138:
any trading profits since 1925, but was still paying dividends by taking money from the reserves. The company had reported £439,000 profits for 1926, but had drawn £750,000 out of the reserves and falsified accounts to make it appear that the money came from trading. In 1927 the company made a trading loss of £507,000, but money was again drawn from the reserves to make it appear that the company had made a profit of £478,000. As a result of this, and a report that in 1928 the company had issued a fraudulent prospectus inviting customers to buy shares in the company and saying that it had earned an average £500,000 a year in the last decade, arrest warrants were issued for Lord
Kylsant and John Moreland, the company auditor. At the time the ruse was discovered the company had a trading deficit of £300,000 a year, the reserves were completely exhausted, and the company owed £10 million.
213:, and reconstituted as The Royal Mail Lines Ltd with the backing of the British government. The case led to several changes in the way companies were audited. Because many accountants shared Plender's view that secret reserve accounting was a regular and respectable practice, and because the pair had not been found guilty of publishing false information as a result of this, the professional response was disjointed and half-hearted. There were major changes, however: although the practice of secret reserve accounting remained acceptable, companies disclosed their use of this in their audit reports. The
194:. Plender was one of the most important and reliable accountants in Britain, and under cross-examination stated that it was routine for firms "of the very highest repute" to use secret reserves in calculating profit without declaring it. Patrick Hastings said that "if my client ... was guilty of a criminal offence, there is not a single accountant in the City of London or in the world who is not in the same position." Both Kylsant and Moreland were acquitted of counts one and two, but Kylsant was found guilty on count three and was sentenced to 12 months in prison.
51:, Kylsant and Harold John Morland, the company auditor, were arrested and charged with falsifying both the trading prospectus and company records and accounts. Although they were acquitted of falsifying records and accounts, Kylsant was found guilty of falsifying the trading prospectus and sentenced to twelve months in prison. The company was then
183:
offence. Count two was an identical count relating to the annual report for 1927 against both defendants and on count three
Kylsant alone was charged with issuing a document—the debenture stock prospectus of 1928 with intent to induce people to advance property to the company. All counts were contrary to section 84 of the
221:
Contemporaries said that the case "probably had a greater impact on the quality of published data than all the
Companies Acts passed up to that date". The case "fell like an atomic bomb and profoundly disturbed both the industrial and the accountancy worlds", and has been linked to reduced public trust of big businesses.
279:
declared that a person making a fraudulent misrepresentation was liable in damages for "all direct consequences", whether the loss was foreseeable or not; whereas the general rule for the award of damages in contract is that the loss caused by the breach must be foreseeable either to the parties or
66:
was passed, criminalizing the failure to disclose the use of secret reserve accounts. The case highlighted flaws in the way company accounts were reviewed, and "probably had a greater impact on the quality of published data than all the
Companies Acts passed up to that date". The case "fell like an
137:
for an extension of the period in which government loans to the company could be paid. The
Treasury first demanded an audit of the company accounts, and sent Sir William McClintock to write a report on the financial state of the company. McClintock's report revealed that the company had not earned
182:
and C. J. Conway for John
Moreland. The indictment contained three counts. On count one, Kylsant was charged with issuing a document, namely the annual report for 1926 with intent to deceive the shareholders about the true state of the company, Morland was charged with aiding and abetting this
220:
A second major change was in the approach accountants took to their job. Previously the attitude was that accountants were only required to do their legal duty, but after the Royal Mail Case accountants were more and more expected to use their ethical and moral judgement in making decisions.
22:
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case, the court held that the prospectus, though "strictly true", was fraudulently intended to give a misleading impression and was thereby an "untrue statement", allowing investors to sue. Kylsant's statement was deemed fraudulent on the basis of the "3-part test in
122:. After these taxes had been paid there was approximately £1 million left, which they again saved, hoping to use this to cover any financial difficulties that might arise. The reserves were again boosted with government money paid under the
67:
atomic bomb and profoundly disturbed both the industrial and the accountancy worlds", and has also been linked to reduced public trust of big businesses. The case is also seen as the reason for the demise of accounting with the aid of secret
47:, had falsified a trading prospectus with the aid of the company accountant to make it look as if the company was profitable and to entice potential investors. Following an independent audit instigated by
263:" which held that a person who (i) intentionally told lies, or (ii) was reckless with the truth, or (iii) did not believe in what he was saying, was liable in fraudulent misrepresentation.
217:
made it clear that failing to disclose the use of this process was unacceptable, and undermined the "true and fair view" companies were required to give in their financial statements.
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upheld the conviction, ruling that although the statements within the prospectus were all true, the document as a whole was false because of what it concealed, omitted or implied.
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as the government paid to requisition its ships as military supply vessels and troop transports. The company had saved the profits, predicting that it would need them to cover
126:, but between 1921 and 1925 the profits of the company rapidly dropped and, beginning from 1926, the directors supplemented the company income by taking money from the
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Kylsant appealed his conviction on count three and was bailed pending the appeal. The appeal was heard in
November 1931 where the
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had been chairman of the company since 1902. He had expanded the company rapidly: aside from the White Star Line, he bought the
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Following his release in 1932, Kylsant stayed mainly out of the public eye despite a brief return in 1933.
