Scottish Court of Session Decisions

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The Companies Act 1862, section 79, enacts—“A company under this Act may be wound up by the Court as hereinafter defined 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; (2) whenever the company does not commence its business within a year from its incorporation, or suspends its business for the space of a whole year; (3) whenever the members are reduced in number to less than seven; (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.”

On September 8, 1904, a petition for an order to wind up the United Collieries, Limited, was presented under the Companies Act 1862 to 1900. The petitioners were thirteen shareholders of the company holding 141,878 shares fully paid up of £1 each, out of a total issued capital of £1,800,572. Two of the petitioners whose holdings were of the value of £5390 disclaimed the petition by letter the day after its presentation.

From statements in the petition it appeared that the company was incorporated on 10th March 1898 with the object of acquiring and working a number of colliery concerns. In June 1902 the company entered into an agreement with the Collieries Consolidation Syndicate, Limited, by which it acquired for £2,444,945, 5s. 7d. certain properties belonging to the latter, including options to purchase coalfields, leases, plant, waggons, and machinery, the price being paid partly in cash and partly in shares of the United Collieries, Limited.

The company at the same time created debentures for the sum of £1,000,000, bearing interest at 5 per cent., and by subsequent agreements the whole of these debentures were made over to the vendors, the Collieries Consolidation Syndicate, Limited, as part of the purchase price, a trust deed embodying the arrangements of purchase being executed in July 1902. On 28th July the firm of Messrs J. S. Morgan & Company, who were largely interested in the Collieries Syndicate, issued a prospectus inviting applications from the public to take up the debentures, but the greater portion of these debentures were not taken up by the public and remained in the hands of J. S. Morgan & Company and the persons associated with them in the Collieries Syndicate.

The petition further stated—“In virtue of the large holding of debentures and shares acquired through the said sale, the said syndicate and those represented by the said syndicate obtained a control over the board of directors of the company and over its management. The financial affairs of the company were recklessly managed, and larger sums than the resources of the company warranted were expended.” The directors of the company proceeded accordingly to borrow large sums of money. They obtained large advances from their bankers, the sums advanced at times exceeding £150,000, and Messrs J. S. Morgan & Company also advanced money to the company, in particular in October 1903 a sum of £75,000 bearing interest at 6 per cent. It was, inter alia, a condition of the loan that the lenders should have the right of nominating a director of the company, and that no director should be elected in addition to or substituted for any of the present directors of the company without the consent of the lenders, and that so long as any part of the loan or interest remained unpaid the company and directors should declare no dividend on preference or ordinary shares, and should exercise none of their borrowing powers except by way of bank overdraft without the previous consent in writing of the lenders. The £75,000 it was arranged was to be paid to the trustees for the debenture holders, to be applied partly for the purpose of a debenture trust sinking fund, partly for meeting the interest due on the debentures. “Although ostensibly entered into for the purpose of equipping the company with additional working capital, the said agreement had no such effect. Its practical result was that the company were thus enabled to meet debenture interest and sinking fund charges, and this by contracting further debt at a higher rate of interest and on terms which involved further surrender of the freedom of the directorate to the lenders, who practically represented the debenture holders.”

In December 1903 a further borrowing agreement, resulting in the creation of second debenture stock, was entered into between the company on the one part and Messrs J. S. Morgan & Company, the lenders, on the other. The agreement provided that the company should create £350,000 of second debenture stock bearing interest at 6 per cent., ranking after the already existing issue of first debentures. Messrs Morgan & Company, in discharge of the company's debt of £75,000 already mentioned, agreed to take £83,333 of debenture stock, being the equivalent of that debt, taking the debenture stock at 90 per cent. of its par value. The company also came under obligations to pay certain sums of money to Messrs Morgan & Company for the better security of the obligations it had incurred to the trustees for the first debenture holders under the trust-deed of July 1902. A deed of declaration of trust was executed in reference to this second issue of debenture stock, under which the general assets of the company were conveyed to the trustees for the debenture-holders who might in their discretion, without any consent on the part of the company or its assignees, enter upon or take possession of the trust-estate, and when the security thereby constituted became enforceable, at their discretion and without consent sell any part thereof.

