Scottish Court of Session Decisions

In 1894 John Gunn was proprietor of 3114 fully paid-up shares of £1 each in the West End Cafe Company, Limited, which carried on business in Princes Street, Edinburgh. Of these shares 700 stood on the register in his own name, the remainder having been transferred to other persons, of whom one was James Muirhead, in security of advances made by them to Gunn, or of cautionary obligations undertaken by them on his behalf. In the same year a new company was promoted to take over the business of the West End Cafe Company and the business of Aitchison & Sons, purveyors. Muirhead was a promoter of the new company, which was styled Aitchison & Sons, Limited.

On 10th May 1894 an agreement was entered into between Aitchison & Sons, James Douglas Jameson, sole partner of that firm, and James Muirhead, first parties, and Mr Gunn, second party, to the following effect:—“Whereas it has been arranged that the West End Cafe Company shall shortly be wound up and the shareholders therein repaid the capital pertaining to them, and that such shareholders in the said West End Cafe Company as desire to reinvest their shares in the said proposed company of Aitchison & Sons, Limited, shall be afforded an opportunity of doing so, and for this purpose, upon their signifying their intention so to do, the amounts of their shares shall be deducted from the price payable by the said Aitchison & Sons, Limited, to the said West End Cafe Company, and upon the winding up of the said West End Cafe Company being completed the said shareholders shall thereupon grant discharges of their shares, and the money to be paid in respect of such discharges shall meet the part payment of the aforesaid price payable by the said company of Aitchison & Sons, Limited, deducted as aforesaid, and scrip in the said company of Aitchison & Sons, Limited, shall be issued for the amount thus discharged; and further, considering that upwards of 3000 A shares of £1 each in the West End Cafe Company belong to the said John Gunn, including 2000 of such shares registered in the name of the said James Muirhead and Henry Waters, Queensferry Street, Edinburgh, the said 2000 shares being held by the said James Muirhead and Henry Waters in security to them in respect of their having signed a cautionary obligation to the extent of £2000 for the said John Gunn, and under which cautionary obligation £1700 of principal is at present due; further, considering that the parties have agreed that the whole amount invested in the said shares of the West End Cafe Company shall be reinvested in the proposed company of Aitchison & Sons, Limited: Therefore it is here by agreed as follows:—(1) The said John Gunn hereby agrees to accept shares in the said company of Aitchison & Sons, Limited, in lieu of the shares possessed by him in the West End Cafe Company, Limited, and authorises his said shares to be deducted from the price payable by the said Aitchison & Sons, Limited, to the West End Cafe Company, Limited, and undertakes to grant all necessary discharges in connection therewith; (2) Seventeen hundred shares of one pound each in the said company of Aitchison & Sons, Limited, shall be allotted in names of the said James Muirhead and Henry Waters in order to cover the balance of principal still due upon the said cautionary obligation, and the balance of the shares of one pound each in the said company of Aitchison & Sons, Limited, shall be allotted in the name or names of the said John Gunn or of his nominees; (3) The said Aitchison & Sons, James Douglas Jameson, and James Muirhead agree to relieve the said John Gunn or his nominees of the said shares in Aitchison & Sons, Limited, or of any part thereof, at any time, upon his giving them three months' notice in writing of his desire to be so relieved, and they shall either themselves pay to him the sum of one pound sterling for each of the said shares of one pound each or procure a purchaser to take over the said shares at par, and they further agree to take over the shares invested in names of the said James Muirhead and Henry Waters at par in order to repay the said cautionary obligation above mentioned.”

