Scottish Court of Session Decisions

The Railway Companies (Accounts and Returns) Act 1911 (1 and 2 Geo. V, cap. 34) enacts—Section 1—“(1) Every railway company shall annually prepare accounts and returns in accordance with the form set out in the First Schedule to this Act, and shall submit their accounts to their auditors in that form. (2) The accounts and returns shall be signed by the officer of the company responsible for the correctness of the accounts or returns, or any part thereof, and in the case of an incorporated railway company, by the chairman or deputy chairman of the directors of the company, and shall be made up for the year ending the thirty-first day of December, or such other day as the Board of Trade may fix in the case of any company or class of companies to meet the special circumstances of that company or class of companies. …” Section 4—“(1) A railway company shall not be under any obligation to prepare or to submit to their shareholders or auditors statements of accounts or balance-sheets, or to hold ordinary general meetings more than once a year, and anything which under any special Act is authorised or required to be done at a general meeting of a railway company to be held at any specified time may be done at the annual general meeting of the company at whatever time held: Provided that nothing in this provision shall relieve a railway company of any obligation to prepare half-yearly accounts in cases where those accounts are required in connection with any guarantee of dividend under any such statutory provisions. (2) The directors of an incorporated railway company may, if it appears to them that the profits of the company are sufficient, declare and pay an interim dividend for the first half of any year, notwithstanding that the accounts are not audited for the half-year, and that a statement of accounts and balance-sheet for the half-year is not submitted to the shareholders, and may close their register and books of transfer before the date on which the interim dividend is declared in the same manner and for the same time and subject to the same provisions as they may close their register or books before the date on which their ordinary dividend is declared or before the date of their ordinary meeting. (3) Any statutory provisions affecting the railway company shall be read with the modifications necessary to bring them into conformity with this section. …”

William Thomson junior, stock and share broker, Glasgow, pursuer, brought an action against the Glasgow and South-Western Railway Company, defenders, concluding for decree “(first) that the holders of deferred stock of the defenders issued under a duly approved scheme for consolidation of the defenders' stocks, dated 1st March 1881, and authorised by section 37 of the Glasgow and South-Western Railway Act 1876, are entitled to participate rateably with the holders of the ordinary stock of the defenders in any excess of dividend paid by the defenders on the said ordinary stock over 5 per cent.; (second) that the defenders on 6th March 1915, in pursuance of the report of the directors of the defenders submitted to and approved at the annual general meeting held on 23rd February 1915, and of the relative resolution passed at the said meeting, made payment to the holders of the ordinary stock of the defenders of a dividend in excess of 5 per cent. on the said ordinary stock within the meaning of the said scheme and statute for the half-year ending 31st December 1914; ( third)) and whether or not decree be pronounced in terms of the second declaratory conclusion hereof, it ought and should be found and declared by decree of our said Lords that the pursuer as a holder of deferred stock of the defenders is entitled to payment of a dividend upon the amount of the said deferred stock held by him for the half-year ending 31st December 1914 at the rate representing the extent to which a dividend has been paid to the holders of the said ordinary stock for the said half-year in excess of 5 per cent.”

The pursuer pleaded—“1. The holders of the defenders' deferred stock being entitled to participate rateably with the holders of ordinary stock in any excess of dividend over 5 per cent. on the ordinary stock, the pursuer is entitled to decree in terms of the first conclusion of the summons. 2. In respect of the payment made by the defenders on 6th March 1915 to the holders of their ordinary stock of a dividend in excess of 5 per cent. on said ordinary stock, declarator should be granted in terms of the second conclusion of the summons. 3. A dividend having been paid on the ordinary stock of the defenders for the half-year ending 31st December 1914 at a rate exceeding 5 per cent., decree should be pronounced in terms of the third declaratory conclusion of the summons.”

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The defenders pleaded—“1. The pursuer's averments being irrelevant to support the conclusions of the summons, the action should be dismissed. 2. The defenders not having declared and paid for the half-year ending 31st December 1914 any dividend on their ordinary stock at a rate exceeding 5 per cent. per annum within the meaning of the Glasgow and South-Western Railway Act 1876 and the scheme of 1881, they should be assoilzied from the first, second, and third conclusions of the summons.”

The facts are given in the opinion ( infra) of the Lord Ordinary ( Hunter), who on 13th November 1915 repelled the pleas-in-law for the defenders and decerned in terms of the conclusions of the summons.

Opinion.—“In this action the pursuer, who is a holder of deferred stock of the defenders, the Glasgow and South-Western Railway Company, seeks to have it found and declared—[ His Lordship then referred to the conclusions of the summons].

