SUPREME COURT.

Press, Volume XLIX, Issue 14844, 9 December 1913, Page 3

SUPREME COURT.

CIVIL SITTINGS. (Before his Honour Mr Justice Dennis ton.) CUNNINGHAM V. HEPWORTH. This was an action brought by William Cunningham, o f Rangiora, farmer, against Raymond Hepworth, of Christchurch, sharebroker, io recover £IoCO, the amount paid by plaintiff for IdJO shares in the Golden Bar Co., which lie alleged he was induced to buy through fraudulent misrepresentations on the part of defendant.

Mr T. W. Stringer, K.C., with him Mr J. H. Williams, appeared for plaintiff, and Mr S. G. Raymond, X.C, with him Mr J. J. Dougall, for defendant.

Mr Stringer, in opening, said it ap- I peared that some time iii tiie year 1911 a guiuieman of the name of* Charles Gittord Moore had an option over a mining claim at McCrea's Flat, Otago, and he had some time m that year pegged out a claim in the district. In December 1911, Moore and Hepworth promoted the Golden Bar Company. An agr ement entered into provided "for a capital of £21,030, the whole of that capital to be allotted as fully paid-up shares. These gentlemen 'paid £270 for this mining claim, Hepworth paying £2CO, and Moore £70. It was unde£ stood, however, that they were to give the original owners of the claim 25C0 fully paid-up shares. They formed' a company themselves, they being the only shareholders, and soid these rights to the company for 21,000 fully paidup shares.. The company was registered as a private company, so that no prospect w; was issued. They held a meet- "" of directors at which they were the only two persons present, and they adopted the agreements made, and allotted shares to themselves. That meant putting them into possession of scrip to the value of £21.000, and they then proceeded to dispose of these shares to outside persons. There was not & oingle copper of working capital in the company; the whole £21,000 was in fully paid-up shares allotted to these Renllemen. Mr Stringer thought that the remarks made by Lord Macnaghton m the case of Gluntino and Barnes,' 1900, appeal cases, p. 248, were applicable to this company. The whole scheme, plaintiff suggested, was devised for the purpose of evading the-provis-B j xi he C . om r an Jes Act, which provided that public companies inviting the public to take shares had to issue prospectuses, so that the full nature of the transaction had to be disclosed. Mr Stringer submitted that if a prospectus in this case had be< .i issued, no person eW 0 ! 1 , 503 w °»>d have bought enares. Of all companies a mining company required working capital, but tfiis company had not a single copper of working capita!. Mr Stringer submitted that the promoters of the company were under a duty to disclose the true position of the company Hepworth by Mr G. B. Ritchie. After a tew introductory remarks concerning the company, plaintiff asked for a prospectus. Hepworth said it would be the same as any other prospectus, and Mr Kitchie concurred in this No prospectus was ever shown to witness, however. .Witness then asked if it were a limited liability company, and if so what was the capital. Hepworth said it was £21,000. Witness asked Uepworth what number of shares there \ ere /So-« He mentioned about 2200. Witness said if he had had the money he would have taken the lot. ilepworth said he had great faith in the mine, and he had underwritten the whole thing himself. He mentioned another sheelite claim. He said he had sold out all his interest in a biV comP'Y'7. the Golden Point, and also in anCompany, the Maritana, and put practically all he possessed into the trolden Bar venture.. After he informed witness he had underwritten the whole thing himself, witness was curious to know who was behind him, as witness took Hepworth to be a man of moderate means. Witness wanted to know if George Mitchell was behind Hepworth in assisting to underwrite the concern. Hepworth said he did not care to mention names, and witness came to the conclusion that Mitchell was in the concern. Hepworth thought it would be a mine that would produce dividends very shortly, possibly within a few months. They wanted none but good men in it. When he said he had underwritten the concern, that made witness believe that the.re was available capital for the whole concern, some £16,000 or £18,000 at least. Witness said he would take 1000 share*, but defendont replied: "Take 1500, which would make you eligible as a director." In reply to witness, defendant said no paid-up share had been given to anyone. All the shares were treated the same. Witness agreed to take 1500 shares. He paid £750 within a few weeks, and the other £750 some months after. ' Witness went down south to see the mine himself. Ho went with Messrs Ritchie, Midgely, and Moore. The property was an old claim which had been worked some time previously. There was an oil engine there, and a battery of five stampers was in course of erection. There were some tram rails there, and Moore informed witness that eight or ten men were working on the property, which was apparently alive. Some two or three months after witness heard the company was ehort of funds. This surprised him, and he tried to see Mr Hepworth but could not find him. Ultimately witness, Mr Holdsworth, and others, took steps to have the company investigated, and a meeting of those interested was held at Duncan, Cottei ill and Stringer's office, at which Mr A. F. Wright, solicitor, was present As the result of Mr Wright's investigation, this was the first time witness became aware that all the shares were paid up, and there was no working capital. Witness averred that he purchased the shares under the assumption that Hepworth had underwritten the company. He would certainly not have bought the shares if he had known the true position of the company. To Mr Raymond: He had also speculated in Donaldson's Sheelite Company, buying 2000 shares, for which he paid a premium of 6s 6d. Hepworth was secretary for this company. Donaldson's was a £40,000 company. Witness was not aware that it was a private company, issuing no prospectus. He did not buy his shares in this company on a prospectus. To hi« Honour: The company must have been going for close on two years when he bought shares in it. There was practically a dividend in the bank at the time. To Mr Raymond: Hβ had never received a dividend from this company. He was not aware that there was no available capital in the company-, that i> had all been paid to the vendor. Domldson. He thought about £23.000 or £24.000 had been paid to Donaldson. He could not for the moment remember bow he had come by the information. He understood a substantial amount was to be paid Donaldson, but he also understood that some substantial men were coming forward. They had guaranteed the bank on one occasion. In addition to this venture he had been a venturer to a email extent in mining shares He held 300 Blackwatere. That ™f . th t, onl y scrip he now held, fle had in the pastbeu some Waihi Grand Junctions, Ross Flats. WestportStock- & onT T? Pk. and Ccnsolihad in the past bought a £J properties and 6olu out. He AiA *. y could be d Icuers did the sam e y. He w weil recognised Sid au-

