3PLR – ANDREWS V. GAS METER COMPANY
POLICY, PRACTICE AND PUBLISHING, LAW REPORTS 3PLR
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ANDREWS
V.
GAS METER COMPANY
COURT OF APPEAL
1897 Jan. 28; Feb. 6.
3PLR/1896/1 (CA-E)
CITATIONS
[1896 A.C 525.]
BEFORE THEIR LORDSHIPS:
LINDLEY, A. L. SMITH, and RIGBY L.JJ.
REPRESENTATION
Warrington, Q.C. (Kirby with him), for the appellant:
- O. Lawrence, Q.C., and Eustace Smith, for the respondent:
Solicitors for all parties: Blyth, Dutton, Hartley AND Blyth.
MAIN ISSUES
COMPANY LAW:- Memorandum and Articles – Alteration of Articles – Increase of Capital – Preference Shares.
CAPITAL MARKET:– Increase of capital – Preference Shares
HISTORY AND SUMMARY OF FACTS
A limited company, having no authority under its memorandum or articles of association to create any preference between different classes of shares, may by special resolution alter its articles so as to authorize the directors to issue preference shares by way of increase of capital.
Hutton v. Scarborough Cliff Hotel Co., (1865) 2 Dr. AND Sm. 521, overruled.
THIS was an appeal from a decision of Kekewich J.
The action was brought for the purpose of determining the rights inter se of the shareholders of the Gas Meter Company, Limited.
The company was formed and registered as a limited company under the Companies Act, 1856; but on October 24 1862, it was registered under the Companies Act, 1862.
By the fifth clause of the company’s memorandum of association it was stated that the nominal capital of the company was “60,000l. divided into 600 shares of 100l. each, every share being sub-divisible into fifths, with power to increase the capital as provided by the articles of association.”
The original articles of association provided as follows:-
Art. 27: “The company may, with the sanction of the company previously given in general meeting, increase its capital.”
Art. 28: “Any capital raised by the creation of new shares shall be considered as part of the original capital, and shall be subject to the same provisions in all respects, whether with reference to the payment of calls or the forfeiture of shares on non-payment of calls or otherwise, as if it had been part of the original capital.”
Neither in the memorandum of association nor in the original articles of association was there any provision as to preference or priority of any class of shares.
In the year 1865 the company were desirous of purchasing a business of manufacturing meters from the administrator of one John West, and in view of such intended purchase a special resolution was passed that articles containing the following clauses should be added to the articles of association of the company:-
Art. 98: “The directors may issue by way of increase of capital 100 shares of 100l. each, fully paid up, bearing in manner hereinafter mentioned, from the 1st day of January, 1865, a preferential dividend of 5l. per share per annum, to be allotted to the administrator of John West, … in part payment of the consideration for the purchase of the premises, plant, stock-in-trade, ANDc., of the business of the said John West.”
Art. 99: “The preferential dividend of 5l. per share on the said 100 shares. … shall be payable out of the profits of the company for the current year, so far as such profits will extend and no further, and no deficiency which may in any year happen in the amount of such dividend by reason of any failure or deficiency of profits shall be a charge on the profits or assets of the company in any subsequent year.”
Art. 100: “The aforesaid 100 shares shall not entitle the holders thereof to any vote in the company, or to any participation in bonus, or to any dividend beyond 5l. per share per annum, limited as aforesaid.”
Art. 101: “…. The aforesaid 100 shares shall be considered and treated as no part of the paid-up share capital for the purpose of apportioning bonus.”
In accordance with these articles the company issued, or purported to issue, 100 preference shares to the administrator of John West.
In the year 1880 resolutions were passed under which each of the shares in the company was sub-divided into ten shares.
The existing capital of the company was 69,800l., consisting of 5980 ordinary shares of 10l. each and 1000 preference shares of 10l. each. All the preference shares were issued as fully paid up. All the existing ordinary shares were fully paid up.
The company had paid dividends of 5 per cent. per annum on the preference shares from their issue in 1865, and dividends on the ordinary shares varying between 6 and 17 per cent.
