Scottish Court of Session Decisions

Upon 10th June 1889 an extraordinary general meeting of the Scottish Assurance Corporation, Limited, incorporated under the Companies Acts 1862 to 1886, was held, at which it was resolved that the said corporation should be wound up voluntarily, and at which Mr Thomas Leander Moyaart Miller was unanimously appointed liquidator, “with full powers under sec. 161 of the Companies Act 1862, to accept shares or other like interests in any other joint-stock company in payment or part payment of the business assets or property of the corporation, and that the remuneration of said liquidator for his services be fixed at the rate per annum of his present salary

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[as manager of the company] in addition to his ‘out-of-pocket expenses.’”

The Companies Act 1862 (25 and 26 Vict. c. 89) by section 161 provides that “Where any company is proposed to be or is in the course of being wound up altogether voluntarily, and the whole or a portion of its business or property is proposed to be transferred or sold to another company, the liquidators of the first-mentioned company may, with the sanction of a special resolution of the company by whom they were appointed, conferring either a general authority on the liquidators, or an authority in respect of any particular arrangement, receive in compensation or part compensation for such transfer or sale shares, policies, or other like interests in such other company for the purpose of distribution amongst the members of the company being wound up, or may enter into any other arrangement whereby the members of the company being wound up may, in lieu of receiving cash, shares, policies, or other like interests, or in addition thereto, participate in the profits or receive any other benefits from the purchasing company; and any sale made or arrangement entered into by the liquidators in pursuance of this section shall be binding on the members of the company being wound up; … no special resolution shall be deemed invalid for the purposes of this section by reason that it is passed antecedently to or concurrently with any resolution for winding-up the company, or for appointing liquidators; but if an order be made within a year for winding-up the company by or subject to the supervision of the Court, such resolution shall not be of any validity unless it is sanctioned by the Court.”

Mr Miller proceeded to London and endeavoured, but in vain, to float a new company which would take up the business of the said corporation. In doing so he incurred expenses amounting to £280, 19s. 7d. Upon 16th September 1889 a general meeting of shareholders approved of the efforts then in progress to secure the end in view.

Upon 15th March 1890 the Court, on a petition presented by a creditor of the said incorporation, pronounced an order continuing the voluntary liquidation but subject to the supervision of the Court, removed Mr Miller from the office of liquidator, and appointed Mr Adam Davidson Smith in his place. No application was made to the Court to sanction the special resolutions of the company.

In June 1890 the new liquidator brought an action of accounting against the former liquidator, in which the latter claimed that he should be allowed to credit himself with the said sum of £280. 19s. 7d. And the pursuer pleaded—“(3) The defender is not entitled to credit for the expenses in London incurred in endeavouring to float a new company, in respect the same are not legitimate expenses of the liquidation.”

The Lord Ordinary ( Kincairney) repelled said plea-in-law.

“ Opinion.—In this action of accounting by the voluntary liquidator of the Scottish Assurance Corporation, Limited, against his predecessor in office, it appears that the defender has rendered to the pursuer a preliminary account, and that the pursuer has objected to various items for which the defender takes credit, amounting to £314, 10s. Of that sum there are items or an item amounting to £280, 19s. 7d. entered as consisting of expenses out of pocket incurred in London, and connected with the floating of the new company, and it is represented to me by both parties that if the question as to the right of the defender to take credit for this sum were decided they would probably be able to adjust their other differences.

I sympathise in the desire of the parties to limit the expenses of litigation as much as possible, but I feel there is some danger of increasing the expenses instead of diminishing it by deciding one special question in a case without a proof or formal renunciation of probation.

It is averred by the defender, and the averment is admitted, that at a meeting of the corporation held on 10th June 1889 it was resolved that the corporation should be wound up voluntarily, that the defender should be appointed liquidator, with full powers, under sec. 161 of the Companies Act 1862, to accept shares or other like interests in any other joint-stock company in payment or part payment of the business assets or property of the corporation, and a committee was appointed to confer with the liquidator as to the manner in which a scheme of reconstruction or amalgamation should be carried out if possible.

The defender avers that he proceeded to London and endeavoured to carry out the scheme of amalgamation and reconstruction in conformity with these resolutions, and that in doing so he incurred the expense which is in question.

The pursuer admits that the defender proceeded to London to carry out a scheme of reconstruction or amalgamation, and that he tried to float another company to take up the business of the company in liquidation; and then he proceeds thus:—‘Admitted that the pursuer refuses to allow credit for expenses so incurred. Explained that an examination of the company's affairs at once disclosed to the defender and others that the liquidation was a creditor's liquidation, and that the defender had no right to incur expenses in floating another company without the authority or concurrence of the creditors,’ and the pursuer's plea relative to the point is this:—‘3. The defender is not entitled to credit for the expenses in London incurred in endeavouring to float a new company, in respect the same were not legitimate expenses in the liquidation.’

I was asked by the parties to decide the question expressed by this plea, and that on the assumption (1) that the resolutions of 10th June 1889 are not challenged on the ground of informality, but are to be taken as special resolutions of the corporation such as are required to sanction procedure under the 161st section of the statute; (2) that the creditors of the corporation have

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not been paid in full; and (3) that the sum in question was wholly expended by the defender in an endeavour to carry out the above resolutions of the company by floating or constituting a new company in order to make over to it the interests of the old.

