Scottish Court of Session Decisions

The Tharsis Sulphur and Copper Company (Limited), a joint-stock company limited by shares, and having its registered office in Glasgow, was incorporated under the Companies Act of 1862 on the 25th October 1866. Under the memorandum of association the nominal capital of the company was declared to be £300,000, divided into 30,000 shares of £10 each, with powers to increase. At a meeting held upon the 23d of October 1867 a resolution was passed authorising the directors to borrow money upon the security of debentures to be issued by the company, and £100,000 was accordingly raised in this way. Owing, however, to the increased operations of the company it became necessary for them to raise additional capital, and accordingly at a meeting held in October 1868 special resolutions were passed referring to the proposed increase of capital. The effect of these resolutions, which are quoted at length in the opinion of the Lord President, was that the capital of the company was increased from £300,000 to £1,000,000, which was divided into 100,000 shares of £10 each. When these shares were issued a certain number were fully paid-up, and on the others £7 of the £10 was paid-up. The shares of this capital, with additional shares subsequently issued as narrated below, stood thus on the 31st of January 1882 as regarded the amount paid on them: there were 91,896 £10 shares fully paid-up, and 31, 100 £10 shares upon which £7 per share only had been called up.

On the 23d April 1874, at a general meeting, it was submitted by the directors that a further sum of £150,000 should be raised on debenture to meet the continued enlargement of the company's business, and this resolution was accordingly passed, and the amount thus authorised was borrowed on debenture.

The operations of the company continuing still further to increase, additional capital was raised in December 1878 for the purpose of acquiring the copper mines of Huelva. Special resolutions were passed at a meeting held upon the 24th of December 1878, and registered on the 8th of January 1879, the most important of which is as follows:—“3. That to enable the directors to pay out to the members of the said company of the copper mines of Huelva the value of their respective shares and interests therein, which has been fixed by the said treaty articles or agreement at the aggregate amount of £430,900 sterling, (1) the present share capital of this company be increased from £1,000,000 to £1,236,660, and that the amount of such increase, being £236,660 sterling, divided into 23,666 shares of £10 each, be deemed and issued as fully paid-up; and (2) the directors be and hereby are instructed and empowered to borrow upon debentures of this company, in addition to the sum of £250,000 already authorised to be borrowed by them, the further sum of £150,000, to be applied, along with £44,240 of ordinary funds of the company, in settlement of the balance of the said sum of £430,900.” By these resolutions the capital of the company was increased from £1,000,000 to £1,236,660, at which amount it stood at the date of the action.

In the spring of 1881 certain shareholders,

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holding £10 shares upon which £7 had been paid-up, brought it under the notice of the directors of the company that they intended to claim dividends upon their nominal, and not upon their paid-up capital, and they also contended that the £3 uncalled upon their shares should be called up instead of the company borrowing money upon debenture. To this application answer was made that the whole matter had been under the careful consideration of the directors, whose policy had been approved and ratified by the shareholders, and that it was impossible to reconsider the decision which had been arrived at.

Upon the 9th of November 1881 an extraordinary general meeting of the company was held, at which the following special resolutions were submitted and adopted:—“1. The company may from time to time by special resolution modify the conditions contained in the memorandum of association so as to reduce its capital to such an extent and in such a manner as may by such resolutions be then determined. 2. The company may from time to time by special resolution modify the conditions contained in the memorandum of association so as to subdivide its shares, or any of them, into shares of smaller amount than is fixed by the memorandum of association.”

Along with these resolutions there was also submitted to the meeting of 9th November a report by the directors, from which it appeared “that a proposal to call up £1 upon the £7 shares, and thereafter exchange them into fully paid-up shares, has met with general approval, and will be regarded as an equitable arrangement.” By this call £31,000 would be raised, while the par value of the 8224 shares which this scheme would put into the hands of the directors will be £82,240, which sum, added to the then existing capital, would bring it up to £1,250,000, while from the high premium which these new shares would realise in the market it was proposed to clear off the debenture debt of the company.