More than 35,000l. had been earned by the company, and was in fact revenue, but had been applied to capital purposes. It was contemplated to re-transfer such moneys to revenue account and distribute them among the members, and at the same time to offer to the members an equivalent amount in shares of the company at par. In consequence of such intention the question had arisen whether the preference shares issued by the company had been properly issued, and whether the holders of preference shares were entitled to any and, if any, what interest in the amount so earned; and this action was accordingly brought on April 22, 1896, by the plaintiff, who was the holder of thirty ordinary shares which he had held since September 25, 1890, against the defendant H. Finlay, who was the holder of 160 preference shares which he had held since November 16, 1882, and the company, claiming on behalf of the plaintiff and the other ordinary shareholders: (1.) A declaration that all profits of the defendant company, after providing for a preferential dividend of 5l. per cent. on the preference shares issued by the company, belonged to and ought to be equally divided between the ordinary shareholders of the company; or in the alternative, (2.) to have it determined how and in what proportion the profits of the company (after providing for a preferential dividend of 5l. per cent. on the preference shares issued by the company) ought to be divided between the holders of ordinary shares and of preference shares in the company.
The defendant Finlay was appointed by the Court to represent all the preference shareholders.
In consequence of the ordinary shares being more valuable than the preference shares, it was contended on behalf of the ordinary shareholders, first, that the preference shares were validly issued; and, secondly, that, assuming they were not, the preference shareholders were not entitled to the rights of ordinary shareholders, but that the resolution and articles relating to the preference shares ought to be read as though the word “preference” had been struck out, the effect of which would be that the holders would not be entitled to receive a dividend of more than 5 per cent. On behalf of the preference shareholders, it was contended that the company had no power to create a preference between different classes of shares, and that consequently the preference shareholders were entitled to rank as ordinary shareholders.
Kekewich J. decided, first, that he was bound by Hutton v. Scarborough Cliff Hotel Co. (1) to hold that the company had no power to issue preference shares; secondly, that the holders of such shares were not entitled to the rights of ordinary shareholders, and were not members of the company, and that their only remedy was restitution of the money which they had contributed to the company.
The defendant Finlay appealed.
Warrington, Q.C. (Kirby with him), for the appellant:
The learned judge having held that the issue of preference shares was invalid, and that the holders of such shares were not entitled to rank as ordinary shareholders, it is now contended, first, that the preference was validly created; and, secondly, that, if not, the holders are in the same position as ordinary shareholders.
Upon the first point, Kekewich J. considered himself bound by the second decision in Hutton v. Scarborough Cliff Hotel Co. (1) There the memorandum contained no reference to the articles, and the articles contained no power to create shares with special privileges. In the first case (2) Kindersley V.-C. decided that the company had no power without altering its articles to issue the unallotted portion of the original capital with a preferential dividend, and that decision was affirmed on appeal. (3) In the second case the Vice-Chancellor held that the company could not alter its articles so as to enable it to issue new shares with a preferential dividend, on the ground that such alteration was an alteration in the constitution of the company, and from that decision there was no appeal.
In Harrison v. Mexican Ry. Co. (4) Sir G. Jessel, while considering himself bound by Hutton v. Scarborough Cliff Hotel Co. (1), held that though it might be inferred from the memorandum of association, where it was silent on the subject of the terms of the original contract under which the company was formed, that all shareholders were to rank equally as regards dividend, that inference was capable of being rebutted by a clear provision in the articles if contemporaneous with the memorandum. That was followed by In re South Durham Brewery Co. (1) and In re Bridgewater Navigation Co. (2) In Guinness v. Land Corporation of Ireland (3) Cotton L.J. expressed the opinion, first, that where the memorandum of association contained conditions not required by the Act of 1862, it was to that extent capable of alteration; and, secondly, that the equality of the shareholders did not arise by implication from the construction of the memorandum, but from the law of partnership.
(1) 2 Dr. AND Sm. 521.
(2) (1865) 2 Dr. AND Sm. 514.
(3) (1865) 4 D. J. AND S. 672.
(4) (1875) L. R. 19 Eq. 358.
Finally, in British and American Trustee and Finance Corporation v. Couper (4), Lord Macnaghten said that the second decision of Kindersley V.-C. in Hutton v. Scarborough Cliff Hotel Co. (5) was not founded upon a sound view of the Act of 1862, and deliberately dissented from it.