I rather think that the question thus raised may be decided now, and that the parties may probably be able to avoid the expense of a proof.

The sum claimed was au outlay made by the defender on behalf of the corporation, and it would, it must be admitted, be a very hard case if he were required to pay it himself.

The argument of the pursuer was that the sum should be disallowed because section 161 was applicable only to the case of a liquidation where all the creditors had been paid, and not applicable to this case where the creditors had not been paid. The argument, therefore, was that the resolution to proceed under sec. 161 was ultra vires, and that therefore outlay by the liquidator in endeavouring to carry out that invalid resolution could not be allowed. It was pointed out that the section contained provisions to secure the interests of dissentient members, but none in reference to the interests of dissentient creditors.

I am of opinion that this contention is ill-founded. The section is expressed as applicable to all cases of voluntary winding-up, and I find no warrant for restricting it to that very limited number of cases where all the debts of the company are paid. The powers in the section have apparently been frequently put into operation in England in liquidations where the debts had not been paid. Several such cases are referred to in Mr Buckley's notes on section 161, and mention may be made in particular of the case of The City and County Investment Company, November 19, 1879, 13 Ch., Div. 475, where the point was, I think, decided, and where it was said that the remedy of a dissentient creditor was to take advantage of the provision in the last clause of the section, and by obtaining an order for winding-up by the Court on a supervision order to make the validity of the resolution dependent on the sanction of the Court.

The case of The Wreck Recovery Company, 15 Ch., Div. 363, referred to for the pursuer, raised a question under section 95, not section 161, and does not, in my opinion, support the pursuer's contention. I think, therefore, that the resolution in question was not ultra vires, on the ground that the debts of the company were unpaid.

It was further contended that the 161st section contemplated the transfer of the assets to an existing company, and not a transfer to a company to be brought into existence for the purpose of taking over the assets. No authority for that proposition was quoted, and the section has not been so understood in the English Courts.

In The Imperial Mercantile Credit Association, 1871, 12 Eq. 504, it was decided that the 161st section applied to a liquidation under supervision, and a resolution to transfer to a company to be formed for the purpose of taking the assets was supported.

In The Irrigation Company of France, 1872, 6 Ch. 176, a resolution authorising a transfer to a French company to be formed, was regarded as not ultra vires, and although in that case irregular, capable of confirmation.

In Bird v. Bird's Patent Deodorising and Utilising Sewage Company, March 7, 1874, 9 Ch. 358, an agreement to sell the assets of the company to an individual on certain special terms was held to be ultra vires, and not sanctioned by the 161st section.

But in the case of Hester & Company, Limited, August 4, 1875, 44 L.J., Ch. 757, James, L.J., pointed out that in the case of Bird the sale was to an individual, but that in the case of Hester the sale was to an agent for the company to be formed, and was ‘therefore within the terms of the section.’ This is an opinion of great weight, expressly opposed to the contention of the pursuer.

I see no reason to question the correctness of the view taken in the English Courts of this section, and therefore I think that the resolution in question could not be regarded as ultra vires, on the ground that it may have contemplated the formation of a new company, and that the defender in endeavouring to float a new company was engaged in an attempt by which, had he succeeded in it, the resolution of the company might have been validly carried into effect.

If, then, there be no other reason for disallowing this outlay, I think the reason that it was an outlay expended in the endeavour to float a new company is not a sufficient reason for disallowing it. It was an outlay made in a legitimate attempt to carry out the resolutions of the company.

No other reasons were offered in support of the contention of the pursuer. It was not suggested that the outlay should be disallowed because the defender's attempt had failed, nor that the resolutions were ultra vires for any other reasons than those which have been mentioned.

I think, therefore, that the pursuer's third plea-in-law has not been supported, and is bad in law. I therefore repel it, and will hear the parties further, if they wish it, on the effect of that judgment.”

The pursuer reclaimed.

It was admitted by joint-minute “That the resolutions of the corporation, dated 10th June 1889, are not challenged on the ground of informality, but are to be taken as special resolutions of the corporation, such as are required to sanction procedure under the 161st section of the Companies Act 1862.”

Argued for pursuer and reclaimer—The Lord Ordinary had scarcely touched upon the really important question here, viz., whether expenses incurred in an effectual effort to create a new company to take over the assets of one in voluntary liquidation

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were legitimate expenses in that liquidation. It was a question of statutory powers and none such were conferred by the 161st section, which was admittedly the only one in the Act upon which the defender could found. Besides, the resolution of 10th June 1889 became invalid by reason of the supervision order, and had not been subsequently sanctioned by the Court—see opinions in re Callas Bis Company, 1889, L.R., 42 C.D. 169. Further, the special resolution which the 161st section contemplated the Court sanctioning was one to accept shares, &c., in a new company formed or to be formed, and not one authorising the endeavour to create such a company.

Argued for defender and respondent—The resolution was lawful under section 161. The shareholders had throughout regarded the action of the defender as the best possible in the interests of the company and its creditors. If the new company had been floated, the preliminary expenses could have been arranged for in the terms of the transfer. Upon the cases referred to by the Lord Ordinary it was immaterial whether the new company was formed or to be formed. Because the effort to form it had failed, was the liquidator to be held personally liable for the expenses? It must be presumed that the Court would, if it had been asked, have sanctioned the resolution, being a reasonable one. If not, the case should be sisted to allow of that sanction being still applied, there being no limit as to time.

At advising—