Scottish Court of Session Decisions

This was an action at the instance of Mrs Margaret Stewart Erskine or Moir, widow and executrix-dative qua relict of the deceased William Moir, Beach House, Broughty Ferry, against Thomas Duff & Company, Limited, having their registered office in Dundee. The pursuer concluded (1) for declarator that she was the owner, as executrix-dative of her deceased husband, of 22 shares of £100 each in the defenders' company which were formerly held by her husband, and that the defenders were bound to enter her name in the register of members of the company as the owner of these shares; and (2) for decree ordaining the defenders to enter the pursuer's name in the said register as the owner of the said shares. There were also conclusions for payment of the sums of £450 and £550, being the dividends which had accrued since the date of Mr Moir's death.

The defenders were incorporated as a limited liability company under the Companies Acts in 1883, with a nominal capital of £50,000, divided into 500 shares of £100 each. On the shares which were allotted and issued £25 was paid up; and the deceased William Moir at the time of his death was the registered owner of the 22 shares in question. Among the original articles of association of the company dated 30th June and 9th August 1883 were the following:—“12. The directors may, after 31st December 1888, without assigning any reason therefor, decline to register any successor to a deceased member other than a purchaser. 13. The directors may from the commencement of the company, in like manner, decline to register any successor to a bankrupt member, or any transfers of shares to purchasers or others. 14. If such declinature is made as above provided for, the company shall be bound to purchase the shares in question at the price at which they were valued under section 61 of these articles.… 59. No dividends shall bear interest as against the company. All dividends on any share not having a legal and registered owner entitled to require payment of and competent to give a valid receipt for the same shall remain in suspense until some competent person be registered as the holder of the share; provided that all dividends remaining for three years after the declaration thereof unclaimed by some person entitled and competent to receive and give a valid receipt for the same, shall at the end of that period cease to be payable, and be added to the reserved fund; but the board may remit the forfeiture in whole or in part whenever they may think proper. When two years shall elapse after the decease of any shareholder, without any person being registered as successor to him in respect of any shares, the directors, at any time after the lapse of such two years, may sell any such share, holding and accounting for the nett proceeds thereof to those equitably entitled.… 61. Once at least in every year, and from time to time as the directors may consider convenient, the accounts of the company shall be examined, and the correctness of the balance-sheet ascertained and certified by an auditor, and after six months from the date of certifying, the balance-sheet shall be unchallengeable. On the occasion of every such balance the directors shall value the shares of the company, and report thereon to the members; and all questions arising as to the value of the shares shall be fixed, determined, and regulated by such valuation, until a re-valuation is made.” Art. 74 provided that all differences between the company and its shareholders should be referred to arbitration.

On Mr Moir's death, on 27th July 1898, the defenders wrote to the pursuer's agents offering to take over the shares held by the deceased “at the last valuation, viz., £100 per share, in terms of the articles of association.” It appeared from a minute of meeting of the directors of the company held on 28th March 1898 that the directors had, as provided by art. 61, valued the shares of the company, and had fixed their value at £100 per share, and that the directors' report had been approved at the annual general meeting held on 30th March. On 22nd December the pursuer was decerned executrix-dative qua relict of her deceased husband, and on 24th December her agents wrote to the defenders requesting them to transfer the shares in question to her. The defenders, by letter dated 27th December, intimated that they refused to transfer the shares to the pursuer, and in reply to a request that they should pay to the pursuer the dividend effeiring thereto, which was declared on 27th December, the defenders also refused to pay it to the pursuer, “seeing that these shares have no legal and registered owner entitled to require payment of and competent to give a valid receipt for same.”

At an extraordinary general meeting of the defenders' company held on 5th May 1899 a resolution was passed by which certain of the original articles of association (including articles, 12, 13, 14, 59, and 61 above quoted) were altered and other articles substituted therefor.

Section 31 of the amended articles of association was in these terms—“No transfer shall be made or registered in favour of a transferee under the age of twenty-one years, or in favour of a woman, married, widowed, or single.” Section 38 empowered

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the directors to refuse to register any transfer of a share where the directors were of opinion that it was not desirable to allow the proposed transferee to become a member of the company. The amended articles further provided that in the event of the death of a member of the company the directors might require his representatives to serve the company with notice that they desired to transfer the shares (secs. 32 and 52), and if the company found a purchaser for the shares the representatives were to be bound to transfer them to him at the “current price,” “current price” being defined (sec. 39) as the price fixed at the last preceding general meeting, and in default thereof as a sum equal to the amount of the capital paid upon the shares.

