Scottish Court of Session Decisions

On 16th April 1890 John M'Knight & Company, Limited, was incorporated under the Companies Acts, its registered office being at Binny Quarry, Uphall. The capital of the company was £12,000, divided into 12,000 shares of £1 each, of which 6650 shares were subsequently subscribed, and the purposes for which the company was formed were, inter alia, to acquire from the firm of M'Knight & Marshall the whole leases, property, effects, and assets belonging to them in their business of brick-making and quarrying, carried on at Cardross Brick Works and Binny Brick Works and Quarry, together with the debts and goodwill of the said business. The company commenced business as brick manufacturers and quarrymasters immediately after its incorporation on 16th April 1890 The whole paid-up capital of the company was thereafter expended in working the said quarry and in erecting brick-works and machinery therein, and no dividend was ever paid to the shareholders.

On the 26th day of January 1892 an extraordinary general meeting of the company was held at Broxburn, when, inter alia, the following extraordinary resolution was unanimously adopted:—“Whereas it has been proved to the satisfaction of the shareholders that the company, by reason of its liabilities, cannot continue its business, and that it is advisable to wind up the same, it is resolved that John M'Knight & Company, Limited, be wound up voluntarily, and that a liquidator be appointed to wind up the affairs of the company and distribute its property.” The said meeting thereafter appointed William Hardie, C.A., Greenock, to be liquidator, and authorised him, if he thought fit, to take all necessary proceedings for the winding-up of the company under the supervision of the Court. On 30th January the company and Hardie,

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its liquidator, presented a petition to the Court praying the Court to order that the voluntary winding-up of the company should be carried on under the supervision of the Court, to confirm Hardie's appointment as liquidator, to direct all subsequent proceedings in the winding-up to be taken before one of the Lords Ordinary, and to remit the winding-up to him accordingly.

On 11th February Daniel Montgomerie, a creditor holding a decree against the company for £357, lodged answers to the petition. He stated, inter alia—“The said company to all intents and purposes was practically a private company. No portion of the capital was offered to the public, but the whole required capital, £6650 in shares of £1 each, was subscribed for and allotted to friends of John M'Knight and Robert Marshall, who were the partners of said firm of M'Knight & Marshall, and who were the promoters of said limited company. There are only thirteen shareholders in said company. The said John M'Knight retained and all along exercised the controlling power in said company, being the holder of 2200 shares, the said Robert Marshall holding 500 shares, the said William Hardie 600 shares, and the company's law-agent 400 shares. … It is explained that no communication of any kind was made to the creditors of said company as to the affairs thereof prior to said meeting…. The respondent is informed, and believes and avers, that the object of said meeting and this liquidation is to enable the shareholders to form a new company to secure and take over the expensive plant and machinery of the present company at a greatly depreciated price…. The respondent believes and avers that questions of liability relative to the shares and the calls in arrear will require to be investigated in the course of the liquidation, and it is necessary in the interests of the creditors that some independent person not connected with the company or the shareholders should be appointed to the office of liquidator, and specially to attend to the creditors' interests in the transfer of the assets to any new company. The said William Hardie was connected with the original formation of the company, and he is the holder of 600 shares therein. Moreover, from the long distance between his residence and place of business in Greenock and the company's works at Uphall, about 12 miles from Edinburgh, where the whole assets are situated, it is highly inconvenient and inexpedient that his appointment as liquidator should be continued.”

