Scottish Court of Session Decisions

Pattisons Limited was on 7th March 1896 incorporated under the Companies Acts for the purpose of carrying on the business of wine and whisky merchants. The nominal capital of the company was £400,000, consisting of 20,000 ordinary shares of £10 each, and 20,000 cumulative preference shares of the same amount.

On 5th December 1898 the company suspended payment. A meeting of creditors was held on 6th January 1899, at which 250 creditors or representatives of creditors were present, representing £795,061 out of a total liability of £872,030. At that meeting Messrs John Scott Tait and Robert Alexander Murray, acting on the instructions of some of the larger creditors, submitted a balance-sheet, which showed liabilities as £920,400, 9s. 11d., and assets as £837,606, 15s, 9d.—deficiency £82,793, 14s. 1d. The meeting of creditors agreed unanimously that a meeting of shareholders should be called with a view to passing an extraordinary resolution for the voluntary winding-up of the company, and for the placing of the liquidation under the supervision of the (Court, and also agreed to recommend to the shareholders the appointment of Mr Tait as one of the liquidators. The committee of advice appointed at the creditors' meeting subsequently approved of the appointment of Mr Murray as an additional liquidator.

An extraordinary general meeting of the company was held on 19th January 1899, at which shareholders representing 30,187 shares were present, and at which a resolution was passed that the company be wound up voluntarily. Messrs Tait and Murray were appointed liquidators for the purposes of the winding-up, and were instructed to take the necessary steps for having the liquidation placed under the supervision of the Court.

Accordingly, on 20th January 1899 a petition was presented by Pattisons Limited and Messrs Tait and Murray, the liquidators thereof, setting forth the foregoing facts, and craving the Court to order that the voluntary winding-up of Pattisons Limited be continued, but subject to the supervision of the Court, in terms of and with the powers conferred by the Companies Acts 1862 to 1898.

Answers were lodged by James Kinnear, builder and contractor, and Messrs Redpath, Brown, & Company, Limited, who on 13th January 1899 had presented a petition to the Court for the winding-up of Pattisons Limited by the Court, and the appointment of an official liquidator. Mr Kinnear was a creditor of the company to the extent of £1852, 16s., representing work executed by him in the erection of bonded stores for the company in Leith, and Messrs Redpath, Brown, & Company were creditors for £1189, 19s. 6d. for iron and other work executed by them for the company.

In their answers the respondents made the following averments:—In the prospectus of the company the assets made over to the company were stated as of the value of £203,555. The vendors Robert and Walter Pattison continued to be managing directors of Pattisons Limited, and as shareholders had and have complete control of the company. In the first yearly report of the company a profit was shown on revenue account of £56,893, and in the second yearly report of £67,170. No balance-sheet was published or circulated among the shareholders. The sums declared and paid as dividends were not profits earned in the business of the company, but were in the knowledge of Walter and Robert Pattison paid out of the capital of the company, which was in fact and to their knowledge insolvent at the date of the second annual meeting. “Questions will arise in the liquidation regarding the liability of the said directors and other officials of the company to repay the dividends declared and paid.” Prior to the creditors' meeting on 6th January Messrs Tait and Murray had drawn up another balance-sheet showing a surplus of assets over liabilities of £141,576. No explanation was given to the meeting of the discrepancy between this balance-sheet and that actually submitted. The losses of the company were chiefly caused by reckless speculations in whisky in which Walter and Robert Pattison engaged. “Questions will arise as to how far the company's assets are liable for debt so incurred.” According to the balance-sheet the company owed balances to the British Linen Company and the Clydesdale Bank amounting to £191,687. That sum was exclusive of sums due by the company to those banks on accommodation bills stated in the balance-sheet at £442,649. There were grounds of serious challenge regarding the validity of certain vouchers and securities claimed to be held by these banks.

The respondents proceeded—“The respondents, who are creditors not connected with the whisky trade, believe and aver

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that their interests and the interests of other independent creditors will be seriously prejudiced unless a compulsory order for winding up is made, and independent liquidators are appointed by the Court to investigate the conduct of the company's affairs, the liabilities to the company of the said Walter and Robert Pattison and the other directors and officials of the company, and the claims of creditors claiming to be secured or to hold preferences. The present petition and the whole proceedings subsequent to the 6th December 1898 have been taken at the instance and under the control of the said Walter and Robert Pattison, in conjunction with the creditors who had been engaged along with them in the speculations above mentioned, in order to avoid independent investigation into the conduct of the company's affairs or the claims of those creditors, and to carry through a scheme of reconstruction of the said company in their own interests, to the prejudice of the respondents and other unsecured creditors.”

The respondents then set forth the details of a scheme of reconstruction prepared by Messrs Tait & Murray “on the instructions of Walter and Robert Pattison, and certain creditors conjunct and confident with them.” This scheme, they averred “would be prejudicial to the interests of unsecured creditors, in respect, inter alia, that (1) it extends the preference of the secured creditors to the whole assets; (2) the interest on debentures of unsecured creditors could not be paid unless the company earned a net annual profit of £65,000; (3) the payment of their debts would be postponed till 1920; and (4) the assets and management of the company are to be entrusted to the directors of the reconstructed company, instead of the assets being realised for the benefit of the creditors. If the company is wound up by order of the Court, and by independent official liquidators, no scheme of reconstruction can be carried through without examination by the liquidators and approval by the Court.”

The Companies Act 1862 (25 and 26 Vict. cap. 89), section 79, enacts—“A company under this Act may be wound up by the Court … under the following circumstances, that is to say—(1) Whenever the company has passed a special resolution requiring the company to be wound up by the Court. … (4) Whenever the company is unable to pay its debts.”

