Scottish Court of Session Decisions

The Oakbank Oil Company (Limited)—a joint-stock company limited by shares, and having its registered office in Scotland—was incorporated, under the Companies Acts 1862 and 1867, on 2d March 1869. The nominal capital of the company, under its memorandum of association as registered, was declared to be £20,000, in 400 shares of £50 each. On 16th November 1869 this capital was, in terms of the articles of association, increased by the issue of new shares of the aggregate amount of £20,000, divided into 400 shares of £50 sterling each. Thereafter by special resolution, passed at an extraordinary general meeting on 21st February 1873, and confirmed at an extraordinary general meeting on 14th March 1873, it was, in accordance with section 21 of the Companies Act 1867, resolved that the capital of £40,000 should be divided into 40,000 shares of £1 each, which was accordingly done. The whole of the capital as thus constituted was fully paid up. But on 6th July 1875 a further issue of shares was made, of the aggregate amount of £20,000, divided into 20,000 shares of £1 each, and on these shares a call to the amount of 5s. per share only was made. The capital of the company therefore consisted at the date of the present proceedings of 40,000 shares of £1 each on which the full amount had been called up, and of 20,000 shares of £1 each on which 5s. per share had been called up.

By the 71st of the articles of association it was 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.” And the interpretation clause defined the word “capital” to mean “the capital for the time being of the company,” and the word “shares” as “the shares into which the capital is divided.”

Both prior to the issue of shares in 1875, and since that issue, the company at each of its general meetings, on the report of the directors recommending a dividend to be paid, sanctioned by resolution the payment of dividend at the rate of so much per cent. on the paid-up capital, and dividends were declared and paid accordingly. The minutes of these meetings were in terms of which the following is a specimen:—“That a dividend be paid from the profits of the past year's working equal to seven and a-half per cent. per annum, free of income-tax, upon the paid-up capital of the company, at the rate of 34 per cent. payable on 15th July, and 44 per cent. payable on 16th December next, at the registered office of the company, 54 Miller Street, Glasgow,—which was carried unanimously.” This practice continued down to and inclusive of the year 1880. Shortly thereafter H. Brown Crum purchased fifty shares of the 1875 issue, on which 5s. per share has been paid up, and prior to the meeting of the company, on 17th May 1881, he intimated to the directors that he intended to challenge the principle on which dividends had hitherto been allocated on the 5s. paid-up shares, and to maintain his right to have the dividend declared and paid on the whole shares of the company in proportion, not to the amount paid up on the different shares held by each member, but in proportion to the number of shares held by each member, irrespective of the question whether such shares were fully or only partially paid up. The directors intimated that they could not assent to these views, and that they intended to recommend to the general meeting of the company, to be held on 17th May 1881, payment of a dividend at the rate of 71 per cent, on the paid-up capital of the company. At that meeting accordingly the directors recommended, and the company in general meeting assembled unanimously passed a resolution in the usual terms, that a dividend of 7 1 2 per cent. on the paid-up capital of the company should be paid. Crum not having been at that time entered in the register as proprietor of his shares, was not entitled to take part in the proceedings of a meeting of shareholders, and accordingly he was not present and did not vote at the said meeting. It was, however, prior to the meeting agreed

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that the question as to the principle on which dividends ought to be declared and paid should be made the subject of a Special Case, and that Crum should not be prejudiced by not taking proceedings to interdict payment of the dividend.

This Special Case was accordingly presented, to which the company were the parties of the first part, and Crum the party of the second part.

The question submitted for the opinion and judgment of the Court was the following—“Whether the second party, as the holder of £1 shares on which only 5s. per share has been paid up, is entitled to claim that all dividends declared shall be declared in proportion to the number of shares held by members without regard to the amount paid up on said shares? Or whether it is within the powers of the directors to recommend, and of the company to sanction, a dividend payable to each shareholder in proportion to the amount paid up upon the shares held by him?”

