VISCOUNT MAUGHAM.—The facts in this case are sufficiently stated in the speech of my noble and learned friend Lord Simonds which I have had the advantage of studying in print, and I see no benefit to be gained by repeating them. I also agree with the conclusions which he has reached, and, if I think it is desirable to express my own opinion on the construction of the articles of association so far as they bear on the question whether the proposed reduction of capital is fair and equitable as between the ordinary shareholders and the preference shareholders, it is because there 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.
I 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 can exercise their rights under articles 139 and 141 (a).
If I am right so far, I can see no great difficulty in the present case. We must first have regard to the plain terms of article 128. It is a complete statement of the rights of the shareholders to the profits earned year by the company as a going concern, subject to two supplementary articles, articles 139 and 141, which must be read with it. Article 128 begins with saving the rights of members entitled to shares issued upon special conditions. The words in the article as to division of "the residue" (after the word "thirdly") are perfectly clear, and they beyond doubt show that, subject to a reserve fund and amounts written off for "depreciation or otherwise" (a far-reaching phrase) and to payment of cumulative preferential dividends due on the two issues of preference shares, the whole residue is divisible among the holders of the ordinary shares in proportion to the amounts paid up or credited as paid up on their shares. The amounts of profits so distributed may obviously be less or greater than the amounts paid up or credited as paid up; but the preference shareholders have no share in the residue. So far the article has dealt only with the rights of the ordinary shareholders to the whole of the divisible profits (the so-called "residue") after paying the preference dividends, and there would remain the reserve fund, and any proper provision for depreciation and also, no doubt, sums carried forward, which, of course, would normally come into the profit and loss account for the next year. The ordinary shareholders for obvious reasons are not given any immediate right to call for division of these amounts of profit, but articles 139 and 141 make clear provision that the items in question are being retained among the company's undistributed assets only so long as it is thought expedient, and it is these articles which, in my opinion, clinch the matter. Article 139, after elaborate provisions as to how the reserve fund is to be employed and subject to a number of permissible applications for the general benefit of the undertaking, contains the following words as to distribution, "or for division by way of bonus to the ordinary shareholders, or as bonuses to the employees of the company, or for repaying any moneys borrowed by the company, or for making provision for paying off the preference share capital, or for such other purposes as the directors shall, in their absolute discrection, think conducive to the interests of the company or its shareholders." I have italicised the words as to paying off 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 in 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 on 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 Capital of the Company allotted among such Ordinary Shareholders or previously unissued."
It thus provides for the conversion into capital of undivided profits standing to the credit of a reserve fund, or a profit and loss account "or otherwise, and including divisible profits arising by way of permanent appreciation in value of any of the company's assets" and the distribution of these amounts "among the members of the company who are holders of ordinary shares." My comment on the words I have here italicised is that, if the undertaking of the company had been sold for cash (and provision made out of a reserve fund or otherwise for payment of debts and liabilities and for paying off the preference share capital), every penny could be distributed among the holders of ordinary shares. I should add here that I agree with Lord Keith that the suggestion that such a distribution is unlikely because of the surtax liability which might accrue to the richer of the recipients is an accidental consideration which ought not to be considered.
For these and other reasons given by your Lordships, my conclusion is that, taking these articles together, it is reasonably clear that, subject to the payment to the preference shareholders of their capital and their preferential dividends if any not yet paid, and subject also to discretionary applications by the directors under the terms of articles 139 and 141 as above set forth, the whole of the reserve funds and other assets of the company, including the proceeds of sale of the capital assets, are appropriated to the ordinary shareholders and in that sense belong to them to the exclusion of the preference shareholders.
If, then, the question of the approval by the Court falls to be considered in the light of the present position of the company, it must follow that the main argument of unfairness falls to the ground, but I am not prepared to deny that the admitted intention to go into liquidation might be one of the facts which the Court ought to consider, and I will therefore state my opinion on that footing. If there is a liquidation, articles 159 and 160 will apply to the first and second issues of the preference shareholders which are sufficiently stated in the speech of my noble friend. Are they a complete statement of the rights attached in a winding-up to the preference shares or should such shares also have a right to participate 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 on 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 Industry Nationalisation 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.) in the Court of Appeal—In re Bridgewater Navigation Co.  2 Ch 317 —a sequel to the important case in this House of Birch v. Cropper (1889) LR 14 App Cas 525. The facts were briefly these. The capital of the company was divided into preference and ordinary shares. It was the owner of the Bridgewater and other canals which it sold in 1887 for Â£1,710,000 to the Manchester Ship Canal Company. It then went into liquidation. The liquidators paid all the debts and liabilities, and repaid to the preference and ordinary shareholders the amount of capital paid up on their shares. There remained in their hands a surplus of Â£550,000; and the question arose how this sum should be distributed between the ordinary and the preference shareholders. The latter might have been entitled under article 85, while the company was a going concern, to a preferential dividend of 5 per cent, and there was (in the view of this House) no other relevant term or condition as to their rights, but on liquidation the article ceased to be applicable. Part of the Â£550,000 consisted of three distinct reserve funds for river improvements, insurance and depreciation; and none of these funds was actually set apart from the other assets of the company. In the books of the company they were sums deducted from profits which the ordinary shareholders might have divided among themselves; they were the undrawn profits of the ordinary shareholders. But the House of Lords did not deal with these items. They decided—see per Lord Macnaghten—(in the complete absence of any such articles as we have in this case) that subject to the payment of the costs, charges and expenses of the winding-up and to the costs of the application "the assets of the company remaining undistributed other than the reserve fund, which is not the subject of this application, ought to be distributed among all the shareholders in proportion to their shares." When the question of the reserve funds came before the Court of Appeal in In re Bridgewater Navigation Co., it was held that, since the assets or amounts in question consisted of the undrawn profits of one class, those profits ought to be distributed in the winding-up amongst the members of that class in the absence of some sufficient reason to the contrary; and there was no such reason. In the result the ordinary shareholders were exclusively entitled to the three reserve funds. I have no doubt that this was a correct decision, and there was no 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 a fortiori one. Much reliance is placed on behalf of the appellants on the case of In re William Metcalfe and Sons. 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 Â£21,000 there in dispute was attributable to accumulated profits. It seems to me difficult to reconcile that case with the decision of this House in Will v. United Lankat Plantations Co., and impossible to reconcile it on sound grounds with the decision of In re Bridgewater Navigation Co.
