Kirkel v Adams (C.A. 24/1933.) [1937] EACA 26 (1 January 1937)

### COURT OF APPEAL FOR EASTERN AFRICA.

Before SIR JOSEPH SHERIDAN, C. J. (Tanganyika), LUCIE-SMITH, Ag. C. J. (Kenya), and HORNE, J. (Kenya).

# MRS. FREDA KIRKEL (Appellant) (Original Second $Respondent$

#### $\eta$

## ALFRED DUNSTAN ADAMS. Liquidator of Kinemas. Ltd. (Respondent) (Original Applicant).

### C. A. $24/1933$ .

- Kenya Companies Ordinance, Cap. 93, Revised Laws-Assessment by Court of damages against delinguent directors or other officers of company—Valuation of assets of company— Balance-sheet of company no criterion of value of assets-Onus of proof of misfeasance. - $Held$ (12-1-34)—(1) That it is the duty of a liquidator instituting misfeasance proceedings to prove his case, and not for the alleged delinquent director or other officer cited as defendant to justify bis actions.

(2) That the balance-sheet or book value of the assets of a company for the purpose of holding such director or officer liable under section 235 of the Companies Ordinance is not a true criterion of the value of such assets, following the maxim, Tantum bona valent, quantum vendi possunt.

In a suit brought in the Supreme Court of Kenya by the official liquidator of Kinemas Ltd., the liquidator claimed the sum of Sh. 44,614/96 from the present appellant and her husband, Morris Kirkel, jointly and severally under section 235 of the Companies Ordinance, Cap. 93 of the Revised Laws, on account of misfeasance by them in their capacity as directors of the company. The amount claimed was divided up under nine heads in respect of which misfeasance or breach of trust was alleged. The official liquidator abandoned certain of the counts. In reviewing the evidence at the trial, the trial Judge held the defendant, the present appellant, liable in the sum of Sh. 17,794/ defendant (the present appellant) liable in the sum of Sh. 17,794/98 in respect of the sale of company's assets for a figure of Sh. 10,000, an inadequate figure which a person exercising due diligence would not have accepted. The trial Judge also found the appellant and her husband, as director of the company, liable jointly and severally to contribute to the assets of the company the sum of Sh. 17,794/98, and that Morris Kirkel, the appellant's husband, should contribute a further sum of Sh. $7,181/43$ , with interest and costs of the suit.

Against that judgment the present appeal was brought on the following grounds, inter alia: That the trial Judge erred in holding (1) that in disposing of the assets of the company the appellant failed to exercise ordinary diligence and was guilty of misfeasance; $(2)$ that the price of Sh. 10,000, at which the assets of the company were sold, was not a fair price; (3) that the price actually obtained by the sale of the said assets when they were sold by public auction nine months later was the criterion of their value. It was submitted that an asset shown at a specific price in a balance-sheet is no evidence of its actual value. and that the onus of proving the value of the assets lay on the liquidator of the company.

Schwartze for Appellant.

Harrison for Respondent.

Schwartze.—There can have been no misfeasance on the part of appellant, as assets were sold at a price approximating their value. Even if appellant were guilty of misfeasance, the amount which she should contribute is not what the trial Judge found. The onus of proof of misfeasance is on the liquidator, who must also satisfy the Court as to the proper value to be placed on the assets. The trial Judge based his finding on the value as shown in the balance-sheet, which is no criterion.

Harrison.—Referred to section 287 of the Companies Ordinance as to liability for a false statement made wilfully. Assets in balance-sheet must be true. Rance's case (1870), 6 L. R. Ch. A. C. 104, as to onus of proof. Figures shown in balance-sheet must be accepted as evidence to some extent. A liquidator has no means of producing evidence to contradict balance-sheet.

Schwartze replied.

The trend of the argument and further cases cited appear from the judgment.

SIR JOSEPH SHERIDAN, C. J.—This is an appeal from a judgment of the Supreme Court of Kenya, holding that the appellant with her husband was jointly and severally liable to contribute to the assets of a company, Kinemas Ltd., in the sum of Sh. 17,794/98. The claim against the appellant and her husband was brought on a misfeasance summons by the liquidator of the company: the claim made was for Sh. $44,614/9$ , being the value of the assets of the company as shown in its balance-sheet. The procedure by way of misfeasance summons is in accordance with the provisions of section 235 of the Companies Ordinance, Cap. 93 of the Laws of Kenya; it provides a summary procedure for taking action against delinquent directors. Section 235 (1) $reads:$ — $\mathcal{H}^{\mathcal{A}}(x) = \mathcal{H}^{\mathcal{A}}(x) = \mathcal{H}^{\mathcal{A}}(x)$ $\mathcal{L}^{\mathcal{L}}_{\mathcal{L}}$ $\frac{1}{2}$

"Where, in the course of winding up a company, it appears that any person who has taken part in the formation or promotion 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 or property 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 promoter, director, manager, liquidator or officer, and compel them to repay or restore the money or property or any part thereof respectively 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 fit."

