Scottish Court of Session Decisions

At advising—

Lord President—It appears that the bankrupt in this case was a shareholder in a company called the Central Halls Company (Limited) to the extent of ten shares as regards one affidavit made in his sequestration, and to the extent of 200 shares as regards the other affidavit. He allowed the calls on each set of shares to fall greatly in arrear, so that at his sequestration he was owing in respect of the ten shares an aggregate sum of £169, 7s. 9d., and in respect of the 200 shares an aggregate sum of £723, Gs. 6d. The company claim to rank in his sequestration for these sums, and it appears to me that the controversy is now limited to one call only on the shares in question, namely, a call made on the 14th June 1880. The Sheriff-Substitute has given effect to the claim of the company, and has found them entitled to rank for that call along with the other sums which they claim, and I think that the Sheriff-Substitute has done rightly. But as the point is one both of novelty and importance, it is necessary to see exactly how the facts stand.

In consequence of the calls having fallen so deeply into arrear, the shares of the bankrupt were forfeited on the 28th June 1880, i.e., the date of the resolution of the company declaring the shares to be forfeited. It is not contended that any informality or invalidity attaches to this forfeiture. It was carried out exactly in terms of the articles of association. But the call was made on the 14th June, just a fortnight before the forfeiture of the shares, and the 29th article of association provides that “Any shareholder whose shares have been forfeited shall notwithstanding be liable to pay to the company all calls owing on such shares at the time of the forfeiture, and the interest, if any, thereon.” =In virtue of this clause of the articles of association it is not doubtful that the company have a good action against shareholders whose shares have been forfeited, or any calls made and owing at the date of the forfeiture. Now, where a resolution making a call has been passed, the call becomes a debt of the shareholder. But it is contended that to make the call effectual it is necessary that there should be intimation in terms of the 13th head of the articles of association. The 12th head provides—“The directors may from time to time, but subject to the directions hereinafter mentioned, make such calls on the shareholders in respect of all monies unpaid on their shares as the directors think fit; and every shareholder shall be bound to pay the amount of every call to the persons and at the time and place appointed by the directors.” And the 13th head provides—“Twenty-one days' notice at least shall be given of the time and place appointed by the directors for payment of every call.” Now, the resolution of the directors not only imposed a call but appointed a time and place when and where the call was to be paid, and at the date of the forfeiture there had been no failure to give notice, because there was plenty of time after the 28th June, the date of the forfeiture, to give notice of the time and place of payment, the first instalment of the call being payable on the 21st July, and the second on the 23d August. Consequently on the 28th June there had been no failure of duty on the part of the company or its directors to intimate the time and place of payment of the call. But on the 28th June the bankrupt ceased to be a shareholder through the forfeiture of his shares, and the question therefore is, Whether the company were under an obligation to give him twenty-one days' notice in terms of the articles of association?

It appears to me that the twenty-one days' notice is a privilege of the shareholders, and a very important privilege. For if they had not twenty-one days' notice of the time and place of the call, they might incur the risk of forfeiture by failure to make payment at the time and place appointed, and they might also be found liable in payment of penal interest. It is therefore clearly a privilege to which they are entitled. Now, what the precise effect of failure to give notice would be in the case of a shareholder whose name is still on the register I do not think it necessary here to determine. It is a point of some difficulty. But the question here is, whether one who has ceased to be a shareholder is entitled to that privilege which belongs to existing shareholders? and I think with the Sheriff-Substitute that at the date of the forfeiture there was a debt due, not only for calls then payable, but also for calls of which the terms of payment had not arrived. They were debts due by the bankrupt, but due by him not as a shareholder, but as having been a shareholder. At the same time, whether or not one who has been a shareholder is entitled after the forfeiture of his shares to notice in terms of the articles of association, he is certainly entitled to some notice. Every man is entitled to some notice as to when and where he is to pay his debts. And notice of this kind the bankrupt has had. On 13th August a circular was sent to him intimating that a call had been made, payable in equal instalments on the the 21st July and the 23d August, and requiring payment. That is not notice in terms of the articles of association, but it is a perfectly sufficient intimation to any ordinary debtor, and having ceased to be a shareholder the bankrupt is just in the position of an ordinary debtor. Therefore I am of opinion that this, is a debt due by the bankrupt, or rather a debt on his sequestration, which may be enforced in the ordinary way.

