In Re Wragg Limited
[1897] 1 Ch 7961897 WL 11444 (CA)
(Decision by: Lindley LJ)
In Re Wragg Limited
Court:
Judges:
Lindley LJA L Smith LJ
Rigby LJ
Subject References:
Company
Winding-up
Liability of Vendors
Purchase moneys of Vendors' Property
Payment in fully paid-up Shares
Issue of Shares at a Discount
Contract
Apportionment of Value
Stamp Duty
Value of Property purchased
Inquiry into
Legislative References:
Companies Act 1867 - 25.
Judgment date: 19 March 1897
Decision by:
Lindley LJ
Although a limited company cannot release a shareholder from the obligation to pay for his shares either in money or money's worth, and cannot therefore issue its shares at a discount, it can, provided the contract is duly registered under the 25th section of the Companies Act, 1867, buy property at any price it thinks fit, and can pay for such property in fully paid-up shares; and the transaction will be valid and binding upon its creditors if the company has acted in it honestly and not colourably, and has not been so imposed upon by the vendor as to be entitled to be relieved from its bargain.
The value received by the company is measured by the price at which the company agreed to buy the property it sought to acquire; and whilst the transaction is unimpeached that is the only value which this Court can take into consideration.
Decision of Vaughan Williams J. affirmed.
APPEAL from Vaughan Williams J.
This was a summons taken out by the official receiver, as the liquidator in the winding-up of the above-named company, in substance for a declaration that certain shares in that company held by Messrs. E. J. Wragg & J. B. Martin and registered in their names as fully paid up were not fully paid up, and for an order that Messrs. Wragg & Martin should forthwith pay the amounts unpaid thereon.
For many years prior to 1894 Messrs. Wragg & Martin carried on business together as omnibus and coach proprietors, livery-stable keepers and job-masters in Whitechapel, and elsewhere in London; and they were the owners of certain freehold and leasehold property, and a considerable number of horses and carriages, and a quantity of harness, stock-in-trade, plant and effects.
In 1894 they determined to convert their business into a private limited company, and with that intent they formed such a company to buy the goodwill, stock-in-trade, and property of their business at a price which they fixed at 46,300l., to be payable in cash, debentures, and fully paid-up shares as hereinafter stated.
This company was registered on January 9, 1894, under the name of E. J. Wragg, Limited, and with a nominal capital of 20,000l. divided into 2000 shares of 10l. each.
The objects for which the company was established were stated in the memorandum of association to be, to acquire and take over as a going concern the above-mentioned business and property, and with a view thereto to carry into effect, with such modifications as might be agreed upon, the agreement stated in art. 3 of the articles of association.
Art. 3 of the articles of association provided that the directors should forthwith in the name of the company enter into and adopt an agreement therein referred to which had been already prepared, and a copy of which was identified as being indorsed by two of the subscribers to the articles, but with power to make modifications therein.
In accordance with this article, on January 10, 1894, an agreement was entered into between Messrs. Wragg & Martin of the one part, and E. J. Wragg, Limited, of the other part, by which, after reciting the carrying on of the business of the vendors, the formation of the company with the object of acquiring that business as a going concern, and the provision in the articles as to the agreement in this behalf, it was agreed - First, that the company should purchase as from December 31, 1893, (1.) the goodwill of the business; (2.) the freeholds mentioned in the 1st schedule; (3.) the leaseholds mentioned in the 2nd schedule; (4.) the coaches, omnibuses, and horses mentioned in the 3rd schedule; (5.) the harness, saddlery, and other machinery, implements, tools, chattels, stock-in-trade and effects in and about the described premises; and (6.) all contracts, engagements, rights, and privileges to which the vendors were or might be entitled. Secondly, it was further agreed that the consideration for the sale should be the sum of 46,300l., which should be paid and satisfied as follows, namely, as to the sum of 7000l., part thereof, in cash (which was expected to be raised by means of first debentures for a total amount of 10,000l.); as to 3000l., further part thereof, by the issue to the vendors or their nominees of 3000l., the residue of those first mortgage debentures the whole of which were to be secured by a trust deed; as to the sum of 6300l., by the issue to the vendors or their nominees of a total issue of 6300l. second mortgage debentures, to be secured by another trust deed; as to 10,000l., further part thereof, by the company taking over the liability of two mortgages, i.e., a first mortgage for 8000l. at 6 per cent., and a second mortgage for 2000l. at 5 per cent.; and as to 20,000l., the balance of the 46,300l., by the allotment to the vendors or their nominees of 1993 fully paid-up shares of 10l. each, being 2000 less the seven shares allotted to the seven signatories of the memorandum of association. Clause 3 of the agreement was as follows: "The said purchase-money is made up as follows, i.e., 6000l. is the value of the goodwill and trade-marks, 12,000l. is the value of the freehold hereditaments mentioned in the first schedule, 500l. is the value of the leasehold hereditaments mentioned in the second schedule, and 27,300l. is the value of the coaches, omnibuses, carriages, horses, moveable plant and machinery, stock-in-trade, and other loose effects; 250l. is the value of the contract rights and privileges; 250l. is the value of all other property to which the vendors are entitled in connection with the business." The only other provisions which need be mentioned were: Clause 13, that Mr. Wragg should be the first managing director of the company, and should hold office for ten years from the formation of the company, at a salary of 400l. a year; clause 14, that Messrs. Wragg & Martin, and a Mr. J. T. Harrison should be the first ordinary directors until the ordinary meeting of the company in 1895; clause 15, that the company should cause the agreement now being stated or some other sufficient contract to be filed with the registrar at the time when the shares forming part of the purchase consideration should be allotted.
This agreement was executed by the authority of Messrs. Wragg, Martin, and Harrison, its execution by the company was attested by Wragg and Martin; and it was registered as required by the Companies Act, 1867. A supplementary agreement was executed the same day, whereby the solicitors of the company undertook to raise 7000l. by first debentures, of which 4600l. was to be paid to Martin, 1000l. to the credit of the company, and Messrs. Wragg & Martin covenanted to pay the debts of the company out of the residue.
The property specified in the agreement was duly transferred to the company, and the company paid over in cash to the vendors the 7000l. which was raised by the issue of the first debentures, and issued to the vendors the debentures, and allotted the fully paid-up shares mentioned in the agreement.
The company afterwards went into liquidation; and at the commencement of the liquidation Mr. Wragg and Mr. Martin were the registered holders of 941 and 891 fully paid-up shares respectively.
The liquidator considered that these shares were improperly issued as fully paid up, and could not properly be so treated, and he accordingly took out the present summons, which was in part a misfeasance summons against Wragg, Martin and Harrison, as officers of the company, under s. 10 of the Companies (Winding-up) Act, 1890.
The summons asked that it might be declared that the respondents Wragg, Martin and Harrison were jointly and severally liable to contribute to the assets of the company 8910l. as compensation for their misfeasance whilst respectively directors of the company, Martin in accepting, and Wragg and Harrison in issuing, or permitting to be issued, to Martin 891 10l. shares in the company in respect of the promotion thereof, and without any payment or consideration; and that it might be declared that Wragg, Martin and Harrison were liable to contribute towards the assets of the company a further sum of 500l. as compensation for their misfeasance while respectively directors of the company in issuing or causing to be issued to Ada Elizabeth Browning, as nominee of Martin, fifty shares in the company in respect of the promotion thereof without any payment or consideration being made or given therefor either in cash or otherwise.
Then by amendment the summons proceeded to ask that it might be declared that Wragg, Martin and Harrison were liable to contribute to the assets of the company the sum of 9410l., as compensation for their misfeasance while respectively directors of the company, Wragg in accepting and Martin and Harrison in issuing or permitting to be issued to Wragg 941 10l. shares in the company without any payment or consideration; and that Wragg, Martin and Harrison might be ordered within four days after service respectively to pay these three sums of 8910l., 500l., and 9410l.
