Scottish Court of Session Decisions

William T. Wilkinson, residing at 119 Plantation Street, Accrington, complainer, presented a note of suspension and interdict against the City of Glasgow Friendly Society, which was registered under the Friendly Societies Acts and had its registered

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office in Glasgow, and against Robert Pirie, M.D., Glasgow, and others, the trustees thereof, respondents. The complainer craved the Court to interdict the respondents “from carrying into effect a pretended resolution of said Society …. purporting to convert the said Society into a company limited by shares and by guarantee under the Companies (Consolidation) Act 1908, by the name of The Glasgow City and General Insurance Company, Limited, or under any other name …”

The complainer pleaded—“(1) The proceedings complained of being illegal, ultra vires, and injurious to the complainer, interdict should be granted as craved with expenses. (2) The defences are irrelevant and should be repelled, and interdict granted in terms of the prayer of the note.

The respondents pleaded—“(2) The proceedings taken by the Society being legal and valid, the note should be refused.”

At a meeting of the delegates of the said Society, held in Glasgow on 6th April 1910, a special resolution that the Society be converted, in pursuance of section 71 of the Friendly Societies Act 1896, into a company limited by shares and by guarantee under the Companies (Consolidation) Act 1908, by the name of the Glasgow City and General Insurance Company, Limited, and that the memorandum and articles of association then before the meeting, and which for the purposes of identification were endorsed with the signature of the chairman, be adopted as the memorandum and articles of association of the company, was passed. A meeting of the delegates confirmed the resolution upon 23d April 1910.

The Rules of the City of Glasgow Friendly Society contained, inter alia, the following provision—“The objects of the Society are to provide by the voluntary subscriptions of the members funds for insuring money to be paid on the death of a member, or on his attainment of a specified age, or for the funeral expenses of the child of a member, or for the endowment of members or nominees of members at any age, or for the relief and maintenance in sickness of members at present insured under previous tables. The gross sum insured on each life shall not exceed £200.” Provision for representation by delegates was made in Rule IV (1), quoted in the rubric.

The Rules provided for voluntary dissolution thus—“No voluntary dissolution can be effected except by the consent of five-sixths in value of the members (includ-inghonorary members) so testifying by their signatures to an instrument of dissolution in the form provided by the Treasury regulations in their behalf, and also by the written consent of every person for the time being receiving or entitled to receive any relief or benefit from the funds of the Society, unless the claim of such person has been fully satisfied, or adequate provision made for satisfying such claim. The value of members to be ascertained by giving one vote to every member, and an additional vote for every five years that he has been a member, but to no one member more than five votes on the whole.”

It was also provided that the surplus of assets over liabilities might be allotted by way of bonus amongst members whose membership exceeded five years' standing, and who were over sixteen years of age, but that the bonus must be given in the form of additions to the benefits, and no bonus was to be allotted except to whole-life assurances or endowment assurances.

Further references to the Rules will be found in the opinions of the Lord Ordinary and the Court ( infra).

The memorandum of association of the proposed new company contained, inter alia, the following provisions—“III. The objects for which the company is established are—-To continue, carry on, and develop such parts of the business heretofore carried on, or which might have been carried on, by the City of Glasgow Friendly Society, registered under the Friendly Societies Acts on or about 27th September 1862, and now converted into this company, as are hereinafter mentioned, viz., To insure money not exceeding £300 to be paid on the death of a member, or to a member at a specified date, or to insure money for the funeral expenses of the husband, wife, child, parent, grandparent, grandchild, brother, or sister, of a member, and also to take over and manage all the funds and assets of the said Society; to perform and carry out all its obligations, and to do all such other things as are incidental or conduciye to the attainment of the above objects.… VI. The share capital of the company shall consist of £30,000, divided into 600,000 shares of one shilling each, and all the profits of the company shall belong to the shareholders, without prejudice to the company declaring a bonus in terms of the articles of association. Every person who was a member of the said Society at the date of the registration of this company, and who was not qualified at said date to receive a bonus in terms of the rules of the Society, shall be entitled on application to the directors to receive one fully-paid share, and each of said members who was at said date qualified to receive a bonus shall be entitled to two fully-paid shares. These shares shall be called A shares. A person entitled to an A share may transfer his right by nominating a member of the company to receive the share, but neither he nor his nominee shall have right to transfer the share or vote or receive a dividend in respect of it unless the premiums paid by the holder to the Society amounted to at least five shillings, or until the premiums paid by him partly to the Society and partly to the company shall amount to that sum. The remaining shares shall be called B shares, and shall not be offered to the public for subscription. They shall be issued for subscription by those persons above sixteen years of age who were members of the said Society at the date of the registration of this company, and who have paid premiums amounting to at

