Dunn v Shapowloff

(1978) 2 NSWLR 235

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(Judgment by: Reynolds)

Dunn v Shapowloff

Court:

Judges:
ReynoldsGlass
Mahoney

Legislative References:
Companies Act 1961 - s. 303 (3)
Justices Act 1902 - s. 112 (5)

Judgment date: 19 October 1978

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Judgment by:
Reynolds

This appeal is brought by leave of this Court from a decision of Cantor J. given on 15th June, 1977, whereby he set aside an order made by a magistrate that the respondent, Walter Geoffrey John Shapowloff, be convicted of an offence under s. 303 (3) of the Companies Act, 1961 . That section is in the following terms: "If in the course of the winding up of a company it appears that an officer of the company who was knowingly a party to the contracting of a debt provable in the winding up had, at the time the debt was contracted, no reasonable or probable ground of expectation, after taking into consideration the other liabilities, if any, of the company at the time, of the company being able to pay the debt, the officer shall be guilty of an offence against this Act."

The charge upon which the respondent was convicted was that between 2nd January, 1970, and 31st March, 1970, in the course of the winding up of Stirling Henry Ltd., which was ordered to be wound up on 5th April, 1971, it appeared that the respondent, being an officer of the company, was knowingly a party to the contracting of a debt provable in the winding up of the company, to wit a debt contracted with Messrs. Donovan & Co., stock and share brokers, and that the respondent had, at the time the debt was contracted, no reasonable or probable ground of expectation, after taking into consideration the other liabilities of the company at that time, of the company being able to pay the debt: see Shapowloff v. Dunn ^[F1] The respondent, having been convicted, was fined $250, and ordered to pay certain costs and expenses.

The summons invoking the jurisdiction of the Supreme Court makes no express reference to the source of jurisdiction, and the order it sought was that the conviction and orders be set aside and the proceedings dismissed. This relief is not indicative of an application for the exercise of prerogative powers, nor was any case sought to be made on this basis and, this being so, the only source of jurisdiction is s. 112 of the Justices Act, 1902 , commonly referred to as an application for a statutory prohibition. The relief sought, however, is not appropriate to the exercise of that section, which confers upon the Court a jurisdiction to restrain the magistrate.

Leave was granted, because it appeared to the Court, prima facie, that the learned judge had misconceived the function of the Supreme Court in appeals brought under s. 112, and had widened his inquiry beyond that which entrenched authority allows, and had himself made findings of fact, which he substituted for those of the magistrate; and upon the further ground that there was an arguable case that the conviction could be supported within the meaning of that section.

That there had been a misconception of his Honour's function has been confirmed on this hearing. The proper question to be considered was whether it appeared to the Supreme Court "after inquiry and consideration of the evidence adduced before the (magistrate) that the conviction ... cannot be supported". If it could not be supported, then the Supreme Court was empowered to restrain further proceedings upon, or in respect of, the conviction. The learned judge does not, in his judgment, in terms refer to the question of whether the conviction can be supported, much less answer a question posed in these terms.

The submissions for the appellant, which I would accept, are as follows:

"The meaning of the expression 'the conviction ... cannot be supported' in s. 112 (5) of the Justices Act has been elucidated by a line of authority in this State, culminating in Hooper v. Gorman ^[F2] , where the earlier decisions in Ex parte Wetherburn; Re Mills ^[F3] , and Ex parte Ross; Re Pym ^[F4] were approved. These decisions establish that a statutory prohibition under s. 112 may be granted, inter alia: (a) where there is no evidence to support the conviction or order; (b) where a finding of fact is one that reasonable men could not find on the evidence; (c) where the magistrate makes a fundamental error in law amounting to such misdirection that the relevant facts are not determined. "However statutory prohibition does not lie in respect of incidental errors which are no more than wrong reasons for the magistrate's decision, such as wrong inferences of fact: Ex parte Wetherburn; Re Mills ^[F5] "In particular s. 112 does not confer a remedy by way of appeal in the ordinary sense: Peck v. Adelaide Steamship Co. Ltd ." ^[F6]

A consideration of the judgment under appeal indicates that his Honour did not confine himself within the strict limits which the section as interpreted by the courts imposes. His Honour said: "It is submitted on behalf of the plaintiff that a consideration of the magistrate's judgment demonstrates a failure by the magistrate to appreciate the evidence to which he refers and demonstrates a jaundiced approach to it. It is further submitted that he only considered part of the evidence on some aspects of the case, and failed to give any weight to other relevant and significant evidence on these topics. This is said particularly of his consideration of the funds available to the company and of the liabilities of the company at the time the debt was contracted."