On 18th May 1899 the pursuer raised the present action.

At an extraordinary general meeting of the defenders' company held on 22nd May the amended articles of association were duly confirmed, and on 21st June the defenders addressed a letter to the pursuer requiring her to serve the company with a transfer notice in terms of the amended articles.

The pursuer averred that the valuation of £100 per share was much under the true value of the shares, the balance-sheets for the years 1897 to 1899 showing an average nett profit of between £6000 and £7000 upon the paid-up capital of £5000. She averred further that she believed that the defenders' object in passing the resolution altering the articles of association was to exclude her from becoming a shareholder, and to compulsorily acquire the shares for their own behoof at a most inadequate price.

The pursuer pleaded—“(1) The pursuer as executrix-dative of her said husband being entitled to and vested in his shares of the defenders' company, she is entitled to decree as concluded for. (3) The existing articles of association having no retrospective effect as from the date of their adoption, and separatim, having no retrospective effect as from the date of the institution of the present action, the defenders' second plea-in-law should be repelled. (4) In respect that the restriction upon the pursuer's right to be registered as her husband's executrix contained in the said articles of association is invalid and illegal, the pursuer is entitled to decree as concluded for.”

The defenders pleaded—“(1) The action as laid is excluded by the 74th section of the articles of association as existing at the date of Mr Moir's death. (2) The pursuer's averments are irrelevant. (3) The defenders having acted within the powers conferred on them by the articles of association as existing as at the date of Mr Moir's death, ( a) in refusing to register the pursuer as proprietrix of the shares libelled, and ( b) in holding in suspense the said dividends, the defenders ought to be assoilzied from the whole conclusions of the summons with expenses. (4) In respect that the shares of the late Mr Moir fall to be dealt with in accordance with the defenders' articles of association, as confirmed and approved by the defenders at the extraordinary general meeting held on 22nd May 1899, and the defenders being willing to implement the obligations in pursuer's favour incumbent upon them under said articles of association, the defenders are entitled to absolvitor.”

The Companies Act 1862 (25 and 26 Vict. c. 89), sec. 50, enacts as follows:—“Subject to the provisions of this Act, and to the conditions contained in the memorandum of association, any company formed under this Act may in general meeting from time to time, by passing a special resolution in manner hereinafter mentioned, alter all or any of the regulations of the company contained in the articles of association, … or make new regulations to the exclusion of or in addition to all or any of the regulations of the company, and any regulations so made by special resolution shall be deemed to be regulations of the company of the same validity as if they had been originally contained in the articles of association, and shall be subject in like manner to be altered or modified by any subsequent special resolution.”

On 23rd January 1900 the Lord Ordinary ( Kincairney) pronounced an interlocutor, finding, inter alia, that the question between the parties, so far as it depended on articles of association, depended on the original articles, and was not affected by the new articles, and that the questions raised in the action fell under the 74th section thereof, to be submitted to an arbiter as therein provided, and sisted the cause in order that it might be submitted to arbitration.

Opinion.—[ After stating the facts]—“This action is based on the original articles, and the pursuer cannot succeed if her right depends on the new articles, which admittedly the defenders are ready and have offered to implement. The defenders contend that the pursuer's right as executrix depends on the new articles.

The distinction between the original articles and the new articles, so far as they bear on the pursuer's rights as executrix of her husband, is not at first sight obvious. Both articles purport to authorise the directors to refuse to register the successor of a deceased member, and both purport to provide for the sale of the deceased member's shares and the payment of the price to his representative.

Section 12 of the original articles provides that the directors may ‘without assigning any reason therefor decline to register any successor to a deceased member other than a purchaser.’ The 59th section provides that ‘when two years shall elapse after the decease of any shareholder without any person being registered as successor to him in respect of any shares, the directors, after the lapse of such two years, may sell any such shares, holding and accounting for the nett proceeds thereof to those equitably entitled.’ The same section contains provisions as to dividends on such shares, to which at present it is sufficient to refer.

