an appeal upheld

Dominion, Volume 12, Issue 11, 8 October 1918, Page 8

an appeal upheld

SALE OF SHARES

IMPUTATION OF FRAUD GROUNDLESS

At the Supremo Court, Napier, on September 19, Mr. Justice Chapman delivered judgment in the caso of Cameron v. Hill. The appeal was on fact and law fl'om the decisions of Mr. S. K M'Carthy, S.M., in which lie found that the' sale of- certain shares in Haywards Pictures, Ltd., .to 11. Hill,.was fraudulent, and that certain misrepresentations had been made _ which amounted to serious deceit. His Honour said: "There were, prior to April, 1913, two picture theatre concerns or companies operating. In April, 1911, the New Zealand Picture Supplies, Limited, was formed with » capital of £5000. Later, this was increased to £20,000. The two companies called for convenience Fuller's and Hayward's, were the sole shareholders in the New Zealand Picture. Supplies, Limited, and between them they held all the shares issued by it. It was formed purely for the purpose of and in the interest of Fuller's and Hayward's. To avoid tho risk of double income tax they leased and bailed their assets to the Picture Supplies Company for an annual rent of £lo,0()0 to each company. During the first year of this arrangement it was able to pay Its rent. Since then the war has pievented this, and it now pays less. It is quite clear, however, that if the Picture Supply Company made a profit, say, of £40,000 in the year, this rent, would absorb £30,000, and the other £10,000 would be divided between I'uller's and Hayward's by way of dividends. In one way or another every farthing made by the Picture Supplies Company belonged to Fuller s and Hayward's, whether it was immediately distributed or not. This is tho central fact of this action, and n is uncontroverted and incontrovertible.

• "It is further to be observed that it necessarily follows that if a. sum _of money had to be spent in connection with the enterprise it was immaterial whether it was spent by the Picture Supplies Company or by Fuller s and Hayward's contributing equally, and consequently that all cheques drawn upon the bank account of tho Picture Supplies. Company "are really the joint cheques of the'other companies. Ihe appellant Cameron had in his name as trustee certain shares in Fuller s and Hayward's. That they wero placed in his name for the bona-fide purposo of preventing any unnecessary competition in connection with the sale is not seriously disputed, and due care was taken in placing them in the liaiids of Gill to dispose of that this should bo made clear, and that the limit of Gill s authority to make representations should be made equally clear. ■Vfter setting out the correspondence which tools place between the Picture Supplies Company and' Hill, in which there seemed to arise a complete misunderstanding of the position, the judgment recites the facts which surrounded the purchase of the shares by Hill, and proceeds:— > ■

Tho Magistrate, however, has m some way similarly misconceived the .position. He says: "The respective properties of the two controlled companies outside the rents received are not dividend producing." Which is true, seeing that they nave pooled their resources. He goes on to say: "These properties are being managed by tho controlling company to produce .the profits set out for its shareholders to the detriment of the shareholders of the two controlled companies. Tho precise methods adopted have not been disclosed." Which is obviously impossible in face of the fact already mentioned by the. Magistrate in his judgment. The Magistrate expresses the opinion that Cameron's principals "were knowingly unloading their unprofitable and retaining their profitable stock." The unquestioned facts show this to be impossible.

The Magistrate further finds alfter referring to the letter of instructions: "The net result of this clause and the omission of all reference to the profits of the two controlled Companies is_ to convey to intending purchasers tho impression that the two controlled companies are sharing the profits of the controlling company on an equality or approximately on an equality with that company."

"This obviously shows a complete misunderstanding off the facts which wero treated as beyond question when tbe interrelation of the .companies was nmde clear on the hearing of this appeal. He continues: "liie defendant Cameron knew that such an impression if created would be false,' and the Court must find that any attempt to create it was fraudulent, .inasmuch a» Cameron on January 21, 1915, when lie signed the authority knew that those responsible for the management of tho controlling company had taken steps to prevent the major part, ffi not tlio whole, of those profits ever reaching the shareholders of tho two controlled companies.' ■■•

"Unless I am myself under sonio extraordinary misapprehension which leads me to misunderstand facts and evidence which have not been in controversy before 1 can only seo in tin's statement further evidence- that the Magistrate has totally misunderstood tho fundamental facts of this case. Tlib only way in which tho management could do such a. thing would bo >to make away. with tho money, which is not suggested to have been done. The real fact is that the so-called rent which tho Picture Supplies Company agreed to pay to tho other companies has not been earned as it was before tho war and that it has been necessary to reduce it. If it wero not reduced it would still he owing, but that would not make Harvard's or Fuller's a shilling richer, as everything that tho Picture Supplies Company owns is theirs. If it had been earned and even if tlio earnings had been concealed by the. Picture Supplies Company it would still be in the possession of that company virtually in trust, for Fuller's and Howard's. When tho Magistrate states: 'I am justified in inferring that the controlling company is still returning abnormal dividends.' ho must mean that it is returning them to someone. Who that someone is I confess myself wholly unable to discover. I should not ordinarily have thought it necessarv or desirable thus to criticise the judgment of the Magistrate, but when a charge of fraud is made and w adopted by a Court it is the duty of an appellate court to examine with the utmost care the foundations of the hndinc; and that T have endeavoured to do For all that appears in this case the three companies are sound and prosperous, but rot as prosperous as was expected. Llns is no uncommon experience in war tune. I cannot find the slightest ground for imputing fraud to Cameron or Gill or d'lvlv'dv else."

Tlie appeal was > therefore, pllowed with costs. Mr. M Myers appeared for tho appellant, and .elr. B. J. Dolan for the defendant.