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TMI Blog1949 (5) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... e has been a difference of opinion in the First Division of the Court of Session and your Lordships have listened to the citation of a large number of authorities which are thought to bear upon the matter in debate. I should perhaps add that I have arrived at my conclusion by somewhat different considerations from those upon which Lord Simonds prefers to lay stress. It will begin by treating the matter as if section 25 of the Coal Industry Nationalisation Act, 1946, did not enter into the case. The company as a matter of law is not in liquidation and I agree with the view that the circumstance that liquidation is contemplated in the near future ought not to affect the construction of the terms on which the preference shares were issued, that is, in this case the articles of association which are to be found set out in Lord Simonds' speech. We are not therefore entitled in considering the question of fairness to shut our eyes to the fact that the directors still have their powers as such and that they and the shareholders at any time before liquidation cad exercise their rights under articles 139 and 141 ( a ). If I am right so tar I can see no great difficulty in the present ea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ords as to the preference share capital. The words are none the less important because the reduction of capital would require the sanction of the court. They show at least that if the transaction is fair and equitable the article contemplates that the preference shareholders can be paid off with or without their consent. Article 141 ( a ) is also of great importance and is in these terms: "The company in general meeting may, on the recommendation of the directors, from time to time by ordinary resolution convert any undivided profits of the company available for dividends on its shares (whether such profits should stand to the credit of any reserve fund or reserve account or a profit and loss account of the company or otherwise, and including divisible profits arising by way of permanent appreciation fit value of any of the company's assets) into capital; and appropriate and distribute the same among the members of the company who are holders of ordinary shares in, proportion to the amounts paid up bit, the shares held by them respectively, by way of bonus, or they may apply such undivided profits in or towards satisfaction of the amounts unpaid in respect of any shares in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipate with the ordinary shares in the remaining assets after payment of the amounts called up and paid up on the ordinary shares? I am of opinion that the articles in question must be construed as a complete statement of the rights of the preference shares in the winding-up for the reason that the whole of the profits and assets of the company (subject to payment of the amounts called up and paid on the preference shares) has been appropriated before liquidation to the ordinary shareholders, and that there is not a word to indicate that upon liquidation the rights of the preference shareholders (if they have not already been paid off) would be increased perhaps very materially by attributing to them part of the profits and assets which have been appropriated to the ordinary shareholders. There might perhaps have been some doubt as to the compensation; payable under the Coal Act as being "surplus assets" of the nature of capital not distributable as dividend and I will deal later with this point. The view which I have suggested as to the effect of an appropriation of profits in favour of a certain class of shareholders is supported by a decision of Lord Lindley (then Lindley, L.J. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o appeal. Apart, however, from any authority, I cannot see any sufficient reason for coming to a conclusion other than the one I have above indicated. In my view it is a sound prima facie rule that profits which have been appropriated, subject to possible application for the benefit of the company, to the ordinary shareholders to the exclusion of the preference shareholders must, in the absence of some other consideration, remain the property of the former on a winding up. It should be observed that in the case last cited there were no such articles as exist in the present case which is an fortiori one. Much reliance is placed on behalf of the appellants on the case of Re Metcalfe Sons Ltd [1932 102 LJ Ch. 121. I must say that in my opinion that case was wrongly decided; and it should be noted that it is expressly stated that the bulk of the sum of 21,000 there in dispute was attributable to undistributed profits. It seems to me difficult to reconcile that case with the decision of this house in Will v. United Lankat Plantations Co. [1913] 83 LJ Ch. 195 and impossible to reconcile it on sound grounds with the decision of Re Bridgewater Navigation Co. [1891] 60 LJ Ch. 