This provision is similar to section $276$ (1) of the English Companies Act, 1929, which repealed and reproduced section 215 of the 1908 Act, and is based on section 10 $(1)$ of the Companies (Winding Up) Act, 1890. In the case of In re the London and Colonial Finance Corporation, Limited, 13 T. L. R. (1897), 576, which is a case on the last-named Act, Lindley, L. J., in his judgment at that page, says: "The summons was issued under section 10 of the Companies (Winding Up) Act, 1890, and the first thing to do is to ascertain what misfeasance or breach of trust is charged against the director. A summons such as this is not an indictment, nor are the proceedings commenced by it criminal proceedings. The proceedings are civil, as distinguished from criminal, and the summons is substituted for a writ in an action with a view to expedition and saving of expense." The liquidator therefore in this case is in the position of a plaintiff, and must prove his case. It has been submitted for the respondent that the onus of proof rests upon the appellant, but that to my mind is not the case. On this point the case of Cavendish Bentinck v. Fenn, 12 A. C. (1887), 652, is in point. $Lord$ MasNaughten, in his judgment at page 669, says: "The 165th section of the Act of 1862 has often come under discussion, and it has been settled, and I think rightly settled, that that section creates no new offence, and that it gives no new rights, but only provides a summary and efficient remedy in respect of rights which apart from that section might have been vindicated either at law or in equity. It has also been settled that the misfeasance spoken of in that section is not misfeasance in the abstract, but misfeasance in the nature of a breach of trust resulting in a loss to the company. . . It was therefore, in my opinion, necessary for the appellant to prove that Mr. Fenn has committed a breach of trust, or a misfeasance in the nature of a breach of trust, as a director of the Cape Breton Company, and that by reason of that misfeasance the company has sustained loss." Again, at page 670 of the same judgment, it is stated: "It clearly appears to me that the appellant has not proved that there was any misfeasance, nor has he proved hat there was any loss." In the judgment of Lord Watson at page 665 it is stated, with reference

to section 165: "It authorizes the recovery at the instance of the liquidator or a contributory of the company in liquidation. first of moneys for which the defendant has become accountable to the company, and secondly of pecuniary loss sustained by the company through the misfeasance or breach of duty of the defendant." Then there is the judgment of Lord Herschell at pages 663-664, in which he says: "I think I have now dealt with the whole of the case put forward on behalf of the appellant, and I have come to the conclusion that he has not established. on any of the grounds suggested, that there has been misfeasance on the part of the respondent resulting in loss to the company in respect of which compensation can be claimed." Section 165 of the Companies Act. 1862, which is referred to in these judgments, provided the procedure and remedy in the case of delinguent directors and officers. The question in this appeal then is: Has there been a misfeasance or breach of trust committed by the appellant by the sale of the assets of the company, including a lease, to Entertainments Ltd., and, if so, what is the amount of the resulting loss to the company? I will first take the case of the lease, the value of which in the balance-sheet of the company is put at Sh. 6,000. The learned Judge, as to the lease, said, at page 32 of the typed record: "The lease is valued in the balance-sheet at Sh. 6,000. I am not aware of the duration of the lease nor how much of the term is unexpired. In the absence of evidence that the lease was not worth Sh. 6,000. as shown in the balance-sheet as at 3-9-32, I must hold that this was the value of the lease which formed part of the assets sold for Sh. 10,000." I am clear in my mind that the balance-sheet or book values of the assets for the purpose of holding the appellant liable under section 235 is not the test, and that the learned Judge misdirected himself on the question of onus. Rather is the test the price which could be obtained by the liquidator in the course of the winding up of the company at the time the sale to Entertainments Ltd. took place. That the balance-sheet value is not the true criterion of the value of the assets is borne out out by the evidence of the liquidator, who is in the position of a plaintiff in the case, when he based his claim on a valuation of the assets at Sh. 20,000. In the face of his evidence, I do not consider that the balance-sheet value can be accepted for the purpose of fixing the liability of the appellant. Mr. Schwarte has argued that the lease would have reverted to the landlord on the company going into liquidation. His continuing the lease would have rendered him liable for the rent, and it must I think be presumed that he would have disclaimed it as an onerous asset. I see no reason for disagreeing with the evidence of Morris Kirkel that the lease would have reverted to the landlord. I do not think that the liquidator, in placing a value of Sh. 20,000 on the assets can have put any value on the lease; he probably appreciated what the fate of the lease would be. The learned Judge valued the talkie apparatus at Sh. 16,000