It is true that the general principle does not by itself apply to moneys arising from appreciations in value of capital; but in the present case I read article 141 as showing that such appreciations are appropriated (in the sense in which I use the word) to the ordinary shareholders. Apart from that view, it seems to me that any doubt as to the attribution of such special assets is removed by the terms of articles 159 and 160 which refer to "the property of the company" as a whole, and do not justify the conferring of a further right to the preference shares beyond the amounts called up and paid thereon. Such a right would require definition and cannot, in my opinion, be derived as a matter of construction from the language of the two articles. I doubt whether there exist any such assets in the present case, where the colliery assets were transferred compulsorily under the Coal Industry Nationalisation Act, 1946. Counsel for the appellants in his forcible argument claimed—and I think with prudence—that his clients were entitled to share in the whole of the (so-called) surplus assets; and no distinction was drawn between different kinds of such assets.
The question that arises as to the effect, if any, of section 25 of the Coal Industry Nationalisation Act, 1946, is due to the difficulty of appreciating its purpose or its implications. I agree with the preliminary considerations stated by Lord Greene, M.R., which are to be found in his judgment on the appeal in the case of In re Chatterley-Whitfield Collieries, Limited, including his remarks as to the drafting of the regulations which are contemplated by the section. In particular I agree with the following remark:—
"One thing the section clearly does not do. It does not purport expressly or impliedly to limit or affect in any way the existing provisions of the Companies Act, or the well-known practice of the Court thereunder, or to lay down any new principles for the Court to follow."
The regulations contemplated by the section have now been published and the remark if the Master of the Rolls applies with additional force. It would, I think, be going too far to say that in confirming or refusing to confirm a reduction of the capital of a colliery company the Court ought to act as if the Coal Industry Nationalisation Act, 1946, had not been passed. On the other hand, I think those who oppose 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 on the proposed reduction, nor why they should object to being repaid by means of the reduction the amounts so paid up which they would receive on the proposed liquidation. In my opinion, the decision of the Judges of the Court of Session by a majority was right and the appeal must be dismissed. The answers should be repelled as irrelevant, and the petition should now be remitted to a reporter. The appellants must pay the costs of the appeal.
LORD SIMONDS.—[After the narrative quoted supra]—The resolution, of which the formal validity is not challenged, having thus been passed, the respondents, as the Companies Act, 1929, requires, presented a petition to the Court of Session for confirmation of the reduction, and on 17th February 1948, in spite of opposition by the appellants, who hold about 45 per cent of the first and second preference stock of the company and lodged answers, by which they averred that the proposed reduction was contrary to law and in any event unfair and inequitable, the First Division of the Court of Session, consisting of the Lord President, Lord Russell and Lord Keith (the Lord President dissenting) repelled the answers as irrelevant in hoc statu and made an order for the usual procedure to follow. Against that interlocutor the present appeal is brought.
Apart from a special factor which is introduced into it by the provisions of section 25 of the Coal Industry Nationalisation Act, 1946, which I will call the Coal Act, I do not entertain any doubt about this case. The Court should, in my opinion, confirm the reduction upon which the respondents have resolved.
The Companies Act, 1929, no more than its predecessors, prescribes what is to guide the Court in the exercise of its discretionary jurisdiction to confirm or to refuse to confirm a reduction of capital. But I agree with the learned Lord President, that, important though its task is to see that the procedure by which a reduction is carried through is formally correct and that creditors are not prejudiced, it has the further duty of satisfying itself that the scheme is fair and equitable between the different classes of shareholders—see, e.g., British and American Trustee and Finance Corporation v. Couper . But what is fair and equitable must depend upon the circumstances of each case, and I propose, ignoring for the moment the particular factor introduced by the Coal Act, to consider the elements on which the appellants rely for saying that this reduction is not fair to them.
