RECONSTRUCTION. INTRODUCTORY NOTES. THERE are three modes of reconstructing a company formed under the Companies Act, 1862; 1. By Special Act of Parliament. See further "Special Acts," infra. 2. By means of a sale sanctioned by the Court under the Joint Stock Companies Arrangement Act, 1870. See further "Arrangements," infra. 3. By means of a voluntary winding up and a proceeding under s. 161 of the Act of 1862. In this division of the work reconstruction under s. 161 will be exclusively dealt with. That section provides as follows: "Where any company is proposed to be or is in course of being wound up altogether voluntarily, and the whole or a portion of its business or property is proposed to be transferred or sold to another company, the liquidators of the first-mentioned company may, with the sanction of a special resolution of the company by whom they were appointed, conferring either a general authority on the liquidators, or an authority in respect of any particular arrangement, receive in compensation or part compensation for such transfer or sale, shares, policies, or other like interests in such other company, for the purpose of distribution among the members of the company being woumd up, or may enter into any other arrangement whereby the members of the company being wound up may, in lieu of receiving cash, shares, policies, or other like interests, or in addition thereto, participate in the profits of, or receive any other benefit from the purchasing company; and any sale made or arrangement entered into by the liquidators in pursuance of this section shall be binding on the members of the company being wound up; subject to this proviso, that if any member of the company wound up who has not voted in favour of the special resolution passed by the company of which he is a member, at either of the meetings held for passing the same, expresses his dissent from any such special resolution in writing addressed to the liquidators, or one of them, and left at the registered office of the company not later than seven days after the date of the meeting at which such special resolution was passed, such dissentient member may require the liquidators to do one of the following things, as the liquidators may prefer; that is to say, either to abstain from carrying such resolution into effect, or to purchase the interest held by such dissentient member at a price to be determined in manner hereinafter mentioned, such purchase-money to be paid before the company is dissolved, and to be raised by the liquidators in such manner as may be determined by special resolution: no special resolution shall be deemed invalid for the purposes of this section by reason that it is passed antecedently to or concurrently with any resolution for winding up the company, or for appointing liquidators; but if an order be Section 162. Reconstruc made within a year for winding up the company by or subject to the supervision of the Court, such resolution shall not be of any validity unless it is sanctioned by the Court." The price to be paid to dissentients is to be determined in accordance with Section 162 of the Act, which is as follows: "The price to be paid for the purchase of the interest of any dissentient member may be determined by agreement; but if the parties dispute about the same, such dispute shall be settled by arbitration, and for the purposes of such arbitration the provisions of The Companies Clauses Consolidation Act, 1845, with respect to the settlement of disputes by arbitration, shall be incorporated with this Act; and in the construction of such provisions this Act shall be deemed to be the special Act, and the company' shall mean the company that is being wound up, and any appointment by the said incorporated provisions directed to be made under the hand of the secretary, or any two of the directors may be made under the hand of the liquidator, if only one, or any two or more of the liquidators, if more than one." A reconstruction under Section 161 above, has now become a matter tions common. of ordinary occurrence, and may be resorted to with advantage in a variety of cases, of which the following are examples : Examples. Mode in which reconstruction effected. Case A. A. Where the company desires to do something ultra vires, e.g.:— (2.) To issue preference shares, there being no power in the memoran- (3.) To issue preference shares, having a priority over preference shares already issued, notwithstanding the holders of such last-mentioned shares, or some of them, refuse to consent. [See supra, p. 196.] B. Where a company desires, without submitting to the stringent conditions prescribed by the Companies Acts, 1867 and 1877, upon a reduction of capital, to carry into effect any arrangement which would amount to a reduction of capital, e.g.: (1.) To divide part of its paid-up capital, either in cash or in specie, among its members. (2.) To reduce the liability on its shares which are only in part paid up. (3.) To extinguish all further liability on such shares. (4.) To return capital, but with power to call it up again. The mode in which the reconstruction is carried into effect is as follows:- In case A. (1). Let it be supposed that the capital of the existing company is 100,0007., divided into 10,000 shares of 107. each, that its object is to work a particular patent for the manufacture of steel, and that it desires to have power to acquire and work other patents for the like purpose. The directors having satisfied themselves that a reconstruction is Preliminary expedient, will suggest it at a general meeting and procure a resolu- steps.: tion in favour of it to be passed, or, as is sometimes done, they will issue a circular to the members or to the largest holders of shares seeking their approval of the plan. If the plan is favourably received, the memorandum and articles of New company. a new company will be prepared. The objects of such company will be to acquire and undertake the property and liabilities of the old company, and to acquire and work any patents for the manufacture of steel and such other objects as may be deemed expedient. The capital will be the same as that of the old company. The articles will authorise the directors to purchase and undertake all or any part of the property and liabilities of the old company upon the terms of an agreement therein referred to. Probably by the articles all, or some, of the directors of the old company will be appointed directors of the new company. Notice will then be issued by the directors of the old company con- Issue of notice. vening an extraordinary meeting of that company to consider certain resolutions which will be given in the notice. If the resolutions are passed by the requisite majority at the first meeting, a second one will be called to confirm them, so that they may become special resolutions. See supra, p. 212. lution. And if they are duly confirmed, the new company will be at once in- Special resocorporated, and the liquidators of the old company and the directors of the new company will execute the agreement mentioned in the resolu- Sale by liquitions. dators. The agreement will provide for the sale of all the property of the old Agreement. company to the new company, in consideration