Scottish Court of Session Decisions

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Cite as: [1868] ScotLR 5_637, [1868] SLR 5_637

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SCOTTISH_SLR_Court_of_Session

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Court of Session Inner House First Division.

Thursday, July 9. 1868.

5 SLR 637

Beaumont & Others (Brook's Trustees)

v.

Great North of Scotland Railway Co. and others.

Subject_1Railway Company
Subject_2Shareholders
Subject_3Dividends
Subject_4Great North of Scotland Railway Consolidation Act 1859.

Railway Company — Dividends — Capital.
Facts:

Under an Act of Parliament, a railway company created certain four-and-a-half per cent. perference shares, the dividends on which were, by a special provision in the Act, to rank pari passu with the dividends on certain five per cent. preference shares which had been created previous to the Act. There was also a special clause to the effect that no part of the deficiency in any year of the full amount of the dividend on the four-and-a-half per cent. preference shares was to be made good out of the profits of any subsequent year. No similar express provision was made regarding a deficiency of dividend on the five per cent. preference shares. Held (1) that the pari passu ranking contemplated by the Act meant that the holders of the two classes of shares should receive dividends rateable and in proportion to the amount of their preferential dividends of five or four-and-a-half per cent. effeiring to the shares held by each of them respectively; and (2) that no deduction from the profits of the company in any year should be made on account of alleged deficiencies in any previous
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year of the dividend on the five per cent. preference shares, until funds were first set aside for payment of the full dividend for such year on the four-and-a-half preference shares.

A resolu-of a railway company authorising the directors, in lieu of cash payments, to pay dividends by allotments of capital stock then unissued in the hands of the company, held to be illegal and ultra vires.

Headnote:

The pursuers—the marriage-contract trustees of Mr and Mrs Brooke—were the holders of £12,000 four-and-a-half per cent. A. preference stock of the Great North of Scotland Railway Company, originally 1200 shares of £10 each, created under the Great North of Scotland Railway Consolidation Act 1859. The defenders, other than the said railway company, were large holders of original five per cent. preference shares or stock of the said company, which had been created prior to the said Consolidation Act, whereby the previous Acts of the said company were repealed. The two main questions raised in the case regarded the relative privileges of these two classes of preferential shares — the original five per cent. preference shares and the new four-and-a-half per cent. preference shares. These questions were—(1) What is the meaning and effect of the provision in section 22 of the company's Act of 1859, that the dividends attached to the new shares shall rank pari passu with the dividends on the original preference shares?—and (2) Seeing that the 23d section of the Act prohibits any deficiency that may arise in any year on the full amount of the dividends on the four-and-a-half. per cent. preference shares from being made good out of the profits of any subsequent year, but makes no similar provision regarding the five per cent. preference shares, are the holders of the five per cent. preference shares entitled to have unpaid arrears of their preferable dividends paid out of the profits of subsequent years either in preference to or pari passu with the preferable dividends on the new preference shares?

With regard to the first question —the pari passu ranking—the pursuers sought in the summons to have it found and declared that the free annual profits of the company should be divided between the two sets of preference shares “ pari passu, that is to say, shilling for shilling, till the amount received by the holders of each of the said two classes of preference shares or stock shall amount to £4, 10s. per cent. per annum.” The defenders, on the other hand, maintained that the profits should be divided between the two classes pari passu,—that is, “ rateably, in the proportion of ten to the holders of five per cent. preference shares or stock, and nine to the holders of the said four-and-a-half percent. A. preference shares or stock.” The conclusion in the summons relating to the second question mentioned above, was to the effect that holders of these two classes of preference shares are entitled to have the free annual profits of the company divided amongst them free from any deduction of arrears of dividend said to be due to holders of the five per cent. preference shares on account of deficiency of dividend in previous years. The summons further concluded to have it declared that certain resolutions of the company passed at meetings on 2d October 1866 and 3d. October 1867 were illegal and ultra vires, inasmuch as they implied that profits should be divided, not according to the pursuers’ interpretation of pari passu, but according to the interpretation of the defenders. Also, that resolutions passed at a meeting of the company on 17th April 1867 should be declared illegal and ultra vires, in so far as it was thereby resolved to issue deferred dividend warrants payable to the holders of the five per cent. preference stock out of profits available for future division. Further, that the resolution at the meeting of 3d October 1867, authorising the directors to pay dividends by allotments of capital stock belonging to the company should also be declared illegal and ultra vires. Finally, the pursuer sought to have the company interdicted from paying to the five per cent. preference shareholders either the above-mentioned deferred dividend warrants or any alleged arrears of dividends accumulated from previous years except out of the surplus profits of any year, and after first paying the full dividend on the four-and-a-half preference shares.