The summons also asked in the alternative that it might be declared that the nominal amount of 891 10l. shares standing in the name of Martin, and 941 10l. shares standing in the name of Wragg, and one 10l. share standing in the names of Martin and Wragg, were unpaid; that Martin and Wragg were respectively liable to pay the nominal amount of such shares respectively, and that they might be ordered to pay such amounts within four days after service of order; and, lastly, that it might be declared that Harrison was liable to contribute the sum of 100l. for his misfeasance in accepting ten 10l. shares in the company, and might be ordered to pay such amount within four days after service of the order.
In support of this summons the liquidator produced a certificate signed by Wragg and Martin as directors of the company, and countersigned by one Browning as secretary, which shewed that on the stocktaking of January 1, 1894, there was stock-in-trade of the value of 15,375l. and no more; and the liquidator also put in evidence a book belonging to the company containing entries headed "Purchase of Business," upon the debit side of which was entered: "1st Jan., 1894. To vendors, 36,230l." (reckoning apparently without the 10,000l. mortgages), and on the credit side was entered, also reckoning without the mortgages:--
TABULAR OR GRAPHIC MATERIAL SET FORTH AT THIS POINT IS NOT DISPLAYABLE
The accountant who made these entries was called, and upon being asked to explain this last entry, said that he found there was a sum of 11,647l. to be accounted for, and so he entered it in this way.
This summons was adjourned into court, and was heard before Vaughan Williams J. on November 18, 20, 26, 30, 1896.
Sir R. B. Finlay, S.-G., Buckley, Q.C., and Howard Wright, for the applicant.
Herbert Reed, Q.C., and Ward Coldridge, for the respondents Martin and Wragg.
Carrington, for the respondent Harrison.
VAUGHAN WILLIAMS J.
This is a very difficult case, but I do not know that I should do any one any good by taking further time to consider it. [His Lordship then stated the terms of the summons, and continued:--]
Now it will be seen that there are joined in this summons a claim in respect of misfeasance by the respondents as officers of the company, under s. 10 of the Act of 1890, and also a claim for a declaration of liability in the respondents, not as officers of the company, but as holders of shares. It is said that you ought not to join two summonses or two charges of a different character in one summons in the way in which it is dane here, and I do not think you ought - that is to say, I do not think it is in accordance with practice that you should do so, and I do not think it is convenient to do so; and if I thought that the respondents here were in any way embarrassed or put in a worse position by this having been done, I certainly should insist upon the official receiver electing whether he would proceed with the misfeasance clauses of the summons, or whether he would proceed with the clauses of the summons which pray for a declaration of liability in the respondents as holders of shares only. But I am of opinion that the respondents are not embarrassed at all. I think, on the other hand, that it is rather a convenient thing for them that this summons does embrace all that it does embrace. The facts which go to support both branches of the summons are a single transaction, and, that being so, it is much better that there should only be one hearing, and that upon that one hearing the official receiver should ask for any legal remedies that he likes.
Another preliminary objection is taken to this summons, and that is that even if you get over the misjoinder objection, it is wrong that the official receiver should seek by summons to obtain a declaration of the liability of shareholders to pay up these amounts on the basis of their shares being unpaid to the extent of the amounts claimed. Here again I agree with Mr. Reed that to take out such a summons as this is not in accordance with the ordinary practice. One gathers from the Act of Parliament and the rules that the ordinary course contemplated by the Legislature and by those who drafted the rules was that the liquidator in a compulsory winding-up should make out a list of contributories, and that thereupon the liability of persons as shareholders should be tested upon an application to remove their names from the list. The liquidator may, if he thinks fit, bring his action for calls. In truth and in fact, in the present case no calls have been made whatever. You may do one of three things: put persons on the list of contributories, in which case there may be an application to remove, or attempt to enforce payment of the calls in the liquidation, or attempt to enforce payment by action. Those are the ordinary modes. But I know of no reason why one should not in a convenient case allow the application to be made in the form in which it is made here. A declaration of the rights of the official receiver and the liability of this class of people is asked for; and it seems to me that when there is a class of people sought to be affected in this way, it is not at all an inconvenient thing that the official receiver should try and enforce the liability by getting a declaration of the sort asked for here, and that if he gets the declaration he should proceed to enforce the liability. The Court, at all events, has jurisdiction to make such a declaration, and I am not going to stop the case on this technical ground: it would be no mercy either to the liquidator or to the respondents. The parties are here now, and it seems to me to be to the interest and convenience of all parties that the matter should be disposed of. But the consequential relief asked for is wrong. At present no calls have been made, yet I am asked to say that the total of these sums is to be paid up forthwith. That is a mere matter of detail, and can be put right when the order comes to be drawn up.
Now I will deal first with the misfeasance branch of the summons. With regard to that, I think the official receiver is in a very great difficulty, because in my judgment a misfeasance summons can only be supported where it is shewn that the misconduct of the officers has diminished the assets of the company, and where the respondents can properly be ordered to contribute damages or a sum of money. If there is no sum of money or there are no damages which the respondents can be ordered to contribute or pay, it seems to me that the summons ought to fail. The Solicitor-General in his argument really admitted as much - that is to say, when pressed upon the subject whether he could support this summons, he practically admitted that he could not support it unless he could shew that there was damage, and he practically admitted that he could shew no damage here, because, if the shares in fact and in law are fully paid up, then it follows necessarily that there has been no damage at all. If the shares in fact and in law are not paid up, there is primâ facie no damage, because the holders of the shares are liable to pay up in full, and the assets will be just the same as if the shares had never been issued as fully paid. There is no suggestion here that there is any insolvency in any of the persons who received these fully-paid shares. One could conceive a case where, fully-paid shares having been wrongfully issued by the directors to an insolvent holder, the liability of that holder to pay up in full would not go much to swell the assets of the company; but there is no such suggestion in the present case.
