Scottish Court of Session Decisions

On 28th October 1905 the Balmenach-Glenlivet Distillery Company, Limited, incorporated under the Companies Acts 1862 to 1893, presented a petition under the Companies Acts 1862 to 1900 and particularly the Companies Act 1867, sections 9 and 10, and 1877, sections 3 and 4, in which it craved the Court, inter alia, “to pronounce an order confirming the reduction of capital resolved on by the special resolution set forth in the petition, approving of the minute set forth in the petition, directing the registration of such confirmation order and minute by the Registrar of Joint Stock Companies, and … and dispense altogether with the words ‘and reduced ’ as part of the name of the company … Answers were lodged by John Croall, 21 Broughton Street, Edinburgh, and others, holders of preference shares in the company of the cumulo value of £5890.

The company which was formed to take over the old established distillery, &c., business of John M'Gregor & Son was incorporated in February 1897. Its memorandum of association in clause 5 provided—“The capital of the company is one hundred and twenty thousand pounds sterling, divided into six thousand preference shares of ten pounds each, which shall he entitled to receive out of profits a cumulative preferential dividend of five per centum per annum (in the manner after stated), and six thousand ordinary shares of ten pounds each, held as fully paid up, with power to increase and reduce the capital, and (without prejudice to existing rights) to divide the shares for the time being into several classes, .and to attach thereto respectively such preferential, deferred, or special rights, privileges, or conditions with regard to repayment of capital or payment of dividends, or both, or voting, as may be determined by or be in accordance with the regulations of the company; provided always that no shares having rights, privileges, or conditions of any kind, preferential to or pari passu with those of the said preference shares shall be created or issued unless said creation and issue shall have been previously agreed to by an extraordinary resolution of the holders of said preference shares, passed in terms of the articles of association. The preference shares shall rank on the net profits of the company (including any balance at the credit of profit and loss account brought forward from previous years, and any sum at the credit of reserve applicable for equalisation of dividend) for a dividend of 5 per centum per annum in preference to any dividend on the ordinary shares; and in the event of the net profits in any year not being sufficient to pay such dividend in full for that period, the shortcoming shall be made good out of the net profits of the subsequent year or years, such arrears of dividend being also paid in preference to any divdend on the ordinary shares. In the event of a winding-up of the company being followed by a distribution of its surplus assets among its members, such distribution shall be regulated as follows, viz.— First, in repaying to the holders of the preference shares mentioned in this memorandum, pari passu, and to the holders of any other issue of stock or shares having priority to the ordinary shares, pari passu, according to their respective priorities and privileges, the amount paid up thereon, and any arrears of dividend thereon; thereafter in repaying to the holders of the ordinary shares pari passu the amount paid thereon; and the residue (if any) shall be paid to the holders of ordinary shares.”.

The articles of association contained provisions in accordance with the above clause of the memorandum, and in particular clause 14 provided—“The company may from time to time, by special resolution, reduce its capital by paying off capital, or cancelling capital which has been lost, or is unrepresented by available assets, or reducing the liability on the shares or otherwise, as may seem expedient, and capital may be paid of upon the footing that it may be called up again or otherwise. The company may also subdivide or consolidate its shares, or any of them.”

The petition stated, inter alia—“The whole share capital of the company was issued. The 6000 preference shares were offered for subscription at £11 per share (being £1 premium), and were allotted to members of the public and issued for cash. The whole ordinary shares were, in terms of the purchase agreement, issued to the vendors as fully paid up. On its formation the company took over the business of distillers, maltsters, merchants, and farmers, formerly carried on by the vendors at Balmenach February 1897, and has since carried on business as distillers, maltsters, merchants, and farmers

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at that distillery. The company does not carry on any other business.… The reports and balance-sheets which have been submitted to the shareholders show that the net profits earned by the company since its formation have been :—

For the period from 1st February 1897 to 81st August 1898			£11,754	1	4
Fortheyearto31st August		1899	7,111	0	1
do	do	1900	8,185	16	2
do	do	1901	6,680	18	9
do	do	1902	5,685	6	5
do	do	1903	2,299	9	0
do	do	1904	2,150	16	4
			£43,867	8	1