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But the original articles contain, besides, a clause (the 14th) which is as follows:—‘If such declinature is made as above provided for, the company shall be bound to purchase the shares in question at the price at which they were valued under section 61 of these articles.’ That is, apparently, at the price at which they were valued at the immediately prior annual valuation.

The pursuer attaches importance to this section, for a reason which will be afterwards explained. But the defenders contend that it does not refer to section 12 at all, but only to section 14, which provides for the bankruptcy of a member. The pursuer contends that it refers to both.

Clause 38 of the new articles provides that the directors may refuse to register a transfer when they are of opinion that it is not desirable to allow the proposed transferee to become a member. The effect of clause 32 and clause 52, read together, is to provide that when a member dies, his share may be sold by the company to their nominee at the current price, that is (section 39) at the price fixed at the last general meeting, ‘and in default thereof, for the capital sum paid upon the shares.’

There thus appears on the surface to be no very material difference between the provisions of the one set of articles and the other. The power to refuse to enter the name of a person in the position of the pursuer on the register is as explicit in the original articles as in the new. But the reason why the pursuer prefers the original articles is this—that she has been advised that clause 12 of the original articles above quoted is invalid and ineffectual, and that therefore these articles do not negative her right to be placed on the register; but that she cannot maintain the same argument in reference to the new articles, under which she (as I understand) concedes that the directors are entitled to exclude her; and for that reason her claim to be entered on the register is of necessity based on the original articles.

In the original articles there is a reference clause (the 74th), expressed in very comprehensive language, by which it is provided—[ His Lordship quoted the clause]. There is no corresponding clause in the new articles.

The questions which were debated in the procedure roll were four:—( First) Whether the case is to be determined in accordance with the original articles or with the new articles? If with the new articles, the defenders are admittedly entitled to absolvitor from the first conclusions, and no further question regarding them has to be considered. But if the question depends on the original articles, then the following additional questions arise, viz.—( Secondly) Whether the Court is excluded under section 74, or, if not, whether the questions between the parties must under that clause be submitted to arbitration? ( Thirdly) If the question should be held not to fall under the clause of arbitration, whether the defenders are bound to register the pursuer? And ( Fourthly) What is the pursuer's right to dividends? In the view of the case which has commended itself to me, I shall require to deal with the first and second questions only.

First. Which of the two articles of association applies to this case? That seems to be clearly the question which must be decided first. It is to be observed, in the first place, that the validity of the resolution to adopt the new articles has not been questioned. These rules are not said to be in conflict with the memorandum, or for any other reason ultra vires. It is admitted that the new articles are the articles which, along with the memorandum, now regulate the company. Their validity dates, not from the date of the adoption of the resolution, viz., 5th May 1899, but from the date of confirmation, i.e., 22nd May 1899, which is four days after the summons was signeted and served, and at and from that date the original articles were abolished. But although the new articles are now the articles of the company, it does not follow that they apply to this particular question which the pursuer has raised. That question is not, it will be observed, a question about the rights of the pursuer as a partner, but about her right to be a partner. At the date of her husband's death, and also at the date of her confirmation as executrix, and of her demand to be put on the register, the original articles were in force; and she certainly had then such right as the original articles or the law conferred. If that was a right to be put on the register, then the defenders' obligation was to put her on the register on 24th December 1898, the date of her demand. The pursuer maintains that that was her right under the original articles. I by no means affirm that she had that right under the original articles or in law, but I think that in considering this question whether the case is governed by the original articles or the new, she is entitled to say that the argument is to be taken on the footing that at that date she was entitled to be registered. The case may be put thus—Suppose that the original articles gave her an express right to be put on the register, could she be deprived of that right by new rules to which she was not and could not have been a consenting party, which as expressly denied that right. I am of opinion that that question should be answered in the negative. I think the pursuer had a vested right to be admitted as a partner if the original articles conferred that right, and that that was a right of which she could not be deprived without her consent. It is true, as the defenders contend, that her claim is founded on the articles, and that the articles could be altered by special resolution by the requisite majority,—indeed, could be altered as they have been altered, and therefore that her right under the articles was subject to variation, and, it may be, defeat; and it is maintained that it was only a right to be registered if the rules of the company were not altered. But I think that before the articles were altered her right was determined, and that the alterations of the articles could only have effect upon her if she was a member.