This is a submission which should have been rejected, but it was not; and his Honour proceeded to substitute his views in a number of relevant respects for those of the magistrate, and to assess and comment upon evidentiary matters the weight of which were within the sole province of the magistrate, unless the limits of reasonableness were exceeded. Having done so, he reached the conclusion that the magistrate was "not justified" in convicting the respondent. He appears to have treated the hearing before him as an appeal on fact.

Thus the question for this Court is to consider whether, after the inquiry and consideration of the evidence for which the section calls, the order cannot be supported. There can be no doubt that facts fundamental to the establishment of the charge are the actual state of the company's finances at the relevant date and the defendant's knowledge thereof. It must be shown that the winding up disclosed a state of affairs which indicate that the officer in question did not have reasonable or probable ground of expectation of the company being able to pay the debt to the contracting of which he was knowingly a party.

That the evidence was capable of supporting the conclusion that the defendant had ample knowledge of the state of the company's affairs at the relevant time is not the subject of challenge. What the assets of the company were at the relevant time was shown. The existing liabilities were established by evidence, subject only to one matter to which I shall shortly make reference. There was debtate as to the value of the company's shareholding, but the determination of the value of these shares was a question of fact.

The qualification as to liabilities arose from the circumstance that the company's auditors had, prior to the relevant date, refused to certify the accounts of the company, unless a provision was made in the sum of $370,000 against a future possible liability to income tax. There was also an evidentiary dispute as to the value of a disputed debt owed to the company.

The case was not complicated by the offering of evidence by the respondent which conflicted with the prosecution's case. The respondent offered no evidence. As I would see the problem, it does not materially differ from the consideration of a submission that there was no case to answer.

There was admitted in evidence a balance sheet and profit and loss account of Stirling Henry Ltd. and its subsidiary company, being a consolidated balance sheet. There is no contention that these accounts were other than the most favourable accounts to the respondent. These accounts were for the year ended 30th June, 1969, and the evidence showed that they were certified by the respondent personally. In respect of certain holdings referred to in these accounts the value was up-dated by notes to the accounts to 5th January, 1970. In particular, the balance sheet showed:

Note 3 read: "Investments-At Cost. The market value of Shares in the listed Company, a mining exploration company, was $320,291 (Consolidated) and $296,771 (Holding Company) as at 5th January, 1970."

This reference is to the holding of some 700,000 shares and options in Endurance Mining N.L. which constituted the company's major asset. There was evidence that the market value of these shares had increased by the sum of $205,000 between 5th January, 1970, the date mentioned in Note 3, and 5th February, 1970, when the debt in question was contracted so as to have a market value at the latter date of $525,000.

They had, however, on the evidence, cost the company $1,230,000, were highly speculative, and the magistrate had evidence before him from which he could infer that, if the market were flooded with these shares in a forced sale to pay debts, there would be a substantial loss in value, and that this effect would be known to the respondent.

There was thus, in my opinion, no compelling reason for the magistrate to attribute to these shares a value of more than $525,000, when considering their availability to meet the debt in question. He was, on the evidence to which I have made reference, entitled to attribute a substantially less figure, and a consideration of his reasons make it probable that he did. He was clearly not bound to treat this market value figure taken from stock exchange quotations as being, in the view of the respondent, equivalent to money in the bank available to meet a newly contracted debt.

The balance sheet shows that the company held other shares in a portfolio. The entry in the balance sheet appears as follows:

Note 7 is in the following terms: "A number of shares have been realised since balance date at prices substantially above market value at 30th June, 1969. Therefore the provisions for loss on realisation of $70,000 (Consolidated) and $50,000 (Holding Company) are considered adequate."

There was no evidence in the case to which attention has been drawn throwing any further light on the nature of these shares or their value. The number which had been realized did not appear, but it could be assumed that any realization either went in satisfaction of debts, and any balance was reflected in the current account as at 5th February, 1970, or the whole was so reflected.

On the morning of 5th February, 1970, the company held 16,060 shares in a company called Tasminex. The closing quotation on the stock exchange on the day before was $12 per share. On this basis the value of the holding was $192,720. The company had not paid for any of these shares, and owed the brokers $1,019,202.09 and was thus in respect of this holding showing a loss of $826,482.

The company's bank account was in credit in the sum of $81,861. The fixed assets were shown in the balance sheet as $43,942, and there was a disputed debt owed to the company and claimed to be for $167,076, so that on the morning of 5th February, 1970, subject to the evidence which entitled the magistrate to vary the figures, the company's position was as follows:

It owed the brokers $1,019,212, and it had a contingent or potential liability to the Commissioner of Taxation for $370,000.

