|
Fixed Assets,
i.e. Goroka and Wau Hotels and
|
| td widt width=114 valign=top style='width:85.5pt;padding:0cm 0cm 0cm 0cm'>
�43,168.13.6
|
Stock
|
|
< |
|
Other Current
Assets
|
|
18,968.14.9
|
|
Amounts Owing:
|
|
idt width=114 valign=top style='width:85.5pt;padding:0cm 0cm 0cm 0cm'>
>
|
�2,269. 0.2
|
|
|
Coffee
Products Limited (�20,505.11.6 at 15/3 in the �)
|
15,635.10.0
|
17,904.10.2
|
|
Shares in
Coffee Products Limited
|
Nil
|
|
Total
Assets:
|
|
|
�80,041.18.5
|
|
Liabilities�secured
|
�5,000. 0.0
|
|
&
|
|
Current
Liabilities
|
39,176. 3.8
|
|
|
|
Amounts owing
to companies
|
5,061.13.8
|
|
 an>
|
|
Total
Liabilities:
|
|
|
�49,237.17.4
|
|
Excess of
Assets over Liabilities:
|
d>
|
�30,804. 1.1
|
The liquidator�s
balance sheets from 1st April, 1961, to 6th October, 1961, show that the Goroka
Hotel made a trading profit during
this period of �6,105 whilst the Wau Hotel
made a loss of �1,601. Although both the Goroka and Cecil Hotels were trading
profitably
it would seem that the capital position of Morobe Hotels Limited was
shaky and it was probable that it would be some time before
the company could
be put on a sound footing. However, despite the faint optimism which apparently
existed in respect of Eriama
Estates and Wanigela Plantations it is clear that
the only Hamac asset of any substantial value was its shareholding in the Hotel
company.
I turn now to
consider the events leading to the sale agreements of 1st and 31st May, 1962.
Apparently with the
sanction or under the direction of the Court an extraordinary general meeting
was called on 28th September,
1961, for the purpose of appointing directors of
Hamac. At this meeting were present: Mr. C. P. W. Kirke, representing Ela
Holdings
Limited, Mr. H. H. Stubbs, representing John Stubbs & Sons (Papua)
Limited, Mr. Stephenson Fox, representing Samboga Limited
and representing the
acting secretaries. I take it that the companies which these persons
represented were creditors of Hamac.
It was reported to the meeting that an
order to stay the liquidation of the company was expected to be made within a
few days and
in anticipation of this order it was necessary to appoint
directors even though the company was still formally in liquidation. It
was
resolved that Messrs. Kirke, Peter Drake, Harrie Hamilton Stitt and Stephenson
Fox be appointed directors of the company. No
consideration seems to have been
given to the Articles of Association of Hamac. Article 74 provided: �the
qualification of a director
shall be the holding of not less than two thousand
shares in the Company; directors shall hold their requisite share qualification
at time of appointment or election.� None of the persons appointed at this
meeting held the requisite share qualification as is
obvious from a subsequent
meeting of directors held on 16th October, 1961, at which 2,000 shares were
allotted to Messrs. Kirke,
Fox and Drake. For some reason which was not
explained no allotment was made to Mr. Stitt.
At the so-called
meeting of directors on 16th October those present were Mr. Kirke and Mr. G. R.
Brook who had been appointed as
his alternate director by Mr. Fox. Mr. Fox
together with a Mr. Guy Newton Moore and a Mr. Bruce Edward Fordham were at
this time
the persons registered as proprietors of the business named E. A.
James and Co. This firm was at this meeting appointed secretaries
of Hamac. Mr.
Brook was an employee of the firm. At this meeting one share each were allotted
to Mr. Brook and Messrs. Davis and
Sinclair, two other employees of E. A. James
and Co. After this allotment of shares Messrs. Kirke and Brook signed and
sealed a
number of transfers of shares in Hamac, amounting in all to 833,155,
to Papua and New Guinea Development Corporation Limited. Hamac�s
issued capital
at this time was 930,905 shares. It was obviously intended that the Corporation
should take over control of Hamac.
At the fourth annual general meeting of
shareholders of Hamac held at the office of E. A. James and Co. in Port Moresby
on 3rd
November, 1961, the only persons present were Brook, Sinclair and Davis,
the latter of whom was also stated to represent the secretaries.
It will be
remembered that the three gentlemen present at the meeting were those to whom a
single share had been allotted at the
meeting of directors of 16th October. At
this meeting the persons who had ostensibly been appointed as directors on 28th
September
offered themselves for re-election and were re-elected. Mr. Stitt
still had no shares. The general meeting confirmed the actions
taken by the
directors since their appointment at the extraordinary general meeting of 28th
September.
At a directors�
meeting held on 10th March, 1962, at which were present Messrs. Kirke, Fox and
one Aitken-Quack who appeared as
an alternate director for Stitt, the persons
acting as directors stated that in view of the fact that the only two assets of
Hamac
making a profit were the Goroka and Cecil Hotels the Board resolved that
its policy should be to dispose of all assets except these
two hotels. At a
further directors� meeting on 24th April at which were present Messrs. Stitt
and Fox, who apparently was at the
meeting in a double capacity both as a
director and as representing the secretaries, there was some discussion about
the sale of
Hamac�s shareholding in Wanigela Plantations Limited and Eriama
Estates Limited to what appears to be an outside company by an exchange
of
shares. At this meeting Fox reported that there had been discussions with the Board
of Sangara as a result of which an offer
was expected for the whole of Hamac�s
Papua and New Guinea Development Corporation Limited�s interest in shares and
credit in Morobe
Hotels Limited. As at 11th August, 1959 Hamac was shown as
owning 340,127 5/- shares of an issued capital of 342,326 shares in this
latter
company. A further 2,000 shares were held by then directors of Hamac. There
appears to have been a further issue of 500
shares to each of Messrs. Fox,
Drake and Kirke, and on 17th November, 1961, Hamac is shown as holding the same
number of shares
in an issued capital of 343,823 shares.
So far I have
concentrated on what was happening within Hamac. It is now necessary to look at
how the defendant (to which I will
refer as Sangara) stood in May, 1962. It was
incorporated in Papua in December, 1952. At all relevant times E. A. James and
Co.
were its secretaries. There was no evidence of its progress until 1961 when
the annual report and balance sheet for the 12 months
ended 31st January, 1961,
shows that of its authorized capital of �1,000,000, �295,883 had been
subscribed for 305,956 6% cumulative
preference shares of 5/- each and for
877,576 ordinary shares of 5/- each. At this stage its only asset was a wholly
owned subsidiary
company, Sangara Plantation and Development Company Limited,
in which it had invested �294,279. The consolidated balance sheet showed
the
plantation property, plant and machinery as being valued at �312,365. Current
liabilities including a secured overdraft of
�3,416 were �22,766. Sangara had
incurred a trading loss for the year of �5,513 due, so the report stated, to
loss of production
brought about by considerable damage caused in the
plantation by a cyclone in December, 1959. Large costs had been incurred in
clearing and rehabilitating the plantation area. However the Board expressed
itself as looking forward to a successful year. The
annual meeting was held in
Sydney on 26th June, 1961, and it was there resolved to pay a first and final
dividend of 3% on the
cumulative preference shares. The chairman supplemented
the report giving the shareholders details of the effect of the cyclone,
and
informed the meeting that the operating company had made a profit of
approximately �1100 for the first quarter of the current
year (i.e. from 31st
January to 30th April, 1961) and stated that the Board had every confidence
that results would continue to
improve. Fox was present at the meeting as a
shareholder and as representing E. A. James and Co. He had previously attended
a number
of directors� meetings in Port Moresby as an alternate director and
from the minutes of a meeting held on 19th November, 1960, it
appears that
Sangara�s directors relied on his assistance in the management of the
plantation undertaking.
Several directors�
meetings were held in the second half of 1961 and early in 1962 at the company
office, that is the office of
E. A. James and Co., Port Moresby. These meetings
were attended only by Fox and either Brook or Davis whom, as I have stated
earlier,
were both employees of Fox. Each of these three persons attended
either in the capacity of an alternate director for one of the
directors, all
of whom resided in Australia, or as representing the firm of E. A James and
Co., the �secretaries� of Sangara. At
a meeting late in June 1961 a great deal
of detail was gone into with regard to the conduct of the plantation and the
purchase
and refurbishing of equipment therefor. Other meetings were
exclusively concerned with approval of share transfers and the entry
of the
transfers in the company�s register of members which was in Port Moresby.
However, on 28th April, 1962, a meeting of directors
was begun which concluded
at a second meeting on 2nd May. At this meeting Messrs. Tytherleigh, the
chairman, and Notson, a director,
were present as was Fox apparently in his
capacity as an alternate director and also as representing the secretaries. At
this meeting
it was resolved that the next annual general meeting be held at
the Collingwood Football Club in Melbourne on 25th June and that
shareholders
and their friends be invited to attend a viewing of films showing the Company�s
assets, which I take to mean a film
showing the activities on the plantation.
There was general discussion about the possibility of purchasing a controlling
interest
in a company known as Guinea Brewery Limited, a brewery company
operating in Lae. The minutes record that the secretaries reported
that two
persons named Nydam and Meier had undertaken to obtain 51,170 fully paid �1
shares in that company for a purchase price
of 204,700 fully paid ordinary
shares in Sangara and �51,170 in cash. The next item of business was a report
from the secretaries
(i.e. from Fox) that Hamac had offered to sell 345,823
fully paid 5/- shares in Morobe Hotels �which fully owned the Hotel Cecil
through its subsidiary Coffee Products Limited and the Goroka and Wau Hotels.�
According to the offer the consideration for the
sale was to be:
N2>1.
(a)����� The sum of
�2,500 to be paid in cash to the vendor upon the execution of a deed.
(b)����� The sum of
�47,500 to be paid in cash to the vendor on the 31st day of May, 1962.
(c)����� The issue
to the vendor on the last mentioned date of 565,000 fully paid 5/- shares in
the capital of Sangara.
N2>2.������ The
purchaser to accept liability for and pay:
(a)����� The balance
of principal moneys together with all interests, costs, charges and expenses
due under a certain equitable
mortgage dated 22nd August, 1957, and made
between the vendor and Flora Shaw Stewart and not exceeding �7,500.
(b)����� The sum of
�14,000 owing by Eriama Estate Ltd. a subsidiary of the vendor and in respect
of which sum the vendor was contingently
liable to the mortgagee Mrs. Simons.
(c)����� Sangara to
fully indemnify the vendor in respect of these two liabilities.
It was resolved that
the offer be accepted and approval was given for the signing and sealing of the
relative agreement.
It is left to
conjecture as to how Fox�s report to Stitt or to Stitt and himself at the Hamac
board meeting of 24th April, that
an offer was expected from the Sangara board
of directors for the whole of Hamac�s interest in Morobe Hotels Limited was
translated
into a report from Fox as secretary to his Australian directors of
this detailed offer made by Hamac followed as it was by the immediate
execution
of a document embodying the offer and its acceptance. Fox was obviously a major
actor in the conversations and negotiations
which must have been taking place
between the arrival in Port Moresby of Notson and Tytherleigh on or shortly
prior to 28th April
and 2nd May. It was he who instructed Mr. Cromie, a
solicitor, on behalf of both parties to prepare the �Deed� which bears date
of
1st May. But there is not the slightest evidence to show what actual knowledge
Tytherleigh and Notson had of the Hamac situation
and in particular of the fact
that they were taking part in acquiring its only viable asset. It could well be
thought that whether
infected by Fox or not they were gripped by the prospect
of grazing in wider and more luscious pastures.
At the same meeting
it was resolved that the board offer to shareholders new shares in the company
in the proportion of one new
share for each two shares of their registered
holding. This would involve an issue of 591,766 shares. Such issue if fully
subscribed
would raise �140,000 in cash and amply cover the proposal to buy the
interest in the Brewery and the Hamac shares in Morobe Hotels
Limited. An air
of optimism must have prevailed for the secretaries were instructed to prepare
and despatch a circular to shareholders
which was to say: �Your Board confidently
expects that the reorganization of the Company will ensure an annual dividend
of 10%
on the ordinary shares of the Company and the full payment of the 6%
preference dividends on the 6% cumulative preference shares.�
The directors
went on to discuss further matters of reconstruction and the appointment of
directors in the Hotel group and the
Brewery company. The minutes show and this
seems to be confirmed by the subsequent accounts presented at the next annual
general
meeting that for the year ended 31st January, 1962, the plantation
property showed a consolidated profit of �6,432.17.9 and that
the directors
proposed to recommend to the general meeting that a final dividend of 9% on the
preference shares be paid bringing
arrears of dividend up-to-date. The
possibility of purchasing yet a further hotel at Kainantu was also discussed.
