Lee v Neuchatel Asphalte Company
| Jurisdiction | England & Wales |
| Date | 1888 |
| Year | 1888 |
| Court | Court of Appeal |
Company - Dividends - Payment of Dividend out of Capital - Wasting Property.
Where the shares of a limited company have, under a duly registered contract, been allotted as fully paid-up shares in consideration of assets handed over to the company, it is under no obligation to keep the value of its assets up to the nominal amount of its capital, and the payment of a dividend is not to be considered a return of capital, merely on the ground that no provision has been made for keeping the assets up to the nominal amount of capital.
There is nothing in the Companies Acts to prohibit a company formed to work a wasting property, as e.g., a mine or a patent, from distributing, as dividend, the excess of the proceeds of working above the expenses of working, nor to impose on the company any obligation to set apart a sinking fund to meet the depreciation in the value of the wasting property. If the expenses of working exceed the receipts, the accounts must not be made out so as to shew an apparent profit, and so enable the company to pay a dividend out of capital, but the division of the profits without providing a sinking fund is not such a payment of dividends out of capital as is forbidden by law.
THIS company was incorporated in July, 1873, as a limited company with a nominal capital of £1,150,000 divided into shares of £10, of which 35,000 were preference and 80,000 ordinary shares.
One of the objects of the company as defined by the memorandum of association was to acquire as from the 1st of July, 1873, and on the terms expressed in an agreement dated the 17th of July, 1873, and made between the Neuchatel Rock Paving Company and five other companies of the first six parts, and H. A. Bradbury contracting on behalf of this company of the sixth part, or on such other terms as might be mutually agreed, the concession granted by the Government of Neuchatel and held by the Neuchatel Rock Paving Company, and the exclusive right thereunder of getting the bituminous rock and mineral products from the Val de Travers, and all the mines, works, business, property, and assets of the last-mentioned company, and also all the sub-concessions held by the other five companies, and all the business properties and assets of those companies. Another object mentioned in the memorandum was to work, dig, win, quarry, and get bituminous rock and other products under the above concession or any other concession to be acquired by the company, and the products of any mines acquired by the company, and to sell and dispose of the same on such terms as the directors might think fit, and to acquire, erect, and set up any new buildings or machinery for developing and carrying on the operations of the company, and to carry on the business of manufacturers of asphalte and bituminous rock pavement in every branch, and (subject to any exclusive concessions for the time being in force, whereby the area of the company's operations might be restricted) to lay down in all places wheresoever the pavement manufactured by or for the company.
By the agreement of the 17th of July, 1873, referred to above, the Neuchatel Rock Paving Company agreed to sell and transfer to the new company when formed, the above concession and all their mines, works, business, property, and assets; and the other five companies respectively agreed to sell and transfer to the new company their sub-concessions, business properties, and assets. The consideration was that there should be allotted to the Neuchatel Rock Paving Company 20,000 preference shares and the 80,000 ordinary shares in the intended company, and to the other five companies the number of preference shares therein mentioned, all such shares to be allotted as fully paid up. The total number of preference shares thus to be allotted was 33,700 out of the 35,000.
The agreement was carried into effect, and on the formation of the company the shares were allotted in pursuance of it, and it will be seen that the company therefore was in substance an amalgamation of the six previous companies, no money passing.
The articles of association contained the following clauses:—
“97. The net profits of the company shall be applied and divided as follows. First, a dividend at the rate of £7 per cent. per annum shall be paid on the preferred shares in proportion to the amount for the time being paid up or deemed to have been paid up thereon. And subject to the payment of such dividend as aforesaid a like dividend shall be paid on the ordinary shares. And after payment of such dividend as aforesaid on all the shares the surplus of the net profits shall be divided by way of dividend rateably amongst all the shareholders in such proportion as aforesaid, but without preference or distinction.
“98. No such distribution of profits shall be made without the consent of a general meeting. It shall, however, be competent for the directors, without such sanction, in the interval between two meetings to declare an interim dividend on the preferred shares at any rate not exceeding 7 per cent., and on the ordinary shares not exceeding 4 per cent. per annum.
“99. In case of any dispute as to the amount of net profits the decision of the company in general meeting shall be final.
“100. The directors may, before recommending any dividend on any of the shares, set aside out of the net profits of the company such sum as they think proper as a reserved fund to meet contingencies or for equalizing dividends, or for repairing and maintaining the works connected with the business of the company, or any part thereof, and the directors may invest the sum so set apart as a reserved fund, or any part thereof, upon such securities as they may select; but they shall not be bound to form a fund, or otherwise reserve moneys, for the renewal or replacing of any lease, or of the company's interest in any property or concession.
“126. In case of a winding-up or distribution of the assets of the company, the holders of the ordinary shares shall be entitled to participate in such assets rateably with the holders of the preferred shares, the intention of these presents being that the priority hereby conferred on the preferred shares shall be confined to dividend, subject to any exceptional claims which may be maintained by the holders of fully paid-up shares.”
The original concession was of a right to get bituminous rock within a defined area in the Val de Travers for a period of twenty years from the 15th of December, 1867, to the 15th of December, 1887, and the consideration for it was a royalty of 19¾ francs per ton, with a minimum rent of 40,000 francs. In 1870 this was modified for the period between the 16th of December, 1870, and the 16th of December, 1881, the dead rent being raised to 100,000 francs, and the royalty varying according to a complicated scheme depending on the quantity got, but being at a rate much less than 19¾ francs if more than 5000 tons were got in a year.
The company found the terms of the concession burdensome, and negotiated for a fresh one. On the 22nd of January, 1878, the Neuchatel Government extended the term of the concession to the 15th of December, 1907, and extended the concession over a wider area. The state made the concession an exclusive one, reserving only the right of working asphalte for its own use. The royalty was fixed at 6 francs per ton, and the minimum rent at 150,000 francs. The company paid down a sum of 200,000 francs (£8000) to the Neuchatel government for this concession. The result of the modification was that in seven years, from December, 1878, to December, 1885, the Neuchatel Government received from the company for rent and royalties nearly £40,000 less on the whole than they would have received if the same quantity had been worked on the old terms.
The result of the company's operations was as follows:— From the 1st of July, 1874, to the 30th of June, 1875, there was a loss of above £6000, but in each of the subsequent years down to December, 1878, the receipts considerably exceeded the outlay, and the loss was made up within three years. No part of the excess was distributed until 1880, when, the surplus for the year ending the 31st of December, 1879, being £8165, a dividend of 4s. per share was paid on the preference shares. No dividend was declared for the following year, but dividends of 5s., 3s. 6d., and 5s. per share were paid on the preference shares for the years 1881, 1882, and 1883. No dividend was declared for 1884, but out of the surplus for that year £21,060, together with a considerable sum held over from the preceding year, was applied in reduction of capital expenditure.
The accounts for the year ending the 31st of December, 1885, shewing a surplus of £17,140, the directors proposed (after setting apart £1000, which they had previously determined to set apart yearly towards repayment of the £8000 which they had paid for the second concession) to pay a dividend of 9s. per share on the preference shares, which would amount to £15,369. A general meeting approved of this proposal.
The Plaintiff, who was a holder of 628 ordinary shares and 16 preference shares in the company, brought his action on behalf of himself and all other the shareholders, except the Defendants, against the company and the directors, alleging that the value of the concession had become depreciated, and a large part of the capital of the company lost, and that there could not be any profits applicable to payment of a dividend until such loss and depreciation had been made good; and the Plaintiff claimed, on behalf of himself and all other the shareholders of the company, or (as the case might be) on behalf of himself and all other holders of ordinary shares, a declaration that the company did not in 1885 earn...
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