The petitioners thereafter on 22nd February lodged a minute in which they made, inter alia, the following statements:—“2200 shares and 500 shares were allotted to Messrs M'Knight & Marshall respectively, but these persons received no part of said shares in respect of services rendered in forming the company or as payment for the value of the business…. It is denied that the shares were allotted to their friends, and that they have all along exercised the controlling power in the company. Out of a voting power of 899 votes Messrs M'Knight & Marshall, together, had only 306 votes. The whole shareholders, with three exceptions, were men of substance, as is shown by the fact that the whole share capital of £6650 issued by the company has been fully paid up except to the extent of £570…. By far the larger number of the shareholders of the company were represented at the said meeting, either personally or by mandatories, and the resolution to wind up the company voluntarily was passed by the meeting unanimously. Since the said meeting the liquidator has received from all the shareholders of the company not represented at the meeting, with two exceptions, written intimation of their concurrence in the resolution adopted, and in the present application for supervision order. The two shareholders whose written consents have not been received are in arrear in payment of calls, and are therefore not entitled to any voice in the deliberations of the company. An approximate state of the company's affairs as at 26th January 1892 has been made up by the liquidator…. From this state it will be seen that the company's liabilities, exclusive of liabilities to shareholders, and to the landlords for breach of contracts of lease, amount to £1164, 2s. 10d., while the assets, exclusive of value of erections and machinery, amount to £500, thus showing that the company has no funds for conducting business, and that the result of liquidation depends on the price to be realised from the sale of the works. With reference to the statement that the creditors of the company have not been consulted with regard to the liquidation, there is no statutory obligation to consult creditors prior to the adoption of a resolution for winding up. After the said resolution was adopted it was duly intimated in the Edinburgh Gazette of 29th January 1892, a copy of which is herewith produced, and on the present petition being presented the liquidator issued circular letters to each of the trade creditors of the company, explaining matters, and asking their concurrence in the course adopted. Creditors representing a substantial amount have intimated their concurrence. The liquidator William Hardie was in no way connected with the original formation of the company, beyond subscribing the memorandum of association in respect of certain shares which he had agreed to take. He was not acquainted with either Mr M'Knight or Mr Marshall until after he had agreed to take shares in the company. His holding of 600 fully paid-up shares in the company affords the best possible guarantee for his realising the company's assets to the greatest advantage, his sole prospect of any return for his money being contingent upon the company's creditors being first paid in full.”

Argued for the respondent—The Court had power to remove a liquidator appointed in a voluntary winding-up—Act of 1862, secs. 141–150; Buckley, pp. 294–5. The petitioner's appointment was open to grave objection, on the ground that he was a

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shareholder, and had been a director of the company— Northumberland and Durham District Banking Company, 1858, 2 De Gex & Jones, 508. A liquidator in a voluntary winding-up had power to sell the whole property of the company without the authority of the Court—Act of 1862, secs. 95 (3) and 133 (7). The petitioner's interests as present shareholder and past director might be at variance with his duties as liquidator, and the respondent had to complain that he had repeatedly applied for information without success. In sequestrations it had been held a sufficient objection to the election of a party as trustee that he had intromitted with the bankrupt's estate as trustee prior to the sequestration— Mowbray v. Bruce, November 13, 1821, 1 S. 132; Macfarlane v. Grieve, January 29, 1848, 10 D. 551. The position of a trustee in bankruptcy had been held in England to be analogous to that of a liquidator in the winding-up of a company— Marseilles Extension Raiway and Land Company, 1867, L.R., 4 Eq. 692. The creditors should have been consulted before the appointment of a shareholder as liquidator was made, and the subsequent concurrence of some of the creditors should be disregarded, as the respondent had not been furnished with a list of the creditors, though he had asked for it, and had therefore been unable to approach them. The Court might have regard to the wishes of creditors—Act of 1862, sec. 149—and in the whole circumstances another liquidator should be appointed in place of the petitioner.

The petitioners argued—The liquidation was a voluntary one, and it was not necessary that a meeting of creditors should be called. If they had anything to complain of, they had their remedy under the statute. The petitioner was the unanimous choice of the shareholders, and it would be a strong step to remove him, even if all the creditors concurred in asking the Court to do so. As a matter of fact the respondent was the only objecting creditor, and thirteen creditors, with claims amounting to £621, 3s. 3d., had expressed their approval of his appointment. In these circumstances no reason had been given to warrant the petitioner's removal from the office of liquidator, but at the same time he was quite willing that the Court should order any proposed sale of the property of the company to be submitted for the approval of the judge supervising the liquidation.

At advising—