Having in view the changes which have taken place in the liquor trade since 1897, and the long depression which has existed and is continuing to exist, and the greater cost of production brought about by the difficulty and expense of so disposing of the distillery effluents as to avoid all cause of complaint by the riparian proprietors, the directors of the company, after careful consideration, came to be of opinion that the capital as stated in the balance-sheet as at 31st August 1904 was no longer fully represented by available assets, and that a considerable portion of the capital of the company had been permanently lost, and that it was advisable that the capital should be reduced so that the value of the assets as appearing in the books should be written down to a figure more nearly approximating to actual value. The directors obtained from Mr James Maitland, distillery architect and valuator, Tain, managing director of the Glenmorangie Distillery Company, Limited, a report on and valuation of the whole buildings, machinery, and plant belonging to the company. Mr Maitland in his report dated 7th April 1905, valued the business properties, including lands, buildings, machinery, plant, distiller's residence, excise officers’ residences, brewers’ and workmen's houses, offices, water pipes, farm steading, railway from distillery to Cromdale, drainage, wheel pit, mill lade, and tail drains at the sum of £28,000, and he reports that ‘in the present depressed condition of the distillery industry, with immense stocks of whisky accumulated in duty free warehouses, and with distilleries capable of producing supplies far in excess of the demand, and consequently very keen competition for all orders, I am strongly of opinion that it would not be safe in present circumstances to calculate anything for goodwill, as it has now no marketable value.’ In the balance-sheet at 31st August 1904 the distillery buildings, railway, machinery, plant, water rights, and goodwill are stated as of the value of £108,406, 18s. 9d., and there is entered an item, ‘purification works, suspense account, expended during last year, £677, 9s. Id.’ together

making	£109,084	7	10
Deducting therefrom Mr Maitland'valuation amounting to	28,000	0	0
Leaves a difference of	£81,084	7	10

The directors are accordingly of opinion that under no circumstances that can be foreseen can the value of the distillery with machinery and plant be stated at a sum exceeding £28,084, 7s. 10d. The directors are satisfied that the other assets of the company are of the value stated in the balance sheet, and accordingly the petitioners believe that there has been a depreciation in the value of the company's assets to an extent considerably exceeding £81,000. In these circumstances the directors after careful consideration came to be of opinion that in order to put the capital of the company on a sound basis and to improve its position, a reasonable scheme, having regard to the legal rights of both classes of shareholders, would be to reduce the preference shares from £10 each to £5, 10s. each and the ordinary shares from £10 each to £1 each, and that the preference dividend for the period from 31st August 1904 to 31st August 1905 should be cancelled. Such reduction would reduce the amount of outstanding capital to the extent of £81,000, and that amount would be written off the book values of the distillery and other assets. The directors were further of opinion that in order to compensate the preference shareholders for the reduction it was fair and equitable that the preference shares in addition to being entitled to a cumulative preference dividend and to a preference as to repayment of capital in the event of a winding-up should also have conferred upon them a right to share rateably in any surplus profits and capital with the ordinary shareholders. Accordingly at an extraordinary general meeting of the company duly held… on 16th June 1905 the following resolution was passed by a majority of 8379, there having been 8653 votes given for the resolution and 274 against it:—‘That the capital of the company he reduced from £120,000, divided into 6000 preference shares of £10 each and 6000 ordinary shares of £10 each, to £39,000, divided into 6000 preference shares of £5,10s. each and 6000 ordinary shares of £1 each, and that such reduction be effected as follows—(1) by cancelling capital which has been lost or is unrepresented by available assets to the extent of £4, 10s. per share on each of the said 6000 preference shares and of £9 per share on each of the said 6000 ordinary shares, and (2) by reducing (a) the nominal amount of each of the said 6000 preference shares from £10 to £5, 10s., and (6) the nominal amount of each of the said 6000 ordinary shares from £10 to £1.’”

