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United Kingdom House of Lords Decisions
You are here: BAILII >> Databases >> United Kingdom House of Lords Decisions >> Caldwell & Co., Ltd v. Caldwell [1916] UKHL 251 (10 February 1916)
URL: http://www.bailii.org/uk/cases/UKHL/1916/53SLR0251.html
Cite as: [1916] UKHL 251, 53 ScotLR 251
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SCOTTISH_SLR_House_of_Lords
Page: 251↓
House of Lords.
(Before
v.
(In the Court of Session, February 25, 1915, 52 S.L.R. 450, and 1915 S.C. 527.)
Subject_Company — Reduction of Capital — Confirmation by Court — Discretion of Court — Inquiry into Reasons — Loss of Capital — Companies Consolidation Act 1908 (8 Edw. VII, cap. 69), secs. 46 and 50.
Facts:
The House of Lords dismissed an appeal from an interlocutor which confirmed a resolution for reduction of the capital of a company proceeding on a statement that capital had been lost, although a reporter to whom the matter had been remitted thought no capital had in fact been lost and no evidence had been taken by the Court, the company having meanwhile again passed a resolution to reduce the capital, and having as required by the Court altered its articles of association to the satisfaction of the reporter with a view to protecting the interests of the dissentient shareholder.
This Case is reported ante ut supra.
The respondent William Hay Caldwell appealed to the House of Lords.
At delivering judgment—
No alteration in this respect has been made by the Companies Consolidation Act 1908, the provisions of which are indeed open to less doubt than those of the Acts which it superseded.
It often happens that the special resolution for the reduction of a company's capital refers to the amount by which the capital is to be reduced as lost or unrepresented by available assets. In such cases I understand that since the decision of the case above referred to the practice of the courts in Scotland has been to dispense with proof of the facts referred to in the resolution,
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The practice of the High Court of Justice in England has not been uniform. Some judges have dispensed altogether with such proof as not being essential to the exercise of the jurisdiction of the Court. Others have insisted on the production of some evidence on the point. My own practice was to insist on prima facie evidence of the existence of the state of facts referred to in the resolution. If no such prima facie evidence were forthcoming it might well be that the special resolution had been passed under the influence of some mistake or misrepresentation as to the true facts, and it would be unfair to the minority if not also to the majority of the shareholders to confirm a reduction voted under such circumstances. Further, inability to produce some such evidence might well suggest want of bona fides in the matter. If capital not really lost or unrepresented by available assets were cancelled, it might be possible thereafter, by some adjustment of the figures in the company's balance sheet, to carry the amount so cancelled to profit and loss account, and so indirectly return paid-up capital to shareholders, thus affecting the rights of creditors. I still think, therefore, that where the reduction of capital is based on the ground that capital has been lost or is unrepresented by available assets, it is, though not necessary, at any rate wise and prudent to insist on some evidence of the fact.
The resolution in the present case proposed a reduction of £12,500 in the company's capital, based on the fact that this amount of capital had been lost or was unrepresented by available assets. The company's last balance sheet, that of 27th September 1913, showed a surplus of assets over liabilities amounting to £1885 odd, but in such balance sheet the goodwill of the business was valued at £9163 odd. Moreover, the company's business had been recently brought to a standstill by an extensive fire, and it would be some time before its buildings and machinery would be restored to working order. Further, the buildings and machinery in question were brought into the balance sheet at values arrived at by deducting the amounts received under policies of fire insurance from the values at which they appeared in the last preceding balance sheet. Having regard to the effect of prolonged cessation of business upon the value, if any, of the goodwill, and to the fact that the amount of the actual loss by a fire is seldom, if ever, covered by the amounts recovered under policies of insurance, I think that there was strong prima facie evidence that at least £12,500 of the company's capital had been lost or was unrepresented by available assets, and the bona fide belief of the directors that this was so is not disputed. It appeared, however, that the company had after the fire made an attempt to raise fresh capital, and in connection with this attempt had obtained valuations of the buildings and machinery as they stood after the fire and before reinstatement.
By substituting the amounts of these valuations for the values of the buildings and machinery appearing in the balance sheet there would, even without allowing anything for goodwill, have been a balance of assets over liabilities—in other words, no capital would have been lost or be unrepresented by available assets. This was the view taken by Sir George Paul, to whom the matter was by the interlocutor of the 22nd May 1914 remitted for inquiry and report. I am not sure, however, that the view is a sound one. There is no evidence as to the instructions upon which the valuations were made or the method of valuation adopted. It is quite impossible to suppose that the valuations could have been made upon break-up prices, and half-destroyed buildings and machinery could not be used for any useful purpose without the outlay of money. What expenditure was contemplated as necessary to be incurred? Was it greater or less than the moneys received under the insurance policies? I cannot say, and it would take strong evidence to convince me that the balance sheet values were so absurdly underestimated that the value of what remained after the fire was really almost as great as the value which before the fire had been placed upon the whole. I should have asked for evidence on these points, and in default of its being produced I doubt whether I should have held that the primâ facie case arising on the balance sheet had been displaced.