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least five shillings either to the said Society or partly to the Society and partly to the company. The B shares shall be divisible equally amongst the applicants or their nominees, and in the event of there being a number of shares which cannot be divided equally, these shares shall be balloted for as may be arranged by the board of directors. Nominees must be persons qualified as above mentioned to apply for B shares. At the first allotment of these shares no person shall be allotted more than six thousand, and the company shall be bound to register all transfers of shares to persons who were members of the said Society at the date of registration of this company, or to the Staff Association, Limited, incorporated under the Companies (Consolidation) Act 1908. VII. In carrying on the company's business the following fundamental conditions shall be observed, and may be enforced by any one having interest—(1) The policies and all other contracts, agreements, engagements, and undertakings of the said Society shall be implemented by this company. (2) Subject to the provisions of this memorandum, of the articles of association, and of any contract, all officials and employees of the said Society shall hold corresponding positions in this company with the same emoluments. (3) The remuneration of agents and collectors who were in office at the date of the registration of this company, as well as their nominees and their successors in all time coming, shall be at the rate of … [certain percentages] … (24) The persons who were members of the said Society and members of its staff at the date of the registration of this company shall be entitled to appoint one director of this company, who shall hold office during the pleasure of the said staff.… The following are the names and addresses of the members of the said staff:—… [ Here follow signatures.] … (25) The delegates and the members of the board of management of the said Society shall be entitled to compensation for loss of office as the same shall be ascertained on actuarial principles.… (26) The provisions in article 14 of the annexed articles of association are held as repeated brevitatis causa.”

Article 14 of the articles of association provides—“14. The agents and collectors shall deliver to the persons who were members of the City of Glasgow Friendly Society at the date of the registration of this company a copy of the company's prospectus with forms of application for shares, give the said members assistance in filling up forms, forward to the head office all applications which they may receive, deliver share certificates, obtain receipts, write up a register of shareholders under their charge in books provided for the purpose, collect the shareholders' contributions to the share capital weekly or otherwise as may be arranged, and in general do everything they may be required to do to carry out the conversion and obtain the necessary capital. For their labour and trouble in connection with these matters, and for obtaining the consent of the members of the said Society to the conversion, if necessary, a special remuneration equal to twenty-one per cent. of the nominal capital of the company shall be distributed out of the capital produced by the issue of the B shares amongst the agents and collectors in proportion to their average weekly collections, the average to be ascertained by taking a period of six months immediately preceding a date to be fixed by the directors for this purpose. For their labours in connection with the conversion a special remuneration equal to three per cent. of the nominal capital of the company shall be distributed out of the capital produced by the issue of the B shares in such proportion as the directors shall determine amongst all the members of the staff, including the agents and superintendent of agents, but excluding the manager, secretary, and collectors; and for their labours in connection with the conversion a special remuneration equal to three per cent. of the nominal capital of the company shall be paid out of the capital produced by the issue of the B shares to the manager and secretary in proportion to their salaries.”

The complainer, inter alia, averred—“The said resolution was not part of the management of the Society for which said delegates were appointed, in respect that it provides for the transfer of the business, assets, and liabilities of the Society to the said proposed company, and was accordingly ultra vires of the said delegates.… It is believed and averred that the assets of the Society are worth £300,000 and its invested funds amount to £269,720. The transfer price is quite inadequate.… The Staff Association Limited will become vested in proportion to its holding in the aforesaid assets and invested funds of the said Society, which at present belong entirely to the members thereof. Equal facilities and privileges are not conferred by the said articles and memorandum of association on the members of the said Society. The result of the provisions aforesaid is that the Society ceases to be as heretofore a mutual benefit association as provided by the rules.… By article 14 of the said articles of association a sum equal to 27 per cent. of the capital of the proposed company is to be distributed amongst the agents, collectors, members of the staff, and manager and secretary, for their labours in connection with the conversion, and in the case of the agents and collectors for obtaining the consent of the members of the Society to the said conversion, which the complainer maintains is illegal and ultra vires of any official. The members should be convened and give their consent to the conversion when the details of the scheme have been fully put before them. £8100 of the inadequate share capital of the proposed company is thus to be distributed amongst these officials, leaving only £21,900 as the true price of the said Society's assets. The Society is thus not carrying out its mutual benefit scheme, and is giving away its assets to persons who are not members.

