Westburn Sugar Refineries
| Jurisdiction | England & Wales |
| Judge | Lord Porter,Lord Normand,Lord Oaksey,Lord Reid,Lord Radcliffe |
| Judgment Date | 05 April 1951 |
| Judgment citation (vLex) | [1951] UKHL J0405-1 |
| Docket Number | No. 5. |
| Court | House of Lords |
HL
Lord Porter. Lord Normand. Lord Oaksey. Lord Reid. Lord Radcliffe.
Company—Reduction of capital—Capital in excess of company's wants—Proposal to pay off excess capital by distribution of assets at book value—True value of these assets greater than their book value—Companies Act, 1948 (11 and 12 Geo. VI, cap. 38), sec. 66 (1).
By sec. 66 (1) (c) of the Companies Acts, 1948, a company may, subject to confirmation by the Court, "pay off any paid-up share capital which is in excess of the wants of the company."
A company, having capital in excess of its wants, sought confirmation of a resolution for reducing its share capital in terms of which the reduction would be effected, not by a cash payment, but by distributing among the shareholders certain assets, viz., shares of another company which, in the petitioning company's balance-sheet, had a book value equal to the amount of capital to be repaid, but whose true value there was reason to believe was considerably in excess of their book value.
Held (rev. judgment of the First Division) that, as the financial position of the company disclosed that the interests of creditors, shareholders and the general public could not be prejudiced by the proposed reduction, the reduction fell to be confirmed by the Court, and further that the possibility that it might have been adopted in view of a threatened nationalisation of the sugar industry afforded no reason for the Court to withhold its sanction.
(In the Court of Session 8th December 1950—Infra, Court Of Session, p. 190.)
The Westburn Sugar Refineries, Limited incorporated under the Companies Acts, 1862 to 1890, with the principal object of carrying on the business of sugar manufacturers and refiners, and now having an authorised capital of £609,000 (all issued and all consisting of ordinary stock), and having power under their articles to reduce capital with the approval of the Court, presented a petition for confirmation of reduction of capital under section 66 (1) of the Companies Act, 1948.
The facts of the case are stated in the report of the case in the Court of Session, infra, p. 190. At 31st March 1950 the current assets of the company amounted to £857,293 and its current liabilities to £285,921.
The First Division on 8th December 1950 refused confirmation. The petitioners appealed to the House of Lords, and the appeal was heard on 15th March 1951.
At delivering judgment on 5th April 1951,—
LORD PORTER .—I have had the opportunity of reading the opinion of my noble and learned friend Lord Radcliffe and find myself wholly in agreement with it. I therefore move that the appeal be allowed.
LORD NORMAND .—I agree with my noble and learned friend on the Woolsack that the appeal should be allowed.
The general rule is that the prescribed majority of the shareholders are entitled to decide whether there should be a reduction of capital and, if so, in what manner and to what extent it should be carried into effect. When the reduction is consequent on a change in the method of carrying on the company's business it is for the shareholders to
decide to what extent its capital is in excess of its wants and on the adequacy of the consideration for the reduction of their share capital. But the powers of the shareholders must be exercised so as to safeguard the rights of creditors, the just and equitable treatment of shareholders, and the interests of the investing public. These principles are affirmed in the following cases :—British and American Normand, Trustee and Finance Corporation v. CouperELR1; Poole v. National Bank of China, LimitedELR2; Caldwell & Co. v. Caldwell3; and In re Thomas de la Rue & Co.4
To come to the present case, I think it clear, according to the foregoing principles, that in consideration of the reduction of share capital the shareholders may decide to accept a transfer of assets to a holding company the shares of which are to be held by them according to their respective interests in the capital of the transferor company, and that the shareholders can also decide that the transfer shall be of such investments as are according to their value in the company's balancesheet the equivalent of the amount of the proposed reduction of share capital.
But in an arrangement in which assets are taken at balance-sheet values there is the possibility that the scheme of reduction may be used as a means of defeating or injuring the rights of creditors or deceiving future investors. If the retained assets are entered in the company's balance-sheet at a figure in excess of their real value, creditors may be prejudicially affected, and it may also be possible by adjustments in the balance-sheet after the reduction takes effect to return paid-up capital to shareholders. The suspicion that a manœuvre to milk the company of its capital is on foot may reasonably be aroused when the company's business is threatened by proposals to nationalise it.
The First Division were therefore, in my opinion, only performing the duty cast upon them by the statute when they scrutinised the proposed reduction with special attention. They had to be satisfied that the rights of creditors and the interests of shareholders actual and prospective were not being sacrificed or injured. The material matter is, not the value of the investments which the company proposes to transfer, but the value of those assets which it will retain. And on this the Court had the advantage of a careful and lucid report by the experienced reporter to whom it had remitted the petition for confirmation.
The report bears that the company is in a strong position as regards its retained assets and its liabilities, that the creditors are amply provided for, and that it is clear that the company's capital is in excess of its requirements. The reporter says also that the shareholders are certainly not prejudiced by the proposals. If there had been any doubt upon any aspect of the proposals I think the proper course would
have been to make a further remit to the reporter with specific directions to investigate and report on the points in doubt. But the reporter in this instance had already shown himself alive to the kind of objection that might be taken, and in addition to his report we have before us the balance-sheet from which it...
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