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Scottish Court of Session Decisions |
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You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Ferguson & Forrester, Ltd v. Buchanan and Others [1920] ScotLR 152 (20 December 1920) URL: http://www.bailii.org/scot/cases/ScotCS/1920/57SLR0152.html Cite as: [1920] ScotLR 152, [1920] SLR 152 |
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Page: 152↓
The dividend rights of the share holders in a limited company were regulated by this special resolution of the company—“That out of the profits of the company, after making due provision for depreciation and reserve fund, the holders of ‘A’ preference shares shall be entitled to receive, as a first charge thereon, a cumulative preferential dividend at the rate of 8 per centum per annum on the capital for the time being paid up on such shares; the holders of ‘B’ preference shares shall be entitled to receive, as a second and postponed charge, a preferential dividend at the rate of 5 per centum per annum on the said shares; and the holders of ordinary shares shall be entitled to receive, as a third and postponed charge, a preferential dividend at the rate of 2
per centum per annum on the said shares; and the balance of profit shall be distributed as follows, viz., two-thirds thereof among the holders of ‘A’ preference shares in proportion to the amount held by them respectively, and one-third thereof among the holders of ‘B’ preference shares and ordinary shares in proportion to the amounts held by them respectively.” 1 2 Held that the holders of “B” preference shares were entitled to get not only a preferential dividend at the rate of 5 per cent. per annum on their shares in any year, but also such sum as would make up a similar dividend for each and every preceding year in which the distributable profits had not sufficed for the payment of a dividend on the “B” preference shares at the stipulated rate.
Ferguson & Forrester, Limited, Glasgow and Edinburgh, first parties; Walter Buchanan, for himself and as representing the whole body of “A” preference shareholders of the company, second party; George Prentice, for himself and as representing the whole body of “B” preference shareholders of the company, third party; and James Haddow & Company, Limited, for themselves and as representing the whole body of ordinary shareholders of the company, fourth parties, brought a Special Case to determine the dividend rights of the holders of “B” preference shares of the company.
The dividend rights of the shareholders of the company were regulated by the special resolution quoted in the rubric, which was one of a series of special resolutions passed and confirmed by the company in 1904, whereby the share capital of the company was reduced and reorganised. The reduction and reorganisation of the share capital was the result of an arrangement with creditors of the company, the company's finances having become seriously involved.
The Case stated, inter alia—“6. For some years after the reorganisation of the share capital made by the foresaid resolutions of 1904 the revenue of the company did little more than meet current expenses without leaving a sufficient margin for distribution amongst the shareholders. For some time no dividend was paid to the ‘A’ preference shareholders, and since 1904 no dividend at all has been paid to the ‘B’ preference shareholders. The arrears of dividend on the ‘A’ preference shares have now been paid up to date, and there is a substantial balance (after allowing for depreciation and reserve) at the credit of profit and loss account available for division amongst the shareholders as dividend.
The questions of law were—“1. Subject to the rights of holders of ‘A’ preference shares to receive as a first charge on the distributable profits of the company in any year a cumulative preferential dividend at the rate of 8 per centum per annum on the capital for the time being paid up on such shares, are the holders of ‘B’ preference shares entitled to receive as a second and postponed charge thereon not only a preferential dividend at the rate of 5 per centum per annum on their shares for that year, but also such sums as may be necessary to make up [ amendment made at the bar] a similar dividend for each and every preceding year in which the distributable profits had not sufficed for the payment of a dividend on the ‘B’ preference shares in preference to the rights of holders of ordinary shares to receive as a third and postponed charge a preferential dividend at the rate of 2
per centum per annum and of all other rights postponed thereto? or 2. Is the preferential dividend of 5 per centum per annum, to which the holders of ‘B’ preference shares are entitled as a second and postponed charge, payable as regards each year out of the profits of that year only?” 1 2 The first parties offered no separate contention and presented no argument. The Case stated that they were interested in having the question disposed of and would give effect to the decision of the Court.
Argued for the third party—The word “preferential” was a word of style and meant the right to have dividends at any time if a fund existed out of which they could be met. The word “cumulative” was redundant. The words “preference dividend” without adding “cumulative” bore in the absence of anything to the contrary the same meaning—Buckley on Companies Acts, 9th ed., p. 650–1; Palmer's Company Law, 10th ed., p. 84. In Foster v. Coles, 1906, W.N. 107, the words “preference dividend” were held to mean cumulative preference dividend, although on a reconstruction of the capital of the company the word “cumulative” before the word “preference” had been struck out of the memorandum and articles.