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose the reduction by founding their argument on the provisions of section 25 are bound to indicate how, the section or the regulations which have recently been made thereunder on any reasonable view of probability can operate in this case to give the preference shareholders any rights to share in the assets beyond those they now possess under the articles of association. Taking the view I have expressed as to the position of these shareholders either now or in a liquidation and agreeing with my noble and learned friend in the view that the Court in the exercise of its jurisdiction should regard the provisions of section 25 as a factor in its consideration of the fairness of a proposed reduction, I find myself unable to see any want of fairness in the proposed reduction of capital. I will summarise the grounds of my decision as follows: The case is one in which liquidation, when it comes, will have been brought about by the action of the legislature. If there were no reduction of capital the holders of preference shares would not, in my opinion, be entitled in a winding-up to anything more than a return of their paid-up capital. I am quite unable to see why they should claim more of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had been made in 1875 and 1894 respectively. In 1923 the respondents by special resolution adopted new articles of association and, inasmuch as in one view the rights of the parties to this appeal depend to some extent upon the meaning and effect of these articles, I must refer to some of them in detail. Article 11 provides that the company in general meeting may from time to time by special resolution increase the capital by the creation of new shares of such amount as may be deemed expedient. Article 12 provides that the new shares shall be issued upon such terms and conditions and with such rights and privileges annexed thereto as by the special resolution creating the same may be directed, and, if no direction shall be given, as the directors may determine; and in particular such shares may be issued with a preferential or qualified right to dividends and to ranking in the distribution of the assets of the company and with a special or without any right of voting or partly in one of these forms and partly in another. This article is a restatement in ampler form of part of clause 5 of the memorandum. By article 78 every shareholder whether preference or ordinary is to have on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ares but after the preference shares (First Issue). These being the articles which govern the rights of the ordinary and preference stockholders of this company, at an extraordinary general meeting held on September 26, 1947, the company passed a special resolution for the reduction of the capital of the company from 8,50,000 (consisting of 40,000 first preference stock, 10,000 second preference stock and 800,000 ordinary shares of 1 each, of which 675,000 had been issued and converted into 675,000 ordinary stock), to 462,500 divided into 337,500 ordinary stock and .125,000 ordinary shares of 1 each and for effecting such reduction by returning to the holders of the first and second preference stocks 1 for each unit of stock held by them and extinguishing such stocks and by returning to the holders of the 675,000 ordinary stock capital to the extent of 10s. for each unit of such stock held by them. It appears that not all those who voted for the resolution were ordinary stockholders, nor did all the preference stockholders vote against it, nor do they all now oppose the reduction. I do not think that your Lordships can get any guidance from the way in which votes were g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r relied on the fact that they have been deprived of a favourable, 7 per cent. investment which they cannot hope to replace and might have expected to continue to enjoy. They further contend that the deprivation of these rights, which would in any case have been an unmerited hardship, is rendered the more unfair because it is likely to be followed at an early date by liquidation of the company or, as it is less accurately expressed, because it is itself only a step in the liquidation of the company. The first plea makes an assumption, viz., that the articles gives the preference stockholders the right in a winding-up to share in surplus assets, which I for the moment accept, but will later examine. Making that assumption, I yet see no validity in the plea. The company has at a stroke been deprived of the enterprise and undertaking which it has built up over many years: it is irrelevant for this purpose that the stroke is delivered by an Act of Parliament which at the same time provides some compensation. Nor can it affect the rights of the parties that the only reason why there is money available for repayment of capital is that the company has no longer an undertaking to carry o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same whether they are now repaid their capital or full use is made of articles 139 and 141, it was urged that the incidence of income-tax would be a sufficient deterrent of this alternative measure. I do not, however, consider that the court can properly have regard to such a consideration as this in determining what is fair between the parties. It might indeed be considered improper to do so if it drove the ordinary stockholders to a course less advantageous to themselves but no more advantageous to the preference stockholder. It will be seen that, even making an assumption favourable to the appellants, I reject their first plea. But it is perhaps necessary, in case there should