Upon the 24th November 1881 the resolutions above quoted were confirmed, and at the same meeting the following among other resolutions were submitted, and passed unanimously—“ First, That the capital of the company be reduced from £1,236,660, divided into 123,666 shares of £10 each (of which shares 91,896 have been fully paid-up, and upon 31,100 of which shares £7 per share only have been called and paid-up, and of which shares 670 still remain unissued), to £1,174,460, divided into 117,446 shares of £10 each, and that such reduction be effected by reducing the liability on each of the said 31,100 shares, after £1 per share shall have been called and paid-up thereupon, to the extent of £2 per share, and exchanging four paid-up shares of £10 each for five shares £8 paid of the said 31,100 shares. Third, That after the capital of the company shall have been reduced under the foresaid first resolution it shall be increased to £1,250,000, divided into 125,000 shares of £10 each, by the creation of 7554 new shares, and the issue of these, along with the 670 shares hitherto unissued, making together 8224 shares of £10 each, which shall be sold to such persons, and upon such terms and conditions, as the directors shall consider most conducive to the interests of the company. Fourth, That the funds to be realised from the call on the 31,100 shares, and from the issue and disposal of the 8224 shares, shall, as regards both capital and premium, be applied in paying off the debenture debt of the company, and all the profit accruing to the company shall be used for increasing the reserve fund, or otherwise, as the directors may consider most expedient.”

These resolutions fell to be confirmed at a meeting which was held upon 9th December following, at which meeting the scheme proposed by the directors was challenged by certain shareholders, eight in number, who especially objected to the £10 shares being converted into £8 shares fully paid-up, and who together held 872 shares. The pursuers of the present action were among those who on that occasion signed a protest, and were holders in their own names of 60 £7 paid shares, and they also claimed 139 other shares of the same class which stood in the register in their father's name.

The company had applied to the Court under the 11th section of the Companies Act of 1867 for confirmation of the special resolutions as approved at the extraordinary general meeting of 9th December 1881.

It was in these circumstances that the pursuers brought the present action of reduction, in which they, inter alia, sought to have the resolutions passed upon the 9th November, and also those passed upon the 24th November 1881, reduced, and to have it declared that they were entitled to dividends in proportion to their amount of nominal capital, and further, that the directors were not entitled to borrow money on debenture to a greater extent than £100,000, which was the amount of the debenture debt at the time when the pursuers became shareholders of the company. The proportion of fully paid-up shares to those on which £7 had been paid was at 31st January 1882 as 91,896 to 31,100.

The pursuers pleaded, inter alia—“(1) Upon a just construction of the memorandum and articles of association, the pursuers are entitled to participate in all dividends in proportion to the nominal capital held by them, and irrespective of the amount paid-up thereon. (2) It was and is illegal and ultra vires of the defenders, by any special resolution, to infringe the rights of the pursuers, those being secured to them by a fundamental condition of the contract constituting the company. (3) The scheme of reduction of capital contained in the resolutions passed 24th November 1881 was and is illegal and ultra vires of the company, because it inverts the rights of one class of shareholders, is not authorised by the regulations of the company, and is not warranted by the provisions of the Companies Act 1867. (7) The issuing of the debentures mentioned in the summons while capital was uncalled was, in the circumstances stated, in violation of the constitution and regulations of the company, and the pursuers are entitled to have decree in terms of the conclusions thereanent.”

“The defenders pleaded—“(4) The special resolutions challenged having been duly passed, and registered in accordance with the provisions of the Companies Acts 1862 and 1867, the reasons of reduction thereof ought to be repelled. (5) The debentures issued by the directors having been so issued by them in virtue of powers to that effect, lawfully conferred on them by the company, the

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defenders should be assoilzied from the conclusions relating thereto. (6) The defenders should be assoilzied from the whole conclusions relative to dividends, in respect (1st) Of the terms of the original articles; (2d) Of the resolutions now sought to be reduced; and (3d) of the acquiescence and homologation and adoption on the part of the pursuer and his authors.”

By minute dated 1st March 1882 John Hoggan junior and George Bradbury Hoggan were sisted as pursuers jointly with Andrew Hoggan junior, the original pursuer in the action, as the 139 shares claimed stood in their joint names.

By interlocutor of 1st June 1882 the Lord Ordinary assoilzied the defenders from the conclusions of the action and found them entitled to expenses. In a note which was added to the interlocutor the following passages occur, which express the views of the Lord Ordinary on the subject:—“The first question to be determined would appear to be, whether the pursuers are, under the existing memorandum and articles of association, entitled to dividend upon the amount of nominal capital held by them in the company, or whether they are entitled to dividend only on the amount of capital paid-up? I was referred to the Oakbank case ( 9 R. 198) as determining this point in favour of the pursuers. It appears to me, however, that there is a marked difference between the two cases. In the Oakbank case there was a clause in the articles of association expressly regulating the payment of dividends—by which I mean final dividends sanctioned by the company,—but in this case the memorandum and articles of association of the company are silent on the subject.

