Scottish Court of Session Decisions

The Companies (Consolidation) Act 1908 (8 Edw. VII, cap. 69), enacts—Section 46—( quoted supra in the rubric). Section 50—“The Court, if satisfied, with respect to every creditor of the company who under this Act is entitled to object to the reduction, that either his consent to the reduction has been obtained or his debt or claim has been discharged, or has determined, or has been secured, may make an order confirming the reduction on such terms and conditions as it thinks fit.” Section 55—“In any case of reduction of share capital the Court may require the company to publish as the Court directs the reasons for reduction, or such other information in regard thereto as the Court may think expedient with a view to give proper information to the public, and, if the Court thinks fit, the causes which led to the reduction.”

Caldwell & Company, Limited and Reduced, papermakers, Inverkeithing, petitioners, presented a petition to the First Division of the Court of Session craving the Court to make an order confirming a proposed reduction of their capital.

William Hay Caldwell, Morar, Inverness-shire, one of the shareholders in the company, respondent, lodged answers.

The petition set forth—“3. That the share capital of the company authorised by the memorandum is £50,000, divided into 50,000 shares of £1 each The whole of this capital has been issued and is fully paid.… 7. That on 24th May 1913 a fire took place in the works of the company which caused serious damage to the buildings, machinery, stock-in-trade, &c., and the stoppage of the works. The works are nowin course of being reconstructed, but some months must elapse before they are in operation. 8. That at the time of the formation of the company the value placed upon goodwill was £20,257, 13s. 7d., but the same was reduced from time to time by sums applied out of the profits, so that at the close of the year to 28th September 1912 it amounted to £9163, 16s. 6d. A settlement has been made with the insurance company in respect of the fire loss for buildings, machinery, plant, stock,

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and stores, and sums have been received in respect thereof as follows:—

Buildings	£10,253 8 11
Machinery	22,562 8 6
Electric light plant	607 11 3
Stock of paper	32,761 7 9
Stores	8,783 19 8
Extinguishing expenses	281 3 11
	£75,250 0 0

The company were also insured against loss of profits, and various sums have been and will be received in respect thereof. According to the balance-sheet of 27th September 1913 the value of the heritable properties and machinery, after deducting the amounts recoverable from the insurance company in respect thereof, stood at £42,317, 3s. 2d. 9. That the company have paid no dividend. The directors are satisfied that having regard to the effect upon the goodwill arising from the interruption caused by the fire, and the depreciated value of the buildings and machinery extant after the fire, the value of the said assets has decreased by not less than £12,500. 10. That accordingly, at an extraordinary general meeting of the company, duly convened and held within the registered office of the company at Inverkeithing on 3rd February 1914, the following special resolution was duly passed, and at a subsequent extraordinary general meeting, also duly convened and held within the said registered office on 18th February 1914, the same was duly confirmed, viz.—‘That the capital of the company be reduced from £50,000, divided into 50,000 shares of £1 each, to £37,500, divided into 50,000 shares of 15s. each, and that such reduction be effected by cancelling capital which has been lost or is unrepresented by available assets to the extent of 5s. per share.’ Certified copies of the minutes of the said meetings and certificates of the postage of the circulars convening the meetings are produced. 11. That the proposed reduction does not involve either the diminution of any liability in respect of unpaid share capital or the payment to any shareholder of any paid-up share capital. The creditors of the company are not therefore affected by the proposed reduction.”

The answers, inter alia, stated—“(Ans. 8) The assets and liabilities of the company, exclusive of the value of goodwill, are according as follows, namely:—

Assets.

Cash paid by insurance company	£75,250 0 0
Cash to be received from them, estimated at	15,000 0 0
Value of properties and machinery extant	61,000 0 0
Present stock of paper, say	4,000 0 0
Capital on shares not paid up	16,784 16 5
	£172,034 16 5

Liabilities.