and the furniture at Sh. $5,794/98$ , the latter being the value stated in the balance-sheet. This valuation is Sh. 1,794 more than thatof the liquidator. When it is remembered that the liquidator must prove the loss that has been caused to the company, it is difficult to support the value of Sh. 16,000 for the talkie apparatus found by the learned Judge. As Mr. Schwartze argued, it is notbased on the balance-sheet value or the evidence. In the absence of the liquidator having proved the value of the talkie apparatus to be more than it realized at the sale which took place nine months subsequent to the transfer by Kinemas Ltd. to Entertainments Ltd., I am not prepared to hold that there was a misfeasance resulting in loss to the company on that item. True that sale was a forced sale, but the circumstances of Kinemas Ltd. at the time of the transfer were such that it is doubtful if the talkie apparatus would have fetched more. At any rate, there is no proof that it would, and consequently the liquidator has failed to establish the necessary ingredient of loss to the company. What I have said as to the talkie apparatus applies equally to the furniture. The balance-sheet value accepted by the learned Judge was not a true test, and I can find no evidence that it would have realized more than Sh. 2,363 had it been sold nine months earlier. I would allow the appeal with costs in this Court and the Court below.

HORNE, J.—This is an appeal from a judgment of Mr. Acting Justice Gamble on a misfeasance summons, by which the liquidator of Kinemas Ltd. claimed, inter alia, the sum of Sh. 27.794/98 for the loss suffered by that company as a result of certain acts of the two directors, Mr. and Mrs. Kirkel.

Kinemas Ltd. is a private limited liability company with a capital of Sh. 45,000. It had taken a lease, no full particulars of which are in evidence, but from the revenue and expenditure account it appears it paid in rent Sh. 29,074, but a portion, the restaurant, was sublet at Sh. 17.300. The value of the lease is given in the balance-sheet at Sh. 6,000. It had purchased the apparatus for exhibiting films which appears in the balance-sheet at Sh. $29,285/47$ , and furniture which also appears in the balancesheet at Sh. $5,794/98$ .

On 3rd September, 1932, in pursuance of a resolution passed by the two directors, the company sold to Entertainments Ltd. -a company which had no share issue, and of which Mr. Kirkel was the sole director—the lease, the exhibiting apparatus and the furniture, which are shown at a total value in the balance-sheet of Sh. $41,080/45$ , for the sum of Sh. 10,000, thus causing on the balance-sheet figures a further loss to the company of Sh. $31,080/45$ . The Sh. 10,000 so received, plus such other items in the balance-sheet as were probably realizable, would then amount to Sh. $16,048/88$ , while the company owed certain creditors.

Sh. 16,827/04. Consequently, Kinemas Ltd. were unable to pay its creditors in full to the extent of Sh. 778/16, and its capital had entirely disappeared.

With regard to the balance-sheet value of the three assets lease, equipment and furniture-I think it must be taken that the value so expressed is derived from the cost price, less depreciation. The real value, however, must depend on the earning capacity, which is not regulated by the cost price, but on extrinsic factors. An exhibiting apparatus will not earn unless it shows films which the public want and shows them in a place where the public will come. On the revenue and expenditure account is the item, Cinema Receipts Sh. 24,825/10, which, at the prices usually charged for admission, does not indicate that the venture of Kinemas Ltd. received much public support. These receipts barely equal the cost of the rent, the film hire, and the lighting. It is in these circumstances that the sale which I have already described takes place, and, on the company being compulsorily wound up, leads the liquidator to take the proceedings now subject to appeal.

The liquidator claimed Sh. 31,080/45. In my opinion, the onus of proof was upon him. He must prove that loss, or a material loss.

Mr. Hamilton, who appeared for the liquidator at the hearing of the summons, argued that the onus was on the directors to show that a wrong value was placed in the balance-sheet on the assets in fuestion. The learned trial Judge appears to have adopted this argument. Mr. Harrison, who has argued the respondent's (liquidator's) case before this Court, goes further, and submits that beyond putting in the balance-sheet as evidence in support of his case no onus of proof was on the liquidator. He cited several cases, all relating to payments by directors of dividends out of capital. Certainly a director is liable if he pays dividends out of capital, but as is stated in the head-note (I use it for brevity) in the City Equitable Case reported in 1925, Ch. p. $407$ : "the onus of proving he has done so lies upon the liquidator who alleges it". And at p. 507 of that report, the learned Master of the Rolls reaffirms the established interpretation of section 215 (235 of Cap. 93) laid down by Lord McNaughten in Cavendish Bentinck v. Fenn, 12 App. Cases 652, at 659: "It has been settled that the misfeasance spoken of in this section is not misfeasance in the abstract but misfeasance in the nature of a breach of trust resulting in a loss to the company." Consequently, I apprehend that whether the loss arises by a payment of dividend out of capital or by the sale of assets at under value, the onus is upon the liquidator who alleges the loss.