In the formal case which they have presented to the House the element of unfairness on which the appellants insist is that the reduction deprives them of their right to participate in the surplus assets of the company on liquidation and leaves the ordinary stockholders in sole possession of those assets. But in their argument both in the Court of Session and before your Lordships they have further 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 give 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 for 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 on. Year by year the 7 per cent preference dividend has been paid; of the balance of the profits some part has been distributed to the ordinary stockholders, the rest has been conserved in the business. If I ask whether year by year the directors were content to recommend, the company in general meeting to vote, a dividend which has left a margin of resources, in order that the preference stockholders might in addition to repayment of their capital share also in surplus assets, I think that directors and company alike would give an emphatic negative. And they would, I think, add that they have always had it in their power, and have it still, by making use of articles 139 or 141, to see that what they had saved for themselves they do not share with others. In observe that the learned Lord President was of opinion that such a use of one or other of these articles would be an impropriety which would at least be open to challenge in a Court of law, but learned counsel for the appellants candidly admitted that he could not support this view. Reading these articles as a whole with such familiarity with the topic as the years have brought, I would not hesitate to say, first, that the last thing a preference stockholder would expect to get (I do not speak here of the legal rights) would be a share of surplus assets, and that such a share would be a windfall beyond his reasonable expectations, and, secondly, that he had at all times the knowledge, enforced in this case by the unusual reference in article 139 to the payment off of the preference capital, that at least he ran the risk, if the company's circumstances admitted, of a such reduction as is now proposed being submitted for confirmation by the Court. Whether a man lends money to a company at 7 per cent or subscribes for its shares carrying a cumulative preferential divident at that rate, I do not think that he can complain of unfairness if the company, being in a position lawfully to do so, proposes to pay him off. No doubt, if the company is content not to do so, he may get something that he can never have expected but, so long as the company can lawfully repay him, whether it be months or years before a contemplated liquidation, I see no ground for the Court refusing its confirmation. To combat the suggestion that, so far as any benefit to the preference stockholders is concerned, the position is substantially 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 them 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 stockholders.
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, undesirable though it may be that fine distinctions should be drawn in commercial documents such as articles of association of a company, your Lordships cannot decide that the articles here under review have a particular meaning because to somewhat similar articles in such cases as In re William Metcalfe and Sons that meaning has been judicially attributed. Reading the relevant articles as a whole, I come to the conclusion that articles 159 and 160 are exhaustive of the rights of there preference stockholders in a winding-up. The whole tenor of the articles, as I have already pointed out, is to leave the ordinary stockholders masters of the situation. If there are "surplus assets" it is because the ordinary stockholders have contrived that it should be so, and, though this is not decisive in determining what the parties meant by their bargain, it is of some weight that it should be in the power of one class so to act that there will or will not be surplus assets.
There is another somewhat general consideration which also, I think, deserves attention. If the contrary view of articles 159 and 160 is the right one and the preference stockholders are entitled to a share in surplus assets, the question will still arise what those surplus assets are. For the profits, though undrawn, belong, subject to the payment of the preference divident, to the ordinary stockholders, and, in so far as surplus assets are attributable to undrawn profits, the preference stockholders have no right to them. This appears to follow from the decision of the Court of Appeal in In re Bridgewater Navigation Co., in which the judgement of the House of Lords in Birch v. Cropper is worked out. This again is not decisive of the construction of the particular articles, but I am unwilling to suppose that the parties intended a bargain which would involve an investigation of an artificial and elaborate character into the nature and origin of surplus assets.
But, apart from those more general consideration, the words of the specifically relevant articles, "rank before the other shares … on the property of the company to the extent of repayment of the amounts called up and paid thereon," appear to me apt to define exhaustively the rights of the preference stockholders in a winding-up. Similar words, in Will v. United Lankat Plantations Co., "rank, both as regards capital and dividend, in priority to the other shares," were held to define exhaustively the rights of preference shareholders to dividend, and I do not find in the speeches of Viscount Haldane, L.C., or Earl 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 In re William Metcalfe and Sons Romer, L.J., reasserted it. But I share the difficulty, which Lord Keith has expressed in this case, in reconciling the reasoning that lies behind the judgements in Will's case and In re William Metcalfe and Sons respectively. In Collaroy Co. v. Giffard Astbury, J., after reviewing the authorities, including his own earlier decision in In re Fraser and Chalmers, said:
"But whether the considerations affecting them [Sc. capital and dividend preference respectively] are ‘entirely different’ is a question of some difficult," and approved the proposition there urged by the ordinary shareholders that a fixed return of capital to shareholders in a winding-up is just as artificial as a provision for a fixed dividend and that, if the latter is regarded as exhaustive, there is no prima facie reason why the former should not be similarly regarded. So also that learned Judge was influenced by the consideration which appears to me to have much weight, that, if such an article as our article 159 is regarded as a complete definition of the rights of the preference stockholders in a winding-up, then there is a logical consistency between their rights before and after the company is put into liquidation. In effect I prefer the reasoning of Astbury, J., in the case last cited to that of Eve, J., and the Court of Appeal in In re William Metcalfe and Sons. Counsel for the appellants in the present case sought to draw a distinction between the right to repayment of capital and the right to some further share in surplus assets and pointed to the fact that articles 159 and 160 said nothing about surplus assets. But this distinction is not, in my opinion, in the present context a valid one. Articles 159 and 160 are the first two in number of articles headed "Distribution of assets on winding-up" and there is nothing in them to suggest a distinction between "surplus assets" and "property of the company," the expression in fact used in articles 159 and 160, required for repayment of capital or distributable as surplus assets. Nor, I think, is the latter expression used throughout the articles; it is perhaps an expression which is better avoided.
