Scottish Court of Session Decisions

The Milford Haven Fishing Company, Limited, was incorporated under the Companies Acts in October 1891.

By the memorandum of association it was provided that—“(5) The capital of the company is £12,500, divided into 625 preference shares of £10 each, bearing a cumulative preferential dividend of 6 per cent. per annum and 625 ordinary shares of £10 each, with power to increase the same, and the share capital of the company (whether original or increased) may be divided into different classes, to be held on the terms prescribed by the articles of association of the company, or by special resolution, and so that the respective classes of shares may have and be subject to such preferences, guarantees, and restrictions

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(if any) as may be prescribed by articles and special resolution.”

The articles of association adopted the regulations of Table A of the Companies Act 1862, with a few modifications, and contained no provisions as to the division of shares into different classes as contemplated in section 5 of the memorandum.

Under the memorandum so framed, 600 ordinary shares of £10 each, and 208 perference shares of £10 each, were allotted and were fully paid up.

By special resolution of the company passed and confirmed at meetings of the company held on 1st and 16th March 1892, it was provided:—“That the present issue of 625 preference shares authorised by article 5 of the memorandum of association of the company shall be a first charge on the property of the company, and entitled to rank in respect of dividend as well as capital in priority to the ordinary shares of the company.”

Thereafter 25 ordinary shares of £10 each, and 287 preference shares of £10 each, were allotted, issued, and fully paid up.

In July 1894 the company resolved to go into voluntary liquidation, and Mr Patrick Rattray, C.A. Glasgow was appointed liquidator. The liquidator realised the estate, and paid the creditors of the company. After this had been done there remained in his hands a sum of about £1000 for distribution among the shareholders.

Difficulties having arisen as to the rights of the different classes of shareholders in the distribution of the surplus assets, the liquidator, in December 1894, presented a • petition to the Court under the 138th section of the Companies Act 1862, in which he set forth the facts given above, stated that no challenge of the special resolution of March 1892 had been made, and submitted the following questions for the determination of the Court—“(1) Was the said resolution of March 1892 valid to create a preference over capital in favour of (a) the whole preference shareholders; ( b) the preference shareholders who acquired their shares subsequent to its date? (2) If the above question be answered wholly in the negative, have the preference shareholders who acquired their shares subsequent to the date of the said resolution any right otherwise arising to be paid out of the assets of the company in priority to the other shareholders? (3) In what proportions are the several shareholders entitled to rank upon the assets? ”

Answers were lodged (1) by Thomas D. Smellie, a holder of preference shares acquired prior to the passing of the special resolution of March 1892, who claimed— (a) that the resolution of March 1892 was valid to create a preference over capital in favour of the whole preference shareholders, and the available assets ought to be divided among the whole preference shareholders in proportion to their shares; or ( b) that said resolution was invalid quoad omnes, and the assets should be divided among all the shareholders in proportion to their shares; and (2) by W. D. Jones, a holder of preference shares acquired subsequent to the passing of the special resolution, who claimed—(a) that the said resolution was valid as regarded preference shares issued subsequent thereto, but was invalid as regarded preference shares issued prior thereto, and therefore that the available assets ought to be divided rateably amongst the whole shareholders who acquired preference shares subsequent to said date; or (b) that said resolution was valid, and the whole available assets ought to be divided among the whole preference shareholders in proportion to their shares.

The ordinary shareholders, who had acquired shares prior to the date of the special resolution, were represented by counsel, but no answers were lodged by them.

The Companies Act 1862 (25 and 26 Vict. cap. 89), sec. 8, enacts, that in the case of a company limited by shares “the memorandum of association shall contain … (5) the amount of capital with which the company proposes to be registered, divided into shares of a certain fixed amount;” and section 12 enacts that “any company limited by shares may so far modify the conditions contained in its memorandum of association, if authorised to do so by its regulations as originally framed, or as altered by special resolution … as to increase its capital by the issue of new shares of such amount as it thinks expedient, or to consolidate and divide its capital into shares of larger amount than its existing shares, or to convert its paid-up capital into stock, but, save as aforesaid,… no alteration shall be made by any company on the conditions contained in its memorandum of association.”

