Majority
(DE- I "APPELLANT; *May 6. FENDANT).. .....
*.*.*.*.**f
*May 28. AND
WILLIAM V. BUTLER,
ON
BEHALF
OF THE WHITE STAR REFINING COM- I[ESPONDENT. PANY, (PLAINTIFF)...
..
.
....
ON APPEAL FROM THE APPELLATE DIVISION OF THE SUPREME COURT OF ONTARIO
Judgment of the Court
J.-This is an appeal from the Second Appellate Division of Ontario (1) setting aside (Latchford, C.J., and Masten, J.A., dissenting) the judgment of Mr. Justice Grant (1) on an issue which Mr. Justice Logie had directed to be tried between the parties.
The facts giving rise to the controversy are not in dispute and may be briefly stated.
By a writing dated the 28th of August, 1926, the appellant gave White Star Refining Company (represented in these proceedings by the respondent) an option to purchase 1,352 shares of the common stock of Western Motor Corporation, Limited, the purpose of the optionee being, if it purchased, to secure the control of that corporation. White Star Company, on the 7th of September, 1926, accepted this option upon the following conditions (agreed to by the appellant): viz. that the appellant would furnish that company " certified public accountant's statement showing the assets and liabilities and profit and loss of Western Motor Corporation, Ltd., to and including August 31st, 1926," and that the appellant would " attach to certified public accountant's statement of assets and liabilities as above affidavit sworn to by yourself before a notary public to the effect that the liabilities of the company will not exceed the amount shown by said accountant's statement." There were further conditions which it will suffice to mention summarily, such as the right of the optionee to examine the confidential records of the corporation, and its right to withdraw if after investigation it was deemed imprudent or unwise to proceed further.
In pursuance of the condition above quoted, the appellant furnished White Star Refining Company the report and balance sheet prepared by Riddell, Stead, Graham and Hutchison, chartered accountants.
This balance sheet shows certain liabilities of the Motor Corporation, and Mignault J there is no criticism of this statement of liabilities as far as it goes. The point is that what is alleged to constitute a liability within the meaning of the contract was not disclosed.
The appellant also furnished the White Star Company his affidavit in which he said:
The Motor Corporation had a share capital of $100,000, divided into 10,000 shares of $10 each, of which 7,500 shares were to be preference shares, non-participating and nonassessable, entitling the holders thereof to a first, fixed, cumulative dividend of 8 p.c. per annum. The financial statement of Riddell & Co. shows that 2,981 preference shares, representing $29,810, fully paid, had been issued. It also states that the sum of $1,028.56 had been paid for dividends, which admittedly refers to dividends on preference shares. The White Star Company subsequently obtained a financial statement from its own auditors to which a note was appended stating that " at October 6, 1926, cumulative preferred stock dividends amounting to $2,518.33 for the period from June 30, 1925, to September 30, 1926, had not been declared."
It is therefore clear that the $1,028.56 paid for dividends on preference shares were for dividends declared for some period anterior to June 30th, 1925.
What ensued between the parties after the receipt of the financial statement and affidavit may be briefly stated. On October 6th, 1926, the White Star Company wrote to the appellant stating that it accepted the option and that its acceptance was based upon the statement of assets and liabilities as set forth in the statement of Riddell & Co. which he had furnished the Company. When the time S.C.R.
for settlement arrived (all other conditions for placing the White Star Company in control and having its nominees elected as directors of the Motor Corporation having been Jfulfilled), a difficulty was encountered with regard to the undeclared and unpaid dividends on preference shares mentioned in the audit of the White Star Company's auditor. The appellant at the trial frankly admitted that the dispute arose as a result of the fact that Riddell and Co. did not show cumulative dividends outstanding against the preferred stock, while the White Star Company's auditors showed these dividends as being charges against the Motor Corporation. The amount in dispute was $3,158.12 (it does not appear how it was made up), and the appellant admits that the money was paid into the Canadian Bank of Commerce in a trust account, with a letter stating that it was to be paid out on the determination of this question. An application was then made to the court for judgment to declare and determine to whom the $3,158.12 paid into the bank should be paid.