The deferred stock of the defenders' company was issued under a scheme of 1881 carried out in the exercise of powers conferred upon the company by the Glasgow and Sonth-Western Railway Act 1876, which provided that the company might prepare a scheme for the conversion and consolidation of all or any of the classes of shares and stock in the capital of the company—other than ordinary stock and funded debt or debenture stock—into such classes of new shares or stock as should be defined by the scheme—provided always that the amount of dividend payable to the holders of each class of existing stock should not be diminished or increased by such scheme.

Under the 1881 scheme eleven of the guaranteed and preference stocks and shares of the company were dealt with. Three of these stocks carried a fixed minimum dividend, with right to further participation in the profits of the company, taking dividend rateably with the ordinary consolidated stock when the dividend declared upon the latter exceeded 5 per cent. As explained in the record, the consolidation of the said eleven stocks was carried out by substituting for them two new stocks, bearing a fixed 4 per cent. dividend, without further participation in the profits of the company, and by separating from the three stocks mentioned their contingent and participating rights, and providing that the holders of these stocks should receive an equivalent which would enable them in the future to participate in any dividend in excess of 5 per cent. paid on the ordinary stock. The last-mentioned purpose was effected by the issue to the holders of the said participating stocks of a deferred stock of the same nominal amount as the existing stock to which contingent rights pertained, such deferred stock alone being entitled to participate rateably with the ordinary stock in any excess of dividend paid on the latter over 5 per cent.

In 1897, by the Glasgow and South-Western Railway Act of that year, the ordinary stock of the company was split into two forms of stock—each holder of the ordinary stock receiving, in substitution for every £100 held by him of that stock, £100 preferred ordinary stock and £100 deferred ordinary stock, and so in proportion for every fraction of £100 of ordinary stock held by him. This splitting-up of the ordinary stock did not affect the rights of the deferred stockholders under the scheme of 1881, section 31 of the Act of 1897 providing that notwithstanding the conversion effected under the powers of the Act the company should continue to ascertain and declare their dividends on the amount of ordinary stock which would have been entitled to dividend if no such conversion had taken place. Section 28 (2) of the same Act was in these terms—‘The preferred ordinary stock and the deferred ordinary stock shall together be entitled in each half-year to the same dividend as that to which the consolidated ordinary stock, in substitution for which such preferred ordinary stock and deferred ordinary stock were issued, would but for the conversion have been entitled, and such dividend shall be appportioned between the preferred ordinary stock and the deferred ordinary stock in the following manner, in so far as the same is sufficient for that purpose (that is to say) first in payment of a dividend at the rate of two and one-half per centum per annum to the holders of preferred ordinary stock, and secondly in payment of any balance to the holders of deferred ordinary stock according to the amount of their respective holdings.’

The Companies Clauses Consolidation (Scotland) Act 1845 provides (section 69) for ordinary meetings of the company being held half-yearly; (section 119) for the books of the company being balanced half-yearly, and a balance-sheet made up giving a distinct view of the profit or loss which has arisen on the transactions of the company in the course of the preceding half-year; (section 109) for the half-yearly accounts and balance-sheet to be audited; and (section 123) for a scheme to be prepared previously to the declaration of any dividend showing the profits, if any, for the period since the preceding ordinary meeting at which a dividend was declared. These provisions were incorporated in the Glasgow and South-Western Railway Consolidation Act 1855, the 56th section of which Act provided that the half-yearly general meetings of the company should be held in February or March and August or September respectively, and the 64th section that the books of the company should be balanced as at 31st January and 31st July in each year.

In 1911 the Railway Companies (Accounts and Returns) Act (1 and 2 Geo. V, cap. 34) was passed. That Act came into operation on 1st January 1913. In terms thereof a railway company has to prepare annual accounts and returns in accordance with a prescribed form made up for the year ending 31st December, or such other day as the Board of Trade may fix in the case of any company or class of companies to meet special circumstances. It is no longer obligatory upon a company (section

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4 (1)) to prepare or to submit to their shareholders or auditors statements of accounts or balance-sheets, or to hold ordinary general meetings more than once a year—‘Provided that nothing in this provision shall relieve a railway company of any obligation to prepare half-yearly accounts in cases where those accounts are required in connection with any guarantee of dividend under statutory provisions.’

The directors of a company may now (section 4 (2) of the 1911 Act) declare and pay interim dividends for the first half of any year although the accounts are not audited for the half-year, and no statement of accounts or balance-sheet for the half-year is submitted to the shareholders.

The defenders say that in accordance with the provisions of this Act they no longer hold half-yearly meetings, and hold only one ordinary general meeting in the year, and their accounts are now and have since 1st January 1913 been made up for the year ending 31st December, and not as before half-yearly as at 31st January and 31st July.

