Scottish Court of Session Decisions

The Companies (Consolidation) Act 1908 (8 Edw. VII, cap. 69), sec. 11, enacts:—“ Application of Table A.—In the case of a company limited by shares and registered after the commencement of this Act, if articles are not registered, or if articles are registered, in so far as the articles do not exclude or modify the regulations in table A in the First Schedule to this Act, those regulations shall, so far as applicable, be the regulations of the company in the same manner and to

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the same extent as if they were contained in duly registered articles.” Sched. I, Table A, Art. 99.—“The directors may, before recommending any dividend, set aside out of the profits of the company such sums as they think proper as a reserve or reserves which shall, at the discretion of the directors, be applicable for meeting contingencies or for equalising dividends, or for any other purpose to which the profits of the company may be properly applied, and pending such application may, at the like discretion, either be employed in the business of the company or be invested in such investments (other than shares of the company) as the directors may from time to time think fit.”

Campbell Paterson, Camphill, Newton-Mearns, in the county of Renfrew, pursuer, brought an action against R. Paterson & Sons, Limited, coffee essence manufacturers, Glasgow, and Robert Paterson and James Davidson Paterson, the two directors of the company, defenders, for reduction of a report of the directors and a minute of a general meeting of shareholders “in so far as the said report and minute propose to deal with the profits of the said R. Paterson & Sons, Limited, for the year to thirty-first March Nineteen hundred and fifteen, by transfering a sum of three thousand pounds to reserve instead of distributing the said sum as dividends among the shareholders;” for declarator “(1) that the profits earned by the said R. Paterson & Sons, Limited, after allowing for all charges, including the payment of directors' salaries, fall to be divided amongst the shareholders in accordance with clause 12 of the articles of association of the limited company, and (2) that the profits on the working of the company's business for the year to thirty-first March Nineteen hundred and fifteen, and stated in the said report to be twenty thousand one hundred and forty-three pounds twelve shillings and threepence, fall to be divided in terms of clause 12 of the articles of association as dividends among the shareholders;” and for an account by the company showing the division of the profits for the financial year ended 31st March 1915, whereby the true sum due to the pursuer in name of profits as a shareholder of the company might appear and be ascertained by the Court, and, failing an account, for payment of £5129, 13s. 1d.

The defenders R. Paterson & Sons, Limited, pleaded, inter alia—“(2) The actings of the defenders being legal and intra vires they should be assoilzied from the conclusions of the summons. (3) The defenders being entitled to allow for a sum being placed to reserve before dividing the profits, and in so doing having acted in the best interests of the company, should be assoilzied from the conclusions of the summons.”

The defenders Robert Paterson and James Davidson Paterson pleaded, inter alia—“The actings of these defenders being legal and intra vires and done bona fide in the interests of the company, they should be assoilzied from the conclusions of the summons.”

The articles of association of R. Paterson & Sons, Limited, inter alia, provided—“1. The regulations contained in table A in the First Schedule of the Companies (Consolidation) Act 1908 shall apply to this company only in so far as they are not excluded, altered, or modified by the following provisions:—… 3… Articles 35 to 40 of said table A are specially excluded. … 12. After allowing for all charges, including the payment of directors' salaries, the profits of the company shall be applied as follows:—( a) In payment of a cumulative preferential dividend on the preference shares at the rate of 6 per cent. per annum so long as they stand registered in the name of Campbell Paterson. ( b) The balance of profits remaining after payment of the above dividend shall be applied in payment of a dividend on the (A) ordinary shares at the rate of 10 per cent. per annum, and on the (B) ordinary shares at the rate of 5 per cent. per annum, so long as these shares stand registered in the name of Campbell Paterson. ( c) The balance of profits (if any), after paying the dividends on said (A) and (B) shares, shall be divided between the holders of said shares equally in proportion to their respective holdings.”