On 14th May the following agreement was entered into between the West End Cafe Company and Aitchison & Sons, Limited:—“The parties hereto, considering that an offer was made on behalf of the second parties by letter addressed to the chairman of the first parties, dated fourth April last, of the sum of Twenty-two thousand pounds for the property, furnishings, and fittings belonging to the first parties, … and it being understood that the purchasers were to take over the bonds at present over the property amounting to Twelve thousand nine hundred and seventy-six pounds, and relieve the sellers of all responsibility in connection therewith, any discharges, however, of the personal obligations of the first parties being at the expense of the first parties, the purchasers to take over all contracts between the company and the employees who might be in office at the date of transfer, and any other current contracts, it being also a condition of the said offer that entry should be given at fifteenth May next or within six weeks from the acceptance of the offer, it being understood that the price would be payable at entry, but that payment of part of the price should be deferred so far as representing the amount of shares held by those in the first parties who might signify their desire that the amounts repayable to them should be reinvested in shares of the second parties; considering further that the said offer has now been submitted to two meetings of the shareholders of the first parties who have approved of the same being accepted, and have authorised the directors to accept it accordingly, and the directors

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of the first parties having again had the said offer before them, and having met with representatives of the second parties, have agreed to accept of the said offer, and hereby accept of the same subject to the following conditions which have been and are hereby agreed upon between the parties, viz., 1. As the second parties will not be in a position to pay the said price of Twenty-two thousand pounds at the term of Whitsunday eighteen hundred and ninety-four, the second parties shall get nominal entry to the Cafe premises at said fifteenth May on paying a sum of Two thousand pounds to the first parties, and on payment to the first parties of the value of the stock-in-trade which may be in hand on the evening of the fourteenth May as the same shall be ascertained by parties mutually appointed by the first and second parties. 2. The balance of the price (subject to the postponement of payment of an amount equivalent to the shares held by those shareholders who agree to continue their holding in the first parties in shares in the second parties; the second parties and their directors, however, granting in favour of the first parties an obligation for payment thereof on the first parties' company being wound up) shall be payable on or before the fifteenth day of June next, and shall bear interest at 5 per centum from fifteenth May till payment; it being understood and agreed that on payment of said price and interest as aforesaid a disposition of the property shall be delivered to the second parties.”

On 23rd June Aitchisons & Sons, Limited, and the directors thereof, granted the following obligation to the West End Cafe Company:—“Considering that by agreement entered into between the West End Cafe Company, Limited, Edinburgh, and us the said Aitchison & Sons, Limited, dated fourteenth May Eighteen hundred and ninety-four, it was agreed that as we, the said Aitchison & Sons, Limited, would not be in a position to pay to the said West End Cafe Company, Limited, the price of Twenty-two thousand pounds for the West End Cafe premises and other assets therein mentioned at the term of Whitsunday Eighteen hundred and ninety-four, on paying a sum of Two thousand pounds to the West End Cafe Company, Limited, and on payment to them of the value of the stock-in-trade in hand on the evening of the fourteenth May, as the same should be ascertained by parties mutually appointed; that the said sum of Two thousand pounds was duly paid, and the value of the stock-intrade was also ascertained and duly paid; considering further that by said agreement it was provided that the balance of the price should be payable on or before the fifteenth day of June Eighteen hundred and ninety-four, and should bear interest at five per cent. from fifteenth May till payment, but subject always to the postponement of an amount equivalent to the shares held by these shareholders who agree to continue their holding in the West End Cafe Company, Limited, in shares in us the said Aitchison & Sons, Limited, we and our directors, however, granting in favour of the West End Cafe Company, Limited, an obligation for payment thereof on the said West End Cafe Company, Limited, being wound up, and now seeing that in addition to the said sum of Two thousand pounds paid on fifteenth May last on account of the price of the property and others, we have of this date paid to the West End Cafe Company, Limited, a further sum of Two thousand eight hundred and eighty pounds to account of said price, with interest thereon from fifteenth May last to date of payment, and that we have taken over and become responsible, as at fifteenth May last for the bonds and dispositions in security affecting the heritable property, amounting to Twelve thousand nine hundred and seventy-six pounds—amounting said three sums in all to the sum of Seventeen thousand nine hundred and seventy-six pounds, leaving a balance of said price still due and owing by us to the said West End Cafe Company, Limited, amounting to Four thousand one hundred and forty-four pounds, with interest thereon at five per cent. per annum from said fifteenth May last till payment, that it is understood and agreed that said balance is to be paid out of monies to be received by shareholders of the West End Cafe Company, Limited, who are to become shareholders in our company, conform to a list thereof annexed and signed as relative hereto, and that said shareholders have signed transfer and application forms in respect of their shares in said West End Cafe Company, Limited, in terms similar to the form annexed and signed as relative hereto, which have been intimated to and lodged with the said West End Cafe, Company, Limited, and it has been arranged that on the West End Cafe Company, Limited, being put into liquidation and wound up, which is to be done with all convenient speed, the sums repayable to the said shareholders in respect of their shares up to the said sum of Four thousand one hundred and forty-four pounds, with interest thereon as aforesaid, shall be received by and paid to the West End Cafe Company, Limited, or to the liquidator to be appointed by them, so that out of the same they or he may secure payment of the balance of the said price, but in the event of the same or any part thereof from any cause not being paid to the West End Cafe Company, Limited, or to the liquidator appointed by them, or of said shareholders or any of them refusing or delaying to sign a discharge of said shares within twenty-one days after being called upon by the said company or the liquidator to do so, we the said Aitchison & Sons, Limited, and we the said” A, B, C, and D, “as directors of said Aitchison & Sons, Limited, and as individuals, and we all, conjunctly, and severally, agree and bind and oblige ourselves and our respective heirs, executors, or successors to pay to the said West End Cafe Company Limited, or to the liquidator to be appointed by them as aforesaid, the said sum of Four thousand one hundred and forty-four pounds, being the balance of said price or such part thereof as may remain unpaid out of the sums to be received on behalf of the said