This then was the
situation as far as I can deduce it from the minutes and balance sheets. On 1st
May, 1962, a deed evidencing the
agreement for sale of Hamac shares in Morobe
Hotels was executed. To this I now turn and I set it out hereunder:
�THIS DEED is made
the first day of May One thousand nine hundred and sixty-two BETWEEN HAMAC
HOLDINGS LIMITED a Company duly incorporated
and having its registered office
situate at James Buildings Cuthbertson Street Port Moresby in the Territory of
Papua and New Guinea
(hereinafter called �the Vendor�) of the one part and
SANGARA HOLDINGS LIMITED a Company duly incorporated and having its registered
office at the same address in the said Territory (hereinafter called �the
Purchaser�) of the other part WHEREBY IT IS AGREED as
follows:
1.������ The Vendor
will sell and the Purchaser will buy the whole of the 5/- fully paid shares of
which the Vendor is the owner
whether at law or in equity in the capital of the
Company Morobe Hotels Limited namely 345,823 shares in all numbered 1 to
345,823.
2.������ The
consideration for the sale of the said shares is as follows:
(a)����� the sum of
�2500 to be paid in cash to the Vendor upon the execution of this Deed,
(b)����� the sum of
�47,500 to be paid in cash to the Vendor on the thirty-first day of May 1962,
(c)����� the issue
to the Vendor on that last mentioned date of 565,000 fully paid 5/- shares in
the capital of the Purchaser the
same being only entitled to rank for dividends
declared after the thirtieth day of June 1962,
(d)����� the
Purchaser shall accept liability for and pay:
N5>(i)������ the
balance of principal moneys together with all interests costs charges and
expenses due under a certain Equitable Mortgage
dated the twenty-second day of
August 1957 and made between the Vendor and Flora Shaw Stewart, and not
exceeding �7500,
N5>(ii)����� the sum of
�14,000 owing by Eriama Estates Limited a subsidiary of the Vendor and in
respect of which sum the Vendor is
contingently liable to the Mortgagee Mrs.
Simons,
(e)����� The
Purchaser hereby fully indemnifies the Vendor in respect of those two
liabilities mentioned in Sub-Clause (d) hereof.
3.������ The
Purchaser hereby acknowledges that the shares the subject of this sale are at
present subject to encumbrances in favour
of Australia & New Zealand Bank
Limited and Flora Shaw Stewart the Vendor agrees with the Purchaser that the
same will be fully
discharged on or before the thirty-first day of May, 1962.
4.������ The
Purchaser hereby agrees with the Vendor that it will do all acts and things
necessary to ensure the appointment to
its Board of Directors of two nominees
of the Vendor and will provide that such appointment shall be made as soon as
practicable
after the execution of this Deed.
IN WITNESS whereof this
Deed has been duly executed the day and year first above written.
THE COMMON SEAL of
HAMAC HOLDINGS LIMITED has been hereunto affixed by us AND WE do hereby certify
that we are the proper officers
of the said Company by whom or in whose
presence the said Common Seal is to be affixed to all documents executed by the
said Company.
Signed:
S. FOX Director
E. A. JAMES &
CO.
THE COMMON SEAL of
SANGARA HOLDINGS LIMITED has been hereunto affixed by us AND WE do hereby
certify that we are the proper officers
of the said Company by whom or in whose
presence the said Common Seal is to be affixed to all documents executed by the
said Company.
Signed:
A. W. TYTHERLEIGH
GEOFF NOTSON
E. A. JAMES &
CO. Secretaries
5.������ It is
hereby expressly declared by the Vendor that the foregoing sale and purchase
has been arranged upon the footing that
the Vendor will from the proceeds of
such sale fully satisfy the whole of the liabilities of Morobe Hotels Limited
and all its
subsidiaries to Territory Finance Corporation Limited; and the
Vendor covenants with the Purchaser so to do.
A. W. TYTHERLEIGH
GEOFF NOTSON.�
It will be noted in
the first place that the seal of Hamac was not expressed to be affixed pursuant
to any resolution of the board
nor does Hamac�s directors� minute book show any
such resolution having been passed. There is therein an unsigned memorandum of
a resolution of directors expressed to be passed pursuant to art. 101 of the
Articles of Association wherein it was stated to be
resolved that the agreement
be approved and that approval was also given for the signing and sealing of the
relative agreement.
There is a pencil note on the document showing that it had
been sent to Mr. Stitt for signature. Article 101 provides that a resolution
in
writing signed by all the directors at the time in the Territory of Papua and
New Guinea or in the Commonwealth of Australia
entitled to vote shall be as
valid and effectual in all respects as if it had been passed at a meeting of
directors duly convened
provided the directors so signing constitute a majority
of the board. However, there is no evidence that this resolution was ever
signed. Article 107 provides that the directors shall provide for the safe
custody of the seal and the seal shall never be used
except by the authority of
the directors previously given and in the presence of one director who shall
sign every instrument to
which the seal is affixed and the same shall be
countersigned in each case by the secretary or some other person appointed by
the
directors. The seal on the purported deed of 1st May was affixed in the
presence of Fox who as has been seen was invalidly appointed
as a director on
28th September, 1961, and it was countersigned twice with the name E. A. James
and Co.: the first of these counter-signatures
was written by Brook and the
second by Fox. The seal of Sangara was affixed in the presence of Tytherleigh
and Notson and countersigned
by E. A. James and Co., secretaries, in the
handwriting of Brook. I will return later to the effect of the sealing on behalf
of
Hamac in the way I have set out.
There was also a
document produced purporting to be a deed of 1st May, 1962, made between Hamac
and Territory Finance Corporation
Limited. For a reason which was not and I
imagine could not be explained there was a recital in this document that the
�vendor�
is indebted to the �purchaser� in the sum of �367,000 and it has been
agreed that �80,000 of that sum should be liquidated. The
operative part of the
document provides that �80,000 shall be paid or satisfied:
N2>(a)����� by the
payment by Hamac to Territory Finance Corporation of �2,500 in cash on 1st May,
1962;
N2>(b)����� by the
further payment of the sum of �47,500 on 31st May, 1962;
N2>(c)����� by the
transfer by Hamac to Territory Finance of 140,000 fully paid 5/- shares in the
capital of Sangara on 31st May, 1962.
According to Mr.
Pike he could find no record of the indebtedness of Hamac, apparently recited
in this document.
On 14th May, 1962, a
deed was executed between Sangara and Territory Finance Corporation Limited in
which it was recited that the
latter had agreed to lend to the former a sum of
�45,000 and that Sangara by way of lien had executed blank transfers in 250,000
fully paid shares of 5/- each in the capital of Morobe Hotels Limited. The
document recites the payment of �45,000 to Sangara which
covenants to repay
this sum by half-yearly instalments of �15,000 beginning in July 1962, with the
appropriate interest. The seal
of Sangara was affixed to this document in the
presence of Brook as a director and was countersigned by Fox as secretary and
by
E. A. James and Co., as secretaries, the latter counter-signature being in
the handwriting of one Browne another employee of Fox.
The seal of Territory
Finance Corporation Limited was affixed in the presence of Fox as director with
three counter-signatures:
the first of Fox as secretary, the second of E. A.
James and Co., as secretaries in the handwriting of Browne and the third of E.
A. James and Co., secretaries, in the handwriting of Fox. For good measure a
Mr. Kilduff, who was then a solicitor practising in
Port Moresby, added his
signature below each of the foregoing. There is nothing in the minutes of
either company to explain this
transaction.
The 15th May saw a
flurry of activity on the part of Sangara, or perhaps more accurately of Fox on
its behalf. Firstly, he presided
at a meeting of the board at 2.00 p.m. at
which were present himself and Brook, and to which the secretary (i.e. Brook)
reported
a profit of �16,813 from 1st February to date. I interpolate to say
that, as Mr. Deane pointed out, that profit could only have
come from the
purchase of shares cum dividend of Coffee Products Limited which was apparently
effected on the following day, 16th
May. It was next resolved that an interim
dividend on the ordinary shares be declared for payment on 27th June, 1962,
provided
that the annual general meeting confirmed the directors�
recommendation for the payment of a 9% preference dividend on the 6% cumulative
preference shares. This was apparently to bring the arrears of dividend on
cumulative preference shares up-to-date. Then a further
meeting was held at
4.15 p.m. again of Fox and Brook, the minutes thereof stating that pursuant to
the agreement signed at the
meeting of the board held on 2nd May it was
resolved that 565,000 shares in the ordinary capital of the company be issued
to Hamac.
The relevant share certificates were then signed and sealed.
At some time on this
same day three cheques were drawn, each for �45,000. The first was drawn by
Territory Finance Corporation Limited
in favour of Sangara, signed by S. Fox
and countersigned by E. A. James and Co., in the handwriting of Brook, the
second by Sangara
in favour of Hamac signed by Fox and also countersigned by E.
A. James and Co., in the handwriting of Brook, and the third by Hamac
in favour
of Territory Finance Corporation Limited also signed by Fox and countersigned
by E. A. James and Co., in the handwriting
of Brook. For what it is worth the
first and third cheques were consecutive cheques from the same cheque book, the
second was from
another book. Territory Finance�s cheque was credited to
Sangara�s account at the Australia and New Zealand Bank on 16th May, and
on the
same day Sangara�s cheque to Hamac was debited. Before and after this
transaction Sangara�s account was �651 in debit. Sangara�s
cheque to Hamac was
credited to its account and Hamac�s cheque to Territory Finance Corporation was
debited, Hamac�s account being
then overdrawn to the extent of �17,835. Also on
that day Hamac�s cheque to Territory Finance Corporation was credited to its
account
and its cheque to Sangara was debited. There was no other transaction
in that account. As far as Sangara is concerned the receipt
of this amount of
�45,000 would appear to be the amount of the loan made to it by Territory
Finance Corporation Limited. I am not
clear whether its payment to Hamac was in
part-satisfaction of the moneys agreed to be paid on 1st May or in payment of a
purchase
of shares in Coffee Products Limited. Hamac�s payment to Territory
Finance Corporation Limited seems only supportable on the basis
of the
agreement to repay �80,000 of a debt of which no trace can be found in the
books. It could equally be thought I suppose
that the ubiquitous Mr. Fox was
trying to juggle things to the satisfaction of everybody. On 16th May, yet
another Sangara board
meeting was held by Fox and Brook. Its only business was
to pass a resolution that Sangara purchase 30,000 fully paid �1 shares
in
Coffee Products Limited for the sum of �45,000 cum dividend. The relative
transfer was signed and sealed.
Hamac must have been
aware of what Fox was doing but whether Sangara was so aware is the crux of the
matter which I will have to
endeavour to analyze in a little more detail later.
On 30th May, Hamac
executed a letter of lien to the Australia and New Zealand Bank over 300,000 of
the fully paid ordinary shares
in Sangara which had been transferred to it on
15th May. It is not entirely clear but it seems that at this time the Bank
released
to Hamac 254,307 shares in Morobe Hotels Limited which it already held
in return for the deposit of these Sangara shares.
A meeting of the
Hamac Board was held on 31st May, at which were present this time Messrs. Drake
and McEachern, the latter of whom
seems to have had a very large if not the
major shareholding in Papua and New Guinea Development Corporation Limited,
which by
now, owing principally to the purported directors� transfers of
833,155 shares to it on 16th October, 1961, owned some 894,000 shares
out of an
issued capital of 936,000 shares in Hamac. At this meeting Drake who was
chairman reported that in telephone discussions
which preceded the drawing up
of the contract of 1st May it had been made clear that the assumption of
liability by Sangara to
creditors dissenting from the scheme of arrangement was
a condition precedent to the signing of that agreement. Fox reported that
at
the time he as a director of Hamac negotiated the contract with Sangara he was
well aware that this was a condition precedent
and that he conveyed to the
directors of Sangara this condition and it was acceptable to them but that it
appeared to have been
omitted from the formal contract which was subsequently
executed (i.e. the deed of 1st May). The meeting resolved that a supplementary
deed which was then tabled be executed to protect the Company�s position. It
was also resolved to forward to Sangara a fresh draft
of a deed to replace the
original of 1st May, and that the Sydney directors of that company be asked to
discuss the matter in Sydney.