be a division of opinion which would make this a decisive issue, that I should shortly examine the assumption. It is clear from the authorities, and would be clear without them, that, subject to any relevant provision of the general law, the rights inter se of preference and ordinary shareholders must depend on the terms of the instrument which contains the bargain that they have made with the company and each other. This means that there is a question, of construction to be determined and, undesi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ares," were held to define exhaustively the rights of preference shareholders to dividend, and I do not find in the speeches of Lord Haldane or Lord Loreburn in that case any suggestion that a different result would have followed if the dispute had been in regard to capital. I do not ignore that in the same case in the Court of Appeal the distinction between dividend and capital was expressly made by both Cozens-Hardy, M.R., and Farwell, L.J., and that in Re Mctcatfe Sons Ltd. [1933] Ch. 142 , Romer LJ. reasserted it. But I share the difficulty, which Lord Keith has expressed in this case, in reconciling the reasoning that lies behind the judgments in Will's case ( supra ) and Re Metcalfe Sons Ltd. [1933] Ch. 142 , respectively. In Colleroy Co. v. Giffard [1928] Ch. 144 Astbury, J,, after reviewing the authorities including his own earlier decision in Re Fraser and Chalmers [1919] 2 Ch. 114, said, "But whether the question affecting them [sc. capital and dividend preference respectively] are 'entirely different' is a question of some difficulty," and approved the proposition there urged by the ordinary shareholders that a fixed return of capital to shareholde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lus assets unless they expressly and specifically renounce that right.' For these reasons I reject the assumption upon which the appellants' first plea is founded. I can deal shortly with the other element of unfairness upon which the appellants rely, viz., that they have been prematurely deprived of a favourable investment. Much that I have already said is equally applicable here. Funds being available for payment off of capital, the natural order is to pay off that capital which has priority and I see no glimmer of unfairness in the company doing so at the earliest possible moment, particularly, if their undertaking having been wrested from them, they can no longer earn 7 per cent. or anything like it on their money. I am of opinion then that, apart from the special considerations arising from section 25 of the Coal Act, the appellants' objections to the proposed reduction have no substance. I turn then to this section. I will not repeat its provisions. The appellants say, (I quote their formal reasons) that the "proposed reduction of capital unfairly and illegally deprives the preference stockholders of their right to an adjustment of their interest in the company's assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made in due course, which are to provide facilities for adjusting the respective interests of different classes in the company's assets so as to give effect, so far as may be, to their "relative expectations of income yield" and to their respective "rights of priority." At the date of the proceedings in the Court of Session no regulations had been made and it was legitimate to hope that, when they were made, they would throw further light upon the way in which effect should be given to expectations of income yield and rights of priority. That hope has been disappointed for regulations have now been made, but they do not illumine the darkness. The court therefore has on the one hand to take into account all those factors with which I have already dealt in considering whether the proposed reduction, apart from the Coat Act, is fair, and the further, by no means negligible, factor that the interposition of further months and perhaps years of delay can be nothing but a hardship to the ordinary stock holders, and on the other hand the factor that the preference stock-holders might at long last get something better than they are now getting, i.e., repayment in full of their capital, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal will be returned to the holders of the 50,000 preference stock and 10s. will be returned to the holders of the 675,000 ordinary stock for each 1 unit held by them. The appellants are certain of the preference stockholders who lodged answers to the petition for confirmation. Their objections to the proposed reduction are that it deprives them prematurely of the advantage of a well-secured 7 per cent. investment; that it deprives them of a right to participate in the liquidation along with the ordinary stockholders in the division of the property of the company if any remains after repayment of the capital of all stockholders; and that it deprives them of the opportunity of obtaining a favourable adjustment of their interests under section 25 of the Coal Industry Nationalisation Act, 1946. I shall begin by dealing with the first and second of these objections and it is first necessary for that purpose to consider what are the rights of the preference stockholders under the articles of association. Article 17 enables the company from time to time by special resolution to reduce its capital. Under