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As well as its immediate impact, the case instigated massive changes in the way companies were
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55:, and reconstituted as The Royal Mail Lines Ltd with the backing of the British government.
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The main defence on the use of secret reserve accounting came with the help of
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A business of national importance: the Royal Mail
Shipping Group, 1902–1937
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87:. It became the largest shipping group in the world when it took over the
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and of the collapse of confidence in the Royal Mail Steam Packet
Company.
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is an untrue statement of fact that induces a contract, and a victim may
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817:
English accountancy: 1800–1954, a study in social and economic history
396:£10,000,000 in 1929 would be worth approximately £767,900,000 in 2024.
333:£1,500,000 in 1910 would be worth approximately £193,410,000 in 2024.
342:£1,000,000 in 1919 would be worth approximately £58,050,000 in 2024.
423:
Theory and
Practice of Corporate Governance: An Integrated Approach
387:£300,000 in 1929 would be worth approximately £23,040,000 in 2024.
378:£478,000 in 1927 would be worth approximately £36,040,000 in 2024.
369:£507,000 in 1927 would be worth approximately £38,226,000 in 2024.
360:£750,000 in 1926 would be worth approximately £54,990,000 in 2024.
351:£439,000 in 1926 would be worth approximately £32,180,000 in 2024.
249:
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was a noted English criminal case in 1931. The director of the
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was a British shipping company founded in London in 1839 by
486:"Oxford DNB Article: Philipps, Owen (subscription needed)"
749:
Perceptions of the Royal Mail Case in the Netherlands
187:. Both defendants pleaded not guilty to all counts.
495:(online ed.). Oxford University Press. 2004.
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470:Shipping Lines: Royal Mail Steam Packet Company
320:inflation numbers based on data available from
209:Following Kylsant's conviction the company was
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715:EWHC Exch J70; (1854) 9 Ex Ch 341; 156 ER 145
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227:
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426:. Cambridge University Press. p. 62.
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800:Sir Patrick Hastings, his life and cases
420:Bloomfield, Stephen (28 February 2013).
162:and Eustace Fulton for the prosecution,
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492:Oxford Dictionary of National Biography
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170:and Wilfred Lewis for Lord Kylsant and
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728:Collin Brooks, ed. (2008) .
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798:Hyde, H Montgomery (1960).
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16:1931 English criminal trial
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133:In 1929 the company asked
849:English criminal case law
815:Stacey, Nicholas (1980).
747:Camfferman, Kees (1998).
228:Influence on contract law
124:Trade Facilities Act 1921
783:. Taylor & Francis.
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760:Edwards, J. R. (1989).
322:Measuring Worth: UK CPI
248:and perhaps be awarded
238:English law of contract
232:The case also affected
150:on 20 July 1931 before
146:The trial began at the
501:10.1093/ref:odnb/35508
36:R v Kylsant & Otrs
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802:. London: Heinemann.
779:Green, Edwin (1982).
673:Camfferman (1998) p.7
664:Camfferman (1998) p.6
457:Camfferman (1998) p.4
266:In the later case of
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569:Edwards (1989) p.151
306:the Great Depression
172:Sir Patrick Hastings
864:1931 in British law
854:Accounting scandals
819:. Ayer Publishing.
730:The Royal Mail Case
641:Brooks (2008) p.266
632:Brooks (2008) p.262
537:Stacey (1980) p.150
107:shipyards in 1924.
753:Vrije Universiteit
712:Hadley v Baxendale
287:Hadley v Baxendale
215:Companies Act 1947
156:Sir William Jowitt
120:excess profits tax
27:
739:978-1-4437-4016-6
623:Hyde (1960) p.226
614:Hyde (1960) p.224
605:Brooks (2008) p.2
596:Brooks (2008) p.3
587:Brooks (2008) p.1
578:Green (1982) p.93
560:Green (1982) p.72
551:Hyde (1960) p.221
528:Hyde (1960) p.220
514:(Subscription or
433:978-1-107-01224-0
242:misrepresentation
234:misrepresentation
152:Mr Justice Wright
105:Harland and Wolff
101:Union-Castle Line
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62:. In 1947, the
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192:Lord Plender
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180:James Tucker
176:Stuart Bevan
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93:Lord Kylsant
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45:Lord Kylsant
35:
34:
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28:
25:Lord Kylsant
18:
652:R v Kylsant
160:D. N. Pritt
135:HM Treasury
49:HM Treasury
838:Categories
518:required.)
403:References
211:liquidated
148:Old Bailey
116:income tax
75:Background
53:liquidated
284:", as in
252:. In the
205:Aftermath
91:in 1927.
701:2 QB 158
655:1 KB 442
294:See also
280:to the "
128:reserves
69:reserves
301:Oceanic
254:Kylsant
250:damages
246:rescind
236:in the
154:, with
60:audited
823:
808:498180
806:
787:
768:
736:
512:
506:5 June
430:
318:UK CPI
313:Notes
142:Trial
821:ISBN
804:OCLC
785:ISBN
766:ISBN
734:ISBN
508:2009
428:ISBN
240:. A
118:and
79:The
29:The
497:doi
33:or
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277:MR
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