At the same meeting the board passed a vote of
thanks to Fox for his efforts in the sale of Hamac investments in Morobe Hotels
Limited to Sangara.
I set out the deed
tabled and sealed at this meeting:
�THIS DEED is made
the Thirtyfirst Day of May One Thousand Nine Hundred and sixty-two BETWEEN
HAMAC HOLDINGS LIMITED (hereinafter
called �the Vendor�) of the One Part and
SANGARA (HOLDINGS) LIMITED (hereinafter called �the Purchaser�) of the Other
Part both
Companies being incorporated in the Territory of Papua & New
Guinea and having their registered office at James Building, Cuthbertson
Street, Port Moresby
WHEREAS
N2>A.������ The parties
hereto executed a document dated the First day of May One thousand nine hundred
and sixty-two (hereinafter
called the �Principal Agreement�) relating to the
sale by the Vendor to the Purchaser of the Vendor�s shares in Morobe Hotels
Limited.
N2>B.������ A
disagreement has arisen between the Parties hereto as to the validity and effect
of the Principal Agreement.
N2>C.������ In order to
resolve the disagreement the Parties have agreed to execute and exchange a new
Agreement prepared by the Vendor
but pending such execution in exchange have
agreed without prejudice to complete the Principal Agreement on the following
terms
NOW THIS DEED
WITNESSETH:
N2>1.������ Without
prejudice to the rights and liabilities of either party in the disagreement
hereinbefore recited the Parties hereto
agree to complete the Principal
Agreement tomorrow EXCEPT that the Vendor will not transfer to the Purchaser
those of the Vendor�s
shares in Morobe Hotels Limited subject to the equitable
charge in favour of FLORA SHAW STEWART and EXCEPT that the purchaser will
not
pay Fifteen Thousand Pounds (�15,000) of the purchase price to the Vendor.
N2>2.������ Immediately
after completion of the Principal Agreement the Purchaser will hand back to the
Vendor its shares in Morobe
Hotels Limited to be held by the Vendor as
Mortgagee with all the rights, powers and privileges of a Mortgagee as set out
in the
New South Wales Conveyancing Act to be held by the Vendor as security
for the Purchaser�s performance of this Agreement.
N2>3.������ The said
sum of Fifteen thousand pounds (�15,000) shall in any event be payable by the
Purchaser to the Vendor immediately
the Vendor assigns and transfers its house
at Lae to the said FLORA SHAW STEWART.
IN WITNESS WHEREOF
the parties hereto have hereunto set their hands and affixed their seals the
day and year first hereinbefore
written.
THE COMMON SEAL of
HAMAC HOLDINGS LIMITED was hereunto affixed by authority of a Resolution of the
Directors in the presence of:
E. A. JAMES &
CO.
Peter Drake.
Signed:
L. F. McEachern.
FOR AND ON BEHALF OF
SANGARA (HOLDINGS) LIMITED in the presence of:
J KAAD
Signed:
S. FOX
It is difficult to
understand what this document was designed to achieve. Although it refers to a
disagreement between the parties
it does not make any reference to dissenting
creditors. However, it does appear to release Hamac from its obligation to
transfer
to Sangara its shares in Morobe Hotels Limited subject to the
equitable charge in favour of Flora Shaw Stewart. Further, it contemplates
the
execution of another agreement wherein apparently all matters outstanding
between the parties would be dealt with. This agreement,
if ever it was
engrossed and executed, was not before the Court. The document was signed by
Fox on behalf of Sangara but there
is no record of nor reference to it at all
in the Sangara directors� minutes.
At a meeting in Port
Moresby of the Sangara Board on 8th June, at which were present Fox and Brook
the secretaries reported that
Hamac were seeking a rearrangement of the
agreement of 1st May and it was noted that this agreement did not fit in with
the �requirements
of the present circumstances� (whatever these may have been).
It was resolved that Territory Finance Corporation Limited be approached
to
ascertain whether that company would treat the original deed made between
Sangara and it as void and enter into another agreement
providing for a loan of
�40,000 repayable as to �10,000 when Mrs. Stewart�s shares were released to
Sangara. Fox, involved as he
was in the financial intricacies of both
companies, could not have been thinking too clearly because on paper at any
rate Territory
Finance had already loaned �45,000 to Sangara on 14th May.
According to the minutes a deed was signed and sealed in the presence
of the
board. Whatever effect was given to this document (which was not before the
Court) Mrs. Stewart�s shares were not then released
to Sangara.
At this time it was
clear to Sangara, or rather to Fox in Port Moresby, that the offer of new
shares to the existing Sangara shareholders
was proving unsuccessful. Only
about 1700 shares had then been applied for and Fox stated that Territory
Finance Corporation Limited
had undertaken to apply for the balance of the
shares and had already made application for the full amount of 560,000 fully
paid
shares. At a later meeting on 12th June, again consisting of Fox and
Brook, it was resolved that 300,000 of the new share be issued
to Territory
Finance Corporation Limited and the minutes state that share certificates were
signed and sealed for this number.
At a Sangara board meeting later that month
held in Melbourne, at which neither Fox nor Brook were present, approval was
given
to future directors� meetings being held in Australia, and it appears to
have been decided that a minute book be kept in Port Moresby
mainly for the
purpose of share transfers. This seems to have been the procedure followed
thereafter but it is impossible from
this meagre fact to say that the
Australian directors had lost confidence in Fox. Be that as it may the Sangara
directors� minute
book shows that no matters of policy were thereafter
discussed at meetings in Port Moresby.
Before attempting to
pronounce upon the validity or effect of the deed of 1st May, 1962, or that of
31st May it is necessary now
to consider the shareholding of Mrs. Flora Stewart
to which reference has been spasmodically made. In 1957 Mrs. Stewart, the then
owner, offered the Hotel Cecil to Morobe Hotels for �85,000. The actual
purchasers appear to have been Hamac and Hotel Cecil Limited
and they agreed to
purchase the hotel for that sum, �45,000 in cash being payable in September
1957 and the balance of �40,000
being satisfied by the issue of a debenture by
Hamac, such debenture being secured by the deposit of shares with a face value
of
�80,000. Included amongst these shares was share certificate No. 37 for
80,000 shares owned by Hamac in Morobe Hotels Limited. The
share certificate
was dated 29th August, 1957, which was about the time of the agreement of sale
with Mrs. Stewart. On the back
of that share certificate there appeared a blank
transfer form showing Hamac as the transferor and the seal of Hamac was affixed
in the presence of one Burton who was then a director, and countersigned by E.
A. James and Co., in Fox�s handwriting.
In May 1962 Mrs.
Stewart was still unpaid as to part of the principal and interest owing to her
and obviously would not surrender
her shares which were part of the 345,823
shares ostensibly contracted to be sold by the deed of 1st May. At this stage
she was
equally obviously the beneficial owner of these shares and Hamac had no
right to sell them nor was there any possible equity in
Sangara which could
compel their transfer to it. From various minutes it seems that negotiations
were being conducted from time
to time with Mrs. Stewart but it was not until
May 1965 that the moneys owing to her were paid. In a letter written by her on
11th
May, 1965, to Sangara she confirms the receipt of that company�s
remittance of �17,269.10.1 which she states to be in full settlement
for
payment of shares which stood to her name in Morobe Hotels Limited and which as
she said �I have sold to Sangara (Holdings)
Limited�. By the same letter she
confirms that this transaction settles all liability due to her from Sangara
and that she has
no further claim against Sangara or its subsidiary companies.
It must have been at some time after this latter date that the transferee�s
name and the number of shares was inserted in the blank transfer and the
document styled transfer of shares for the 80,000 shares
was signed on behalf
of Sangara by its then directors Eskell and Sutherland. It must have been then,
too, that in the blank form
of transfer on the back of the share certificate
the consideration �as per agreement of 1st May 1962� was inserted. However, I
will shortly consider the legal position with regard to the transfer of these
shares.
It will be
convenient at this place to see what happened to the balance of the shares
allegedly sold by Hamac to Sangara in Morobe
Hotels Limited. As I have said
254,307 shares seem to have been released by the Australia and New Zealand Bank
to Hamac on or about
31st May, 1962. These included 61,764 shares in Morobe
Hotels Limited covered by share certificate No. 26 in the name of Hamac
Holdings and 40,000 shares in the Hotel company covered by share certificate
No. 36. These shares were originally deposited at the
Bank under a letter of
lien of 7th October, 1957. The remaining shares, viz. 152,543, were those
contained in the ten share certificates,
Exhibit �NN�, which I assume to have
been held by the Bank under a supplementary lien or liens. The history of all
these shares
after their release by the Bank is uncertain. There is reference
to their being redeposited with Hamac as security for the carrying
out of the
agreements or agreement, whatever it was, that was arrived at in May 1962 but
the documents before the Court do not
enable me to say in whose physical
possession they were at this time. What is certain is that the blank form of
transfer for the
61,764 shares which had been deposited with the Bank in August
1957 was filled in by describing Hamac Holdings as the transferor,
Sangara
(Holdings) Limited as the transferee, and the number 254,307 being inserted as
the number of shares being transferred,
with the share particulars contained in
certificate No. 26, No. 36 and the other ten certificates set out in the margin
and at
the foot of the document. Again the consideration was stated as being
�as per agreement of the 1st May, 1962�. The transfer does
not contain any date
to show when it was signed or sealed (it was executed at some time after Mr.
Eskell joined the board of Sangara
which was at the end of June 1964). It is
this document which was described by Mr. Deane as a forgery.
It only remains to
say that from the latter part of 1962, although Sangara utilized the services
of Fox in raising finance and apparently
at the same time getting itself deeper
into financial difficulties, it does not appear to have entrusted him with any
matters of
policy-making, and control over the affairs of the company seems to
have been exercised exclusively by the directors� meeting usually
in Sydney.
Whatever financial difficulties Sangara found itself in seem to have stemmed
from the misplaced optimism of its directors
with regard to its share issue in
June 1962 and its subsequent attempts to raise finance.
Hamac�s claim before
the learned trial judge was, inter alia, for a declaration that the deed of 1st
May was void. In its statement
of claim it alleged that the shareholding
represented by its shares in Morobe Hotels Limited was its main undertaking and
that
by art. 102 (a) of its Articles of Association any sale or disposal by the
directors of its main undertaking had to be subject to
ratification by the
shareholders in general meeting. The sale to Sangara was never so ratified nor
was it ever authorized. In argument
Mr. Deane submitted further that any
contract of sale of this shareholding should have been expressed to be subject
to such ratification
and, as I understood him when reiterating this argument
before us, the fact that it was not so expressed should have put the purchaser
on inquiry. It was also alleged that contrary to art. 107 of the Articles of
Association Hamac�s seal was affixed to the deed without
the authority of the
directors previously given and it was not signed and countersigned as required
by that article. Further it
was alleged that at all relevant times Hamac had no
directors or officers and no person had authority to bind it. As a consequence
the deed was never authorized, entered into, ratified or executed by Hamac, and
further it was alleged that Sangara knew of all
the foregoing attributes of
invalidity. Before the learned trial judge and before us Mr. Henderson, for
Sangara, submitted that
Hamac�s shareholding in Morobe Hotels Limited was not
its main undertaking and that its seal to an outsider would appear to have
been
regularly affixed. He did not and could not really contend that the provisions
of art. 74 of Hamac�s Articles of Association
had been complied with nor say
that there were any validly appointed directors to authorize or enter into the
contract of sale
of the shares. But, so he argued, even if in fact the
shareholding in the Hotel company was Hamac�s main undertaking and its seal
was
improperly affixed there was nothing in the evidence from which it could be
reasonably inferred that Sangara knew of these
matters or that it was not
entering into a contract with a properly constituted and authorized board of
directors.
