Scottish Court of Session Decisions

The City Property Investment Trust Corporation was registered as a company under the Companies Acts on 9th January 1890, the registered office being at 163 West George Street, Glasgow.

As defined by clause 3 of the memorandum of association the objects of the company were, inter alia, ( a) to ( f) inclusive to take over and develope heritable property; “( g) To advance or lend the monies of the company to persons purchasing or leasing the property of the company, or property in which it is interested, or to give guarantees or indemnities for monies lent or otherwise given by others to such persons. ( h) To invest the funds of the company, or funds over which it has control or an interest in the purchase of, or otherwise to acquire and hold any bonds, shares, stocks, obligations, debentures, debenture stock, scrip, or other acknowledgments of governments, states, dominions, provinces, municipalities, public trusts, or ruling or public authorities, or the bonds, debentures, debenture stocks, scrip, obligations, shares, either paid up or not paid up, stocks or securities of companies and undertakings incorporated or established by Act of Parliament, royal charter, or under the Joint-Stock Companies Acts in the United Kingdom, or under the law of any colony, or by state authority, or under the law of any foreign country or state, or on the security or mortgage of heritable or real estate wherever situated. ( i) To make advances on the security of any bonds, shares, or real or personal property of any kind, ( j) To acquire securities or investments, either paid up or not fully paid up, by original subscription or tender, either alone or in conjunction with others, or in any other manner, and to make payment thereon as and when necessary; and also to acquire any such securities or investments in excess of the monies for the time proposed to be invested by the company, and to sell or otherwise dispose of any excess thereof, and to subscribe for the same either conditionally or otherwise. ( k) To sell, exchange, or otherwise dispose of any securities, investments, or property of the company; and to vary the said securities and investments or property from time to time.”

As defined by clause 5 of the memorandum of association the capital of the company was £230,000 divided into 20,000 preferred shares of £10 each, and 30,000 deferred or founders' shares of £1 each. The holders of preferred shares were declared to be entitled to a preferable dividend of 5 per cent. per annum out of the profits of each year, and to preferable repayment of their capital in the event of a liquidation. Subject to these rights the profits and assets of the company were declared to belong to the holders of deferred or founders' shares. It was further provided that the preferred shares when fully paid up should be converted by the directors into stock, and that the directors might with the sanction of the shareholders convert any paid—up shares into stock.

Under the articles of association, article 113, the business of the company, which in article 2 was defined as “the carrying out of the purposes and objects mentioned in the memorandum of association or any part thereof, and the entering into and performance of all contracts, agreements, acts, operations, and other matters incident thereto or connected therewith,” was to be managed by the board of directors, “and without limiting or controlling any general or other power or authority hereby given to them expressly or by implication, or which is or may be vested in them by virtue of their office, the board shall have the specific powers after mentioned—( i) They may invest either temporarily or permanently, such monies of the company as they may from time to time be of opinion should be invested otherwise than in the purchase of or in the loans upon heritable property or real estate, and they may from time to time vary or realise such securities: Provided always that no sum exceeding 5 per cent. of the subscribed capital, and the capital which can be raised by the exercise of the borrowing powers of the company shall be so invested in any one undertaking.” Article 116 provided—“The board may, with the sanction of a general meeting, and subject to the provisions of these presents, declare dividends. No greater dividend shall be declared than shall be recommended by the board.”

On the formation of the company there were issued of the authorised capital 12,988 preferred shares of £10 each, afterwards converted into £129,880 preferred stock and 24,771 deferred or founders' shares of £1 each fully paid, amounting together to £154,651. The remaining shares of the capital were never issued, and by special resolution passed 3rd, and confirmed 24th October 1895, were cancelled.

The company commenced business, and immediately after its incorporation purchased two large properties in Glasgow, the one known as the Central Chambers at £126,435, 5s., and the other at £11,500. Upon these properties the company borrowed £77,500, and upon their improvement they laid out as capital expenditure £34,711, 15s. 9d., so that these properties stood in the books of the company at 31st January 1896 at £172,647, 0s. 9d.

