledger are Hr King £104/-/7 and Mre Ying £142/1/6 wat nothing of these agounte ig available. Another @iree or F.Laking owas £10/1/6 but , avan that is not realisable. 'hare wera praferen' ial creditors, tha Grovn £46/-/5, sent £59/4/4 and J Morrison debenture holder £210/e/6 im all £296/13/5. if that be deducted from the £444/6/5 realised if ao ata and /eonts and expenses are reckoned, there is not much left for the trade eroditors whoss claims amount to a Little over £890, books When the ligaidator examined the bedtime of the company ho found that Barr,while @ director, agreed to transfer his shares aqually to King and Sorrison and received the consideratiab money out of the com- -pany's funds, chis led to earrespondence and to the present nro- -veadings to compel restoration of the funds so dealt with, King aud Merrison{now Mrs Zing} hava not been proceaded against in this way for appa ently they hive nothing. The liquidator therefore sho even in point of Jaw stands in @ phroager porition than the comany itealfELiteroft''s gise, 21 Ch 2.p.519) has in the circumstances a clear legal and morai right on behalf of the unmid ereditors to require striet proof of any exonaration relied on which would oan- ~able tho former cireatoy te retain, at the rato of twenty shi) ings in the £, the comany's moneys go received in prefsrango to the a2 . eomany's trade era itora who eee @ mora trifle. .-------a-n- =e jhe constitution of the company makes it altegathor ultra vires of the ow the oomsany to arehass shaves, or to ond nev ay to nrehise shares, farther ,Ho.5 of the Comrany's Arti oa,eays in tha aosh exolicit ter "the Diragtors shall not emoLoy the fants of the Gomoany ar any pm: "tharqof inthe varohesa of sharas of the Commany". The inonnaeity of & @om any to surchase its own shares is of con, UL} with exvertence So a cublie Reesuntant was noesesarily fully conscious of that, Artiels § Just quoted wig a aistinet orohibition agningt employ ~ing the eomany's monzy for such a sarcose, In the face of light, the threa directors entered into the agreaneat of 1 kay 1922 referred to in the notice of motion, The @greament itself ts of an extraordinary nature an@ the way if was carrie oni was evan wore extraordinary. "he ole sehame in lain Unglieh was to let Darr get baek the £600 he had paid into the company together with a email sum he had earned by priskilled in addition to the £6 or £7 a week he was ordinarily getti a _—— ~ _—_——-~- extra working at a Knitting wiohine, and/nearly £200 more for theY rouble he had been put to, and for the neo of hia monay. The sroblen plainly vas how to do this,withort colliding with the law prohibiting % coupony purchasing Ite om ehares, 2n* without openly violating Article 5. 0f course that was, and I now held it fo be impossible, bat the wy if was attempted wae by moans of tha agraument of 1 May, an? the devlous methods resorted to for tha vureoso of carrying it cut. The wae wad only aight months after the incorporation of the company. In form, and in legal effect, King and Sorrison,-orsonally bought Perr's gheres. if they XXREORK Intented the purchase to be in realitya swreface for the company they were conseloualy @olng an illagal act, and by paying paying £100 down by tha ea y 8 chaque and further stimulating for 'he comrany'a ondorgament of tho bills, which meant eortainly paymant hy tha comany,they were Mlagrantly violating Articie.5. lf, as tho lettor of the appellant's solleltors data? 16 } truary 1924, ac orts the intention sas that King and iorrison ware really purchasing vere -sonally and intended to have the benefits of the sharea, then in view of Article 5 the mtter was if anything still worse. faughan J, as to 'his agraenont, after hasring the evidence of the parties,saya:- " the "yeason glvon by the raupondent for this development was that the busi? "-nogs was doing so wall that King and "ise Morrison wanted to got it "hack again,hat L doubt very much whether this le the true explanation". the His Honor ther8fore wan not prepared to heliave Barr. J doubt so expressed ta amply justified. the real reason is not @Leclosed Ag ® rasult however of this agreement Darr on 1 May, aa the learned ah du ge found, received the 5 promissory notes, three of which have/been produced and tivo of which ara in evidence. Tha notes as originally given were the notes of King ond Sorrigon ag prineipals,but ondorsed hy ths company by Zing @nd sorrigon as directors. 