article, 78 every share (now every unit of stock) has one vote in a poll at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , and their main claim is that as corporators they have an equal right with the ordinary stockholders to share in the company's property in a liquidation, unless that right is excluded by the terms of those articles by which their rights are conferred. The chief controversy is therefore whether articles 159 and 160 contain an exhaustive statement of their rights in a liquidation, excluding any further right to share in what have been called the surplus assets of the company. But these articles can only be properly understood if they are read in conjunction with articles 17,78, 128, 139 'and 141 ( a ). The cumulative effect of these articles is to give the ordinary stockholders power until liquidation begins to distribute among themselves in one way or another all accretions to capital which, may arise either from the profits of the company or from the permanent appreciation of its assets, and I find it difficult to reconcile a power so comprehensive in its scope with an intention that the preference Stockholders should after liquidation takes place, retain an interest in the company's property beyond what is necessary to satisfy their prior claim for the return of their capital. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd that such perference shares rank both as regards capital and dividend in priority to the other shares ". In the Court of Appeal it was held that, the preference shareholders were not entitled in the distribution of profits to anything more than a 10 per cent. dividend. Cozens-Hardy, M.R., said: " Sir Frattcis Palmer in his book, Palmer's Gompmy Precedents 11th ed., Part I, p. 814, says: It is generally assumed that where the preference shares are given a fixed preferential dividend at a specified rate, that impliedly negatives any right to take any further dividend and probably this assumption is well founded'. In my opinion that assumption is well founded". Farwell, L.J., agreed. But these learned judges were careful to confine their judgments to preferential dividend rights, and Farwell, L.J., said that the considerations affecting capital and dividend were entirely different and that he did not think that you could reason from what will happen to capital in a winding-up to what ought to happen to dividend while the company is a going concern. This House affirmed the decision of the Court of Appeal, and Lord Haldane, L.C. said (83 L.J. Co. at p. 199; [1914] A.C at p. 17): "I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holders in the company were entitled to participate along with other shareholders in the company's property after repayment of the capital; but he explained in the later case of Colleroy Co. v. Giffard [1928] Ch. 144 that this decision was based on the particular terms of the special resolution and he retracted what he had said in Fraser and Chalmers's Case ( supra ) so far as it controverted the opinion of Sargant, J., in the National Telephone Co. Case ( supra ) which I have quoted. The last case calling for consideration is Re Metcalfe Sons Ltd. [1933] Ch. 142 la that ease Eve, J., repudiated the idea that an express direction as to ranking in priority for return of capital excludes any further pari passu ranking on surplus property, and held that the ordinary shareholders must establish that the preference shareholders had renounced their statutory right as members of the company to share in the company's property in a liquidation. His judgment was affirmed by the Court of Appeal, With respect to the learned judges who were parties to the decision, I hats felt unable to reconcile it will the ratio of the judgment in Will's case ( supra ) . It is Unnecess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this case was before the Court of Session, justify any firm expectation of advantage to the preference stockholders. How the regulations will be applied by the tribunal is a matter of doubtful speculation. The ordinary stockholders are not bound to await the operation of the regulations before exercising powers which are committed to them by the articles, it was conceded that the payment of a dividend which would absorb all "surplus assets" or the distribution of a bonus which would exhaust the undivided profits could not be met by an Interdict based on the plea that these were oppressive abuses of powers. Why then should they hold their hand if they desire to reduce the capital in the manner proposed rather than to take part in the doubtful hazard of proceedings before a tribunal constituted under section 25? The company is not bound to satisfy the court that its proposals are not unfair. It has brought forward proposals which are intra vires, regular on the face of them, and in conformity with the usual practice as laid down by Lord Wrenbury in his book on the Companies Act (11th ed., p. 120). If the objectors can find in the provisions of section 25 or of the regulations anythin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng in favour of the proposed reduction. For the sake of brevity, I shall refer to the proposed reduction as "the scheme" and shall use the phrase ''surplus assets" as a convenient phrase to describe the assets which remain, in the winding-up of a company, when all its creditors have