Debts of firm of Messrs Caldwell & Company agreed to be paid by the company, and debts of the company not already paid out of profits	55,750 0 0
Share capital	50,000 0 0
	£105,750 0 0

Quoad ultra the petitioners' averments are denied. (Ans. 9) Admitted that the company have paid no dividend. Quoad ultra denied under reference to articles 7 and 8. (Ans. 10) The special resolution, the minutes of meeting, and certificates of postage of circulars, are referred to for their terms. Explained that the sole ground alleged in the said special resolution for the proposal to reduce the company's capital—namely, that capital has been lost or is unrepresented by available assets, is, as already stated, inconsistent with fact. The passing and subsequent confirming of said special resolution were accordingly unnecessary, incompetent, and ultra vires. Further explained that the proposed reduction of capital is, as is shown by the circular to shareholders convening the said meetings, a copy of which is herewith produced and referred to, a part of a large scheme to rearrange the existing capital of the company and to introduce new capital into it. The proposed reduction of capital and the proposed rearrangement of capital would work unfairly against the respondent (who does not consent thereto) in respect—(1) that reduction of capital followed by the issue of new capital would in effect distribute a certain share of present surplus assets of the company belonging to the respondent, in respect of his share-holding, to the persons who should take up the new shares without the respondent receiving a consideration therefor; and (2) that no provision is proposed to be made by the petitioners for the cancellation, with regard to any new shares to be taken up by the respondent under the proposed rearrangement scheme, of the restriction under which the respondent agreed to hold his existing shares when he consented to the insertion of article 103 in the articles of association.… (Ans. 12 and 13) The respondent respectfully submits that the prayer of the petition should be refused in respect (1) that the sole alleged ground for reducing capital, namely, that capital of the company has been lost or is unrepresented by available assets, is untrue; (2) that the passing and subsequent confirming of the said special resolution were, and that the proposal to reduce the capital of the company so long as there remains available capital not already fully paid up is unnecessary, incompetent, and ultra vires; (3) that the proposed reduction of capital involves a diminution in liability in respect of the existing unpaid share capital, and may affect creditors of the company; and (4) that the proposed reduction of capital would work unfairly against the respondent, who does not consent thereto, and that it is preliminary to a larger scheme of rearrangement of the capital of the company, which also would work unfairly against him, and to which he does not consent.”

On 22nd May 1914 the Court, having heard counsel, repelled the second and third reasons stated in the answers for refusing the petition, and remitted to Sir George Paul, C.S., to inquire into the regularity of the procedure and the reasons for the proposed reduction of capital, and to report.

He reported—The minute proposed to be registered is in proper form.

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As the proposed reduction does not involve either the diminution of any liability in respect of unpaid share capital or the payment to any shareholder of any paid-up share capital, no notice to creditors or other notice or intimation beyond what has been already given seems to be necessary.

As the proceedings have been regular, and the reasons for the proposed reduction of capital appear to be sufficient, the reporter is of opinion that an order may be pronounced in terms of the prayer of the petition, and that the words ‘and reduced’ as an addition to the name of the company may be altogether dispensed with.”

The respondent lodged a note in which he pointed out that the Court had not dealt with his reasons one and four for refusing the petition, and on 11th June 1914 the Court remitted anew to Sir George Paul, C.S., “to inquire—(1) whether the capital of the company has been lost or is unrepresented by available assets and should be cancelled; and (2) whether the cancellation of the same followed by the proposed rearrangement of the company is just and equitable, and will not work unfairly against the respondent.”

The reporter reported—… In contemplation of the formation of the company a preliminary agreement was entered into … The thirteenth clause is as follows:—‘The said William Hay Caldwell shall have no right in virtue of his holding in the company to a seat on the board thereof or in any way to interfere in the management or control.’ This restrictive condition is repeated in the 103rd clause of the articles of association. On the incorporation of the company the preliminary agreement with Mr Millar was adopted in all its clauses by the incorporated company, conform to an agreement which repeated its provisions verbatim.…

The resolution and confirming resolution reducing the capital were respectively passed on 3rd and 18th February 1914.

The latest balance sheet then existing was for the year of the fire, i.e. the year to 27th September 1913. It showed the following results:—

Assets.

