Scottish Court of Session Decisions

Lord President—This is a special case in which your Lordships are asked to determine whether the second or third parties are entitled to a certain sum of money amounting to £550, which arises out of certain operations connected with the North British Rubber Company. The question depends on the terms of the settlement of the late Mr Blyth, and the first parties to the case are his trustees. Mr Blytli's settlement need only be recited to a very limited extent in order to make clear the question which is now before the Court. He made what I may call a special trust of certain shares which were in his possession, and those shares included certain shares in the North British Rubber Company. He directed that the trustees should hold these shares and pay the free income of them as an alimentary provision to his daughter Mrs Milne, the second party, and that the capital of the shares should be held in certain proportions for certain other purposes, the third parties being the residuary legatees under the truster's settlement. Now in 1904, February 6—that is to say, after Mr Blyth's death, and when the trustees were vested in the shares—the North British Rubber Company issued a circular letter to their shareholders, and that circular letter forms part of the case. The circular letter begins by a statement that the directors of the North British Rubber Company “find that there is at the credit of the reserve fund an amount sufficient to permit them to distribute amongst the ordinary shareholders in terms of the powers contained in the articles of association a bonus of 50 per cent to each shareholder on account of the shares held by him.” There is no question raised upon the directors' powers in doing so, and I do not think it well could have been raised, because in articles 112 and 113 of the articles of association of the company, which are also held part of the case, and therefore subject to your Lordship's consideration, there is provision for the establishment of a reserve fund, and there is provision that the directors may from time to time divide such fund among the ordinary shareholders rateably. I think it is quite clear, therefore, that while these directors were entitled to accumulate a reserve fund as they did out of undivided profits, they were not bound to keep it in that state, but they might if they liked divide it among the ordinary shareholders—in other words, divide the profits which up to this moment they had kept undivided. Now, reverting to the circular letter, the circular letter goes on to say, that although they propose to divide this bonus it is quite clear in the present state of the company that increased capital will be required, and accordingly they make the proposal to the shareholders to increase the capital of the company by the creation of 20,000 second preference shares of £12, 10s. each, and the creation of debenture stock of £100,000. They indicate at the same time that they do not propose to issue all that capital, but only a half of each class. They then point out that the capital proposed to be issued in preference shares will exactly equal in amount the sum which they propose to distribute by way of bonus, and that accordingly as they intend to offer this capital to the shareholders before offering it to anyone else, each shareholder will find himself by the receipt of his bonus in the position of being able to take up this capital if he so pleases. Of course these proposals as to new capital could not be carried out without special resolutions, and special resolutions were duly promulgated and passed. The final letter following upon this is a letter of 6th April 1904, and this letter, which is addressed to each shareholder individually, is in these terms— [His Lordship read the letter of Qth April], The option of this trust to acquire the preference shares was exercised by the trustees, who filled up that application for allotment, and accordingly got an allotment of shares, for which the sum of £550 was due. They of course got a warrant or cheque for £550. The two transactions squared each other, and they took the shares. The second party to the case says she is entitled to the £550, being the bonus dividend declared, whereas the third parties to the case contend that that is not so, because this was truly merely a distribution of capital, and that being so, the second party has no right to receive part of the capital of this estate. Now, there have been several such questions in cases like this, and we have had a very satisfactory statement of authority from the bar and a discussion upon the same. I do not think it at all necessary to go into the whole series of cases, because at this time of day I do not think there is any doubt as to the doctrine of law that is to be applied to such cases. I think everybody has been content, including the tribunal of highest resort—the