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shareholders as aforesaid, with interest thereon from the said fifteenth May Eighteen hundred and nine-four till payment thereof.”

The disposition of their premises by the West End Cafe Company in favour of Aitchison & Sons, Limited, proceeded upon a narrative setting forth the stipulations as to the payment of the price embodied in the documents above quoted.

Mr Gunn signed the memorandum of association of Aitchison & Sons, Limited, and agreed to take 1000 shares therein. On the 31st May he applied for 700 shares in that company by filling up a form of application issued for the use of shareholders in the West End Cafe Company.

At a meeting of directors of Aitchison & Son Limited held on 16th April 1895 it was resolved that no further shares than those already allotted should be issued to Mr Gunn, and that the shares presently allotted to him should be marked on the register as having been accepted in full of his signature to the memorandum of association for the shares opposite his name. This was done.

Two thousand shares in Aitchison & Sons, Limited, were allotted to Mr Muirhead, who subsequently transferred them to the joint names of himself and Mr Waters. These were in reality Gunn's, but, as above mentioned, were held by Muirhead and Waters in security of a cautionary obligation undertaken by them on his behalf.

On 21st March 1896 Mr Gunn gave notice to Mr Muirhead that he desired to be relieved of the whole of the shares held by him in Aitchison & Sons, Limited, but Mr Muirhead declined to take them over.

In these circumstances Gunn raised an action against Muirhead to have it declared that the latter was bound to implement the obligations undertaken by him in the agreement dated 10th May 1894, that in reliance thereon the pursuer had “accepted and paid the sum of £1 each for the following shares of the nominal value of £1 each, fully paid up, presently standing registered” in the share register of Aitchison & Sons, Limited [the pursuer here set forth the shares held by him and his nominees], and that on the lapse of three months from 21st March 1896 the pursuer became entitled to insist upon the fulfilment by the defender of his obligations under the minute of agreement. There was also a conclusion to have the defender ordained to implement the said obligations by relieving the pursuer of the shares and paying the sum of £1 each therefor.