Section 80—“A company under this Act shall be deemed to be unable to pay its debts … (4) Whenever it is proved to the satisfaction of the Court that the company is unable to pay its debts.”

Section 147—“When a resolution has been passed by ‘a company to wind up voluntarily, the Court may make an order directing that the voluntary winding-up should continue, but subject to such supervision of the Court, and with such liberty for creditors, contributories, or others to apply to the Court, and generally upon such terms and subject to such conditions as the Court thinks just.”

Section 149—“The Court may, in determining whether a company is to be wound up altogether by the Court or subject to the supervision of the Court, in the appointment of liquidator or liquidators, and in all other matters relating to the winding-up subject to supervision, have regard to the wishes of the creditors or contributories as proved to it by any sufficient evidence, and may direct meetings of the creditors or contributories to be summoned, held, and regulated in such manner as the Court directs, for the purpose of ascertaining their wishes, and may appoint a person to act as chairman of any such meeting, and to report the result of such meeting to the Court: In the case of creditors regard shall be had to the value of the debts due to each creditor, and in the case of contributories to the number of votes conferred on each contributory by the regulations of the company.”

Argued for the respondents—This was a case in which the company should be wound up by the Court. The respondents' application for a winding-up by the Court had at least the advantage of priority. In a question between a company and one of its creditors, the creditor had a right to a winding-up order ex debito justitiœ, unless it could be shown that such an order would do him no good— Gardner & Company v. Link, July 11, 1894, 21 R. 967. Here there were circumstances averred which would place the respondents at a disadvantage unless a winding-up order were pronounced. The respondents were in a special class of creditors; their debt was due in respect of work done at the company's buildings. The great bulk of the creditors on the other hand were “in the trade,” or had discounted the company's bills. Besides, the banks had a preponderating influence among the creditors, and it might be the liquidator's duty to contest their claims to a preference. Moreover, the respondents' averments made it plain that there were many things in the company's affairs which required searching investigation. In such circumstances the Court always preferred a liquidator of its own appointment— Barned's Banking Company, 14 L.T. 451, per Romilly, M.R.; National Debenture and Assets Corporation, L.R. (1891), 2 Ch. 505; The Varieties, Limited, L.R. (1893), 2 Ch. 235; Medical Battery Company, L.R. (1894), 444; Land Development Association, L.R., February 5, 1892, W.N. 23. In Drysdale Gilmour v. Edinburgh Exhibition, November 13, 1890, 18 R. 98, there were no averments that the affairs of the company called for special investigation. It was left to the discretion of the Court by the statute to determine whether or not the opinion of the majority of creditors should prevail; and there were the strongest reasons here for appointing as liquidator some independent person wholly unconnected with those who had brought the concern to grief. The liquidators appointed by the shareholders had been suggested by the parties concerned in the accommodation bills. The voluntary liquidator would have too free a hand. He was irremoveable except for fault, and could exercise greater

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powers without going to court than an official liquidator. He would have absolute authority to sanction a reconstruction scheme like that already broached, by which cash payments to the creditors might be indefinitely postponed, and they might be compelled to accept scrip in payment of their claims. It had been decided that section 161 of the Companies Act 1862 applied to a winding-up under the supervision of the Court as well as to a purely voluntary winding-up— Imperial Mercantile Credit Association, L.R., 12 Eq. 504; Anglo-Romano Water Company, Wright's Case, L.R., 5 Ch. 437. A voluntary liquidation under the supervision of the Court might run through such a scheme of reconstruction and the only remedy open to a dissentient creditor would be an appeal under section 137 of the 1862 Act.

Argued for petitioners—The petition should be granted. No reason had been adduced why effect should not be given to the wishes of the vast majority of the creditors. The majority even of “stone and lime creditors,” to which class the respondents belonged, representing £23,000, were desirous of voluntary liquidation. A strong prima facie case of impropriety must be made out before the Court would interfere to thwart the majority of creditors. A creditor was not entitled ex debito justitiœ to a winding-up order as against others creditors, though he was as against the company— West Hartlepool Ironworks Company, L.R., 10 Ch. 618; Drysdale, ut sup.; Oriental Commercial Bank, 14 L.T. 755; Inns of Court Hotel Company, 1866, L.R., W.N. 348; California Redwood Company, Limited, unreported. It made no difference whether the application for a winding-up order or the resolution of the creditors in favour of liquidation under supervision was prior in time— New York Exchange, Limited, L.R., 39 Ch. Div. 115. Precisely the same arguments as those of the respondents had been used unsuccessfully in the City of Glasgow Bank case, November 27, 1878, 6 R. 244, per L.-P. Inglis at 252. The recent English cases relied on by the respondents were decided under the Companies Winding-up Act 1890, which did not apply to Scotland. The explanation of the discrepancy between Mr Tait's two reports was that bills which, in preparing the first, he had assumed from the company's books to be assets of the company, turned out on inquiry to be accommodation bills, and therefore liabilities instead of assets. A great deal of work had already been done in the way of examining the company's books, and it would mean great waste of time and money if, owing to the appointment of an entirely new liquidator, that work had to be done over again There would be no material difference in the respondents' position whether the company was wound up by the Court or voluntarily under the supervision of the Court. Under secs. 159 and 160 of the Act of 1862 the liquidator must obtain the sanction of the Court for any scheme of compromise or reconstruction, and a compromise imposed by a majority of creditors upon a minority under the Joint Stock Companies Arrangement Act 1870, sec. 2, must also be sanctioned by the Court—Buckley on Companies, 7th ed. 364.

At advising—