House of Lords—everybody has been content with the passage in the judgment of Lord Justice Fry given originally in the case of Bouch v. Sproule, which went to the House of Lords. The passage of Lord Justice Fry, which is quoted with approbation by Lord Herschell in Bouch v. Sproule (1887, L.R., 12 App. Cas. 397), is in these terms—“When a testator or settlor directs or permits the subject of his disposition to remain as shares or stocks in a company which has the power either to distribute its profits as dividends or convert them into capital, and the company validly exercises this power, such exercise of its power is binding on all persons interested under the testator or settlor in the shares, and consequently what is paid by the company as dividend goes to the tenant for life, and what is paid by the company to the shareholders as capital or appropriated as an increase to the capital stock of the concern enures to the benefit of all who are interested in the capital.” The only point really lies in the application of that doctrine of law to the facts of each particular case. I think it is apparent that necessarily each case must stand upon its own facts, and that, although it is very right and proper to cite other cases in order to pick out the circumstances which the judges determining these cases may have thought led to the preponderance being on one side or the other, still in one sense no one case is an authority for another. I say that because there was an attempt to say that this case was ruled by the case of Gunnis' Trustees, 6 F. 104. I do not think any case can really be ruled by the facts of another case, although there may be such similarity as may involve the same train of reasoning in the second case as in the first. I believe that is precisely the way Lord Herschell puts it in that very case of Bouch v. Sproule, which, being a House of Lords case, must be the leading case in that branch of the law. After that passage I have read, Lord Herschell, having commented upon the earlier cases, puts the question thus, on page 398—“I now come to the question whether the company did in the present case distribute the accumulated profits as dividend, or convert them into capital. And here I find myself constrained to differ from the conclusion at which the Court below arrived. I think we must look both at the substance and form of the transaction. It is to be observed in the first place that the amount of that portion of the new capital created which was to be paid up was exactly equal to the amount of the profits to be distributed. And it was obviously contemplated, and was, I think certain, that no money would in fact pass from the company to the shareholders, but that the (entire sum would remain in their hands as paid-up capital.” I think that is a statement of an issue of fact which will always arise in each case and on which the whole matter must be determined. Now, he makes another observation which I think very pertinent. He says—“We must look both at the substance and the form of the transaction,” and I think that is so, because it is just one of that class of cases where it may very often be that the form really determines the substance. It is quite clear of course that there is such a thing as substance behind an independent form. No company could really return its capital to its shareholders merely by calling it dividend. But on the other hand if there is a sum of money, as there was here, which it was quite intra vires of the company to use as dividend, or to use for the purpose of creating new capital, then it may very well be that the form will determine what is the true substance of the transaction, which might be either the one or the other. Accordingly, I do not think it particularly material to very narrowly scrutinise or still less to criticise results that may have been come to in other cases, to find whether one would have exactly agreed with them or not. But the point is to find what has happened in this case. Now, I confess that in this case I have come to the conclusion that here the company truly did make payment of a dividend. In the first place they say so, and in the next place there is this great testing point in this case, that not only did they have the money, but they gave the money in a way in which you had to go through no process whatever in order to get the cash by the ordinary way in which modern payments are made, namely, by going to a banker and getting a sum of money in exchange for an absolutely negotiable document, because nobody gives money in cash and bags of gold now-a-days. I think it is there where you have a contrast with what was done in the case of Bouch v. Sproule. In the case of Bouch v. Sproule it might have been that a shareholder would have said, “I do not want new shares,” but unless he had actually cut off his nose to spite his face the only way in which he could have got the value of his shares would have been to have taken the shares and then have sold them in the market, where they would have had a recognised value. I do not go upon that particularly, but I go upon the fact as determined by the learned judges that what was really done in Bouch v. Sproule was the creation of new capital and not the payment of dividend at all. Now, when I look at what was done here I am driven to the conclusion that what was done was the giving of a dividend, because in the circular letter of 6th April not only are you told that a warrant will be posted to you on 13th May, but you are invited to apply for shares. If you do not apply for shares all that will happen to you will be that you will have forfeited any right to get shares. Accordingly, upon the question which is a pure question of fact and upon the documents submitted to us I have come clearly to be of opinion that this company did, as matter of fact, pay a dividend in cash as it was entitled to do, and that being so, upon the doctrine laid down by Lord Justice Fry, I think the second party is entitled to prevail.