It is submitted, first, that the reference to the articles in clause 5 of the memorandum, which empowers the company to increase its capital as provided by the articles, means the articles in force for the time being when the increase is contemplated; for the person who framed the memorandum must be taken to have known that under s. 50 of the Act of 1862 the articles were capable of modification by special resolution. Consequently the articles as altered must be read as explaining the memorandum and rebutting the presumption, if any, arising therefrom, as to the equality of the shareholders. For this proposition it is not necessary to overrule the second decision in Hutton v. Scarborough Cliff Hotel Co. (5), as explained by subsequent authorities. But further, it is submitted that that decision is wrong, and ought to be overruled, and that, even without the reference to the articles in the memorandum, the company could give itself power to issue these preference shares by a special resolution altering the articles. The essential conditions of the memorandum are stated in s. 8 of the Act of 1862, and one of those conditions is the amount of capital. But by s. 12 the company is expressly empowered to modify the conditions of the memorandum so as to increase its capital, if authorized to do so by the articles as originally framed or as altered by special resolution. Therefore, the clause in the memorandum as to the increase of capital is mere surplusage, and cannot in any view of the case be treated as importing equality between the shareholders in respect of that capital.
[Their Lordships intimated that they desired to hear counsel for the respondent on the question as to the validity of the issue of preference shares before dealing with the question as to the position of the preference shareholders, in the event of the issue being declared to be invalid.]
(1) (1885) 31 Ch. D. 261.
(2) (1888) 39 Ch. D. 1.
(3) (1882) 22 Ch. D. 349, 377.
(4) [1894] A. C. 399, 417.
(5) 2 Dr. AND Sm. 521.
- O. Lawrence, Q.C., and Eustace Smith, for the respondent:
Upon the true construction of clause 5 of the memorandum, the reference to the articles is a reference to the articles as they then stood, and the intention was to incorporate art. 28. If any increase was to be permitted, it was to be on the same footing as the original capital, i.e., on the footing of equality. Hutton v. Scarborough Cliff Hotel Co. (1) is expressly recognised as an authority in Ashbury v. Watson (2), which shews that a memorandum may contain conditions beyond those required by the statute, which are nevertheless unalterable.
The decision of the Vice-Chancellor has also been recognised in the text-books: Lindley on Companies, 5th ed. pp. 322, 334, 343, 396, 405, 597; Buckley on Companies, 6th ed. p. 182.
Warrington, Q.C., in reply.
[The question as to the position of the holders of preference shares in the event of the issue being declared to be invalid was then argued.]
MAIN JUDGMENT
Feb. 6.
LINDLEY L.J. delivered the judgment of the Court (Lindley, A. L. Smith, and Rigby L.JJ.) as follows:-
The question raised by this appeal is whether certain preference shares issued by a limited company as long ago as 1865 were validly issued or not. If they were not, a further question will arise, which is – what are the rights of their present holders? The company was formed and registered as a limited company under the Companies Act, 1856; but in October, 1862, it was registered under the Companies Act, 1862, and it is by that Act and the decisions upon it that the above questions have to be determined.
(1) 2 Dr. AND Sm. 521.
(2) (1885) 30 Ch. D. 376.
The company’s original capital as stated in its memorandum of association was “60,000l., divided into 600 shares of 100l. each, every share being sub-divisible into fifths, with power to increase the capital as provided by the articles of association.” By the articles of association which accompanied the memorandum of association, and were registered with it, power was given to the company to increase the capital (art. 27), and it was provided that any new capital should be considered as part of the original capital (art. 28). The issue of preference shares was not contemplated or authorized. In 1865 the company desired to acquire additional works, and passed a special resolution under the powers conferred by the Companies Act, 1862, ss. 50 and 51, altering the articles and authorizing the issue of 100 shares of 100l. each, fully paid, and bearing a preferential dividend of 5l. per cent. per annum. Those shares were accordingly issued to the vendors of the works referred to, and are the shares the validity of which is now in question. The company has been prosperous, and the ordinary shareholders have for years received a higher dividend than the preference shareholders. A considerable reserve has also been accumulated, and this action has been brought to determine the rights of the preference shareholders to this reserve fund. The learned judge has held that the creation of the preference shares was ultra vires, and that their holders never became and are not now shareholders in the company, and that they have none of the rights of shareholders, whether preference or ordinary. He has not, however, declared more definitely what their rights are. They have appealed from this decision; but on the appeal they only claimed to be preference shareholders entitled to a preferential dividend of 5 per cent. Their claim to any share of the reserve fund was dropped. The judgment against the validity of the preference shares is based upon the well-known case of Hutton v. Scarborough Cliff Hotel Co. (1), which came twice before Kindersley V.-C. in 1865, and which Kekewich J. very naturally held to be binding on him. Kindersley V.-C.’s first decision was that a limited company which had not issued the whole of its original capital could not issue the unallotted shares as preference shares unless authorized so to do by its memorandum of association or by its articles of association. This decision was affirmed on appeal (2), and was obviously correct; and would have been correct even if the whole of the original capital had been issued and the preference shares had been new and additional capital. The company, however, afterwards passed a special resolution altering the articles and authorizing an issue of preference shares. This raised an entirely different question, and led to the second decision. (3) The Vice-Chancellor granted an injunction restraining the issue of the preference shares, and he held distinctly that the resolution altering the articles was ultra vires. He did so upon the ground, as we understand his judgment, that there was in the memorandum of association a condition that all the shareholders should stand on an equal footing as to the receipt of dividends, and that this condition was one which could not be got rid of by a special resolution altering the articles of association under the powers conferred by ss. 50 and 51 of the Act.