tbority, being a valuator for tlio Government. One day at the Federal Club .Sir Ritchie bad introduced tue subject of sbeehtc to him, and had stated lie had gone over the Gokit-n Bar property with Mr HolUswortii. W itnti»s knew Hokisworth well and bad considerable respect for his judgment. This conversation occurred the same afternoon tnat witness went over to Hepworth's oiiice. lie did not remember, but possibly be did tell Ritcnie, that if it were good enough for Holdsworch, it was good enough for him. A report by a mining expert was handed him to read at Hepworth's omee. He did not remember reading any mine manager's reports. Going with .Kitcine, and knowing that Holdsworth had tiiKt-n shares, gave him coniidonco, and he did not investigate the matter so fully as he otherwise would have done. He did not remember Hepworth advising him to go down and sew the mine before taking up shares. A suggestion had been made to inspect the mine and it culminated in the visit of Moore. Midgely, ilitchie and himself to the property. The reason why he did not pay his cheque when he signed the contract note was because Hepworth said there was no particular hurry for the money, the whole concern being underwritten. Witness did not remember Hepworth asking him to go down and inspect the mine and saying that if witness were not satisfied, he (Hepworth) would tear up the contract note. In reply to his Honour, witness said he had understood that Hepworth was prepared to End the whole of the capital of the company outside the shareholders, he having backing behind him. witness understanding the person backing Hepworth to be George Mitchell. Witness understood that the whole of the shares in the company were fully paid up. To Mr Raymond : Before he paid the second £750, he knew the company was practically insolvent, but he paid the amount. Hβ had transferred of the shares on February 25th, 1913, to Mr Midgely. He got absolutely nothing from Midgely for the shares. His object in transferring the shares, was &vat Midgely went down South with him, Moore, and Rilchie, and witness induced him to take s€o of witness's shares. Witness considered he had robbed Midgely innocently upon his representations and, therefore, transferred to Midgely the shares. Midgely paid witness £500, taking shares from witness instead of from the company. • To his Honour: If he obtained any damages, he would pay Midgely pro rata. To Mr Raymond: He did not suggest that he hnd been out of pocket more than £1000. • Air Stringer considered that Midgely ought to bo joined as a plaintiff, becnu<3e Cunningham took up 1500 shares believing Midgely would take up 500. Further crpss-examined by Mr Raymond, plaintiff said he obtained from Midgely the balance of £250 on February 25th, 1913, when he signed the transfer of the shares to Midgoly. To Mr Stringer: Ho thought the capital was behind Hepworth in some shape or form. The money he paid to F.epworth, he thought was going into the company, not into Hepworth's pockets. Frank Edward Graham, chairman of 'be Oh'ristchurch Stock Exchange, said ho hnd heard of the Golden Bar Co. Ltd. On the balance-sheet produced, tho shares in the company since its constitution were of no value whatever. To Mr Dougall: Hβ had never known a mining company to carry on without working capital. There' had been a slieelito boom, and although Golden Seheolite and Maritana shares had never been listed he had heard of their sales at a premium. This closed the case for the plaintiff. • THE DEFENCE. Mr Dougall, in opening the case for the defence, explained the valuable qualities of sheelite, remarking that it was valued for its percentage of tungstic acid. The fluctuation of values made it purely speculative. The acid was usoa for hardening and lightening steel, and rendering* it