After condescending on the minute of agreement, the pursuer averred—“Upon the sum of £3114 due to him as repayment of the said shares held by him and for him in said West End Cafe Company, Limited, becoming payable, the pursuer invested the whole of said sum in acquiring 3114 fully paid-up shares of the value of £1 each in the said company of Aitchison & Sons, Limited.… The whole of said shares in the new company were paid for in cash by applying the sum of £3114 due to the pursuer as aforesaid.” This averment the defenders denied.

The pursuer pleaded—“(1) The defender having by the minute of agreement founded on entered into the obligations set forth in the summons, is bound to implement the said obligations as concluded for in the conclusions of the summons for declarator and implement.”

The defender pleaded, inter alia—“(3) None of the pursuer's shares being fully paid up the defender should be assoilzied, with expenses. (4) The pursuer being unable to implement his obligations in the document founded upon in the summons by transferring the shares referred to therein free from any liability from calls thereon the defender is entitled to absolvitor, with expenses.”

The Companies Act 1867 (30 and 31 Vict. cap. 131), sec. 25, enacts that “Every share in any company shall be deemed and taken to have been issued and to be held subject to the payment of the whole amount thereof in cash, unless the same shall have been otherwise determined by a contract duly made in writing and filed with the Register of Joint Stock Companies at or before the issue of such shares.”

After a proof the Lord Ordinary ( Pearson) on the 14th July 1898 pronounced the following interlocutor:—“Finds that to the extent of 1114 shares standing partly in the name of the pursuer and partly in the name of F. C. Auld (the pursuer's nominee), the pursuer has failed to prove that the shares tendered by him as in implement of the agreement libelled are fully paid-up shares, on which there is no further liability; therefore dismisses the action, and decerns.”

Opinion.—“This is an action for implement of an agreement, dated 10th May 1894.…

The defender reserves his right to challenge the agreement on extrinsic grounds.

But, subject to that, he is willing to implement it, provided the pursuer is able and willing to fulfil his part of it.

Now, the defender thereby agreed to relieve the pursuer or his nominees of his shares in a new company of Aitchison & Sons, Limited, paying him the sum of £1 for each share of £1, or procuring a purchaser to take over the shares at par; and he further agreed to take over at par a certain further lot of shares standing in name of the defender and a Mr Waters.

I take it that the shares tendered by the pursuer in implement of his part of this agreement must be fully-paid shares; and, further, as no contract to the contrary was filed, in pursuance of sec. 25 of the Act of 1867, they must be shares which have been paid for in cash. And it lies upon the pursuer to make out that the shares which he tenders answer this description.

The company of Aitchison & Sons, Limited, had its inception in a syndicate, of which the defender Mr Muirhead was a prominent member. This syndicate agreed in April 1894 to acquire the property, furnishings,

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and fittings belonging to the West End Cafe Company at the price of £22,000, of which a sum of £12,976 was represented by bonds on the property which were to be taken over.

On 11th May 1894 the memorandum of association of the new company was signed, the pursuer subscribing for 1000 shares of £1 each, and the defender Muirhead for 2000 shares.

On 31st May the pursuer applied for an allotment of 700 shares in the new company. The application letter was addressed to the directors of Aitchison & Sons, Limited, and it contained no reference to the obligation incurred by signing the memorandum of association. It was in a special form which had been settled as appropriate to the case of a shareholder of the West End Cafe Company taking shares in the new company.

The 700 shares were thereafter allotted to the pursuer, and on 16th August 1894 he was entered on the register of the new company as the holder of 700 allotment shares. The share certificate was dated on 10th October 1894, and issued then or shortly afterwards, describing the 700 shares by their numbers, and as ‘fully paid up.’

