(Ante, Dec. 2, 1881, vol. xix. p. 174, 9 R. 198.)
Subject_Public Company — Articles of Association — Payment of Dividend where some Shares fully Paid-up, others not — Companies Acts 1862 and 1867 (25 and 26 Vict. c. 88, and 30 and 31 Vict. c. 131).
The articles of association of a limited company provided that “the directors may, with the sanction of the company in general meeting, declare a dividend to be paid to the members in proportion to their shares.” The articles also provided that “capital” should mean “the capital for the time being of the company,” and “shares” the “shares into which the capital is divided.” The capital consisted of 60,000 shares of £1 each. Two-thirds of the shares were fully paid-up, and on the remaining third only 5s. per share had been paid. Held (aff. judgment of First Division) that under the terms of the articles of association dividends were to be paid in proportion to the nominal, and not in proportion to the paid-up capital held by each member.
This Special Case is reported ante, Dec. 2, 1881, vol. xix. p. 174, and 9 R. 198.
The first parties, the Oakbank Oil Company, appealed to the House of Lords.
The respondent's counsel were not called on.
At delivering judgment—
The question depends, I think, entirely upon the true construction of the contract contained in the memorandum and articles of association of this company. It is unnecessary to determine whether the a priori arguments on the one side or upon the other exactly balance each other, or whether in the absence of express terms in the contract requiring to be construed one a priori argument would preponderate over another. To me it seems that that consideration is the same on both sides. If we had to consider what was a priori a reasonable contract as to dividends in a company of this sort, it would appear to be an unreasonable proposition that if a man made
That being so, the particular question before your Lordships really depends upon the construction of the words “a dividend to be paid to the members in proportion to their shares,” as they occur in the 71st article of association of this particular company. My Lords, if the effect be one which is unsatisfactory to the company, it may be, as the Court below have thought, that with regard to any future dividends to be paid by them they may alter that article of association, and take power to declare a dividend of a different character to be paid, it may be, upon what has actually been paid-up upon the shares, but at all events they have not altered the articles, if they have power to do so, and your Lordships must decide this question upon the articles as they stand.
Now, I will first notice an argument of Mr Benjamin, founded upon the word “may” in that article 71—“The directors may, with the sanction of the company in general meeting, declare a dividend to be paid to the members in proportion to their shares.” As I understand the argument, it was this, that there would be a power to declare a dividend though nothing was said about it, and that therefore the word may “there, which is permissive, must be taken to mean that, if the directors like, the dividend which they declare to be paid in proportion to the shares, they may so declare it, but that that is not to exclude them from the power of directing it to be paid in some other manner. My Lords, I cannot accede to that argument. It appears to me that directors and general meetings of companies of this sort can have no implied powers, excepting such as arise by proper implication from the powers expressed in the articles of association. The powers are entirely created by the law, and by the contract founded upon the general law, which enables such companies to be constituted. Therefore I think that the word “may” means that if the directors get the assent of a general meeting they may declare a dividend; but that is not to be any kind of dividend; it is to be a dividend of that kind which the clause contemplates, namely, a dividend to be paid to the members in proportion to their shares.” If therefore a dividend is declared, it must be—whatever is the true construction of those words—one which the members will participate in in proportion to their shares.
Then the whole question is—What is the meaning of the words “in proportion to their shares?” Now, I have looked as far as I could through the whole of these documents—the articles of association, and also the memorandum of association—and I find the word “shares” continually occurring throughout both documents. In the memorandum “the nominal capital of the company” is £20,000 in 400 shares of £50 each. That was at a time when nothing could have been paid-up, and when the word “nominal” was used with strict propriety, because it was not adopted or even subscribed, or probably not subscribed by any others at all events than those persons whose names are underwritten to the memorandum, whose shares amount to a very small proportion indeed of that sum. In the fundamental document of the company the word “shares” is used to signify the aliquot part of the £20,000, the original nominal capital.