easily worked at high speed. Mr Dougall quoted tne Year Book to show a largo increase in the export of the mineral in the last three years. There was a considerable rush for shares, options, and claims, and there was no doubt that hard-head-ed business men had lost their heads in the rush. Mr Stringer: That is the opportunity for mine promoters. Mr Dougall, continuing, said that everything had been done in the present case in an open and straightforward way. The plaintiff alleged fraud, but had not piven direct evidence in support of his allegations. In the memorandum of association Moore was assigned 3750 shares, and Hepworth 17,'J50, but of that number Hepworth held 6000 on behalf of Moore and Norrie, 3000 for Beckett, and 2500 for McConnell and Peddie, the original owners of the claim, 1750 for Mitchell, and 4000 for himself DEFENDANT'S EVIDENCE. Defendant said he had been in business in Ohristchurch as a sharebroker for five or six years. Early in February, 1911, be went to McCrae's Flat, Otago. Operations were being carried on by the Maritana Co. and by Donaldson's. He was accompanied by George Mitchell. At that time there was considerable movement in Otago in sheelite. At McCrea's Flat ho met Mr C. 6. Moore, and Moore stated he had an option from two men possessing an interest over the whole of the Golden Bar claim. From information supplied to witness at the time, the Golden Bar claim had been worked for some years successfully, but was not being worked at the time. The purchase money, £270 ? had to be found. Witness made enquiries of several miners in the district, all of whom spoke favourably of the claim. Witness came to an arrangement with regard to the property. Liabilities were incurred immediately afterwards before the company was formed for wages and shares. Out of a cheque for £500 received from Mr Mitchell, witness paid all expenses, wages, etc., and also guaranteed to pay wages accruing not to exceed £350. Mitchell was to receive 1750 shares in a company not to exceed £20,000. Witness expended more money than he received, so that there was a credit balance standing to his credit against tho persons he was acting for. At the date of the registration of the company the 17,250 shares standing in •witness's name were held by him in verbal trust as set out by Mr Dougall. In reply .to his Honour, witness said that the shares were practically divided into fifths. Five shares in the property were defined, though there were more than five people interested. The 3750 shares acquired by Moore represented a third fox himself, one-thud for Norrie, and one-third for Beckett which meant that Moore, Norrie, and Beckett each held 4250 shares. 2500 shares were held by the vendor plus ' 1750 held by Mitchell, making another 4250, witness held 4000 shares. Moore Beckett, and Norrie. were the members of the partnership that bought an interest from McConnell and Peddie. Further examined by Mr Raymond, witness said the mine was being worked before the formation of the company, i After the formation of the company, witness, Moore, and Norrie got Mr Evans a mining engineer, to report upon the claim. Mr Evans submitted a xeport (read by Mr Raymond). As the result of discussions between Beckett, Moore, arid himself, witness undertook to provide £500 to enable Evans, who had been appointed manager, to make a start. Witness then sold 475 shares on behalf of the joint owners in the company for £475 to Lewis and Anderson, Subsequently giving a bonus of 100 shares. The whole of this money went into the compxny's coffers. Some time later Moore sold some shares on his own behalf. On April 17th witness sold 1000 shares to R. B. Holasworth, on which £400 was received in cash about that date £100 a moTitn later, and JflO on Nosembei: 13t*. 1912. The