Finally, on this part of the case I ought to deal with an observation made by Lord Macnaghten in Birch v. Cropper upon which counsel for the appellants relied. "They," he said, "[sc. the preference shareholders] must be treated as having all the rights of shareholders, except so far as they renounced these rights on their admission to the company." But, in my opinion, Lord Macnaghten can have meant nothing more than that the rights of the parties depended on the bargain that they had made and that the terms of the bargain must be ascertained by a consideration of the articles of association and any other relevant document, a task which I have endeavoured in this case to discharge. I cannot think that Lord Macnaghten intended to introduce some new principle of construction and to lay down that preference shareholders are entitled to share in surplus 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 avilable 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 as affected by the payment of compensation under section 25 of the Coal Industry Nationalisation Act, 1946," and that it "is contrary to, or in any event frustrates, the object of section 25, and therefore ought not to be sanctioned by the Court." In argument it has been urged that the preference stockholders have a statutory right to adjustment, with which the Court either cannot or should not interfere.
I dissent at once from the major proposition that, in view of section 25, it is no longer competent for the Court to exercise its jurisdiction under section 55 of the Companies Act, 1929. It is impossible to read any such implication into section 25 of the Coal Act or to suppose that the jurisdiction of the Court could have been intended to be ousted except by express words. The greater difficulty lies in the alternative proposition, that at least in the exercise of a discretionary jurisdiction the Court ought not to preclude any interested party from the opportunity of such advantage as section 25 might afford him. And in support of this view it may be urged that, until the statutory compensation has been awarded, it is not possible to predicate of any class of shareholders what is a fair way of dealing with any of the assets of the company. I have felt the force of this argument. But, if it is accepted, the Court must in the result hold its hand in every case in which a company carrying on a colliery undertaking proposes either to reduce its capital or to enter into a scheme of arrangement affecting classes of shareholders or debenture holders, perhaps too even where debenture holders take proceedings to enforce their security, on the ground that by exercising jurisdiction it might prejudice the inchoate rights of some person under section 25 of the Coal Act. I cannot think it right to accede to a suggestion which would involve so much delay and inconvenience to companies which wish to rearrange their affairs in view of the changes brought about by the Act. I prefer therefore to adopt the view put forward by the learned Dean of Faculty and to say that the Court should in the exercise of its jurisdiction regard the provisions of section 25 as a factor to be included in its consideration of the fairness of a proposed reduction, but no more than that. It is in that way that I propose to examine the section in relation to the present proposal.
The section looks forward to regulations to be 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 on 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 Coal 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 stockholders, and on the other hand the factor that the preference stockholders might at long last get something better than they are now getting, i.e., repayment in full of their capital, a possibility resting not on any sure guidance in the section or regulations, but on the speculative hope that, since there is no guidance, anything may happen.
It does not appear to me that there is in this latter factor such weight as to justify the Court in saying that the reduction here proposed is not fair and equitable between the different classes of shareholders. I do not want to prejudge what may happen in any similar case that comes before a tribunal to be set up under this Act. But I find it difficult to conceive circumstances in which preference stockholders, being repaid their capital in full and their claims to priority being thus satisfied, can yet assert with any hope of success that their expectations of income yield relative to those of the ordinary stockholders entitle them to something more.
I am therefore of opinion that the Court has properly exercised its jurisdiction in confirming the proposed reduction and that this appeal should be dismissed with costs.
LORD NORMAND.—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. These articles give clear notice to the preference stockholders that there is no assured permanence of their right to a cumulative 7 per cent dividend, and there is no unfairness in abridging, if that were all, the brief period now remaining before liquidation, in which dividends might still be paid, by the use of the power to repay preference capital. The appellants' case, indeed, was not founded so much on the loss of their expectation of future dividends as on the deprivation of the major right which they said they had in the property of the company in a liquidation, and, if their case on this major ground fails, their case upon loss of expectation of dividend must fall with it. So much is this true that there would have been, I think, no opposition if a substantial pari passu repayment of the capital of all stockholders had been proposed. What the appellants object to is the complete extinction of their rights as stockholders by the repayment of their whole capital on the eve of liquidation, and their main claim is that as corporators they have an equal right with the ordinary stockholders and 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. The wording of articles 159 and 160 appears to be well designed to give effect to this limitation of their rights. The appellants placed some reliance on the word "rank," which they said implied an ulterior right to participate in the company's property after their priority right to a return of capital and the ordinary stockholders' right to a like return were satisfied. In support of this view it was argued that there were three elements to be considered, the rights of the stockholders to dividends while the company was a going concern, and in a liquidation their rights first to a return of their capital and second to "surplus assets." I am unable to assent to these contentions. The word "ranking" may be used, and in Scottish legal practice it is habitually used, of an absolute and exhaustive right; and it carries no implication of an ulterior right not included in the ranking. Moreover in article 12, which empowers the issue of new shares "with a preferential or qualified right to dividends and to ranking in the distribution of the assets of the company," the word "ranking" is plainly used with reference to a right which may be exhaustive. The rights in liquidation are not two rights but one, a right to participate in the division of the company's property. In articles 159 and 160 the priority ranking of the preference stockholders is expressly a ranking on "the property of the company" and there is no room for the suggestion that these articles leave over a further unexpressed ranking also on the property of the company. I therefore come to the conclusion that, subject to the argument based on section 25 of the Coal Industry Nationalisation Act, the preference stockholders have no right to anything beyond what they will receive under the proposed reduction of capital.