Then we come to the interpretation clause. The interpretation clause in the article says that generally where there is nothing repugnant in the context the word “shares” is in the articles to have a meaning substantially the same as that which it has in the memorandum—which it might be expected—that is, that it shall mean “the shares into which the capital is divided.” It was very justly observed by the learned counsel who just now so ably addressed your Lordships (Mr Buckley),
I will not take your Lordships through all the clauses of the articles of association, but I think that there are many relating to shares and many relating to other circumstances in respect of which shares confer privileges or powers or obligations, and I cannot find a single place in which there is anything suggesting a different sense of the word shares from that which the interpretation clause mentions. But the very clause which has been so much relied upon in argument as furnishing reasons against the application of that sense to the 71st section—namely, the 6th—appears to me to be an instance of the same use of the word. The 6th clause says—“The directors may, if they think fit, receive from any member willing to advance the same, all or any part of” what?—“The moneys due upon the shares held by him beyond the sums actually called for;” and then “upon so much of the moneys so paid in advance as from time to time exceeds the amount of the calls then made upon the shares in respect of which such advance has been made the company may pay interest.” What is the meaning of the word “shares” there? Shares in the subscribed capital, not the part which has been paid-up or the part which has not been paid-up, but manifestly the whole of the subscribed amount of the shares of which part has not been paid-up. Therefore that clause, as it appears to me, instead of contradicting the interpretation placed upon the 71st section by the Court below, confirms it, and although it may be true that it would be an improbable thing in a case in which the calls were unequal that the dividend should be equal between different classes of shareholders, and it might be an improbable thing that the directors should use the power of taking in advance at interest from a member the part not called up upon his shares, yet there is the power, and I am not satisfied that it can be limited in its application to original shares as distinct from shares subsequently issued; but the same power of dealing with the subject of dividend by way of exclusion or otherwise seems to me only generally to form an argument such as that insisted upon by the appellants' counsel. If the money has not been advanced to the company, and therefore does not carry interest, still it may be making, and probably will be making, interest or profit in the hands of the shareholder, and if an equality in respect of dividend (supposing the dividend to be equal) is not an obstacle to the natural and literal interpretation of the 71st section, I do not see any obstacle which arises from the fact that instead of making interest elsewhere the shareholder receives interest from the company for paying voluntarily what he is not obliged to pay. I cannot see how that can make any difference at all.
And with regard to the suggested mode of interpreting the words “in proportion to their shares,” as applying to the shares which are numbered in the company, I venture to think that that is a fallacy. The particular numbers, which are used particularly for the purpose of identification and transfer, and to keep the shares from being improperly dealt with, are immaterial for this purpose, inasmuch as this clause does not look to any of those objects, nor does it look to each share separately and singly, but it looks to the aggregate amount of shares held by those persons who are to receive the dividend. That aggregate amount may be determined by two things—first, by the amount of each share, and then by the amount of all the shares held by the shareholders put together as compared with those held by others.
I do not think, my Lords, that there is really any necessity to found anything upon the Act of 1867; but I may say that without some express authority in the original regulations of the company, or in the regulations which this Act enabled the company to make by way of alteration, prima facie there would not be a power to pay a dividend in proportion to the amount paid-up on each share in cases where a larger amount was paid on some shares than on others. The fact that the Legislature thought it necessary in 1867, five years after the original Act, to declare it expressly, and to make that power dependent upon the authority to be found in the company's regulations, either as originally made or as altered, is, to say the least, decisive against the supposition which your Lordships are asked by the appellants' counsel to make as to the Act of 1862, the words of which are exactly the same as those which you have in this article—“The directors may, with the sanction of the company in general meeting, declare a dividend to be paid to the members in proportion to their shares.” Those words are found in the model set of articles in Table A, which was to enter into the constitution of every company formed under the Act. The appellants say that under the Act of 1862 they can do the very thing which in 1867 it was thought necessary to give express power to do, and to make that power dependent upon the authority contained in the company's regulations. I can only say, my Lords, that having arrived at the conclusion that the natural construction of the words of this article, and that construction which they will receive if you compare the manner in which the word “shares” is used throughout these articles, is in accordance with the judgment of the Court below, I am certainly very much confirmed, rather than otherwise, in that construction by the Act of 1867. Therefore, my Lords, I move your Lordships to dismiss this appeal with costs.
But which is the right or the best course is not, I apprehend, a matter for your Lordships to consider—what the Court below had to deal with, and what we have to deal with, is to see what is the true construction of these articles. They happen to be identical in the manner in which they are framed with the articles in Table A of the Act of 1862. Upon that question I have not been able to doubt that the Court below was quite right in the judgment which it gave, and that judgment should be affirmed. The words of article 71 of these articles (72 in Table A) are—“The directors may, with the sanction of the company, declare a dividend to be paid to the members in proportion to their shares.” I can put no meaning whatever upon the words “in proportion to their shares” except that the dividend is to be equal to each member according to the proportion which he has subscribed of the capital money. “Nominal capital” is the phrase used, which is not very applicable when the company is once started; the subscribed capital which the member has paid-up or may be made to pay up is, I think, the right term. The dividend is to be paid to the members in proportion to their subscribed capital. Mr Benjamin endeavoured to argue that the directors have the power under the word “may” to give a dividend in a different proportion. I am quite clear they have no such power at all. They need not give any dividend if they think it inexpedient to do so; but if they give a dividend, they must give it rateably in the way I have mentioned, and in no other way whatever.