(1) 2 Dr. AND Sm. 514, 521.
(2) 4 D. J. AND S. 672.
(3) 2 Dr. AND Sm. 521.
The judgment of the Vice-Chancellor is a little obscure, because he treats the condition as a condition of the constitution of the company, and he may have meant by that expression either the constitution as fixed by the memorandum of association or the constitution as fixed by the memorandum of association and the original articles. But unless he had meant the constitution of the company as fixed by the memorandum of association his decision is unintelligible; for, so far as the constitution depended on the articles, it clearly could be altered by special resolution under the powers conferred by ss. 50 and 51 of the Act. A company cannot deprive itself of this power: see Malleson v. National Insurance and Guarantee Corporation (1)and Walker v. London Tramways Co. (2) The Vice-Chancellor further seems to have been of opinion that the condition could be excluded by contemporaneous articles of association, and his decision has been so understood by succeeding judges. Accordingly, in 1875, in the case of Harrison v. Mexican Ry. Co. (3), Sir G. Jessel held that the condition of equality imported into the memorandum of association by Kindersley V.-C.’s decision was negatived by one of the articles of association filed with the memorandum, and which article authorized the creation of additional capital by the issue of new shares, “in such manner, to such amount, and with and subject to such rules, regulations, privileges, and conditions” as the company should think fit. In our opinion it is impossible to uphold this decision, or the view of Kindersley V.-C. himself, as to the effect of articles on the memorandum, if it is once conceded that it is a condition in the memorandum of association that there shall be equality amongst the shareholders. If the condition is really one of the conditions of the memorandum, it is immaterial whether the condition is express or implied. If the memorandum of association really prescribed equality amongst all the shareholders, as Kindersley V.-C. held that it did, the articles of association could not override the memorandum of association in that particular. (See s. 12 of the Act, and Ashbury Railway Carriage and Iron Co. v. Riche (4) and Guinness v. Land Corporation of Ireland. (5)) The departure thus made by Sir G. Jessel from the principle on which the Vice-Chancellor based the second decision in Hutton v. Scarborough Cliff Hotel Co. (6) was sanctioned by the Court of Appeal in 1885 in the case of In re South Durham Brewery Co. (7), and again in 1888 in In re Bridgewater Navigation Co. (8), a case which, although reversed on another point (9), was not questioned on the point now under consideration. These decisions turned upon the principle that although by s. 8 of the Act the memorandum is to state the amount of the original capital and the number of shares into which it is to be divided, yet in other respects the rights of the shareholders in respect of their shares and the terms on which additional capital may be raised are matters to be regulated by the articles of association rather than by the memorandum, and are, therefore, matters which (unless provided for by the memorandum, as in Ashbury v. Watson (1)may be determined by the company from time to time by special resolution pursuant to s. 50 of the Act.
(1) [1894] 1 Ch. 200.
(2) (1879) 12 Ch. D. 705.
(3) L. R. 19 Eq. 358.
(4) (1875) L. R. 7 H. L. 653, 667.
(5) 22 Ch. D. 349.
(6) 2 Dr. AND Sm. 521.
(7) 31 Ch. D. 261.
(8) 39 Ch. D. 1.
(9) (1889) 14 App. Cas. 525.