Heritable properties	£12,961 12 5
Machinery, &c.	29,355 10 9
	£42,317 3 2
Deduct the amount of depreciation reserve account	10,843 18 6
	£31,473 4 8
Stock in trade.	5,327 2 3
Outstanding accounts	2,204 10 11
Office furniture	55 5 3
Cash in hand	115 7 1
Sundries outstanding	245 1 3
Goodwill	9,163 16 6
Sum received from Insurance Company in respect of loss by fire	75,250 0 0
	£123,834 7 11

Liabilities.

Outstanding accounts	£2,290 16 9
Bills payable	601 2 11
Carry forward	£2,891 19 8	£123,834 7 11
Brought forw'd	£2,891 19 8	£123,834 7 11
Due Royal Bank of Scotland	29,496 1 3
Due on loans	34,239 17 9
Debts heritably secured	1,050 0 0
Sundries outstanding	3,641 4 9
Legal expenses	337 4 9
Compensation to workmen, reserve account	292 1 5
		71,948 9 7
		£51,885 18 4
	Shareholders' capital	50,000 0 0
	Representing in the balance sheet profit and loss account	£1,885 18 4

But the values of the heritable properties, machinery, &c., in the balance sheet were mere book values, and did not necessarily represent actual values. It would seem more accurate to substitute the values of experts as contained in their valuations made by the instructions of the directors three months after the fire, for the book values shown on the assets side of the balance sheet as modified by the depreciation reserve fund. These valuations, it seemed to the reporter, would show the actual values as they then existed more accurately than the book values in the balance sheet.…

Substituting then the values as brought out in the experts' valuations, and accepting the entries in the balance sheet which deal with ascertained figures, the following result is brought out:—

Assets.

1. Machinery as per Messrs Menzies and Thomson's valuation of 3rd September 1913	£42,000 0 0
2. Buildings as per Alexander Robertson's valuation of	9,690 0 0
Value of buildings and machinery after the fire before reinstatement	£51,690 0 0
3. Stock-in-trade	5,327 2 3
4. Outstanding accounts	2,204 10 11
5. Cash in hand	115 7 1
6. Sundries outstanding	245 1 3
7. Sum received from Insurance Company in respect of damage by fire	75,250 0 0
	£134,832 1 6

Liabilities.

1. Outstanding accounts	£2,290 16 9
2. Bills payable	601 2 11
3. Due Royal Bank of Scotland	29,496 1 3
4. Due on loans	34,239 17 9
5. Debts heritably secured	1,050 0 0
6. Sundries out standing	3,641 4 9
7. Legal expenses	337 4 9
8. Compensation to workmen, reserve account	292 1 5
		71,948 9 7
	Surplus	£62,883 11 11

Note.—In bringing out the above result no value has been put down for goodwill,

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which appears in the balance sheet as £9163, 16s. 6d.; nor for office furniture (£55,5s. 3d.) as that was probably included in the expert's valuation of machinery, &c.…

Assuming that in the present case your Lordships are not satisfied on the inquiry that capital has been lost or is not represented by available assets, the important point for consideration seems to be whether in such circumstances a special resolution bearing to be based on the ground that capital has been lost or is not so represented should be confirmed.

The second branch of the remit directs the reporter to report ‘whether the cancellation’ of capital as proposed ‘followed by the proposed rearrangement of the company is just and equitable and will not work unfairly against the respondent.’

The company's desire seems to be to raise money for its business by means of an increase of capital, and to give up its present system of working on borrowed money. It has been advised that it should do so by an issue of 15s. shares, and that that would only be feasible if the existing shares were reduced by 5s. each to 15s. per share. Nothing beyond that is proposed.