been paid and all the members have been repaid the amounts paid up on the capital held by them. In so using the phrase I do not forget Lord Macnaghten's observation that the "surplus assets" are "part and parcel of the property of the company part and parcel of the joint stock or common; fund which at the date of the winding-up represented the capital of the company. It is through their shares in the capital, and through their shares alone, that members of a company limited by shares become entitled to participate in the property of the company" My reasons for the conclusion already stated are as follows: (1) In my view the preference stockholders have, under the company's memorandum and articles, a right to share in the surplus assets in a winding-up. (2) The company's substratum is gone and it winding-up is inevitable. Thus the scheme does not serve any useful business purpose connected with the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ual 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 ". Thus in the present case the preference stockholders are entitled, to share in the surplus assets with the ordinary stockholders in proportion to their respective holdings, unless the articles of the company otherwise provide. I turn first to articles 159 and 160, since they are the only articles which deal directly with the matter in issue, though of course they must be read in conjunction with all the other articles, in order to get a complete picture. I shall quote these two articles although they have already been read: 159. In the event of the company being wound up, the preference shares (First Issue) shall rank before the other shares of the company on the property of the company, to the extent of repayment of the amounts called up and paid thereon. 160. In the event of the company being wound up, the preference shares (Second Issue) shall rank before the ordinary shares but after the said preference shares (First Iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e respective positions of the preference and the ordinary when the company goes into liquidation. As Lord Romer (then Romer, L J.) said in Re Metcalfe Sons, Ltd. [1933] Ch. 142 : " Because... the preference shareholders, as regards dividend, are entitled to nothing store than the fixed preferential dividend expressed to be given to them, it does not in the least follow that so far as regards their rights in a winding-up they are only entitled to the privileges of preference expressly given to them in that respect." In order to find out how the company's property is to be dealt with when that event happens, one has to return to the articles dealing with the position in a winding-up. I have already dealt with articles 159 and 160, and, having travelled full circle, I have discovered nothing which expressly or impliedly deprives the preference stockholders of their ordinary right as corporators to share in the surplus assets in a winding-up. I hope and believe that I have avoided approaching this question of construction "with any obsession or preconceived idea as to the inherent equality between Shareholders in a company "to quote again Romer, L.J., in Meicalfe's case ( su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oning on which it was founded, were correct. I also agree with the reasoning and the decision in the case of Re Williamson-Buchanan Steamers Ltd. [1936] Sc LT 106 I have not overlooked the case of Re Bridgewater Navigation Co. [1891] 2 Ch. 317 If the preference stock were to continue in existence until liquidation, interesting questions might arise as to whether that case was rightly decided, and if so whether the facts of the present case would support any claim by the ordinary stockholders similar to the claim successfully put forward in the Bridgewater case ( supra ). I do not, however, find that case of any assistance on the question construction. It is, of course, necessary to consider carefully the decision of this House in Will v. United Lankat Plantations Co. [1914] AC 11 I would observe first that the House was then dealing only with a question as to the rights of the preference shareholders in respect of dividend while the company was a going concern, but certain observations of Lord Haldane were much relied upon by counsel for the company. For my part, I do not think that Lord Haldane was addressing his mind in the slightest degree to the rights which the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e that their Lordships either formed no view upon the observations of the Master of the Rolls and Farwell, L.J., or agreed with those observations. In Metcalfe's case [1933] Ch. 142, all the members of Court of Appeal mentioned Will's case ( supra ) and clearly did not think it contained anything adverse to the reasoning of Eve, J. It may possibly be material to note that in Will's case ( supra ) this House had to consider the joint effect of the second resolution of July 13, 1891, which (to quote Lord Haldane) "gave the authority to make the bargain and defined the terms which the bargain was to contain" when the preference shares were issued, and the articles of the company, in particular article 43. In the present case the first preference shares were created in 1878, and the second preference shares in 1892 and the present rights of the shareholders are defined by the articles adopted in 