I think this amendment would put a premium on the issuing of no par value shares; that is to say, no par vahie shares can be issued for such consideration as the directors may think fit, whereas the par value shares will have to be issued for such consideration as in all the circumstances of the transaction may justly be deemed an adequate consideration therefor. The trouble with that section, as was pointed out when the bill was up the other day, is that it leaves it to someone in the future to project his mind back and determine what was adequate consideration in all the circumstances at the time the shares were issued. In the interests of shareholders there ought to be some certainty about this matter. As I pointed out the other day, those who buy shares should not be left in the position of
having it as a possibility that they may be put on a List of contributories two or three years hence on the ground that it was then possible to establish that the consideration was not adequate. The directors have to take come responsibility with regard to this matter. It is proposed by section 96B to bring that responsibility home to the directors by providing that any director is to be liable for the difference between the amount of the nominal value of the shares and the true amount which the property or service represents. This amendment should provide for an express resolution by the directors to the effect that they have determined in all the 'circumstances of the transaction that the property or service which it is proposed to transfer to the company in consideration of the issue of shares is a justly adequate consideration therefor. That means that the directors must go on record; they have before them those words and they must put them in the resolution: "A justly adequate consideration" for the shares which are being issued. Then section 96 would apply thus: in case of any shares issued where such a resolution has not been passed, or if it is proved that as a matter of fact the director knew the consideration was inadequate or that he failed to take reasonable steps to ascertain whether the consideration so received by the company was in fact adequate, he is liable for the deficiency between the actual value of the property and the nominal value of the shares which are to be issued. I do not see how we can go further than that without injecting a great deal of uncertainty and the possibility of a good deal of hardship in connection with the issue of shares. I am going to ask the Secretary of State (Mr. Cahan) if he will accept an amendment which I have just drawn up to the one which he has suggested so that subsection 9 will read:
Shares in the capital stock of the company having a nominal or par value shall not be issued as fully paid except for a consideration payable in cash to the total nominal amount of the shares so issued, or foT a consideration payable in property or services which the directors may determine by express resolution to be in all the circumstances of the transaction a justly adequate consideration therefor.
And then go on with proviso with regard to mining companies as is provided in the amendment the Secretary of State has just read. Otherwise we shall have a totally different state of affairs as regards no par value shares from that regarding par value shares. After all we have to put the responsibility on the directors, and section 96B puts a very stringent penalty upon the direc-
Companies Act Amendment
tor who does not do his duty with regard to inquiring as to the adequacy of the consideration.
If I understand the amendment suggested, it would mean that when shares are issued under these circumstances for property as fully paid, those to whom the shares , are allotted or the transferees of such allottees would not be liable even if the consideration were inadequate, but that the directors personally would be liable under the proposed section 96B. Is that the view of the hon. gentleman?
a quotation by the hon. member for Hants-Kings (Mr. Ilsley) from Mr. Wegenast in which I concurred. He quoted Mr. Wegenast as saying:
Present law requires consideration to be not merely adequate in all circumstances but to be equivalent of par value or issue price of stock although in some eases courts have shown reluctance to go behind honest decision of directors.
I think that is the present law. If that is an issue to be discussed, I can show from quotations from the 1934 act that that is the present law. On the other hand I am not surprised that courts have been reluctant to go behind the honest decision of the directors. We cannot require of directors any more than that they shall make adequate inquiry and then give an honest decision. I think that is the present law, but so far as I am concerned, if we are to consider amending section 96B so as to make directors liable to the limit, I do not object to the change as proposed by the hon. member for Shelburne-Yarmouth (Mr. Ralston).
to agree with the hon. member for Shelburne-Yarmouth. I think the section would be whittled down far too much by amending it in the way proposed by him. It seems to me that there is no hardship in requiring a subscriber for shares to pay for them in either cash or property or services, and I would have no objection, so far as that point is concerned, to the section as proposed by the Secretary of State. I would be afraid if we went any further we would not be making any reform whatever; in fact, we would be going backwards. Certainly if the law is as stated by Mr. Wegenast and by the Secretary of State, the section drafted by the Secretary of State merely states with almost exactitude the law as it exists at the present time, and I do not think we would make it easier than
it is at present for persons to get shares without paying for them.