In September 1914 the pursuer alleges that the defenders paid a dividend on their ordinary stock for the half-year ending 30th June 1914 which did not exceed 5 per cent. It was, in fact, 3 per cent. On 16th February 1915 the defenders' directors issued their report to their shareholders, dated 23rd January 1915, for the twelve months ending 31st December 1914. In this report they say—‘The dividend for the half-year ending 31st December will be at the rate of two and a half per cent. per annum to the holders of preferred ordinary stock, and at the rate of three and a half per cent. per annum to the holders of deferred ordinary stock.’ This payment, which the pursuer maintains is a dividend at the rate of 6 per cent. for the half-year ending 31st December 1914, has now been made to the holders of ordinary stock, and no provision has been made for paying to the holders of deferred stock a dividend measured by the amount by which the dividend on the ordinary stock exceeded 5 per cent., i.e., in this case 1 per cent.

According to the defenders' contention no dividend was declared or paid for the half-year ending 30th June 1914 or the half-year ending 31st December 1914, within the meaning of the defenders' Act of 1876 or the scheme of 1881 following thereon, whereby the pursuer's rights as a holder of deferred stock are defined. They maintain that the dividend recommended by the directors to be declared by the shareholders at the general meeting on 23rd February 1915 was a dividend for the whole year ending 31st December 1914 at the rate of 4 1 2 per cent. This figure is arrived at if you take the two sums, 3 per cent. and 6 per cent., distributed for the year 1914 and divide by two. In support of this contention they found upon the resolution passed at the general meeting of 23rd February 1915, which was, inter alia, in these terms—‘It was resolved … II. That a dividend be now declared for the year ending on 31st December last at the rate of … four and a half per cent. on the ordinary stock, to account of which payment has already been made at the rate of one and one-quarter per cent. to the holders of preferred ordinary stock and one-quarter per cent. to the holders of deferred ordinary stock, by interim dividend at the rate of three per cent. per annum for the half-year from 1st January to 30th June last, leaving one and one-quarter per cent. now to be paid to the holders of preferred ordinary stock and one and three-quarters per cent. now to be paid to the holders of deferred ordinary stock. …’

I am not able to accept the defenders' contention as sound. It appears to me that a dividend is just the proportion of the profits earned by a company that is in fact distributed at any particular time. No authority was cited to show that a distribution not approved by a general meeting of the company is not a dividend. The contrary seems to be the inference to be drawn from the language of the Act of 1911, which allows directors without calling a general meeting of the company to declare an interim dividend. Where such a dividend is declared the final distribution is a separate dividend for the second half-year. Under the scheme of 1881 the rights of deferred shareholders are determined by the amount of each dividend that is declared. They are not cumulative rights, or affected by any previous declaration of dividend. The 5 per cent. mentioned is 5 per cent. for the period to which the dividend applies. The defenders practically conceded this point by admitting that previous to the passing of the Act of 1911 the deferred shareholders participated rateably with the ordinary shareholders in any excess of half-yearly dividend paid to the latter over 5 per cent., and that notwithstanding the fact that the dividends for the full year might be under 5 per cent.

The rights of holders of the deferred stock of the defenders' company are not affected by the Act of 1911. If therefore I am right in accepting the pursuer's view that the second distribution of profits for the year 1914 was a dividend for the second half of that year, and in my construction of the scheme of 1881, it follows that the pursuer is entitled to succeed in his present claim. The pursuer argued that the defenders were bound in relation to the deferred stockholders to prepare half-yearly accounts, and to calculate the dividends due to them in each half-year separately. There is, however, no conclusion of the summons raising this point, and as parties were not agreed upon an amendment being made so as to embrace it, I think it inadvisable that I should express an opinion upon the matter. I repel the pleas for the defenders, and grant decree in terms of the conclusions of the summons.”

The defenders reclaimed.

Thereafter the pursuer obtained the leave of the Court to amend his pleadings by adding the following conclusion and plea-in-law:—“( , or otherwise that the holders of the said deferred stock are entitled to require the defenders to ascertain the profit or loss which shall have arisen on the transactions of the defenders for each half-year ending thirty-first January and thirty-first July, or otherwise for each half-year ending thirtieth June and thirty-first December, and to calculate and ascertain the dividend, if any, payable to the holders of said deferred stock out of the profits so ascertained for each such half-year, and to make payment thereof to the holders of the said stock accordingly.”

4. The defenders being bound by statute and under said scheme in relation to the deferred stockholders to keep and prepare accounts showing the profits earned in each half-year separately, or otherwise to ascertain the profits earned in each half-year separately, and to declare and pay dividends out of the profits so ascertained for each half-year, decree should be pronounced in terms of the last declaratory conclusion of the summons.”

