Scottish Court of Session Decisions

By the 79th section of the Companies Act 1862 (25 and 26 Vict. cap. 89), it is, inter alia, enacted—“A company under this Act may be wound up by the Court …. under the

Page: 626↓

following circumstances (that is to say) …. (4) Whenever the company is unable to pay its debts. (5) Whenever the Court is of opinion that it is just and equitable that the company should be wound up.”

By the 80th section of the Act it is enacted—“A company under this Act shall be deemed to be unable to pay its debts (1) Whenever a creditor, by assignment or otherwise, to whom the company is indebted at law or in equity, in a sum exceeding fifty pounds then due, has served on the company, by leaving the same at their registered office, a demand under his hand requiring the company to pay the sum so due, and the company has for the space of three weeks succeeding the service of such demand neglected to pay such sum or to secure or compound for the same to the reasonable satisfaction of the creditor … (3) Whenever in Scotland the inducice of a charge for payment on an extract decree, or an extract registered bond, or an extract registered protest, have expired without payment being made. (4) Whenever it is proved to the satisfaction of the Court that the company is unable to pay its debts.”

This petition was presented by certain bondholders, to the amount of £7480, creditors of the Oregonian Railway Company, Limited, who stated that they “believe and aver that the company is unable to pay its debts,” and that they were desirous, for the protection of their rights as bondholders, to have the company wound up by the Court, and Mr James Alexander Robertson, chartered accountant, Edinburgh, appointed as liquidator. The petition set forth:—The objects of the company were stated by the memorandum of association, dated 30th April 1880, to be the constructing, owning, leasing, selling, &c., of Railways in the State of Oregon or elsewhere in North America, and in particular of certain lines there. By the articles of association of the company, dated 30th April 1880, it was provided (sec. 2) that the original capital of the company should be £160,000, divided into 16,000 shares of £10 each, and it was further provided (sec. 3) that the company might increase its capital. The company was by the articles to have power to borrow to a certain amount per mile of railway. The whole of the original capital of the company was applied for and allocated, and £6 on each share of £10 was called up. The first object of the company was to acquire and extend what was known as the Dayton, Sheridan, and Grand Ronde railway in the Willamette Valley, Oregon, and for that purpose the company in 1880 borrowed £95,000, for which they issued first mortgage coupon bonds having fifteen years to run from 15th May 1880, and bearing interest at six per cent.

“The security for the said bonds,” the petition further stated, “was—(1) A mortgage or deed of trust, dated 11th and 14th February 1881, whereby the said railway was conveyed to certain persons as trustees for the said bondholders; (2) the uncalled capital; and (3) the property and assets of the company as then existing. It was, inter alia, provided in the said mortgage or deed of trust that the company might lease the said line, with the consent of the trustees under the said mortgage first had and obtained, and upon such terms and conditions as might be agreed upon and be expressed and set out in said written consent.

In the year 1881 the company resolved to unite two sections of their line by erecting a bridge over the Willamette River, and to extend the line to the city of Portland, and for this purpose the company, by special resolution of date 22d December 1880, agreed to increase their capital from 16,000 shares of £10 each to 40,000 shares of £10 each. 16,000 only of the new shares were taken up, and upon these £6 per share has been called. The company also borrowed a further sum of £119,700, for which they issued bonds or deeds of security at a premium of four per cent., having twenty years to run from 15th May 1881, and bearing interest at the rate of six per cent. The security for the said bonds was—(1) A mortgage or deed of trust, dated 2d and 4th February 1882, whereby the company's railways (other than that already mentioned, and specially mortgaged in security of the 1880 bonds) were conveyed to certain persons as trustees for the said bondholders; (2) the uncalled amount of the capital for the time other than the original capital of £160,000 held in security for the 1880 bonds; and (3) the property and assets of the said company other than those conveyed to the holders of the 1880 bonds.

The extension of the railway to Portland, which was the principal object for which the said sum of £119,700 was borrowed in 1881 as aforesaid, was never carried out, and the security of the bondholders was thereby greatly lessened, as the said extension would have given the bondholders the security of twenty-six additional miles of railway, besides increasing the value of the whole line by connecting it with a city of importance. Further, the said sum of £119,700 exceeded by at least £15,000 the amount of £1500 per mile which the company was entitled to borrow in terms of the said articles of association.

By indenture dated the 1st day of August 1881, the company let the whole railways possessed by them to the Oregon Railway and Navigation Company of Portland in Oregon, in the United States, for a period of 96 years from the said 1st of August 1881, at a rent of £28,000 per annum, under certain deductions, until the proposed extensions of the railway were completed. The consent of the trustees under the mortgage or deed of trust in security of the 1880 bonds was not obtained to the said indenture, as required by the said mortgage or deed of trust first mentioned. The said lessee company entered into possession of and carried on the said railways under the said lease, but it is believed that they have found the said railways much less remunerative than they expected, and have allowed the line to fall into a state of disrepair. They have accordingly expressed their dissatisfaction with the terms of the said lease, and have intimated their intention to repudiate it on the ground of invalidity. It is believed that the said lessee company have failed to pay the half-year's rent due at Whitsunday last.