The facts are given in the opinion ( infra) of the Lord Ordinary ( Hunter), who on 1st December 1915 pronounced this interlocutor—“Reduces the report and minute libelled in so far as said report and minute propose to deal with the profits of the defenders R. Paterson & Sons, Limited, for the year to 31st March 1915, by transferring a sum of £3000 to reserve instead of distributing the said sum as dividends among the shareholders, and repones and restores the pursuer thereagainst in integrum; Finds and declares (1) that the profits earned by the said R. Paterson & Sons, Limited, after allowing for all charges, including the payment of directors' salaries, fall to be divided amongst the shareholders in accordance with clause 12 of the articles of association of the limited company, and (2) that the profits on the workings of the company's business for the year to 31st March 1915, stated in the said report to be £20,143, 12s. 3d., fall to be divided in terms of clause 12 of the articles of association as dividends among the shareholders, and decerns: Quoad ultra continues the cause, grants leave to reclaim, and reserves all questions of expenses.”

Opinion.—“In this action Mr Campbell Paterson sues R. Paterson & Sons, Limited, and Mr Robert Paterson and Mr James Davidson Paterson, its directors, for reduction of ( first) a report of the directors of the company, dated 17th June 1915, and ( second) a minute of the sixth annual ordinary general meeting of the shareholders, dated 25th June 1915, in so far as the said report and minute propose to deal with the profits of the said R. Paterson & Sons, Limited, for the year to 31st March 1915, by transferring a sum of £3000 to reserve instead of distributing the said sum as dividends among the shareholders. The pursuer also seeks to have it found and declared—(1) That the profits earned by the said R, Paterson & Sons, Limited, after allowing for all charges, including the

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payment of directors' salaries, fall to be divided amongst the shareholders in accordance with clause 12 of the articles of association of the limited company; and (2) that the profits on the working of the company's business for the year to 31st March 1915, stated in the said report to be £20,143, 12s. 3d., fall to be divided in terms of clause 12 of the articles of association as dividends among the shareholders. In any event, he asks for an account by the company showing the division of the profits of the company for the financial year ended 31st March 1915, whereby the true sum due to the pursuer in name of profits as a shareholder of the said company may appear and be ascertained by the Court, and, failing an account, for payment of £5129, 13s. 1d.

“In 1909 the business of R. Paterson & Sons was converted into a private limited company under the Companies (Consolidation) Act 1908. The share capital of the limited company was fixed at £63,001, divided into (1) 35,000 cumulative preference shares of £1 each, (2) 14,000 (A) ordinary shares of £1 each, (3) 14,000 (B) ordinary shares of £1 each, and (4) 1 (C) ordinary share of £1. The whole of the preference shares, amounting to £35,000, and the whole of the 14,000 (B) ordinary shares, were allotted to the pursuer. The 14,000 (A) ordinary shares were allotted to the defenders Robert Paterson and James Davidson Paterson. The remaining 1 (C) ordinary share of £1 was allotted to Mr R. B. Paterson, a retired bank agent residing at 2 Windsor Quadrant, Glasgow. This share, with a vote attached, was created to prevent a deadlock in the event of the A ordinary shareholders voting against the B ordinary shareholders.

The first directors of the company were the pursuer and the defenders Robert Paterson and James Davidson Paterson, and it was provided by the articles of association that they should hold office till death or resignation.

On 5th May 1914 the pursuer retired from his position of managing director, under an agreement which stipulated that the profits of the business should continue to be divided as provided for in the existing articles of association, but in consideration of being left in sole charge of the business the defenders Robert Paterson and James Davidson Paterson thereby personally guaranteed that the pursuer's share of the profits would not in any year be less than £7000, which amount the said defenders guaranteed, subject to a right of appeal to the arbiter therein mentioned. It was provided that this arrangement should continue during the pursuer's lifetime.

By the articles of association of the company, clause 12, it is provided as follows:—[ quoted supra].