The 71st of the company's articles above quoted was identical in its terms with the 72d regulation of Table A, Schedule I, appended to the Companies Act of 1862 (25 and 26 Vict. cap. 89); and the following other provisions of Acts of Parliament were referred to in argument:—

The Companies Clauses Consolidation (Scotland) Act 1845 (8 Vict. cap. 17), sec. 123, enacted that “Previously to every ordinary meeting at which a dividend is intended to be declared the directors shall cause a scheme to be prepared, showing the profits, if any, of the company for the period current since the preceding ordinary meeting at which a dividend was declared, and apportioning the same, or so much thereof as they may consider applicable to the purposes of dividend among the shareholders, according to the shares held by them respectively, the amount paid thereon, and the periods during which the same may have been paid, and shall exhibit such scheme at such ordinary meeting, and at such meeting a dividend may be declared according to such scheme.”

The Companies Act 1867 (30 and 31 Vict. cap. 131), sec. 24, provided that “Nothing contained in the Principal Act shall be deemed to prevent any company under that Act, if authorised by its regulations as originally framed or as altered by special resolution, from doing any one or more of the following things, namely, … (3) Paying dividend in proportion to the amount paid up on each share in cases where a larger amount is paid up on some shares than on others.”

Argued for Crum—The dividends ought to be paid to members in proportion to the number of their shares, whether these shares were fully paid up or not. That was the natural construction of the 71st of the company's articles, and was confirmed by comparing the 72d of the regulations in Schedule I, Table A, of the Companies Act of 1862, with sub.-sec. 3 of sec. 24 of the Companies Act of 1867—See Buckley on the Companies Acts, 3d ed., p. 414—and also by comparing the 72d regulation with sec. 123 of the Companies Clauses Consolidation (Scotland) Act 1845. At all events, the 71st article, read along with the definitions of “capital” and “shares” in the articles of association, admitted of no other construction. There was no injustice in this result, for the company were trading on the credit of these members whose shares were not fully paid up. And in any case the company might alter the present state of matters, either by calling up the remaining 15s. per share or by passing a special resolution to pay the dividends according to the paid-up value of the shares.

Replied for the company—The presumption was for payment of dividend in proportion to the amount paid up—Lindley on Partnership, i. pp. 679 and 797. That was the equitable rule, because though no doubt the company were trading on the credit of those who had not fully paid up, yet such members were amply compensated by the use of their money in the meanwhile, and ought not to receive interest twice over. If, however, the particular company's articles provided otherwise, of course equity must yield to the agreement which the partners had chosen to make. Did the company's articles so provide here? The 71st article when taken by itself was admittedly ambiguous. The other side contended that “number” was the word which ought to be understood; the company contended that “number and value” were the true words. Either construction was grammatical and in itself intelligible; the company's alone was equitable. The objecting shareholder, however, said that the 71st article must be read along with the interpretration clause. That was so. But the definitions in that clause were not so stringent as to leave no other possible construction of the 71st article than that contended for by the other party. The question was really left where it was — whether “number” only or “number and value” were the words to be supplied. As regards sec. 24 of the Act of 1867, the company also took advantage of it, for they said that the words “if authorised” meant “if not prohibited,” and on the foregoing argument the company were not prohibited. Certainly the practice was admittedly in favour of their view—and practice was of importance—Lindley, vol. ii. p. 822. Lastly, it was doubtful whether the company had the power by a special resolution of so altering the constitution of the company as to pay dividends proportionally to the paid-up value of the shares if the articles did not already authorise it— Hutton v. Scarborough Hotel Company,—and at any rate the consent of the shareholders of 1875 was necessary. As to calling up the remaining 15s. per share, the directors might not need the money.

Authorities— Hutton v. Scarborough Cliff Hotel Company (Limited), July 24, 1865, 2 Drewry & Smale 521, and April 25, 1865, 11 Eng. Jur. (N. S.) 551; Somes v. Currie, July 11, 1855, 1 Kay & Johns 605; Ebbw Vale Steel Company, January 15, 1876, L.R. 4 Chan. Div. 827; ex parte Maude, November 25, 1870, L.R. 6 Chan. 51; Lindley on Partnership, 4th ed. pp. 679, 797, 822; Buckley on the Companies Acts, 3d ed. p. 414.

After argument the Lords made avizandum.