Re S. M. Barker, Ltd

• Jurisdiction: Ireland
• Judgment Date: 01 January 1950
• Date: 01 January 1950
• Docket Number: (1947. No. 755 P.)
• Court: High Court

In re S. M. Barker, Ltd.

In the Matter of S. M. BARKER, LIMITED and in the Matter of the Companies Acts, 1908 to 1924

(1947. No. 755 P.)

Company - Winding up - Summons by liquidator against directors - Extent and limitations of use of s. 215 of Companies (Consolidation) Act, 1908 (8 Edw. 7, c. 69).

Sect. 215, sub-s. 1, of the Companies (Consolidation) Act, 1908, provides as follows:—"Where in the course of winding up a company it appears that any person who has taken part in the formation . . . of the company, or any past or present director, manager, or liquidator, or any officer of the company, has misapplied or retained or become liable or accountable for any money . . . of the company, or been guilty of any misfeasance or breach of trust in relation to the company, the court may, on the application of . . . the liquidator, or of any creditor or contributory, examine into the conduct of the . . . director, manager, liquidator, or officer, and compel him to repay or restore the money . . . or any part thereof . . . with interest at such rate as the court thinks just, or to contribute such sum to the assets of the company by way of compensation in respect of the misapplication, retainer, misfeasance, or breach of trust as the court thinks just."

Shortly before the making of an order for its compulsory liquidation a private company, limited by shares, and incorporated under the Companies Acts, 1908 to 1924, voluntarily released a number of simple contract debts due to it and arising out of certain transactions between three persons in their personal capacity and the company. These three persons were, at the time, the sole directors of the company and the entire share capital of the company then stood in the names of the three persons and of another company the share capital of which was also owned exclusively by them. The entire share capital of the company was later transferred on a sale to another group of persons and subsequently the official liquidator, finding himself faced with a heavy deficiency of assets, moved the Court for an order under s. 215 of the Companies (Consolidation) Act, 1908, declaring that the former directors were liable to contribute to the assets a sum by way of restitution or as damages for misfeasance.

Held, that since the pecuniary gain resulting from the release of the debts had been enjoyed by the debtors concerned in their personal capacity only and not either as directors of the company or as trustees for the shareholders the section had no application and accordingly the motion by the liquidator should be dismissed.

Dictum of Maugham J. in In re Etic[1928] 1 Ch. 861, at p. 875, applied.

Motion on Notice.

S. M. Barker, Limited, a private company limited by shares, was incorporated in the Irish Free State under the Companies Acts, 1908 to 1924, in the year 1932, with a paid-up share capital of £500. Three of the original directors and shareholders at its formation were persons named Solomon Latchman and his sons, Max Latchman and Moss Latchman, who, in the year, 1946, while they were the sole directors of the company and controlled its entire share capital, sold their interest in the Company to one, A. G. T. Cole, and persons associated with him, for cash.

In the year, 1947, a petition was presented by a creditor for the winding up of S. M. Barker, Limited, on the ground of insolvency, which proceedings were undefended, and an order was made by the High Court of Justice that the Company be wound up and Mr. Robert P. J. Smyth, an accountant, was appointed official liquidator.

In view of a deficiency of assets and having regard to difficulties encountered in ascertaining the nature of the transaction relating to the transfer of the share capital in the year, 1946, the liquidator now applied to the Court for an order pursuant to s. 215 of the Companies (Consolidation) Act, 1908, declaring that the said Solomon Latchman, Max Latchman and Moss Latchman, being past directors of the Company, were liable to pay and contribute to the assets of the Company certain sums which appeared to the liquidator to be due by them to the Company.

The material facts appear more fully from the judgment of Gavan Duffy P., post.

Cur. adv. vult.

Gavan Duffy P.:—

On the 24th November, 1947, S. M. Barker, Limited, a private company, limited by shares, incorporated in Ireland

under the Companies Acts, was ordered to be wound up, upon an undefended petition presented by a creditor on grounds of insolvency, and Mr. Robert P. J. Smyth, incorporated accountant, was appointed official liquidator. Faced with a heavy deficiency of assets, the liquidator now moves this Court for an order, under s. 215 of the Companies (Consolidation) Act, 1908, declaring three past directors of the Company, Messrs. Solomon Latchman and Max and Moss Latchman, his sons, liable to contribute to the assets sums amounting (I shall generally disregard shillings and pence throughout) to £14,540, by way of restitution or as damages for misfeasance.

The Company was incorporated in the year 1932, with a paid-up share capital of £500, afterwards increased to £600. The three Latchmans had been directors from the outset and during the critical period from early in August, 1946, to 12th October, 1946, they were the sole directors of the Company; and during that period the three Latchmans owned between them the Company's entire share capital, which stood registered in their several names and in the name of the Universal Woollen Company, Limited, a company entirely owned by them.

The evidence is that early in August, 1946, the Latchmans were approached, on the introduction of one of their employees, by one, A. G. T. Cole and his associates from London, strangers to the Latchmans, who contemplated acquiring the assets of the Company by buying all its share capital from them. There were no debentures and the trading of the Company had shown profits in the years, 1942, 1944 and 1945, to go no further back, and a loss in 1943. The Company claimed, however, to possess valuable manufacturing and purchasing licences and these were then privileges hard for newcomers to procure.

Negotiations followed immediately. The Latchmans obtained satisfactory bank references as to Mr. Cole; the fixed assets were revalued and a sum of £6,600 was inserted in the balance sheet for goodwill, theretofore omitted; the Latchmans, who had asked for a higher figure, based the goodwill on the value of the Company's licences and the figure was a compromise accepted by the Cole group. The result of the revaluation was to add £8,000 to the value of the assets in question and to place them at a figure of £14,100 in the balance sheet. I need not examine the details because I am satisfied that the revaluation was honest and that it was accepted by the Cole group and that it is unimpeachable; in particular, the value of goodwill, as at that time, was fairly estimated.

The assets in the balance sheet had also included a sum of £14,540, representing the total indebtedness of the Latchmans to the Company; its auditors, with the consent of the intending purchasers, also altered this figure; they reduced it to £11,805, by first setting off a sum of £2,595, being the net liability of the Company to three "associated companies"controlled by the Latchmans and then by writing off gratuitously from the total of the Latchmans' indebtedness a sum of £140; this reduction was effected by way of making the total Latchman liability to the Company coincide with the excess of the Company's liabilities over its other cash assets.

The Cole group then agreed to pay to the vendors, as owners of the total share capital (£600) a sum taken on the balance sheet drawn up as at the 11th October, 1946, to represent the net excess of the Company's assets over its liabilities, as ascertained for the purposes of the sale. The gross purchase price was taken at £14,100, from which there fell to be deducted the difference between the debts due by the Company and due to it, as follows:—

Trade and general creditors	£10,500
Bank overdraft	3,499
	-------
	£13,999
Net debtors	2,194
	-------
Deficiency on balance	£11,805

In making these calculations the indebtedness of the Latchmans was eliminated from the assets. The net price was ascertained as follows:—

Revised value of stock and fixed assets plus goodwill	£14,100
Deduct net balance of liabilities, as above (being the precise equivalent of the Latchmans' liability, as now reduced)	£11,805
	-------
Balance payable in cash to vendors	£2,295
	-------

The purchasers also indemnified the vendors against certain liabilities undertaken by them personally in the interest of the Company. The purchase of the shares was completed as at the 12th October, 1946, but payment of the cash balance due to the vendors was deferred by agreement, pending the collection by the Company of book debts due to it. On the 12th October, 1946, the three Latchmans resigned from the Board and representatives...