I think the hon. member for Hants-Kings is wrong in suggesting that we are going backwards. Where we are going forward and making a very long step forward is in section 96B; it never existed before and, as I understand the matter, is not the law to-day. If you come to the stage where you could prove the directors were actually guilty of fraud, then there might be some common law remedy by the company against the director. But now what I am suggesting is putting par value shares on exactly the same basis as no par value shares, namely, that the consideration shall be such as is solemnly, honestly, to use the word used by the Secretary of State, determined by the director as being an adequate and just consideration under all the circumstances. Then we come to section 96B which is a sweeping reform, which provides that any director who fails to take reasonable steps to ascertain the adequacy of the consideration; that is, even if he had an honest belief in the adequacy of the consideration, if it is proved that he did not take steps to check up that belief, he is going to be liable for the deficiency between the consideration received and the nominal value of the shares. That is a pretty stiff penalty to put on directors, and anybody who wished to make a step forward in that direction and wanted to make blue sky laws would have no apology to make for that particular section. But in subsection 9 under section 5 we place par value and no par value shares on the same basis as regards consideration in so far as the allottee is concerned. If he gets a certificate with the words "paid up" on the face of it as a receipt from the directors saying that they have determined that that is the consideration which he hands to them as a just and adequate consideration under all the circumstances, it does not seem to me that he ought to have to face a liquidator two or three years afterward in order to make up that consideration. Everyone knows how absolutely impossible it is to take a pencil and figure out exactly the dollar value of some of the considerations put into a company. As long as it is honest and adequate according to their judgment, after reasonable inquiry has been made as to its adequacy, it seems to me we should not go further.
I am in the position of agreeing with the hon. gentleman. I think if we a.re to enact this section it is an abundant precaution to provide that the
Companies Act Amendment
public shall be protected by resolution passed by the directors. The provision that the minister has made that action shall be taken in any event within three years to protect the situation to which attention was directed the other day by the hon. member seems to me most reasonable. But I believe it is in the public interest to have that on the record, that the directors pledge their judgment and the exercise of their discretion that the services or property received for the shares were just and adequate and warranted the issue of fully paid up shares to the extent mentioned. Then when you apply section 96 as amended by the minister I think you will have as complete a case as you ever get in the world. I think it is a strengthening of the position, may I say to the hon. member for Hants-Kings (Mr. Ilsley), because then anyone who inquires will have a resolution of these men that the consideration is in their judgment just and adequate. If there is fraud I think there is no doubt about their Liability. Now a statutory liability will be imposed upon them within the three years, being the limitation suggested by the minister. I believe this is a strengthening of the law.
Shares in the capital stock of the company having a nominal or par value shall not be issued as fully paid except for a consideration payable in cash to the total nominal amount of the shares so issued, or for a consideration payable in property or services which the directors may determine by express resolution to be in all the circumstances of the transaction a justly adequate consideration therefor.
If I understand the remarks of the hon. member for Shelburne-Yarmouth (Mr. Ralston) he wishes to have not only this section but 96B amended so that stock in the hands of transferees cannot at any time be affected. I am opposed to this amendment. The wording of that is that the directors simply have to pass a resolution that in their opinion the consideration is just and adequate. For the exploiting promoter-and I understand it is being done now-the provisional directors of the company are clerks in the office of some firm of solicitors. What would prevent a company such as that having the first permanent
directors consist of the same provisional' directors, and at a later time transfer to the actual people who are promoting the company?
If I may interrupt, that may no longer take place under this act, and no longer does take place under it. It is no longer permissible to file a statement in lieu of prospectus; if shares are put out to the public they must be put out with a prospectus and with all the particularity required by the prospectus. We have got beyond the stage, which the hon. gentleman suggests, in the 1934 act.
My hon. friend is wrong also in his assumption in1 regard to the change in 96B. The only change I would suggest in that is-I presume it is intended to exempt mining companies; I do not care whether that is done or not-that a director be liable if this resolution has not been passed, as well as being liable if he has failed to make proper inquiry as to the adequacy of the consideration, or has knowledge that the consideration is inadequate.
I am not particular about mining companies. I regard mining companies as no more speculative than most other companies. But that is the express recommendation of the price spreads commission, of which the hon. gentleman was a member.