When the case was heard upon Sir George Paul's report, the Court appears to have been of opinion that though it had not been proved that no capital had been lost or was unrepresented by available assets, there was no primâ facie case that any capital had been so lost or was so unrepresented.
Under these circumstances I think the more prudent course would have been to adjourn the hearing so as to give the shareholders an opportunity of reconsidering the matter and passing another special resolution with the real facts present to their minds.
The Court, however, holding that the matter was within their discretionary jurisdiction, and that (provided certain alterations for the appellant's protection were made in the articles of association) the proposed reduction was fair and equitable to all shareholders including the appellant, by their interlocutor of 25th February 1915 confirmed the reduction, but directed that it should not take effect until the articles of association had been altered in such manner as would, in the opinion of Sir George Paul, prevent the said reduction from unfairly affecting the interests of the appellant.
Since the last-mentioned interlocutor was made, and before the present appeal was presented to your Lordships, the precise respects in which the articles were to be altered for the appellant's protection were in due course determined by Sir George Paul and effected by special resolution of the company. Further, since the last-mentioned interlocutor and before this appeal to your Lordships, the company passed a special resolution that without prejudice to
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All the members of the company with the exception of the appellant voted in person or by proxy in favour of the special resolution, and the ordinary resolution was passed unanimously. These resolutions, in my opinion, entirely remove any possible objection to the course taken by the Court below, and I can only express my astonishment that under the circumstances the appellant was advised to appeal to your Lordships at all.
I think the appeal should be dismissed with costs, leaving the Court below to make such final order confirming the reduction as may be required.
In the present state of the law, if the Court, although not satisfied that capital has been lost or unrepresented either as or to the extent conceived by the company itself, be of opinion in regard to a proposed reduction of capital that (1) no creditors' interests would be prejudiced thereby, (2) no detriment would be produced to the investing public, or (3) the reduction would not act inequitably or unfairly among the shareholders, then, in my opinion, the Court is entirely free to sanction the reduction. Such reduction, apart from loss of assets, may be, in Lord Macnaghten's words in Poole's case, “a prudent and business-like matter,” and in any event it would be an act of domestic management by the company of its own affairs with which a court of law should not interfere.
This was, in my view, the state of the law prior to the Companies Act of 1908; by that statute (46–56) it is still so, and the language of section 46 does not leave any doubt of the power to reduce in any way—the case of a loss or disappearance of capital being instanced—without prejudice to the generality of the power.
While accordingly the shape of the resolution may have brought about the inquiry into this question of loss of capital, the learned Judges of the Court below in no way accepted the view that the law or statute was subject to any other construction than that above expressed. Lord Skerrington explains this in his judgment, and I venture to concur in terms with his view, that “I cannot find any trace in the statute of a suggestion that the Court ought to review the opinion of the company and its directors in regard to a question which primarily at least is domestic and commercial.”
In Scotland the procedure upon such application is by way of remit to a “man of business,” that is, to a solicitor of standing. No one can doubt after perusing the exhaustive report of Sir George Paul that the matter has been thoroughly inquired into, and the fullest consideration has been given to every objection taken by the appellant and to every view of his rights which he put forward. There is therefore in Scotland no question of procedure such as that which has given rise to the variety alluded to in the opinion of my noble and learned friend Lord Parker.
In regard to the three points above mentioned, they stand as follows—(1) and (2) It is admitted that no creditors' rights suffer prejudice, and that (this is a “private” limited company) the reduction would involve no prejudice to the public. There remains only the third, viz., possible unfairness among the shareholders. The appellant is the only member of the company who suggests this, the others are all satisfied.
What Sir George Paul did was to suggest a certain alteration in the articles of association so as completely to safeguard the appellant's position. I am in no way convinced that anything of the kind was necessary. But the Court below acquiesced in the suggestion, and the thing has been done. This appeal to your Lordships' House accordingly appears to me to be without any justification.
The argument presented on the figures bearing upon the question whether the company had sustained in fact losses which would account for the £12,500 proposed to be written off, even if it were well founded, would not warrant the conclusion that the Court could not or should not sanction the reduction. But I am of opinion that it is not well founded. Having studied the documents, I take the view which the directors took. I think this reduction was in the interests of prudent and sound administration. The serious fire, with the loss and possible dislocation of trade, and the existence, notwithstanding this, of an item of goodwill of over £9000 under the head of “assets,” fully warranted in themselves a radical rectification such as the proposed reduction of capital may at least assist in effecting. I venture to agree with
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I am of opinion that the appeal should be dismissed with costs.
Their Lordships dismissed the appeal.
Counsel for the Appellant— Clauson, K.C.— Smith Clark. Agents— J. & D. Smith Clark, W. S. Edinburgh— Murray, Hutchins, Stirling, & Company, London.
Counsel for the Respondents— Macmillan, K.C.— Wilton. Agents— Davidson & Syme, W.S., Edinburgh— Faithfull & Owen, London.