256 Case List

Company

Pre-incorporation contracts

Kelner v Baxter (1866) – pg 134. contract signed by promoters who added “on behalf of – X company ltd”. Company concerned was not in existence at time contract made. Court said that if person makes contract as agent when the principal has not been formed then the agent is bound personally.

Newborne v Sensolid (Great Britain) Ltd (1954) – pg 134. N contracted to sell tinned ham to S. Contract signed using coy name but not yet incorporated and added a scrawl under name which was individual’s signature. Held that coy or individ. could not enforce contract as individ had not signed as agent and coy was not in existence.

Elders Pastoral Ltd v Gibbs (1988) –

Walker v Carter (1993) –

Dfc v McSherry Export Kilns Ltd (1987) – pg 137. DFC advanced money to MEKL. MEKL granted a debenture to DFC. This was executed on same day as incorporation, however incorporation did not take place until the following day therefore making it a preincorporation contract. Debenture was lodged 3 days later however this was not held to be deemed a deliberate act that ratified the contract.

Class-Sea Boats v Duke (1996) – pg 137. actions to carry out terms of pre incorp contract do not constitute ratifying contract.

Topic 7 – Directors Duties

Sojourner v Robb (2008) – “best interests of company as perceived by director”. Courts rarely interfere. It would have to be a decision that no reasonable person could think was in best interests of coy – extreme.

Regal (Hastings) Limited v Gulliver (1942) – pg 235 Conflict of interest. Interests of the company must come first. Directors have to account for profits they enjoy even if the company was not prejudiced. Two directors took up shares of a subsidiary coy to help further business of original coy (cinemas). When plans of coy changed, they sold their shares at a profit. As a matter of fact, the directors acted in good faith, however did not obtain prior approval to sell shares from shareholders before retaining profits. Due to “fiduciary relationship/that they were directors of Regal” reason they obtained the shares in the first place.

Thorington v McCann – pg 233. An executive director of a successful tavern took up a renewal of a lease of the tavern on his own behalf rather than the company’s.

Walker v Wimbourne (1976) – Consider creditors. Coy directors guaranteed the loans of another coy in the group at a time when the coy was itself in financial difficulty. Courts held that transaction exposed the coy to serious risk of financial loss and was undertaken in total disregard to the best interests of the coy and its creditors.

Nicholson v Permakraft (NZ) Ltd (1985) – pg 247 Court of appeal obiter suggests that to ignore the intereste of creditors by making payments prejudicial to them might well constitute a misfeasance by the directors.

Hilton International Ltd (in liq) v Hilton (1988) – pg 248/225 followed Nicholson in that directors owe duty to creditors.

Kuwait Asia Bank EC v National Mutual Life Nominees (1990) – pg 248 not follow Nicholson and directors do not owe duties to creditors.

Hogg v Cramphorn (1967) – pg 219 Proper purpose doctrine. If power exercised improperly then transaction can be set aside. A director may act in the best interests of coy but still act for an improper purpose. There was a takeover bid of the coy so the coy allotted shares (with voting rights) to an employee trust to defeat the takeover bid as they felt that a takeover was not in the best interests of the coy. Although acting in good faith, the purpose of being able to issue shares was not to defeat takeover bids, therefore there had been a breach in duty.

Howard Smith Ltd v Ampol Petroleum Ltd (1974) – pg 220 – proper purpose refined. H & A were competing in a takeover of another coy. A, in conjunction with another party controlled 55% however the board wanted H to takeover so issued further shares to dilute A’s shareholdings to allow H to takeover.

Topic 8 - Duties re Reckless trading

Thompson v Innes (1985) – pg 223 Coy had not shown profit in two years trading. Sales only reached 63% of budget and debts increased by 70%. It was held that to continue trading was reckless.

Re Bennett, keane & white ltd (in liq) (no 2) (1988) – company was incorporated to acquire hotel. Once acquired, an expensive renovation programme was entered into which resulted in overextending debt to the extent that they were unable to pay ordinary creditors as well as reducing turnover while renovations were being carried out. Held that in failing to investigate and plan the project, that the directors had acted recklessly.

Nippon Express (NZ) Ltd v Woodward (1998) – courts held that directors had failed their duty under s135 by continuing trading when one of them was untrustworthy and had run up debts greater than $1M with little hope of repaying them.

Re Hilltop group (in liq); Lawrence v Jacobson (2001) – test of liability in s135 is objective. How would an ordinary, prudent director be expected to act in the circumstances.

Fatupaito v Bates (2001) – pg 223. s135 imposes stringent duty on directors to avoid substantial risks of serious loss to creditors even when great rewards exist.

Re BM & CB Jackson Ltd (in liq); Benchmark building Supplies Ltd v Jackson (2001) – pg 221. a director will be held fully responsible even though he or she may have been much less involved in running the coy than fellow directors.