The interest upon the said bonds was regularly paid half-yearly when the same became due until the term of Whitsunday last, when no interest was paid. In a circular dated 13th May 1884, which was sent by the secretary of the said company to the bondholders, it was stated that ‘in the present state of uncertainty as to payment by the lessee company of the Whitsunday rent, the

Page: 627↓

directors, considering the amount of their advances on behalf of the company, deeply regret they do not feel at liberty to authorise the bank to pay the Whitsunday coupons.‘”

The petitioners then set forth the amount of their bonds, and stated that interest due at Whitsunday 1884, to the amount of £60, was due and unpaid, and that payment had been demanded from the company on 17th May 1884. “The amount of the uncalled capital of the company,” the petitioners further stated, “is £64,000 on the original capital, and a like sum upon the increased capital, and if the said uncalled capital were called up and applied in extinction of the said bonds a sum of £31,000 would still remain unpaid on the 1880 bonds, and a sum of £55,700 on the 1881 bonds. The petitioners have been unable to obtain accurate information as to the value of the assets of the company. There are no books of the company at the head office at Dundee showing the expenditure of the company. Only one balance-sheet of the company has been issued, viz. in July 1882, and no statement has ever been published, or it is believed even made up, showing the details of the capital expenditure, which appears to have amounted in 1882 to £417,833 or thereby. An extraordinary general meeting of the said company has been called for the 7th of June 1884, to consider a resolution to wind up the company voluntarily, but in the circumstances the petitioners believe that it is advisable, in the interests of the bondholders, that the company should be wound up by the Court.”

The petition, though prepared, and a copy of it sent to the secretary on 6th June, did not appear in the Single Bills till 10th June.

With regard to the statement that a meeting of the company to consider a resolution to wind it up voluntarily had been called for the 7th June, it appeared from documents produced that an extraordinary general meeting had been called for that day to consider extraordinary resolutions, (1) that it had been proved to the satisfaction of the company that it could not by reason of its liabilities continue its business, and that it was advisable to wind it up, and (2) that it be wound up voluntarily. It also appeared that notice had also been given for the same meeting of a resolution to increase the capital of the company to the amount of £20,000 by the creation of 20,000 new preference shares of £1 each, to carry a preferential dividend of 10 per cent., and have priority over all other capital of the company in the distribution of the assets. With regard to these resolutions, the petitioners' agents on 6th June sent this letter to the secretary of the company:—“Dear Sir,—The course followed by your directors has placed our clients in a position of considerable difficulty. Looking to the effort made to raise £20,000 of preferred capital, and to the offer of Messrs Cox and Leng to contribute £5000 towards the legal expenses of enforcing the lease [that to the company who had taken a lease of the line, as stated in the petition], we were unwilling to apply for a winding-up if such arrangements could be carried through satisfactorily. But we have only heard of them from the newspapers, and anything we have learned otherwise led us to doubt if this object would be attained. We presume from your silence on the subject that you will not know yourself if the preferred shares are to be taken up until the first meeting of shareholders to be held to-morrow. If the capital be not then subscribed, another meeting will be held immediately afterwards for the purpose of resolving on a voluntary liquidation and of appointing a liquidator. In the interest of our clients, which, as they are advised, can only be efficiently protected by a liquidator entirely independent of and unconnected with either the directors or the shareholders of the company, we wish the winding-up to be conducted by an Edinburgh accountant, and at the first meeting of the bondholders Mr Mitchell suggested Mr J. A. Robertson, to whom no objection could be taken, and whose experience, as well as his ideas regarding his own remuneration, satisfy us that the interests of all concerned will be safe in his hands. In order to secure to our clients a voice in the appointment of the liquidator, we have therefore been advised to present to-day the enclosed petition for the winding-up of the company. In the event of the preferred capital being subscribed to-morrow, and of satisfactory guarantees being given for its application in the interest of the bondholders, it will be open to our clients to withdraw the petition. If, however, the additional capital is not subscribed, and the shareholders appoint a liquidator who may appear to us not to be suitable in the circumstances, the petition will be proceeded with, unless other arrangement shall be made to our satisfaction. In order not to prejudice any chance there may be of your raising the preferred capital, we have delayed presenting the petition, so that it will not appear in the Single Bills till Tuesday” [10th June].

At the meeting on 7th June the company passed a resolution “That the Oregonian Railway Company is quite capable of conducting its business, and therefore that it is not desirable to wind up the same.”

On 9th June the interest due to the petitioners was paid by the company.