The learned trial
judge found that Hamac�s main undertaking at the relevant date was its interest
in Morobe Hotels Limited and he
found further that at the relevant time Sangara
left its acquisition of Hamac�s interest in Morobe Hotels Limited to Stephenson
Fox as its agent and that his interest in and knowledge of Hamac�s affairs was
entirely complete. He went on to find that Fox knew
of the disability of the
alleged directors of Hamac, that he knew that Hamac�s interest in Morobe Hotels
was its main undertaking
and that the sale or disposal of this interest had not
been ratified by the Hamac shareholders in general meeting or in any way
at
all. He found also that good faith was absent and that a plan was devised to
strip Hamac of its valuable hotel interests and
pass them to Sangara and that
Fox was the executive of this plan. In his view Sangara could not rely upon the
principle of Royal British Bank v. Turquand[dlxxxiii]�because
Sangara must be taken to have known that the internal regulations of Hamac had
not been complied with in the sale. On the
appeal Mr. Henderson, for Sangara,
strenuously contended that the principles of Turquand�s case[dlxxxiv]�as
expounded and developed in later cases were applicable and that there was
nothing in the evidence to fasten Sangara with any
knowledge which Fox may have
possessed of the irregularities existing both within the Hamac structure and in
its conduct of its
affairs.
It is clear enough
that the so-called directors of Hamac were invalidly appointed and that the
subsequent share issues or transfers
made under their direction were equally
invalid. It is equally clear that there was no resolution authorizing the
making of the
agreement for sale with Sangara nor for affixing the seal of
Hamac to the so-called deed of 1st May and further that the seal was
not
affixed in the presence of a director and countersigned by the Secretary as
required by art. 107. If reliance had to be placed
upon the fact of this
document being a deed it would be a nullity as such (see Equity Nominees
Ltd. & Anor. v. Tucker & Anor.[dlxxxv]).
The question whether
the sale of Hamac shares in Morobe Hotels Limited was a sale by the purported
directors of its main undertaking
has occasioned me more difficulty. Mr.
Henderson argued that one must look at the legal reality of the situation
existing at the
time of the agreement for sale and at this time it is clear so
he said that Hamac�s main undertaking was the holding of shares in
subsidiary
companies and that when one looks at the position of these companies they all
are of relatively equal importance. He
was at pains to point out the difficult
financial situation in which Morobe Hotels found itself and that although two
of the hotels
which formed part of the assets of the Hotel company were making
trading profits the capital position of the company was not at
all good.
Further, of the shares which were contracted to be sold 254,307 were
hypothecated to the Bank as security for an overdraft
and 80,000 to Mrs.
Stewart as security for payment of the balance of the purchase money owing on
the Hotel Cecil which had been
purchased from her nearly five years previously.
In addition, their secured debts were piling up and in fact receivers were
appointed
six months later to recover �58,000 of such debts. However, I think
it reason able to infer that by March 1962, those in de facto
control of Hamac
felt that the only assets of any potential that the company had were the hotels
at Goroka and Lae and the detailed
financial analysis made by Mr. Deane amply
bears this out. Indeed it seems to me that unless Hamac at or about this time
could
have obtained a massive infusion of new capital its position overall was
hopeless. Whilst I cannot share the learned trial judge�s
certainty that
Hamac�s main undertaking at the relevant date was its interest in Morobe Hotels
Limited I cannot on the other hand
conclude that he was wrong in finding as he
did.
Mr. Deane submitted
that the rule in Turquand�s case[dlxxxvi]�only
operates where a number of circumstances are found to exist. These include good
faith on the part of the person invoking the
rule and absence of knowledge or
notice of any matters which would make the transaction in question void or
invalid, the absence
of suspicious circumstances putting the person invoking
the rule on inquiry and his acting on the basis that the person with whom
he
was dealing had the necessary authority. He argued that the contract for the
sale of the Hotel company shares should have been
expressed to be subject to
ratification by the shareholders in general meeting and such a qualification
not being present in the
document Sangara should have been on notice that
Hamac�s Articles had not been complied with. However, before this argument
could
succeed it would be necessary in my view for Sangara to be aware that the
shares in the Hotel company were Hamac�s main undertaking.
It was argued to the
contrary that the matters relied upon by Mr. Deane were matters arising within
the internal conduct of Hamac�s
business and not such as to put the directors
of Sangara on inquiry.
I begin by asking
the question whether an outsider acting in good faith and with no reasonable
ground for suspicion entering into
such a contract as is evidenced by the
document of 1st May would be entitled, at any rate after consideration had
moved from him,
to hold the vendor to its agreement. In my opinion the invalid
appointment of directors and allotment of shares stemmed from a properly
constituted meeting of shareholders (and that this meeting was properly
constituted was not contested), and as it seems that the
meeting was directed
to be called by the Court for the purpose of electing directors it is
reasonable to assume that Hamac held
out the persons elected (albeit invalidly)
as directors of the company. Of itself the fact that the entry into the
contract or
the affixing of the seal to the deed was not authorized by a
meeting of the board of Hamac is clearly vis-�-vis the outsider a matter
of
internal regulation and one into the regularity of which he is neither bound
nor has any right to inquire. With some hesitation
I think the same can be said
of the improper affixing of the seal. To the outsider acting in good faith and
with no reasonable
ground for suspicion the seal might well appear to be
properly affixed. Fox of course must be taken to have had at all relevant
times
detailed knowledge of the financial position of Hamac and its subsidiaries and,
as a professional secretary, of the requirements
of Hamac�s Articles of
Association. However, I cannot escape the suspicion that his failures to see
that proper procedures were
followed could have been due to crass and
invincible ignorance. It is perhaps worthy of note that at the meeting of 28th
September,
1961, at which the pseudo directors were elected the chairman was a
solicitor of this Court.
The real question is
whether Sangara is such an outsider as I have been positing and the answer to
this question involves a close
consideration and determination of the
relationship between that company and Fox. As well as his close involvement in
the affairs
of Hamac he seems also at all relevant times to have been a
director of Territory Finance Corporation Limited and of Papua and New
Guinea
Development Corporation Limited which by now had a controlling interest in
Hamac. He or his firm were also the secretary
of these companies but in my
opinion there was no evidence to fasten Sangara with knowledge of his
activities, whatever they were,
in relation to this group of companies.
The directors of
Sangara all resided in Australia and up to May 1962 the business undertaking of
the company was the plantation
at Sangara. E. A. James and Co., or Fox as its
secretary, seems to have been relied upon both to keep the books of the company
and to generally supervise the management of the plantation. He was present at
the annual meeting in Sydney on 26th June, 1961,
advising of the financial
position of the company. He presided as an alternate director in Port Moresby
at a directors� meeting
on 28th June at which a great deal of detail was gone
into concerning the equipment for and the running of the plantation. However,
I
deduce no more from this than that on his return to Port Moresby from the
general meeting as the man on the spot he could have
been acting as the
intermediary between the Australian board and the plantation manager. At all
material times he obviously had
the confidence of the directors. He was also a
shareholder of the company.
Mr. Deane submitted
that during the relevant periods Fox was for all practical purposes the person
who represented Sangara: he was
its eyes, ears and hands, and in fact was the
board of directors. As he correctly stated during the period from 24th March,
1961,
to 12th June, 1962, there were 18 meetings of the Sangara board of
directors. At 15 of these the only persons present were Fox and
either Brook or
Davis who were both his employees and who were both alternate directors of
Sangara. At two of these meetings the
only persons present were Brook and Davis
and at only one were any other directors present. This was the meeting of 28th
April
at which Fox, Tytherleigh and Notson were present. However, as Mr
Henderson riposted, ten of the meetings were concerned solely
with the transfer
and issue of shares. At a further three meetings there were other formalities
dealt with; for example, fixing
the date of the annual meeting and a formal
recommendation of a dividend, and one such meeting (that to which I have earlier
referred)
dealt with the local management of the plantation. When it came to a
really important matter of policy members of the board came
to Port Moresby
from Australia. This was for the meeting which was spread over two days between
28th April and 2nd May, 1962. So
far as the documents show this was the first
occasion on which Hamac obtains any mention in the affairs of Sangara. This is
not
to say that there had not been correspondence or conversations between Fox
and the Australian directors prior to their arrival in
Port Moresby, but it is
a matter of sheer conjecture as to what information they possessed before that
date. It seems reasonable
to infer that this major change in policy or
direction brought the Australian directors, Tytherleigh and Notson, to Port
Moresby
in April after Fox had interested Papua and New Guinea Development
Corporation and Stitt, who seems to have had an interest in this
company, in
being associated with Sangara.
It would have been
obvious by April 1962 to anyone controlling Hamac that no finance could be
raised by it to buy the Brewery and
with the legalisation of native drinking a
real possibility in the near future a company which could control a brewery
with hotel
outlets ought to have every chance of a successful life. I cannot
see any evidence to show that this transaction of 1st May was
entered into
other than in good faith on the part of Tytherleigh and Notson. The minutes of
the meeting of 1st May show that the
policy of acquiring the controlling
interest in the Brewery was decided upon and that further rosy visions of hotel
ownership were
being entertained by the decision to inquire into the
possibilities of acquiring the Kainantu Hotel. They were also prepared to
add
representatives of the Papua and New Guinea Development Corporation Limited on
to the board. Fox, who had a finger in every
pie, could easily have painted a
glowing picture of the future at the same time being mindful and hopeful that
�50,000 and 565,000
Sangara shares were to revivify Hamac.
Whilst a great deal
had been left to Fox I cannot see that at this stage he was anything like being
in the position of �the directing
mind and will of the corporation, the very
ego and centre of the personality of the corporation� (see per Viscount Haldane
L.C.
in Lennard�s Carrying Company v. Asiatic Petroleum Co. Ltd.[dlxxxvii]). All
that I think can reasonably be inferred from the evidence is that he was acting
as some sort of an agent for Sangara. There
is some slight evidence that before
the signing of the agreement some conversation took place between Drake
(another pseudo director
of Hamac) and either Tytherleigh or Notson. Again I assume
that some discussion was going on between 28th April and 2nd May as to
the
terms of the agreement. It is impossible on the evidence to say how much Fox
disclosed to Tytherleigh and Notson of his connection
with Hamac but to use the
test propounded by Vaughan Williams J in In re Hampshire Land Company[dlxxxviii], i.e.
was it within the scope of his duty to Hamac to give notice to Sangara of the
information he had got, I cannot see that there
is the slightest evidence that
it was nor, secondly, that it was within the scope of his duty as the secretary
of Sangara to receive
such notice (see also In re David Payne & Co.[dlxxxix]); and
I can see nothing in the evidence to show that Hamac and Sangara were not both
at arm�s length in the negotiations leading
to the conclusion of the agreement.
However, in my
opinion the method of affixing Hamac�s seal to the deed of 1st May should have
put Sangara on notice that all was
not well. The association of the Sangara
directors with Fox would appear from the company records before the Court to
have been
of such long duration and so close that they could not have failed to
know that he was, if not the sole proprietor of E. A. James
and Co., at least
the principal of the firm in Port Moresby. They must have known also that he or
his firm was the secretary of
Hamac. It is basic to the rule in Turquand�s
case[dxc]�that
outsiders who deal with a company are deemed to have notice of its public
documents and so of its Articles of Association.
Consequently, assuming for the
purposes of these transactions that Tytherleigh and Notson were Sangara they
must be affected with
notice that the Hamac seal was affixed by Fox as director
and countersigned by himself as secretary. The fact that the words �E.
A. James
& Co.� were also written by one of his employees does not in my view alter
the position. And so they must be deemed
to have notice that the deed was
invalidly executed. This being so I cannot see how Sangara could rely on the
validity of the deed.