The same conclusion results from a consideration of the authorities and especially of Will v. United Lankat Plantations Co . In that case article 43 of the articles of association provided that new shares should be issued with such priority as regards dividends or in the distribution of assets as the company in general meeting might direct. The special resolution creating new shares declared "that the holders thereof be entitled to a cumulative preferential dividend at the rate of 10 per cent per annum on the amount for the time being paid up on such shares; and that such preference 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 Francis Palmer in his book, Palmer's Company Precedents, (11th ed.) part i, p. 814, says this ‘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 Viscount Haldane, L.C., said:
"I should have thought that if we were dealing with an ordinary case of two individuals coming together, and if a document were produced saying ‘You are to have a cumulative preferential dividend of 10 per cent’ or whatever might be the equivalent in the circumstances of the bargain, it would be naturally concluded that that was the whole of the bargain between the parties on that point. You do not look outside a document of this kind in order to see what the bargain is; you look for it as contained within the four corners of the document."
Later in his judgment he adds this:
"I think that Farwell, L.J., called attention to what is really a cardinal consideration in this matter. Shares are not issued in the abstract and priorities then attached to them; the issue of shares and the attachment of priorities proceed uno flatu;and when you turn to the terms on which the shares are issued you expect to find all the rights as regards dividends specified in the terms of the issue."
With this opinion Earl Loreburn and Lord Atkinson agreed. The ratio decidendi applies with equal force to priorities of participation in the company's property, and I see no ground on which it may be supposed that the declaration of rights as regards dividends is exhaustive, but the declaration of rights as regards property is not exhaustive. There is as good reason and it is equally easy to define exhaustively the one set of rights as the other. Sargant, J., in In re National Telephone Co. said:
"… 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 preferential 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, but for the "specified rights, they would have been entitled." The decision of this House in Will's case had not been pronounced when Sargant, J., decided In re National Telephone Co., and his opinion reflects his construction of the judgment of the Court of Appeal. The next case is In re Fraser and Chalmers, Limited, in which Astbury, J., held that the preference shareholders 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 Collaroy Co. v. Giffard that this decision was based on the particular terms of the special resolution and he retracted what he had said in In re Fraser and Chalmers, Limited so far as it controverted the opinion of Sargant, J., in In re National Telephone Co. which I have quoted. The last case calling for consideration is In re William Metcalfe andSons. In that case 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 have felt unable to reconcile it with the ratio of the judgement in Will v. United Lankat Plantations Co. It is unnecessary for me to elaborate my reasons, because they are most clearly stated in the opinion of Lord Keith in the present case, and I would respectfully adopt what he has there said. It is, I think, not possible to distinguish Metcalfe's case from the present case, and I have therefore come to the conclusion that it should be overruled and that the ratio of Will v. United Lankat Plantations Co. was correctly applied in Collaroy Co. v. Giffard and In re National Telephone Co.
I must now turn to section 25 of the Coal Industry Nationalisation Act, and I begin with what is common ground, that the statutory jurisdiction of the Court to confirm reductions of capital is not ousted. It was, however, said that the Court should decline to entertain applications for confirmation of a reduction of capital in the interval between the vesting date and the settlement and payment of compensation under the Act on the ground that the declared intention of Parliament is that the interests of different classes of shareholders or stockholders shall be subject to an adjustment under regulations made by virtue of section 25. That, I think, is in accordance with the opinion of the Lord President. I share, however, the difficulty, which the Master of the Rolls felt and expressed in his judgment in In re Chatterley-Whitfield Collieries, Limited, in appreciating what the declared intention of Parliament may be. It must be remembered that a Court of law has no discretion whether it shall exercise its jurisdiction or not: judex tenetur impertiri judicium scum. The Court, however, cannot be moved to suspend applications for confirmation of reduction of capital in order to give place to a tribunal created by a statute which has neither clearly ousted nor clearly suspended the jurisdiction. Its duty therefore remains to consider whether the proposed reduction of capital is fair and equitable, but in discharging this duty it must have regard to the provisions of section 25. If that section opens to the preference stockholders a prospect of advantage of which they could be deprived only by a reduction of capital involving the extinction of their shares before liquidation, I would be prepared to hold that the reduction was unfair. But neither section 25 nor the regulations, which have been made under it since 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 Acts, (11th ed.) p. 120. If the objectors can find in the provisions of section 25 or of the regulations anything which should stand in the way of the Court's approval, it is for them to disclose it. If they fail to do this, the Court has no material before it which would warrant a finding that the proposed reduction is unfair.
I would dismiss the appeal.
LORD MORTON OF HENRYTON.—The respondent company (hereafter called "the company") seeks to effect a reduction of its capital, by returning to the holders of its Â£40,000 first preference stock and Â£10,000 second preference stock capital to the full extent of Â£1 in respect of each Â£1 of such stock held by them respectively and thereby extinguishing these two stocks and by returning to the holders of its Â£675,000 issued ordinary stock capital to the extent of 10s. in respect of each Â£1 of such stock held by them respectively. This reduction can only be carried out subject to confirmation by the Court, and the Court will not confirm the reduction unless it is "fair and equitable." It is this discretion, vested in the Court, which properly safeguards the interests of a dissenting minority—see British and American Trustee and Finance Corporation v. Couper . The words "fair and equitable" are not used with any technical meaning, but "in the ordinary sense of those words"—per Lord Macnaghten.
The appellants are a dissenting minority, of no fewer than seventyone preference stockholders, holding among them about 45 per cent of the preference capital, and there can, I think, be no doubt that the proposed reduction is detrimental to the preference stockholders and beneficial to the ordinary stockholders. Moreover there is no reason for the proposed reduction, at this stage in the company's history, other than the desire of the ordinary shareholders to obtain a benefit for themselves, at the expense of the preference shareholders. It is for your Lordships to determine whether, notwithstanding these facts, the proposed reduction is fair and equitable in all the circumstances of the present case.