The defenders in reply added the following plea-in-law;—“3. The defenders, in a question toith their deferred stockholders, not being bound to keep and prepare accounts showing the profits earned in each half-year respectively, and not being bound and having no power to ascertain the profils earned in each half-year separately and to declare and pay dividends out of the profits so ascertained for each half-year, are entitled to be assoilizied from the fourth conclusion of the summons.”

Argued for the defenders (reclaimers)—The defenders' financial year prior to 1911 ran from 1st February to 1st February—Glasgow and South-Western Railway Consolidation Act 1855 (18 and 19 Vict. cap. xcvii), sec. 64—and their general meetings were half-yearly (section 56). To those meetings the balance sheets were submitted—Companies Clauses Consolidation (Scotland) Act 1845 (8 and 9 Vict. cap. 17), secs. 109 and 119. The object of those enactments was to secure that the shareholders had full information as to the financial position of the defenders and of the profits, if any, available for distribution as a dividend. No dividend could be declared except at and by those meetings after all the statutory solemnities had been observed—Companies Clauses Consolidation (Scotland) Act ( cit.), sec. 123. By the Railway Companies (Accounts and Returns) Act 1911 (1 and 2 Geo. V, cap. 34) the defenders ceased to be bound to prepare half-yearly accounts—section 1 (1) and 4 (1)—except where such half-yearly accounts were required in connection with any guarantee of dividend under the defenders' Acts; the financial year ran from 31st December to 31st December—section 1 (2)—but the directors might, if they thought fit, declare and pay an interim dividend for the first half of any year—section 4 (2). The payment to the holders of ordinary stock for the half-year ending 31st December 1914 was not a dividend for a half-year, for the only dividend payable was a yearly one, because the statutory pre-requisites, e.g. balance sheets submitted, and meeting of shareholders for the declaration of and payment of a dividend only came into existence once a year—Railway Companies (Accounts and Returns) Act ( cit.)—unless the case fell under section 4 (1). Further, it was not an interim dividend, for such a dividend was only payable for the first half of any year. In any event an interim dividend was not a dividend in the statutory sense, because it was not preceded by the statutory solemnities for the declaration of dividends; thus it was declared by the directors not by the shareholders, and without balance sheets being laid before a general meeting. It was in reality a payment to account of the dividend payable for the whole year— Lucas v. Fitzgerald, 1903, 20 T.L.R. 16, per Lord Alverstone, C.J., at p. 18. Further, the case was not one in which the obligation to prepare and submit to half-yearly meetings balance sheets &c., for the half-year subsisted in terms of the Railway Companies (Accounts and Returns) Act ( cit.), sec. 4 (1), for the pursuer had not any guarantee of dividend, for guarantee of dividend meant that there was a contract with the shareholders that he should get a fixed rate of interest which vested in the shareholder as each term for payment passed. North British Railway Company v. Wingate, 1913 S.C. 1092, 50 S.L.R. 857, was not in point, for in that case the deferred shareholders had a contractual right to a share in the profits of each half-year giving them a vested right thereto as each term passed, and really amounting to an assignation at each term of the amount accrued then.

Argued for the pursuer (respondent)—The Railway Companies' (Accounts and Returns) Act ( cit.) dealt solely with regulating matters of form in railway accounting, and was not intended to affect the rights of shareholders. Prior to 1911 the rights of deferred shareholders to dividends were regulated by the Glasgow and South-Western Railway Act 1897 (60 and 61 Vict. cap. clxxii), sec. 28 (2), by which right to payment of a dividend arose half-yearly. The pursuer's right was dependent on the amount of dividend paid in each half-year to the holders preferred ordinary stock, and if the dividend paid to them in any half-year exceeded 5 per cent., the pursuer, as holder of deferred stock, became entitled to a dividend. Thus if not more than would pay a dividend of 2 1 2 per cent. on the preferred stock was earned in one half-year, and more than would pay a dividend of 2 1 2 per cent. on the preferred stock was

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earned in the next half-year, the year's rate was more than 5 per cent., and the deferred stock would come in— Wingate's case ( cit.), per Lord President Dunedin at p. 1098. The mere fact that the Act of 1911 prescribed that accounts should be made up yearly would not affect that right. Further, the interim dividend was for the present purpose a real dividend. A dividend was simply a distribution of profits—Buckley's Companies (9th ed.), p. 648. And the interim dividend was exactly in the same position as the prior half-yearly dividend, and the pursuer was entitled so to treat it, with the result that for the half-year ending 31st December 1914 a dividend at a higher rate than 5 per cent. per annum was paid, and the pursuer was entitled to come in and share in the profits. In any event the pursuer's stock bore a “guarantee of dividend” in the sense of the Railway Companies (Accounts and Returns) Act ( cit.)— Wingate's case ( cit.), per Lord President Dunedin at p. 1101. Here there was an obligation to deal with each half-year on its own merits.

At advising—