After the 1st May
the position becomes more confusing. One must assume I think that Tytherleigh
and Notson were aware of the tight
liquid position of Sangara and that its
current account was in debit. There is no evidence to show what financial
arrangements
they had in mind to meet the immediate payment of �2,500 and the
further payment of �47,500 on 31st May�both payable before subscription
monies
for the new share issue could be expected to be in hand. One can only assume
that they left it to Fox to arrange the necessary
bridging finance and that the
transactions of 15th and 16th May were carried out if without their actual
knowledge at least with
their prior general approval. There is nothing in the
Sangara minutes to show otherwise and it may be that at this stage Fox became
for all practical purposes Sangara. So far as the learned trial judge held that
Fox�s knowledge was Sangara�s knowledge in the
negotiations at the end of the
month of May leading to the purported deed of 31st May, I cannot see that he
has drawn any wrong
inference from the scrappy material before him nor that he
is wrong in his conclusion that this document was void. In the result,
although
by what appears to be a slightly different route, I arrive at the same
conclusion as his Honour that neither document
can stand nor be relied upon and
this conclusion in my opinion vitiates the subsequent transfer of the 254,307
shares effected
by the �forged� transfer endorsed on the back of share certificate
No. 26. Leaving aside the question of the effect of a forged
transfer the
transfer itself can only find support in the �Deed� of 1st May. That support
being withdrawn it can find no other
justification in any matter put before the
Court.
However, in my view
the transfer of the 80,000 shares stands on a different footing. Although the
deed of 31st May can be given
no effect it does I think serve to show that the
intention of the parties at the time was to withdraw these shares from the
purported
sale pending some satisfactory arrangement being made with Mrs.
Stewart to liquidate the debt owed to her. There is no evidence
to show that
any such arrangement was ever made before 11th May, 1965, when Sangara paid her
out, apparently in full. The evidence
shows that she was an equitable
mortgagee, that a blank transfer was given to her duly sealed and she must have
had at the least
an implied power of sale of these shares. It is I think a
reasonable inference from her letter of 11th May, 1965, that she regarded
herself
as having exercised that power. There is no evidence as to how or in what
circumstances the form of transfer on the back
of share certificate No. 37 was
filled in, but whatever be the explanation I fail to see how the transfer could
be said to be pursuant
to the �Deed� of 1st May, 1962. That document purported
to obligate Sangara to accept liability to Mrs. Stewart for and to pay her
an
amount not exceeding �7,500 and further contains an undertaking by Hamac to
discharge the encumbrance in her favour (albeit
with the assistance of
Sangara�s �7,500) by 31st May, 1962. Obviously neither of these obligations was
discharged and one must
conjecture that some other arrangement superseded the
provisions contained in the document.
It is true that
there was no evidence before the Court of the events leading up to the handing
over of the share certificate by
Mrs. Stewart to Sangara save for the letter of
11th May, 1965, which was tendered on behalf of Sangara without objection by
counsel
for Hamac. But it is also true that as a result of the payment of
�17,269.10.1 by Sangara to her she treated the transaction as
a sale by her to
Sangara. There is nothing in the evidence to show that she had no right to sell
nor that Sangara did not acquire
a good title by virtue of such sale. No
interrogatories and answers were tendered to impugn this sale and there is
nothing in the
Hamac directors� minutes to show that that Company had any part
in the transfer of these shares to Sangara. Hamac sought a declaration
that
Sangara held these shares in trust for it. In my view the onus was on Hamac to
show that they were affected with a trust and
it has not discharged that onus.
Accordingly I would allow the appeal in respect of the 80,000 shares and
declare that the appellant
is entitled to remain on the share register of
Morobe Hotels Limited as the owner of those shares. Otherwise I would dismiss
the
appeal.
FROST J: In this case, the respondent, which was a company the
liquidation of which had been stayed, claimed a declaration that a deed under
the seal of the company dated 1st May, 1962, whereby it agreed to sell to the
appellant 345,823 5/- shares owned by the respondent
in a company called Morobe
Hotels Ltd., and a deed supplemental thereto dated 31st May, 1962, also under
seal of the company, were
both void, and a declaration that the appellant holds
such shares in trust for the respondent, together with other consequential
relief. The respondent alleged that the deeds were void upon three grounds:
firstly, as the directors acting on behalf of the respondent,
although
apparently properly appointed by the shareholders, did not, at the time of
appointment, hold qualification shares as required
by art. 74 of the company�s
Articles of Association, they had no authority to bind the company in contract;
secondly, as there
was no minute of a resolution of the de facto directors
authorizing the affixing of the seal of the company to the deed dated 1st
May,
1962, the seal was affixed without the authority of those directors and thus
the requirements of art. 107 were not complied
with; thirdly, both deeds were
void on the ground that the sale of the shares was a sale by the directors of
the company�s main
undertaking and that, contrary to art. 102 (a) of the
Articles of Association, it had not been ratified by the company in general
meeting. As the facts and issues have been fully stated by the Acting Chief
Justice, it is unnecessary for me to set them out.
Although the whole
issue in this case is whether the respondent can rely upon these irregularities
to set aside the deed of 1st
May, 1962, as the learned trial judge pointed out,
any one of the three matters of irregularity would, apart from that issue, be
sufficient to render the deed a nullity. The first irregularity was not
disputed by Mr. Henderson and as to the second irregularity,
he submitted that
it was remedied by the execution of the deed of 31st May, 1962, which amounted
to a ratification of the earlier
deed. But if the earlier deed is void, Mr.
Henderson did not argue that the second deed could stand alone, so this
submission can
only succeed if the first deed is upheld. Accordingly, I propose
to deal with the third ground which was strongly contested by Mr.
Henderson.
The question is what
is the meaning to be given to the term �main undertaking�. Mr. Henderson
submitted that the company had only
one undertaking, which was the ownership of
shares in other companies, and thus the �main undertaking� could only be
constituted
by these shares in their entirety. In my view, this submission
cannot be right. When used in a debenture, it is well established
that
�undertaking� means all the property of the company. The word �undertaking�
appears in the plaintiff�s Memorandum of Association,
one of the objects for
which the company was established being �to acquire and take over any business
or undertaking, and the whole
or any of the assets and liabilities of such
business, or undertaking, and to carry on the same, or to dispose of, remove or
put
an end thereto or otherwise deal with the same as may seem expedient.�
(Clause 3 (d)). Insofar as the dictionary meaning of �undertaking�
is
concerned, it is �anything undertaken; any business, work or project which one
engages in or attempts; an enterprise� (Webster,
2nd ed.). The Shorter
Oxford Dictionary includes as one of the meanings of �undertaking�,
�enterprise�. These references afford a guide to the meaning of �undertaking�
in art. 102 (a). In my opinion, it means business or enterprise, and more
particularly, in the connotation of art. 102 (a), it
means the balance of
assets over liabilities of such business or enterprise. I consider that each of
the subsidiary companies of
the plaintiff can be considered as a business or
enterprise, so that the assets of each business or enterprise means the shares
in each such company. Turning to the word �main�, its meaning involves a
comparison of either the parcels of shares owned in each
subsidiary company or
the businesses conducted by each subsidiary company. In my opinion, the
appropriate measure of comparison
is the value of the shares or the value of
the business conducted by each subsidiary company upon the basis of
profitability.
As the Acting Chief
Justice has shown, the assets of Aroana Estates Ltd. and Ela Services Ltd. had
been sold prior to May 1962,
the proceeds, in the case of the former company
having been disbursed between Papua and New Guinea Development Corporation and
the plaintiff, and in the case of the latter company, to Papua and New Guinea
Development Corporation. The facts also show that
the assets of Eriama Estates
Ltd. were worthless and Wanigela Plantations Ltd. practically worthless. Even
on Mr. Henderson�s analysis,
the assets of Morobe Hotels Ltd. were worth in the
excess of assets over liabilities �30,804. The value of the book debts owed by
the subsidiary companies to the plaintiff were worthless or practically
worthless. Thus the only valuable asset of the company
was the block of shares
in Morobe Hotels Ltd. Further, this was the only company which was carrying on
business in May 1962. Both
the Goroka Hotel and the Hotel Cecil were making
profits and although the Wau Hotel showed a small loss for the preceding year,
the Valuer-General said in evidence that under proper management he considered
that it would be profitable. Thus this company was
the only profitable company
in which the respondent held shares. For these reasons I have come to the
conclusion that the shares
it owned in Morobe Hotels Ltd. constituted the
respondent�s main undertaking. As the sale of these shares was not ratified by
the
shareholders in general meeting, his Honour, in my judgment, was right in
holding that the deed of 1st May, 1962, was made in breach
of art. 102 (a) of
the Articles of Association.
Mr. Henderson made
no submission based on art. 100, probably because it would not cover the whole
of his case. But as he was concerned
to argue that the learned trial judge was
wrong in describing the directors� meeting of 16th October, 1961, as a �hollow
farce�,
I propose to refer to it. Article 100 provides:
�All acts done by
any meeting of the Directors or by a Committee of Directors or by any person
acting as Director shall not withstanding
that it be afterwards discovered that
there was some defect in the appointment of any such Director or person acting
as aforesaid,
or that they or any of them were disqualified be as valid as if
every such person had been duly appointed and was qualified to be
a Director.�
The relevant
statutory provision to be found in the Companies Ordinance, 1912-1926,
s. 250 (4), has the same effect. For an outsider to gain the protection of that
section, good faith must be shown.
Channel Collieries Trust Ltd. v. Dover
etc. Light Railway[dxci], a
case to which both counsel referred. In that case, the facts were somewhat
similar to the present, in that directors were appointed
who did not hold the
necessary qualification shares, but the shares were allotted to them
subsequently on the same day. However,
after hearing the evidence of the
directors concerned, the learned trial judge accepted that evidence and found
that all the directors
were acting �in perfect good faith, were not aware of
the invalidity of the appointment by reason of the want of qualification,
and
they honestly believed that it was sufficient if contemporaneously with,
although in point of time immediately after, their
appointment they obtained
the qualifying shares� (per Lord Cozens-Hardy M.R. at p. 511), and it was
accordingly held that the action
of the directors in allotting further shares
was validated by a statutory provision similar to s. 250 (4). In the present
case,
there was a lapse of time after the purported appointment of directors
before the allotment of the necessary qualifying shares was
made to them, but
this is not necessarily fatal in the application of art. 100. However, this
case is distinguishable on the ground
that, as none of the persons concerned
was called as a witness and good faith was strongly in issue, there was no
evidence to justify
a finding of good faith. I consider that, unless such
evidence was called, prima facie the directors would be assumed to know the
meaning and effect of art. 74 and the consequent invalidity of their
appointments. Oakbank Oil Co. v. Crum[dxcii]; The
People�s Prudential Assurance Co. Ltd. v. The Australian Federal Life
& General Assurance Co. Ltd.[dxciii].
Thus the onus of proof on this issue was on the appellant. Accordingly, the
provisions of art. 100 or s. 250 (4) would not avail
the defendant.
I turn now to Mr.
Henderson�s main argument that the respondent is bound by the deed of 1st May,
1962, despite the irregularities
in the appointment of the directors and the
affixing of the seal and the absence of ratification of the deed by the
shareholders
in general meeting. He relied on the rule in Royal British Bank
v. Turquand[dxciv]�or,
more particularly, on the principles of estoppel as laid down by Diplock L.J in
Freeman and Lockyer v. Buckhurst Park Properties (Mangal) Ltd.[dxcv]. It
is logical first to refer to the doctrine of constructive notice which was
expressed by Lord Hatherley in Mahony v. East Holyford Mining Co.[dxcvi]�as
follows:
�Every joint stock
company has its memorandum and Articles of Association; ... Those Articles of
Association ... are open to all
who are minded to have any dealings whatsoever
with the company, and those who so deal with them must be affected with notice
of
all that is contained in those two documents.�
The directors of the
defendant are also deemed to know the proper meaning and consequences of
non-compliance with those Arcticles.
Oakbank Oil Co. v. Crum[dxcvii].
Thus, in this case,
the directors of the appellant are deemed to have knowledge of the provisions
of arts. 74, 102 (a) and 107,
supra, and the effect of such provisions, but
these irregularities could not be discovered from the public documents of the
company.
Under these circumstances the rule in Turquand�s case[dxcviii], may
enable the appellant to bind the respondent to the contract.
�The so-called rule
in Turquand�s case [1856] EngR 470; (1856) 6 El. & Bl. 327 is I think correctly
stated in Halsbury�s Laws of England: �But persons contracting with a
company and dealing in good faith may assume that acts within its constitution
and powers have
been properly and duly performed and are not bound to enquire
whether acts of internal management have been regular�. ... I leave
aside the
question what in the application of the rule is the meaning of �good faith� ...