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Strictly speaking, she was not a member, because she was not on the register (Companies Act 1862, section 22), but she is entitled to say that she must be dealt with as if that had been done which she was entitled to insist on at the date of her demand. If she was then entitled to insist on being entered, I think she must have that right still, and that her right, such as it was, could not be affected by delay in registering her name contrary to the articles then subsisting.

Various authorities were referred to on this point, none of which appear to be conclusive. The pursuer referred to Auld v. The Glasgow Working Men's Provident Investment Building Society, July 16, 1885, 12 R. 1320, rev. February 15, 1887, 14 R. 27. That was a case as to a building society, the rules of which provided for payment to a withdrawing member of the sum at his credit. But in consequence of depreciation of the property of the society a resolution was adopted reducing the amount so payable. It was held in the House of Lords that the contract between the withdrawing member and the society was embodied in the rules, and could not be altered to the detriment of a member without his consent. In that case the rules appear not to have authorised the alteration, which was held to be ultra vires, which is an important distinction between that case and the present. The pursuer further referred to The Liquidator of the Milford Fishing Company, Limited v. Jones, May 20, 1895, 22 R. 577. But all that was decided in that case was that an alteration by the company of its articles of association was ultra vires because it conflicted with the memorandum. In this case the material alteration was admittedly intra vires.

The defenders referred to the case of Pope v. City and Suburban Permanent Building Society, 1893, 2 Ch. 311, a case about which I feel some difficulty. Justice Chitty decided that a member of a building society who had given a month's notice of withdrawal was bound by an alteration of the rules of the society affecting injuriously the conditions of his withdrawal, which was made after the notice but before the money was paid. The alteration, however, was made under the sanction of a special clause in the rules, and was not said to be ultra vires. Justice Chitty held that although the member had a vested right to be paid according to the rule existing at the date of the notice, yet that his vested right was liable to be divested by a later rule authorised by the contract. The report is unsatisfactory, and does not shew why the money had not previously been paid under the notice, and it does not appear that the society had refused to pay it when it was due. That circumstance, which I think important, and the fact that it was a building society case, differentiate that case from the present, and make it unnecessary for me to say whether otherwise I would be prepared to follow it. It is a judgment by a single judge.

The recent case of Allen v. Gold Reefs of West Africa, Limited, May 9–10, 1899, referred to on both sides, does not appear to be a satisfactory case or report, or an available authority. The question was different. It was whether an alteration of the rules which extended the lien of the company over shares held by a member, adopted after the member's death, affected his executor. That was a totally different question, but even on that question there was no judgment, because the case was decided on insufficiency of notice.

The case of James v. Buena Ventura Nitrate Syndicate, Limited, 1896, 1 Ch. 456, is not in my opinion applicable. It was to the effect that the estate of a deceased member might participate in an allotment of shares made after his death but while his name was on the register. It was contended by the defender that so long as the name of a deceased member was on the register, his estate was to be treated as if it were the member, and was subject to all the fluctuations in the fortunes of the company, and to all the alterations of its rules to which the member would have been subject if he were alive. That may be quite sound, but I do not think that it affects the right of the company to destroy a vested interest to be admitted as a member by the retrospective effect of a special resolution.

I am, on the whole, of opinion that the vested interest of the pursuer is to be dealt with at the date of her demand, 24th December 1898, on the footing that her rights were expressed in the original articles, and that her right to be entered in the register (if that was her right under these original articles) has not been affected by the special resolution confirmed on 22nd May 1899.

If that were doubtful, there is a specialty in this case which I take to be conclusive; for not only did the pursuer's right depend on the original rules at the time when she made her demand extra judicially, but it did so when her claim became litigious. She raised this action on 18th May, and at that date the new rules had no existence, and it appears to me that the maxim pendente lite nihil innovandum applies, and concludes the question.

For these reasons I have come to the conclusion that the right of the pursuer, on the one hand, to be put on the register, and the right of the defenders, on the other hand, to refuse to put her on the register, depends on the original articles and not on the new articles.”

His Lordship then dealt with the arbitration clause, and expressed the opinion that the questions raised in the action fell to be determined thereunder.