The financial year of the company ended on 31st March. The general meeting of the company for the year 1915 was held on 25th June 1915. According to the directors' report presented to that meeting the result of the year's working showed a profit of £20,143, 12s. 3d., from which the directors proposed to transfer to reserve £3000, leaving the sum of £17,143, 12s. 3d. available for dividends on the preference and ordinary shares as follows:—(1) In payment of dividends on the preference shares; (2) in payment of dividends on the ordinary shares; and (3) the balance over to be divided in equal proportions between the A and B ordinary shares. The defender Mr Robert Paterson, who was in the chair at the general meeting, moved that the accounts be approved of and the dividends paid in accordance with the directors' recommendation. This motion was seconded by the defender Mr James Davidson Paterson. The pursuer moved the following amendment:—‘The proposal of the directors being contrary to clause 12 of the articles of association of the company, this meeting resolves that the profits of the company for the past year be applied as follows:—( a) That a dividend of 6 per cent. be paid on the preference shares. ( b) That a dividend of £10 per cent. be paid on the “A” ordinary shares, and 5 per cent. on the “B” ordinary shares. ( c) That the balance of profits shall be divided equally between the holders of “A” and “B” ordinary shares, all in terms of clause 12 of the articles of association; and further, that these dividends and division of profits be paid immediately, and the directors instructed accordingly.’ This amendment was seconded by Mr R. B. Paterson. Acting on the advice of the law agent of the company, the chairman ruled that the amendment in respect that it provided for the payment of a larger dividend than that recommended by the directors was incompetent. Against this ruling the pursuer protested.

The pursuer has received payment of his dividend on his preference shares, and one-half of the dividend on his ordinary shares, the balance not having been yet paid.

The question that I have now to determine is whether or not it was competent for the defenders to transfer £3000 to reserve instead of distributing the sum as dividends among the shareholders. By article 99 of table A in the First Schedule annexed to the Companies (Consolidation) Act 1908 it is provided—‘… quoted supra …’ Article 1 of the defenders' articles of association provides—‘1. The regulations contained in table A in the First Schedule of the Companies (Consolidation) Act 1908 shall apply to this company only in so far as they are not excluded, altered, or modified by the following provisions.’ It appears to me that the effect of this article is to preclude the defenders from creating a reserve, except in so far as it is justified under the 12th article of the articles of association of the defenders' company. In the case of Fisher v. Black and White Publishing Company, [1901] 1 Ch 174, the memorandum of association made express provision for the distribution of ‘the profits from time to time available for dividend.’ The articles of association provided that in so far as they did not exclude or modify the regulations contained in table A in Schedule 1 of the Companies

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Act 1862, these regulations should, so far as applicable, be deemed to be regulations of the company. Clause 74, which makes provision for creating a reserve similar to that made in clause 99 of table A of the 1908 Act, was not expressly excluded, and it was therefore held that it was not in toto excluded by implication, but that it must be taken to form part of the articles; that ‘profits available for dividend’ meant the net profits after making any deductions which the directors could properly make before declaring a dividend, and that the directors were justified in setting aside as a reserve fund to meet contingencies so much of the profits of a year as they thought fit. In that case the expression ‘profits available for dividend’ was treated as different from the expression ‘profits’ ( see Lord Justice Rigby at p. 178 and Lord Justice Romer at p. 182). Article 12 of the articles of association of the defenders' company contains no such qualification of the word ‘profits.’ If, therefore, I am right in this view as to the limited application of article 99 of table A, I think it follows that the directors' position can only be justified by showing that the creation of the reserve was made as an allowance for charges. The question then arises, What is meant in this article by charges? I do not think that the expression is intended to cover future charges that properly form a deduction from future profits. If it did it would enable the directors as holders of the ordinary A shares to exercise their discretion to the prejudice of the holders of B shares. On the other hand, it does not seem an unreasonable view to hold that it includes charges either actually or contingently payable out of the profits of the year. The legality or illegality of the action of the directors of the defenders' company will therefore depend upon whether or not the reserve was created for such a purpose. The defenders explain that since the raising of the present action the Finance (No. 3) Bill 1915 has been introduced, and that if it becomes law they will, in terms of section 34, require to pay out of the profits for the year ending 31st March 1915 the sum of £4000 or thereby in name of excess profits duty. They do not, however, suggest that the reserve fund was created to meet such a claim—a circumstance which would have raised a different question from that now before me. On the contrary, they state that this charge will form a deduction from the dividend actually declared by them, and in fact they have tendered to the pursuer payment of the half-year's dividend still unpaid under deduction of £2000. The pursuer has averments against the bona fides of the individual defenders in exercising their discretion as they have done, but if their action was ultra vires I do not require to consider the relevance of these allegations. As I understand the defenders' position, they justify the creation of a reserve fund because it was advisable to have additional working capital. This appears to me to be different from setting aside the money to meet a charge in the sense in which I have construed that expression, and therefore not justified under the articles of association. They cannot exercise a power because it is advisable in the interests of the company if it is not conferred upon them. New powers can only be acquired by an alteration of the articles of association. I propose therefore to pronounce a decree under the reductive and declaratory conclusions of the summons, and quoad ultra to continue the cause.”

