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TMI Blog1932 (11) TMI 9X X X X Extracts X X X X X X X X Extracts X X X X ..... arge of its liabilities or for returning to the shareholders the capital they have paid up; they are part of the joint stock or common fund which, at the date of the winding-up, represented the capital of the company, but they are no part of the repayable capital. It has ex hypothesi been repaid before they came into existence. These assets are distributable amongst the contributories in accordance with their contractual rights inter se and the question I have to determine is the true interpretation of these rights in this case. In approaching the solution of this question it is to be borne in mind that every person who becomes a member of a company limited by shares of equal amount, becomes entitled to a proportionate part in the capital of the company and, unless it be otherwise provided by the regulations of the company, entitled, as a necessary consequence, to the same proportionate part in all the property of the company. Preference shareholders are members of the company and as much shareholders in it as the ordinary shareholders are, and they must be treated as having all the rights of shareholders, except so far as they renounced those rights on their admission to the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cal terms the essential characteristics by which the pretence shares are to be distinguished from the ordinary ones, and nowhere in the memorandum or in the articles is there a word to indicate anything beyond an intention to state these two characteristics, and I cannot believe that the statement of these in one and the same sentence can in itself afford the smallest clue to the true construction of the contract. Nor does the suggestion that the direction as to ranking in priority impliedly negatives any pari passu ranking impress me. As I have already observed, and as is admitted, and, indeed, has been decided in several cases, an attachment to preference shares of a priority to return of their capital does not bar their participation in surplus assets, and if this be right I do not understand how a direction as to ranking in priority can raise an implication negativing pari passu ranking. The contention that there is nothing to imply that, after repaying the preference capital, there is to be any return of capital eo nomine to any one, I confess I do not understand. If it means that what is spoken of as "capital" in the memorandum and articles is the 24,000 and nothin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... common to all the cases which calls for comment, though I do not see how it can affect the question of construction. In the case of a successful company, and one may take it that success is aimed at and anticipated in the great majority of cases, the imposition of a limit on the preferential dividend means that the bulk of the divisible profits goes to the ordinary shareholders while the company is a going concern, and in those circumstances when the company ceases to do business the rateable division of surplus assets amongst the two classes does not strike me as being otherwise, than a fair adjustment when what remains of the property, created by the employment of 1he joint capital comes to be dealt with. If the company is unsuccessful, surplus assets are not likely to come into being, but there may be cases indeed, the present would seem to be such an one where the profits have not been sufficient to justify the payment of dividends on the ordinary shares, and where therefore the surplus represents assets which at some future date, had the company continued to trade, might have become available for dividends on the ordinary shares. In such a case, a winding-up and rateable dist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght to express the opinion I have formed upon the cases which were brought to our attention. The short point which we have to determine is : what are the rights of the ordinary and preference shareholders in the winding up of this company, William Metcalfe Sons, Ltd., in respect of a surplus which remains after discharging all the liabilities of the company and returning the share capital which has been subscribed by the members of the company? The argument presented to us was on behalf of the ordinary shareholders, who claim that they alone are interested in this surplus. They claim that rights of the preference shareholders are limited and finally determined by the terms of the memorandum and articles; that they cannot make a claim to parity as between themselves and the ordinary shareholders in respect of this surplus, and that all the rights of the preference shareholders have been satisfied and are contained in their right to receive priority in payment both of the 5 per cent, dividend and the return of their capital. It is necessary, therefore, to look at some of the cases which have dealt with this matter before. First of all, I should like to refer to a case to which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o apply the word "capital" to it or to call it a dividend fund. In Birch v. Cropper; Bridgewater Navigation, In re , in respect of which I have just referred to a passage in the speech of Lord Macnaghten in the House of Lords, Cotton, L. J., says (57 L.J. Ch., at p. 823 : 39 Ch. D., at p. 25) that when a winding up has taken place "all question of preference is now at an end, and the shareholders are to be dealt with as having equal rights, because the provision in the articles creating the preference shares, as regards dividend to arise on the working of the capital is at an end. We must deal with them all as shareholders having equal rights, and in my opinion, when that is so, and when there is the indication in the articles of association which form the contract of partnership that profit is to be divided when it is a going concern and arising from the working of the business in accordance with the sums paid upon each share, then in this particular case, and having regard to that provision, the true equitable mode of dividing this sum is to divide it among all the shareholders in accordance with and in proportion to the amount paid up by them on their shares." But that only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the rights of the shareholders inter se to priority of payment or otherwise," In those articles one does not find any assistance in a matter which is later in date than the appropriation of dividends and the return of capital; nor does one find any assistance in section 247 of the Companies Act, which provides that the money is to be divided among the members according to their rights and interest in the company. But although the memorandum and articles of association have spoken in the terms that I have read, showing what the preference of the preference shareholder is, it is, I think, clear that that preference is not carried into a field which belongs to a period when those articles have already been completed and fulfilled, and when the time has come to deal with a different sum, over which neither director nor shareholder has any power. It must be remembered that under Art. 82 every member has a vote, and an equality of voting power is maintained by that article as between the preference and the ordinary shareholders. That being the nature of the terms of the memorandum and articles of association in this case, is there sufficient to affirm that the rights of the pref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntract there. Whether that distinction is satisfactory to all minds is another question, but I find myself inclined to agree with Eve, J., who did not quite follow the distinction between Fraser Chalmers, Ltd., In re and Colleroy Co. v. Giffard. Now I have dealt with a sequence of authority which has indicated the touchstone which is to be applied by the Court in these cases. The case which lies on the other side is that of National Telephone Co., In re, which was decided by Sargant, J. I cannot accept the decision in that case as in any way impinging upon or altering the general rule which has been provided by the authorities which I have discussed so far. Therefore, looking at the authorities as a whole, one comes back to the proposition that there must be in respect of this surplus fund a parity between all the shareholders, for the preferential rights are no longer operative ; they do not exclude the preference shareholders from parity unless it can be found from their terms and from the nature of the contract that, in relation to their rights to this surplus sum, they are to be displaced by the ordinary shareholders. Each case must depend upon its own facts, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m that in construing the memorandum and articles we must not approach the question with any obsession or preconceived idea as to the inherent equality between shareholders in a, company ; but when with an open mind we have construed the memorandum and articles, then I agree entirely with the statement made by Astbury, J., in giving his judgment in the case of Fraser Chalmers, Ltd., In re (88 L.J. Ch., at p. 347; (1919) 2 Ch., at p. 120), that "all shareholders are entitled to equal treatment unless and to the extent that their rights in this respect are modified by the contract under which they hold their shares." In other words, I find myself in disagreement with a statement made by Sargant, J., as he then was, in National Telephone Co., In re. He said (83 L.J. Ch., at p. 585; (1914) 1 Ch., at p. 774): "It appears to me that the weight of authority is in favour of the view that, either with regard to dividend or with regard to the rights in a winding-up, the express gift or attachment of preferential rights to preference shares on their creation is, prima facie, a definition of the whole of their rights in that respect, and negatives any further or other right to which, bu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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