The petition further stated that at the said general meeting separate special resolutions dealing with the arrears of dividend on the preference shares, and giving effect by amendments in the articles of association to the alterations on the rights of the preference and ordinary shareholders, were submitted and carried by the same majorities; that at a separate meeting of the preference shareholders held on the same day a resolution consenting to the special resolutions and to the rights attached to the preference shares being abandoned or altered was carried by 2733 votes for to 1374 against, and that at an

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extraordinary general meeting of the company held on 12th July 1905 the resolutions were confirmed by a majority of 7343, votes to the number of 8567 being for and 1224 against.

The minute proposed to be registered was—“The capital of the Balmenach-Glenlivet Distillery, Limited, is £39,000, divided into 6000 preference shares of £5, 10s. each and 6000 ordinary shares of £1 each, all of which shares have been issued and are fully paid.”

The answers, which did not deny that a reduction of capital was necessary, stated, inter alia:—“In both the memorandum and articles of association of the company it is specially provided that the preference shares are preferential both as regards dividend and capital, and in the prospectus issued to the public and on the faith of which the preference shares were applied for it is set forth that these shares are ‘entitled to a cumulative dividend of 5 per cent. per annum preferential as regards both dividend and capital.’ Said shares were issued at a premium of £1 per share, or in other words of 10 per cent.… The respondents do not admit that Mr Maitland's said valuation is at all adequate. Further, Mr Maitland has reported that the goodwill for which …. £68,800 or thereby was paid is now valueless. The respondents submit that the goodwill still possesses a substantial value and that Mr Maitland's valuation of £28,000 for the distillery, adjuncts, and goodwill is very greatly underestimated.… Under the resolutions which the Court are now asked to confirm it is proposed to throw one-third part of the alleged loss of capital on the preference shareholders and the remaining two-thirds thereof on the ordinary shareholders, whereas under the memorandum and articles of association the whole of the loss fell to be borne primo loco by the ordinary shareholders. It is further proposed that while in the original articles of association each class of shareholders has the same voting power according to the value of the shares held by them—that is to say, one vote for each £10 of capital—an ordinary shareholder holding only a £1 share shall in future have the same voting power as a preference shareholder holding a £5, 10s. share. The respondents accordingly crave the Court to refuse the prayer of the petition, because … (2) it is not proved and it is not the case that capital has been lost to the extent represented by the proposed reduction of capital; (3) the resolutions in question are incompetent as being in breach of the fundamental provisions of the memorandum and articles of association; and (4) the resolutions in question even if competent are inequitable and ought not to be confirmed by the Court.”

It appeared that practically the whole of the ordinary shares still belonged to the M'Gregor family, the vendors, and that the directors were virtually their representatives.

The Court on 17th November 1905 remitted to Mr G. M. Paul, D.K.S., to inquire as to whether the proceedings had been regular and proper, and as to the reasons for the proposed reduction of capital, and to report.

Mr Paul in his report stated—“… It seems impossible to ascertain with arithmetical certainty the precise amount of depreciation. A conclusion can only be reached on a consideration of the independent opinions of reliable experts formed, in a minor degree, on their estimate of the value of the properties as such, but mainly on the effect which what they imagine will be the future of the whisky trade will have upon the particular distillery.… It is clear that the share capital ought to be written down very considerably; it is the extent only of the reduction which is in question. It. would be somewhat less than £75,000 if Mr Doig's valuation were accepted, £79,400 if Mr Spence's were accepted, and £81,000 if Mr Maitland's were accepted. The company has by large majorities passed a special resolution for reduction based on Mr Maitland's valuation, and the objection of the minorities was not to the amount of reduction.…”