The pursuer reclaimed. In the interval between the date of the Lord Ordinary's interlocutor, and the debate in the Inner House, the last of the three arbiters named in the arbitration clause died and the whole case therefore fell to be determined by the Court. When the case came on for hearing, the defenders stated that they reclaimed against the interlocutor of the Lord Ordinary so far as it found that the question depended on the original articles of association, and was not affected by the new

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articles. They contended further that assuming the pursuer's rights depended on the original articles, they were entitled thereunder to refuse to register her as owner of the shares. They offered to procure a purchaser at the price fixed in terms of article 61, and to register him as owner.

Argued for the defenders—1. The pursuers' rights depended on the amended articles of association, and not on the original articles. Under sec. 50 of the company's Act 1862, a limited company had power to alter its articles of association. Mr Moir was thus a party to an alterable contract, and his executrix could have no higher right than he had— Allen v. Gold Reefs of West Africa Limited [1900], 1 Ch. 656; Andrews v. Gas Meter Company [1897], 1 Ch. 361; Pope v. City and Suburban Permanent Building Society [1893], 2 Ch. 311. The cases of Pope and Allen were a fortiori of the present. In Allen the Court held that the rights of creditors could be defeated by subsequent alteration of the articles. Had the articles expressly provided that an executor should be registered, it was within the power of the defenders to refuse to register, and then alter the articles so as to exclude executors. In any view, the new articles, even if reducible, stood unreduced, and must be held to be valid. The pursuer's claim to be registered was therefore excluded, under section 31 of the amended articles, or at least under section 52, the defenders having served her with a notice in terms of that section, and she was therefore bound to transfer the shares at the current price to the defenders' nominee. 2. But if the Lord Ordinary's view were sound, that the pursuer's rights depended on the original articles, she had no absolute right to be registered thereunder. The obligation on the defenders to purchase under section 14, applied only to the case of a bankrupt member, and did not refer to section 12, which gave the defenders an absolute right to refuse to register any successor of a deceased member other than a purchaser. An executor had a complete remedy under section 12 apart from section 14, for he could sell his shares, and the company was obliged to register the purchaser. But if section 14 applied to the present case, it was not the law that a company could under no circumstances purchase its own shares— British and American Trustee and Finance Corporation v. Couper [1894] AC 399, per L. Ch. Herschell. The rule of Trevor v. Whitworth [1887], 12 App. Ca. 409, quoted by the pursuer, did not apply inter socios, but only in a question with creditors. It was not to be assumed that the company would exercise their right in an illegal way. If they purchased the shares without reducing their capital, no doubt that would be illegal, and the pursuer might be liable in the event of the company becoming bankrupt. But the defenders were prepared to find a purchaser, and give the pursuer the current price of the shares in terms of section 14. That was a perfectly legal mode of discharging their obligation to purchase the shares, and it was all that the pursuer had a right to demand. In any view, if section 14 were ultra vires, it might be struck out; section 59 remained, which provided for the rights of executors.

Argued for the pursuer—(1) The Lord Ordinary was right in holding that the pursuer's claim to be registered must be determined under the original articles, which constituted the contract between the company and Mr Moir. The amended articles did not purport to affect vested rights or act retrospectively; if they did they were ultra vires. The company could not break its contrAct — James v. Buena Ventura Nitrate Grounds Syndicate, 1896, 1 Ch. 456, per Rigby, L. J.; Auld v. Glasgow Working Men's Building Society, Feb. 15, 1887, 14 R. (H.L.) 27; Allen, supra. (2) The question therefore was, what was the contract under the original articles? Sections 12 and 14 must stand or fall together, and section 14 purported to give power to the company to purchase its own shares, which was illegal— Trevor v. Whitworth, supra; Hope v. International Financial Society (1876), 4 Ch. Div. 327. No doubt a company might reduce its capital with the sanction of the Court, but in the present case it had not done so, and the Court would never sanction reduction with an unpaid liability of £75 on each £100. The company was thus never in titulo to enforce section 14. The whole scheme had broken down, and there was therefore nothing to justify the defenders' refusal to register the pursuer as a shareholder. The cases of Pope and Allen were distinguishable from the present, because here the defenders were in mora; the pursuer was entitled to be registered, and the defenders had no right to delay registration. In Allen the application was not made till after the alteration of the rules. Section 59 applied only to unclaimed shares or dividends, and had no application to the present case.

At advising—