Scottish Court of Session Decisions

George Morton, Limited, presented a petition to the Court to confirm a reduction of capital.

There being no opposition to the petition, the Court on 31st May 1900 remitted to Mr C. E. Loudon, W.S., to report as to the regularity of the proceedings, and the reasons for the proposed reduction of capital. From his report it appeared that the petitioners George Morton, Limited, were incorporated on 12th May 1898 under the Companies Acts 1862 to 1890. The company was formed to acquire and carry on the business of George Morton, wine and spirit merchant and bonded warehouse proprietor, Dundee. By the fifth article of the memorandum of association the capital of the company was fixed at £65,000 divided into 35,000 ordinary shares of £1 each and 30,000 preference shares of £1 each. The preference shares conferred the right to a fixed cumulative dividend at the rate of 5 per centum per annum, and were likewise preferential as to capital. Of the said shares, 25,000 ordinary shares and 25,000 preference shares had been issued and fully paid up. The remaining 10,000 ordinary shares and 5000 preference shares were unissued. The Court was asked to confirm a special resolution passed at an extraordinary general meeting of shareholders held on 22nd March 1900, and confirmed at an extraordinary general meeting of shareholders held on 21st April 1900, by which it was resolved “that the company accept a transfer or surrender of the 12,500 ordinary shares of £1 each (fully paid), Nos. 1 to 12,500 both inclusive, standing registered in the name of James Morton, and thereby reduce the capital from £65,000 to £52,500 divided into 30,000 preference shares of £1 each, and 22,500 ordinary shares of £1 each, and that the capital is and shall be reduced accordingly.” The company had power to reduce its capital by article 49 of the articles of association. The effect of the reduction proposed was to reduce the paid-up capital from £50,000 to £37,500, and the total capital from £65,000 to £52,500. The reason for reduction of capital was that the company had sustained losses amounting to £12,500, and Mr James Morton, the chairman of the company, resolved to transfer

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or surrender 12,500 ordinary shares standing in his name, thus bearing the loss himself instead of allowing the other shareholders to suffer. At the date of the failure of Messrs F. W. & O. Brickmann, whisky merchants, Constitution Street, Leith, that firm were owing to the petitioners the sum of £16,259, 8s. 9d. From this sum, however, fell to be deducted £650, the par value of ordinary and preference shares of the company held by one of the partners of the said firm, Mr F. W. Brickmann, over which the company held a lien in terms of the articles of association. There remained, accordingly a total indebtedness of £15,609, 8s. 9d., the amount of the company's claim in the sequestration of Messrs F. W. & O. Brickmann. It was expected that a dividend would be paid, which would make the total loss not more than £13,500. From an examination of the balance-sheet, as at 22nd February 1890, if effect was given to the proposed reduction, the assets of the

company amounted to	£87,569	4	11
And the liabilities, deducting £300 at the credit of reserve fund, to	85,758	3	10
Showing surplus assets amounting to	£1,811	1	1

By the Companies Act 1877 (40 and 41 Vict. c. 26), sec. 3, it is provided that “the word “capital,” as used in the Companies Act 1867 shall include paid-up capital, and the power to reduce capital conferred by that Act shall include a power to cancel any lost capital or any capital unrepresented by available assets, or to pay off any capital which may be in excess of the wants of the company.”

After stating the facts as above narrated, the reporter proceeded as follows—“It appears to me that at the date of presenting the petition the assets and liabilities should be approximately of equal amount. In this case there is an apparent surplus of assets of £1811, 1s. 1d., which could be immediately utilised for payment of a dividend. I am therefore of opinion that the capital lost or unrepresented by available assets is £12,500, less £1811, 1s. 1d., or £10,688, 18s. 11d.—in round figures, £10,700.

With reference to this point, the petitioners have brought to my notice a case similar to the present, viz., The Grianaig Shipping Company, Limited, Petitioners, which was heard before the First Division of the Court of Session on 23rd December 1899 (S.L.R., vol. 37, p. 260). The petitioners in that case asked for an order confirming the reduction of capital lost or unrepresented by available assets. The reporter brought to the notice of the Court the fact that the proposed reduction of capital exceeded the amount of capital which had been lost, or was unrepresented by available assets, by a sum slightly exceeding £200. The Court, without giving opinions, granted the prayer of the petition.

It is to be observed, however, that in that case the property of the company consisted of ships, which are not only of fluctuating value, but also tend to diminish in value; and further, that the surplus was inconsiderable in amount.

I venture, therefore, to submit for your Lordships' consideration whether capital has been lost, or is unrepresented by available assets to the extent stated by the petitioners.

The company has no borrowed money or debenture or other obligation to the public, other than the trade debts in the ordinary course of business. …

In the present case the interests of the creditors are not affected, and no consent by them is required.

The proceedings throughout have been regular, and the reasons for the reduction of capital to the extent of £10,700 appear to be good and sufficient, but I am not satisfied that capital is lost or unrepresented by available assets to the extent of £12,500, the amount of capital which the company proposes to cancel.

Should your Lordships consider that the objection to the confirmation order above stated is not a valid one, I am humbly of opinion that your Lordships may make an order confirming the reduction of the capital of the company, approving the minute of reduction, and on the confirmation order and minute being registered by the registrar of joint stock companies, to direct such notice of the registration of said order and minute to be made as your Lordships shall think fit.

As the reduction of capital does not involve either the diminution of any liability in respect of unpaid capital, or the payment to any shareholder of any paid-up capital, I am of opinion that your Lordships may authorise the petitioners to dispense altogether with the addition of the words ‘and reduced’ to the company's name.”

Argued for petitioner—The Companies Amendment Act 1877 by defining capital as “lost capital or capital unrepresented by available assets or capital in excess of the wants of the company,” specified different kinds of capital which companies could deal with independently when exercising their statutory power to reduce. It was not intended that all three varieties should be considered when reducing on the ground that certain capital had been lost in the course of trading. Any other construction would subject the policy of the company to review of the Court. In In re Agricultural Hotel Company, [1891], 1 Ch. 396, the Court had sanctioned the reduction of one class of shares, and in The Grianaig Shipping Company, Limited, Petitioners, December 23, 1899, 37 S.L.R. 260, the Court had confirmed a reduction of capital notwithstanding that the assets of the company on paper exceeded the liabilities.

At advising—