Joseph v Campbell

(1933) 50 CLR 317
(1933) 39 ALR 390
(1933) 7 ALJ 210
(1933) 51 WN (NSW) 1

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(Judgment by: Rich, Dixon and McTiernan JJ.)

Joseph
v Campbell

Court:

Judge:
Rich, Dixon and McTiernan JJ

Hearing date: 9-10 August 1933
Judgment date: 14 August 1933

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Judgment by:
Rich, Dixon and McTiernan JJ.

The appeal is from an order of Harvey, C.J in Equity, which dismissed an application on the part of the appellant for the removal of his name from a list of contributories. The list of contributories was settled by the liquidator of the London Furnishing Co Ltd (in liq). It imposed upon the appellant a liability in respect of 1800 shares of £1 each, upon the footing that no amount had been paid up thereon. The question for decision is whether the appellant did or did not pay up in cash the capital represented by these shares. The appellant and his wife were the only shareholders of a Company incorporated in Victoria, called Louis Joseph Pty Ltd, the business of which he conducted. This Company had a branch of its business in Sydney and a branch at Newcastle. The appellant resolved to set up another business in Newcastle, and for that purpose to incorporate another Company, but under the law of New South Wales. Some delay occurred in the registration of the proposed Company, and in the meantime it became necessary to secure a lease of the premises which the appellant desired to use for the new business. The appellant therefore opened the business under a trade name before the Company was registered. He obtained £1000 from Louis Joseph Pty Ltd by drawing two cheques of £500 each upon its bank account, which, indeed, he appears to have used as his ordinary means of banking. This sum was applied in meeting the expenses of establishing and conducting the business, including the purchase of some of the stock-in-trade. The remainder of the stock-in-trade was supplied by Louis Joseph Pty Ltd, and debited to the new business at Newcastle. This business was opened at the end of January, 1928. The Company was registered on 5th April, 1928, and is the liquidating Company. Before the date of the incorporation goods had been supplied to the business by Louis Joseph Pty Ltd to the amount of £800 16s. 6d. Upon its incorporation the liquidating Company took over the business. No formal agreement was drawn up, and no record was made of any terms upon which the business was so taken over. The name of the Company was substituted for the trade name previously used. It continued the same set of books of account, which were made up upon the footing of a business commencing its accounting period at the end of January, 1928, and contained no record or suggestion of any change of ownership on the new Company's registration. A bank account had been maintained under the trade name previously used, and into this bank account the two cheques, amounting to £1000, of Louis Joseph Pty Ltd had been paid at the end of January, 1928. A new account was opened in the name of the Company after its incorporation, and the old account was closed by transferring to the account of the new Company, by means of a cheque, the amount standing at the credit of the old account, which was £172 12s. 2d. Upon its registration the memorandum of association of the Company was subscribed by seven persons in respect of one share each; otherwise no share capital had been issued.

On 18th April, 1928, the appellant drew, in the name of the liquidating Company, a cheque for £1800 in favour of L. Joseph Pty Ltd The bank account of the liquidating Company was not opened until 20th April, 1928. On that day a cheque was drawn in the name of L. Joseph Pty Ltd on that Company's account for a like amount in favour either of the appellant or the liquidating Company, it does not appear which. In the books of Louis Joseph Pty Ltd the amount of the cheque was debited against the appellant as an advance to him. On 20th April, 1928, the appellant made out an application to the liquidating Company for 1800 shares, and paid the cheque for £1800 into that Company's bank account, thus opening the account. In his application he said -- "I have paid to the Company's bank at Newcastle the sum of £1800, being at the rate of £1 per share." On 23rd April, 1928, the liquidating Company's cheque of the 18th April was presented for payment and the amount debited to its account. It is this transaction which the appellant relies upon as constituting a payment up of the amount of the shares which were allotted to him in pursuance of his application.

The decision appealed from denies that a payment in cash in respect of the shares took place, on the ground that the cheques were no more than cross-cheques representing no actual payment. There can be no doubt that the two cheques were meant to effect concurrent counter-payments. When the cheque of Louis Joseph Pty Ltd was given in payment of the liability upon the shares, it was intended that, by means of the cheque of the same amount which had, on 18th April, been issued in the name of the liquidating Company, its proceeds should be at once withdrawn from the bank account to which it would be credited. If the liquidating Company issued that cheque neither in payment of a liability which it was bound to discharge, nor in exchange for some equivalent consideration, it would, in our opinion, be clear that the effect of the transaction was to leave the liability upon the shares undischarged. Although the cheque would have been credited to the liquidating Company's account as money, yet inasmuch as it was appropriated to answer the Company's own outstanding cheque, it would not form part of the liquidating Company's general resources, and the Company would not have been put in funds by the transaction. Upon this hypothesis the appellant would remain liable for the amount of the shares.

The rules of law which bring about this result are not in doubt. They are stated in Commissioner of Stamp Duties (NSW) v Perpetual Trustee Co Ltd (Sarton's Case), 43 CLR 247 at pp 263-4, (1930) ALR 33 at p 36, in the judgment of Knox, C.J, and Dixon, J, as follows: --

The provision contained in s 25 of the English Companies Act 1867 is in force in New South Wales: it is s 55 of the New South Wales Companies Act 1899. Therefore, in the absence of a filed agreement providing for some other form of payment, shares must be paid up in cash. It is, of course, well settled that when the liability upon shares and the liability upon a cross-demand against the Company of a sum certain immediately payable are mutually extinguished by an agreed set-off, this amounts to payment within the section -- see Larocque v Beauchemin, (1897) AC 358 at p 365; North Sydney Investment and Tramway Co v Higgins, (1899) AC 263 . The circuity involved in actual cross-payments is dispensed with. Spargo's Case, (1873) 8 Ch App 407 ; Fothergill's Case, (1873) 8 Ch App 270; Larocque's Case, [1897] AC 358 ; and Higgins's Case, [1899] AC 263 , were directed to the application to the requirements of this section of the principles of the common law which enabled payment to be effected without circuity. But these principles are called into play only for the purpose of s 25, and only where there is a sum lawfully payable by the Company which when paid might lawfully be repaid to the Company in discharge of the liability upon the shares. The liability upon shares cannot be discharged unless the Company obtains in funds or assets that which is, or is supposed to be, a real equivalent to the capital represented by the shares.