On 10th June counsel for petitioners moved in the Single Bills for an order for intimation of the petition. This motion was opposed by counsel for the company, who contended, inter alia, that in respect the debt averred in the petition to be due had been paid on the previous day (9th June), conform to a receipt for the amount produced, the petition should be de piano dismissed as incompetent. The Court, in order that an opportunity might be given that the statements made on behalf of the company might be embodied in a written form, continued the motion, and on 11th June the following minute was boxed to the Court:—“Murray, for the company, stated that on 9th June current, being within twenty-one full days of the date of any demand for payment being made therefor, the whole past-due interest, including additional interest up to 9th June on the bonds, was paid to the agents making said demands, conform to receipt herewith produced.

“The interest was not demanded in terms of the Companies Act 1862, sec. 80, sub-sec. 1, in respect that the demand was not made under the hand of the creditors, and was not left at the registered office of the company. The demand, made as it was by the present agents for the petitioners, was delivered in Dundee through the post-office on the 19th of May. It is produced herewith and referred to.

The principal sums in said bonds are not repayable

Page: 628↓

till the years 1895 and 1901, as set out in the petition.

The company now has at its disposal a sum sufficient to pay the whole interests which became due to the bondholders at Whitsunday last, and also those to become due at Martinmas next.”

The minute then set forth the resolution of 7th June (above narrated), that the company was capable of conducting its business, and that a winding-up was not desirable.

On 12th June the Court heard argument on the petitioners' motion for intimation.

Argued for the company—The petition fell to be dismissed. (1) The minute contained statements of fact which showed that the petitioners were not in a position to demand liquidation. The true condition of the company was as follows:—The revenue of the company consisted of the rent payable by the Oregon Railway and Navigation Company of Portland under the lease of 1st August 1881 mentioned in the petition. As long as this was paid, the company regularly paid the interest on the debenture bonds. The lessee company had, however, repudiated the lease, averring that they were advised that it was against public policy, and they ceased to pay the rent as formerly. In consequence of this the company were unable to pay the half-year's rent due at Whitsunday last. They were advised to take proceedings in order to compel payment, and these would probably have issue in a few months, two of the directors having subscribed a sum of £5000 to try the question. In these circumstances the meeting of 7th June had been held, and it had been resolved not to wind up but to continue the business by means of the issue of preference stock. This to the amount of £16,000—a sum sufficient to pay the interest for some time to come—had been taken up. The letter of the petitioners' agent showed their true object, and what the petitioners proposed to do, in keeping a liquidation hanging over the head of the company, would only hamper it and destroy the chance of raising funds. This was a state of matters which did not justify liquidation. Intimation of the petition would infallibly destroy the credit of the company in the market. In fact the presentation of the petition had already stopped the taking up of the preferential stock. But (2) the company was not “unable to pay its debts” in the statutory sense. The only debt due to the petitioners, viz., the interest on their bonds up to 9th June had been paid before the petition was lodged, and their title to insist in the petition had been taken away. The only possible debts due at present were the principal sums in the bonds, and these were not repayable till 1895 and 1901. In the case of The European Life Assurance Society, Oct. 1869, 9 Equity 122 and 128 (judgment of Sir W. James), it was laid down that the “inability” of a company to pay its debts under section 80 of the Act was an inability to pay debts actually due, for which a creditor could demand immediate payment, and the Court would not order a company to be wound up by reason of any liability not immediately payable, unless it was reasonably certain that the existing and probable assets would be insufficient to meet existing liabilities. The statute required something more than was averred in the petition—some of the common law indicia of insolvency which warrant sequestration. (3) The petition was incompetent, inasmuch as the Act provided that 21 days must elapse after demand for payment of the sum due before a liquidation can be demanded ( vide sub-sec. 1 of 80th sec. of Act)— Catholic Publishing Co., 33 L.J. Ch. 825; Buckley, 3d ed. 380.

The petitioners replied—The petition contained perfectly distinct averments that the company was unable to pay its debts, and the petitioners offered to prove this. Two notices had been given to the shareholders for the 7th June—one for the purpose of resolving that it was desirable to wind-up, and the other for the purpose of resolving that the capital should be increased to £20,000. The second resolution no doubt was carried, but the only way the company could pay the interest on their bonds was to raise £20,000 of preference shares bearing 10 per cent. interest. They were in fact going to borrow money at 10 per cent. to pay interest on money previously borrowed at 6 per cent. The floating debt amounted to some £57,000 unsecured, and there were only some £7000 total free assets to meet it. This debt was proposed to be paid out of the preference shares. The company was in fact eating up its capital. This state of facts, then, disclosed an undoubted prima facie case for intimation. The petitioners were, however, quite willing that the petition should, after intimation, be sisted so as to fix the list of contributories in the event of a future winding-up being necessitated by the lease being held to be bad.

At advising—