Re Petherick Exclusive Fashions Ltd (in liq) (1987) – P was sole director of coy and held all but two shares. Coy was never profitable and was liquidated with $80,000 worth of debts. When liquidator took over he found 8 cheques totalling $7,500 dated just prior to liq and not sent out. This showed that coy had to wait for funds to clear before sending cheques. Held that from this point on P could not have honestly believed that the coy would be able to pay debts as the arose. Also held to trade recklessly.

Re South Pacific Shipping Ltd (in liq); Traveller v Lower (2004) – reviewed the authorities on the sections (both under the old and new Acts) and held that:
(i) Only taking illegitimate risks is penalised;
(ii) In determining whether a business risk is legitimate material considerations included:

(a) Whether the risk was filly understood by those whose flmds were in peril,
(b) Where a company is insolvent or on the edge of that, the persons primarily interested are the creditors not the shareholders,
(c) While there is no duty to cease trading as soon as a company becomes balance sheet insolvent, the tolerance of continuing trading is generally a matter of months, and
(d) Whether the conduct of the director was in accordance with orthodox commercial practice.
(iii) The collateral benefits L hoped to gain by continuing and expanding trading, (while known to the shareholders in general terms) were to be gained by taking risks with the money of trade creditors who were not on notice of the risks they faced.
(iv) It was most unusual for a company to continue trading for years in such circumstances. (v) The governance style adopted by the directors was lamentable (directors’ meetings were few and far between, there was limited adherence to orthodox practices such as agendas, board papers matching performance against forecasts, ensuring decisions were implemented, recording proceedings in minutes).
(vi) The directors did not do what can be expected in a company facing insolvency, ie addressing the reasons for insolvency and putting in place a carefully thought through strategy for salvaging the situation, and
(vii) in those circumstances, L can “fairly be regarded” as having forfeited the protection of limited liability (it was irrelevant that L believed he could inject whatever finds were necessary to ensure that trading continued).
The Court concluded:
1. SPS should have ceased trading in 4/1994 not 2/1998, and L was in general liable for all the debts between those dates.
2 After taking ino account various off-setting factors the court ordered L to pay $7 million towards the $27 million to unsecured creditors.

South PacWe Shipping Limited case taken on appeal to the CA:
Lower v Traveller [2005] 3 NZLR 479 (CAy
• Approach taken tby William Young J m distinguishing between legitimate and illegitimate risk was confirmed

Further endorsed in Mason v Lewis [2006 3NZLR 225]
• The CA set out ’the essential pillars’ of s135
“The duty which is imposed by s.135 is one owed by directors to the company (rather than to any particular creditors);” “The test is an objective one;”
“It focuses not on a director’ s belief but rather on the manner in which a company’s business is carried on, and whether that modus operandi creates a substantial risk of serious loss;”

“What is required when the company enters troubled waters is a ‘sober assessment’ by the directors . of an ongoing character, as to the
‘ company’s likely future income and prospects”.

Topic 9 – Duty of care

Re City Equitable Fire Insurance Co Ltd (1925) – pg 224. Romer J held that a director who acts honestly could only be liable for gross or culpable negligence in his or her business sense. This means that the directors duty was something less than the conventional duty to take all reasonable care.

Dorchester Co Ltd v Stebbing (1989) – the court rejected the argument that non executive directors can rely on the competence and diligence of auditors, and do nothing themselves.

Mason v Meltzer v Lewis (2006) – Directors had failed to pay proper attention to the financial affairs of the company when solvency was a critical issue. They also failed to ensure that standard accounts were kept and tabled. They had relied on a dishonest manager and an accountant in relation to these matters. (kind of knew or should of known, but didn’t do anything.)

Topic 10 – Directors duties Company Information

Aberdeeen Rly Co v Blaikie Bros (1854) – pg 228 A coy contracted to purchase office furniture from a p/ship. The coy’s chairman of the board was also the managing partner of the p/ship. Conflict of interest and the coy was allowed to set aside the contract.

Cook v Deeks (1916) – 3 of the 4 directors of a Canadian railway company diverted a contract in which the company was interested, to another company which they had formed. Held that the contract belonged to the original company and the directors were bound to hold it on behalf of the coy and were not entitled to “make a present of it to themselves”.

Canadian Aero Service v O’Malley (1973) – where the president and executive VP of a coy were held to be liable where having actively pursued a contract on behalf of the coy, then resigned and formed a new coy and acquired the contract for the new coy.

Pacific Shipping Co Ltd v Andersen (1985) – a shipping coy operated between lyttelton and wellington and were looking to add a 2nd ship. The 2nd ship could be chartered however board decided to defer decision and await results of a feasibility study. Meanwhile a director resigned and chartered the same boat to effectively do the same route. Held that Anderson had usurped the business opportunity for himself using the coy’s information and had made use of unauthorised info.

Queensland Mines Ltd v Hudson (1978) – Managing director, Hudson, obtained a license for coy to develop mine but was unable to proceed owing to financial problems. H resigned and, with the knowledge of the directors, developed the mine himself. Held that he was not accountable for profits. The rejection and knowledge of the board excused him. (it was above board and in the open)