Then, as to the second branch of the summons, it is said that the respondents are liable either because there was no registered agreement within the meaning of s. 25 of the Act of 1867, or because the issue of the shares was wholly or partially without consideration. Now, first, with regard to the contention that there was no registered agreement. The agreement between the vendors and the company has, in fact, been registered, but it is said that the so-called agreement is not an agreement within the meaning of s. 25, because it was not made between independent legal entities, or between bodies or persons between whom bargaining was possible. This independence was negatived, it is said, by the vendors and shareholders being the same persons, and it was contended by the Solicitor-General that it followed that there was no real agreement which could be registered, and Smith v. Brown [FN1] was cited as an authority for this proposition. I, however, do not think the judgment of the Privy Council delivered by Lord Hobhouse in that case is meant to affirm that there can be no real agreement between vendors and a company the shareholders of which are identical with the vendors. I suppose that if the Court arrived at the conclusion that there could be no real agreement between such parties which was capable of registration, it would also hold that there was no real agreement for any purpose. It seems to me that so to hold would be inconsistent with the decision of the House of Lords in Salomon v. Salomon & Co. [FN2] , in which case the House held that the vendors and the company were distinct legal entities capable of contracting, notwithstanding the fact that the shareholders of the company consisted of the vendor and his family. The House of Lords, although it decided that I was wrong in holding that the true contract was a contract between principal and agent and not between vendor and purchaser -- wrong, that is, in going behind the form of contract - never suggested that I was wrong in holding that the vendor and the purchasing company were distinct legal entities, although unless they had been distinct legal entities they could no more have stood in the relation of principal and agent than in that of vendor and purchaser. It seems to me that the so-called agreement, which the Privy Council in Smith v. Brown [FN3] said could not be registered because it was unreal and not made between independent parties capable of a bargain, was the resolution of the syndicate, and not the agreement with the company which never was registered. I wish just to call attention here to a fact or two in the Privy Council case. It will be observed that the particular resolution, or so-called contract, which was registered was a resolution or contract of July 30, 1888. The company was not, in fact, incorporated until August in that year - certainly not before August 8, which is the date of the memorandum of association - and Lord Hobhouse when he comes to give judgment says [FN4] : "The only document purporting to be an agreement which has been registered in the present case, and the only document, therefore, which it is necessary to consider, is that of July 30, 1888. The Courts below regard it as a contract sufficient to comply with the exigencies of s. 57 of the Act of 1874. In the opinion of their Lordships, that document is not a contract in any proper sense of the word. It is nothing more than a resolution by certain persons interested in a mining property setting forth the manner in which they proposed to put the property before the public It does not create nor was it intended to create any legal rights, duties, or obligations as between the persons expressed to be parties to it. It was a contract in form only. The persons interested in the property and the shareholders in the company to be registered were just the same persons over again in a different guise; they had, as stated above, already distributed the whole of the share capital among themselves. In Hartley's Case [FN5] there was a genuine sale and a genuine purchase and a genuine bargain to pay the price by paid-up shares issued to the vendor, who could enforce the bargain under peril of annulling the sale." It may be difficult to reconcile the judgment in this case with the judgment in Hartley's Case [FN6] , unless one treats the judgment in the way in which the Solicitor-General invited me to treat it; that is to say, as a judgment based upon the fact of the identity of the vendors and the shareholders, because in Hartley's Case [FN7] and in the present case that which was registered was a document which came into existence prior to the formation of the company. In Hartley's Case [FN8] and in this case there was a trustee interposed; but at the same time Lord Hobhouse does say in his judgment that the document is not a contract, but nothing more than a resolution by certain persons interested in the mining property setting forth the manner in which they propose to put the property before the public, and which does not create, nor was intended to create, any legal rights, duties, or obligations as between the persons expressed to be parties to it, but a contract in form only. Now I understand Lord Hobhouse to lay down a complete proposition there wholly independent of what follows. It is true that he proceeds to state that, "The persons interested in the property and the shareholders in the company to be registered were just the same persons over again in a different guise; they had, as stated above, already distributed the whole of the share capital among themselves." I do not understand that Lord Hobhouse means that that identity between the vendors and the shareholders of the company is essential to the conclusion which he had already arrived at, that there was no real contract intended to be acted upon at all. It is a fact which is consistent with it, but it does not seem to me that it is essential to the conclusion arrived at by Lord Hobhouse. All I can say is, I do not so read Lord Hobhouse's judgment, and, if Lord Hobhouse's judgment does mean that, I can only say that it would lead to most inconvenient and dangerous consequences. It may very well be that one ought to arrive at conclusions although the consequences may be dangerous and inconvenient; but it is not a conclusion which has ever been arrived at as yet. There have been probably in the last twenty-five years an enormous quantity of private companies formed in which the partners in the business which was sold and the shareholders in the new company have been identical. It is a very usual way of dealing with a business, and the truth of the matter is that the more valuable the business is the more often does this in practice happen. Two partners in a first-rate business do not want, because they are converting their business into a public company for convenience of administration and distribution of profits and liabilities, to let strangers or outsiders into a share in the business; and the consequence is that in all probability, if you were to take a list of the private companies in existence at the present moment, you would find that their solvency compared very favourably with that of the solvency of what are ordinarily spoken of as public companies as distinguished from private. I say, therefore, that I should be most reluctant to come to the conclusion that Lord Hobhouse meant to enunciate a new doctrine which is so inconsistent with the views that commercial people, whether lawyers or not, have heretofore taken of the formation of "private" companies, using the term in its popular sense, under the Joint Stock Companies Acts. I think that this contention, that the vendors and the company are not independent legal entities capable of a bargain in any case in which there is identity of vendors and shareholders, is wrong, and I not only think that, but I think that even if the view taken of the judgment of Lord Hobhouse is right (that is the view put forward by the Solicitor-General), yet I should not be bound to follow it, because the decisions of the Judicial Committee of the Privy Council do not technically bind me sitting here. I am bound, if the decision of the House of Lords and the decision of the Judicial Committee differ, to obey the decision in the House of Lords and disregard the decision in the Privy Council. The Solicitor-General called my attention to the fact that the eminent judges constituting the House in Salomon v. Salomon & Co. [FN9] and constituting the Judicial Committee in Smith v. Brown [FN10] were practically identical; but it makes no difference: the two bodies are distinct legal entitles, and under those circumstances I cannot pay any attention to the fact that the persons composing the two bodies were the same on this particular occasion.
I do not think that I need say anything more about this part of the case, except that I think that there was a contract here which was capable of being registered under s. 25, and I do not assent to the argument that the identity of the vendors and shareholders prevents the registration, and, the contract having in fact been registered, it seems to me that the section has been complied with. But this of course does not dispose of the whole case. The 25th section of the Act of 1867 is a restrictive and not an enabling section. The Courts having put upon the Companies Act, 1862, such a construction that while it was held that it was an indispensable condition of limited liability that the shares should be paid up by those who took them, yet you might pay up in kind, then came s. 25 of the Act of 1867, which says you shall not be allowed to pay in kind unless you have filed the agreement pursuant to that section. Here I say that the agreement has been filed pursuant to that section; but that does not dispense with the necessity of real consideration being given in order to comply with the Act of 1862. There remains the fact that the nominal amount of shares must be paid either in cash or in kind, and no device can get rid of this obligation. The proposition that it is ultra vires to issue shares except as against a consideration equivalent to the amount mentioned on the face of the shares will probably not be disputed; nor can it be disputed since the decision - in In re Eddystone Marine Insurance Co. [FN11] , in which case the decision of Wright J. was affirmed by the Court of Appeal - that in any case in which shares really are issued without consideration the holder of those shares will remain liable to pay up the face value, notwithstanding the filing of a contract under s. 25 of the Act. The head-note of that case is: "A company limited by shares, formed under the Companies Act, 1862, has no power to issue shares as fully paid up, as a free gift or bonus, to its shareholders, although a contract to do so has been made without any fraudulent intent and registered under s. 25 of the Companies Act, 1867." That case of course falls a very long way short of that which it is necessary for the official receiver to establish here. This is not a case in which there was a sham contract. In the Eddystone Case [FN12] the contract purported to be a contract to issue the shares in respect of past services, and the Court held that there were no real services rendered whatever, and that notwithstanding the so-called contract the shares were a mere gift. I should say here that as a fact there was no difficulty in arriving at this conclusion, because the very contract which was registered really was an intimation of what the true character of the bargain was; whereas in the present case there is a real contract and real consideration passed from the vendors to the company.
In the present case these gentlemen, being interested in different ways in the business of a livery-stable keeper and in the plant which was used for that business - it does not matter how they were interested; I believe there was no partnership deed, but they were so interested that they were minded to act together in disposing of the property - proposed to dispose of the property by promoting and forming the company of which it was intended that these gentlemen should be the shareholders. Having promoted and formed this company, the contract of January 10, 1894, was entered into immediately after the formation of the company between Wragg and Martin of the one part, and Wragg and the company of the other part. In truth and in fact Wragg and Martin made this contract as the representatives of the other persons who were interested in the business. The contract in question is for the sale of what is described generally as the goodwill and business premises, and the horses, carriages, and plant which are described on the contract as being the properties mentioned in the 1st, 2nd, and 3rd schedules to the contract. The freeholds are in the 1st schedule, and the leaseholds in the 2nd, and then follow the horses and carriages in the 3rd schedule. The price was 46,300l., payable as to the sum of 7000l. in cash, 3000l. in first mortgage debentures, part of the total issue of 10,000l. mortgage debentures, 6300l. by the issue of second mortgage debentures; as to 10,000l., by the company taking over certain mortgage liabilities of the vendors; and lastly, as to 20,000l., the balance of the said sum of 46,300l., by the allotment to the vendors or their nominees of 1993 fully paid-up shares of the company.