Judgment:

The Lord Ordinary ( Barcaple) found for the pursuers on all the points except the first; having interpreted the pari passu ranking of the two classes of shares in the sense contended for by the defenders. The grounds of the decision his Lordship fully explained in the following note appended to his interlocutor:—

“1. It appears to the Lord Ordinary that the statute meant to confer a pari passu preference upon the two sets of shareholders, in the ordinary sense of that phrase. That is, that it was not intended in any way to affect the amount of the claims on which they were respectively to be ranked, but only to exclude priority or preference of ranking by either party, in competition with the other. If that is the true nature of the provision, it follows that the original shareholders who are entitled to a larger amount of preferential dividend on each share held by them, must be entitled to rank for that larger amount pari passu with the new shareholders ranking for their smaller amount of preferential dividend. This, which the Lord Ordinary thinks is the natural construction, appears to be supported by the terms in which the provision is expressed. If it had been enacted that the two classes of shareholders should rank pari passu with one another, there might have been a plausible argument that, to the extent of the newshareholders’ claim to a four-and-a-half per cent. preferential dividend, it was intended to exclude all inequality between them and the original preference shareholders, as to amount as well as priority of claim. But the terms of the enactment, which is, not that the two classes of shareholders shall rank pari passu, but that the dividends attached to the new shares shall rank pari passu with the dividends on the preference shares, is unfavourable to the pursuers’ contention, and seems to indicate that the claims which are to be so ranked are claims for the larger and smaller rates of preferential dividend to which the parties are respectively entitled.

The Lord Ordinary thinks the question in regard to arrears of the preferential dividends on the original preference shares to be attended with greater difficulty. It is to be kept in view that any similar claim for arrears on the part of the holders of four-and-a-half preference shares is expressly excluded by the 23d section of the Company's Act, 1859.

Reference was made to a course of decisions in the Court of Chancery of great authority — Sturge v. Eastern Union Railway, 7 De. G. M. & G. 158; Crawford v. North-Eastern Railway, 3 Kay and Johnston, 723; Henry v. Great Northern Railway,

