Scottish Court of Session Decisions

The Companies Act 1877 (40 and 41 Vict. cap. 26), sec. 3, enacts—“The word ‘capital,’ as used in the Companies Act 1867, shall include paid-up capital; and the power to reduce capital conferred by that Act shall include a power to cancel any lost capital, or any capital unrepresented by available assets, or to pay off any capital which may be in excess of the wants of the company; and paid-up capital may be reduced either with or without extinguishing or reducing the liability (if any) remaining on the shares of the company, and to the extent to which such liability is not extinguished or reduced it shall be deemed to be preserved, notwithstanding anything contained in the Companies Act 1867.”

The Walker Steam Trawl Fishing Company, Limited, a company limited by shares, incorporated on 29th November 1901 under the Companies Acts 1862–1900, and having its registered office at Commercial Road, Aberdeen, presented a petition to the Court for, inter alia, “an order confirming the reduction of capital resolved on by one or other of the special resolutions set forth in the petition.”

The petition stated—“Clause fifth of the memorandum of association is in the following terms—‘The capital of the company is £50,000, divided into 50,000 shares of £1 each, with power to increase or reduce the capital in conformity with the law in force at the time and with this memorandum and articles of association of the company, as originally framed or as duly and competently altered, and to attach to any additional capital such preferential, deferred, or special rights, privileges, or conditions as the company may determine.’

“By clause 52 of the articles of association it is provided that ‘The company may by a special resolution reduce its capital by reducing the number or the value or both the number and the value of the shares into which it is divided, and may consolidate or subdivide its shares, and may cancel any shares that have not been taken or agreed to be taken by any person in the manner and with all or any of the incidents prescribed by the statute’; and by clause 148, that ‘If the company shall be wound up, the surplus assets shall belong to the holders of the shares in proportion to the amount paid up or deemed to be paid up thereon, but this article shall be without prejudice to the rights of the holders of any shares to be issued on special terms.’

The whole of the original share capital was issued as ordinary shares, and 12s. 6d. has been paid up on each share. Since its incorporation the company has been uniformly prosperous. For the first two years the dividends were at the rate of 7 1 2 and 5 per cent. respectively on the subscribed capital, and during the last three years

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uniform dividends at the rate of 10 per cent. have been declared and paid, and that after ample allowance has been made for depreciation on the company's property. The company finds that the capital subscribed is as much as it can profitably make use of for many years to come, and its financial position is such that there is no necessity for retaining the liability of 7s. 6d. attaching to each share, which liability has the effect of unduly depressing the selling value of the company's shares. The company desires, however, to retain the denomination of its shares at £1 sterling each, which is the reason for resolutions numbers one and two and for the first minute hereinafter specified.

Accordingly an extraordinary general meeting of the company was held in Aberdeen on 27th April 1907, at which the following resolutions were unanimously passed:—(1) … [ quoted supra in rubric] … (2) That in order to carry out the re-allocation of the share capital among the shareholders the directors of the company be authorised to receive from Mr Andrew Walker, Commercial Road, Aberdeen, such amount as may be required to pay the shareholders any fraction of a pound sterling with which they may be credited in the share capital account of the company, and that the said Andrew Walker receives the resultant remaining shares at par value equivalent to the amount so paid by him. Alternatively (3) … [ quoted supra in rubric].

At an extraordinary general meeting held on 13th May 1907 these resolutions were unanimously confirmed as special resolutions of the company.

The company has no debentures or debenture stock [ The petition then set forth the company's liabilities, the creditors in which gave assent, and its assets, which were ample.] ….

The minute proposed to be registered is as follows:—The capital of the Walker Steam Trawl Fishing Company, Limited, is £50,000 divided into 50,000 shares of £1 each, of which 31,250 shares have been issued and are fully paid up, leaving 18,750 shares still to be issued; or alternatively, the capital of the Walker Steam Trawl Fishing Company, Limited, is £31,250, divided into 50,000 shares of 12s. 6d. each, all of which shares have been issued and are fully paid up.”

On 19th July the Court remitted to Mr W. C. L. Winchester, W.S., to inquire and report whether the power prayed for should be granted.

On 9th October 1907 Mr Winchester, inter alia, reported—“… “Section 3 of the Act of 1877 enumerates the modes of reducing capital, and applies to capital whether paid up, subscribed, or unissued, and embraces (1) cancelling lost capital; (2) cancelling capital unrepresented by available assets; (3) paying off capital in excess of the wants of the company; (4) cancelling issued but unpaid capital; and (5) cancelling unissued shares.

“Sir Henry Burton Buckley, in his work on the Law and Practice under the Companies Acts (8th ed p. 615), observes that neither the Act of 1867 nor that of 1877 prescribes the manner in which the reduction of capital is to be affected. Nor is there, he adds, any limitation of the power of the Court to confirm the reduction except that it must first be satisfied that all the creditors entitled to object to the reduction have either consented or been paid, or secured— British Finance Corporation v. Couper, [1894] AC 399–403. The power of reduction is general, and extends to every possible mode of reducing capital— Phœbe Gold Company, 1909, W.N. 182. Subject to the confirmation by the Court, which is required, and which is the safeguard of the minority, the question is a domestic one for the decision of the majority, and the Act leaves the Court to determine the extent, the mode, and the incidence of the reduction, and the application of any capital moneys which the reduction may set free.

The observations made and the cases referred to in Buckley, and those which have been decided in the Scotch Courts, all appear to deal with applications for the “ reduction of capital” in one form or other.

The conclusion I have formed is that the first resolution printed in this petition cannot be confirmed by the Court as a “reduction of capital” under either the Act of 1867 or that of 1877. The resolution in question purports to be “a conversion” or “re-allocation” of the share capital, and I do not think it can in any sense be held to be “a reduction of capital” within the meaning of the Acts founded on by the petitioners.

I have found nothing in the Acts nor in the authorities which would warrant me in suggesting that such a resolution is competent as “a reduction of capital,” but as the petitioners are anxious that the first resolution should be confirmed, I have thought it right, in the absence as far as I can find of any direct authority, to report the matter to your Lordships.

The second or alternative resolution clearly imports a reduction of capital, and is authorised by the regulations of the company as originally framed, and it is competent under sections 9 to 19 of the Act of 1867. The petitioners ask for confirmation of one or other of the special resolutions, and I beg respectfully to suggest that, should your Lordships hold the first resolution to be incompetent, the second or alternative resolution may be confirmed.…'

Argued for the petitioners—The object of confirmation was to protect creditors or a minority of shareholders. The company unanimously desired the first resolution to be confirmed. They preferred to have £1 shares rather than 12s. 6d. shares. The creditors had also consented to the reduction. It made no difference to anyone outside the company which resolution was confirmed. There was no limit to the way a reduction could be carried out. The first resolution was a reduction of capital, for it was a

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reduction of available capital. Reference was made to in re Phœbe Gold Mining Company, 1900, Weekly Notes 182.