Argued for the second and fourth parties—The question was not one of the constitution
Page: 153↓
of the company but of the construction of the contract. The words “preferential dividend” merely meant that the dividend was to have priority over other dividends. The words did not mean that the dividend was to be cumulative. Where in the resolution it was intended that a dividend should be cumulative the word “cumulative” was used. Thus the 8 per cent. dividend of the A preference shareholders was expressly said to be a “cumulative preferential dividend,” and thus was contrasted with the dividend in question. If neither the constitution of the company nor any enactment conferred the right to a cumulative dividend, the presumption was that the dividend was non-cumulative— Staples v. Eastman Photographic Materials Company, [1896], 2 Ch. 303, per Kay, L.J., at 309. Partick, Billhead, and Maryhill Gas Company, Limited, v. Taylor, 1888, 15 R. 711, 25 S.L.R. 539, was different from the present case, because in that case there was no element of compromise or of contract, and no fund out of which the arrears of dividend could be paid. Henry v. The Great Northern Railway Company, 1857, 1 De G. & J. 606, was also different from the present case, because in that case the company was not a limited company, and the dividend was not payable out of a separate fund, and the dividend was called “interest or preference dividend.” In Miln v. Arizona Copper Company, Limited, 1899, 1 F. 935, 36 S.L.R. 741, Lord M'Laren's observations on the meaning of the words “a preferential dividend” were obiter only.
The decision of this case depends entirely upon the construction of the fifth head of the special resolutions. By these special resolutions certain changes were made on the articles of association of the company, and particularly as to the distribution of capital and the dividend to be allowed thereon.
The clause itself begins with words that seem to me to be of general application, at any rate until you come down to where the “balance of profit” is disposed of, these introductory words being “that out of the profits of the company, after making due provision for depreciation and reserve fund,” certain payments ars to be made to the holders of “A” preference shares, to the holders of “B” preference shares, and to the holders of ordinary shares. Now I cannot read these words “out of the profits of the company”—as meaning anything else than that the profits there mentioned are the whole profits of the company. The language is in marked contrast to the language which was used in the case which Mr Mackay founded on—“out of the net profits of each year”; and in the Scottish case of Miln v. Arizona ( 1899, 1 F. 935, 36 S.L.R. 741) the words were just the same—“to receive out of the profits of each year.” It is quite recognised in company law and company documents that there is a very material and well-recog nised difference between providing that dividends are to be paid “out of the profits of the company” and to be paid “out of the profits of each year of the company.” And I agree with the argument of Mr Macmillan on this point that text-writers such as Palmer and Buckley are useful as guides as to the meaning of terms, which Mr Mackay quite readily agreed are in ordinary use, as well as of terms which have become terms of art in this particular branch of law or business having to do with joint-stock companies.
I notice that what I think is the result of both Sir Francis Palmer's views and those of Lord Wrenbury is stated thus in Stroud's Dictionary under the word “cumulative”—“A preference dividend is prima facie cumulative, so that failure of profits wherewith to pay it in any one year will be made good out of any profits that may be made in a subsequent year.” As is pointed out, however, if there is room for doubt, the doubt may be removed by the addition of the word “cumulative.” But it seems to me that a “preference dividend out of profits” implies a “preference dividend out of the whole profits” and not merely a “preference dividend out of the profits for one year.” And that view is further strengthened when one sees the form in which the language of this article characterises the dividend. The description is that so far as the holders of the “A” preference shares are concerned they are “to receive, as a first charge thereon”—that is to say, on the whole profits of the company—“a cumulative preferential dividend.” And then the “B” preference shareholders similarly get not merely a dividend but they get a “charge”—no doubt “a second and postponed charge,” but still a “charge”—on the profits for a preferential dividend at the rate of 5 per cent. per annum. It seems to me that that necessarily means, when you look at the structure of the article, a charge upon the same whole profits for a preferential dividend. And similar language is used with regard to the payment of the fixed dividend to the ordinary shareholders—it is to be a charge upon these profits, that language being made more pointed by the fact that it is plainly contemplated that these charges and preferential dividends may not, and probably will not, exhaust the whole profits, because there is a riding clause at the end disposing of the balance of profit which is to be distributed, two-thirds thereof among the holders of “A” preference shares and one-third thereof to the holders of “B” preference shares and ordinary shares, but this for obvious reasons is not made a charge.