But does the same result follow if the cheque drawn against the proceeds of the cheque given in respect of the share capital is used to discharge an actual liability of the liquidating Company, or is applied in the acquisition of assets? In our opinion it does not. If the Company's assets are increased or the actual liabilities diminished to the extent of £1800 as a result of the transaction, it appears to us that, in substance, the share capital of the Company has been supplied to it and utilised by it for a legitimate purpose. In this case objection can be made that if the share capital has been provided it has not been provided in cash. The payment of a cheque credited to the bank account is a cash payment. The complaint is not, as so often is the case under s 55 of the "Companies Act" of New South Wales" -- s 25 of the English Companies Act 1867" -- that, although the share capital is provided, it is not paid in cash. It is that an apparent payment in cash is illusory because it is annihilated by a counter-payment. The real question appears to us to be whether the counter-payment restores the first payment to the payer or is an expenditure by the Company in the discharge of its liabilities or for some other legitimate purpose. In other words, has share capital been paid but applied in the acquisition of assets or the discharge of liabilities? If the Company had been registered on or before the date when the business was commenced, and the cheque for £1800 in favour of L. Joseph Pty Ltd had been given in respect of stock-in-trade supplied by it, we think no doubt could be entertained of the propriety and efficacy of the transaction. But, because the registration of the Company was delayed, the Proprietary Company advanced the sum of £1000, and supplied goods for the purpose of the Newcastle business. When the liquidating Company took over the business as a going concern a formal agreement might have been made, imposing on the Company, as part of the consideration for the acquisition of the business, the obligation to reimburse the Proprietary Company in respect of these advances and goods, and in that case we think that there could have been no doubt that the shares would have been effectually paid up. But the transfer of the business to the new Company was accomplished merely by putting the Company in possession of the enterprise, and was accompanied by no express statement of the terms upon which it was done. Did it involve the Company in any implied obligation to discharge the debts of the business, or to reimburse the expenditure incurred in connection with it?

In the judgment appealed from Harvey, C.J in Equity answers this question in effect by saying that it is a reasonable inference that the Company took over the business on a "walk-in, walk-out" basis, indemnifying the appellant against any liabilities which he had incurred up to the date of the Company's taking over the business, and that His Honour believes this is what would be held to be the implied contract. We agree that a contractual relationship was created between the appellant and the new Company, but we think the obligation implied is a little more than mere indemnity. When the affairs of two or more companies or enterprises are governed by the decisions of one mind, the absence of any formal expression of an intention to contract often means that no contractual intention existed. But in the present case the plan upon which the transaction proceeded is clear, and, in our opinion, that plan necessarily involved the assumption of obligations on the part of the Company. The plan was that the Company, upon its registration, should assume the proprietorship of the business retrospectively as from its inception. Upon this footing the accounts of the business continued as if the Company had existed at the beginning and the books of account were its books; the receipts, whether of capital or revenue, its receipts; and the expenditure, its expenditure. The first balance-sheet was made up as for an accounting period beginning at the end of January, when the business was established and before the Company was incorporated. Even apart from the oral evidence and depositions, all this makes it clear that there was a real intention that, in acquiring the benefit of the business, the Company should do so upon terms that it should bear all the burdens incurred as from the establishment of the business which was set up in anticipation of the Company's formation. Those burdens had necessarily been imposed upon the appellant, and the books, particularly the private ledger, show that they were considered as undertaken by the Company. The true implication is, we think, that the Company should reimburse the moneys provided and discharge the expenditure incurred pending its registration. In the accounts the sum of £1800 represented by its cheque of 18th April, 1928, is treated as a payment on account of the liabilities of the business to Louis Joseph Pty Ltd incurred from 28th January to 31st December, 1928, that is, by the successive proprietors for the time being of the business. Among these liabilities are included the advance of £1000 and the price of the goods supplied. It follows that the payment should be taken as made in intended discharge or recoupment of these sums. The books of Louis Joseph Pty Ltd are not in evidence, but we do not think we should assume that the payment was not there credited accordingly.

In these circumstances we are of opinion that the cross-cheque was given and used to discharge an actual liability of the Company incurred in the acquisition of its assets. The result appears to us to be strictly in accordance with the policy of the company law, because the actual outlay incurred in establishing the enterprise for the benefit of the intended Company was thrown against share capital, and this was done when the enterprise was fresh, and before it underwent any material change or deterioration. Although payment and counter-payment by cross-cheques may raise suspicion, yet in this case upon examination it turns out to be no more than a formal expression of the payment of share capital and a concurrent but legitimate application of the share capital so paid.

For these reasons we think the appeal should be allowed.

The order of the Supreme Court, dismissing the summons, should be discharged, and in lieu thereof it should be ordered that the appellant should be settled on the list of contributories of the London Furnishing Co Ltd (in liq) in respect of 1800 shares fully paid up, instead of 1800 shares upon which nothing had been paid up.

The appellant should have his costs in the Supreme Court of the summons and his costs of this appeal out of the assets of the Company.