4s now produced tha two Ww 'are altered by being converted into a note by "King and Com "pany Limited", which mkeg nonsense of the notes aa enforced Imt ag will appoar presently this ms done ac part of a subsequent expedient to try and avoid personal responsibility. The sum of £190 was paid to any's cheque, drawa by flog end Morricon, an* bearing Barr by the co: Gato 19 Kay 1922. tt it wag paid on £2 Hay owt of the company's tank account. But though tho appellant roesived the £100, and the eonpang! emlorgsement for 11 the rest of tha prios,amounting in all to "2711/1 for the charge trahsfor of tho sharee vais not executed until S1 lay, which was the day Darr wag to retire'f on the eomvany. "he shares were exprasesed to he tvansfarred 250 to King and 259 to Morrison, oach transfer stating 11 was In oonulderation of 555/16/8. On SL May 1922, at a directors neobing attended hy the three directors,Barr tendered his resignation ag director; the two transfers were sabmitted ance ware vith the share cortificates directed to ba held by Mesors Sly end -usee]1 pending the payment in fall, that is until 4 January 1923, and fire 3.xing wag appointed director till the end of the yaar. Then says the Sinatesie "thare being no Carther business the mevting wae adjourned", That appears at p.7 of tha Minute Rook. Us to that moment thera had baan no dividend declared and there hat Wren NO ene ee ne eee ee ee eee directors fees or other remancration, whieh could in any vay acconnt for the differance batwaen £500, the paid value of the shares and the eum Man of £711/13/4 the agreed consideration, How than can wa account Pose for tho dtfferance,viz, £211/15/4? WwAMOUAM,as Hanghan J, 920, thore may havo beon ® few pounds due for salary. 1: ig paid that £16/7/- vas thus due for work dong, ihe balance is approxinately accounted for after dadueting @ bonus of £59 by £50 Lor divid nds,£50 Lor directors fees ang £100 allowanca ae director for working overtime. "he explana. ~tion in evidence WAM by Sing wa that the sum of £713/15/4 was oalou- -iatad on this hagis L, way of anticipation. ity Brown for Uarr f£ bla cantantion, kn ooint of f davonts ar on tha anthentleity of a minute doar ing dato OL say 1288 and oarnorti to raaord & Gireetor® methine on that aay. iavghan J sotnted ous the extraurtinary eircunstaneas of that minutos Th Gan alreaéy stated a directors! meiting on that éay, ani the minutes have been referred to. "ho axvlieit statement is thore mado that there waa no furthor Imelnogs. Thosa minutes vera novor amended but were, at a sabsoquent moeting, on 12 July read ond confirmatory natVnoating appears on p.8 of the Minute confirmed as they stand. Books Hovon folio.9. thoro appoar what parpoyt to bo Mimmtes of a iseting of Directors of 31 May on which this sossibly crucial pro- -vinion for the balance of tha jries might havo Gapended. After stating the ¢ireanstances,aughan J,sayo:- "it is extremely peen- "liar and alsa guepiclous that a further minute of tho mooting of on "31 May appears withoat any explanation on Fo)to 9 of the Minute Book I join tn the teormed Judge's ougricion and disivuss of that minuto. More especially ig that so in view of two clrounstancesa. "ne ia the provision of Article 64 that King aakxkuexkemr os Vanaging Directo® shall for & yaars- receive a vaiary of not less than 2a yoar, ani "shall devota the whole of hin enorry and skill to och time ag "ghell be neeessary. for the eonluct promotion and advancement of the "uaginesa of the comsany during hia em loynent as such banaging "Dievetor™. vho other le that in ding'a evidence i! appears that et that time sach director was getting #26 or £7 a week, L@m not saliafled thai that second minuge, é ied Zl ilarch, xewkintxxc truthfully repesente anything dune at a directors neuting on FL bey, 1f guch & rogolution sags eve jausad it must have beon passed between 1) Suly and 20 Angust, 1022, when the shireaho! vetnoating Wig holde At 'has mesting as appears from the recoded wlmton "yireotorc' faa and adiltional salary os paused by ilroctors "hheting of Sl May wo duly approved". the only members won St the uharoholders'' meeting wore UU. ing,hiiss Morrisen ang tae Singe Thilo nesting must have followed very