The reporter discussed at length the question whether it was not ultra vires of the company to deal with the preference shares as proposed in view of the terms of the memorandum of association, on which point he referred to Buckley on Companies Acts, 8th ed., pp. 517, 616, 7th ed. p. 493; Palmer's Company Law, 5th ed., pp. 76, 77; Floating Dock of St Thomas, [1895] 1 Ch 691; London and New York Investment Corporation, [1895] 2 Ch 860; British and American Trusteeand Finance Corporation v. Couper, [1894] AC 399; Ashbury v. Watson, L.R. 30 Ch D 376; Rawlins and Macnaghten on Companies, p. 478. He then went on to consider the scheme, assuming its competency, and stated:—“If the proposed alteration be not ultra vires, then, while the legal rights of shareholders ought not, in the general case, to be departed from, it may nevertheless be that the proposed scheme of reduction should be allowed if it forms part of a fair and equitable general arrangement for keeping the distillery alive as a going concern and avoiding liquidation. As matters stand, the profits of the last three years have fallen considerably short of the amount (£3000) required for payment of the dividends on the preference shares, and as these dividends are cumulative, the arrears must, unless something is done, speedily become a charge of considerable amount upon the profits of the company, with little prospect of such an increase, in the near future at least, as will be sufficient for clearing them off. The profits for the year to 31st August 1904, after allowing £1000 for depreciation, amounted to £1155, 2s. 4d. Those for the year to 31st August last, without making any allowance for depreciation, amounted to £1847, 12s. Id. Moreover, the voting power attached to the ordinary shares being equal to that of the preference shareholders, and the ordinary shares being in the hands of a very few individuals closely connected with the management, and therefore readily available in full strength for voting purposes, the control

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of the company by the ordinary shareholders is virtually absolute, and no scheme of reduction proposed by the preference shareholders having for its object the cancelling of the whole of the ordinary share capital would have any chance of being carried with the requisite majority. If so minded, the ordinary shareholders might make a voluntary winding-up or a voluntary scheme for reconstruction impossible, and they might give much trouble in case of an attempt on the part of the others to have the company wound up under a compulsory order. Even in a winding-up a sale of the concern might, in the present depressed state of the industry, be impossible or only possible at a considerable sacrifice. The reporter understands that distilleries which have only been a comparatively short time in existence are practically unsaleable. In respect of its name a purchaser might be found for Balmenach, but, on the other hand, the uncertainty as to the future of the pollution difficulty, added to the depression in the trade, would have a prejudicial effect. Therefore an arrangement calculated to keep the company alive as a going concern, although involving (for a consideration) a departure from the legal rights of the shareholders, might nevertheless be one which, on the terms proposed, should be accepted as fair and equitable in the circumstances.”

In connection with the proposed cancelling of the preference dividend for the year August 1901 to August 1905, reference was made to Oban & Aultmore Glenlivet Distilleries, Limited, July 15, 1903, 5 F. 1140, 40 S.L.R. 817. Assuming the competency and fairness of the scheme the reporter said—“if your Lordships shall be pleased to confirm the special resolution for reduction of the company's capital, the reporter begs respectfully to submit for consideration whether it should not be made a condition that, in view of the changed circumstances, the articles of association should be altered in some respects. Section 11 of the Act of 1867 enacts that the Court may make the confirmation order ‘on such terms and subject to such conditions as it deems fit.’ Article 70 of the articles of association provides as follows:—‘On a show of hands every member shall have one vote only. In case of a poll he shall have one vote for every share, whether preference or ordinary, held by him.’ So long as all the shares had the same nominal value, the provision of a vote for every share was fair towards all the shareholders. But if the proposed reduction receives effect, and article 70 above quoted remains unaltered, there will be 6000 ordinary shares of £1 each, and the like number of preference shares of £5, 10s. each, and the holder of a number of £1 shares will have as many votes as the holder of a like number of £5, 10s. shares. The holders of the ordinary capital, with a stake of £6000 in the concern, will have equal voting power, and therefore equal powers in the management of the affairs of the company, with the holders of the preference capital, whose stake in the concern is £33,000. It seems to the reporter that article 70 should be altered so as to give the two classes of shareholders respectively voting rights corresponding to the amount of capital which, when the reduction takes effect, will belong to each class. Mr Justice Kekewich ( Pinkney Steamship Company, (1892) 3 Ch 125), who had occasion to consider this point, directed the petition to stand over to give the company the opportunity of altering its articles. Failing its doing so he intimated that he would dismiss the petition. In a previous case ( Continental Union Gas Company, 7 T.L.R. 476) Mr Justice Chitty had dismissed the petition because the proposed reduction would bring about this inequality of voting power. Subsequently to both these cases Mr Justice Romer ( James Colmer, Limited, (1897) 1 Ch 524) held that this was not necessarily a fatal objection, but that in a proper case the Court had power to confirm notwithstanding that voting powers were affected. The case was, however, a special one. The articles of association empowered the holders of any one class of shares by a specified majority to consent on behalf of all the holders of shares of that class to (among other things) any scheme for the reduction of capital affecting prejudicially such class of shares. Meetings of shareholders were accordingly held consenting to the proposed scheme of reduction. Mr Justice Romer was much influenced by these specialities …”