Lord Mure—The argument of the Sheriff-Substitute is that the provision relating to notice was no longer applied to the bankrupt after he had forfeited his shares through failure to pay the calls. I think that the Sheriff-Substitute is right in that view. What may be the effect of want of notice in the case of one who continues to be a shareholder I do not think it necessary to inquire. At anyrate, the bankrupt here had ceased to be a shareholder.

Lord Shand have come to the same result as your Lordships in holding that the Sheriff-Substitute is right in saying that as regards the £2, 10s. call itself “the appellants are entitled to be ranked on the estate for the £2, 10s. call on the bankrupt's shares, but not for the penal interest thereon. But while I agree with this result, I do not put that result on the same grounds as your Lordships have done.

On the 14th of June the directors resolved that there should be a call of £2, 10s. per share, “payable at the registered office in two equal instalments of 25s. each, the first instalment on Wednesday 21st July, and the second on Monday 23d August 1880.” On 28th June the shares of the bankrupt were forfeited in respect, not of this call, but of former calls. At the date of the forfeiture two days only had to elapse before the twenty-one days required for the notice of the payment of the first instalment would begin to run. But no notice was given to the bankrupt, and no intimation of the call was made to him until after the first instalment had become payable, and ten days before the second fell due. Now, as I understand the view of your Lordships, this gentleman being no longer a shareholder, was no longer entitled to notice in terms of the articles of association. I cannot assent to that view. I do not think that the circumstance that his shares had been forfeited puts Mr Yuill, as regards notice, in any different position from those who remained shareholders. I think that he was entitled to the same notice. The articles of association provide—“Twenty-one days' notice at least shall be given of the time and place appointed by the directors for payment of every call.” Now, if the liability of the shareholders for payment of the calls is conditional upon their getting notice, it appears to me to follow that the liability of Mr Yuill must be the same. For I cannot see that the forfeiture can take away the right to notice of calls which is the condition of the shareholder's liability. The case, therefore, seems to me to raise this question, with which I think the Court ‘ought to deal, viz., whether the call creates a merely contingent liability dependent on due notice being given, or whether the liability is absolute although the time of payment is conditional on the shareholder having twenty-one days’ notice?

Now, it is not disputed that the resolution making the call was quite in terms of the articles of association. A clear interval of twenty-one days intervened between the date of the resolution and the time fixed for the payment of the first call, and there was a month between the two successive terms of payment. Now, the effect of making a call seems to me to be to create an instant debt, and I think that this view is very much supported by the 15th article of association, which provides “that a call shall be deemed to have been made at the time when the resolution of the directors authorising such a call shall have been passed.” In short, I do not think that anything of the nature of a merely conditional or contingent liability is created by the call. Take the case of a call in which notice had been given to some of the shareholders but not to others. The result of making the liability conditional on notice being given is that there would be a debt created as against the one body of shareholders who receive notice, but not as against the other who do not. This seems to me to be a very disastrous result in carrying on such a company. It is said that the directors might make a new call. But that, it appears to me, would be very anomalous. I never heard of such a thing. I think, therefore, that the call creates an instant liability, and the only effect of not giving due notice is that a notice must subsequently be given to pay the call twenty-one days afterwards. The only difference between such a case and one in which notice has been duly given is that penal interest does not run for twenty-one days after the date of the notice actually given.

Lord Deas—For the reasons stated by your Lordship in the chair and Lord Mure, I concur; but supposing that not to be a sufficient ground, I should then be prepared to concur in the opinion of my brother Lord Shand.