Scottish Court of Session Decisions

The Partick, Hillhead, and Maryhill Gas Company, Limited, was incorporated under the Companies Acts 1862 and 1867 on 2nd May 1871, with a capital of £50,000.

By article 6 of the company's articles of association power was given to the shareholders “to increase the capital of the company by the creation of new shares, whether ordinary, preferential, or special.” By resolution passed on 29th October 1872 the ordinary share capital was increased to £100,000. On 22nd August 1873 the shareholders resolved to further increase the capital of the company “by the sum of £30,000, to be issued in 6000 preference shares of £5 each, these shares to be entitled to a preferential dividend” of 5 1 2 per cent., and thereafter these preference shares were issued. From the date of the issue till 30th June 1890 the dividend of 5 1 2 per cent. was duly paid on the preference shares, the average dividend paid on the ordinary shares during the same period being rather over 3 1 2 per cent.

By the articles of association the directors were authorised to set aside a reserve fund and a depreciation fund, the clauses authorising these funds being as follows:—“13. Any part of the profits of the company may, at the discretion of the directors, be set apart as a reserved fund to be applied at their discretion—(a) For paying off of the company; (b) for equalising dividends; (c) for meeting contingencies; ( d) for any other purposes of the company. 14. The reserved fund shall not at any time exceed in the whole £10,000. 15. Any part of the profits of the company may, at the discretion of the directors, be set apart as a depreciation fund, to be at their discretion applied to the repair and renewal of buildings, erections, vessels, plant, works, and other property of the company. 16. The depreciation fund shall not at any one time exceed 25 per cent. of the original cost to the company of the property, buildings, and machinery in respect of which that fund is formed. 17. The moneys carried to the reserve fund and the depreciation fund respectively shall be invested in the company's name on such securities as the directors think proper, and the income arising from such fund shall be added thereto until it reaches its limit, and shall thereafter be deemed earnings of the company.”

The application of the earnings of the company was provided for by article 18, which was in these terms—“18. All the earnings of the company, including all their receipts properly carried to the account of revenue, shall every year be applied as follows—(1st) In payment of all taxes, rates, and rents, and other preferable charges payable in respect of the company's landed property or works, and all arrears, if any, thereof; (2nd) in payment of all management, working, and other current expenses of the Company, and all arrears, if any, thereof; (3rd) in payments to the reserved fund and the depreciation fund; (4th) in payment to the preferential shareholders, if any, of their dividends, according to their respective priority; (5th)

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in payment of a dividend on the ordinary shares.”

In 1890 the Corporation of Glasgow promoted a bill for the extension of their boundaries, so as to include a considerable portion of the area supplied by the Partick, Hillhead, and Maryhill Gas Company, and the directors of the company, thinking that the passing of the Corporation's bill would have a fatal effect upon the prosperity of the company, with the approval of the shareholders, opposed the Corporation's bill, and also promoted a bill of their own. The preambles of both bills were in 1890 found not proved, and the proceedings on each side were resumed in the following year.

In March 1891, in accordance with resolutions passed by the shareholders of the company, an agreement was entered into between the company and the Corporation of Glasgow for sale to the latter of the company's undertaking at the price of £202,500 with entry at 1st July 1891.

Questions thereafter arose between the company and its preference shareholders as to the sums available for distribution when the sale of the company's undertaking should be completed, and a special case was presented in order to obtain the opinion of the Court on the following questions—“(1) Are the ordinary shareholders entitled to the reserve and depreciation funds, and must these funds be taken out of the price of the works before a distribution is made, or do these funds, in whole or in part, fall to be included in the capital fund available for distribution among all the shareholders? (2) Should the parliamentary expenses, referred to in Stat. 11 hereof, so far as those have not been already charged to revenue, be charged in whole or in part against the revenue of the year 1890–91 before paying a dividend to the preference and ordinary shareholders, or should they be charged against the capital fund to be distributed among all the shareholders?”

The parties to the case were (1) the company, and (2) Robert Taylor, as representing the preference shareholders.

It appeared from the case stated that at 30th June 1890 the amount of the reserve fund was £205, and of the depreciation fund £14,228; that the whole amount of these sums would, had the directors not applied the same to form a reserve and a depreciation fund, have been available for payment of increased dividends to ordinary shareholders, and might have been so applied; that the funds had not been invested separately, but had been entirely used for extension of works, and other capital purposes of the company; that all the work of repairs or renewals had been charged to revenue account; and that the works were then in a good and efficient condition. It further appeared from the case that during the proceedings in Parliament in 1890 and 1891 expenses to the amount of £5000 had been incurred, of which £1000 had been charged against the revenue of 1890 (Stat. 11); that in addition to the capital raised by the issue of shares, the company had raised money by the issue of debenture stock and terminable debentures, and were due to the holders of such stock the sum of £81,990; that the revenue of the year ending June 30, 1891, after meeting all charges for interest on debenture stock and borrowed money, would show a considerable surplus; and that the price of £202,500 to be paid by the Corporation would not be sufficient, after payment of the parliamentary expenses and of the other debts of the company, to repay to the shareholders the whole par value of the share capital, it being anticipated that the deficiency, if spread rateably over the whole share capital, would amount to about 10 per cent. thereof.

There was no statement in the case to the effect that the shareholders had authorised the application of the reserve and depreciation funds to capital purposes.

Argued for the first parties—(1) The depreciation and reserve funds would not, owing to the sale of the company's undertaking, be required for the purposes for which they were intended, and as they had come out of profits which would otherwise have been available for the payment of dividends to the ordinary shareholders, these shareholders were entitled to them, and their right could not be defeated by the unauthorised conduct of the directors in applying these funds to capital purposes— Mills, 5 Ch. App. 621. (2) The parliamentary expenses had been incurred in defence of the whole property of the company, and had led to the arrangement with the corporation. They should therefore be charged against capital.

Argued for second party—(1) The depreciation fund was intended to prevent depreciation of the company's plant and works; that was, its capital, and as a matter of fact had been spent on capital purposes. It could no longer, therefore, be looked upon as profits, but fell to be included in the capital fund available for distribution, and the reserve fund must be similarly dealt with— Bridgewater Navigation Company 1891, 1 Ch. 155. (2) The whole or at least a part of the parliamentary expenses should be charged against the revenue of the year 1890–91. If the company had continued as a going concern, they could not have been charged against capital, but must have been dealt with as current expenses. An indication that the Legislature intended such expenses to be dealt with in this manner was to be found in the schedule to the Gasworks Clauses Act 1871.

At advising—