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The provisions of article 14 are accordingly ultra vires.”

On 15th June 1910 the Lord Ordinary ( Skerrington) pronounced this interlocutor—“. . The Lord Ordinary … sustains the first and second pleas-in-law stated for the complainer, suspends the proceedings complained of, and interdicts, prohibits, and discharges the respondents the City of Glasgow Friendly Society, and Robert Pirie [and others] as trustees of the said the City of Glasgow Friendly Society, and any person authorised by them, from carrying into effect a pretended resolution of said Society passed on 6th April 1910 and confirmed on 23rd April 1910, purporting to convert the said Society into a company limited by shares and by guarantee under the Companies (Consolidation) Act 1908, by the name of The Glasgow City and General Insurance Company, Limited, or under any other name.…”

Opinion.—“The complainer is a policyholder in and a member of the City of Glasgow Friendly Society. He asks to have the Society and its trustees interdicted from carrying into effect a pretended resolution of said Society passed on 6th April, and which it was proposed to confirm at a meeting called for 23rd April 1910, purporting to convert the said Society into a limited company under the Companies (Consolidation) Act 1908, by the name of the Glasgow City and General Insurance Company, Limited. On the day before the confirmatory meeting the Lord Ordinary on the Bills refused interim interdict hoc statu in respect of an undertaking given by the respondent's counsel, that they would not carry into effect any resolutions that might be passed at the meeting called for 23rd April. When the case came before me in the procedure roll the complainer's counsel moved for interim interdict upon the ground that this undertaking had been broken. It now appears that this motion was based upon a complete misapprehension as to the actual facts, and that there was no breach of the judicial undertaking.

“The first ground upon which the complainer maintains that the proposed conversion is illegal is that the special resolution authorising it was passed and confirmed at meetings of delegates of the Society and not at meetings of members. Section 71 of the Friendly Societies Act 1896 (59 and 60 Vict. cap. 25) authorises a registered society by special resolution to convert itself into a company under the Companies Acts. Section 74 defines how a special resolution may be passed and confirmed at ‘general meetings.’ Section 106 (the definition clause) enacts that ‘the expression “meeting” shall include (where the rules of a society or branch so allow) a meeting of delegates appointed by members.’ Rule 4 (1) of the Society in question provides that ‘to enable members to arrange for the management of the Society they shall be represented by delegates, and annual general meetings and special meetings of the Society for that purpose shall consist of meetings of delegates elected as hereinafter provided.’ Prima facie the special resolution for the conversion of the Society was regular in respect that it was passed and confirmed at meetings of delegates to whom the management is entrusted by its rules. The complainer's counsel argued that the word ‘management’ as used in the rules meant ordinary management, and that the conversion of the Society into a limited company was an act of extraordinary administration. I can find nothing in the rules to support the view that acts of extraordinary administration must be dealt with at meetings of members as distinguished from meetings of delegates.…

