Scottish Court of Session Decisions

On 30th March 1911 the Palace Billiard Rooms, Limited and Reduced, presented a petition under the Companies (Consolidation) Act 1908, and particularly sections 46 to 52 and 55 thereof, for confirmation of a resolution for reduction of capital.

Answers were lodged by the City Property Investment Trust Corporation, Limited, proprietors of the subjects occupied by the petitioners, who objected to the prayer of the petition being granted until they (the petitioners) either consigned the rent for the unexpired future of the lease, or granted security therefor.

The facts are stated in the report by Sir George M. Paul, C.S., to whom the petition and answers were remitted for inquiry.

The reporter stated—“The petitioning company was incorporated under the Companies Acts 1862 to 1898, on 8th June 1900. Its registered office is situated at 95 Hope Street, Glasgow.

The main objects for which it was formed, as stated in clause 3 of the Memorandum of Association, were to provide a billiard-room or rooms, and to carry on therein the business of billiard-room keepers or proprietors, and bagatelle table keepers, to provide places of amusement, sport, and entertainment, and to carry on various other subsidiary businesses.

By special resolution passed on 2nd, and confirmed on 23rd, November 1908, the company was declared to be a private company in the sense of the Companies Act 1907.

The nominal capital of the company is £4000, divided into 4000 shares of £1 each. Of these 3429 have been issued, 3129 having been paid for in cash, and 300 allotted in terms of an agreement filed with the registrar. All the shares were fully paid.

By article 94 of the articles of association the directors are authorised, before recommending any dividend, to set aside out of the profits of the company such sums as they think proper as a reserve fund to meet contingencies or for equalising dividends, or for repairing, improving, and maintaining any of the property of the company, and for such other purposes as the directors shall in their absolute discretion think conducive to the interests of the company.

A reserve fund was accordingly accumulated out of the annual profits of the concern. As shown in the balance-sheet for the year ending 31st July 1908, it amounted at that date to £1779.

By special resolution, passed and confirmed on said 2nd and 23rd November 1908 respectively, the company resolved to return to the shareholders, out of the reserve fund, the sum of 10s. per share in reduction of the amount paid up on each share, and the shareholders were repaid that amount accordingly—the reserve fund being utilised for that purpose to the extent of £1714, 10s., thus constituting the £1 shares as shares paid up to the extent of 10s. per share, and uncalled to the extent of 10s. per share.

As the result of the above operation, the issued capital of the company, which originally consisted of 3429 fully paid shares of £1 each, now consists of 3429 shares of £1 each, whereof 10s. per share has been paid up.

The company has power to reduce its capital.

It is stated in the petition that the company acquired premises at No. 95 Hope Street, Glasgow, on a fifteen years' lease from Whitsunday 1900, from the City Property Investment Trust Corporation, Limited, 93 Hope Street, Glasgow, at a rent of £400 per annum for the first five years, £500 per annum for the second five years, and £600 per annum for the remaining period of the lease. The company also rented additional premises from the same landlords, on the same terms and conditions as in the principal lease, at a rent of £30 per annum. The latter premises, it is

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stated, were fitted up at a cost of about £400.

During the earlier years of its existence the company was very successful, but latterly its profits have been steadily diminishing. The dividends paid have been at the following rates—1902, 5 per cent.; 1903, 30 per cent.; 1904, 37 1 2 per cent.; 1905, 37 1 2 per cent.; 1906, 17 1 2 per cent.; 1907, 15 per cent.; 1908, 10 per cent.; and 1909, 7 1 2 per cent. No dividend has been paid for the year to 31st July 1910. An estimate of the profits for the current year lodged in process shows some improvement.

