Scottish Court of Session Decisions

William Donald was the inventor of certain processes for the manufacture of chlorine, for which he took out patents in the United Kingdom and other countries. On 18th December 1890 he concluded an agreement with a party acting as trustee for a company which was intended to be incorporated for the purpose of taking over and working these processes.

This agreement provided, inter alia—“(2) The vendor agrees to sell to the company, and the second party acting on behalf of the company agrees to purchase the said inventions and letters-patent, and the exclusive benefit thereof, and of all extensions of the said letters-patent, and also of all improvements and additions to the said inventions or new discoveries useful for the manufacture of chlorine, or any of the objects of the company in the possession of the vendor or which may hereafter be made by him. (3) The consideration to be given by the company to the vendor for the said inventions, letters-patent, and others, and for the obligations hereby undertaken by him, so far as not paid for by the salary and commission to be paid him under article twelfth hereof, shall be the sum of £20,000 which shall, to the extent of £18,800, be satisfied by the allotment to him or his nominees of 1880 fully paid-up deferred shares of ten pounds each of the company, having the rights specified in the said memorandum and articles of association, and to the extent of twelve hundred pounds sterling by payment to him of (1st) a sum of seven hundred pounds sterling within thirty days after the registration of the company; (2nd), the further sum of five hundred pounds sterling when one hundred tons of bleaching powder, under the said letters-patent, shall have been manufactured and bona fide sold by the company, but declaring that it shall be in the power of the company to make the said payment of five hundred pounds at an earlier date if they should be satisfied with the prospects of the company. … (6) The vendor shall show a good title in his own name to the letters-patent agreed to be transferred, and shall, at the expense of the company, execute an assignation or assignations, and do all such assurances and things as may be necessary or may reasonably be required for transferring and vesting the letters-patent in company, and shall also, at the expense of the company, from time to time, grant all such further assignations and deeds, and do all such things as may be necessary for giving full effect to these presents, declaring always that the company shall be bound to make all the payments which may be necessary for keeping up and completing the patents obtained by the vendor as aforesaid, the vendor being bound to make all payments in respect of the said patents up to the date of this agreement. (8) The vendor shall with all due despatch furnish to the company all plans and drawings of plant in existence, and any others which may be required for working the said invention so far as the vendor may be capable of preparing the same. … Further, the vendor shall give, or cause to be given, advice, instruction, or information for the erection of the necessary plant, and the working of the said inventions. By article 10 the directors were given power, with the consent of the shareholders holding a majority of the company's shares, to sell the patents, property, and assets of the company to an individual or other company, and provision was made for the distribution of the price obtained among the preferred and deferred shareholders.

The agreement further provided—“11. In the event of a winding-up being resolved on in consequence of its being found that the business cannot be carried on with profit, or in any other case than that of a sale having been made of the patents, property, and assets of the company under the preceding article, the patent or patents shall be reconveyed to the vendor without any price being paid by him therefor, but all expenses connected with such reconveyance shall be borne by him. … In such event the directors shall have right to sell the works as a going concern if they think proper, with right to use the patents in connection therewith, but subject to the condition that the vendor shall have a right of pre-emption at the price proposed to be taken from any third party. 12. The vendor shall enter the employment of the company on the same being incorporated as manager or as managing director, in the option of the company, and shall devote his whole time to the business of the company, and shall principally take charge of the technical and manufacturing department, and any other manager or secretary to be appointed by the company shall principally take charge of the commercial and financial department.” …

The company was incorporated under the name of Donald's Chlorine Company, Limited, on 22nd December 1890. By the memorandum of association the object for which the company was formed was declared to be, inter alia, to acquire, work, and develop Donald's inventions and patents for the manufacture of chlorine, and power was taken to adopt and carry out the agreement which had been concluded with him. After its incorporation the company adopted that agreement, and in terms of article 3 thereof 1880

Page: 103↓

fully paid-up deferred shares were allotted and a sum of £700 paid to Donald. On 6th June the Court, on the application of a creditor, ordered the company to be wound up by the Court, and appointed Wm. Dunlop, C.A., Glasgow, to be official liquidator. At the date of the liquidation the patents had not been assigned by Donald to the company, and he declined to transfer them to the liquidator.

