Executor’s Liability For Call On Shares Argued

Press, Volume CVI, Issue 31098, 29 June 1966, Page 3

Executor’s Liability For Call On Shares Argued

(New Zealand Press Association) DUNEDIN, June 28. The hearing of a claim for £8427 10s brought by the Standard Insurance Company, in liquidation, against a former director, Thomas Kay Stuart Sidey, was begun a second time in the Supreme Court at Dunedin today before Mr Justice Woodhouse.

Mr Justice Gresson presided at the original hearing on June 13, but disqualified himself on personal grounds. The company alleges in the action before Judge alone that Sidey, as sole executor representation in the estate of David Baxter, is liable to meet the call on 16,855 shares in the estate on April 9,1962.

The company is represented by Mr E. C. Champion and Mr E. J. Somers, both of Christchurch. Sir Wilfred Sim, Q.C., with him Mr C. B. Chettleburgh, appears for Sidey.

Mr Champion said Sidey was not a customary shareholder or member holding shares in his own right He was under an obligation in the estate of David Baxter, who died in 1901. The question to be answered was Sidey liable, in the circumstances? The company alleged that on November 28, 1956, Baxter’s estate was registered as the holder of 28,205 £1 shares, which on January 5, 1960, were paid up to 10s each. Between September 17, 1958, and August 15, 1960, it was alleged, Sidey transferred 11,350 shares, leaving the estate registered as the holder of 16,855 shares. Of these 11,350 shares he was said to have transferred 10,000 shares to himself as a person beneficially entitled, and sold the balance, 1350, for £2335 12s 6d. Call Made On April 4, 1962, the liquidator called up the 10s unpaid on Standard Insurance shares held by the estate amounting to £8427 10s. It was alleged that Sidey, as executor, had no assets in the estate other than the 16,855 shares which were worthless. Sidey distributed assets of the estate without making provision for the contingent liability of the shares, said Mr Champion. Mr Champion said it was his submission that Sidey’s failure to make provision for the contingent liability constituted a position where he was personally liable, at any rate to the extent of distribution. His Honour asked if this was a concession: It appeared to take away from the argument. “What should he have done?” his Honour asked. Mr Champion said Sidey should have retained the shares which, at that time, were worth 19s each. He should not have transferred

to himself £lB5O, the proceeds of the sale of 1000 shares, and not paid to himself dividends on the remaining shares, totalling some £4240. An alternative was to place the position before the Court to ascertain if Sidey was at liberty to do what he did, said Mr Champion. The plea for relief under section 73 of the Trustee Act brought about the position where the onus of proof must be on the company, but it was also on the defence. If it relied on relief, to establish the claim, Mr Champion said he would say immediately that the honesty of Sidey was not in question. Sir Wilfred Sim said the case had unusual and abnormal features. There was nothing like it in the law books “and I submit there never will be.” The executorship had run for more than 60 years in a sequence of three trusts under different testators’ wills. The company had been in existence since 1874 and “in the whole of its history had a reputation of rock-like security.” It had never made a call on its shares. Only Assets The only assets Sidey had available for the call on the shares were shares in the company. These shares held for possible contingent liabilities were destroyed into worthlessness by the company itself. The shares were the only assets Mr Sidey had to handle as executor: 60 years later this was not surprising. The claim was against Sidey as the executor of Baxter’s estate and when Sidey referred to himself as “executor” it was in reference to the estate of Helena Sidey, his mother, which was a trust, by devolution, from the Baxter estate.

Sir Wilfrid Sim said the company had gained effectve shareholders who had paid their calls when these were made by the liquidator. The share transfers were not “devastavits” (wasting of assets) of the estate. He submitted that the shares Sidey sold were his own shares. They were not estate property. Sidey was a bare executor by representation, holding the assets as a trustee in the estate of Helena Sidey and bound by terms of her will. The executorship in all important aspects had been a trusteeship. Trustees were not subject to the rigid rule applicable to executors. The case could fail completely on this ground alone. Judge’s Question At this stage his Honour asked Mr Champion if he would be prepared to state what Sidey should have done in the circumstances. “I don’t think I should be left to decide what was the proper thing to do." During further discussion

his Honour questioned how anyone could control a contingent liability when the only assets were shares.

His Honour said that he would adjourn the Court to consider whether he should ask for a definite answer from the company as to what Sidey should have done. Just before the Court rose for lunch, Sir Wilfrid Sim said that Sidey found himself in the same embarrassment as his Honour. “He has been unable to get an answer as to what he should have done,” Sir Wilfrid Sim said. Counsel’s Opinion In reply to his Honour’s question, Mr Champion said that the defendant could not retain dividends against liability to a creditor. He said Sidey should have kept the dividends in the estate or he could have applied to the Court for leave to distribute the dividends. Instead he had taken a calculated risk in distributing the dividends himself. Sidey could also have sold the 10,000 shares at 19s but he had decided to transfer them to himself. Alternatively, he could have sold the 16,000 estate shares and retained sufficient money to meet contingent liabilities. As regards the 1000 shares he had sold for £lB5O, he could have retained the proceeds and again applied to the Court for leave to distribute.

His Honour said it appeared that the action would be barren unless the company could prove it had suffered a loss. Defendant's Evidence

Sidey, in evidence, said he had been a director of Standard Insurance from 1949 until its failure In 1961. The company had always been regarded as being conservatively run. Few risks were taken. In recent years the profit came largely from re-insurance. There had not been a call on shares since 1878 and there had been no reason to anticipate a call. The fixed assets of the company stood at just under £2

million. There was £500.000 worth of undistributed profits at June 30, 1960. The profitability was very good and the company had considerable goodwill value. Four separate approaches had been made to take over the company, said Sidey. The directors considered that an acceptable take-over price would be not less than £3 a share. No-one could have foreseen the catastrophe which had nothing whatever to do with the business of the company. It had arisen from a series of frauds by a servant of the company with the assistance —active or passive—of others. The company’s resources had been pledged in a number of guarantees. “Like Fairy Tale” Forms had been printed and the transactions had not gone through the company books. Some millions of pounds were involved. Sidey said the first hint of trouble had come at the end of 1960. “It was almost like a fairy tale. It was something that no-one could conceive happening.” His Honour: More like a nightmare. Sidey: Yes, sir.

The 28,000 shares had been part of Margaret Baxter’s and his mother’s estate. If he had not distributed the shares, the company would not have received any money on call. The hearing will continue tomorrow.