Scottish Insurance Corpn Ltd v Wilsons & Clyde Coal Co Ltd

A court may confirm a reduction of capital only if it is fair and equitable between the different classes of shareholders. Fairness depends upon all the circumstances and the rights conferred by the company’s constitutional instruments.

An express statement of preference shareholders’ priority on a winding-up may exhaust their rights. It need not preserve an additional right to participate equally in surplus assets. Where their rights are limited to repayment of capital, paying that capital in full does not become unfair merely because it ends a favourable investment or precedes an expected liquidation.

Section 25 of the Coal Industry Nationalisation Act 1946 neither ousted nor suspended the court’s jurisdiction over capital reductions. Its possible operation was a factor in assessing fairness, but a speculative prospect of adjustment did not require confirmation to be withheld.

The respondent coal company’s undertaking had passed to the National Coal Board under nationalisation legislation. It resolved to reduce its capital by repaying the first and second preference stock in full, extinguishing those stocks, and returning part of the ordinary capital. A substantial minority of preference stockholders objected.

By a majority, the First Division of the Court of Session repelled the objections as irrelevant in hoc statu and directed the usual procedure upon the company’s petition for confirmation. The preference stockholders appealed.

The central questions were whether the proposed reduction was fair and equitable between the classes, whether the preference stockholders had a right to participate in surplus assets upon liquidation, and whether section 25 of the Coal Industry Nationalisation Act 1946 prevented or weighed against confirmation.

1. Appeal dismissed by a majority of three to one. Viscount Maugham, Lord Simonds and Lord Normand held that the preference stockholders’ objections disclosed no basis for refusing confirmation. The answers were repelled as irrelevant, the petition was remitted to a reporter, and the appellants were ordered to pay the costs of the appeal. Lord Morton of Henryton dissented.

2. Per Lord Simonds, with Viscount Maugham and Lord Normand reaching the same conclusion, the court’s discretionary jurisdiction required it to ensure that a reduction was formally regular, did not prejudice creditors, and was fair and equitable between the classes of shareholders. Fairness depended upon the circumstances of the particular company.

3. Per Lord Simonds and Lord Normand, the rights of preference and ordinary shareholders depended upon the bargain embodied in the company’s constitutional instruments. Articles 159 and 160, read with the remaining articles, exhaustively defined the preference stockholders’ rights on a winding-up. Their priority extended to repayment of the capital paid up. It did not carry a further right to share in surplus assets. Viscount Maugham agreed, emphasising that the profits, reserves and appreciations had been appropriated to the ordinary shareholders under the articles.

4. Per Lord Simonds, repayment in full was not rendered unfair because it ended a valuable 7 per cent investment or occurred before an anticipated liquidation. A preference shareholder could not complain merely because a company lawfully proposed to repay the capital when funds were available. Any participation in surplus assets would have been outside the preference stockholders’ reasonable expectations and, on the majority’s construction, outside their legal rights.

5. Per Lord Normand, In re William Metcalfe & Sons could not be reconciled with the ratio of Will v United Lankat Plantations Co and should be overruled. The reasoning in Collaroy Co v Giffard and In re National Telephone Co was preferred.

6. Per Lord Simonds and Lord Normand, section 25 of the Coal Industry Nationalisation Act 1946 neither ousted nor suspended the court’s jurisdiction under section 55 of the Companies Act 1929. It was one factor in assessing fairness. The uncertain possibility of a favourable statutory adjustment did not outweigh the delay and prejudice that withholding confirmation would cause.

7. Lord Morton dissented. He considered that the articles preserved the preference stockholders’ right to share in surplus assets and that extinguishing their rights immediately before inevitable liquidation, solely to benefit the ordinary stockholders, was unfair and inequitable.

1. House of Lords: By a majority of three to one, dismissed the appeal, repelled the preference stockholders’ answers as irrelevant, remitted the petition to a reporter and awarded the costs of the appeal against the appellants: [1949] AC 462.
2. First Division of the Court of Session: By a majority, the Lord President dissenting, repelled the preference stockholders’ answers as irrelevant in hoc statu and directed that the usual procedure upon the petition for confirmation should follow.