Now, reading that clause as a whole, it seems to me that the “A” preference shareholders, the “B” preference shareholders, and the ordinary shareholders so far as their fixed dividends are concerned, are given a charge on the profits which entitles them to get out of the profits, whether they were for the year actually in question or for any subsequent year, what would make their dividends, under the heads I have been dealing with, preferential dividends
Page: 154↓
But there is the point which Mr Mackay founded on very strongly in this respect, that as regards the holders of the “A” preference shares their dividend is described as being “a cumulative preferential dividend,” whereas the word “cumulative” is not repeated as regards the preference dividend of the “B” shareholders nor as regards the 2
Of the authorities cited to us there was none exactly in point, but two of them come near to the present case. I refer particularly to the case of the Partick, Hillhead, and Maryhill Gas Company Limited v. Taylor, 1888, 15 R. 711, at p. 713, 25 S.L.R. 539. There was a distinction taken there between certain of the dividends in respect that one of them was declared to be a charge for dividend for the year and “all arrears,” whereas these words did not occur as regards certain of the other dividends; and it was urged, therefore, that dividends where the words did not occur were not to be cumulative. But the Lord President there said this—“The fourth rule is this—‘In payment to the preferential shareholders, if any, of their dividends according to their respective priority.’ With regard to that rule it is said that the words ‘all arrears’ which occur in rule 1 are omitted, and it is therefore contended that the directors are not entitled to pay arrears of these dividends. I think that it is far too strict, I may say too fanciful, a construction of the rule. If the rights of preference shareholders are such as I have stated them to be I cannot think they can be cut off by any such construction of the articles of association.” And, accordingly, the omission of these words in regard to the dividend to one set of shares was not held sufficient to deprive them of their preferential character so as to make them non-cumulative.
In the same way, in the case of Foster v. Coles, 1906, W. N. 107, to which Mr Macmillan referred, there is an indication that even alterations on the articles of association such as occurred in that case will not take away the right of preferential shareholders to get arrears of dividends. In that case the dividend was originally declared to be a cumulative preference dividend. In a subsequently amended set of articles the word “cumulative” was struck out, and it was simply left to be a “preference dividend.” But it was held that although that change had been effected it made no difference as regards the cumulative character of the right, the learned Judge saying that the preference shareholders were entitled to have any deficiency in their dividends made up out of the profits of subsequent years.
The result is therefore that in my opinion the 5th article of the special resolutions is so expressed that the “A” shareholders and the “B” shareholders and the ordinary shareholders, so far as their fixed return of 8 per cent., 5 per cent., and 2
Accordingly I am of opinion that we cannot read this 5th article as the “A” shareholders desire us to read it—as restricting the “B” and ordinary shareholders so far as their fixed dividend is concerned to getting it out of the profits of each year only, to use the language of the alternative question put to us. I think the legal view of the provision is expressed in the first alternative of the question which is submitted to us—that the “B” shareholders are entitled to get “not only a preferential dividend at the rate of 5 per cent. per annum on their shares for that year, but also such sum as will make up a similar dividend for each and every preceding year in which the distributable profits had not sufficed for the payment of a dividend on the ‘B’ preference shares” at the stipulated rate.
I am therefore of opinion that we should answer the first alternative in the affirmative and the second alternative in the negative.
In the resolution before us, in the case of the “A” shareholders both words are used and mistake is prevented. In the case of the “B” shareholders the word “preferential” alone is used, and it is argued that this imports a simple and not a cumulative preference.
I am not prepared to deduce this result from the mere omission of the word “cumulative.” I think the unexplained omission of the word, in itself unnecessary, although it does cause perplexity, should not lead us to derogate from the usual meaning of the
Page: 155↓
As regards the reported cases I agree with what the Lord Justice-Clerk has said.
I think Mr Macmillan effectually displaced that view by pointing out that without giving them what they ask in this case their action still receives very important recognition, because they have under article 5 a first charge and 8 per cent. as against 5 per cent. and 2
I think therefore that the case must be treated as your Lordships have treated it—as a pure question of construction without aid from presumptions. So treating the case, I am of opinion that the unexplained insertion of the word “cumulative” in one clause and not in two others is not sufficient to displace the prima facie meaning and the effect of the word “preferential,” and I agree that this result is materially aided by the opening words of the 5th article.
The Court answered the first question of law as amended at the bar in the affirmative, and the second, the alternative question, in the negative.
Counsel for the First Parties— Paton. Agents— J. W. & J. Mackenzie, W.S.
Counsel for the Second and Fourth Parties— Mackay. Agents— J. W. & J. Mackenzie, W.S.
Counsel for the Third Party— Macmillan, K.C.— Fleming. Agents— R. Addison Smith & Company, W.S,