In agreement with the Lord President of the Court of Session, but in disagreement with the majority of the First Division, I have reached the conclusion that it is neither fair nor equitable. I shall first state my reasons and shall then proceed to expand them and to consider the arguments advanced at the hearing 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 in Birch v. Cropper 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 a winding-up is inevitable. Thus the scheme does not serve any useful business purpose connected with the carrying on of the company. The only results which will follow from it are (a) the preference stockholders will forthwith cease to receive their interest at 7 per cent, instead of continuing to receive it until winding-up; (b) the preference stockholders will be excluded from any share in the surplus assets on a winding-up. The ordinary shareholders have used their voting power in order to secure these results, and for no other purpose; there is no other reason why the company should not proceed to liquidation without taking this preliminary step. (3) The opposition to the scheme does not come from a small or factories minority but from a substantial minority who have excellent reasons for wishing to oppose the scheme. (4) It is possibly of some importance that the scheme cuts out the preference stockholders from any chance of getting favourable adjustment of their interests in the company's assets under section 25 of the Coal Industry Nationalisation Act, 1946. As will appear hereafter, however, I attach very little weight to this point.
My first reason is of great importance. If the preference stockholders are not entitled to share in the surplus assets, the scheme at once assumes a different aspect. In the Court of Session Lord Keith thought that they were not so entitled, and the question is, of course, one of construction. The respective rights of preference and ordinary stockholders depend entirely upon the company's memorandum and articles of association, to which I now turn. By clause 5 of the memorandum the company has power to increase its capital "by the creation and issue of new shares, either ordinary, or having such preference, priority and special privileges attached thereto, as may be determined by special resolution of the company." It is, I think, unnecessary to trace the stages by which the company's capital reached its present amount. In the year 1923 the company by special resolution adopted new articles of association. Before that date, all the preference stock had been issued, and, in my view, no other document is material for determining the present rights of all classes of stockholders.
The articles must, of course, be read as a whole, and in reading them it is important to bear in mind that (to quote Lord Macnaghten in Birch v. Cropper) "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." 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, as they have not yet been read in full:—
"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 issue) on the property of the company to the extent of repayment of the amounts called up and paid thereon."
As these two articles are similar in their terms, mutatis mutandis, it will be sufficient to examine one of them in detail. Certainly neither of them contains any words which expressly exclude the preference stockholders from sharing in the surplus assets, although such words are very commonly found in a company's articles, and they appear, for instance, in the articles of Chatterley-Whitfield Collieries, the respondent company in the next appeal before this House. The omission of any words of exclusion is, I think, somewhat significant. The new articles were adopted in 1923, and in 1919, Astbury, J., had decided in the case of In re Fraser and Chalmers, Limited that the preference shareholders in the company then in question were entitled to share in the surplus assets, pointing out (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." This was the last relevant decision before the company in the present case adopted its new articles, and I think that, if it had been intended to exclude the preference shareholders from any share in the surplus assets, express words of exclusion would have been inserted in articles 159 and 160.
Are there any words which raise an implication of such an exclusion? I cannot find them. Article 159 is concerned simply with the order in which shares shall rank "on the property of the company," and the extent to which the first preference shares (now stock) shall rank before the other shares of the company. They are to rank before the other shares, on that property, to the extent of repayment of the amounts paid up. Surely the implication is that, except to the extent just stated, the preference shares are to have no priority, but are to rank equally, on any property of the company which is left after the paid-up capital has been repaid. If, however, there is no such implication there is not a word which raises the implication that they are to be excluded from the ordinary right, as corporators, to share equally with other corporators in a winding-up on this portion of "the property of the company."
Turning now to the other articles, I look in vain for any words which expressly or impliedly exclude the preference shareholder from the right just mentioned. I would first note that article 12 has no relation to the existing preference stock, as it had all been issued before this article was adopted. I do not think it matters whether or not there was an earlier article in the same terms, as the present rights of all stockholders depend upon the 1923 articles. Counsel for the company relied particularly upon articles 128, 139 and 141 (a). I shall have to return to these articles later, and I have no desire to minimise the marked difference between the position of the preference and the ordinary stockholders in regard to the profits, while the company is a going concern. But, with all respect to those who think otherwise, I cannot obtain from these three articles any light on the respective positions of the preference and the ordinary stockholders when the company goes into liquidation. As Lord Romer (then Romer, L.J.) said in In re William Metcalfe and Sons:
"Because … the preference shareholders, as regards dividend, are entitled to nothing more 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 Metcalfe's case. I have construed the memorandum and articles with an entirely open mind, and having construed them I fall back upon that inherent equality which is, to my mind, in no way disturbed by the regulations of the company.
I leave the articles by asking, and answering to the best of my ability, two questions:—(a) What would have been the position as to the distribution of the company's property on a winding-up, if the articles had contained no provisions at all as to how that property was to be distributed? In that event there could, I suppose, be no doubt that the balance remaining after payment in full of the creditors would have been divisible equally among all the stockholders, preference and ordinary alike, under sections 211 and 247 of the Companies Act, 1929. See Birch v. Cropper . (b) To what extent is the position altered by the memorandum and articles of this company? Answer—The only provisions as to this are contained in articles 159 and 160, and they do no more than confer a priority on the preference stockholders "to the extent of" repayment of their capital.