Now the liquidator put in evidence the various accounts, balance-sheet and revenue and expenditure account I have already referred to, gave his opinion that these assets, though shown at

a value of Sh. 41,080, were worth Sh. 20,000, and called two witnesses: Mr. Holm, who put the value of the apparatus at Sh. 24,000, and Mr. Kampf, who put it at Sh. 16,000 to Sh. 18,000 on a forced sale. No evidence was called as to the value of the lease or the furniture. There is, of course, the evidence of Mr. Kirkel at his public examination that the value of these three items was in September, 1932, Sh. 41,080/45, but he is referring to the value shown in the balance-sheet at 31st December, 1931. With regard to the apparatus, he says: "The total cost was £350 to £400 (Sh. 8,000). It was adapted to the old machinery. It is shown in the balance-sheet at Sh. 25,384/65, and in April, 1932, was increased to Sh. 29,385/47." Whether the Sh. $41,080/45$ represented capital expended on obtaining these assets or not is a matter that I cannot discover from this evidence. Doubt being thrown on the balance-sheet figures both by Mr. Kirkel and the liquidator, it appears to me to be wrong for the learned trial Judge to have given any weight to such evidence of value as was to be derived from the balance-sheet. The maxim. Tantum bona valent, quantum vendi possunt ("Things are worth what they will sell for"), is the one to be applied here. Has the liquidator shown by evidence what the assets could have sold for on the 3rd September, 1932? He alleges in his affidavit at the public examination (para. 9): "I have made inquiries as to the. market value of the said assets at the date of the sale, and I am o fopinion that the talkie apparatus alone could have been sold for not less than Sh. 15,000." At the hearing of the misfeasance summons he gives his opinion as Sh. 20,000, and he calls Mr. Kampf, who says that the Capitol Theatre would have purchased this equipment if that company had been aware that it was for sale. In cross-examination, Mr. Kampf says: "My co-directors wanted new machinery and not old, but if I could have bought at a cheap rate naturally I could do so." Such evidence is not sufficient to show that there was a possible buyer on 3rd September, 1932, for if Mr. Kampf's co-directors wanted new, he could not buy old. It does not matter what the assets cost, nor what they might, in the opinion of more or less expert valuers, fetch in other circumstances.

The trial Judge was, I think, entitled to draw inferences of fact from such facts as were before him. He had the original value or purchase price, and he had the auction sale price in June, 1933, nine months after the alleged misfeasance. It was a forced sale. The only possible buyers for such an article as the talkie equipment, it is obvious, are (1) persons about to start a new theatre or who have a theatre wanting such equipment, and (2) speculators. This sale was perhaps unduly hurried. Mr. Kampf was present, but had no intention of buying. Another theatre proprietor was present but did not bid. Mr. Medicks, the landlord first of Kinemas Ltd. and then of Entertainments Ltd., bought the apparatus and furniture for Sh. 10,463.

It is quite clear that if the directors of Kinemas Ltd. had gone into voluntary liquidation on 3rd September, 1932, there would have been also a forced sale. The company had only Sh. 985 in cash. It was owed Sh. 5,000 approximately, and owed nearly Sh. 17,000. It was unable to pay the rent on the lease. These facts were realized by the learned trial Judge. Nevertheless, he came to the conclusion that the fair value of all the assets on 3rd September was Sh. 27,794/48. He accepted the balance-sheet figure of Sh. 6.000 for the lease without any evidence that there was an actual assignee at that value in view. or even a possible one, at any value. He accepted the balancesheet figure for the furniture and draws an arbitrary inference that the value of the equipment was Sh. 16,000.

In my opinion, the liquidator has not satisfied the onus of proof. I would therefore allow the appeal and reverse the judgment so far as it relates to Mrs. Kirkel, the appellant, and would allow her the costs of this appeal.

LUCIE-SMITH, Ag. C. J.—I agree with the judgments read by Sheridan, C. J., and Horne J. Appeal will be allowed with costs in this Court and the Court below.