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1858, 27 L. J. Ch., 1; Matthews v. Great Northern Railway, 1859, 28 L. J. Ch., 375; Corry v. Londonderry and Enniskillen Railway, 1861, 30 L. J. Ch., 890. On the authority of these cases, it must be held to be settled in England that, when there is nothing in the Acts authorising a preferential dividend specially adverse to such a construction, the preference is good for arrears of dividend, as well as for the dividend itself, for the period which has elapsed since the last declaration of dividend. The Lord Ordinary concurs in the reasoning on which these decisions were arrived at; and, in any view, he would have held them to be conclusive authorities on such a question. If the right of the original preference shareholders in this case still stood upon the Company's Act of 1851, which authorised the creation of their preference shares, the Lord Ordinary would have greatly doubted whether the terms of the ninth section of that Act did not exclude the application of the general doctrine as established in the English cases. It seems to deal with the net revenue of the Company separately, as it arises from year to year, and to provide that in every year in which it shall be equal to a dividend of 5 per cent. or upwards on the whole shares, ordinary and preferential, they shall all participate equally. But however this may be, the Act of 1859, which authorises the issuing of the new preference 4½ per cent. shares, repeals the previous Act, and seems to put the privilege of the original 5 per cent. preference shares upon a new footing. It is declared by section 21st that they ‘shall be entitled in perpetuity to a preferential dividend at the rate of £5 per centum per annum.’ This is such a constitution of right to a preferable dividend as has been held to give a preferable right to payment of arrears of the dividend out of the profits of subsequent years; and the Lord Ordinary is not disposed to think that there is anything in the concluding part of the clause to exclude that construction. But it is not necessary to determine the point in the present case, where the question does not arise with ordinary shareholders alleging that the claim for arrears is excluded by the limited terms in which the preference is conferred. The holders of the new preference shares found upon the enactment, in section 22d of the Act, that the dividends attached to their shares shall rank pari passu with the dividends on the original preference shares. The Lord Ordinary is of opinion that this privilege, on the faith of which the shares were created, and the manifest intention of the Legislature in conferring it, would be so far defeated by allowing arrears of dividends to be ranked upon the free profits of a subsequent year, either to the exclusion of, or pari passu with, the preferable dividends on the new preference shares. It is obvious that on the first occasion on which the profits should not be sufficient to pay a dividend of 4½ per cent. on the new shares, and of 5 per cent. on the original preference shares, the shortcoming on the latter could not in any way compete with the preference conferred on the former. That is precisely what is excluded by the provision that the two classes of preferable dividends should rank pari passu. Accordingly, in the proceedings complained of, the free profits then for division were divided between the two sets of preferable shareholders, the amount not being sufficient to pay them 5 and 4½ per cent. respectively. Deferred dividend warrants were issued to the original preference holders for the shortcoming on their dividends; but it is not necessary at present to inquire whether that was a proper proceeding. The first question for consideration is whether the shortcoming caused by the pari passu ranking of the 4½ per cent. dividends can be brought forward on the next occasion of declaring a dividend, either to exclude or compete with the claim of the new shareholders for their 4½ per cent. preference dividends? The directors and the company have acted upon the view that the arrear is a preferable claim of such a kind that it is to be deducted before stating the balance of free profits on which the two sets of preference dividends are to be ranked. At the debate the defenders maintained, as an alternative view, that they were at least entitled to have the arrears ranked pari passu along with the 5 and 4½ per cent. dividends which have accrued since the last dividend was declared. The Lord Ordinary is of opinion that both these views are inconsistent with the provision for a pari passu ranking of the preferential dividends. He thinks it impossible to hold that, while the claim for the sums now constituting these arrears, when it first emerged, was clearly excluded, as in competition with the 4½ preferential dividends it can come into competition with them merely by assuming the title of a claim for arrears. It is just as prejudicial to the holders of the new preference shares to have the amount of that claim ranked either preferably or pari passu in 1867, as it would have been in 1866. The Lord Ordinary thinks that the effect of the pari passu ranking having been to exclude the claim, when it first emerged, for a portion of the 5 per cent. dividends, as in competition with the 4½ per cent. dividends, that claim cannot afterwards be brought forward in competition with the same dividends accruing at a subsequent time, so as practically to repone the holders of the original preference shares against the equal ranking required by the Statute. These arrears may, and the Lord Ordinary assumes that they do, exist as a good claim against the profits of the company, which may hereafter, in the event of surplus profits arising, be held to be preferable in competition with the ordinary shareholders and with the new preference shareholders, after they have received their 4½ per cent. dividends. But in the existing state of matters, the claim appears to be excluded by the pari passu preference conferred by the Statute upon the latter class of shareholders.

At the meeting held on 17th April 1867, it was resolved to issue to the holders of the 5 per cent. stock deferred dividend warrants for the dividends of that half-year, at the rate of 5 per cent., while no dividends were declared or dividend warrants issued in favour of the holders of the 4½ per cent. stock. This was clearly an improper proceeding, as tending to defeat the pari passu right of the latter class of shareholders. The directors appear to have become aware of this, and they recommended a different course, which was adopted by the next meeting. But the Lord Ordinary thinks that the pursuers are entitled to have it declared that the resolution to issue these deferred warrants was illegal and ultra vires, and to interdict against their being paid except out of surplus profits, after payment of the preferential dividends. They do not insist in a similar conclusion in regard to the resolution at the meeting of 2d October 1866, to issue deferred warrants for the arrear which then arose on the 5 per cent. preference dividends, amounting to £1964, 17s., these warrants having been already paid.

