Hutchison & Company
| Jurisdiction | Scotland |
| Judgment Date | 16 July 1930 |
| Docket Number | No. 120.,No. 25. |
| Date | 16 July 1930 |
| Court | Court of Session (Inner House - First Division) |
1ST DIVISION.
CompanyConstitution and incorporationAlteration of memorandum of associationObjects of companyPower to invest reservesCompanies Act, 1929 (19 and 20 Geo. V. cap. 23), sec. 5.
Sec. 5 (1) of the Companies Act, 1929, empowers a company, by special resolution, to alter the provisions of its memorandum with respect to the objects of the company "so far as may be required to enable it(a) to carry on its business more economically or more efficiently." Sec. 5 (2) provides that the alteration shall not take effect until, and except in so far as, it is confirmed by the Court.
A mercantile company, founding on sec. 5, presented a petition craving the Court to confirm a resolution altering its memorandum of association by adding thereto a clause enabling the company to invest its reserve funds in such stocks and securities as the company or its directors might think proper, on the ground that the company's existing powers of investment appeared not to permit of its reserves being invested to the best advantage.
The Court, following J. & P. Coats, Limited, (1900) 2 F. 829, granted the prayer of the petition.
Robert Hutchison & Company, Limited, corn merchants, millers, and maltsters, Eastbridge Mills, Kirkcaldy, presented a petition to the Court under section 5 of the Companies Act, 1929,1 craving the Court to confirm an alteration of the provisions of the Company's memorandum of association with respect to its objects, adopted by special resolution of the Company passed on 8th May 1930.
The petitioners averred that the directors had had under consideration the powers of the company with reference to its reserve funds, which amounted to 100,000; that these funds had been profitably invested from time to time, but that the directors were doubtful if the powers of investment contained in the Company's memorandum were wide enough to enable these funds to be invested to the best advantage; and that, by special resolution duly passed on 8th May 1930, the Company had resolved that the following paragraph be added to the objects of the Company specified in its memorandum of association:"To invest the Reserve Funds of the Company, or any other moneys of the Company not immediately required for the other objects of the Company, in such stocks, funds, and securities or other investments (including shares, stock, debentures, debenture stock, or other obligations and securities of Companies or Corporations constituted according to the laws whether of Scotland or of any other part of the British Empire or of any Foreign State) as the Company or the Directors may think proper, and to hold, sell, or otherwise deal with such investments, provided that no such investment be made in or on the security of any shares of the Company."
On the petition appearing in the Single Bills of the First Division on 11th June 1930, the Court remitted to William Campbell Johnston, Esq., W.S., to report.2
On 16th July 1930 counsel for the petitioners was heard upon the petition and report before the First Division (without Lord Sands). Counsel referred to the undernoted authorities,3 and moved the Court to grant the prayer of the petition.
LORD PRESIDENT (Clyde).This is a petition to confirm an alteration of the memorandum of association of a limited Company carrying on the business of corn merchants, millers, and maltsters. The Company has long held large reserve funds amounting to about 100,000. These funds can be dealt with under articles 99 and 114 of the Company's articles of association, which authorise the employment of these funds in the Company's business, orif they are not required for that purposethe investment of them in such securities and investments as the
Company sees fit, with power to vary such investments and to dispose of them for the benefit of the Company. But the Company desires to include among its purposes as set out in the memorandum of association that of investing its reserve funds and of dealing with such investments, "provided that no such investment be made in or on the security of any shares of the Company." It is intelligible that a company, whose business makes it expedient to hold large reserves for what may turn out to be a long period of years, should desire to place among its purposes that of investing the funds and dealing with the investments so made. But it is at least doubtful whether the articles of association are not sufficient
to give the Company all the powers it really needs. It has been pointed out in the Privy Council (Burland v. EarleELR4), in somewhat similar circumstances, that it was not the business of the Court to interfere in the internal management of companies so long as they kept within their powers, and that the power to form a reserve fund carried with it, and implied, power to invest that reserve fund in the form of securities which need not be confined to the class of trust investments. I have already indicated that, in my opinion, there is much to be said for the view that in the present case the Company's articles give the Company all the powers which it requires; but there is precedent in this Court, in the case of J. & P. Coats, Limited,5 for sanctioning such an alteration as is now proposed. In any view, it can do no harm to add to the purposes of the Company as proposed; and, as the reserves arerelatively speakingpermanent, the new purpose may be said to be required to enable the Company to carry on its business more efficientlyCompanies Act, 1929,6 section 5 (1) (a). The new purpose only applies to reserve funds, and does not, therefore, convert the Company into an investment company. I think, therefore, we may grant the prayer of the petition.
