Poole and Others v. National Bank of China [1907] UKHL 616
(Before the Lord Chancellor (Loreburn) , Lords Macnaghten , Robertson , and Atkinson .)45 SLR 616Poole and Others v. National Bank of China.Subject_ Company — Reduction of Capital and Shares — Petition for Order Confirming Reduction — Jurisdiction — Conditions — Special Resolution — Companies Act 1867, secs. 9 and foll. Facts:Wherever a company has passed a special resolution for reducing its capital the Court has jurisdiction to entertain a petition at the instance of the company, for an order confirming such reduction. There are no other conditions-precedent to such jurisdiction, and, in particular, it need not be proved that the capital which is to be cancelled is lost or unrepresented by available assets. The petition will be granted by the Court if the interests of creditors are properly safeguarded, and if the proposed reduction is a prudent and business like measure, not unfair to any shareholder, or detrimental to the public.British and American Trustee and Finance Corporation v. Couper (1894), A.C. 399, approved and followed ; Anglo-French Exploration Company (1902), 2 Ch. 845, disapproved.retention of a reserve fund of at least £11,674 was necessary to support the credit of the company as a bank and to meet contingencies; but the appellants did not admit that such retention was necessary, and stated that in any case the founders' share capital could not be written off until the whole of the reserve fund had been exhausted.Appeal from an order of the Court of Appeal ( Vaughan Williams, Romer, and Stirling, L.JJ. ), dated 6th April 1905, affirming the decision of Farwell , J., dated the 3rd March 1905, granting the prayer of the petition of the respondent company to obtain confirmation of a special resolution reducing its capital from £1,000,000 divided into 750 shares of £1 each (founders' shares) and 99,925 shares of £10 each (ordinary shares) to £699,475 divided into 99,925 shares of £7 each. Such reduction was to be effected by writing off the whole amount paid, or credited as paid, on each of the 750 shares of £1 each, and cancelling those shares, and by writing off £3 per share, part of the sum of £8 per share, which had been paid or credited as paid on the 40,453 shares of £10 each which had been issued, and by reducing each of the 99,925 shares of £10 each to a share of £7.The appellants were together holders of forty-four founders' shares of the company, and opposed the petition.The company was incorporated in 1891 as a company limited by shares under the Companies Acts 1862 to 1890 by the registration of a memorandum, accompanied by articles of association. The objects for which the company was established were to establish and carry on the business of commercial trading and commission agents and of bankers and financial agents in the United Kingdom of Great Britain and Ireland, China, Japan, Borneo, the Empire of India, the British colonies, and other British dependencies in the East, America, and the Philippine Islands, and elsewhere, as might from time to time be determined, and other ancillary objects contained in the memorandum of association.On the hearing of the petition the company stated that its financial position at the 31st Dec. 1903 was as follows:—The capital paid up was £324,374; the capital reserve fund was 191,973 dollars; reserve fund accumulated out of net profits 175,533 dollars; undivided profits, 21,668 dollars—389,174 dollars; or at the exchange of 1s. 8d.—£32,431—total, £356,805. The assets of the bank (other than the Chinese Government gold bonds) amounted to 4,452,958 dollars; less the liabilities, 2,213,289 dollars—2,239,669, dollars; or at the exchange of 1s. 8d.—£186,639; Chinese Government gold bonds, £27,300—£213,939; showing a loss of capital to the amount of £142,866. It was proposed to write off this loss of £142,866 by appropriating the undivided profits at the 31st Dec. 1903, 21,668 dollars; capital reserve fund, 191,973 dollars; part of the profit reserve fund 35,443 dollars—249,084 dollars; or at the exchange of 1s. 8d.—£20,757; by writing off the whole amount paid on the founders' shares, £750; and £3 per share of the amount paid up on each of the 40,453 issued ordinary shares, £121,359—£122,109; total, £142,866. This would leave the paid-up capital represented by 40,453 shares of £7 each, £5 paid, £202,265; and the reserve fund would be reduced to 140,090 dollars—£11,674.It was alleged by the company that the
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By a special resolution of the company, duly passed and confirmed at extraordinary general meetings held on the 3rd Sept. and the 24th Sept. 1904, this proposal was accepted.A resolution was passed to the same effect at a separate meeting of the holders of the ordinary shares held on 3rd Sept. 1904. No meeting of the holders of the founder's shares of the company was held pursuant to art. 17 of the articles of association.The reduction proposed to be effected did not involve either the diminution of any liability in respect of unpaid capital or the payment to any shareholder of any paid-up capital.At delivering judgment—