The next question is whether the step which the respondents propose to take is a ‘conversion’ within the meaning of section 71 of the Act of 1896, or whether it is not designed to accomplish at the same time other and wider purposes which are outside the purview of the Act. It has been decided by the Court of Appeal in England that the procedure contemplated by the statute is a mere matter of machinery by which a friendly society may become a different legal entity having objects identical with its objects as formerly prescribed by its rules and the Friendly Societies Act; though, of course, when once converted, it can exercise such powers of altering or enlarging its objects as defined by its memorandum as are conferred by the Companies Act on all limited companies. Accordingly a friendly society was restrained from converting itself into a limited company with a memorandum including among its objects the transacting of general insurance business— Blyth v. Birtley, 1910, 1 Ch. 228. In the present case the third or ‘object-clause’ of the memorandum of association of the proposed new company is substantially the same as rule 1 (3) of the friendly society, except that the new company does not propose to insure its members against sickness, and that the maximum sum which it may insure upon each life is raised from £200 (the present limit) to £300. The first six clauses of the memorandum are framed in accordance with section 4 of the Companies (Consolidation) Act 1908 (8 Edw. VII, cap. 69), which applies to companies limited by guarantee and having a share capital, and with relative form (section 118 and schedule III, form C). The sixth clause states the share capital of the company at £30,000, divided into 600,000 shares of one shilling each. It further provides that every member of the Society shall be entitled to receive either one or two fully paid shares according as he is not or is qualified to receive a bonus in terms of the rules of the society at the date of the registration of the company. These shares are to be called A shares. The remaining shares (to be called B shares) are to be offered for subscription to certain of the members. These shares may be transferred to other members or to ‘The Staff Association, Limited, incorporated under the Companies (Consolidation) Act 1908.’ It is not explained what function this second proposed company is intended to perform in the carrying

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out of the conversion scheme, but one may conjecture that its object is in some way to benefit the employees or ‘staff.’

Clause 7 of the memorandum is of a novel and peculiar character. It provides that ‘in carrying on the company's business the following fundamental conditions shall be observed, and may be enforced by anyone having interest.’ Then follow 26 sub-sections, which are intended to define and fix for all time coming the remuneration, rights, and privileges of the agents and collectors and other officials of the company. By the rules of the Society (vi, 5 a) agents and collectors held their appointments ‘with the privileges and subject to all the terms and conditions specified in the rules of the Society for the time being,’ and they were entitled to ‘such remuneration as the board of management may from time to time direct.’ On the registration of the company all the officials and employees of the Society will hold corresponding positions in the company, their remuneration rights and privileges being henceforth secured by the memorandum of association, which by section 7 of the Act of 1908 cannot be altered except as expressly provided in the statute. By sub-section (3) of clause 7 of the memorandum ‘the remuneration of agents and collectors who were in office at the date of the registration of this company, as well as their nominees and their successors in all time coming, shall be at the rate’ of certain percentages of the collections together with certain fees. Sub-section (24) details the names and addresses of the members of the staff. Sub-section (25) provides ‘the delegates and the members of the board of management of the said Society shall be entitled to compensation out of the capital produced by the issue of the B shares, for loss of office as the same shall be ascertained on actuarial principles.’ Sub-section (26) holds as repeated brevitatis causa article 14 of the annexed articles of association. This article provides that for their labour and trouble in connection with the conversion ‘… [ His Lordship then quoted the article, which is given above.] …’ It follows that the company, if and when registered, will be bound to distribute a sum equal to 27 per cent. of its nominal capital, or £8100, among its officials and employees, and that this money is to be paid out of capital.

I do not need to consider whether these ‘fundamental conditions’ would or would not be binding upon the company after its registration, as it is not open to the respondents to impeach the legality and validity of their scheme. It is, however, plain enough that the promoters of the scheme are endeavouring to use the machinery of the Act of 1896 for entirely alien purposes, viz., in order to impose upon the company obligations in favour of its staff which were not incumbent on the Friendly Society, and in order to divert part of the company's capital from the ‘objects’ enumerated in the memorandum to the purposes set forth in the so-called ‘fundamental conditions.’ If these purposes are such as a limited company can lawfully accomplish by procedure either judicial or extrajudicial under the Act of 1908, the respondents can attain this end by converting the Friendly Society into a limited company and by then initiating and carrying through the requisite procedure. It is, however, out of the question for the promoters to saddle the company before it comes into existence with liabilities which it may have neither the wish nor the power to adopt as binding on itself. Though the company is to be limited by guarantee and not by shares its powers with reference to its share capital will be the same as if it was a company limited by shares—Act of 1908, sec. 56.

I accordingly sustain the complainer's first and second pleas-in-law, and grant interdict against the respondents carrying into effect the resolutions of 6th and 23rd April 1910.”

