C. A. 1897 ANDREWS v. conditions of the memorandum are stated in s. 8 of the Act of 1862, and one of those conditions is the amount of capital. But by s. 12 the company is expressly empowered to modify GAS METER the conditions of the memorandum so as to increase its capital, COMPANY. if authorized to do so by the articles as originally framed or as altered by special resolution. Therefore, the clause in the memorandum as to the increase of capital is mere surplusage, and cannot in any view of the case be treated as importing equality between the shareholders in respect of that capital. [Their Lordships intimated that they desired to hear counsel for the respondent on the question as to the validity of the issue of preference shares before dealing with the question as to the position of the preference shareholders, in the event of the issue being declared to be invalid.] P. O. Lawrence, Q.C., and Eustace Smith, for the respondent. Upon the true construction of clause 5 of the memorandum, the reference to the articles is a reference to the articles as they then stood, and the intention was to incorporate art. 28. If any increase was to be permitted, it was to be on the same footing as the original capital, i.e., on the footing of equality. Hutton v. Scarborough Cliff Hotel Co. (1) is expressly recognised as an authority in Ashbury v. Watson (2), which shews that a memorandum may contain conditions beyond those required by the statute, which are nevertheless unalterable. The decision of the Vice-Chancellor has also been recognised in the text-books: Lindley on Companies, 5th ed. pp. 322, 334, 343, 396, 405, 597; Buckley on Companies, 6th ed. p. 182. Warrington, Q.C., in reply. [The question as to the position of the holders of preference shares in the event of the issue being declared to be invalid was then argued.] Cur, adv. vult. Feb. 6. LINDLEY L.J. delivered the judgment of the Court (Lindley, A. L. Smith, and Rigby L.JJ.) as follows:-The question raised by this appeal is whether certain preference shares issued by a limited company as long ago as 1865 were validly issued or not. If they were not, a further question will arise, which is-what are the rights of their present holders? The company was formed and registered as a limited company under the Companies Act, 1856; but in October, 1862, it was registered under the Companies Act, 1862, and it is by that Act and the decisions upon it that the above questions have to be determined. The company's original capital as stated in its memorandum of association was "60,000l., divided into 600 shares of 1007. each, every share being sub-divisible into fifths, with power to increase the capital as provided by the articles of association." By the articles of association which accompanied the memorandum of association, and were registered with it, power was given to the company to increase the capital (art. 27), and it was provided that any new capital should be considered as part of the original capital (art. 28). The issue of preference shares was not contemplated or authorized. In 1865 the company desired to acquire additional works, and passed a special resolution under the powers conferred by the Companies Act, 1862, ss. 50 and 51, altering the articles and authorizing the issue of 100 shares of 1007. each, fully paid, and bearing a preferential dividend of 51. per cent. per annum. Those shares were accordingly issued to the vendors of the works referred to, and are the shares the validity of which is now in question. The company has been prosperous, and the ordinary shareholders have for years received a higher dividend than the preference shareholders. A considerable reserve has also been accumulated, and this action has been brought to determine the rights of the preference shareholders to this reserve fund. The learned judge has held that the creation of the preference shares was ultra vires, and that their holders never became and are not now shareholders in the company, and that they have none of the rights of shareholders, whether preference or ordinary. He has not, however, declared more definitely what their rights are. They have appealed from this decision; but on the appeal they only claimed to be preference shareholders entitled to a preferential dividend of C. A. 1897 ANDREWS v. GAS METER C. A. 1897 ANDREWS 5 per cent. Their claim to any share of the reserve fund was dropped. The judgment against the validity of the preference shares is based upon the well-known case of Hutton v. ScarGAS METER borough Cliff Hotel Co. (1), which came twice before KindersCOMPANY. ley V.-C. in 1865, and which Kekewich J. very naturally held to be binding on him. Kindersley V.-C.'s first decision was that a limited company which had not issued the whole of its original capital could not issue the unallotted shares as preference shares unless authorized so to do by its memorandum of association or by its articles of association. This decision was affirmed on appeal (2), and was obviously correct; and would have been correct even if the whole of the original capital had been issued and the preference shares had been new and additional capital. The company, however, afterwards passed a special resolution altering the articles and authorizing an issue of preference shares. This raised an entirely different question, and led to the second decision. (3) The ViceChancellor granted an injunction restraining the issue of the preference shares, and he held distinctly that the resolution altering the articles was ultra vires. He did so upon the ground, as