In the year 1891 the company, finding it was unable to make advantageous purchase of properties, proposed to the shareholders that the company should exercise its

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general powers of investment, and upon the 26th day of March 1891 the following resolution was passed by the company:— “That the company approve of the directors investing such part of the funds of the company as they think proper in the investments specified in objects ( g) to ( j), both inclusive, of the memorandum of association, but this shall not be held as in any way limiting the directors as to investing in any other form of security authorised by the memorandum of association.”

Acting on this resolution there was invested as at 31st January 1892 in general investments £71,039, 9s. 5d., that sum being the actual cumulo cost to the company of making such investments. During the year which ended on that date six different general investments were purchased on various dates at a total cost of £26,003,8s. 3d., and sold all within six months of the date of purchase at £27,347, 16s. 3d. In ascertaining profits the company charged against revenue any losses which arose on sales of any of the investments, and similarly credited revenue with any profits derived from such sales. The profit of £1351, 2s. 6d. was credited to revenue as profit, and included in the company's revenue account and. divided as dividend amongst the shareholders.

At 31st January 1893 the company's general investments stood at £82,724, 5s. 6d., treated in the way just stated. During the year ending on that date eight different general investments which had been bought at a total cost of £28,074, 15s. 3d. were sold, each within a few months after purchase, at £28,974, 15s. 3d. The profit of £896,17s. was credited to revenue as profit, and included in the company's revenue account. Among the general investments was a debenture for £2250 in a company which during this year defaulted and went into liquidation. The board were of opinion that a loss of 50 per cent. would arise upon this debenture, and wrote off that amount, being £1117, 10s., from the profits of the year. This was approved of by the shareholders at the annual meeting. A dividend of 4 per cent. was paid to the preference shareholders on 9th March 1893 for the year to 31st January 1893.

At 31st January 1894 the general investments stood at £79,162, 8s. 4d., treated as before stated. During the year ending at that date two general investments which had been bought at a total cost of £8467, 1s. 11d. were sold, each within a few months after purchase, at £8396, 9s. 10d. The loss of £71, 4s. 1d. was debited to revenue, and was included in the company's loss and profit account. The directors reported that the market price of the quoted investments showed a depreciation in value compared with the prices at which they stood in the company's books. A dividend of 4 per cent. was paid to the preference shareholders on 7th March 1894 for the year to 31st January 1894.

The depreciation of general securities continued during the year ending 31st January 1895, and certain losses arose which in the judgment of the directors were likely to prove permanent. These losses were estimated at £6000, made up as follows:—

Amount.	Name of Investment.	Estimated Loss.
400	Industrial and General Trust, Limited, Preference Shares of £10 each, now £1600 Unified Stock	£1616 12 8
125	Trustees, Executors and Securities Insurance Company, Limited, £10 snares, £7 paid	766 9 1
20	Numa Syndicate Shares of £1, 15s., paid	£15 3 0
	Loan through the Syndicate to the South Gila Canal Company	1000 0 0 / 1015 3 0
$10,050	Alessandro Irrigation District 6 per cent. Bonds	1583 18 8
£2,700	Veuve Mennier at ses Fils, Limited, 6 per cent. Debentures	1017 16 7 / £6000 0 0

The directors in their report stated that if this depreciation was met out of revenue it would probably restrict the dividend on the preferred stock to 2 or 3 per cent., but in their opinion it would be more in the shareholders' interest to meet the depreciation by a reduction of capital.

Special resolutions were passed by the company for a reduction of capital, but the Court on January 17, 1896, refused to confirm the resolution, as reported ante, xxxiii. 309, and 23 R. 400.

Thereafter the directors in their report for the year ending 31st January 1896 stated that the balance at the credit of revenue at that date was. £8937 5 10 and recommended that it should be applied as follows:—

“( a)	In meeting the above-referred to capital loss of … Under deduction of the said amount at credit of capital reserve at 31st January 1895	£6000 0 0 1059 5 5/ £4940 14 7
( b)	In payment of a dividend on the preferred stock for the year ending 31st January 1895 at the rate of 3per cent., less tax Leaving	3766 10 4 8707 4 11/ £230 0 11

to be carried forward. The said report and accounts were submitted to the shareholders and approved of, and the dividend

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of 3 per cent. to the preference shareholders was duly paid.”

Michael Grieve Thorburn, who was a holder of both classes of shares, objected to the sum of £4940, 14s. 7d. being debited to revenue account, and a special case to settle the point was submitted to the Court by (1) the company and (2) Mr Thorburn.

