Scottish Court of Session Decisions

In July 1908 the Scottish Queensland Mortgage Company, Limited, presented a petition to the Court under section 2 of the Joint Stock Companies Arrangement Act 1870, section 24 of the Companies Act 1900, and section 38 of the Companies Act 1907, for sanction of a proposed scheme for reduction of capital, the ultimate object of the company being to wind up its affairs and divide its assets among its members. There were no outside creditors.

The petition stated—“The capital of the company was £500,000, divided into 100,000 shares of £5 each. Of the said shares, 35,000 were subscribed and £2 each called up thereon, of which 4668 were afterwards forfeited on account of failure of the holders to pay the calls, or a portion thereof, leaving the amount of shares subscribed and outstanding 30,332, upon which there was paid up £60,664. On the shares forfeited as aforesaid the sum of £4037, 2s. 11d. was paid up.

In terms of the powers conferred upon them by article 24 of the articles of association of the company, the directors received from various members moneys due upon the shares held by them beyond the sums actually called up. The total amount so received was £18,709.

In terms of the memorandum and articles of association, the company borrowed money on debenture to an amount not exceeding the uncalled capital for the time being. For a considerable number of years the company was successful, but some years ago, owing to the financial conditions in Australia, it was considered undesirable to continue the business of the company, and accordingly a policy of realisation of the company's assets was adopted, and the whole sums borrowed by the company on debenture were in due course repaid. In further pursuance of that policy the directors thereafter repaid the said sum of £18,709 (with the exception of £12, which has been placed on deposit-receipt pending production of title) received from members in advance of calls, with all interest due thereon, and the directors are of opinion that it is desirable in the interests of the company that the remaining assets should be judiciously realised, the proceeds distributed among the shareholders, and the company ultimately liquidated. The directors are of opinion that a gradual realisation will produce sufficient to repay at least 16s. per share, and it is desirable that 24s. per share should

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be written off by a reduction of the capital to that extent.

The company have funds in hand at the present time equal to about 3s. per share, and, with the view of distributing this sum, and the further proceeds of realisations, among the shareholders as quickly and economically as practicable, the directors have proposed that an arrangement should be entered into between the shareholders and the company, in terms of a scheme, of which the salient provisions are shortly as follows:—That the capital of the company should be reduced to 30,332 shares of £1 each of 1s. paid up. That such reduction should be effected by—( a) Cancelling and extinguishing 69,668 shares of the capital of the company of £5 each, which by reason of nonissue, forfeiture, or otherwise, are no longer outstanding. ( b) Confirming the repayment of £18,709 paid up by various shareholders in advance of calls. ( c) Reducing each of the £30,332 shares of £5 each, £2 paid, issued and outstanding, to £1 shares, 1s. paid, such reduction to be effected (1) by returning to the holders of said shares capital to the extent of 15s. per share (whereof 3s. will be paid in cash, and 12s. by the allotment of debenture stock), (2) by cancelling paid-up capital on the said shares to the extent of £1, 4s. per share, and (3) by extinguishing the liability in respect of uncalled capital on the said shares to the extent of £2, 1s.

Upon the scheme becoming effective, and the requisite authority obtained for the reduction of the capital in terms thereof, it is provided that the shareholders should in respect of the 15s. per share to be repaid to them in terms of the scheme, accept in satisfaction and full discharge thereof 3s. per share in cash and 12s. per share in non-interest-bearing debenture stock, the company having right to redeem such debenture stock at any time upon giving thirty days' notice of their intention so to do, such redemption to be either by purchase on the market or by tender, at a price not exceeding par, or by pro rata payments.”

The Court sanctioned the scheme, and the company thereafter passed a special resolution reducing its capital in accordance therewith.

In September the company presented the present petition for confirmation of reduction of capital.

The petition was remitted to Mr Charles Young, W.S., to report.

In the course of his report he stated—“The reporter has some difficulty as to whether the proposed reduction of capital is one which your Lordships can competently be asked to grant, and he lays the matter before your Lordships for consideration.

Under head ( b) of the proposal your Lordships are asked to confirm the repayment to various members of a sum of £18,709 paid up by them in advance of calls. It would appear that such a repayment made by directors at their own hand is irregular, and while several cases are referred to in Sir Francis Palmer's Company Precedents, 9th ed., vol. i, p. 964, in which the English Courts have ratified such repayment, the reporter has been unable to find any case in which the Scotch Courts have done so. The only analogous case to this would appear to be where trustees had at their own hand done an act which would under the Trusts Acts require the sanction of the Court. The Court has never been in the habit of confirming such, as the Trusts Acts lay down the procedure to be followed, which is, that the sanction of the Court shall be got before the act is done. It seems doubtful even whether directors may repay money paid to them in advance of calls without first going through the process of reducing capital. In the present case they have already repaid the money, and now ask your Lordships to confirm their act. The question here is, however, somewhat complicated by the fact that, in approving of the scheme submitted to the Court in the petition which was before your Lordships in July, this repayment has already been confirmed before the petition to reduce capital came into existence. Under head ( c) of the above proposal it is intended that the directors shall issue debentures for 12s. of the amount proposed to be repaid to the shareholders, and the question which arises here is whether this is a true reduction of capital in terms of the Companies Acts. There is no doubt that a company may reduce capital by repayment to the shareholders of capital in excess of the wants of the company, and borrow a similar amount ( Nixon's Navigation Company, 1897, 1 Ch. 872). In that case the company had been prosperous, and were continuing business. In this case, however, the reduction is proposed on account of loss, and as a means of distributing assets. For this purpose the reporter does not see that the company is any better off as regards the 12s. of its capital which it is proposed to reduce if they incur liability for debentures for that amount.

The simpler plan would be if the company were judiciously liquidated, and the petition sets forth that this is the only object the company now has in view. The reporter knows of no case where such a course as the one proposed here has been pursued in Scotland. In England, where a company had ceased to carry on business, and the only object was to divide the assets, the Court held that it was not a proper reduction of capital as contemplated by the Acts, and refused the petition ( Wallasey Brick Company, 1894, 70 L.T. 870.) It is, therefore, for your Lordships to consider whether this is a reduction of capital as contemplated by the Companies Acts, or whether the same object would not be more properly attained by a winding-up or liquidation of the company. It must, however, be borne in mind that the proposed reduction of capital is a part of the Scheme of Arrangement which on 17th July 1908 your Lordships approved of in the previous petition.

If your Lordships take the view that this is a proper reduction of capital in terms

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of the Companies Acts, and that the repayment of the £18,709 already made by the directors is one which may be confirmed, the reporter has found the procedure for reducing capital regular and proper, and in conformity with the Companies Acts.”

Counsel for the petitioners moved the Court to grant the prayer of the petition, submitting that there was no foundation for the reporter's objections. He cited the additional authority Poole v. National Bank of China, [1907] AC 229.