“When the memorandum and articles of association of a company do not expressly deal with the payment of dividends, and when you cannot gather from them any clear indication of a contrary intention, I am clearly of opinion that dividends ought to be paid in proportion to the amount of paid-up capital, and not according to the amount of nominal capital, held by a shareholder. But I think it is quite legitimate to consider the whole provisions of the memorandum and articles of association in order to see what was truly the intention of the contracting parties in that respect. The memorandum of association of this company is, as I have said, silent on the subject of the payment of dividends, but I was referred to two articles of the articles of association, and I think to two only, the 7th and the 75th—the former by the defenders, and the latter by the pursuers,—as throwing light on the intention of the parties on this subject. The 75th article provides that ‘the directors may from time to time, and as often as they deem it expedient, declare and divide an interim dividend out of the profits of the company, and pay the same to the members in proportion to the capital held by each, without the necessity of calling a general meeting to obtain the sanction of the company.'

It will be observed that this clause refers to the payment of interim dividends only, and if this question had related to interim dividends, I should have had no doubt, on the authority of the Oakbank case, that these must be paid in proportion to the amount of nominal capital held by a shareholder, and not in proportion to the paid-up capital; and in the absence of evidence of a contrary intention, it would be difficult, if not impossible, to avoid the conclusion that final dividends were to be paid in the same mode and manner and on the same principles as interim dividends.

But the company say that the 7th article shows that it was the intention of the contracting parties that dividends should be paid on called-up capital only, still more clearly than the 75th article shows that they were to be paid on nominal capital.

This article is in these terms:—' The directors may, if they think fit, receive from any member, willing to advance the same, all or any part of the moneys due upon the shares held by him beyond the sums actually called for; and upon the moneys so paid in advance, or so much thereof 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 shall pay interest at such rate as the member paying such sum in advance and the directors may agree upon; which interest shall be in lieu of dividends in respect of such advance.' Now, it will be observed that this article deals directly with the matter of uncalled-up capital. It authorises the directors to take advances of such uncalled-up capital in anticipation of calls, and to pay interest thereon at such rate as may be agreed upon between them and the member so advancing; which interest is to be in lieu of dividends in respect of such advances. If it be, as the pursuers say, that a member of the company is entitled to dividend on uncalled-up capital, then what he would have to arrange with the directors on making an advance would not be interest in lieu of such dividend, but interest in addition to it; because, of course, he would not advance money to the directors unless he was to get such interest from them as he could get elsewhere for the use of the money. It is difficult to come to the conclusion that the parties could have intended, that where money was paid to the company in answer to a call, the shareholder was to receive a dividend only on the amount; but where money was advanced in anticipation of a call, the shareholder was to receive not only the dividend but interest also. It is absurd to suppose that the parties intended to empower the directors to pay interest for the use of money when they could have it without by simply calling it up. It appears to me that the article is intended to meet the case where the directors may not desire to increase the capital on which they have to pay dividend by calling up more capital, but at the same time require money for the purposes of the company.

The article accordingly authorises them to take advances from members in anticipation of calls, at an agreed-on rate of interest, in lieu of dividend; but it provides that as soon as the call is made interest shall cease and dividend shall be paid. This is an advantage to the member on the one hand, because while he gets interest for his money, it relieves him from liability for future calls, while the advantage to the company on the other is sufficiently apparent.

I am therefore of opinion that the 7th article of the articles of association clearly indicates that it was not the intention of the contracting parties that dividends should be paid in proportion to the amount of nominal capital held by a shareholder, and that it does so quite as clearly as the 75th section indicates an intention to the contrary, but there is this difference, that the 7th article is

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dealing expressly with the matter of uncalled-up capital.…..