Lord Adam—I perfectly agree with what your Lordship has said upon the law of this case, and I also agree that the case depends upon what view you take of the facts, and of what the company actually did and wished to do in the matter. Now, the question arises very simply. It arises on the will of the late Mr Blyth, who directed his trustees to hold these shares of the North British Rubber Company for a certain party in liferent and for the third parties in fee. It appears that the sum of £550 was paid by the Rubber Company to the trustees under the will, and the question, and the only question, raised in this case is—is it to be treated as dividend; and if so, there is no question of the second party's right to it; or is it to be treated as having been a payment of capital, in which case there is equally no doubt that the third party should prevail. It is obvious that this company had been very successful, and they desired to increase their capital to a large extent; the mode in which they proposed to carry that out is very clearly set forth in the case. As your Lordship has said, the proposals of the directors of the company are clearly set out in the circular letter of 6th February 1904. They begin that letter by saying that there is at the credit of the reserve fund an amount sufficient to permit them to distribute among the ordinary shareholders a bonus of 50 per cent. They then say that it is proposed to increase the capital, and they give the reason why. They state how that is to be done. They propose that the capital of the company should be increased by the creation of 20,000 second preference shares of £12, 10s. each, and by £400,000 of debenture stock; and then they say, it is, however, necessary at present to issue only one-half of each class. Now, the question arises about this issue of 10,000 preference shares. It is said that the capital represented by the intended present issue of second preference shares will be £125,000, and equals the total of the bonus of 50 per cent on the ordinary capital. They then say—“The bonus payable to each shareholder will therefore enable him to meet the price of the preference shares to be offered to him. It is proposed to ask the shareholders to apply for their pro rata proportion of these second preference shares simultaneously with the payment of the bonus.” There is no doubt therefore as to the company desiring to increase their capital, ana as to the mode in which they proposed to carry that out. In carrying it out they passed the requisite resolutions setting out the conditions on which such shares should be issued. That was not the creation of fully paid-up shares, which was a mode in which they might have increased their capital if they had thought that the best way. But that was not the way they took. The way they took was this. They had the undisputed right to pay a dividend put of the reserved fund, and they took £125,000 for that purpose, and so having increased their capital by the creation of £125,000 of shares, they send out a circular letter informing the shareholders of this, and say that the directors had resolved to distribute a bonus as mentioned, and that the warrant would be posted on 13th May next. That is the history so far of this matter relating to the bonus. From the notice in the dividend warrant sent out on 13th May it is stated that the dividend was declared on 30th March, and following that out they passed the requisite resolutions declaring a dividend of 50 per cent on the share capital. Now, ex facie of that proceeding that appears to me to be a declaration—a perfectly valid declaration—of a dividend of 50 per cent. per share. There is no question of their power to do so, because as your Lordship pointed out they have special power to pay a dividend out of the reserve fund if they so pleased. That was not a bogus arrangement, because it is perfectly clear that having declared a bonus payable on 13th May 1904, they sent the amount of the bonus due to each shareholder of the company who was entitled to it. They sent to each of them and made actual payment of the bonus to each of the shareholders. It humbly appears to me that unless there is something to render that proceeding invalid or to show that that proceeding should not be carried out, that that is a declaration of a bonus. Now, what is said is that that should not be. It is said that the directors intended to increase their capital. There is no doubt that is so. I have no doubt by making payment of the bonus and payment of the allotted shares simultaneous that they hoped and expected that the shareholders would consent and agree to take up the allotted shares. But the question occurs to me, where is there anything illegal in that—where is there anything to render it invalid. The shareholders were perfectly free to do as they liked in that matter—they had the matter in their own hands. They might have gone to the bank next day and got the money in exchange for the dividend warrant. There was no obligation upon them to take the shares. It is perfectly true that they got notice in the circular letter of 6th April that the directors proposed to increase the capital, and they enclosed an application form, and they told them that the application must be returned by 2nd May next. That was before the dividend was actually paid. What were the consequences if they refused to take up the application? Not that they were not to get the dividend, but that they would be held to have forfeited any right to an allotment. There is nothing in that that I can see to render the thing invalid. I agree with your Lordship that each case must turn upon its own facts, and looking to the actual facts in this case, and to what the directors did, I see no reason to suppose that this was not a valid declaration of dividend. The directors might have increased their capital by the issue of fully paid-up shares, but for good reasons of their own they did not take that course. Possibly they thought that a number of shareholders might think they had shares enough. However that may be, I see nothing in the course they took to make the declaration of the dividend not a valid one. For these reasons I agree with your Lordship, and I think the question should be answered accordingly.