Then the contract allocated the 46,300l. among the considerations thus to be transferred, because it says the said purchase-money is to be made up as follows: 6000l. is the value of the goodwill and trade-marks, 12,000l. is the value of the freeholds, 500l. the value of the leaseholds, 27,300l. the value of the coaches and horses and other loose effects, 250l. is the value of the contract rights, and 250l. is the value of all other property which the vendors are disposing of. Such is the contract. When the accountant came to open the books he wished to see vouchers of some sort of the various sorts of property or capital with which this company was beginning business, and he asked for particulars of the coaches, omnibuses, and horses. That is the part of the transferred property to which 27,300l. is allocated out of the 46,300l. He seems to have been given a document which has been before me which purports to state what was the value of this stock on January 1, 1894. It appears by that document that the value as on January 1, 1894, was 15,375l., and the auditor being embarrassed at finding stock to the purchase of which 27,300l. was appropriated, looked about him to see how he should open the books consistently with this statement. If the valuation had taken place at the end of the first year, possibly the difficulty might have been met by writing it off as depreciation; but it did not take place then; it took place at the beginning of the year, and he dealt with it by introducing a fresh item, "Balance of goodwill," and then putting in the horses, carriages, harness, & c., at substantially the 15,375l. There is some small difference in the figure, but I do not want to trouble myself as to ascertaining it exactly. Now that the company has gone into liquidation, the official receiver seeks to say that there is an absence of consideration for the issue of the fully paid shares to the extent of the difference between the 15,375l. and the 27,300l., and he of course can only apply that to the shares actually issued, the total number of which was 20,000. I think that I ought to find what as a fact the truth is about this document. In my judgment I ought on this evidence to hold that this is a document which represents the state of this stock immediately before this contract, and I think that I ought to hold that the facts as to the amount of this stock were known to the vendors, and also known to the directors of the company.
I was going to deal with the principles which have been laid down in the cases in which the Court has thought itself justified in saying that there was no consideration really passing, although there was a formal contract under which that consideration purported to pass; but before I go on with that, as I have thus stated the facts of the case, perhaps it is more convenient that I should at once say that I do not agree with the contention of the Solicitor-General that on these facts the official receiver is entitled, if the general contentions of the Solicitor-General are right, to have these shares treated as to eleven-twentieths as unpaid. It seems to me that if he is right, it is eleven-forty-sixths and not eleven-twentieths, because, according to my judgment, there is an entire contract for the sale of the realty, the leaseholds, the goodwill, and the stock and plant for 46,300l. It is true that the parts of that 46,300l. are appropriated to each one of these items, the amounts appropriated being set forth. But still there is only one contract. I do not think that one is entitled to say that the fully paid shares were issued as payment for the stock of carriages a bit more than I have a right to say that they were issued in payment of realty, or in payment of leaseholds, or in payment of goodwill. I think that the whole price - 46,300l. - was paid for an entire consideration; and it seems to me, therefore, that one ought not to say eleven-twentieths, but ought to say eleven-forty-sixths. This is rather an arithmetical than a legal question, and I need not trouble with the matter any further.
Going back to the principles I have already pointed out, I may say that in the Eddystone Case [FN13] absence of any real consideration was not only found as a fact by the Court, but practically appears upon the face of the contract; and that case is very different from the present case, in which substantial property of great value passed under the contract. The question which I have to decide is whether, in a case where there is a real contract, and real consideration is transferred against fully paid shares, the Court will go behind the contract, and say that the consideration transferred is a sham to the extent that the price given exceeds what the vendor and the company must have known to be the value of the property transferred. Now, to assist me with regard to this matter, several cases have been cited. The first is In re Almada and Tirito Co. [FN14] That was a case in which the application was by shareholders in a going company for rectification of the register, and in which the 1l. shares had been issued at a discount, really being issued for 2s. a share, the resolution being "that the capital of the company be increased from 210,000 shares of 1l. each to 420,000 shares of 1l. each, by the issue of 210,000 shares of 1l. each, credited with 18s. per share paid, with a deposit of 6d. a share," so that it appeared on the face of that contract that the company was doing that which was ultra vires, because they were issuing these shares at a discount. When Cotton L.J. had disposed of the actual case, he said in his judgment [FN15] :
"It was asked in the argument, 'How can you measure the value of the goods which are to be given and to be taken in payment of the shares?' If the contract does define the value, then, unless the contract is set aside as fraudulent, that will fix the shares as paid up, the contract being that a certain property or quantity of goods is to be taken in payment in full of the shares of the company. But suppose in such a case there was a contract that the person taking the shares should give to the company goods or an acre of land fixed by the contract and admitted by the parties as worth, not the amount of the shares, but only 10s., then, although it does not arise for decision here, I in no way intimate any opinion that if such a company were wound up, a person who took shares on an admission that he was only giving half their value would not be held liable for the remainder, as a sum which, on his own admission and on the contract on which he took the shares, must be considered as only payment of part of the amount of the shares, leaving the other half unpaid, and therefore to be called up if there was a winding-up. That we have not to decide."
I confess when I read that passage I thought, when the Lord Justice used the expression "fixed by the contract and admitted," that he meant "or admitted"; but I have come to doubt whether I was right myself, because the case put by the Lord Justice, which he says he has not to decide, is a different case from that which he was deciding and had to decide, unless in this, that in the case he was deciding and had to decide that which was the sole issue or consideration was shares in a company, but in the hypothetical case that he puts what was sold was goods -- "goods or an acre of land," he says. Therefore the case is different; and, when one comes to see that, he makes exactly the same statement in the second part of the sentence, where he uses the words, "as a sum which on his own admission and on the contract on which he took the shares." I doubt whether I am right in saying that he meant "or" there. I am inclined to think that we must take it that he meant "and." My attention was called to what Lord Macnaghten said in Ooregum Gold Mining Co. of India v. Roper . [FN16] But I will first read what Lord Watson says [FN17] : "A company is free to contract with an applicant for its shares; and when he pays in cash the nominal amount of the shares allotted to him, the company may at once return the money in satisfaction of its legal indebtedness for goods supplied or services rendered by him. That circuitous process is not essential. It has been decided that, under the Act of 1862, shares may be lawfully issued as fully paid up, for considerations which the company has agreed to accept as representing in money's worth the nominal value of the shares. I do not think any other decision could have been given in the case of a genuine transaction of that nature where the consideration was the substantial equivalent of full payment of the shares in cash. The possible objection to such an arrangement is that the company may over-estimate the value of the consideration, and, therefore, receive less than nominal value for its shares. The Court would doubtless refuse effect to a colourable transaction, entered into for the purpose or with the obvious result of enabling the company to issue its shares at a discount; but it has been ruled that, so long as the company honestly regards the consideration given as fairly representing the nominal value of the shares in cash, its estimate ought not to be critically examined." And then when Lord Macnaghten comes to give judgment he says [FN18] : "But I desire to protest against some of the propositions which were advanced in connection with this part of the argument. It was said that if a company limited by shares owes its bankers 1000l., and its shares are at 50 per cent. discount, fully paid shares of 2000l. nominal value may be given in discharge of the debt. It was said that a company limited by shares may issue fully paid shares at their market price at the time, however much they may have become depreciated, in exchange for goods having a recognised market value. Speaking for myself, I am not prepared to assent to either of those propositions without further argument. I am inclined to agree with the view expressed by Cotton L.J., though it is not necessary to decide the point" -- that is, the view of Cotton L.J. in the Almada and Tirito Case [FN19] --
"It seems to me that all that has been determined so far is that the Court will decline to rip up a transaction not impeached as dishonest, and not proved to be such, merely because the company may have paid an extravagant price for their property."