It is a rule designed for the protection
of those who are entitled to assume,
just because they cannot know, that the person with whom they deal has the
authority which
he claims. This is clearly shown by the fact that the rule
cannot be invoked if the condition is no longer satisfied, that is, if
he who
would invoke it is put upon his inquiry. He cannot presume in his own favour
that things are rightly done if inquiry that
he ought to make would tell him
that they were wrongly done�. Morris v. Kanssen[dxcix].
No argument was
submitted by either counsel on the meaning of �good faith�, nor was any case
cited in which, although it was not
shown that the persons contracting had
knowledge or were put on inquiry, the rule could not be invoked on the ground
that there
was otherwise lack of good faith on the part of those persons. But
the overriding requirement of bona fides has been consistently
propounded as
part of the rule since Mahony v. East Holyford Mining Co.[dc], (in
those terms by Lord Chelmsford at p. 892, and as absence of fraud by Lord
Hatherley at p. 895), and I see no reason for limiting
its general meaning,
which I take to denote honest dealing (cf. the sale of goods legislation, Goods
Ordinance 1951, s. 5 (2)).
The learned trial
judge found that the appellant, through Stephenson Fox, had knowledge of the
irregularities and there was an absence
of good faith and thus the appellant
was not entitled to the protection of the rule. Mr. Deane strongly argued that
the onus of
proof was on the appellant to bring itself within the rule. Upon
this question, Mr. Henderson�s submission is important that the
basis of the
rule is estoppel, relying upon the authority of Freeman and Lockyer v. Buckhurst
Park Properties (Mangal) Ltd.[dci]. In
that case, Diplock L.J, after analyzing the relevant law said:
�If the foregoing
analysis of the relevant law is correct, it can be summarised by stating four
conditions which must be fulfilled
to entitle a contractor to enforce against a
company a contract entered into on behalf of the company by an agent who had no
actual
authority to do so. It must be shown:
(1)����� that a
representation that the agent had authority to enter on behalf of the company
into a contract of the kind sought
to be enforced was made to the contractor;
(2)����� that such
representation was made by a person or persons who had �actual� authority to
manage the business of the company
either generally or in respect of those
matters to which the contract relates;
(3)����� that he
(the contractor) was induced by such representation to enter into the contract,
that is, that he in fact relied
upon it; and
(4)����� that under
its memorandum or articles of association the company was not deprived of the
capacity either to enter into
a contract of the kind sought to be enforced or
to delegate authority to enter a contract of that kind to the agent.� (at pp.
505-506).
The way in which Mr.
Henderson put his case under this statement of the law was that, following Mahony
v. East Holyford Mining Co.[dcii],
under the constitution of the company, it was the conduct of the shareholders
who were entitled to appoint the directors which
the appellant must be taken to
have relied upon as a representation that the persons acting as directors of
the plaintiff, including
Stephenson Fox, were its directors. (Freeman and
Lockyer v. Buckhurst Park Properties (Mangal) Ltd.[dciii]).
This submission would bring the defendant�s case within pars. 1 and 2 of the statement
of law made by Diplock L.J, but Mr. Deane
submitted that the defendant could
succeed under par. (3) only if it was proved that that company was induced by
such representation
to enter into the contract, that is, it in fact relied upon
it. In my view, if estoppel applies generally and not only in the type
of case
before Diplock L.J (supra), the onus of proof would be on the party seeking to
uphold the contract. As no evidence was
called by the appellant, it would
follow that the appellant had not sustained the onus of proof and was therefore
not able to bring
itself within the rule. However, as the rule was expressed by
Lord Hatherley in Mahony v. East Holyford Mining Co.[dciv]�(supra),
it seems that the maxim omnia praesumuntur rite esse acta is the foundation of
the rule, and Lord Simonds expressly stated
in Morris v. Kanssen[dcv]�that
the rule was an application of the maxim. Upon this basis, the onus would on
the usual operation of the maxim be shifted to
the party which seeks to set
aside the contract. That was the view expressed during argument by Vaughan
Williams L.J in In re Hampshire Land Company[dcvi], and
I consider that it is the rule which I should apply.
The first question
is thus whether Fox�s knowledge, which can only be the knowledge he is deemed
to have of the Articles and their
effect, can be imputed to the appellant. Mr.
Henderson submitted that Fox�s knowledge was only that of a de facto director
and
secretary of the appellant and director and secretary of the respondent. He
relied upon In re Hampshire Land Company[dcvii]�as
establishing that Fox�s knowledge was not to be imputed to the appellant. In
that case, Vaughan Williams J referred to Mellis
L.J negativing the �general
proposition that the knowledge of the common officer is always the knowledge of
the two companies.
But the moment you have done that you have to ask yourself
this: where is the line to be drawn, or what is the test to be applied
in order
to say whether or not in each case the knowledge of the common officer is the
knowledge of each company employing him?
It seems to me that, broadly, the
Lords Justices do draw the line thus, that the knowledge which has been acquired
by the officer
of one company will not be imputed to the other company, unless
the common officer had some duty imposed upon him to communicate
that knowledge
to the other company, and had some duty imposed on him by the company which is
alleged to be affected by the notice
to receive the notice . . . It seems to me
that that is not at all the case here. The case is very much more like the one
which
both Mr. Bramwell Davis and Mr. Jenkins had to admit was an exception to
the general rule that they sought to lay down, for they
admitted that if Wills
had been guilty of a fraud, the personal knowledge of Wills of the fraud that
he had committed upon the
company would not have been knowledge of the society
of the facts constituting that fraud; because common sense at once leads one
to
the conclusion that it would be impossible to infer that the duty, either of
giving or receiving notice, will be fulfilled where
the common agent is himself
guilty of fraud. It seems to me that if you assume here that Mr. Wills was
guilty of irregularity�a
breach of duty in respect of these transactions�the
same inference is to be drawn as if he had been guilty of fraud. I do not know,
I am sure, whether he was guilty of actual fraud; but whether his conduct
amounted to fraud or to breach of duty, I decline to
hold that his knowledge of
his own fraud or of his own breach of duty is, under the circumstances, the
knowledge of the company.�
(pp. 748-750).
This judgment and
particularly the passage last cited was approved and applied in J C.
Houghton & Co. v. Nothard, Lowe & Wills Limited[dcviii].
If Fox is to be
considered only as a common director or secretary, as the appellant was not
bound to inquire into the internal management
of the respondent and as, Fox
being a party to the irregularities, no assumption can be made that he would
disclose those irregularities,
in my opinion, under the rule laid down in In
re Hampshire Land Company[dcix].
Fox�s knowledge should not be attributed to the appellant.
His Honour
considered that case inapplicable on the ground that, in the negotiations
between the parties, Fox was the appellant�s
agent to whom it left the entire
conduct of the transaction. I assume that his Honour had in mind the principle
of such cases as
Lennard�s Carrying Co. Ltd. v. Asiatic Petroleum Co.
Ltd.[dcx]�where
the fault of a manager who represented �the directing mind and will of the
corporation� was held to be the personal fault
of the company. (See p. 713, per
Viscount Haldane L.C.). See also H. L. Bolton (Engineering) Co.
Ltd. v. T.J Graham & Sons Ltd.[dcxi]; The
Lady Gwendolen[dcxii]�and John
Henshall (Quarries) Ltd. v. Harvey[dcxiii].
The conclusion I
draw from the evidence was that up to the date of the execution of the deed of
1st May, 1962, Fox�s role was the
appellant�s active director in Papua. Thus he
presided at directors� meetings and whilst most of these meetings were
concerned
with formal matters, there was at least one meeting when important
business affecting the plantation was resolved. It is true that
he carried out
the negotiations between the appellant and the respondent and acted for both
companies, but this was a circumstance
also to be found in In re David Payne
& Co. Limited[dcxiv]. In
that case, the Court of Appeal refused to attribute the knowledge of a common
director who had conducted negotiations for a
loan upon the security of a
debenture to the lender company. I have accordingly come to the conclusion that
up to the date of the
deed, Fox is to be considered a common director and
accordingly under the rule in In re Hampshire Land Company[dcxv], his
knowledge of the non-compliance by the respondent with the relevant Articles is
not to be attributed to the appellant.
But this is not the
end of the matter so far as the rule in Turquand�s case[dcxvi]�is
concerned. The learned trial judge found that a plan was devised to strip the
respondent of its valuable hotel interests and
pass them on to the appellant. I
assume this to be the basis of his finding that there was a want of good faith
on the part of
the appellant. For myself, I am unable to come to the conclusion
that the existence of such a plan can be inferred from the effect
of the
contract, because from the appellant�s financial position as analyzed by the
Acting Chief Justice, it seems to me that it
could not be said that as at 1st
May, 1963, the consideration provided for by the deed was inadequate. Because
of the fall in value
of the appellant�s shares��5,001 was all that was realized
on the sale by its bankers of 166,400 of Sangara shares�the transaction
did
turn out to be ruinous, but in my opinion this could not have been reasonably
expected as at 1st May, 1962. In short, I do
not consider that any want of good
faith can be inferred from the terms of the deed alone. It is also appropriate
for me to refer
at this stage to the forged transfer of shares which appears
endorsed on the back of certificate No. 26, purporting to be a transfer
of
254,307 shares in Morobe Hotels Ltd. As it appears that this transfer was not
filled in until after one S. L. M. Eskell became
a director in June 1964 the
lapse of time after the deed of 1st May, 1962, prevents the respondent from
relying on the inference
which can be drawn from the forged transfer not only
of want of good faith but also that the appellant was aware that the directors
who acted as such at the date of the deed were not authorized to act on behalf
of the respondent. However, there are other matters
which bear on the issue of
whether the appellant was acting in good faith.
At the meeting of
directors of the appellant on 28th April and continued on 2nd May, 1962, when
it was resolved to accept the respondent�s
offer, consideration must have been
given to the means by which the sum of �2,500 was to be raised on the execution
of the deed
and �47,500 by 31st May, 1962, because it was resolved, as appears
from the minutes, �that an application be made to the bank or
another financial
institution for an overdraft of �50,000 required for the deposit to be found on
the hotels pending receipt of
subscriptions from shareholders�. At this stage,
the company had two banking accounts, both in overdraft, one secured, and it
thus
had no funds to meet the deposit, as both Notson and Tytherleigh who
attested the deed on behalf of the appellant must have known.
Then followed the
�round robin� of cheques, as Mr. Deane described it, the deed of loan between
Territory Finance Ltd. and the
appellant, attested by Fox and his employee
Brook, and the entries made by Fox in the books of Territory Finance Ltd.
indicating
the payment of �45,000 as having been made against a non-existing
debt owing by the respondent to that company. The result of these
paper
transactions so far as the appellant and respondent are concerned is that each was
left with the same overdraft as it had
before the passing of the cheques. That
purported payment of �45,000 to the respondent, in my opinion, can only be
taken to be
part payment of the sum of �50,000 being the deposit under the deed
of 1st May 1962, and indeed Mr. Henderson did not submit otherwise.
These
matters appear to me to be inconsistent with good faith on the part of the
appellant. They indicate a conclusion that Notson
and Tytherleigh, having no
doubt in mind their return to Australia, had left to Fox the finding of the
deposit and that Fox was
aware that the company�s financial position was such
that, even assuming the shares in Morobe Hotels Ltd. to be available as a
security on the due date, that is, 31st May, 1962, the appellant in fact had no
reasonable expectation of raising �50,000. At this
point, the fact that none of
the directors of the appellant was called as a witness, although Fox was at the
Court on subpoena
ad duces tecum, is significant; �when circumstances are
proved indicating a conclusion and the only party who can give direct evidence
of the matters prefers the well of the court to the witness box the Court is
entitled to be bold�. The Insurance Commissioner v. Joyce[dcxvii]. The
conclusion which I consider the actions of Fox on 15th May, 1962, indicate, is
that at the date of the execution of the deed,
pending the result of the new
share issue which was then uncertain, the company left the raising of the
deposit to Fox, that the
board of directors of the appellant was aware that it
had no ready funds to meet the deposit, that Fox was aware that the money
for
the deposit could not be found and the transaction could not be effectuated
unless he took action contrary to his duty to the
respondent. In the absence of
any evidence called by the appellant upon this matter, I consider that this
conclusion is justified.
