Scottish Court of Session Decisions

On January 18, 1908, William Sime, C.A., liquidator for winding-up voluntarily the Humboldt Redwood Company, Limited, a company registered on 17th August 1885 under the Companies Acts 1862 to 1883, presented under the Companies Acts 1862 to 1900, and particularly under section 138 of the Act of 1862 (25 and 26 Vict. cap. 89), a petition to determine a question arising in the winding-up.

The question submitted was—“Whether the ordinary shareholders are entitled to receive payment of their capital in full before the deferred shareholders receive anything on account of their capital or not?”

Answers were lodged by (1) Archibald Coates and others, holders of both ordinary and deferred shares, who claimed that the ordinary shareholders were entitled to payment of their capital in full before any payment was made to the deferred shareholders, and (2) by the liquidators of the Merchant Banking Company, Limited, holders of a large number of deferred shares, who maintained that they were entitled to a pari passu ranking with the ordinary shareholders.

The memorandum of association of the Humboldt Redwood Company, Limited, article 4, is quoted supra in rubric. The articles of association of that company provided—Art. 43—“The holders of ordinary shares of the company shall be entitled to receive out of the profits of each year a cumulative preferential dividend at the rate of 10 per cent per annum on the amount for the time being paid up on the ordinary shares held by them respectively, and the surplus profits in each year shall belong to the holders of the deferred shares.” Art. 137—“In the event of the company being dissolved and wound up, the different shares or stocks of the company shall be repaid out of the assets of the company as realised, in the order in which the shares or stocks are entitled to rank for payment of dividend.”

Argued for Archibald Coats and others—The articles of association (article 137) specifically provided that the holders of ordinary shares were entitled to a preference in the matter of ranking for repayment of capital over the holders of deferred shares. It was perfectly competent to provide for this preference in the articles of association though the memorandum was silent on the subject. New shareholders might be brought in with a preference over the existing shareholders by special resolution— Andrews v. Gas Meter Company, [1897] 1 Ch 361; Bangor and Portmadoc Slate and Slab Company, 1875, L.R., 20 Eq. Ca. 59. A fortiori such a preference could be created by the articles of association.

Argued for The Merchant Banking Company, Limited—The rights of the shareholders as regards ranking for repayment of capital were to be determined by reference to the Memorandum. The articles of association could not modify the memorandum in regard to any matters required to be stated in the memorandum—The Companies Act 1862 (25 and 26 Vict. cap. 89),. sections 8, 12. The articles so far as inconsistent with the memorandum were invalid— Guiness v. Land Corporation of Ireland, 1882, 22 Ch. Div. 349. Here article 5 of the memorandum provided for equality of treatment quoad capital, and the articles of association so far as they modified that provision were invalid.