But it is said that the measures proposed by the company would operate so unjustly and unfairly towards the pursuers that the Court ought not to sanction them. Now, if the majority of a company propose to benefit themselves unjustly at the expense of a minority, the Court no doubt will interfere. But I do not think there is any case of that sort here. Assuming that the pursuers are by the existing articles of association entitled to payment of dividend in proportion to the amount of their nominal capital, the pursuers, and all other shareholders in their position, will be injuriously affected by the proposed alteration of the mode of paying dividend; but the Legislature has specially authorised a company to make payment of dividend in that mode, which no doubt they considered the most equitable mode, and I should have thought it a very delicate matter for the Court to interfere in such a case, although the change might fall hardly on particular classes of shareholders. But where the Court is called on to interfere, to prevent the exercise of statutory powers by the company, on the ground of manifest injustice to an individual or to a class of shareholders, then I think the whole circumstances of the case are to be considered. Now, the case we have to deal with is, not that the pursuers have all along been paid dividend in proportion to the amount of nominal capital held by them, or that the shares held by them had been bought and sold in the market on the footing that the uncalled-up portion was earning dividend, and was therefore (as it would have been in this case) worth three or four times its nominal value, and that it was now proposed unjustly to deprive the pursuers of all those advantages by the resolution of the company. But the case truly is, that the pursuers have never been paid dividend on the uncalled-up portion of their shares, and it has not hitherto been supposed that they had any right to be so paid; and it is not the fact that their shares had been bought and sold on that footing; but the object of the company is—in case it should be found that the regulations of the company are to be read in a way leading to results which the company never contemplated and never acted on—to enable them to continue to divide dividends as they have always been divided in this company, and to remedy what in that event they think would be an unjust way of dividing dividends—and I can see nothing unjust or inequitable in that. Assuming, however, that under the existing memorandum and articles of association the pursuers have not a right to dividend in proportion to the amount of their nominal capital, then they are not injured by the addition of a regulation to the articles of association giving effect to what has always been the practice of the company; and as regards the reduction of the shares from £10 to £8 shares, that is simply reducing the liability of the pursuers to that extent.

But it is said by the pursuers that the company are not entitled to increase their capital, by the issue of new shares, before calling up all uncalled-up capital due on existing shares. By the 27th article of the articles of association the directors have, under the sanction of a special resolution of the company, power to increase its capital by the issue of new shares. I do not see, and I was not referred to, any article in the articles of association which limits them in the exercise of this power. It would appear, therefore, to be left to the discretion of the directors and of the company to determine when and in what manner additional capital shall be raised. But it is said by the pursuers that the company have been trading on the security of their uncalled-up capital, and that if more capital is required it is unfair and unjust not to call up their uncalled capital, so as to give them the benefit thence resulting, in place of giving it to the whole members of the company. It will be observed that the company have to some extent recognised the claims of the pursuers in this respect, because they have called up one-third of the uncalled-up capital. I was referred to no authority to the effect that a company is not entitled to issue new shares so long as any existing capital remained uncalled-up; and if, as I think, the company has the power, I see nothing in the circumstances of this case calling upon the Court to interfere with the discretion the company has exercised in that respect. Put into figures the result is this,—the pursuers propose that the £3 per share on the 31,100 shares shall be called up. That would give a sum of £93,300, which would be equivalent to 9330 new shares of £10 each, but as the company expect a premium on each new share of at least £40, the sum which the pursuers desire should be wholly appropriated to them and the other holders of £7 shares amounts to £373,200. On the other hand, the company propose to give the holders of £7 shares the benefit of one-third of this sum, viz., £124,400, and to give them the benefit of the other two-thirds, amounting to £248,800, along with the other shareholders of the company. It appears to me that by the proposal of the company the holders of the £7 shares will be sufficiently remunerated for any risk they may have run in consequence of the company having traded on the security of their uncalled-up capital, and that if the element of fairness is to be taken into consideration in judging of this matter, the proposal of the company is not liable to objection on that score. It will be observed that the sum proposed to be given to the holders of £7 shares is more than the amount of their uncalled-up-capital, £93,300.

The pursuers further maintain that it was ultra vires of the company to borrow money on debenture so long as any capital remained uncalled-up. I was referred to no authority in support of that proposition. It appears to me that the question whether the company should borrow money for the purposes of the company, or call up further capital, is a question as to the mode in which the company should be managed, and that it is therefore within their power to act in this matter as they think best for the company.— Bryon v. Metropolitan Saloon Company, 3 De G. and I. 123. On the whole case, therefore, I am of opinion that the defenders are entitled to be assoilzied from the conclusions of the action, with expenses.

I was referred to the following cases— Ashbury Railway Company v. Riche, L.R., H. of L., 653; Hutton v. Scarborough Hotel Company, 2 Dr. and Sm. 521, 11 Jurist, N.S. 551; Melhado v. Hamilton, 28 Law Times, 578; Harrison v. Mexican Railway Company, 19 L. R., Eq. 358; Taylor v. Chichester Railway Company, 2 L.R., Ex. 356,

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384; Menier, 9 Chancery Appeals, 350; Somes, 1 K. and I. 605.”