The company has power to increase capital not only under clause V of its memorandum but also under clause 7 of its articles, which empowers it ‘by a special resolution to increase its capital by the issue of new shares, with or without preferred or deferred rights,’ &c. Its proposed scheme of raising capital by an issue of new shares instead of by borrowing as heretofore seems unobjectionable, but it has been advised that an attempted issue of 15s. shares to rank pari passu with the original £1 shares would be unsuccessful, hence the necessity of reducing the value of the share from £1 to 15s. Having regard to recent decisions and the general terms on which reduction of capital is authorised by the Act of 1908, the reporter sees no reason why, assuming a corresponding re-arrangement of the assets side of the balance-sheet, as pointed out by Mr Justice Buckley, a special resolution for reduction based on such a ground and passed by the prescribed majority, or as in the present case unanimously, might not be confirmed by your Lordships on your being satisfied that it would not prejudicially affect any class or individual. It has been represented on behalf of the respondent that, notwithstanding these powers to increase capital conferred upon the company by the articles of association, certain of the shareholders are barred from voting in favour of the exercise of them by the terms of the agreements which form the contract with him. It seems to the reporter that there is no ground for that contention. The eighth article in each of the agreements bears that the ‘price or consideration payable by the company shall be £50,000, and shall be payable by the allotment to the persons after mentioned of the shares after specified of the company (being the whole initial capital of the company),’ &c. It seems, moreover, that the power to increase capital contained in the memorandum and articles must be read as incorporated in the agreements, wherein it is recited that the memorandum and articles had, ‘with the privity of William Hay Caldwell, Caldwell & Company, Gordon Caldwell, and Francis Pasley Caldwell, been already prepared.’

In a note for the reporter ‘The respondent submits that the proposed scheme will work unfairly against him, in respect that he cannot claim of right to participate in the new issue of shares, and may under the articles of association (9 and 7) of the company be refused any allotment of the new issue.’ Further, that ‘Even in the event of the respondent's being allotted a proportion of the new issue, these new shares would apparently continue to be subject to the restrictive conditions which by the articles of association attach to the respondent's present holding. In respect of these new shares the respondent would have no vote, and if desirous of transferring the same he might have the registration of his transfer refused without any reason being stated therefor’ (see art. 35). ‘The said allotment of new shares to the respondent would thus be rendered practically useless.’

The restrictive conditions to which the respondent refers as attaching to his present holding are embodied in the agreements (clause 13) and in clauses 103 and 77 of the articles. ‘(103) Notwithstanding anything hereinbefore or hereinafter contained, William Hay Caldwell shall have no right, in virtue of his holding in the company, to a seat on the board thereof, or in any way to interfere with the management or control.’ Clause 77, ‘Subject to article 103, every member present in person shall on a show of hands have one vote,’ &c.

As regards the disposal of the shares of new capital, article 9 provides that, ‘subject to any special direction of the company to the contrary, all new shares shall be offered to the shareholders in proportion to the number of existing shares held by each of them,’ &c.; and article 7 provides that the new shares may be disposed of in such ‘manner as the company by special resolution may direct, or, if no direction is given, as the directors may think expedient.’

“The reporter cannot believe that the company or the directors would refuse to give the respondent a proportional allotment of new shares as provided by clause 9. They might be prepared to give an undertaking to that effect. Nor can he believe that they would capriciously decline to register any reasonable transfer of the shares so allotted to him. A power to refuse to register transfers when a portion of the share capital is uncalled is not unusual. An unrestricted power, as in the present case, is less common, but it may be thought useful in order to keep off the register persons who in the opinion of the directors may be considered undesirable as shareholders. In the present case the clause has been in the articles since the beginning. It must be kept in view, moreover, that by special resolution passed on 25th August and confirmed 10th September 1908 the company was declared to be a private company in the sense of the Companies

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Act of 1907, which enacted (section 37 (1)) that ‘for the purposes of this Act the expression “private company means a company which by its articles,’ inter alia, ‘( a) restricts the right to transfer its shares, and ( b) limits the number of its members (exclusive of persons who are in the employment of the company) to fifty.’ The company's articles of association were accordingly altered by adding clauses, inter alia, declaring the company to be a private company, and providing that the number of its members (exclusive as above mentioned) should be limited to fifty, ‘and no transfer which would increase such number of members beyond fifty shall be valid, and the directors shall refuse to recognise or register any transfer which would so increase such number.’

As regards the restrictive conditions in clauses 103 and 77, these, as already mentioned, were imposed (as regards clause 103) in the agreements and (as regards both clauses) in the articles of association with the consent of Mr William Hay Caldwell and his legal adviser, and he must accept them as they stand, but as there seems to be a doubt whether, in view of the words of clause 77 of the articles when read along with clause 103, the respondent is or is not entitled to a vote, it may be that the company would be prepared to consider favourably a request by him that the words of 77 ‘subject to article 103,’ and of 78 and 80 ‘subject as aforesaid’ should be deleted.