Lord Chancellor (Loreburn )—In this appeal your Lordships are asked to refuse your sanction to a resolution for the reduction of its capital which has been passed by the National Bank of China. The appellants represent a very small proportion of the holders of founders' shares. But if this resolution is in fact unfair even a few opponents will prevail. The only question is whether it is unfair, for the contention that it contravenes a bargain contained in the memorandum and articles of association cannot be made good; and it is no part of the business of a court of justice to determine the wisdom of a course adopted by a company in the management of its own affairs. I can see nothing that ought to induce your Lordships to interfere with the conclusion arrived at by Farwell, J. and by the Court of Appeal, and I am the more inclined to agree with them by the consideration that the appellants made no specific proposal in either of the Courts below, though they maintained here that the scheme for reduction might have been so modified as to preserve their interest without thwarting the policy of the company. The conduct of an opposing minority is not without its significance in considering such questions as are now before the House. Nor is it an indifferent matter from the same point of view that the appellants deferred their appeal to this House to the very last day, while the resolution sanctioned by the Court was in full operation and shares presumably changing hands on the footing of its validity. Apart, however, from these latter considerations, I think that this appeal should be dismissed.Lord Macnaghten —i quite agree with my noble and learned friend on the woolsack that this appeal must be dismissed. I venture to add a few observations, because there seems to be a growing tendency to narrow and restrict the power of reducing capital conferred by the Act of 1867 on companies limited by shares. That tendency is apparent, I think, in the judgment of the Court of Appeal in the present case, and particularly in the addition which that Court has made to the order pronounced by Farwell, J. The power conferred by the Act of 1867 is perfectly general. Any restriction upon it not authorised by the Act of 1867 or the Act of 1877 is calculated, I think, to lead to inconvenience and expense, and to hamper and embarrass companies in the conduct of their domestic affairs. The subject of reduction of capital was very fully considered by this House in 1894 in the case of British and American Trustee and Finance Corporation v. Couper (1894), A.C. 399. In that case Lord Herschell, L.C., after referring to the Acts of 1867 and 1877, said—“It will be observed that neither of these statutes prescribes the manner in which the reduction of capital is to be effected, nor is there any limitation of the power of the Court to confirm the reduction, except that it must first be satisfied that all the creditors entitled to object to the reduction have either consented or been paid or secured.” Later on, in dealing with the case before the House, he says—“The interests of creditors are not involved, and I think that it was the policy of the Legislature to intrust the prescribed majority of the shareholders with the decision whether there should be a reduction of capital, and if so, how it should be carried into effect.” By way of caution he adds this observation—“There can be no doubt that any scheme which does not provide for uniform treatment of shareholders whose rights are similar would be most narrowly scrutinised by the Court, and that no such scheme ought to be confirmed unless the Court be satisfied that it will not work unjustly or inequitably. But this is quite a different thing from saying that the Court has no power to sanction it.” Lord Watson takes the same view. His words are these—“Apart from the interest of creditors, the question whether each member shall have his share proportionately reduced, or whether some members shall retain their shares unreduced, the shares of others being extinguished upon their receiving a just equivalent, is a purely domestic matter, and it might be greatly for the advantage of the company that the latter alternative should be adopted.” Speaking for myself, I see no reason to alter or modify what I said in that case. “Creditors,” I observed, “are protected by express provisions. Their consent must be procured or their claims must be satisfied. The public, the shareholder, and every class of shareholders individually and collectively, are protected by the necessary publicity of the proceedings and by the discretion that is entrusted to the Court. Until confirmed by the Court the proposed reduction is not to take effect, though all the creditors have been satisfied. When it is confirmed the memorandum is to be altered in the prescribed manner, and thePage: 618 ↓
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Lords Robertson and Atkinson concurred.Appeal dismissed.Counsel for Appellants— Eve, K.C.— Jenkins, K.C.— Whinney. Agents— Slaughter & May, Solicitors.Counsel for Respondents— Upjohn, K.C.— Kirby. Agents— Paines, Bly, & Huxtable, Solicitors.