The liquidator accordingly presented a note under the 100th section of the Companies Act 1862, craving the Court to require Donald to transfer the patents to him.

He founded in particular upon articles 2 and 6 of the agreement with Donald, and stated, inter alia—“In pursuance of the objects of the company, the directors have expended the whole of the subscribed capital of the company (£20,000), together with about £11,000 of borrowed money, upon the construction of works for the manufacture of chlorine upon Mr Donald's patented process. These works are not quite complete, but they can be completed now at a very trifling cost. It is very important in the interest of the creditors and shareholders that these works should be sold immediately as a whole, together with the absolute right to the patents, without which it will not be possible to obtain a full price for the undertaking of the company. … The said William Donald held the post of managing director of the said company from its commencement to the date of liquidation, and he is thus an officer of the company within the meaning of the said section.”

William Donald lodged answers, in which he made the following statements—“It is admitted that the company was erecting works at Longford, Kilwinning. These works, which are the only works of the company, were not complete at the date of the liquidation. The respondent's patented invention had not been tried by the company, and no products had been manufactured or sold under his processes. … The patents now in question were not part of the estate of the company at the commencement of the winding-up. The personal claim of the company thereto under the said agreement was conditional and defeasible. The company have not paid the full price, at least £500 thereof remaining at this date unpaid, and have not fulfilled the inherent condition of the said agreement requiring bona fide manufacture and sale under the respondent's processes. … The said (11th) article … secures to the respondent the exclusive right to the patents in the cases therein provided for, one of which has now arisen. … During the progress of the works now stopped the respondent acted for the company as technical adviser and works manager under the provisions of article 8th of the agreement. The respondent, whose qualifications are those of a practical chemist only, was a director of the company, and he was under article 12th of the agreement to have acted as manager in the technical and manufacturing department, … but there has been no manufacture to manage.”

The respondent pleaded—“(1) That the note was incompetent, as the present case was not within the purview of section 100 of the Companies Act 1862. (3) That he was entitled, under the agreement and in the circumstances set forth in the answers, to refuse compliance with the demand of the liquidator.”

Section 100 of the Companies Act 1862 provides—“The Court may at any time, after making up an order for winding-up a company, require any contributory for the time being settled on the list of contributories, trustee, receiver, banker, or agent or officer of the company to pay, deliver, convey, surrender, or transfer forthwith, or within such time as the Court directs, to or into the hands of the official liquidator any sum or balance, books, papers, estate, or effects which happen to be in his hands for the time being, and to which the company is prima facie entitled.”

On 20th July 1893 the Lord Ordinary ( Stormonth darling) pronounced this interlocutor:—“The Lord Ordinary having heard parties, and considered the note for the official liquidator, and answers thereto by William Donald, requires the said William Donald, within twenty-one days, to transfer to the official liquidator the patents specified in the prayer of the said note, together with his rights and interests in the inventions for which applications have been made for patents, also as specified in said prayer, and decerns; and decerns and ordains the said William Donald, within the period before mentioned, to execute assignations with regard to the patents to which the same are applicable, and similar assignations with regard to the other patents before referred to, such assignations to be adjusted at the sight of James M'Caul, S.S.C., and that at the expense of the official liquidator: Remits to the said James M'Caul to adjust the said assignations in terms of this interlocutor, reserving to the respondent William Donald any claim which he may make in the liquidation to a preference in respect of the unpaid balance of £500 mentioned in article 3rd of the agreement, as if he had retained possession of the patents in question, and to the liquidator his answer to such claim: Finds the said William Donald liable to the official liquidator in the expenses caused by his opposition to the said note, &c.

“ Opinion.—In order to justify an application under the 100th section, all that is necessary is that there should be estate or effects in the hands of any one of a certain number of persons, including the officers of the company, to which the company is prima facie entitled. Now, I am very clearly of opinion that the patent rights which form the subject of the present application fall within that description. They are in the hands of Mr Donald, the original patentee, and he is an officer of the company, because he was its managing director. The company's right to these patents stands on an agreement between them and Mr Donald, which, by its second

Page: 104↓

and third sections, provides for the sale of these inventions to the company at a certain price. The price was to be £20,000, and was to be satisfied to the extent of £18,800 by an allotment to Mr Donald of fully paid-up deferred shares, and by an immediate payment of £700. Both of these things have been done; the shares have been issued, and the £700 has been paid. To the extent of the remaining £500, the payment was made conditional on a certain quantity of bleaching powder being manufactured and bona fide sold by the company. That event has not taken place, because the company has been wound up on the application of a creditor before it proceeded to manufacture anything.