LORD BLACKBURN.I concur.
LORD MORISON.I am of the same opinion. I think the case of J. & P. Coats5 is a direct authority in support of this application.
The Court approved of the report and confirmed the alteration of the provisions of the Company's memorandum of association with respect to its objects set forth in the special resolution of the Company passed on 8th May 1930.
1 The terms of sec. 5 are sufficiently set forth in the rubric.
2 Report."The reason given for the proposed alteration of the provisions
of the Company's memorandum of association is to enable the reserve funds of the Company to be invested to the best advantage.
"Article 99 of the articles of association of the petitioning Company in force at the time of passing the special resolution was in the following terms:99. The Directors may, before declaring any dividend on the Ordinary Shares, set aside out of the profits of the Company remaining after payment of the Dividend on the Preference Shares, such sum as they think proper to a Reserve or other Fund or Funds, which shall, at the discretion of the Directors, be applicable for meeting contingencies, for the gradual liquidation of any debt or liability of the Company, or for repairing or maintaining the works connected with the business of the Company, or at the discretion aforesaid, shall be, in whole or in part, applicable for equalising Dividends, or for distribution by way of Bonus, among the Ordinary Shareholders of the Company for the time being, on such terms, and in such manner as the Directors may from time to time determine. The Directors may employ the Reserve Fund or other Fund or Funds in the business of the Company.
"There is in the article quoted no provision that the reserve fund may be invested and no definition of the class of investment in which it may be invested.
"The reporter does not doubt that the proper formation and investment of a reserve fund is an advantage and enables a Company to carry on its business more economically or more efficiently, but it appears to him that the omission referred to was remedied by the new articles of association, which were adopted by another special resolution passed at the extraordinary general meeting held on 8th May 1930.
"By these new articles of association, inter alia, the following powers were conferred on the directors:[Article 114] (l) They may transfer to a Reserve Fund any sums which in any past year of the Company may in the opinion of the Directors have been set aside out of profits for depreciation in excess of what was necessary, and also debit to any appropriate Capital Account any sum which may in any previous year have been debited to any Reserve Account, or Reserve Fund, or to Profit and Loss, and credit the amount of any sum so debited to any Reserve Account or Reserve Fund or to the Profit and Loss Account. (p) They may invest any sums so set aside or any funds not immediately required for the business of the Company in such securities and investments (other than shares of the Company) as they may see fit, and vary such securities and investments, and dispose of all or any part thereof for the benefit of the Company, with full power to employ the sums so set aside in the business
3 J. & P. Coats, (1900) 2 F. 829; Burland v. EarleELR, [1902] A. C. 83.
of the Company and that without being bound to keep the same separate from the other assets.'
"These provisions for the internal management of the Company do not contain the same powers as are sought in the proposed alteration of the provisions of the memorandum of association, but they appear to give the Directors ample powers of investment.
"It is instructive to observe that Table A of the First Schedule to the Companies Act, 1929, contains a clause [Article 93] dealing with reserve funds and provides that the directors may set aside out of the profits of the company such sums as they think proper as a reserve or reserves, which shall at the discretion of the directors either be employed in the business of the company, or be invested in such investments (other than shares of the company) as the directors may from time to time think fit. At the same time the form of memorandum of association given in Table B does not specifically...
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