On this application, Mr. Justice Logie directed that an issue should be tried between the applicant, Butler, plaintiff, and Fairhall, defendant, this issue to be as follows:
It is clear that anything outside this issue is irrelevant, and therefore the appellant cannot be heard to contend, as he did in the courts below as well as on this appeal, that he had given notice to the officers of the White Star Company, before they finally accepted the option on October 6th, 1926, that these preference dividends had not been declared and that the acceptance was made with full knowledge of this fact. The only question with which we are concerned is that stated in the issue on which the parties proceeded to trial.
The learned trial judge (1) considered that the undeclared dividends were not a liability of the Motor Corporation and therefore did not require to be disclosed in the auditors' report furnished by the appellant. He also relied on the fact that the White Star Company had accepted the option with full knowledge that these dividends had not been declared.
This judgment was reversed by the Second Appellate Divisional Court of Ontario, Latchford, C.J. and Masten, J.A. dissenting (1).
The majority of the learned judges were of the opinion that within the meaning of the option and its acceptance the undeclared dividends on preference shares were a liability of the Motor Corporation which the appellant should have disclosed in the report furnished by his auditors, and consequently that the issue should be determined in favour of the respondent.
The dissenting judges agreed with the trial judge that the undeclared dividends were not such a liability. But they also took another ground, fully explained by Mr. Justice Masten, and which, with all deference, appears to me to be based on a misconstruction of the issue. This ground, Mr. Justice Masten observes, was not presented by counsel for the respondent (the appellant here), and is that " the issue is as to whether the dividends in question ' constitute a liability under the contract ' " (the italics are those of the learned judge). Mr. Justice Masten says that the real issue " is the liability of the plaintiff (Butler; possibly the learned judge meant the defendant Fairhall), not the liabilities of the Company (the Motor Corporation) He adds:- The conclusion of the learned judge on this question is that:
With respect, the issue states a proposition of law which the plaintiff (the respondent) affirms and the defendant (the appellant) denies. This proposition is that the undeclared dividends constitute a liability under the contract (i.e. the option and its acceptance under conditions agreed to by the appellant) not disclosed in the report of Riddell & Co. on the Motor Corporation, and that this liability, in J. pursuance of the contract, is to be borne by the appellant Fairhall.
I think it is unquestionable, as shewn by the admissions of Fairhall at the trial above referred to, that the intention of the parties was that if the court came to the conclusion that these undeclared dividends were a liability within the meaning of the contract, which should have been disclosed in the financial statement, this liability should be borne by Fairhall, and that, if the court so decided, the sum of $3,158.12 paid into the bank to await the decision on the issue should go to the respondent.
This being the only point in the case, my opinion is that within the meaning of the contract, as understood by the parties, the undeclared dividends on preference shares were a liability which should have been diclosed in the report of the appellant's auditors.
It is nihil ad rem that until a dividend is declared no action on behalf of a shareholder lies to enforce its payment, and from that point of view it can no doubt be said that a company incurs no liability until a dividend is declared by it. But it was not in that sense that the White Star Company employed the word " liabilities " in its letter of October 7th. The purchase was of a block of common shares giving the control of the company to the purchaser. It was an essential condition of the respondent's acceptance that the assets and liabilities of the company should be truly shewn in the financial statement of a certified public accountant which the vendor undertook to furnish the purchaser.
And for the additional protection of the latter, and so that it could determine whether it was imprudent or unwise to proceed further, the appellant was required to make an affidavit " to the effect that the liabilities of the company will not exceed the amount shown by said accountant's statement." For a purchaser of common stock of the Motor Corporation, undeclared but overdue dividends on its preference shares were certainly a liability of the company, in the sense that he could obtain no dividend on his common shares before the payment of all accrued