Matters so remained until April 1895. The settlement of the price between the West End Cafe Company and the new company, which had come in place of the syndicate, was practically completed in December. And in conformity with an arrangement, of which all concerned were cognisant, the sums payable to the new company by the individual allottees of shares were (so far as those allottees had been shareholders in the Cafe Company) crossed or set off against their respective shares of the price payable by the new company for the heritable property, fittings, and furniture of the West End Cafe Company. It is true that the new company was not directly indebted to the old shareholders in their shares of the price. It was indebted in the whole price to the liquidator of the old company, whose duty it was to pay it over or account for it to the members of the old company, in proportion to their holdings in that company, and who, on their request, reinvested so much of the price in shares of the new company.

In my judgment that was, according to the authorities, payment in cash within the meaning of sec. 25 of the Act of 1867. But in the view I take of the case it is not necessary to decide this point.” …

The defender reclaimed, and argued—The obligation on the defender, if any, was to take over from the pursuer shares fully paid up. The defender could not be held to take shares on which there was an outstanding liability, and the pursuer being in petitorio must, as an indispensable condition of succeeding in an action to enforce the obligation, do whatever was necessary to convert the shares into fully paid-up shares— Baranagh Oil Refining Co. ( Arnot's case), 1887, 36 Ch D 702; Howard & Wyndham v. Richmond's Trustees, June 20, 1890, 17 R. 990. The main question therefore was, were the shares in question fully paidup or shares which inferred liability? In other words, did sec. 25 of the Act of 1867 apply? The Lord Ordinary's view was unsound. On the face of the various agreements it was manifest that, except as regards a very small part, the shares in the new company were never to be paid for by the handing over or the cross-entry of money. The transaction was an exchange of scrip against scrip. It was never contemplated that there should be a cash payment to the old company. What was given for the shares at the date of their issue was not money but shares of the old company, It was necessarily implied in such an arrangement that the fortunes of these shares must be followed for good or evil. If the old company had continued to exist, the new company must have gone on its register of shareholders, and the fact that the old company went into liquidation did not alter the situation. It could not be held that shares had been paid for in cash unless there was a liquid obligation prestable in money, and that obligation had been fulfilled by a money payment. In the contract here between the new company and the old there was no kind of obligation prestable in money. The whole transaction was carried through on the footing that only a very limited amount of cash should pass. The rest of the purchase price was to be made up by taking over a bond and by taking over shares. What the new company got was the property of the old company less the shareholders' claims upon it. The case was ruled by the decisions in Johannesburg Hotel Co. L.R. [1891], 1 Ch. 119, per Lord Chancellor at p. 126; and Liquidators of Coustonholm Paper Mills Company, Limited v. Law, July 8, 1891, 18 R. 1076; Spargo's case, L.R., 7 Ch. 407; and Larocque v. Beauchemin, L.R. [1897], A.C. 359, were easily distinguishable from the present. In those cases there were genuiue cross-entries of cash transactions. There was nothing of the sort here. The law on the matter had been well summarised by Lord Stormonth Darling in Liquidator of Scottish Heritages Company, 5 S.L.T. 419, p. 336.

Argued for the pursuer—The Lord Ordinary was right. The shares in question had been paid for in cash, interpreting that expression in the sense put upon it by Spargo's case and Larocque, ut sup. These decisions made it plain that “payment of cash” could not be limited to payment in actual coin. A cheque if honoured was payment in cash. The whole nature of the transaction must be looked at— Larocque, ut sup., per Lord Macnaghten, at p. 364, and what had happened here was that the pursuer gave an order to the liquidator of the old company to pay to the new company a sum due to him by the old company. It was a simple case of cross-entry designed to save the trouble of the liquidator paying the money to Gunn in the first instance, and Gunn paying the money to the new company in the second. The Court had been much influenced in the Johannesburg case by the fact that there the company was a bogus company. Payment of some sort was undoubtedly

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necessary— Ooregum Gold Mining Company v. Roper, L.R. [1892], A.C. 125, and there had been payment here. The pursuer also referred to Ferrar's case, 1874, L.R., 9 Ch. 355; and Barrow-in-Furness v. Northern Counties Land and Investment Company, 1880, 14 Ch. D. 400.

At advising—