Against this interlocutor the pursuer reclaimed, and argued—The questions to be considered in the present case are analogous to those raised in the Oakbank case. By section 75 of the articles of association the directors are to declare interim dividends “in proportion to the capital held by each” shareholder; this clearly implies nominal capital. It is the proposal to supersede this section, and substitute for it sections 17 and 18, in which dividends are expressly declared to be payable only on “the amount of paid-up capital,” that the pursuer objects to. The pursuer does not ask both interest and dividend; by the arrangement sanctioned in article 7 the interest is fixed but the dividend fluctuates. As the unpaid portion of the capital is lying at three weeks' call, to substitute interest on it for dividends, as is proposed, would be to displace an existing right. Dividends should be paid according to nominal or subscribed capital when the articles of association are silent on the subject. Upon the second branch, as to the right to alter the articles of association—these articles have been altered in order to bring out the views of a majority of the company. If defenders have the right to delete article 75, they may alter the whole articles of association. By the scheme as proposed, one out of every five of the pursuers' £10 shares is taken from them and given to the public, and they are excluded to this extent from future dividends, and their interest in the company would thus be reduced by one-fifth. The whole of these resolutions must be accepted or rejected; as they were all submitted to the meeting at once, they must stand or fall together. The defenders maintain that the Legislature authorises three-fourths of their number by vote to reduce the capital of the company, and to put the balance so obtained into its coffers.—See section 51 Companies Act 1862, and section 24 Companies Act 1867. The same rule must govern surplus assets which govern dividends. By common law the rights of parties cannot be shifted by a majority, for the Court and the company are here dealing with vested interests. Object to this proposed scheme because it takes away shares from one set of shareholders, and not from any of the others; either what the company have done is not warranted by the first resolution, or that resolution is not warranted by statute. Where money is required for company purposes, the uncalled capital should first be exhausted before money is raised on debenture.

Authorities—Lindley on Partnership, i., 269, 797; Somes v. Currie, 1855, 1 Kay and Johnston, 605; Ex parte Maude, November 1870, L. R., 6 Ch. 51; Hutton v. Scarborough Hotel Company, 1865, 2 Dr. and Sm. Ch. 521, aff. 11 Eng. Jur. N.S. 551; National Provincial Marine Insurance Company, June 10, 1870, L.R. 5 Ch. 559; Monro v. Edinburgh Cemetery Company, February 5, 1851, 13 D. 595; Hunter v. Carron Company, December 15, 1865, 4 Macph. 216, rev. June 25, 1868, 6 Macph. 106; Oakbank Oil Company v. Crum, December 2, 1881, 19 S. L. R. 174.

Argued for the respondents—It is first to be considered whether under the articles as they existed prior to the special resolutions dividends fell to be paid upon nominal or upon paid-up capital. As a rule, in joint-stock companies, in the absence of special regulations, dividends should be paid upon the paid-up capital.—See Lindley, i. 679 and 797. Assuming that before the passing of these resolutions dividends ought to have been paid on the nominal capital, then under section 24 of the Companies Act of 1867 power was given to pass resolutions to alter the articles of association of the company; see also section 12 of Companies Act of 1862—dividends should be paid as common law directs. The important words of article 7 are “in lieu of dividend in respect of such advances.” Upon the pursuers' hypothesis they are getting two things—first, a dividend for their liability; second, interest for their £3. The 7th and 75th are the two most important sections in the articles of association. If the pursuers' contention is right, these two articles are repugnant to and destroy each other; as to the alteration in the rules, that was done by the company ob majorem cautelam. Was it ultra vires of the company to alter these rules? Article 75 is qualified by sec. 50 of the Companies Act of 1862, and prevents this being a case of vested interests. Distinguish between the memorandum, which is the charter of the company, and cannot except in very few particulars be altered, and its articles of association; those can be altered by the company as easily as they can be made, by special resolution. This is a statutory corporation, and no analogy can be drawn between it and an ordinary partnership. Dividends are not referred to in the memorandum of association, but are left to the regulation of the company. It is said that this scheme is a fraud by the majority upon the minority, but if what is proposed is reasonable in itself, and allowed by the articles of association, then it is not a fraud. The uncalled capital was in reality a liability which might some day be enforced. The company was entitled to increase its capital, especially when so high a premium could be obtained for the new shares. What it is proposed to do is really for the benefit of the company as a whole.

Authorities— Kirkstall Brewery Company, March 1, 1877, 5 Ch. Div. 535; Ashbury Carriage Company, June 1875, L.R., H. of L., 7 E. and I. App. 653; Menier v. Hooper Telegraph Works, February 1874, 9 Ch. App. 350; Companies Acts 1862, 1867, 1877; memorandum and articles of association of the company, sections 7, 27, 29, and 75.

The Lords made avizandum.

At advising—