Lord Kinnear—I have had some difficulty in this case, because I think if we could look at all the probabilities there might be a great deal of force in Mr Blackburn's argument that the substance of this transaction was intended to be, and was, to convert the undivided profits into paid-up capital upon newly created shares. But then we are not only not at liberty to speculate upon the probabilities, which is always a hazardous process, but I think we are precluded by the form of process adopted by the parties even from drawing inferences of fact from the facts stated by the parties themselves, because this question is before us in the form of a special case, and by statute that is competent only when the parties interested in the question of law are agreed upon the facts and dispute only upon the law. And accordingly we are in the habit of taking, and I think we are bound to take, the statement of facts upon which the parties are agreed, not only as an exact and accurate statement but as an exhaustive statement of all the facts which by the contract of parties are to be deemed to be relevant, and are to be taken into account in the consideration of the question of law. Now, upon the question of law which arises in the case, I think the principle must be taken as finally decided in the words which your Lordship in the chair quoted from Lord Justice Fry, because the learned Judge's statement of principle has been cited and approved by the House of Lords in the case of Bouch v. Sproule. And it comes to this, that when a testator directs that part of his estate shall remain as shares or stocks in a company which has power either to distribute its profits as dividend or to convert them into capital, and the company validly exercises this power, such exercise of power by the company is binding upon all persons interested in it, and consequently what is paid as dividend by the company goes to the liferenter, and what is appropriated as increased capital goes to the persons interested in the capital. That is the doctrine of law upon which the question put to us must be decided. The only further question of law which might be raised upon that statement, and was raised by Mr Blackburn, was whether that doctrine could apply to profits accumulated during the lifetime of the testator, and therefore accumulated before the liferent interest created by his will had begun. But then I think that difficulty is met by Lord Watson in the case of Bouch v. Sproule. He says that the rule must obtain Whether the profits with which the company is dealing belong to the current year, or have been previously reserved for the purposes of the company's business. The question therefore between the parties appears to me to resolve, the moment the law has been ascertained, as I think it is by this authoritative statement, into a mere question of fact. Whether the accumulated pro—its in question have been paid as dividend, or whether they have been converted into paid-up capital upon newly created shares—upon that question of fact I have come to agree with your Lordships, for the reasons which have been already stated, and which I do not think it necessary to repeat. I only observe what appears to me to be conclusive on the one side, and that is that the company did pay in money, or in what is equivalent to money, the £550 now in question as dividend upon existing shares. They issued to the shareholders a dividend warrant in perfectly clear and explicit terms, which is equivalent to a cheque, which could have been taken to the bank, and upon which the money must have been recovered. All that is equivalent to paying a dividend in money. It appears to me, therefore, that it is established by the agreement of parties as to the facts that the company did in fact pay this sum of £550 as dividend. Now, the argument upon the other side came to this, that notwithstanding that payment it must be held that in substance the transaction was the conversion of the profits into capital upon two main grounds. In the first place, Mr Blackburn said these accumulated profits were de facto part of the floating capital of the company, because they were used as part of the capital from the time when the profits were first reserved for the purposes of the company's business. Secondly, he said that it was known to the company, and was apparently found in fact, that no shareholder would refuse his shares and prefer to take the money as dividend, and in point of fact probably no shareholder did. Now, these are considerations of fact which might or might not have weight if we were balancing equally well proved facts against one another, but the observation I make upon them is, that they are not to be found in the special case. They are statements of fact only, and I decline to draw from what is stated any inference to the effect that the undivided profits were used as part of the floating capital of the company. That may or may not be, but it is a matter of fact, which, if either of the parties intended to found upon it, it was necessary to put to the other party and obtain his agreement to its being stated. Therefore I think we must exclude from consideration all argument based upon inferences of fact which are not to be found in the special case itself. We know nothing except what is set forth in explicit terms by the parties themselves. From what is so set forth I can gather nothing except that this £550 in dispute was paid as dividend, and therefore it belongs to the party having interest in the dividend accruing to the shareholders, and not to the party interested in the capital stock of the company.

Lord M'Laren was absent.