Argued for the ordinary shareholders— The special resolution was invalid, and gave no preference in the division of capital to the preference shareholders, whether they had acquired their shares before or after its date. The first part of clause 5 of the memorandum set forth the original capital of the company, and it only conferred upon the preference shares a preference as to dividend. The second part of the clause did not authorise any change to be made in the character of shares after they had been issued. The meaning of that part of the clause was that the original capital might be classified in the articles, and increased capital by special resolution. No authority was given to alter the character of shares after they had been offered to the public. The resolution was therefore a modification of the terms of the memorandum. But under the 12th section of the Companies Act 1862 there were three ways, and three ways alone, in which the conditions in the memorandum of association might be modified. The modification attempted to be made here was not one of these three. This memorandum was illegal if and in so far as it sought to reserve power to modify by special resolution its conditions in ways other than those contemplated by statute. The resolution innovated upon the essential conditions of the memorandum, and prejudiced those

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who had taken shares on the faith of that memorandum. Whether this resolution could have been rendered valid by the consent of all the shareholders was immaterial, as there was no suggestion that such ratification had taken place. The case was ruled by those of Hutton v. Scar borough Cliff Hotel Company, Limited, 1865, 2 De Vewry & Smale, 514 and 521, and 4 De Gex Jones & Smith 672; Ashbury v. Watson, 1885, L.R., 30 C.D. 376; Rams—botham v. Scottish American Investment Company, Limited, February 25, 1891, 18 R. 558. The only capital that could possibly have been affected by the special resolution would have been new capital issued after it had been passed. There had been no new capital issued here; the resolution was meant to affect the original capital and was quite invalid. Lord Herschell's opinion, relied on by the respondents, had not been accepted by other judges as sound—cf. Union Plate Glass Company, 1889, 42 C.D. 513, Justice Kay; Railway Time Tables Publishing Company, 1894, 10 Times L. R. 660, Justice Kekewich.

Argued for the respondent Smellie—(1) The special resolution should receive effect. The case of Ashbury was not in point. No alteration of the memorandum of association in breach of the provisions of section 12 of the Act was attempted to be made. Clause 5 of the memorandum specially provided that the share capital of the company was to be held subject to such preferences as might be prescribed by the articles of association or by special resolution. This provision, in terms, applied to capital both original and increased, and if the original shares could be classified by special resolution, it must have been contemplated that the classification might take place after some of the shares had been issued, for there could be no special resolution until there were shareholders. No objection could be made to the validity of clause 5, and the ordinary shareholders had taken their shares in the knowledge that an additional preference might subsequently be conferred upon the preference shareholders. The resolution was therefore valid. The preference conferred belonged to those who held preference shares before the resolution as well as to those who acquired such shares after— wards. The whole “present issue,” namely, the presently existing issue, was affected. If the company could issue new preference shares with additional preference attaching to the capital as well as to the dividend, there was no reason why they should not attach the additional preference to the old shares. In both cases the existing ordinary shareholders were similarly affected. (2) Even if the resolution was not valid in itself, the arrangement having got the consent of the shareholders was valid inter se. It in no way affected any creditors — See Lord Herschell's opinion in Ooregum Gold Mining Company of India v. Roper, L.R., App. Cas. 1892, p. 143.; British and American Trustee and Financial Incorporation v. Cooper, L.R. 1894, App. Cas. 399, per Lord Macnaghten, p. 416; Queb—rada Land and Copper Company, 1889, L.R., 40 C.D. 363, per Justice North. (3) If the resolution was invalid, it was invalid as regarded these preference shareholders who had taken their shares subsequent to the resolution as well as the others.

Argued for the respondent Jones—The special resolution was valid but it only affected “the present issue,” namely, the shares presently to be issued after the passing of the resolution— Bangor Slate Company, 1875, L.R., 20 Eq. 59. In any case, those who acquired shares after the resolution had only to share with the other preference shareholders, and not with the ordinary shareholders.

At advising—