It being the opinion of the directors that there is no likelihood of the uncalled capital of 10s. per share being now required, an extraordinary general meeting of the company was called and was held on 17th February 1911. At that meeting a resolution was duly passed to the effect that the capital should be reduced from £4000, divided into 4000 ordinary shares of £1 each, to £2000, divided into 4000 shares of 10s. each, and that such reduction should be effected by reducing the nominal amount of the shares from £1 to 10s. each, and by extinguishing the liability in respect of uncalled capital to the extent of 10s. per share. That resolution was duly confirmed at a subsequent extraordinary general meeting, held on 6th March 1911, and thus became a special resolution of the company

In their answers the respondents set forth, inter alia, that they are creditors of the petitioners, being proprietors of the premises occupied by them, that the petitioner's lease expires at Whitsunday 1915, and that the rent payable is £630 per annum. They also point out that on each of the 3429 shares in issue there is at present an uncalled liability of 10s., and that the proposed reduction of capital would involve the diminution of liability, in respect of uncalled share capital, to the extent of at least £1714, 10s., thereby prejudicially affecting their security for the rent of the premises. In these circumstances they object to the reduction being confirmed until the petitioners either consign, in name of the Accountant of Court, a sum sufficient to cover the rent of the premises up to the end of the lease, i.e., Whitsunday 1915, or otherwise grant satisfactory security therefor.”

After stating the contentions of parties the reporter proceeded—“While there seems to be some apparent force in these contentions, the express provision in the 49th section must be kept in view, viz., that where a creditor whose debt or claim has not been discharged does not consent, the Court may, if it thinks fit, dispense with such consent on the company securing payment of the debt or claim by appropriating, as the Court may direct, … if the amount is contingent or not ascertained—‘an amount fixed by the Court after the like inquiry and adjudication as if the company were being wound up by the Court.’ With reference to that and the cases noted on the margin hereof—[ In re Telegraph Construction Company, 10 Eq. 384; Gooch v. London Banking Association, 32 Ch.D. 41; Elphinstone v. Monkland Iron Company, 11 A.C. 332; Oppenheimer v. British and Foreign Exchange and Investment Bank, 6 ChD 744]—Buckley observes, ‘It would appear that when a company proposes to reduce its capital, a lessor is entitled to have a sum impounded to meet future rents.’

As regards the security to be provided, that might either take the form of a satisfactory personal obligation by one or more of the directors or shareholders for payment of the full rents and fulfilment of the tenants' obligations till the termination of the lease, or the setting aside of such a sum by way of security as might be considered equitable in the circumstances. The whole of the reserve fund, which now amounts to £455, with any additions that may be made thereto, might be set apart and appropriated as a special security, together with such an additional sum as with the reserve fund might amount to two years' rents. The additional sum might either take the form of a setting aside of cash or cancellation of a smaller amount of uncalled capital. It has to be kept in view that the rents have been regularly paid, and that only four more full rents are payable.”

Argued for petitioners—The respondents' claim was a contingent one in the sense of section 49 (3) (ii) of the Companies (Consolidation) Act 1908 (8 Edw. VII, c. 69)—the contingency being the non-payment of the rent in future. That being so the Court was entitled to dispense with their consent on such a valuation of their claim as would be made if the company were being wound up by the Court. In other words, the respondents were only entitled to a ranking for the fair value of their loss, viz., the difference between the rent under the lease and the rent they might reasonably be expected to get from another tenant—the lease being broken by the assumed insolvency— In re Telegraph Construction Company (1870), L.R., 10 Eq. 384; Oppenheimer v. British and Foreign Exchange and Investment Bank (1877), L.R., 6 ChD 744; in re Midland Coal, Coke and Iron Company, [1895] 1 Ch 267. Reference was also made to rule 8 of the rules of 1909 for Reduction of Capital— vide Palmer's Company Law, (9th ed.) p. 572.

Argued for respondents—The respondents' claim, though future, was not a contingent one, for it was admitted. That being so the case fell under the first head of section 49 (3). The petitioners therefore were bound to consign the balance of rent due. What the petitioners sought was a privilege, and they were therefore bound to comply strictly with the requirements of the statute.

At advising—