The question of law was, “Was the company entitled to debit the said sum of £4940, 14s. 7d. to revenue?”

Article 19 of the special case was in the following terms:—“(19) For the purposes of this case it is agreed that the said sum of £6000 has been lost, and that said loss had occurred at the time of the special resolution above referred to.”

Argued for the first party—Under their memorandum of association the company had the power to traffic in stocks and shares, and this they were in the practice of doing after 1891. The case was thus distinguishable from Verner v. General and Commercial Investments Trust [1894], 2 Ch. Div. 239, in which the company did not look to the sale of the investments which they bought as the source of their profit. In that case the investments were permanent assets of the company, and therefore fixed capital. But in the present case the company trafficked in stocks and shares. These the company bought, not for the purpose of retaining them and dividing the income derived from them among the shareholders as dividend, but for re-sale and division of the profit if such resulted. Such investments were fluctuating and circulating capital described by Lindley, L.J., in Verner, supra (1894), 2 Ch. 266. Gains made by a company by realising investments at larger prices were treated as “income” in the sense of the Income Tax Acts— Scottish Union and National Insurance Company v. Inland Revenue, February 8, 1889, 16 R. 461; Scottish Investment Trust Company, Limited v. Inland Revenue, December 12, 1893, 21 R. 262. In the same way, losses made by realising investments should be treated as losses to revenue. That there had been a permanent loss was admitted by the second party in article 19 of the special case, and it was impossible to set against an admitted loss a possibility of some future appreciation of capital assets. Separatim—Under the articles of association it was the duty of the directors to fix the dividend. This was only an expression of the customary rule that it was in the discretion of the directors, who were the best judges of what kind of business the company was carrying on, to decide as to what was the amount of the profits which should be divided as dividend. The company had approved of the course adopted by the directors, and if the Court saw that the directors and the company were acting fairly and reasonably, they would not interfere with discretion exercised by the directors— Lee's Neuchatel Ashphalte Company (1889), L.R., 41 Ch. Div. 1—opinions of Cotton, L.J., 18, and Lindley, L.J., 21 and 25; Bishop v. Smyrna and Cassaba Railway Company (1895), 2 Ch. 596.

Argued for second party—No doubt it was admitted that certain investments had depreciated, but these investments had never been realised, and were held as part of the capital yielding income. Investments which had not been sold, and which earned dividends which were credited to revenue, were, while so held, fixed capital, and not circulating capital. Besides, other stocks held by the company might have appreciated, and thus the loss would be wiped out. Under the articles of association the preference shareholders had no right to any part of the reserve fund. By receiving a small dividend they were simply being asked to help to accumulate assets for the benefit of others. The investments in question stood in the same position as the whole of the capital in the case of Verner, supra. That case had decided that it was legal for a company, even if the assets had depreciated, to pay dividends to the full extent of its profits for the year, and the shareholders were entitled to demand that the whole income should be divided amongst them—opinion of Stirling, J. [1894], 2 Ch. 258 and 259; see also Wilmer v. M'Namara & Company, Limited [1895], 2 Ch. 245. There was nothing illegal or improper in the company devoting the money earned during the year in the payment of a dividend, and where, as here, the preference shareholders have no interest in reserve, they are entitled to demand that their dividend should be paid. Where a company reduces its capital, it must not do so in such a way that the incidence of the burdens will be different from what it would have been if the company had gone into liquidation— Bannatyne v. Direct Spanish Telegraph Company, 1886, L.R., 34 Ch. Div. 287, opinion of Cotton, L.J., 299 and 300; in re Floating Dock Company of St Thomas, Limited [1895], 1 Ch. 691, opinion of Chitty, J., 698; in re London and New York Investment Incorporation [1895], 2 Ch. 860, opinion of Stirling, J, 867 and 868. Further, even although the capital in question was held to be circulating, the loss here referred to was not of the kind that falls to be replaced out of revenue. It was only circulating capital consumed or spent in earning the revenue that required to be replaced—not capital, as here, absolutely lost—Lindley, L.J., in Verner, supra [1894], 2 Ch. Div. 266. In that respect there was no difference between fixed and circulating capital, if absolutely lost.