3. The last point in the case is as to the

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alleged illegality of the resolution, passed at a meeting of 3d October 1867, authorising the directors, in lieu of cash payments, to pay the dividends then declared on the two classes of preference stock above mentioned by allotments of capital stock then unissued in the hands of the company. Reference on this point was made to the case of Hoole v. Great Western Railway, L. R., 3 Ch. Ap. 262. The cases are different, in so far as there was there a statutory provision that dividends should not be paid out of monies received for the shares. But on general principles, which were given effect to in that case, the Lord Ordinary is of opinion that the resolution was ultra vires of the company. It appears from the minute of the meeting, and the report of the directors on which it acted, that there were not funds presently available for payment of the dividend, although profits may have been actually made. The Lord Ordinary thinks that, in these circumstances, the company could not make use of their unissued shares to pay the dividend. They could not of course compel any shareholders to take stock, and the result of any, of them refusing to do so would be to give to some of the shareholders their dividends in stock, as an equivalent for payment, and to others only the prospect of payment when funds can be set free for that purpose. As was said by Rolt, L. J., in the case of Hoole, the option given to the shareholders to take shares ‘is not a payment of the apportioned share of net profits.’ Lord Cairns held, and the Lord Ordinary thinks his reasoning is equally applicable to the present case, that every shareholder has right to have the shares ‘turned into money, and to have the money rateably divided among the shareholders,’ and that, ‘if saleable, they must be sold for the equal benefit of all,’ and if not saleable, ‘must be kept for the equal benefit of all.’ For these reasons, the Lord Ordinary thinks that the pursuers are entitled to the declarator which they ask as to this matter. He does not think that they are barred by delay from insisting in this or any of the other conclusions of the action.

The defenders, the Clydesdale Banking Company, maintain, that having sold their shares to Mr Peter White, and the transfer having been completed on the day on which the summons was executed against them, they have no interest in the subject-matter of the action, and that they ought therefore to be assoilzied, or have the action dismissed as against them. But it does not appear that they have parted with their right to the dividends in dispute, and they have accordingly appeared to defend the action. In these circumstances, it does not appear that any distinction can be taken between them and the other defenders.

The action was made necessary by what the Lord Ordinary holds to have been the illegal acts of the company in favour of and supported by the other defenders. But as the pursuers have failed in their important contention as to the mode of ranking the preference dividends pari passu under the Statute, they are only found entitled to half of their expenses.”

The pursuers acquiesced in the Lord Ordinary's finding with regard to the pari passu ranking.

The defenders reclaimed.

Clark and Birnie for the Great North of Scotland Railway Company.

Young and Mackenzie for the Standard Life Assurance Company.

Solicitor-General and Blair for the City of Glasgow Assurance Company.

Balfour for the Clydesdale Bank.

Gifford and Shand in reply.

At advising (by Lords Deas, Ardmillan, and Kinloch, the Lord President having declined)