Argued for petitioners—The case of the British and American Trustee and Finance Corporation v. Couper, [1894] AC 399, and that of in re Credit Assurance and Guarantee Corporation, Limited, [1902] 2 Ch 601, supported the view that it was competent for the Court to confirm the proposed scheme. It was within the power of the Court to confirm although changes in the position of different classes of shareholders were brought about— British and American, &c., Corporation ( ut sup.); Palmer's Company Law (5th ed.), pp. 66–7, and cases there cited; in re Welsbach Incandescent Gas Light Company, Limited, [1904] 1 Ch 87; in re Allsopp & Sons, Limited, July 1903, 51 W. R. 644. The memorandum (clause 5) gave power to the company to reduce the capital and also to divide the shares into classes with such privileges as it liked. The power so conferred was not derogated from by the provisions relative to repayment on a winding-up. These provisions only referred to a winding-up, and that being so the present case fell within the rule of Welsbach (ut sup.). No doubt the preference shareholders were to be considered, but the Court had power to alter their position provided the alteration was as slight as possible, and the transaction as a whole was fair and equitable—Palmer's Company Law (5th ed.), p. 77. The proposal was fair and equitable, as it was impossible to reduce the ordinary shares more without abolishing them, in which case the management of the company would also go.

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Argued for respondents—The proposed scheme was incompetent. It interfered with the right of the preference shareholders as declared in the memorandum—Companies Act 1862, sections 12 and 50. The proposed application of the assets on dissolution of the company was contrary to clause 5 of the memorandum. Tacking on a reduction of capital did not alter the fact that the course proposed was incompetent— Liquidator of Milford Haven Fishing Company, Limited v. Jones, March 20, 1895, 22 R. 577, 32 S.L.R. 449; City Property Investment Trust Corporation, Limited v. Thorburn, January 17, 1896, 23 R. 400, 33 S.L.R. 309; Ashbury v. Watson, July 23, 1885, L.R., 30 C. D. 376. The petitioners proposed to cut down the amount out of the company's income which the preference shareholders were entitled to, to about one-half, for they were at present entitled to £3000, i.e., 5 per cent. on £60,000. Such alteration was inconsistent with the memorandum. In the event of a winding-up the rights of the respondents would be very prejudicially affected. The preference shareholders would only receive out of what was available about one-half of what they would at present. The ordinary shareholders were unduly benefitted at the expense of the respondents. The loss ought to fall on the ordinary shareholders— In re Floating Dock Company of St Thomas, Limited, [1895] 1 Ch 691; In re London and New York Investment Corporation, [1895] 2 Ch 860; Buckley on Companies Acts (8th ed.), p. 616; Companies Act 1867, section 9. The memorandum provided that the preference shareholders were to be paid in full on the company ceasing, and that before any of the other shareholders got anything. The powers given to alter the memorandum did not apply to that right, which was saved from the power to modify under the term “existing rights.” The memorandum was not a “flexible” one, such as the memorandum in Allsopp (ut sup.) and Welsbach (ut sup.). That being so, no change could be made on the relative right of the preference and ordinary shareholders. Apart, however, from its legality the proposed reduction was most inequitable. It was proposed to cut down the preference shares by £4, 10s. a share, and there were no circumstances to justify such a proceeding. Further, it was proposed to permit an ordinary shareholder holding only a £1 share to have the same voting power as a preference shareholder holding a £5, 10s. share. The Court would not sanction a reduction if the transaction were, as here, inequitable— In re Barrow Haematite Steel Company, [1900] 2 Ch 846.

At advising—