1923. Your Lordships do not know, nor, in my view, is it now material to know, what were the terms of the original offer of preference shares at the time when they were created. For these reasons, I am of opinion that the preference shareholders in the present case are entitled to share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urn 10s. in the to the ordinary stockholders, who, if the scheme is approved-, will be left in undisputed possession of the field. In answer to a protest on behalf of the preference stockholders, the secretary of the company wrote on September 17, 1947: "In view of the passing of the Coal Industry Nationalisation Act, 1946, the liquidation of this company sooner or later is inevitable. The proposed reduction of capital is only the first step in that direction the Directors, being unwilling to proceed with formal liquidation until further progress has been made with the adjustment of the company's claims . . ." (The italics are mine.) Confirmation is now opposed not by a single obstructive; shareholder or a small coterie of dissentients, but by seventy-one preference stockholders holding 45 per cent. of the preference stock". Later, the Lord President said: "If it were not anticipated' by both parties that there will be a substantial surplus after repaying to- all the shareholders their subscribed capital and on the accounts this anticipation is plainly well-founded this case would be academic. Both parties see that, if there is no 'first step' of a reduction of capital to ext ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... difficult to imagine that any well informed preference stockholders would support the scheme, unless he were also a still larger holder of ordinary stock. I don not place much weight on my fourth reason, because it is 'impossible to foretell with any accuracy what (if any) adjustment of interests will ultimately be made under section 25 of the Act of 1946, if the preference stock continues in being. There may be cases in which it can be said that adjustments will probably be made in favour of preference stockholders, but I am not satisfied that this is such a case. The existence of section 25 is, I think, of little importance in the present case, one way or the other. It certainly cannot be regarded as suspending the power of the court to approve a reduction of capital; it is merely a circumstance to be taken into account when the court is exercising its discretion. I now turn to the reasons urged by counsel in favour of the scheme. First, it is said that it is the ordinary practice, where money is to be returned to the shareholders in a company, to return it in the same manner as capita! is repayable in a winding-up. Counsel referred, as part of his argument, to a passage in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "for making provision for paying off the preference share capital". This provision formed, I think, the basis for Lord Russell's approval of the scheme, but, with all respect, I feel that he gave too little weight to the fact that this article gave the ordinary stockholders no contractual right to pay off the preference. If and when provision had been made for this purpose, it would still have been necessary to bring the proposal before the court for its confirmation or rejection. In this House it was argued that this article "gave warning" to the preference stockholders that they might be paid off some day, and therefore they could not properly complain if this event happened. No doubt any stockholder who read article 139 would be given this warning. But, in the case of every company whose articles contain no provision as to the redemption of its preference shares, every preference shareholder who reads section 55 of the Act is given warning that, subject to confirmation by the court, a scheme may provide for the payment off of his shares. The preference stockholders in this company are in exactly the same position; they may be paid off if the court, in its discretion, thinks fit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it becomes unfair for a man to exercise a contractual right in a particular way; cases in which some unexpected event happens, giving rise to a state of circumstances utterly different from that which the parties contemplated. In the present case, nationalisation has come upon the company and has made liquidation inevitable. The preference stockholders are about to lose an investment which they would have liked to keep; the ordinary stockholders would probably have preferred the company's business to continue. In these circumstances it does not avail the ordinary stockholders to say: "This scheme is not unfair, because we could have achieved the same result by employing either of two other methods". I would reply: "Be it so; the adoption of either of these two methods would be unfair. It may be that the court could not prevent you from achieving your ends by either of these methods, but you have chosen a third method which gives the court a discretion to stop you, and you will be stopped." For these reasons I do not think that your Lordships' decision should be affected by the "alternative methods" argument. The only question before you is in regard to this particular scheme for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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