Of course, if I am wrong and the funds were available,
a stronger inference could be drawn from Fox�s actions, and the case is a
fortiori. It follows that in this respect Fox was dealing with the respondent
less than honestly and this lack of good faith on
the part of Fox must be
attributed to the appellant, and thus render both deeds void.
I have also come to
the conclusion that even if there had been good faith on the part of the
appellant, the appellant was put on
inquiry by the mode of execution of the
deed, and on two grounds. Mr. Henderson strongly submitted that the appellant
was entitled
by reason of the seal being affixed on the face of the deed to
assume that it was regularly affixed and to accept it as the deed
of the
respondent company. The first ground is based on Equity Nominees Ltd. and
Anor. v. Tucker and Anor.[dcxviii], on
which Mr. Deane relied. It follows from the High Court�s decision that to
comply with art. 107 of the respondent�s Articles
of Association, two persons
were required to be present when the seal was affixed, one a director to sign
and a second person as
secretary to countersign, per Barwick CJ, Taylor J at p.
523, per Windeyer J at p. 526. In this case, as Fox signed as director
and also
purported to countersign �E. A. James & Co.� as secretary, that was
insufficient compliance and in my judgment Mr.
Deane�s submission was right,
that Brook�s counter-signature could not cure the defect, as Brook�s act could
have no greater effect
than the act of Fox, his employer. Whilst I do not
consider that Mr. Deane�s submission is sound that this is the end of the case,
for the contract was supported by consideration, unlike the deed before the
High Court, the appellant must be treated as having
knowledge that art. 107, of
which also it is deemed to have knowledge, was not complied with, for its
directors must have known
that Fox was the resident partner of E. A. James
& Co., which acted also as its secretary. The appellant was thus put on
inquiry
whether the purported deed was the deed of the respondent.
But secondly, apart
from the requirements of art. 107, the deed on the face of it bore the
signature only of Fox and the counter-signature
of his firm. If the contract is
considered as one entered into on behalf of the respondent, being the sale of a
substantial portion
of the company�s assets, it would be beyond the power of a
single director (Rama Corporation Ltd. v. Proved Tin & General
Investments Ltd.[dcxix]�and
one of the class of unusual contracts, and so outside the directors� ostensible
authority. Houghton & Co. v. Hothard, Lowe & Wills Ltd.[dcxx]; Kreditbank
Cassel v. Schenkers Ltd.[dcxxi].
Thus, having regard to the fact that Fox had acted for the appellant in
negotiating the contract, the fact that the deed bore
no signature on its face
other than Fox�s in my judgment was sufficient to place the defendant on
inquiry whether the contract
had been duly entered into with the authority of
the respondent. It might be said that if inquiry had been made, and there was
no evidence that it had, it would have revealed only the fact that Fox acted
with the authority of the other directors and not the
facts that the directors
were irregularly appointed, or that the sale had not been ratified by the
shareholders in general meeting.
But if persons are put on inquiry and do not
investigate, they are still debarred, �though probably if they had inquired
they would
have learned nothing�. Chapleo v. Brunswick Permanent
Building Society[dcxxii]. The
same view was taken by Bankes L.J in A. L. Underwood Ltd. v. Bank of
Liverpool[dcxxiii]. In
that case, it was held that the act of an agent in paying his principal�s
cheques into his own account was so unusual as to
put the bankers on inquiry.
Bankes L.J said:
�I feel satisfied
that the obvious inquiry whether the company had not got its own banking
account would have put a stop to the
fraudulent system adopted by Underwood,
and I do not think that it lies in the mouth of the appellants to say that an
inquiry would
have been useless. In In re Alms Corn Charity[1901] UKLawRpCh 145; , [1901] 2
Ch. 750, 762, Stirling L.J quotes a decision of Lord Romilly with approval, in
which he said: �With respect to the argument, that it was
unnecessary to make
any inquiry because it would have led to no result, I think it impossible to
admit the validity of this excuse.
I concur in the doctrine of Jones v. Smith[1841] EngR 1169; ,
(1841) 1 Hare, 43, 55, that a false answer, or a reasonable answer given to an
inquiry made, may dispense with the necessity of further inquiry, but
I think
it impossible, beforehand, to come to the conclusion, that a false answer would
have been given, which would have precluded
the necessity of further inquiry. A
more dangerous doctrine could not be laid down, nor one involving a more unsatisfactory
inquiry,
namely, a hypothetical inquiry as to what A. would have said if B. had
said something other than what he did say.� (at p. 789).
The reason for the
rule would seem to be the undesirability of placing any qualification on the
extent of the duty once inquiry
is called for.
I do not consider
that the words used by Lord Simonds in Morris v. Kanssen[dcxxiv]�in
referring to such an inquiry that a person ought to make which would tell him
that things were wrongly done are to be taken
to affect the views of Brett L.J
and Bankes L.J (supra), particularly as the above passage had been cited by
Lord Greene M.R. in
the Court of Appeal and not referred to in the speeches in
the House of Lords, sub-nom. Kanssen v. Rialto (West End) Ltd.[dcxxv].
Thus, as the defendant made no inquiry, for this reason also the defence based
on Royal British Bank Ltd. v. Turquand[dcxxvi]�fails.
The conclusion I
have thus reached is as the learned trial judge held, that the rule in Turquand�s
case[dcxxvii]�does
not prevent the respondent relying on the lack of authority of the persons who
purported to bind it to the deed of 1st May,
1962, and the absence of
ratification of the deed by the shareholders in general meeting, so that the
deed is accordingly void.
Mr. Henderson then
submitted that, if the Court did reach that decision, the appellant was still
entitled to succeed so far as the
80,000 shares are concerned, the subject of
the share certificates which had been delivered by the respondent to Flora
Stewart,
and on this matter I have the misfortune to be unable to agree with
the Acting Chief Justice. The deed dated 1st May, 1962, refers
to an equitable
mortgage dated 22nd August, 1957, made between the plaintiff and Flora May
Stewart (par. 2 (d) (1)), but no instrument
of equitable mortgage appears to
have been tendered in evidence. There is thus no evidence of the terms of the
equitable mortgage.
Neither counsel addressed any argument concerning the
rights of the parties pursuant to a deposit of shares, together with a blank
transfer. In the absence of any evidence as to the terms of the deposit,
presumably the general law is applicable. The cases are
referred to in Halsbury,
3rd ed., Vol. 27, p. 262. Where shares together with a blank transfer are
deposited to secure a debt, the transaction is an equitable
mortgage only. If
no express power of sale is given, or no time is fixed for payment, the law
implies a right in the mortgagee
to sell, after giving reasonable notice. London
& Midland Bank v. Mitchell[dcxxviii]; Stubbs
v. Slater[dcxxix]; France
v. Clark[dcxxx]. The
guarantor may complete his security by filling up the transfer and obtaining
registration of the shares either in his own
name or in some other name, (ibid.
per Lord Selborne at p. 263). Stubbs v. Slater[dcxxxi].
Although in the absence of reasonable notice the sale is wrongful and could be
restrained, if in fact the sale is completed in
good faith, the only remedy of
the depositor of the shares is to sue for damages for wrongful conversion. Stubbs
v. Slater[dcxxxii].
Thus Mrs. Stewart had the right to sell the shares in Morobe Hotels Ltd. and to
have the blank transfer filled in to show either
herself or the person to whom
she sold as a transferee. Mr. Henderson based his argument on a letter dated
11th May, 1965 by Mrs.
Stewart, in which she acknowledges receipt of
�17,269.10.0 in full settlement for payment of shares �which stood in my name
in
Morobe Hotels Ltd., which I have sold to Sangara Holdings.� Mr. Henderson
thus submitted that so far as these shares are concerned,
the appellant
obtained title to them by a transaction quite independent of the deed, so that
a declaration of the nullity of the
deed would not affect the appellant�s title
to these shares. However, the instrument of transfer endorsed on the back of
the share
certificate was filled in to show the transfer as �as per agreement
1st May, 1962�. There was a reason for this, as under the deed
dated 1st May,
1962, it was provided that the respondent should accept liability for and pay
the balance of principal monies etc.
due under the equitable mortgage and not
exceeding �7,500. I consider that the construction to be placed upon the
reference in
the instrument of transfer to the agreement of 1st May, 1962, is
that the appellant was adopting, for the purposes of that transaction
with Mrs.
Stewart, the deed of 1st May, 1962, so that it could obtain credit under the
deed for the sum not only of �7,500, but
also the increased sum which was
actually paid, viz. �17,269.10.0. Accordingly, I consider that as the transfer
of the shares from
Mrs. Stewart was treated by the appellant as being made
under the transaction, this Court should so hold, and accordingly the order
made in the Court below that all the shares in Morobe Hotels Ltd. are held in
trust by the appellant for the respondent should
be affirmed.
In my judgment, the
appeal should be dismissed.
PRENTICE J: I have had the benefit of reading the statement of facts
and reasons for judgment herein of Minogue ACJ and with respect I agree
with
his Honour�s reasons for regarding the deed of 1st May, 1962, between the
parties to this suit as a nullity. However I would
found my conclusions on a
rather wider basis and would hold the said deed, and consequentially that of
31st May, 1962, to be void
and of no effect for reasons approximating those
outlined by Ollerenshaw J at the hearing of the suit.
To my mind the
evidence establishes that the deed was void for that (i) it was entered into
pursuant to the actions of persons who
were not directors of the company and
did not have the qualifying shares to entitle them to become directors, and
there were no
directors of the company; (ii) the deed was not authorized by a
resolution of �the Board of Directors�, even assuming it were a
properly
constituted board; (iii) the deed was not sealed and countersigned in
accordance with the requirements of the Articles
of Association of the company
(Equity Nominees v. Tucker)[dcxxxiii];
(iv) the purported sale of shares was a sale of the main undertaking of the
company such as could not have been effected by even
real directors without
ratification by a general meeting of the company shareholders, and there was no
such ratification. Looking
not only at the purported allotment of �qualifying
shares� to the �directors� on 16th October, 1961, but at all the circumstances;
I am satisfied that Fox as the effective representative and owner in New Guinea
of the firm of E. A. James & Co. which was
the secretary of Hamac Holdings
Limited, must have had full knowledge of the disabilities of himself and his
associates in dealing
with the company�s assets in the way they purported to
do.
The question falls
to be determined as to whether the appellant Sangara (Holdings) Limited had or
should have had attributed to
it, the knowledge of Fox as to the invalidity of
the deed and also the subsidiary question whether the appellant is able to rely
on the rule in Turquand�s case to enable it to resist this suit for the
recovery of the shares dealt with under the deeds of 1st May, and 31st May, 1962.
The evidence reveals
that of the eighteen meetings of the board of Sangara during the period
24-3-1961 to 12-6-1962, at only one�that
of 28th April, 1962�were any directors
present other than Fox and his employees (at that particular meeting Messrs. Notson
and
Tytherleigh were present). At fifteen of them the only persons present were
Fox and either Brook or Davis (both being his employees).
Fox gave instructions
both on behalf of Hamac and Sangara for the preparation of the deed of 1st May,
1962. He made the relevant
entries in the appellant�s books. He signed, and he
alone, the deed of 31st May, 1962, on behalf of Sangara without any authority
of any meeting of directors. He signed the deed of 14th May, 1962, between the
appellant and Territory Finance on behalf of the
appellant. He signed the
appellant�s cheque of 15th May, 1962, in favour of Hamac. He was thanked by the
other members of the board
�for his sterling effort to bring about
diversification and further consolidation of the affairs of the company�
(Director�s report
25th June, 1962). He continued to be associated for some
years afterwards with the appellant and with Morobe Hotels Ltd. and later
appointed Mr. S. L. M. Eskell to the Board of Directors of Morobe Hotels Ltd.,
following which there occurred an incident which
has been described by the
defendant�s counsel, and I consider correctly described, as the forgery of
certain share transfers.