I believe now that I have called attention to the main passages in all the judgments that refer to this matter. One starts with the Eddystone Case [FN20] , and then there is the Almada and Tirito Case [FN21] , and then come the observations of the noble Lords in the Ooregum Case . [FN22] The conclusion which I draw from these cases is, that the Court will not limit itself to a case where there is no consideration whatever, like the Eddystone Case . [FN23] I believe that the Court ought to go into the question of whether there is real consideration or whether the consideration is a sham, not only in the case where the whole consideration is impeached, but in the case where a part of the consideration is impeached; but whether it is the whole that is impeached or whether it is a part that is impeached, in my judgment you can only impeach it in cases where the evidence justifies you in saying that, quâ that part of the consideration, the transaction is a sham - that the transaction is a colourable one.
I should be very loth to hold that because there is a contract which recites a perfectly valid consideration the Court may not in a winding-up, where the interests of the creditors are involved, go behind that contract, and say the so-called consideration is a colourable consideration and a sham. I propose, therefore, to put to myself this question. Am I bound to come to the conclusion that this consideration, so far as it relates to the 11,000l. parcel of 27,000l., is a colourable consideration in any shape? Well, it seems to me that, making all these assumptions in favour of the official receiver, there is very great difficulty about it. I do not know in the least what it was that fixed the sum of 46,300l. here; but I suppose that it was the will of the vendors, and the vendors offered it to the company for this amount, and I am told that it now appears that the horses and carriages were not of the value of 27,000l., but they were of the value of 15,000l. only. It may be so in point of fact; but I do not know - there is nothing to shew me - that the goodwill was not undervalued, and there is nothing to shew me that the freeholds or leaseholds were not undervalued. I do not know. Supposing the vendors had not been themselves directors of the company, it might very well have been that those who were advising the company might think it a good bargain to give the 46,300l., never mind how the money was distributed. I do not know the relations between the vendors themselves. It may be, for aught I know, that some of them were interested in the realty, some in the leaseholds, and some of them in the horses and carriages, and the vendors may have thought it convenient, for the purpose of the adjustment of their own rights, to say, "We will put 27,000l. out of this total of 46,300l. against the horses and carriages, because the vendors A. and B. are interested in the horses and carriages, and that is as between us, the vendors, the amount of their interest, and we will put 19,000l. on the realty and the goodwill." The real truth of the matter is that so long as the purchasers were willing to pay 46,300l. for the things included in the sale, it was nothing to them how the vendors chose to have the sums distributed - the vendors might have the sums distributed just as they chose. Then it is said,"Oh, but that is not an answer, because the stock is shewn to have been of this value to the knowledge of both contracting parties." Well, I assent. I have already said I think there is evidence of that, but it does not seem to me that that is in the slightest degree material. The vendors for their own purposes preferred to have the consideration, the price, appropriated in this manner, and I do not know any reason why they should not do so. At all events, it seems to me that in a case where there is substantial property transferred and a price appears in the contract, and that contract has been acted on and the property parted with, where you cannot rescind the contract and restore the parties to their pre-contract position, you ought not to say that there was no consideration unless it is proved, and proved beyond all reasonable doubt, that the shares thus issued as fully paid were issued as a gift or a bonus to the vendors. The learned counsel who prepared the summons seems to have been impressed with that himself, and he seeks to allege it in the summons by saying that these fully paid shares were issued for promotion money. There is no evidence of that; and when one considers what was likely to actuate these very persons who were making the contract, and not leaving out of consideration their personal identity, it is clear they had nothing to do but to fix whatever price they thought right, and that price of course would be accepted. There was no need to allocate the price in the way in which it is done in this contract, and so doing would in no way assist the directors in carrying out any dishonest purpose, or in cloaking any gift, or in cloaking the payment of any promotion money. Under those circumstances it seems to me that it is a wrong inference to draw that this was either a gift or promotion money. I do not believe it in fact. If I am asked why the vendors, who had it in their power to sell without more this property for 46,300l., allocated it in the way in which they did allocate it in the contract, I say the inference I draw is that they did it for the purpose of adjustment of the price amongst themselves. It is said that these directors might have gone into the witness-box and explained this if they chose, and it is said that they did not, and they have not, and they are not entitled, it is true, to ask the Court to draw the same inference that it might have drawn if they had gone into the witness-box and given satisfactory evidence; but, on the other hand, the official receiver is not entitled to say, because these respondents have not gone into the witness-box,"Be good enough to draw an inference that the issue of this excess, as it is called, of 11,000l. of shares was an issue of bonus shares, or an issue of shares to cover promotion money, or for some other illegal purpose." The official receiver is not entitled to ask me to draw that inference from the mere absence of the respondents from the witness-box unless the evidence already makes out such a case as to entitle me to go behind the contract at all. Prima facie, I am not entitled to go behind the contract. The contract on the face of it is a perfectly unimpeachable contract, and it is for the official receiver to shew that he is entitled to go behind it before he can place any such reliance upon the absence of these people from the witness-box, and it seems to me under those circumstances that I ought not to draw the inference that I am invited to draw.
I think, therefore, that the official receiver has failed to make out in fact in the present case that the consideration was to the extent, as has been contended, or to any extent, a sham. I think there was a real contract for sale at 46,300l., and that the only way of getting out of this is either to succeed in maintaining the argument that there could be no contract between the vendors and the company in this case because of the identity of the vendors and the shareholders, or if you do not do that, the only other way that you can do it is to shew that, as to this 11,000l., the consideration is a sham or a colourable consideration. I myself think that these people in law were independent contracting parties. Speaking for myself, even where you have got independent contracting parties, I should have been disposed to hold that you might go behind the contract and shew that the true relation of the parties was not that of vendor and purchaser, but something else; and this is done occasionally, at all events, because in cases of bills of exchange, for instance, where you have got an accommodation acceptance on the face of the contract, the acceptor is the principal debtor; but not only as between the holder and the acceptors, but as between drawer and acceptor, you can go behind the contract and shew what the true relation was in spite of the contract. But that is a very different thing from saying, as is really suggested here, that you are entitled, in the absence of proof of a transaction being a sham or a colourable transaction, to go behind the contract, and to make a new contract for the parties under which the property is to be taken over at a different price from that in the contract.
Under these circumstances I think that the official receiver has failed. I do not think that he has either made out that there was no contract because of the want of independence of the parties, nor do I think that he has made out that this contract in fact was colourable or a sham; and that disposes of the whole of the second branch of the summons. For the reasons that I have already given, I do not think that it can be said that the decision in Smith v. Brown [FN24] shews that there was no contract here which could be registered, and I have already dealt with the misfeasance part of the summons. The summons will be dismissed with costs.
(F. E.)
The liquidator appealed. The appeal was heard on February 26, March 2, 4, 5, 1897.
Sir R. B. Finlay, S.-G., Buckley, Q.C., and Ingle Joyce, for the appellant. The question is whether the shares issued to Messrs. Martin & Wragg can be treated as fully paid up, and we contend that they cannot be so treated. The point is new in point of decision, but the principles which are applicable to it have long been laid down.