In every case the answer to the question now under consideration depends upon the true construction of the regulations of the company in question. I am, however, strengthened in the view which I have formed by the closely reasoned judgment of Eve, J., in Metcalfe's case, unanimously accepted by the Court of Appeal as correct. There are, of course, differences in the wording of the memorandum and relevant articles between the present case and Metcalfe's case. The articles are very shortly set out in the report, which does not show whether or not there were any articles on the same lines as articles 128, 139 and 141 (a); but Mr Stamp argued "the moment before the winding-up the ordinary shareholders could have passed a resolution dividing the whole of the surplus assets or accumulated profits between them" and this argument is dealt with by Eve, J. I think, therefore, that any distinction which exists between the present case and Metcalfe's case must be an extremely fine one. Metcalfe's case settled, so far as regards the Court of Appeal, along-standing difference of judicial opinion which is fully set out in the judgements. It is not binding on your Lordships' House, but, in my view, the decision, and the reasoning on which it was founded, were correct. I also agree with the reasoning and the decision in the case of Williamson-Buchanan Steamers, Limited.
I have not overlooked the case of In re Bridgewater Navigation Co. 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 Bridgewatercase. I do not, however, find that case, in which the facts were of a very special nature, of any assistance on the question of construction which arises in the present case.
It is, of course, necessary to consider carefully the decision of this House in Will v. United Lankat Plantations Co. 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 preference shareholders would have in a winding-up. These rights were not in dispute in this House. See Collaroy Co., Limited v. Giffard . Lord Haldane was delivering an impromptu opinion upon one topic only, and I do not think he intended his words to be applied to any other topic. The other noble and learned Lords also concentrated on the topic with which alone the case was concerned. I cannot form any idea what view the House would have taken if the rights of the preference shareholders to surplus assets in a winding-up had been under consideration. I am supported in my view that Will's case is of no assistance in the present problem by the following facts:—(a) When Will'scase was heard in the Court of Appeal Cozens-Hardy, M.R., clearly though that the preference shareholders would share in surplus assets in a winding-up while Farwell, L.J., said;"To my mind the considerations affecting capital and dividend are entirely different. The preference given to capital is in the winding-up, and the preference claimed to be given to dividend here is in a going concern; and I do not think that you can 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. As to what may happen in a winding-up I express no opinion. Sir Francis Palmer says this, immediately following the passage read by the Master of the Rolls, in Palmer's Company Precedents, (11th ed.) part i, p. 814: ‘Where preference shares are given a preference as regards capital, that does not impliedly exclude them from sharing in the surplus assets in winding-up, after clearing off the whole of the paid-up capital: In re Espuela Land and Cattle Co. It is therefore open to contention that the attachment of a preferential dividend does not impliedly exclude the right to participate in surplus profits after paying a like dividend on the subordinate shares. In order, however, to preclude any question on this point, it has for some time past been customary to insert express words negativing the right of preference shareholders to participate in further profits.’" If this House, in affirming the Court of Appeal, had disagreed with these observations, it would seem likely that some member of the House would have criticised them. The absence of any such criticism may indicate 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. (b) In Metcalfe's case all the members of the Court of Appeal mentioned Will v. United Lankat Plantations Co., and clearly did not think it contained anything adverse to the reasoning of Eve, J. (c) It may possibly be material to note that in Will's casethis House had to consider the joint effect of the second resolution of 13th July 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 in the surplus assets, and that the authorities furnish no good ground for a contrary conclusion.
I now come to my second reason for thinking that the scheme is unfair and inequitable, and I should like to adopt, respectfully, the summary of the situation given by the learned Lord President:
"What are the admitted facts? This company's capital structure consists of preference and ordinary stock in the ratio of roughly 1 to 13. Its business was coal mining, and on 1st January 1947 its collieries and working assets passed to the National Coal Board in exchange for a share, as yet undetermined, in the global sum of compensation. Liquidation is inevitable. The company's substratum is gone. Its remaining assets, consisting of investments and cash, can no longer be employed in prosecuting the objects for which it was formed. No resumption of business is in contemplation. It survives with one foot in the grave, solely for the purpose of being wound up, and it will be wound up as soon as the compensation has been ascertained. There is no question in this case, as in earlier cases, of recasting the company's finances in its interests as a trading entity. There is no question here of discretionary forecasts of business men as to the company's commercial future. This company's future is behind it. Its creditors are provided for. There is only one active controversy, viz., the division of the assets amongst the shareholders. These assets, even without taking into account the compensation from the National Coal Board, are ‘much more than sufficient’ to meet all liabilities, and a glance at the balance-sheets is enough to show that in the end of the day there are bound to be considerable surplus assets. Faced with this situation (which must have a parallel in many other concerns affected by nationalisation of the industries in which they have previously been engaged), this company determined to wind up by instalments and to die by inches. On 26th September 1947 a special resolution was passed (by a majority) reducing the capital from Â£850,000 to Â£462,000 by returning capital to the shareholders to the extent of Â£388,000, described as being in excess of the wants of the company, as it manifestly is. Had this return of capital been effected rateably, no objection could have been stated. But the proposal is to pay off the whole preference stock at par and to return 10s. in the Â£ 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 17th September 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 extinguish the preference stock at part, the surplus assets will have to be divided between all the shareholders, whereas, if this reduction is confirmed, the whole of the surplus assets will be appropriated by the ordinary stockholders, and the preference stockholders will get nothing but the part value of their stock. The ordinary stockholders have used their voting predominance with the object of cutting the preference stockholders out, and the question for us is whether in the circumstances that is, in a business sense, fair and equitable."