It seems clear to me
that Fox was not only the nose of the appellant company for searching out possible
commercial quarry, but was
the eyes, ears and good right hand of the appellant
at all material times. In addition it seems to me to be inconceivable that the
scheme of kite flying of cheques whereby cheques were passed between Sangara -
Hamac - Territory Finance - Sangara involving imaginary
considerations at two
stages and false entries to books but without any money actually passing away
from Sangara should not have
been known to Notson and Tytherleigh. They must
have been aware of the appellant�s inability to produce in actuality the
�50,000
consideration required under the deed of 1st May, 1962, which they
themselves signed; and they must have been aware of their company�s
liability
under the deed of 31st May, 1962, the negotiation for, signing of (and as
appears from the answers to interrogatories)
approval and ratification of which
were carried out by Fox and his employees. I consider the knowledge of Fox as
to the vice inherent
in the two deeds must be attributed to the appellant
Sangara�such was the dominant position in its affairs of Fox as secretary,
alternate director and negotiating agent with obviously full powers. It might
be said that the position in April/May 1962, of the
appellant�s Board was that
of the speaker in:
�The Counsel�s good,
the fox replies Could we perform what you advise.�[dcxxxiv]
Whereas by the time
the bogus deed between Hamac and Territory Finance was prepared on 1st May,
1962 to give some documentary colour
to the approaching coup de gr�ce�and that
between Territory Finance and the appellant dated 14th May, 1962, which latter
document
was signed in seven places by�Mr. Fox and his employees and by no one
else other than a Mr. Kilduff who seems to have made a Melchisedechian
entry
and exit from nowhere to nowhere�the position could be aptly recorded as:
�The hungry foxes
around them stared and for the promised feast prepared . . .�[dcxxxv]
Being satisfied that
the knowledge of Fox must be necessarily attributed to the appellant company,
it follows in my opinion that
the company must be held to have acted without
good faith. From the special position occupied by Mr. Fox in the affairs of
Sangara
it follows that the decisions relating to �common officers� in a
consideration of whether Turquand�s case applies, are beside the point
as his Honour found at the hearing of the suit. In any case, in seeking to have
the rule in
Turquand�s case apply, a party relying on the rule carries
the onus of establishing itself within the principles of the case (Freeman
& Lockyer v. Buckhurst Park Properties)[dcxxxvi]. I
do not consider the appellant has done so.
If it were to be
assumed that Fox had knowledge of the disabilities to the deeds and that the
inferences that the appellant in fact
had knowledge of the matters of
disability were not irrefragable�yet I would consider those inferences highly
probable though such
as could be rebutted by evidence which if available must
have been within the appellant�s power to produce. The circumstances that
the
hearing of this suit involved the making of allegations of improprieties
against the appellant company�s directors together
with the actual presence of
Mr. Fox at the trial, can be taken in my opinion as serving to indicate as the
most natural inference
that the appellant feared to adduce the evidence
concerned�and this fear is some evidence that the witnesses if called would
have
exposed facts unfavourable to the party. (Wigmore on Evidence
(1940) 3rd. ed., vol. 2, par. 285, p. 162�as cited by Windeyer J in Jones
v. Dunkel [1959] HCA 8; 101 C.L.R. 298 at p. 320). As the failure to give evidence was
not explained it may lead rationally to the inference that the evidence of Mr.
Fox or the other directors of Sangara would not have helped its case.
I am unable to
conclude that his Honour who tried the issues has made any mistake in his
findings.
With due respect to
the opinion of my brother Minogue, I consider no alteration should be made to
the order made at the hearing
of the suit. The undated transfer of 80,000
shares which was apparently arranged in 1964 under the ministrations of Mr. S.
L. M.
Eskell (as appears from the minutes of the directors� meeting of Morobe
Hotels Ltd. held 12th November, 1964,) is vitiated on the
ground that it
purports on its face to be made pursuant to the agreement of 1st May, 1962.
That agreement being void and of no
effect I consider the �transfer� of 1964 to
be affected by the vice of its parent and to be nugatory.
It has been urged
upon this Court that the transfer of the 80,000 shares should be treated in a
separate category as being a transfer
made by a mortgagee, Mrs. Flora Stewart,
exercising power of sale, and in respect of which consideration had passed from
the appellant
to Mrs. Stewart. Mr. Henderson relied upon the statement in a
letter from Mrs. Stewart to the appellant acknowledging a remittance
�in full
settlement for payment of shares which stood to my name in Morobe Hotels
Limited and which I have sold to Sangara (Holdings)
Limited.� The reference to
shares standing in her name would appear from the share certificate and the
(originally) blank form
of transfer of shares, as well as from the 1st May,
1962, deed�s reference to �equitable mortgage�, to be incorrect. No evidence
has been given of any demand made by Mrs. Stewart such as would justify the
exercise of such implied power of sale as Mrs. Stewart
might have had. (Deverges
v. Sandemand Clark & Co.)[dcxxxvii]. It
would seem difficult to find established from Mrs. Stewart�s letter alone
(assuming it to be admissible against the respondent),
in the face of the
assertion actually on the transfer of shares�that the said transfer was not in
pursuance of the deed of 1st
May, 1962, but was made on a sale by the
mortgagee.
There is an
alternative way of looking at the transfer of shares. One may view it as a
document made false by the addition of material
alterations within the meaning of
s. 486 of the Criminal Code (Papua). By the addition of the words �as
per agreement 1st May, 1962 ... Sangara (Holdings) Limited . . . Sangara via
Popondetta
Papua ...�, and the creation of a form of acceptance of transfer by
Sangara (Holdings) Limited, the document has been converted
from a transfer as
security, to a transfer outright. In my opinion the alteration may be regarded
as a forgery going to the whole
or essence of the instrument so as to destroy
it (Chao v. British Traders Ltd.)[dcxxxviii]. On
either view of the effect of the transfer of these 80,000 shares, I consider
that, in respect of the monies paid to Mrs. Flora
Stewart to secure the release
of these 80,000 shares in Morobe Hotels Limited mortgaged by Hamac Holdings,
the appellant, which
brought no counter claim in this suit, should be left to
its remedy, if any, elsewhere.
I would dismiss the
appeal with costs.
Appeal dismissed
with costs.
Solicitor for the
respondent/defendant: Francis & Francis.
Solicitor for the
appellant/plaintiff: P. J Clay, Acting Crown Solicitor.
EDITORIAL NOTE
An appeal in the
above case was taken to the High Court of Australia. On 8th December, 1973, the
Full Court of the High Court dismissed
the appeal for want of prosecution.
R>
[dlxxxii]The following Articles of Association of Hamac
Holdings Limited are relevant to the judgment.
N2>�74.����� The qualification of
a Director shall be the holding of not less than two thousand (2000) shares in
the Company. Directors
shall hold their requisite share qualification at time
of appointment or election.�
N2>�102.����
(a)������� The business of the
Company shall be managed by the Directors who may pay all expenses of or
incident to the formation
and registration and the issue of its capital. The
Directors may exercise all the powers of the Company which are not by these
presents or by the Companies Ordinance required to be exercised by the Company
in general meeting subject nevertheless to the provisions
of any Acts of
Parliament or of these Articles and to such regulations (Being not inconsistent
with any such provisions or these
presents) as may be prescribed by the Company
in general meeting but no regulations made by the Company in general meeting
shall
invalidate any prior act of the Directors which would have been valid if
such regulation had not been made. Provided that any sale
or disposal by the
Directors of the Company�s main undertaking shall be subject to ratification by
shareholders in general meeting.
(b)������� Without prejudice to
the general powers conferred by the last preceding sub-clause the Directors may
determine who shall
be entitled to sign on the Company�s behalf bills notes
receipts acceptances endorsements cheques releases contracts and documents.�
N2>�107.���� The Directors shall
provide for the safe custody of the Seal and the Seal shall never be used
except by the authority
of the Directors previously given and in the presence
of one Director who shall sign every instrument to which the Seal is affixed
and the same shall be countersigned in each case by the Secretary or some other
person appointed by the Directors.�
[dlxxxiii](1856) 6 El. & Bl. 327; 119 E.R. 886.
[dlxxxiv](1856) 6 El. & Bl. 327: 119 E.R. 886
[dlxxxv](1966-67) 116 C.L.R. 518.
[dlxxxvi](1856) 6 El. & Bl. 327; 119 E.R. 886.
[dlxxxvii] [1915] A.C. 705, at p. 713.
[dlxxxviii][1896] UKLawRpCh 122; [1896] 2 Ch. 743, at pp. 748-749.
[dlxxxix][1904] 2 Ch. 618.
[dxc][1856] 6 El. & Bl. 327; 119 E.R. 886.
[dxci][1914] UKLawRpCh 89; [1914] 2 Ch. 506, per Swinfen-Eady L.J, at p. 512.
[dxcii] (1882) 8 A.C. 65, per Lord Selborne, at p. 71.
[dxciii][1935] NSWStRp 29; (1935) 35 S.R. (N.S.W.) 253, at pp. 268-9.
[dxciv](1856) 6 El. & Bl. 327; 119 E.R. 886.
[dxcv] [1964] 2 Q.B. 480, at pp. 502-506.
[dxcvi][1875] UKLawRpHL 22; (1875) L.R. 7 H.L. 869, at p. 893.
[dxcvii] (1882) 8 A.C. 65, per Lord Selborne, at p. 71.
[dxcviii](1856) 6 El. & Bl. 327; 119 E.R. 886.
[dxcix] [1946] A.C. 459, per Lord Simonds, at pp. 474-475.
[dc](1875) L.R. 7 H.L. 869.
[dci][1964] 2 Q.B. 480; [1964] 1 All E.R. 630.
[dcii](1875) L.R. 7 H.L. 869.
[dciii] [1964] 2 Q.B. 480, at p. 507, per Diplock L.J
[dciv][1875] UKLawRpHL 22; (1875) L.R. 7 H.L. 869, at pp. 894-5.
[dcv] [1946] A.C. 459, at p. 475.
[dcvi][1896] UKLawRpCh 122; [1896] 2 Ch. 743, at p. 745.
[dcvii][1896] 2 Ch. 743.
[dcviii] [1928] A.C. 1, per Viscount Dunedin, at p. 14, and
Viscount Sumner, at p. 19.
[dcix][1896] 2 Ch. 743.
[dcx][1915] A.C. 705.
[dcxi] [1957] 1 Q.B. 159, per Denning M.R., at pp. 172-3.
[dcxii] [1965] P. 294, at p. 344, per Willmer L.J
[dcxiii] [1965] 2 Q.B. 233, per Lord Parker, at p. 241.
[dcxiv][1904] 2 Ch. 608.
[dcxv][1896] 2 Ch. 743.
[dcxvi](1856) El. & Bl. 327; 119 E.R. 886.
[dcxvii][1948] HCA 17; (1948) 77 C.L.R. 39, per Rich J, at p. 49.
[dcxviii](1967) 116 C.L.R. 518.
[dcxix][1952] 2 Q.B. 147.
[dcxx][1927] 1 K.B. 246.
[dcxxi][1927] 1 K.B. 826.
[dcxxii][1880] UKLawRpCP 23; (1881) 6 Q.B.D. 696, per Brett L.J, at p. 715.
[dcxxiii][1924] 1 K.B. 775.
[dcxxiv][1946] A.C. 459.
[dcxxv] [1944] 1 Ch. 346, at p. 359.
[dcxxvi](1856) El. & Bl. 327; 119 E.R. 886.
[dcxxvii](1856) El. & Bl. 327; 119 E.R. 886.
[dcxxviii](1899) 2 Ch. 161.
[dcxxix][1910] UKLawRpCh 34; [1910] 1 Ch. 632, per Lord Cozens-Hardy M.R., at p.
639.
[dcxxx][1884] UKLawRpCh 57; (1884) 26 Ch.D. 257, per Lord Selborne, at p. 262.
[dcxxxi][1910] 1 Ch. 632.
[dcxxxii][1910] 1 Ch. 632.
[dcxxxiii](1967) 116 C.L.R. 518.
[dcxxxiv]J Gay, �The Fox at the Point of Death�.
[dcxxxv] [1964] 2 Q.B. 480, at pp. 505-6; [1964] 1 All E.R.
630, at p. 639.
[dcxxxvi]J Gay, �The Fox at the Point of Death�.
[dcxxxvii][1902] 1 Ch. 579.
[dcxxxviii] [1954] 1 All E.R. 779, at p. 789.
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