next'sale was 250 snaree to Mr Arrow- ! smith. Witness handled 100 of them, and that was paid into the company's account. Mr Parnham bought 200 shares for £14$. That money was not paid into the company's account, but was divided among the four holders of shares. The total cash sales of trust shares was £3370. The sum of £1725 was paid for development of the mine, and £1645 was retained by the vendor for six months. Witness's receipts from the apportionment was £461 ss, which he paid into the company's account. He had made payments on account of the company totalling £490 Is 6d, and there was £204 owing to him for salary. Part of that he had written off, and for the balance he took debentures. He first met Mr Cunningham on April 15th, 1912. Mr Ritchie, who brought Mr Cunningham in, said the latter was going to have a flutter in the "Golden Bar," and would take 1500 shares, that being, Ritchie said, a qualification for a seat on the board. Witness produced Mr Evans's reports by request, and there was a little discussion as to the work being done. Cunningham said he had been offered 2250 shares by Moore, and added that if the proposition was good enough for Mr Holdsworth it was good enough for him. Witness advised plaintiff not to touch the shares until he had seen the property, and Mr Ritchie advised him to that effect. Cunningham said he would take the shares, and would inspect the property later. Witness made out the contract note, on which he endorsed an option for the purchase of 750 additional shares, which Mr Cunningham asked should be reserved for him. The option was to run till May 14th. winch Mr .! Cunningham said was his birthday, and | his lucky day. Witness told Cunningham he wanted no deposit or payment until he had inspected the property, j and that the whole transaction was to ; be regarded as an option only, and not j to be binding until May 14th, by which j time plaintiff was to inspect the pro- ■ perty. Cunningham said the 750 shares were for a friend, but he did j not say that any portion of the law i shares were for a friend. He did not j tell Cunningham there were only j 2200 shares in the company for j sale, nor did he say that the j shares were of great value, and were . well worth acquiring, nor did be say , that the proceeds of the sale would go . to the company, and would be available , for the development of the mine. -He did not say that he, with the assistance of a capitalist, had underwritten the whole of the 21,000 shares. Witness concealed nothing froiri Cunnincham; there was nothing to conceal. Witness next met plaintiff early in May, apji Cunningham said he was satisfied with his inspection of the mine, and would take tVip sbarrs, bnt did not want the extra 750. On Mar 18th Cunningham came in and paid £750 on account of the snares, the balance to bo pa i<l in pit months' timp. On February 24th, i IPI3 Cunningham sold 500 shares at £1 pioh to Willinm Midiley. Late in 1912, and early in 1913, the company was in trouble, and witness made personal advances with Moore. Tn Feb- j rii.iry a resolution was put through j authorising debentures to be issued, and j noxt month witness took up some debentures. The position at the present ti'r.e was that the company owed him £600. To Mr Strimrer: It was m March. 1911, that he went in with Moore. Witness received a fifth snare in th* mine on undertaking to find £270 for the mine, and a further £300 for further development. Hβ paid this amount before he received tho £500 from Mr Mitchell, but applied Mr Mitchell's money to this item. Witness honestly believed the mine was a valuable one, although the owners sold it for £270. Mr Prddy one of the original owners, sold his 1250 shares for £150 to four shareholders of the company. The company did not have a banking account until early this year. Before that the company's items went through witness's trust account. From June, 1912. to September, Is 2, the amount won from .

the mine was; £700, but since then no- j thing was won. He and Mooro had made advances of £550 and £450, and ! had taken debentures for £1000 over all the company's assets.. He told Cunningham the capital of the company was 21,000 shares of £1 each. Ho did not tell Cunningham there was no working capital, but that was quite unnecessary. The hearing of the case will be resumed to-day.