we understand his judgment, that there was in the memorandum of association a condition that all the shareholders should stand on an equal footing as to the receipt of dividends, and that this condition was one which could not be got rid of by a special resolution altering the articles of association under the powers conferred by ss. 50 and 51 of the Act. The judgment of the Vice-Chancellor is a little obscure, because he treats the condition as a condition of the constitution of the company, and he may have meant by that expression either the constitution as fixed by the memorandum of association or the constitution as fixed by the memorandum of association and the original articles. But unless he had meant the constitution of the company as fixed by the memorandum of association his decision is unintelligible; for, so far as the constitution depended on the articles, it clearly could be altered by special resolution under the powers conferred by ss. 50 and 51 of the (2) 4 D. J. & S. 672. (1) 2 Dr. & Sm. 514, 521. (3) 2 Dr. & Sm. 521. Act. A company cannot deprive itself of this power: see Mallinson v. National Insurance and Guarantee Corporation (1) and Walker v. London Tramways Co. (2) The Vice-Chancellor further seems to have been of opinion that the condition could be excluded by contemporaneous articles of association, and his decision has been so understood by succeeding judges. Accordingly, in 1875, in the case of Harrison v. Mexican Ry. Co. (3), Sir G. Jessel held that the condition of equality imported into the memorandum of association by Kindersley V.-C.'s decision was negatived by one of the articles of association filed with the memorandum, and which article authorized the creation of additional capital by the issue of new shares, "in such manner, to such amount, and with and subject to such rules, regulations, privileges, and conditions" as the company should think fit. In our opinion it is impossible to uphold this decision, or the view of Kindersley V.-C. himself, as to the effect of articles on the memorandum, if it is once conceded that it is a condition in the memorandum of association that there shall be equality amongst the shareholders. If the condition is really one of the conditions of the memorandum, it is immaterial whether the condition is express or implied. If the memorandum of association really prescribed equality amongst all the shareholders, as Kindersley V.-C. held that it did, the articles of association could not override the memorandum of association in that particular. (See s. 12 of the Act, and Ashbury Railway Carriage and Iron Co. v. Riche (4) and Guinness v. Land Corporation of Ireland. (5)) The departure thus made by Sir G. Jessel from the principle on which the Vice-Chancellor based the second decision in Hutton v. Scarborough Cliff Hotel Co. (6) was sanctioned by the Court of Appeal in 1885 in the case of In re South Durham Brewery Co. (7), and again in 1888 in In re Bridgewater Navigation Co. (8), a case which, although reversed on another point (9), was not questioned on the point now under consideration. These decisions turned upon the (1) [1894] 1 Ch. 200. (2) (1879) 12 Ch. D. 705. (3) L. R. 19 Eq. 358. (4) (1875) L. R. 7 H. L. 653, 667. (5) 22 Ch. D. 349. (9) (1889) 14 App. Cas. 525. C. A. 1897 ANDREWS v. GAS METER C. A. 1897 ANDREWS V. GAS METER principle that although by s. 8 of the Act the memorandum is to state the amount of the original capital and the number of shares into which it is to be divided, yet in other respects the rights of the shareholders in respect of their shares and COMPANY. the terms on which additional capital may be raised are matters to be regulated by the articles of association rather than by the memorandum, and are, therefore, matters which (unless provided for by the memorandum, as in Ashbury v. Watson (1)) may be determined by the company from time to time by special resolution pursuant to s. 50 of the Act. This view, however, clearly negatives the doctrine that there is a condition in the memorandum of association that all shareholders are to be on an equality unless the memorandum itself shews the contrary. That proposition is, in our opinion, unsound. Its unsoundness was distinctly pointed out by Lord Macnaghten in British and American Trustee and Finance Corporation v. Couper. (2) The view taken by Kindersley V.-C. cannot, in our opinion, be supported by reference to the Companies Act of 1862; and it is inconsistent with the decisions to which we have referred, and which, if wrong, can only now be set right by the House of Lords. It was, however, contended that this Court, at all events, had approved and followed the decision of Kindersley V.-C.; and Ashbury v. Watson (1) was referred to on this point. In that case the memorandum of association stated that preferential shares might be created, and what the preferential rights were to be; and it was held that these were conditions which could be properly introduced into the memorandum of association, and which, being introduced there, could not be afterwards departed from and be treated as articles of association capable of change. No doubt Fry L.J. relied on Hutton v. Scarborough Cliff Hotel Co. (3) to shew that provisions about preference shares were conditions which could properly be inserted in the memorandum of association; but the propriety of the decision of Kindersley V.-C. in that case was not before the Court, and we do not regard Ashbury v. Watson (1) as conflicting with (2) [1894] A. C. 416, 417. (3) 2 Dr. & Sm. 521. (1) 30 Ch. D. 376. |