In many cases it might be a matter of some difficulty to shew that a property consideration given by vendors for fully paid-up shares was not a fair equivalent for the shares; but in this case the vendors themselves have supplied the evidence. Under clause 3 of the agreement of January 10, 1894, the stock-in-trade of the vendors was to be taken as of the value of 27,300l.; but on January 1, 1894, the vendors themselves signed a certificate that the stock-in-trade was then of the value of 15,375l. and no more; and one of the books of the company contains an entry headed "Purchase of Business" of the same date, which fixes the value of the stock-in-trade at the same amount. It must, therefore, be taken to be established as between the vendors and the company that what the company were to pay 27,300l. for was estimated by the vendors to be worth only 15,375l., i.e., 11,925l. less. This same "Purchase of Business" account, moreover, after entering the value of the goodwill at 6500l., finishes with entering 11,647l. to "Balance of Goodwill Account," which entry, having regard to the evidence, must be a fictitious one, made in order to bring up the total, less the 10,000l. for mortgages, to the nominal amount of the purchase-money.
So that, taking it in round numbers, disregarding the 10,000l. for the mortgages, and treating the price to be paid by the company as 36,300l., according to the vendor's own statement, the company get stock-in-trade, 15,375l.; goodwill, 6500l.; leaseholds, 500l.; fixtures, 208l.; and freeholds, 2000l. - total, 24,583l.; and they gave 20,000l. in shares, 7000l. in cash, 3000l. in first, and 6300l. in second debentures - total, 36,300l. This brings out a deficiency of over 11,000l., which can only be attributed to the shares; and consequently, to that amount the shares which were issued to the vendors as fully paid up were not fully paid up either in money or in money's worth.
Now the liability of shareholders to pay for their shares was not imposed by the Companies Act, 1862. It has always existed. What the Act of 1862 did was (s. 7) to limit the liability to the amount (if any) unpaid upon the shares: Oakes v. Turquand . [FN25] Then by s. 25 of the Companies Act, 1867, every share in any limited company shall be taken to have been issued and to be held subject to the payment of the whole amount thereof in cash, unless otherwise determined by contract duly made and filed. This leaves the liability to pay the full nominal amount of each share absolutely untouched, and only prescribes the particular manner in which the shares are to be paid for where there is no registered contract. Here there is such a contract; but still the shares cannot be issued at a discount, and they must be paid for in money or in money's worth. It is established that when the shareholder pays in money he must pay the full nominal amount of his shares: In re Addlestone Linoleum Co. [FN26] ; In re Almada and Tirito Co. [FN27] ; Lee v. Neuchatel Asphalte Co. [FN28] ; Ooregum Gold Mining Co. of India v. Roper . [FN29] And the same principles apply when the shareholder is paying for his shares in property. Here the company were entitled to issue shares in payment to the vendors for property, but not to issue shares as fully paid up in exchange for property of less than the full nominal cash value of such shares. A limited company might, no doubt, make an improvident bargain which, in the absence of fraud and collusion, would hold good; but this was not the case of a bargain between an independent vendor and an independent company, and it cannot be said here that the consideration accepted can be regarded as representing the cash value of the shares, and as a fair equivalent for them: In re Eddystone Marine Insurance Co. [FN30] ; Smith v. Brown [FN31] ; Elkington's Case. [FN32]
It is not every contract that can be investigated; and a real cash bargain for property, though imprudent or excessive as to price, may stand; but here the parties themselves have demonstrated that they knew the shares were not to be paid for at their value in goods; there never was any cash debt constituted; and it was a legal impossibility for the company to issue the shares at less than their cash value: In re Weymouth and Channel Islands Steam Packet Co. [FN33] ; Ex parte Welton . [FN34]
The learned judge of the Court below has not taken a correct view of the facts. We do not seek to charge the vendors with dishonesty, nor do we seek to set aside the contract; but we claim to have established that the vendors have not paid in full for their shares, and that they must make good the deficiency whatever it may be.
Herbert Reed, Q.C., and Ward Coldridge, for the respondent Martin. The case made by the appellant is that there was no real independent bargain, and that the stock-in-trade was sold at an extravagant price. But Harrison, who was one of the contracting parties, was not a vendor; he was a debenture-holder and a shareholder, and as such perfectly competent to bargain on behalf of the company; while if the vendors were selling at an exorbitant price, they would have been more likely to take their profits in cash than in shares.
But all question as to the actual value of the property taken by the company is immaterial. No attempt has ever been made to set aside the contract. When a company has agreed to treat the property which it is to acquire and to pay for in shares as of a certain value, then, unless the contract can be rescinded on the ground of fraud (which is not alleged in this case), the agreement must be taken as it stands, and the sufficiency of the consideration given for the shares cannot be inquired into, the property must be taken as worth the agreed price, and the shares issued in respect of it must be taken to be fully paid up: Pell's Case [FN35] ; Forbes and Judd's Case [FN36] ; In re Baglan Hall Colliery Co. [FN37] ; Salomon v. Salomon & Co. [FN38] The decision in Ooregum Gold Mining Co. of India v. Roper [FN39] is not inconsistent with this; and that in In re Almada and Tirito Co. [FN40] , though not in accordance with the authorities, does not shew that the value of property paid for in shares can be inquired into where the contract is not impeached; nor is there any case in which that has ever been held.
[LINDLEY L.J. referred to Leeke's Case [FN41] and Chapman's Case . [FN42] ]
A contract, if it is one that cannot be rescinded, must be accepted as a binding contract, and as one that fixes the price, where the subject of it is capable of a measure of value and there is an independent bargain. A vendor may say, "My property will fetch in the market only 15,000l.; but I will not sell it to you, the company, for less than 20,000l." Why should not the company agree, if it chooses, to give 20,000l.? The contention is that you can inquire into the real value because otherwise the shares will not be paid up. But that is a fallacy. In the case of great banking or brewery firms that have been converted into limited companies it has been usual for the assets to be fixed at a price payable by the issue of shares. When property and not money is given in payment, it is necessary and sufficient that either one of two things shall be established, namely, either (1.) that the company has bonâ fide agreed to take the property at a price equal to the amount credited on the shares (in which case the value of the property is not material), or (2.) that the true value of the property was at the date of the issue of the shares not less than that nominal amount: Buckley on the Companies Acts, 7th ed. p. 607. In short, the price is fixed by the contract, and the number of shares is fixed against that price.
The argument for the appellant applies only to cases where there is no independent bargain. A man may have property which he values at 5000l. Why should he not sell it, if he chooses, for 10,000l.? This case can only be decided against us on the ground that the shares were issued at a discount, which has not been and cannot be proved. The evidence should be construed in favour of the transaction, and there is nothing in it to justify the inference that it was ultra vires. There is a broad principle that where a party is attempting to set aside a transaction for illegality, and the facts connected with it are equally consistent with the transaction being legal or illegal, it lies on that party to prove the illegality: per Bowen L.J. in Hire Purchase Furnishing Co. v. Richens . [FN43]
Eve, Q.C., and Carrington, for the respondent Wragg. There is no evidence which shews that the company paid too much for the property it bought. As to the contention that the stock-in-trade is stated in the agreement to be worth 27,300l. while in the books it is stated at 15,375l. only, the apportionment of the consideration is made by the agreement according to the usual practice, for the purpose of satisfying the requirements of the Stamp Act, 1891 (54 & 55 Vict. c. 39), while reducing the amount of ad valorem duty payable under s. 59, sub-s. 1 ; and the mode of apportionment does not affect the validity of the contract. There is nothing dishonest in attributing profit to stock; and if the parties had been acting dishonestly they would have taken good care to have rendered the arguments of the appellant impossible.
