United Kingdom House of Lords Decisions

The practice of the High Court of Justice in England has not been uniform. Some judges have dispensed altogether with such proof as not being essential to the exercise of the jurisdiction of the Court. Others have insisted on the production of some evidence on the point. My own practice was to insist on prima facie evidence of the existence of the state of facts referred to in the resolution. If no such prima facie evidence were forthcoming it might well be that the special resolution had been passed under the influence of some mistake or misrepresentation as to the true facts, and it would be unfair to the minority if not also to the majority of the shareholders to confirm a reduction voted under such circumstances. Further, inability to produce some such evidence might well suggest want of bona fides in the matter. If capital not really lost or unrepresented by available assets were cancelled, it might be possible thereafter, by some adjustment of the figures in the company's balance sheet, to carry the amount so cancelled to profit and loss account, and so indirectly return paid-up capital to shareholders, thus affecting the rights of creditors. I still think, therefore, that where the reduction of capital is based on the ground that capital has been lost or is unrepresented by available assets, it is, though not necessary, at any rate wise and prudent to insist on some evidence of the fact.

The resolution in the present case proposed a reduction of £12,500 in the company's capital, based on the fact that this amount of capital had been lost or was unrepresented by available assets. The company's last balance sheet, that of 27th September 1913, showed a surplus of assets over liabilities amounting to £1885 odd, but in such balance sheet the goodwill of the business was valued at £9163 odd. Moreover, the company's business had been recently brought to a standstill by an extensive fire, and it would be some time before its buildings and machinery would be restored to working order. Further, the buildings and machinery in question were brought into the balance sheet at values arrived at by deducting the amounts received under policies of fire insurance from the values at which they appeared in the last preceding balance sheet. Having regard to the effect of prolonged cessation of business upon the value, if any, of the goodwill, and to the fact that the amount of the actual loss by a fire is seldom, if ever, covered by the amounts recovered under policies of insurance, I think that there was strong prima facie evidence that at least £12,500 of the company's capital had been lost or was unrepresented by available assets, and the bona fide belief of the directors that this was so is not disputed. It appeared, however, that the company had after the fire made an attempt to raise fresh capital, and in connection with this attempt had obtained valuations of the buildings and machinery as they stood after the fire and before reinstatement.

By substituting the amounts of these valuations for the values of the buildings and machinery appearing in the balance sheet there would, even without allowing anything for goodwill, have been a balance of assets over liabilities—in other words, no capital would have been lost or be unrepresented by available assets. This was the view taken by Sir George Paul, to whom the matter was by the interlocutor of the 22nd May 1914 remitted for inquiry and report. I am not sure, however, that the view is a sound one. There is no evidence as to the instructions upon which the valuations were made or the method of valuation adopted. It is quite impossible to suppose that the valuations could have been made upon break-up prices, and half-destroyed buildings and machinery could not be used for any useful purpose without the outlay of money. What expenditure was contemplated as necessary to be incurred? Was it greater or less than the moneys received under the insurance policies? I cannot say, and it would take strong evidence to convince me that the balance sheet values were so absurdly underestimated that the value of what remained after the fire was really almost as great as the value which before the fire had been placed upon the whole. I should have asked for evidence on these points, and in default of its being produced I doubt whether I should have held that the primâ facie case arising on the balance sheet had been displaced.

When the case was heard upon Sir George Paul's report, the Court appears to have been of opinion that though it had not been proved that no capital had been lost or was unrepresented by available assets, there was no primâ facie case that any capital had been so lost or was so unrepresented.

Under these circumstances I think the more prudent course would have been to adjourn the hearing so as to give the shareholders an opportunity of reconsidering the matter and passing another special resolution with the real facts present to their minds.

The Court, however, holding that the matter was within their discretionary jurisdiction, and that (provided certain alterations for the appellant's protection were made in the articles of association) the proposed reduction was fair and equitable to all shareholders including the appellant, by their interlocutor of 25th February 1915 confirmed the reduction, but directed that it should not take effect until the articles of association had been altered in such manner as would, in the opinion of Sir George Paul, prevent the said reduction from unfairly affecting the interests of the appellant.

Since the last-mentioned interlocutor was made, and before the present appeal was presented to your Lordships, the precise respects in which the articles were to be altered for the appellant's protection were in due course determined by Sir George Paul and effected by special resolution of the company. Further, since the last-mentioned interlocutor and before this appeal to your Lordships, the company passed a special resolution that without prejudice to

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