of the new company undertaking the debts and liabilities of the old company, paying the costs of winding it up, providing the funds necessary to purchase the interest of any dissentient members, and allotting to every assenting member of the old company one share in the new company in respect of each share held by him in the old company. If the matter has been properly managed, the chances are that there Dissentients. will be but few dissentient members (if any). The funds to pay them will be provided by the new company by borrowing or otherwise. The property of the old company will be in due course made over to Completion of the new company, which will allot its shares as provided by the agree ment. The debts and liabilities of the old company (if it has any) will be got rid of as soon as possible. Many of the creditors will probably agree to accept the liability of the new instead of the old company; the rest will be paid. sale. As soon as may be the liquidators hold the final meeting (Section 142 Dissolution of of the Act), and make the proper return to the registrar (Section 143 of old company. the Act), and at the expiration of three months therefrom the old com pany is ipso facto dissolved. General or particular authority to liquidators. Variations in arrangement. New company commonly takes the old name. Section 161, it will be observed, authorises a sale sanctioned by a special resolution conferring "either a general authority on the liquidators, or an authority in respect of any particular arrangement." Sometimes a general authority is given; but in most cases it is limited to a sale on the terms of a particular agreement. Instead of a draft agreement, as above, it is not uncommon to have a provisional agreement made between one person on behalf of the old company and another on behalf of the intended new company. In such case the resolution will authorise the liquidators to "adopt" the agreement. Of course the arrangement must vary according to the circumstances of the company, and the object of the reconstruction. Thus in cases A. (2) and (3), supra, p. 552 :— Care will be taken that the articles of the new company contain full power to issue preference shares, or the capital of the new company will consist in part of preference shares. Suppose that the shares in the old company are 207. fully paid up, and that it is desired to return 107., the agreement will provide that the new company shall, in exchange for each share in the old company, allot one fully paid-up 107. share in the new company, and pay the sum of 107. in cash. Or suppose that the object of the reconstruction is to divide in specie some assets of doubtful value, e.g., debentures of some other company. The new company will, as the consideration for the sale, agree to allot shares to the members of the old company, and to divide the debentures among them pro rata. Suppose the shares in the old company are 207. with 107. paid up, and it is desired to reduce the liability to 57. In such case, one 157. share in the new company, with 107. credited as paid up, will be allotted in exchange for each share in the old company. In case B. (3) : Suppose the shares in the old company to be 107. with 77. paid up, and that it is desired to extinguish all further liability. The object will be attained by allotting one fully paid up 77. share in the new company in exchange for each 107. share in the old company. In case B. (4) :— Suppose the shares in the old company are 107. fully paid up, and that it is desired to return 57. per share, but with power to call it up again. In such case the new company will allot one of its 107. shares credited with 57. paid up, and will pay 57. in cash in respect of each 107. share in the old company. In cases of reconstruction the new company very commonly takes the name of the old one. This is effected under Section 20 of the Act. See supra, p. 64. Immediately after the special resolution to wind up, &c., has been passed by the old company, the liquidators sign the proper consent to the registration of the new company by the same name. Supra, p. 219. The new company is registered by the old name the same or next day, the agreement is forthwith executed and the new company commences business, thus avoiding any stoppage. Sometimes the name is slightly varied, and sometimes a perfectly different one is chosen for the new company. to company. It will be observed that Section 161 only authorises a sale to a Sale must be company. Hence a sale to an individual, who is to form a new company, and make such profit as he can out of the transaction, is not valid. Bird v. Bird's Patent Sewage Co., 9 Ch. 358. See Form 333, supra. But an agreement with some person purporting to act on behalf of an intended company, for a sale to him as such agent or to the company may be valid. In re Hester & Co., 44 L. J. N. S. 757. Section 161 does not require that the sale should be made to a com- It may be to pany registered under the Act of 1862. The sale may be to any foreign comcompany, English or foreign. In re Irrigation Co. of France, Ex parte For, 6 Ch. 183. pany. An agreement adopted by the liquidators of a company pursuant to Liquidators the direction of the company given by virtue of Section 161 is valid. may be Southall v. British Mutual Life Assur. Soc., 11 Eq. 65; 6 Ch. 614. directed to adopt agree The agreement may provide for the allotment of the shares, &c., to ment. the members of the company being wound up directly. See In re City Agreement and County Investment Co., 13 C. Div. 475. may provide for allotment members directly. A sale under s. 161 may be made in consideration of shares that of shares to are only in part credited as paid up. In re City and County Investment Co., 13 C. Div. 475; Imperial Mercantile Credit Association, 12 Eq. 504; Hester & Co., 44 L. J. 757. But in such case the liquidator should take care that the shares are not allotted to him but to the shareholders directly, otherwise he may be involved in liabilities which he never contemplated. Dyett's case, 43 L. T. 85. distribution. The question whether upon a sale under s. 161 the members can Mode of by special resolution determine the mode in which the shares forming the consideration for the sale shall, as between different classes of members, be distributed cannot be regarded as settled. Previously to the decision of the Master of the Rolls in Paget v. Griffith, 5 C. D. 894, it was very generally thought that the members could so determine, and many reconstructions were effected on that footing. For example where the capital of a company was divided into different classes of shares, e.g., preference and ordinary, it was not uncommon to reconstruct with a view (inter alia) to converting all the shares into shares of uniform character. For this purpose the relative value of the shares in the old company (as a going concern) was approximately ascertained, and the agreement provided for the allotment of the shares in the new company accordingly, e.g., two for every preference, and one for every ordinary share. So, too, when there were different classes of shares, and the company desired to reconstruct (e.g., to extend its powers), it was not uncommon to adopt a scheme under which the capital of the new |