Sir R. B. Finlay, S.-G., in reply. No attempt has been made to support the grounds on which the judgment of Vaughan Williams J. proceeded, and I submit that they cannot be supported. It is said that the consideration for the purchase was apportioned as it was in the contract, because stamp duty is not payable upon stock-in-trade, and that the difference of 11,000l. odd ought to have been added to the 6000l. apportioned for the goodwill, raising that item to 17,000l., and consequently that the apportionment was no real indication of value. That is equivalent to saying, "The goodwill was worth 17,000l., but to escape stamp duty we put the goodwill, which was chargeable, at 6000l. only, and added 11,000l. to the goods and chattels which are free." But this would have been an evasion of the Stamp Act, 1891, and a gross fraud upon the revenue. In cases of this kind the apportionment must be made fairly bonâ fide, so that such property may bear its fair amount of stamp duty: The Stamp Act, 1891, ss. 5, 54, 58 sub-s. 1, 59 ; Alpe on Stamp Duties, 5th ed. pp. 20, 122; 1 Palmer's Company Precedents, 6th ed. p. 152; Dart's Vendors and Purchasers, 6th ed. pp. 597, 598; Davidson's Precedents, 3rd ed. vol. ii. pt. 1, p. 353; Key & Elphinstone's Conveyancing, 4th ed. vol. i. p. 369.
All the evidence upon the point, however, shews that the apportionment in clause 3 was correct, and displaces the contention that the goodwill was worth more than 6000l.
Another argument is that the excess in value represents a profit on the contract; but the vendors and the vendees are the same persons, the business is the same business; there is nothing more than a change in the manner in which it is held, and there can be no profit in the ordinary sense. But even if the vendors and vendees were independent, we shew that a sum has been added to the agreed price of the stock-in-trade, and no amount of bargaining would make a company to part with its shares for less than their nominal value. If the company honestly regards the consideration given as fairly representing the nominal value of the shares in cash, its estimate, according to Lord Watson in Ooregum Gold Mining Co. of India v. Roper [FN44] , ought not to be critically examined; but here the company, according to their own shewing, did not do so. Pell's Case [FN45] , Forbes and Judd's Case [FN46] , and In re Baglan Hall Colliery Co. [FN47] do not touch the point here. It is not payment in kind if the thing taken is of insufficient value.
Cur. adv. vult.
Lindley LJ
After stating the facts of the case, continued:-- The liquidator contends that the shares issued to Martin and Wragg were improperly issued as fully paid up, and cannot be properly so treated. No attempt has been made to impeach or set aside the agreement of January 10, 1894. Nor, having regard to the decision of the House of Lords in Salomon v. Salomon & Co. [FN48] , is it possible to hold that agreement invalid on the materials before us. The company, although a small one, promoted by the vendors and managed by them, must be treated as competent to buy the property which it was formed to acquire, and to take it at the price named by the vendors. The only question is whether the shares issued as fully paid up in part payment of the price can be treated as fully paid up.
Before examining the law upon this point I will state the grounds on which the appellant contends that they cannot. It appears from the books of the company that the stock-in-trade, which by clause 3 of the agreement is taken to be worth 27,300l., was entered as of the value of 15,375l. only, and it is contended that the paid-up shares given to the vendors must be attributed in part at least to this difference of 11,000l. odd. In other words, it is contended that the company ought to be treated as having issued shares to the nominal amount of 20,000l. (the rest of the 27,300l. being cash or debentures) in payment of goods of much less value - namely, of the value of 15,000l. odd only - as both vendors and buyers well knew.
I am quite unable to take this view of the contract. I will assume that the stock-in-trade was worth only 15,000l. - i.e., that it would not have fetched more in the market. There was no agreement to buy the stock-in-trade at that price and to pay for it in shares of a larger nominal amount. The third clause in the agreement was merely inserted for stamp purposes. It was absolutely useless and meaningless for any other purpose. No evidence is required to prove it. No lawyer accustomed to the preparation of deeds can fail to see why it was inserted or its legal effect. Stamp duty had to be paid on so much of the 46,300l. as was liable to duty, and duty was payable in respect of so much of this sum as was attributable to the goodwill and of the freeholds and leaseholds, and of nothing else. These were valued at the respective sums mentioned in clause 3; 27,300l. remained and the stock-in-trade remained, and the 27,300l. was attributed to that. I do not say that this was right; but whether right or wrong, the third clause does not in any way alter the real agreement between the vendors and the company.
The real agreement was that the vendors should sell and that the company should buy the various properties mentioned in the schedule to the agreement for one sum of 46,300l., which apparently was 11,000l. more than could have been obtained from any other purchaser. But the parties did not appropriate any part of the purchase-money to any definite part of the property purchased, nor is the Court at liberty to do so. It would be wholly wrong to treat the agreement as one to pay 27,300l. for stock-in-trade, valued as between the vendors and the company at 15,375l., and to attribute the whole of the share capital to the purchase of that particular item. To do this is to fasten on the parties a contract which they never made and one, moreover, which would entirely defeat their intentions if the appellant is right in his contention.
Such being the true agreement between the parties, I will endeavour to ascertain the law applicable to the case.
In Leifchild's Case [FN49] a limited company bought a patent and paid for it in paid-up shares; the holder was held not to be a contributory. The agreement was not sought to be set aside, and no question as to the actual value of the patent was raised. No one apparently thought that question material. This case was decided in 1865 by Kindersley V.-C., and is valuable as shewing that as early as that year it was taken for granted that shares in a limited company issued as paid up in consideration of property transferred to the company must be treated as paid up unless the whole transaction was set aside on the ground of fraud.
In 1869 Drummond's Case [FN50] came before Giffard L.J., sitting as the Court of Appeal, and it was then distinctly decided that even a subscriber of the memorandum of association could satisfy his liability in respect of the shares for which he subscribed by paying for them in money or money's worth, or, as Giffard L.J. put it, in "meal or in malt." This general proposition has never been doubted; but there was a difficulty in applying it to a subscriber of the memorandum of association. The difficulty was to identify the shares which he was to receive as vendor with those which he had bound himself to take and pay for by subscribing the memorandum of association. This difficulty always arises in similar cases. It has never been doubted, so far as I know, that the obligation of every shareholder in a limited company to pay to the company the nominal amount of his shares could be satisfied by a transaction which amounted to accord and satisfaction or set-off as distinguished from payment in cash. In 1867 the Legislature rendered all such transactions invalid unless they were made pursuant to a duly registered contract; but if there is such a contract the law is now what it always was.
As regards the value of the property which a company can take from a shareholder in satisfaction of his liability to pay the amount of his shares, there has been some difference of opinion. But it was ultimately decided by the Court of Appeal that, unless the agreement pursuant to which shares were to be paid for in property or services could be impeached for fraud, the value of the property or services could not be inquired into. In other words, the value at which the company is content to accept the property must be treated as its value as between itself and the shareholder whose liability is discharged by its means.
The following are the decisions which established this doctrine. The point was first raised in 1869 in Pell's Case . [FN51] Pell had agreed to sell his business to a limited company for a certain number of fully paid-up shares which were allotted to him and were registered in his name. On the winding-up of the company, Lord Romilly held him to be a contributory in respect of these shares, but to be entitled to an inquiry as to the value of the property given for them, and to be allowed such value, but no more, towards payment of them. This decision, however, was reversed on appeal by Giffard L.J. [FN52] , on the ground that, the agreement for the sale of the business for paid-up shares not being impeached, the shares ought to be treated as paid for in money's worth.