Between January and March 1904 four bonds of £25,000 each and one for £10,500 were granted by the company to Messrs J. S. Morgan & Company, and on 9th May 1904 a bond was granted to two of the directors for £10,000. Those bonds appeared

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to have been discharged by the issue of the remainder (or nearly so) of the second debenture stock of £350,000. “None of the said second debenture stock was issued to the shareholders or to the public. It was taken up by private arrangement by the said firm of J. S. Morgan & Company and those acting with them, and by the directors and their respective nominees. By its issue no money was made available to the company for trading capital, and as it was issued at £90 for every £100 of stock the debts of the company were at once increased by one-ninth, or upwards of £38,600.”

In May 1904, as the result of various agreements between the trustees for the first and second debenture-holders and the company, £30,000 of prior lien debentures (ranking prior to all existing debentures) were created. This sum of £30,000 of prior lien debenture stock was advanced (on terms) by Messrs J. S. Morgan & Company, and the company granted a disposition and assignation in security in favour of two of the partners of that firm. “The said prior lien debenture stock of £30,000 was used to enable the company to pay the interest assured on the prior lien debentures and on the other debts in which the directors and Messrs Morgan & Company and their clients were interested up to May 1904. As the result of the various transactions and agreements before mentioned the money obligations of the company were enormously increased, while the administration of the company had become more completely subject to the control, and its whole available pledgible assets (other than waggons) had been conveyed or assigned, or attempted to be conveyed or assigned, to those representing the debenture-holders, and to Messrs Morgan.”

In May 1904 a meeting of. the first debenture-holders was held, at which they appointed a committee to consult with the directors of the company as to its financial position. As a result of this the directors of the company convened a general meeting of the company in August 1904 for the purpose of creating a stock called income debenture stock to the amount of £200,000. The resolution which was passed was in the following terms—“That income debenture stock of the company to the amount of £200,000 be constituted and secured in terms of the draft deed of declaration of trust submitted to this meeting and identified by the signature of the chairman of this meeting, expressed to be made between the company of the one part and persons to be named therein as trustees of the other part; that said income debenture stock carry cumulative interest at the rate of 6 per cent. per annum, payable out of the net income of the company which shall remain after paying out of the gross income all rents, royalties, taxes, rates, wages, salaries, repairs, insurance, and other outgoings, but without making any allowance for depreciation, and after paying and providing for the first debenture interest, the first debenture sinking fund payments, and the second debenture stock interest, and also confer right on the holders of said income debenture stock for the time being, issued in proportion to the amount of the income debenture stock held by them respectively, to nine-tenths of the whole surplus net income aforesaid which shall remain after paying the interest as aforesaid on the said income debenture stock for each year, and which would otherwise have been divisible as profits of the company; that the directors be and they are hereby authorised to execute, under the seal of the company, a deed in the form of the said draft deed of declaration of trust, and to nominate trustees for the purposes thereof; that the existing shareholders of the company be invited to subscribe for the said income debenture stock to a minimum extent of 1s. 6d. for each share held by them respectively in the capital of the company, but that the directors be empowered to give to the preference shareholders special consideration in allotment; and as regards any income debenture stock not subscribed for by the existing preference and ordinary shareholders, that the directors be and they are hereby authorised to issue same to such persons, and on such terms as they think fit.”

At the meeting the passing of the resolution was opposed by preference shareholders holding upwards of £330,000 of the preference stock of the company, but it was passed by the aid of the proxies of those interested in the first and second debentures of the company. By the deed of declaration of trust adopted for the issue of the proposed income debenture stock, it was, inter alia, provided that the trustees might in their discretion, without any consent on the part of the company, enter upon or take possession of the trust estate, and it was also provided that the committee of the first debenture holders were to be at liberty to call on the company to procure the resignation or removal of a clear majority of the directors and to appoint as directors such persons as the said committee should nominate, and that the said committee, by notice in writing to a majority of the directors, might remove them from office and appoint other directors in their place, or at any time remove any individual director objected to. Of the money to be raised by the new income debenture stock, a large proportion had to be applied to payments to Messrs J. S. Morgan & Company and in payment of other debts, and the balance, if any, remaining would, the petitioners averred, be quite insufficient to enable the company to carry on its undertakings with a prospect of success. “The result of the administration of the company during the short period which has elapsed since its acquisition of the colliery concerns before mentioned, is accordingly this, that a heavy debt has been incurred by the company, and that its whole available assets of every kind have already been, or attempted to be, hypothecated to those who have, as before stated, obtained complete control of the company's administration

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and management. In the event of the proposed issue of income debenture stock being carried out on the terms mentioned the result will be to hand over in addition to the same parties practically the whole income of the company and to permanently extinguish the beneficial interests therein of the whole body of shareholders.”