The respondent further submitted in his note that, assuming that his contention that capital had not been lost to be well founded, but that the reduction had been confirmed on other grounds, ‘the proposed issue of new shares on the basis of the present capital being worth only 15s. in the £ would have the effect of distributing among the new shareholders one-fourth of the present total value of the respondent's present holding without his receiving any consideration therefor.’ That, however, would not strike specially against the respondent, the other shareholders would be equally affected.

“In conclusion, the reporter begs to report that in his opinion (1) capital has not been lost or is not unrepresented by available assets; and (2) subject to his observations, if capital should on the ground of loss or on any other ground be cancelled to the extent proposed and should be followed by an issue of new capital as proposed, such an arrangement would not be unjust or inequitable and would not work unfairly against the respondent.”

Argued for the petitioners—The proposed reduction of capital should be given effect to being based on a valid special resolution of the company, backed by a three-fourths majority of the shareholders—Companies (Consolidation) Act 1908 (8 Edw. VII, cap. 69), secs. 46, 50. The objections of the respondent were therefore immaterial, and he must adhere to his bargain with the company. On part 1 of the remit the reporter was not entitled to come to the conclusion to which he had come, which could only be justified on the valuation of expert valuers. The company could put their own valuation on their property. The reporter's opinion was not proof of the facts. On part 2 the report was irrelevant for the reason stated above. It was not for the Court to decide how a commercial business should be conducted. They could only inquire whether the proposed change was fair to shareholders and to the public, and whether in fact capital had been lost or was unrepresented by available assets— Poole, &c. v. National Bank of China, Limited, [1907] AC 229, Lord Macnaghten at 239; in re Hoare & Company, Limited and Reduced, [1904] 2 Ch 208, Vaughan Williams, L. J., at 216. In England since the passing of the Act of 1908 it had been the practice for the Court to consider merely the position of creditors. It was perfectly legitimate for a company to recoup revenue out of capital— Mills v. Northern Railway of Buenos Ayres Company, [1870] 5 Ch. Ap. 621, Lord Hatherley, L.C., at 631. As regards sufficiency of notice to the shareholders the Court could always, if it liked, dispense with notice—sec. 9 of Act of 1908. At worst it was a mere irregularity in the petition, and did not involve readvertisement— in re The Pavilion, Newcastle-on-Tyne, Limited and Reduced, November 14, 1911, Weekly Notes 235.

Argued for the respondent—The resolution was ab initio null, because obtained from the shareholders on erroneous information— Scottish Manitoba v. North-West Real Estate Company, Limited, November 12, 1892, 20 R. 31, 30 S.L.R. 61. There was no instance of the Court granting such an application without cause shown. The case of Poole, &c. v. National Bank of China, Limited ( cit. sup.) proceeded upon a proof in which Farwell, J., had held that the company had lost assets (pp. 233, 236). The objectors in that case held founders' shares which were admittedly worthless—Lord Macnaghten at 239. Moreover, the directors did not obtain their special resolution in respect of erroneous information, and there was no cancellation of any part of the objectors' shares. The case of Poole ( cit. sup.) was therefore no authority for the proposition that it was unnecessary to prove loss of assets—Buckley on the Companies Acts (9th ed.), pp. 132–3, 136, 141; City Property Investment Trust Corporation, Limited, Petitioners, January 17, 1896, 23 R. 400, Lord Trayner at 405, 33 S.L.R. 309; Palmer's Company Precedents (11th ed.), Part I, pp. 1262, 1277. The Louisiana and Southern States Real Estate Mortgage Company, [1909] 2 Ch 552, was the only case which might appear to support that proposition, and there the facts were different. The Court might ask for the reasons for the proposed reduction which the directors would be unable to give, and must be satisfied that it will not operate inequitably—sec. 55 of the Act of 1908; in re Barrow Hœmatite Steel Company, [1900] 2 Ch 846, [1901] 2 Ch 746. The proper course, therefore, was to remit back to the reporter to proceed de novo.

At advising—