The respondents reclaimed, and argued — (1) The proceedings taken by the Society were valid. The Society was going to do nothing but modify its rules and at the same time convert itself into a company. The company was not really a new entity; there was a continuity of being between the Society and it. The members of the Society continued to be associated together, but as a company. It was admitted that the respondents were wrong if they altered their objects. But all changes that were made were changes that the Society (remaining a Friendly Society) could have made. Accordingly if the Society, first, had altered its rules and then applied for conversion, all the grounds upon which the Lord Ordinary's judgment proceeded would be gone. The Court would not interfere with the internal management of a company acting within its own powers— Foss v. Harbottle, 1843, 2 Hare 461; Burland v. Earle, [1902] AC 83 (Lord Davey at 93). The changes here were matters of management, and could not be considered ultra vires unless it could be shown that they were not incidental to the purpose of the company or that they were straight in the face of the articles of association. Gratuities to employees were not ultra vires of an ordinary limited company. The delegates ultra vires not promoters and were not being paid for getting up the company. They were being paid for doing a bit of financial work for the company, for they had the power of transferring large bodies of members, and their goodwill was worth securing. A company was entitled to do anything which the directors honestly and reasonably thought would be beneficial, i.e., good business, and which was not contrary to the constitution— Taunton v. Royal Insurance Company, 1864, 2 H. & M. 135; Simpson v. Westminster Palace Hotel Company, 1860, 8 H.L. 712 (Lord Chancellor Campbell at 717); Southall v. British Mutual Life Assurance Society, 1871, L.R., 6 Ch. App. 614; Hutton v. West Cork Railway Company, 1883, 23 Ch. D. 654 (Lord Bowen, at 672–3); Hampson v. Price's Patent Candle Company, 1876, 24 W.R. 754; Henderson v. Bank of Australasia,

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1888, 40 Ch. D. 170 (North, J.), at 181; Cyclists' Touring Club v. Hopkins, [1910] 1 Ch 179. It was laid down in Blythe v. Birtley, [1910] 1 Ch 228, that there was no interval in the change between a friendly society and a company. At the same time a friendly society could not be converted into a company without the introduction of many things that were not in the society previously. (2) By section 71 of the Friendly Societies Act 1896 ( cit. sup.) every registered society could by special resolution determine to convert itself into a company. Section 74 ( cit. sup.) laid down that a special resolution must be passed by a three-fourths majority of the members entitled under the rules to vote. Under the rules of this Society the only members entitled to vote were the delegates who had duly passed the resolution. Except in the case of dissolution and amalgamation (which closely resembled dissolution), nobody else except the delegates had any right to interfere. This Society was managed and controlled by the delegates, representatives of the shareholders, and not by the shareholders themselves.

Argued for complainer—It had been decided in England that the procedure under section 71 of the Friendly Societies Act 1896 ( cit. sup.) was mere matter of machinery, and that conversion was competent provided the objects remained unchanged— Blythe v. Birtley ( cit. sup.). The scheme in the present case was palpably ultra vires. It involved the distribution of 27 per cent. of the nominal capital among the officials. None of the cases cited had any application. They were merely illustrations of the exercise of discretionary powers by directors of limited companies. It was not disputed that in cases of going companies the directors were entitled to give gratuities to employees in order to make them and their successors work harder. Moreover, the payments in all the cases quoted were payments out of revenue and not out of capital. In the present instance they were payments out of capital— In re George Newman & Company, [1895] 1 Ch 674 (Lindley, L.J., at 686). The payments to the officials were a material element in inducing the vote that had brought about conversion, and therefore ultra vires—see Vaughan Williams (L.J.) in Kaye v. Croydon Tramways Company ( cit. sup.), at [1898] 1 Ch. 375. (2) The procedure was irregular in respect that the special resolution was carried by the votes of delegates. It was unnecessary for the Legislature to specify in section 71 ( cit. sup.) the majority by which a special resolution must be passed, in respect that before a society could be converted it must be dissolved and the provision in the rules with regard to dissolution applied, which was based on section 78 ( c) of the Act. If the rule with regard to dissolution did not apply to conversion, then there was no provision in the rules with regard to conversion. They were accordingly thrown back on the Act, which provided that a special resolution must be passed by a three-fourths' majority of members—section 74. The resolution now in question had not been so passed.

At advising—