The petition proceeded especially upon section 79, sub-sections 4 and 5, of the Companies Act 1862 quoted above.

In the narrative of the petition it was further averred that the company was unable to pay its debts, but at the debate it was admitted that the last balance-sheet of the company showed that it was solvent if its assets were valued as those of a going concern.

On 15th October minutes submitting that the petition should be dismissed de plano were lodged by (1) The United Collieries, Limited; (2) The Collieries Trustee Company, Limited, trustee for the first debenture holders, representing £942,900; (3) Lord Belhaven and Stenton and others, trustees for the second debenture holders, representing £348,241; (4) all the company's trade creditors, with a few insignificant exceptions, and 513 shareholders holding among them more than half of the whole issued capital of the company, viz., £1,054,467 out of £1,800,572. These minutes set forth in detail the various reasons which rendered it inexpedient that the petition should be granted, and on certain points contradicted or gave a different complexion to the facts set forth by the petitioners. Their general contention was that the issue of the various debenture stocks and the proposal to issue the new income debentures had been made with a view to promoting the best interests of the company as a whole, and constituted the only means for saving a valuable commercial undertaking from financial ruin; that the liquidation of the company would so depreciate the value of its available assets, which consisted largely of goodwill and mineral leases containing clauses excluding sub-tenants and assignees, as to cause serious loss, and that intimation and advertisement of the petition would cause injury to the interests alike of the creditors and shareholders of the company.

On 18th October counsel for the petitioners moved the Court for an order for intimation and advertisement.

Counsel for the minuters opposed the motion, and moved that the petition should be dismissed de piano. They argued—The fact that the petitioners represented only £136,488 out of £1,800,572 of capital, and that they were opposed by practically everyone else interested in any way in the company, was in itself a sufficient ground for dismissing the petition. The petitioners, however, founded upon sub-sections 4 and 5 of section 79 of the Act of 1862. As to sub-section 4, the company was in fact solvent, and the petitioners had pointed to no debt unpaid which was actually due and for which a creditor could claim immediate payment— European Life Assurance Society, 1869, 9 Equity 122; but in any case sub-section 4 afforded no ground for a petition at the instance of these shareholders, who, if the company were insolvent, could have no interest in its assets, which would be insufficient to meet the claims of creditors and debenture holders— Rica Gold Washing Company, 1879, 11 Ch. D. 36; Chapel House Colliery Company, 1883, 24 Ch. Div. 259; ex parte Fox, 1871, L.R., 6 Ch. 176. As to sub-section 5, the sub-section was inapplicable to the present case, as it was not ejusdem generis with any of the four sets of circumstances already enumerated in sub-sections 1 to 4— Suburban Hotel Company, 1867, L.R., 2 Ch. 737. But even if it were, liquidation at the present time would be most unjust and most inequitable, as it would depreciate the assets of the company and ruin its business to the prejudice of creditors and all concerned. If the Court were satisfied on the point they could dismiss the petition without further procedure— Macdonell's Trustees v. Oregonian Railway Company, June 12, 1884, 11 R. 912, 21 S.L.R. 625; Wotherspoons v. Brescia Mining Company, Limited, December 5, 1896, 24 R. 207, 34 S.L.R. 158. Allegations as to past mismanagement were no ground for liquidation. There was here no question of the directors having acted ultra vires; the shareholders had sanctioned the issue of the debentures, but even if they had not, it was settled that directors might issue debentures at a discount— Anglo-Danubian Steam Navigation and Colliery Company, 1875, 20 Eq. 339.

Argued for the petitioners—They had set forth a prima facie case for liquidation sufficient to entitle them to an order for intimation and advertisement. It was unjust and inequitable that the company should be continued on its present footing. If not actually insolvent, it was no longer capable of being carried on as a going concern and was really being bolstered up solely in the interests of the various debenture holders, chief among whom were Messrs Morgan & Company. Under the proposed scheme the holders of the new debenture bonds would have complete control of the company to the exclusion of the preference and ordinary shareholders. The position of the company and the extravagance and mismanagement of the directors combined to make it “just and equitable” that the company should be wound up. The fact that the majority of the shareholders were opposed to the petition was not conclusive— Varieties, Limited [1893], 2 Ch. 235; Gutta Percha, Corporation [1900], 2 Ch. 665.