Through the Looking-Glass and What Alice Found There Lord Morton's Dissent in Scottish Insurance Corporation v Wilsons & Clyde Coal Company Limited [1949] AC 462
| Author | Dr Charles Wild and Dr Stuart Weinstein |
| Pages | 125-136 |
Lord Morton’s Dissent in
Scottish Insurance Corporation v Wilsons & Clyde Coal Company Limited [1949] AC 462Dr Charles Wild and Dr Stuart Weinstein7.1 Introduction 125
7.2 Facts 129
7.3 Lord Morton’s dissent 131
7.4 Conclusion 136
7.1 INTRODUCTION
When Alice goes through the mirror in Lewis Carroll’s sequel to Alice’s Adventures in Wonderland entitled Through the Looking Glass, she finds a world that is recognisable but, in many important respects, turned sideways. In much the same way, when one considers a dissenting judgment such as the one that we will consider here, namely, that of Lord Morton of Henryton in Scottish Insurance Corporation Limited v Wilsons & Clyde Coal Company Limited,
The concept of limited liability has had a number of significant implications for English company law, including the need to protect the capital contributed by a company’s members, since, by the very nature of this concerto, those members
462.
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cannot be required to contribute funds to enable the company to pay its debts once they have paid for their shares in full. The Companies Acts have, therefore, sought to address the perceived legal freedom which companies have to reduce their share capital by seeking to regulate such issues as the protection of creditors and the class rights of members, such as preference shareholders. In other words, to support groups which would appear vulnerable within the context of capital reduction.
The Companies Act 2006, s 641 currently states that all limited companies may reduce their share capital by a special resolution confirmed by the court.
Clearly, there are internal procedures that need to be followed and which will impact upon the ease with which a majority may seek to reduce a company’s share capital. The most obvious hurdle to overcome is that of securing a special resolution, especially where such a reduction does not impact on all classes of shares in a similar fashion. The Companies Act 2006, s 630 also provides the added complication that, if class rights are to be varied or abrogated, the company may accomplish this only in accordance with provisions in the company’s Articles of Association for the variation of class rights; or where the company’s Articles contain no such provision, if the holders of shares of that class consent to the variation in accordance with this section. Consequently, a resolution to vary the rights of a particular class may be of no legal effect unless the consent of the class is obtained. Finally, as Lord Morton observed in Scottish Insurance Corporation:
This reduction can only be carried out subject to confirmation by the court and the court will not confirm the reduction unless it is ‘fair and equitable’. It is this discretion, vested in the court, which properly safeguards the interests of a dissenting minority: see British & American Trustee & Finance Corporation Ltd v Couper [1894] AC 399. The words ‘fair and equitable’ are not used with any technical meaning, but ‘in the ordinary sense of those words’.
The question arises, though, as to whether a particular reduction of share capital, in particular the reduction of a company’s preference shares, will fall within the scope of the Companies Act 2006. The general principle is that a court will require that the proposed reduction treats all shareholders equitably.
The repayment of shareholders should be treated as if the company was being wound up. Preference shares have no inherent priority as to the repayment of capital in a winding-up. Consequently, if the assets are not enough to pay the preference and ordinary shares in full then, unless the Articles of Association or terms of issue provide to the contrary, preference and ordinary shares are paid off rateably according to the nominal value of their shares.
If one considers more closely the case law on the issue of whether or not the class rights of a group of shareholders, such as preference shares, have been varied, the overarching message is one of a narrow and, perhaps, over-literal approach to the meaning of ‘variation of rights’. As such, they will only regard class rights as varied if, after the purported act of variation, the rights in question are different in substance from before. Indeed, Evershed MR noted in White v Bristol Aeroplane Co Ltd:
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The question then is… are the rights which I have already...
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