clocely the Ctrectors masting of the game three persons on the same day, at which Ur King yeported having paid Mr Darr £150 in respect of Pireetora' eas dee! Avy to this,%eughan J,rightly observes:- "There is as a mtter of "feet no traces of King ever having pala such a sum to the raspon- "dent sxeept in the shape of the tvo cheques | have already mone B-tioned". Tha seaoné chague wa one fer £298/7/- on lst June thich if 1% ineluded dhlrecters fess was inconsistent wlth tha alleged minute of let Maroh which stipulated for "the approval of the "gharonolders in genaral Meeting". Thosa two chaques however con- -tAined no,guoh oum., The £190 chequa wig thy flret paymant for the sharas. Th: soeond ohaque was tha amount of the first, note £250 plas £30 ané 218/7/- bonne and salary and in advance of tho Jate fixed in the agreement. Thare ia not the least trace of any state. -ment or arrangement by Barr to treat tha choques se payment of the £150 directora fees. The full £500 rapresenting the nominal value of the shares themaclvas hac not yot bean paid. Yho subsequent events inel ng book ontries Gisnrova the statement. in any easa it vas naver stéted to or ay proved af the shareholders' mocting. The learned primary dudge manifestly did not halleva the entry nor do 1, Reverting to tho shareho? ders' meeting the Balango vheat wis annrovad by tha three persons named constituting tho Charoholders' Meoting.The Balance Sheet is im typowriting, and there is apsended a written atatement including "directors feag £450%* That 1 suppose moans £150 to sack of tha three Vireetors for the 'ast year. How what sas done with ragard to the Directors' foas &e? bot a penny was ever paid to King or Morrison. Farr go' the amounts In the total £760/0/4 that ho received up to 4 Jamary 1923. Sat as to the vest, it ramained so dar ag King and Morrison area concerned in erocs entries of debit and eredht. As to Barr himself, credits ant debits are hopeless, bocause admittedly he rooaived £500 of the company's monoy for tha cheres poalies the extras,and he still retains 011 he received. ie must therefore rely on the mutual relationa of King and Norrigon, with the eomeany to prove if he can the restoration in law to the company's eoffara of the moneys wrongfuliy taken from them by the tripartite and never restored in fact. arranganontl Ag to the original nature of this act i adopt withont quoting what Maughan J says. -he substance Is that tha rayments and yoeoipts# of the £100 and@ the £250 ware misfeasance, and that the three immediately airesetors concerned xxxxhunxtax beckme Liable to uake good the Loss to the company. they never did maka gued tha toss. Brown relied? on esrtain book ent ioe, lesgorf folios 104, sings A/O, 106 Morvison's A/o and 115 Berr's A/G. in King's 4/¢ 1% appaars that on 31 May, he wac Sabited with £50, that ie ons half the £100 first paid to Tarr, bee veauss King got one-haif the shares. in ihe books thie cabit of £59 iseuphoniously @tiled "cash atvance". "hat is to say the Managing jjreetor in s.ite of Article 5 and contrary to the consti y -tution of the com applied the comsany''s money to yay for six eapital sires in a way that was suhstantisily a return of capital to aati another director, cal'ing it for the present a cash advance to hinself and intensing to account for it by oranting subsequently an indebtetnesa of the comany to himsolt. 'ho process is repeated on Ist June as to £149/5/6 which was one-half of £296/7/~, The may that eross indebtedness appears has heen stated. King is debited also with two other sums £60 and £50 aq "cash advanceB", the total £283/6/- debits velng £263/6). Ao arainst that there is @ wolltary era 'it of £11/2/11, leaving & net debit of £272/3/1, which is taken into the balance aheot of August 1922 a5 8 dobt. lt is obviously not treated ab anytime as paid off, bsing carried on into the next financial year ont followed by Gohits of one-half tha other moneys said to Darr. Norrison is daalt with in the same way at folio 106. On 20 Dieomber 1922, at a meoting of Lire tors i: appears from tha lunuteg that "after discussion i{ was resolved that the 500 "shares (fully paid up) originally hold by lr J.i.Rarr tith fate of 2a "of like Alyectorehia(Sist kay 1928) bo rookeatbion fre kon over "hy the comcany ant de weltten off capital'. It shonld be ob