In Forbes and Judd's Case [FN53] Lord Hatherley clearly intimated his concurrence with the view that, unless the agreement was impeached, the value of the property given for the shares could not be gone into. In In re Baglan Hall Colliery Co. [FN54] , Giffard L.J. again acted on the same principle, and there being, as he said, "some confusion in the views entertained of cases of this nature," he went fully into the grounds of his decision, referring to the various sections of the Companies Act, 1862, which were material. He fully recognised the obligation of a shareholder to pay for his shares; but he again held that this obligation could be satisfied otherwise than by payment in money. In that case the company had agreed to buy a colliery and to pay for it in shares, and the handing over of the colliery as the consideration for the shares was held to be payment in full. [FN55] No question was raised as to the value of the colliery. In Leeke's Case [FN56] Stuart V.-C. criticised Pell's Case [FN57] , and evidently disapproved the decision of Giffard L.J.; but, although Leeke's Case [FN58] was affirmed on appeal, the Vice-Chancellor's strictures on Pell's Case [FN59] were not approved. [FN60]
In Jones's Case [FN61] the Court of Appeal again adhered to the principle laid down in Pell's Case [FN62] , Forbes and Judd's Case [FN63] , and In re Baglan Hall Colliery Co. [FN64] James L.J. seems to have had some doubt whether he should have come to the conclusion he did if it had not been for the decisions; but I understand his doubt was as to the identification of the shares subscribed for with those given for the property taken by the company. Mellish L.J. had no misgivings, and expressly approved the decision of Giffard L.J. in Pell's Case . [FN65]
In Maynard's Case [FN66] fully paid-up shares were allotted to a subscriber of the memorandum of association in payment of property sold by him to the company. He was held to have satisfied his liability, the company "being free to accept payment in any honest way." [FN67] It was proved to the satisfaction of the Court that the shares for which he subscribed were to be paid for in property to be bought by the company at a sum equal to the amount of the shares subscribed for. It was not suggested that the agreement was ultra vires or depended for its validity on the value of the property.
All these cases arose before the Companies Act, 1867, came into operation, although some of them were decided at a later date. In Fothergill's Case [FN68] , which arose after that Act was in force, the above decisions were again considered, and were held inapplicable to cases to which that Act applied unless a proper agreement were duly registered. In Fothergill's Case [FN69] there was a registered agreement, but it was held not to apply to the shares for which he had subscribed the memorandum of association, and he was held to be a contributory in respect of them. But I can find nothing to throw doubt on the application of the law as settled in Pell's Case [FN70] , and the others referred to above, to similar cases arising since 1867, and in which the shares in question have been issued pursuant to a duly registered agreement as required by the Act.
In Anderson's Case [FN71] a colliery was sold to a limited company for paid-up shares. A proper agreement was registered. The price of the colliery to the company was 150,000l., to be paid in shares. The vendors had shortly before agreed to buy it for 66,000l. and to pay 42,000l. in shares. They therefore made a huge profit. It was, nevertheless, held by the Court of Appeal that so long as the agreement for sale to the company was unimpeached, all the 150,000l. shares must be treated as fully paid up. This case is the last to which it is necessary to refer bearing directly on the question I am examining.
I understand the law to be as follows. The liability of a shareholder to pay the company the amount of his shares is a statutory liability, and is declared to be a specialty debt (Companies Act, 1862, s. 16), and a short form of action is given for its recovery (s. 70). But specialty debts, like other debts, can be discharged in more ways than one - e.g., by payment, set-off, accord and satisfaction, and release - and, subject to the qualifications introduced by the doctrine of ultra vires, or, in other words, the limited capacity of statutory corporations, any mode of discharging a specialty debt is as available to a shareholder as to any other specialty debtor. It is, however, obviously beyond the power of a limited company to release a shareholder from his obligation without payment in money or money's worth. It cannot give fully paid-up shares for nothing and preclude itself from requiring payment of them in money or money's worth: In re Eddystone Marine Insurance Co. [FN72] ; nor can a company deprive itself of its right to future payment in cash by agreeing to accept future payments in some other way. It cannot substitute an action for the breach of a special agreement for a statutory action for non-payment of calls: see Pellatt's Case. [FN73]
From this it follows that shares in limited companies cannot be issued at a discount. By our law the payment by a debtor to his creditor of a less sum than is due does not discharge the debt; and this technical doctrine has also been invoked in aid of the law which prevents the shares of a limited company from being issued at a discount. But this technical doctrine, though often sufficient to decide a particular case, will not suffice as a basis for the wider rule or principle that a company cannot effectually release a shareholder from his statutory obligation to pay in money or money's worth the amount of his shares. That shares cannot be issued at a discount was finally settled in the case of the Ooregum Gold Mining Co. of India v. Roper [FN74] , the judgments in which are strongly relied upon by the appellant in this case. It has, however, never yet been decided that a limited company cannot buy property or pay for services at any price it thinks proper, and pay for them in fully paid-up shares. Provided a limited company does so honestly and not colourably, and provided that it has not been so imposed upon as to be entitled to be relieved from its bargain, it appears to be settled by Pell's Case [FN75] and the others to which I have referred, of which Anderson's Case [FN76] is the most striking, that agreements by limited companies to pay for property or services in paid-up shares are valid and binding on the companies and their creditors. The Legislature in 1867 appears to me to have distinctly recognised such to be the law, but to have required in order to make such agreements binding that they shall be registered before the shares are issued.
There is certainly no decision yet which is opposed to the above statement of the law. The observations in In re Addlestone Linoleum, Co. [FN77] , In re Almada and Tirito Co. [FN78] , Lee v. Neuchatel Asphalte Co. [FN79] , and Ooregum Gold Mining Co. of India v. Roper [FN80] , relied upon by the appellant in this case, fall far short of deciding that the value of the property or services paid for in shares can be inquired into or is material in any case in which the sale is not impeached. These and other cases decided upon the Act of 1867 shew (1.) that since that Act, as before, shares must be paid for in money or money's worth; (2.) that since that Act, as before, they may be paid for in money's worth; (3.) that since the Act payment in money's worth can only be effectually made pursuant to a properly registered contract; (4.) that, even if there is such a contract, shares cannot be issued at a discount; (5.) that if a company owes a person 100l., the company cannot by paying him 200l. in shares of that nominal amount discharge him, even by a registered contract, from his obligation as a shareholder to pay up the other 100l. in respect of those shares. That would be issuing shares at a discount. The difference between such a transaction and paying for property or services in shares at a price put upon them by a vendor and agreed to by the company may not always be very apparent in practice. But the two transactions are essentially different, and whilst the one is ultra vires the other is intra vires. It is not law that persons cannot sell property to a limited company for fully paid-up shares and make a profit by the transaction. We must not allow ourselves to be misled by talking of value. The value paid to the company is measured by the price at which the company agrees to buy what it thinks it worth its while to acquire. Whilst the transaction is unimpeached, this is the only value to be considered.
This appears to me to be in complete accordance with the passages quoted from the judgments of Cotton L.J. in In re Almada and Tirito Co. [FN81] and Lords Watson and Macnaghten in Ooregum Gold Mining Co. of India v. Roper. [FN82] Lord Herschell's judgment, as I understand it, is distinctly favourable to the respondents. In my judgment the law is settled, and cannot be declared wrongly settled by this Court, at any rate. If it is to be altered, the decisions which have settled it must be declared wrong by the House of Lords, or the law must be altered by Act of Parliament. Vaughan Williams J. has had to consider this matter on more than one occasion - namely, in Chapman's Case [FN83] , and again in the present case - and on both occasions the principle on which he based his decision is in my judgment correct. The summons which has raised the question of Martin and Wragg's liability is of an unusual kind, being a misfeasance summons and an alternative application to enforce payment up of the shares. It was dismissed with costs, and no question was raised on appeal except the important question of principle which I have considered. The appeal must be dismissed with costs.