This view, however, clearly negatives the doctrine that there is a condition in the memorandum of association that all shareholders are to be on an equality unless the memorandum itself shews the contrary. That proposition is, in our opinion, unsound. Its unsoundness was distinctly pointed out by Lord Macnaghten in British and American Trustee and Finance Corporation v. Couper. (2)The view taken by Kindersley V.-C. cannot, in our opinion, be supported by reference to the Companies Act of 1862; and it is inconsistent with the decisions to which we have referred, and which, if wrong, can only now be set right by the House of Lords.
It was, however, contended that this Court, at all events, had approved and followed the decision of Kindersley V.-C.; and Ashbury v. Watson (1) was referred to on this point. In that case the memorandum of association stated that preferential shares might be created, and what the preferential rights were to be; and it was held that these were conditions which could be properly introduced into the memorandum of association, and which, being introduced there, could not be afterwards departed from and be treated as articles of association capable of change. No doubt Fry L.J. relied on Hutton v. Scarborough Cliff Hotel Co. (3) to shew that provisions about preference shares were conditions which could properly be inserted in the memorandum of association; but the propriety of the decision of Kindersley V.-C. in that case was not before the Court, and we do not regard Ashbury v. Watson (1) as conflicting with any of the other decisions of the Court of Appeal, in which Kindersley V.-C.’s decision has been judicially considered.
(1) 30 Ch. D. 376.
(2) [1894] A. C. 416, 417.
(3) 2 Dr. AND Sm. 521.
We desire to add that we do not base our judgment in this case on the words “with power to increase the capital as provided by the articles of association,” which are in the memorandum of association. That power would have existed under s. 12 of the Act if those words had not been in the memorandum. We prefer to rest our decision on the grounds above explained. But the words in the memorandum to which we are now referring certainly shew that the conditions on which new capital was to be issued were not to be implied from the memorandum of association, but were to be ascertained from the articles; and as these might be changed from time to time under the powers conferred by ss. 50 and 51 of the Companies Act, 1862, it would follow from Harrison v. Mexican Ry. Co. (1), and other cases like it, that the resolutions of 1865 would be valid, even if the second decision could still be regarded as good law.
For the reasons, however, which we have given we are of opinion that the second decision in Hutton v. Scarborough Cliff Hotel Co. (2) was wrong, and ought not to be followed, and that the decision appealed from must be reversed, and the resolutions thereby declared to be ultra vires must be declared intra vires and valid. If, by declining to follow the second decision in Hutton v. Scarborough Cliff Hotel Co. (2), we were disturbing titles or embarrassing trade or commerce we should treat it as one of those decisions which, though wrong, it would be mischievous to overrule. But such is not the case; and it is desirable, from all points of view, to remove from companies a fetter which ought never to have been imposed upon them, and which in practice has been got rid of by skilled draftsmen by the insertion of power to issue preference shares in the original articles of association or the memorandum of association itself. These devices will no longer be necessary. We understand that there will be no dispute now as to the rights of the preference shareholders, and that the proper declaration will be as asked by the plaintiffs in the first paragraph of their claim. The costs will be provided for by the parties.
(1) L. R. 19 Eq. 358.
(2) 2 Dr. AND Sm. 521.
RIGBY L.J.
There is one remark I want to make with reference to the supposed influence of the second decision in Hutton v. Scarborough Cliff Hotel Co. (1) during all this series of years. According to my recollection, from the very first it was looked upon as a doubtful decision, and I doubt if any one deliberately acted upon it. But when there came the decision of Harrison v. Mexican Ry. Co. (2) before the late Master of the Rolls in 1875, I think it was considered extremely difficult, if not impossible, to reconcile that in any way with Hutton v. Scarborough Cliff Hotel Co. (1) The Master of the Rolls certainly does not profess to overrule the principle of that decision, but he decides upon a principle which would be equally applicable in the case before Kindersley V.-C., for in that case, in the existing articles of association, a contemporaneous document with the memorandum that the Vice-Chancellor was considering, were two articles, 17 and 18 – one authorizing an increase of capital, and the other saying that “the increased capital shall be raised from time to time in the number of shares, and of the amount or value and, subject to these articles, on such conditions as the extraordinary general meeting shall direct.” I cannot treat the case of Hutton v. Scarborough Cliff Hotel Co. (1) from the date of Harrison v. Mexican Ry. Co. (2) as being an unchallenged decision. I think it was virtually overruled from that date.
(1) 2 Dr. AND Sm. 521.
(2) L. R. 19 Eq. 358.