Then if the dividend is to be in proportion to the capital which has been subscribed, the thing, I think, is to follow what in my opinion is the plain meaning of the words. It was argued (I confess that I thought I was doing injustice to the argument, for I never could understand how it could be an argument at all) that because there is a clause—clause 7, Table A, and 6 in these articles—which enables a man whose shares are not paid-up to agree with the directors to advance the amount uncalled, or any part of it, to them upon such terms as they may agree upon, that is somehow or other antagonistic to the construction which the Court below has placed upon clause 71. As I said before, I was afraid there might be some argument there which I did not perceive. I can only say, that exercising the greatest acuteness which I could exercise for the purpose, I could not see that there was any argument there at all.
The only result, then, comes round to this, if the words mean what I have construed them to mean, is there any reason in holding that we should force them to mean something else; though there may be inequality, and perhaps more inequality in the one construction than in the other, still I think the question is really which of the two should be adopted,—whether if the parties are ingenious enough to strike it out we should adopt some tertium quid—something between the two—which should give to a shareholder who has not paid up the full amount of his shares some benefit without giving him quite the same amount of dividend as if he had paid the money all up. Whether any such thing could be devised or not, or whether it would be consistent with the Acts as they stand, is not the question now before us, and I will not express any opinion upon it.
Now, when one looks at the Act of 1867 it very greatly strengthens my belief that the true construction of these words is not that for which the appellants contend. I do not read that Act exactly as saying that the Act of 1862 did prohibit the third thing in that clause; it rather seems to be this, that the Act of 1862, if it had the effect of preventing it, is not in future to prevent it; it declares that it shall not prevent it in future if on the true construction of the regulations as they stand originally, or of the regulations as altered, it may be done. Now, it is not pretended here that the regulations have been altered so that it may be done. It therefore comes solely to the question on the true construction of the regulations as they were originally drawn, Is this prevented or not? I have already expressed my opinion that upon the true construction of the words, taking them in their ordinary sense, it is prevented, and holding that opinion I think that the judgment of the Court below should be affirmed.
And now we come to the clause itself. It is a little remarkable. It says—“The directors may declare a dividend,”—that is to say, a sum to be divided—you may put a stop there—“to be paid to the members in proportion to their shares.” Now, Mr Buckley has shown (not that I think there is any great doubt about it) that the word “shares” there does not mean the share named in the Act of Parliament, which is numbered and otherwise particularly described. But when he came to show what it did mean, the task may have been more difficult—that is to say, with reference to the interests of his clients—for he rather, I think, inadvertently dropped the word “interest”—that the dividend, the thing to be divided, was to be paid to the shareholders in proportion to their interest; and then having said that, he endeavoured to make out that “interest” must mean the sum that they had paid and were liable to pay in respect of calls made. Now, that really is to add altogether to the words in the 71st article, and without, as it appears to me, any good reason, because the only reason at all given was this, that if the construction contended for by the respondent is right, then the directors could not avail themselves of section 6 without in truth giving the shareholder from whom they borrowed money a sort of premium or benefit, and making him better off than any of the other shareholders. All I can say is, that if that is so, they must not avail themselves of that section, and instead of borrowing money from their shareholders generally, they must borrow money from any of their shareholders who have not paid up in full. I confess that I see no reason for putting an unnatural meaning upon this very intelligible article 71.
Again, when we turn to the qualification of directors, the qualification of a director is 1000 shares in the company. I have only to look at the language with reference to a qualification of that kind, and I cannot fail to see that 1000 of the five shilling shares would equally qualify a director as 1000 £1 paid-up shares.
Then, again, as to the property of a shareholder in a certificated share, that is, a proportion of the subscribed capital of the company registered in the shareholders' list of the company in the name of the individual—there are half-a-dozen other instances in which the term applies, and I see no reason for putting a different construction upon this clause 71 of the articles. In truth, the respondent here insists upon the literal and grammatical interpretation of clause 71; he does not ask the House to interpolate anything at all; he takes it as it is, and asks for its interpretation. On the other hand, upon the part of the appellants it is necessary, in order to arrive at a conclusion favourable to them, to interpolate some words and place them in article 71; and giving the same interpretation to “share” there as they would to it in every other portion of the articles of association they ask us to read it “share in the paid-up capital of the Company.” I have come to the conclusion that we cannot do that, and that rules the entire question in favour of the respondent.
I may observe also that when this company found it necessary to raise additional capital they did two things—First, they broke up the original £50 shares and made them £1 shares; then when they came to raise additional capital they did it by a resolution of this kind, using the word “shares” in the manner I have just pointed out, “that the directors be empowered to increase the capital of the company,” how? “By the issue of 20,000 shares of £1 each.” And what was really done was this—The company did not want then
Interlocutor appealed from affirmed and appeal dismissed with costs.
Counsel for Appellants— Benjamin, Q.C.— Buckley, Q.C. Agents— Wild, Brown, & Wild— Smith & Mason, S. S.C.
Counsel for Respondents—Solicitor-General Asher, Q.C.— Rigby, Q.C. Agents— Grahames, Currey, & Spens— J. & J. Ross, W. S.