this a few days before the Tact sromissory nota seayoble to Bary Sah fell dus, when tho sharos vora to be transferred in the Share vegister. On 2nd or 4th Jamary 1923, that note £90/8/4 was caid, whe halt of that note £45/4£(aswere also half of oach of the other notes of siriiay amounl) au debited bo fimg and to Morrison reepoctively. Unt not as "cash acvaness" and the raason for that ia show in tho eash book from which the entries eone, by words sha ing that the amounts are to be charged as for Ring & Cc Limited's shares. Than in conformity Me, with the reso ution of 20 Decombor - a fortnight before- find in ie Shanbrogiater at folio 8 which ta Barr's share folio and uncer date 2 January 1985, an oatry showlng that his 600 shares have bean trans- -Lerrod to "King & Co La". Tarnin® back thon to the cash book en- ~tries of £90/8/4 ;old respeatively on 1 Cetober, 1 November and 1 Dew scombor, it is sean that these several paynents debited to King and Morrison in equal amounts are followed by the words "King & Co Ma", The alteration of the two cromiasory notes for £90/8/4 éuo resncetively 4 Decomber 1922 and 4 January 1923 by inserting "King and Comeany Lta" ag thi mker immediately above tha namee of King an? Morrison, is ob~ -vlously part of the same operation to effectuate the resolution of 20 Levomber BR. Of course this all results in a middie,but not in effording a Legal quitianee to anybody for the original miafessance, Than on 6 April 1923, a new departure takes place,probably to fit in ag fay as possible with what has just boon narrated. For the first tine an account is opened in the lodger for J.i.Barr. 'he company by this time is plainly moribuné, ani srerarations ore being made Por burial as decent ond ag sofa as is possible. <irat in tho Journal folio 22, an entry is mde debiting Barr with £248/7/- and crediting King and "orri- "son with £124/3/6 each, | statement being added "for payaents to Farr "charged to theiy secounte in error', That is carried into tho i yer aecountG. Dut what does the keanf7f- rapresant? That is explained by the credit entries in Darr's account. if is dividend 260. cages 216/7/- Bonus for Dank Guerantes £29, Overtime £100 and director's feos £50, it wil be at once notiesd that it does nos inelute a penny of the £500 for the shares thenselves, ani therefore ag mst ba taken nog a pemiy of tha £100 and £250 fi rocoived by Barr and @irseted by tha Jucgnent anger appenl to bo revlaced. Further tha ontrics referred to are oro tanto eK part of ® process which is an attempted undoing of the egrenment. If Barr la to be debited ao batween nia/ the company, for that is tha necas ary meaning of his account in the company's ledgar, with the £248/7/ proviously debited to King and Horrigon, it meane the money was advanced to him by tha company. Ana conversely 1f he ig to bs credited per contra by the commany in ageount with itself sith the various sums amounting to 2248/7 /—= it disregards the intervention of King and Morrison altogether. it is plain that the new Barr lodger;-account, folio 115, is an attempted step in the variation of the agroument of 1 May 1922 ,hy wiking the company tho tranaforro. and not King and Norrison of the shares from Barr and by making Barr the ereon dealing direst with tha company in gotting on antiolpatory advance of £2ae/7/-. Folio 115 is 4s useless 85 @ souree of excalpation for Barr as any other entry. 50 far as appears Parr wis no party to the new set of entries. if ho had beon they woult not @vail him. Tor,eo far as Qppears was he warty to the divagations beginning 20 December, ine -alading the alteration of tha promissory ----------------<+-29-- migyary notes now v tu hive bewn on o by the goriare Saugban J wae perfectly Juatifiied in rejecting the mechanical book fication a onivies &a eufticiont Just y sone distinet rellable evidence of oxonereiion. L repeat the Qp.wal Le atte y hopejess and miesed with costa. Ag to the rest of tha oder, relieving Barr from the £361/12/4, Adhere was no crogs appeal or notice in iieu of it. Application vas made by Ke Flannery at the ber to ghallenga this cart of the oréer, bet resieted by Ss Brown. La Flannery did not sustain the onug reste the Court -ing on &n @prlicant oo tardily sealing to aspaal a refused in its diseretion to exercise its power to oven the quecte questlon.