Now, the only ground, so far as the agreement goes, upon which the respondent resists this application is that he has certain rights under the 10th and 11th articles. By the 10th article the directors have power, with the consent of a majority of the shareholders, to sell the patents, and it does not seem to me that that clause in any way affects the present question, no sale having in point of fact taken place. By the 11th article it is provided that in the event of a winding-up being resolved on, in consequence of its being found that the business cannot be carried on with profit, or in any other case than that of a sale having been made of the patents and assets of the company under article 10, the patents are to be reconveyed to the vendor without any price being paid. If this had been a voluntary liquidation a question of some difficulty might have arisen. But it is not a voluntary liquidation. I must assume that it was in the contemplation of both parties to the agreement that there might be a winding-up of a different kind. And that is what has happened. Creditors have stepped in, and have procured an order from the Court for the compulsory winding-up of the company: and accordingly the event contemplated by article 11, and upon which its whole provisions depend, has not taken place. In short, it seems to me that the agreement affords very clear prima facie evidence of the company's right to these patents, and that neither article 10 nor article 11 affords any answer to the liquidator's demand.

It is further maintained by the respondent that at all events he has a right of retention of these patents at common law as security for payment of the balance of £500 of the purchase price. Now, it seems to me that that question does not arise at the present stage, and it is not an impediment to my granting an order under the 100th section. It may be that the respondent has the right for which he contends, although on that point I express no opinion at all. But that is a question which may hereafter be raised in the liquidation, and the only concession which I think the respondent is entitled to at the present stage is that his right to make that claim, notwithstanding his parting with the possession of the patents, should be reserved.”

The respondent reclaimed, and argued—The application was incompetent, and should be refused. The respondent was a practical chemist, and employed by the company only in practical work. He was not an officer of the company in the sense of the 100th section of the Companies Act, and the patents were not in his hands as an official of the company, but as undivested seller— Hollingsworth's case, 3 De G. & Sm. 102; Imperial Land Company of Marseilles, in re National Bank, L.R., 10 Eq. 298; in re Llangennech Coal Company, February 1, 1887, 22 W.N. 22. Nor were the company “ prima facie entitled” to the patents. They were the property of the respondent, who was an undivested seller. It was an essential condition of his contract with the company that there should be bona fide manufacture and sale under the respondent's processes, and the respondent was under no obligation to assign until that condition had been fulfilled— Mackay v. Dick & Stevenson, March 7, 1881, 8 R. (H. of L.) 37, and L.R., App. Cas. 57. The condition never had been fulfilled. Further, part of the agreed-on price, viz., £500, was still unpaid, and there was nothing in the statute to compel a vendor to surrender his lien. The object of the liquidation appeared to be to deprive the respondent of all share in the proceeds of his own inventions, and there was no reason for giving the company any privilege beyond its strict legal rights. Again, under the 11th article of the agreement, the respondent was entitled to a reconveyance of the patents in the event of a winding-up or “in any other case,” and he could not be bound to convey subjects of which he was entitled to demand a reconveyance. The averments of the respondent could not be disposed of without proof, and where proof was necessary the 100th section was inapplicable.

The petitioner argued—The respondent was an officer of the company in the sense of the 100th section of the Companies Act, and that section applied to the circumstances of the case— Oakwell Collieries Company, 1859, W.N. 65; Robertson v. British Linen Company Bank, July 18, 1891, 18 R. 1225. The respondent mistook his position under the agreement. He was not entitled under article 6 to retain the patents until payment of the £500. Besides, payment of the £500 was not rendered impossible by the Lord Ordinary's judgment. On the contrary, his right to that sum, if he had any, was preserved. If he had a preference he could only make it good in the liquidation— Adam & Winchester v. White's Trustee, May 30, 1884, 11 R. 863. Article 11 of the agreement clearly could not apply to a winding-up by the Court.

At advising—