Lord Deas—The Statute of 1859 authorised the Great North of Scotland Railway Company to issue certain shares entitling the holders to a preferential dividend of 5 per cent. per annum, and to issue certain other shares entitling the holders to a preferential dividend of 4½ per cent. It was stated that the 5 per cents. existed previously, but it is not easy to see how that is of great materiality in the present question, as it is what was done by the Act of 1859, which regulates the rights of parties. Section 21 of that Act provides for the dividends on the 5 per cents., and section 22 provides for the dividend on the 4½ per cents., and declares “that the dividend so attached to the said new shares shall rank pari passu with the dividends on the preference shares.” Section 23 provides that the new shares shall be entitled to a preferential dividend out of the profits of each year in priority to the ordinary shares, and declares that, if in any year ending the 1st August, there shall not be profits available for the payment of the full amount of such preferential dividend for that year, no part of the deficiency shall be made good out of the profits of any subsequent year, or out of any other funds of the company. The question which arises between these two classes of shareholders was put perhaps as strongly as it could have been put for the 5 per cent. shareholders by Mr Young, in this way—That there is nothing in the Act of 1859 to prevent them from carrying forward arrears, just as they would have done in a question with the ordinary shareholders, if the 4½ per cents. had never been created. That is, if the 4½ per cents. had not been excluded from arrears, they and the 5 per cents. would have ranked each for arrears as well as for the dividend of the year, and it was then contended that the clause limiting the right of the 4½ per cents. cannot interfere with a right belonging to the 5 per cents. But although that is very plausible, it is not convincing. The question is not whether certain parties might have ranked pari passu under other enactments, but what is the fair meaning of this Act; and when we look at it in that view, section 22 tells the other way, because the result would be that which is pointed at by the Lord Ordinary, that while the parties would rank pari passu for the first year, that ranking would be negatived in subsequent years by the arrears of the 5 per cents. The question is, Did the Legislature ever mean that?—and that, suppose the company is due the one set of shareholders £5, and the other £4, 10s., the one should rank for arrears and the other not? I do not think that is the meaning of pari passu ranking under these enactments, and that is what we have to do with. The consequences must be taken into account in considering what is the fair meaning of these enactments. In that view I entirely agree with the result at which the Lord Ordinary has arrived. The only other point is as to the giving off of the Formartine and Buchan stock, and on that point I entirely concur with the Lord Ordinary. Apart from decisions, it comes to this, that the dividends would be paid with the capital and not the profits of the company. If the company were first to sell the shares, and then give the price to the shareholders, that would be giving the capital; and what has been done comes to precisely the same result. Each shareholder who received an

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allotment of that stock would receive a portion of the capital of the company which ought to be left to yield dividend. There may be a little difficulty as to the way in which the Lord Ordinary has dealt with the dividend warrants. The 5 per cents. may be entitled, as in a question with the ordinary shareholders, to get payment of these arrears, and it may be quite right to give them a voucher to enable them to claim them afterwards. The objection is not to the giving of the warrants, but to the terms in which they are expressed. If a qualification is inserted, that they are not to compete with the 4½ per cent. shareholders, I suppose that will be satisfactory.

Lord Ardmillan—I have scarcely anything to add. We are dealing with two sets of preference shareholders, we are not in a competition between preference and ordinary shareholders. The holders of 5 per cent. stock have a preference; so have the holders of 4½, and what the Statute has given is a pari passu ranking for dividends. The words of the 22d section are, not a pari passu ranking of debts or a pari passu ranking of creditors, but that the “dividend so attached to the said new shares shall rank pari passu with the dividend on the preference shares.” Now, I think the dividends which the company distribute are the annual profits— there is to be an annual distribution between these two classes. To allow one of them to be dealt with as if holding a preferable debt over the other, or to claim a pari passu ranking for the year's dividend, plus arrears, would give a right to accumulate arrears year after year until the one class would swallow up the other. According to the ordinary understanding, a dividend is an annual payment, it is a distribution of a sum at a particular date, and what I think here is, that the dividends are to be divided annually pari passu between these two classes of shareholders. I do not think that would be the case if Mr Young's argument was sustained.

Lord Kinloch—I have arrived at the same result. As to the leading question, of what is the sound meaning of the 22d section, I think the sound meaning is, that the 5 per cents. and the 4½ per cents. are put on the same footing. I think what they are to rank for is the dividend for the year and not the arrears. It is quite true that the right of the 5 per cents. to arrears is not taken away, but what is meant by that is, that they are to have a preference with the ordinary shareholders. Anything else would be begging the question. On the second point, I think the case of Hoole is sound in principle, and ought to be adhered to.

Solicitors: Agent for Pursuers— James Webster, S.S.C.

Agents for Great North of Scotland Railway Company— Henry & Shiress, S.S.C.

Agent for Standard Life Assurance Company— A. J. Russel, C.S.

Agents for City of Glasgow Assurance Company— Hunter, Blair, & Cowan, W.S.

Agents for Clydesdale Bank— Ronald & Ritchie, S.S.C.

1868