Ignoring the contingent liability and any adjustment to the value of the Endurance shares, to which reference has already been made, and realizations of shares, these figures show an excess of assets over liabilities of $134,000 approximately.

It is immediately apparent that, if the full value was not attributed to the disputed debt and, if the value of the Endurance shares were written down for the reasons given, the liabilities might well have exceeded the assets, without taking into account the contingent debt to the Commissioner of Taxation. It was known to the respondent that the most the debtor was offering in settlement of the disputed debt was $10,000, and the evidence disclosed that it was settled for this sum in the liquidation. Reference has already been made to the fact that the auditors insisted on provision being made for a possible liability to taxation. The respondent claimed that an opinion had been furnished by counsel and the Chairman of Directors, who was a solicitor, had advised that this tax would not be properly assessable.

These were evidentiary considerations, the weight of which it was for the magistrate to consider. His finding that the respondent, or a reasonable man in his position, was not entitled to ignore this possible liability is not shown to be erroneous, much less to be a fundamental error of law within the principle which allows relief under s. 112 of the Justices Act.

The evidence showed that this was the state of affairs when the respondent on 5th February, 1970, placed an order with Donovan & Co., for the purchase of an additional 5,000 shares in Tasminex, giving rise to a debit of $131,305.50, which is the transaction to which the charge relates.

I am not prepared to accept as a proposition of law that, in order to succeed in a prosecution under this section, it is incumbent on the prosecution to prove that, at the date in question, the liabilities of the company exceeded its assets. By way of example, a director may have knowledge of what has happened, or is likely to have happened, which will bear upon the company's capacity to pay the debt in question, notwithstanding its present solvency. The section is not directly concerned with the question of whether, if a creditor pursued his legal rights to judgment and some form of execution, satisfaction would have ensued, but is concerned with the question of the company paying the debt. It surely cannot be a satisfactory answer to a charge under this section that on a winding up there would be a probability that the creditor would receive dividends amounting to 100 cents in the dollar. Creditors do not do business with a company on this basis.

So, with only $81,000 in the bank, a current liability of over $1 m. to brokers, assets (current and fixed) which could reasonably be regarded as insufficient to meet that current debt, and no apparent prospect of borrowing money, a further debt of $131,000 was incurred, in circumstances where it could be regarded as an act of desperate speculation. It was, in my view, open to the magistrate to form the opinion that, if called upon to do so on 5th February, 1970, to pay its debts, it could not do so within a reasonable time, even ignoring the potential debt of $370,000 for income tax. The figures in the balance sheet were not a compelling guide to realisable figures. He could conclude as a matter of practical judgment that, if the company was then and there wound up, a deficiency would result; and he was equally able to conclude that the respondent knew the situation. He could readily have concluded that neither the respondent nor a reasonable man in his position would expect that the company could pay this debt. The position of a company which is incurring large risks by reason of the variations in the price of shares from one day to another is special, and to be distinguished from that of an ordinary trader dealing in merchandise.

To this material should be added the answers given by the respondent in his examination before the Master in Equity and in particular the following question and answer: "Q. Well, as a matter of fact you did not really look at the situation to see how you were going to pay for the Tasminex shares you were ordering? A. No, I don't think so."

This can be used to reinforce the view that it was open, on the evidence, to find that it did appear, in the course of the winding up, that the respondent did not have the ground of expectation for which the section calls, but made a speculative plunge with indifference to the prospect of payment, and that any entertaining of an expectation was groundless.

The respondent submitted that there was no evidence of share certificates being delivered pursuant to the order he gave, nor was there evidence to support a finding that the debt to Donovan & Co. was provable in the winding up. These submissions were made to Cantor J., and rejected and, in my opinion, rightly so. The magistrate had evidence of an order to the brokers and of purchases made in fulfilment of that order, and a document signed by the company and dated March 1970 provides material putting it beyond doubt that a debt existed in respect of the transaction in question.

In my opinion, there was a case to be answered and the defendant, not having called evidence, the conviction can be supported. The respondent appeared in person. He should pay the costs of the appeal and have a certificate under the Suitors' Fund Act, 1951 . In all the circumstances, an application for an order that the respondent pay the costs before Cantor J. was not seriously pressed, and there should be no order in respect of those costs. The conviction before the magistrate should be affirmed but, pursuant to the powers under s. 115 (3) of the Justices Act , the fine should be reduced to $200, being the maximum pecuniary penalty then allowed under the section.