The defenders reclaimed, and argued—The defenders were entitled to allow for a sum being placed to reserve before they proceeded to divide the profits. Unless prohibited by its constitution a company was not prohibited from creating a reserve fund— Burland v. Earle, [1902] AC 83. By the Companies (Consolidation) Act 1908 (8 Edw. VII, cap. 69), sec. 11, the model articles contained in Table A applied to the company unless they were excluded by the company's own articles of association, and the onus was on the pursuers to show that any of the model articles were excluded. The model article 99 was not expressly excluded by article 12 of the articles of association of the company. Nor was it excluded by implication. The two articles were not mutually repugnant— Wemyss Collieries Trust, Limited v. Melville, (1905) 8 F. 143, 43 S.L.R. 98. Certain other of the model articles were expressly excluded. Accordingly, since exclusio unius est expressio alterius, article 99 was impliedly included. There was a presumption against the exclusion of a reasonable provision such as that contained in article 99. The dividends referred to in article 12 were not called “yearly” dividends and did not refer to immediate division. The provision of a reserve fund out of the profits was not inconsistent with the profits so reserved eventually going to their proper destination. Moreover, article 12 only directed a division of the profits “after allowing for all charges,” which meant after making all proper deductions, and the provision of a reserve fund was a proper deduction. Fisher v. Black and White Publishing Company, [1901] 1 Ch 174, decided that where a distribution of “profits available for dividend” was directed it was lawful to create a reserve fund, but that case did not decide that, where a distribution of “profits” was directed, it was unlawful to create a reserve fund. Moreover, the construction of the word “profits” in that case could have no bearing on the construction of the word in the present case, where it occurred in a different document.

Argued for the respondents—The defenders were not entitled to allow for a sum being placed to reserve before they proceeded to divide the profits. The company's own articles of association were the test as to how much of table A was included. The articles of association of a company might be so framed as to altogether exclude table A. The true question in such cases was not one of admission as against non-admission, but rather one of inclusion as against extrusion. In the present case the true question was not as to whether the model article 99 was inconsistent with article 12 of the company's own articles of association, but

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rather as to whether article 99 was included in the company's articles at all. Article 99 was necessarily excluded because it was absolutely inconsistent with article 12, which was mandatory and excluded any discretionary power to create a reserve fund out of the profits. The whole fasciculus of clauses 95 to 102 of table A was excluded. The mere fact that certain other articles of table A were expressly excluded gave rise to no implication that it was intended to include article 99. In Fisher v. Black and White Publishing Company ( cit.), although certain articles of table A were expressly excluded, no such inference was drawn. The absence of a reserve fund was not unreasonable. The company had never hitherto had a reserve fund. It was a family company of a unique character, and it had power to borrow money. It was an inference from the decision in Fisher v. Black and White Publishing Company ( cit.) that where there was a direction to divide “profits” as distinguished from “profits available for dividend” it was not lawful to create a reserve fund out of profits— see Kekewich, J., at 17 T.L.R. 103, and Rigby, L.J., at [1901] 1 Ch. 178, and Romer, L. J., at [1901] 1 Ch. 182. Wemyss Collieries Trust, Limited v. Melville ( c it.), was distinguishable. In that case it was conceded that both the articles in dispute were included, and the question was how to read them together, but in the present case the de quo was whether article 99 was included at all. Moreover, in that case the article which corresponded to article 12 in the present case was quite different from article 12, and there was express power to create a reserve fund.

At advising—