Finally, he observed:
"… it can make no appreciable difference to these ordinary stockholders whether they get 10s. in the Â£ now at the ‘first step’ in the winding-up, or whether the relative investments continue to be held by the company until the ‘formal liquidation.’ On the other hand it is impossible on any business view of the matter to see how in the inevitable liquidation the preference stockholders could ever get less than 20s. in the Â£ for their stock; and, if they are forced to accept 20s. now and to forgo their right to a 7 per cent dividend and to participation in the surplus assets in the liquidation, they are being bought off for less than a just equivalent, and this loss is being inflicted upon them not in the interests of the company but solely in order that the ordinary stockholders may eventually appropriate 13/13ths of the surplus assets instead of 12/13ths. This is not my idea of what is just or equitable, and I do not believe that any jury of business men would so regard it."
These passages express so clearly my own views on this branch of the case that I would only add this—there is no question, in the present case, of a "continuing burden" on the company in paying the dividend on the preference stock. Winding-up is inevitable, the sum required to pay this dividend only amounts to Â£3500 gross per annum, and this sum cannot seriously be regarded as a burden, having regard to the free assets of the company and the "interim income" provisions of the Act of 1946.
My third reason, as to the nature of the opposition to the scheme, is also dealt with in the passage quoted above. I would only add that it is not of course to be supposed that the holders of the remaining 55 per cent of preference stock support the scheme, merely because they have not appeared in these proceedings. Indeed, I find it difficult to imagine that any well-informed preference stockholder would support the scheme, unless he were also a still larger holder of ordinary stock.
I do 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 circumstances 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 capital is repayable in a winding-up. Counsel referred, as part of his argument, to a passage in Buckley on the Companies Acts, (11th ed.) p. 120, which has appeared in a number of editions of that work, including at least one which Lord Wrenbury himself prepared. There is a striking lack of authority on this point, but I would agree that in an ordinary case, where a company is intending to carry on business and desires to pay off any paid-up share capital under section 55 of the Act of 1929, the practice is as stated in Buckley. It is still necessary, however, for the Court to consider with care in each case whether a scheme is fair and equitable in the circumstances of that particular case. It is not enough for those supporting a scheme to say "the company is still in being and the proposed repayment is in accordance with the ordinary practice." If that were enough the Court's discretion would be cut out and the ordinary shareholders would be able to treat preference shares as being redeemable, at their option, as soon as sufficient capital, in excess of the wants of the company, became available for the purpose. The practice can, at most, have the effect of making it necessary for objectors to point to some circumstances which distinguish the case under consideration from the ordinary run of cases. Here they can point at once to the taking over of the company's business by legislative action, the imminence of liquidation, and the absence of any reason, from the standpoint of the company's business, for any repayment of capital at this stage. Thus, I think that the practice in question is of little assistance to the respondent company's argument. The ordinary stockholders are, in effect, seeking to use to the detriment of the preference stockholders a priority in respect of capital which was intended to be for their benefit. I would call attention, on this point, to the contrast drawn between the position of a company intending to continue its business and a company whose business is at an end, in the judgment of the Master of the Rolls In re Chatterley-Whitfield Collieries, Limited., which your Lordships are about to consider. The considerations which make the practice prima facie a fair and convenient one in the former case have no application in the latter case.
Next, reliance is placed on article 139, and in particular on the power expressly given to the directors to set aside, out of the profits, a reserve fund to be used, inter alia, "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, and they will not be paid off if the Court does not think it fair and equitable. I cannot see why the existence of this "warning" in article 139 should be of any real assistance to this House in deciding the question whether payment off, in the present circumstances, is fair and equitable. It may not be irrelevant to note that no funds have ever been set aside for the express purpose of paying off the preference stock, which has stood at the figure of Â£50,000 for over fifty years. I think that the Lord President was justified in observing that but for the "Act of 1946 the investment would in all human probability have continued to yield 7 per cent for an indefinite time."
Lastly, and this is, I think, the point which was most strongly pressed, it is said that there can be nothing unfair or inequitable about the scheme, because the profits (after payment of the preference dividend) are divisible among the ordinary stockholders under article 128; any surplus assets are due to the abstinence of the ordinary shareholders as regards dividends in the past, and the ordinary stockholders could now, if they thought fit, use their voting power to divide the surplus assets among themselves, either (a) by declaring a vast ordinary dividend under article 129, or (b) by capitalising all undivided profits under article 141 (a) and distributing the resulting capital among themselves by way of bonus. I was at first impressed by this argument, but I have come to the conclusion that it is of little weight. Article 128 merely expresses that which is the ordinary rule in companies having preference shares, and no doubt there were good reasons, from the point of view of the company's business, why no larger ordinary dividends were paid in the past. Now comes an event, imposed on the company from without, which puts an end to the company's business. The fact that there are surplus assets arises partly from this event and only partly from the past abstinence of the ordinary stockholders. I have already said why I think it would be unfair if the preference stockholders were now cut out by the proposed reduction of capital. In my view, it would also be unfair if at this stage the ordinary stockholders were to adopt either course (a) or course (b) already mentioned. It is quite true that they have a contractual right to do so, but it is easy to think of many cases in which 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 getting rid of the preference shareholders. Is it fair and equitable or not? I think it is not. I would allow the appeal, with the result that the company's petition for confirmation of the reduction of capital would meet with the fate which, in my view, it richly deserves, that of dismissal with costs.