In Re Wragg Limited
[1897] 1 Ch 7961897 WL 11444 (CA)
(Decision by: A L Smith LJ)
In Re Wragg Limited
Court:
Judges:
Lindley LJ
A L Smith LJRigby 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:
A L Smith LJ
After stating the facts of the case up to the agreement by Wragg and Martin for the sale of their business to the company, continued:--
The Solicitor-General, who appeared for the liquidator, did not seek upon any ground to impeach the sale by Messrs. Wragg & Martin to E. J. Wragg, Limited; but he asserted that he could shew by evidence that the shares in E. J. Wragg, Limited, which were taken by Wragg and Martin as fully paid up in part payment of the agreed price of 46,300l., were not so - in other words, that he could shew that there was a deficiency in the value of the property sold by Messrs. Wragg & Martin to the company for the agreed price of 46,300l., and that as regards that deficiency, which he alleged to be 11,647l., the shares held by them were not fully paid up.
It is admitted that the present proceeding of the liquidator is without precedent, and apart from the authorities, some of which I will deal with hereafter.
I will first ascertain the facts upon which the liquidator relies in proof of his case, assuming that he is entitled to go into them. [His Lordship then stated the agreement of January 10, 1894, and continued:--]
It is argued for the liquidator that the 3rd clause of the agreement of January 10, 1894, shews that the stock-in-trade sold to the company was valued at 27,300l.
I agree that upon the face of this clause it is so; but before I say that it is proved that 27,300l. was the value of the stock-in-trade, I must consider for what purpose this apportionment of the 46,300l. into its different component parts was made and inserted in the agreement. The Solicitor-General was unable to make any suggestion as to this. He simply said there it is stated upon the face of the clause that the value of the stock-in-trade was 27,300l., and that establishes the fact. Primâ facie this would be so; but as except upon one hypothesis the clause is obviously useless and there is no possible reason for its insertion, I do not think that what would otherwise be its primâ facie meaning is necessarily its real meaning. The hypothesis is this: that the distribution of the items in this clause was made solely to arrive at the stamp duty payable upon the instrument of agreement, for otherwise it is inconceivable why it should have been inserted; and that this is the only reason for its existence I have no doubt.
It was said that the Court could not come to such a conclusion without having the respondents' evidence thereon.
But with evidence, or without evidence, for what other purpose was the clause inserted? To this there has been no answer. In my judgment this supposed valuation of the stock at 27,300l. is not a real valuation of such stock at all. [The Lord Justice then referred to the certificate signed by Martin and Wragg as to the value of the stock-in-trade on January 1, 1894, and the book of the company containing the entries headed "Purchase of Business," and continued:--]
What is the meaning of this last entry, "Balance to Goodwill Account, £ 11,647"? Does it mean profit upon the sale of Messrs. Wragg & Martin's business to the company, over and above the estimated items therein appearing; or, if not, what does it mean? The liquidator suggests that it was put in as representing nothing. The accountant he called to give evidence as to this gave no intelligible account of why he made this entry as he did. He said that he found that there was a sum of 11,647l. to be accounted for, and so he entered it in this way: the liquidator ignores the fact of a possible profit being made upon the sale of the business to the company, and says that he has proved that the sum of 11,647l. represents nothing. I do not think that he has.
It was vigorously insisted upon that, as the respondents had not been called, the Court was bound not to infer that the component parts of the 46,300l. were allocated as they were in clause 3 for stamp duty purposes, for that would be to infer that it was done for the purpose of defrauding the revenue, which no court could without evidence infer. Assuming for a moment the probability that the agreed price of 46,300l. for the business as a going concern embraced a profit to Mr. Wragg and Mr. Martin upon the sale thereof to the company over and above the estimated items, the whole thing is at once explained.
Whether the Revenue can complain is another matter; and, indeed, it would seem that the 11,647l. should have been distributed over the different items sold, and not placed exclusively upon the stock, and if this were the point I should decide against Messrs. Wragg & Martin.
In my judgment, the liquidator fails to establish that the 11,647l. is a fictitious entry and represents nothing; and, indeed, the true inference from the facts adduced by the liquidator is that it represents the agreed profit passing to the vendors upon the sale of this business to the company. The liquidator has failed to prove that the 27,300l. was the real price of the stock, and thereby, as he contends, the 11,647l. represents nothing. But, even if this were otherwise, another point arises. If there were in fact the shortage, as it has been called, of the 11,647l., what right has the liquidator to say that the shortage was the consideration for the shares, so that by that amount they were not fully paid up?
There was ample property conveyed by the vendors to the company to satisfy 1993 fully paid-up shares of 10l. each, i.e., 19,930l.; for, leaving out the 10,000l. of mortgages transferred to the company, the agreed price was 36,300l. Deduct 11,647l., the alleged shortage, and it leaves 24,653l. as consideration for 19,930l. of shares.
Why is the liquidator to allocate the shares against what he alleges to be shortage, even if it existed, and not against the whole consideration of 24,653l.?
Mr. Buckley ingeniously argued that if he did not do this the result would follow that the consideration for the 7000l. cash and for the 9300l. of first and second debentures would be short - that is, assuming that there was no agreed profit upon the transaction. He got at it thus: 36,300l. agreed contract price (leaving out the two mortgages for 10,000l.), 11,647l.; shortage leaves 24,653l.; shares, 1993, leaving 4723l. as consideration for the 7000l. cash and the 9300l. in first and second debentures; and therefore, he said, the shares, and not the cash and debentures, must be taken to have had insufficient consideration given for them. A purely speculative conclusion, and which also omits the consideration of profit.
So much for the facts; and upon these alone, apart from the cases, I agree with my brother Vaughan Williams that the liquidator has failed in his case.
But when I come to the authorities the same result follows.
It is now well settled law that for a shareholder in a company limited by shares to have fully paid-up shares, and therefore not to be liable for calls in a winding-up of the company, he must shew that he has fully paid up to the face value of the shares, either in cash or in value received by the company in some form; or partly in cash and partly in value received by the company in some form; and if the payment other than in cash be relied on, this can only be so if there be a "contract duly made" in writing, and filed with the Registrar of Joint Stock Companies, at or before the issue of the shares, pursuant to s. 25 of the Companies Act, 1867. The House of Lords has definitely settled this point in the case of the Ooregum Gold Mining Co. of India v. Roper . [FN84]
Partial payment is not sufficient; but shares may be lawfully issued as fully paid up for considerations which the company have agreed to accept as representing in money's worth the nominal value of the shares: per Lord Watson in the Ooregum Case . [FN85]
It is not suggested that the contract of January 10, 1894, is not an honest bargain, or that its consideration is colourable or illusory.
Now, is a liquidator entitled to go into the adequacy of the consideration, and to shew, if he can, that the consideration for the contract was inadequate, unless it appears so upon the transaction itself; or, if not, if he desires to do so, must he not impeach the contract itself?
If there be no consideration at all for the shares, and it be shewn, as in the case of In re Eddystone Marine Insurance Co. [FN86] , that the words inserted in the registered contract, "in consideration of services," were placed there as a mere blind, that will suffice.
Again, if in a registered contract a money value less than the face value of the share be placed upon the consideration which the company had agreed to accept as representing in money's worth the nominal value of the share, that share, I should think, would not be fully paid up; for instance, as was put in argument, a contract to supply to a limited company 100 tons of coal, valued at 10s. per ton, as a consideration for 100 1l. shares in the company - i.e., a value of 50l. worth of coal for 100 1l. shares - these shares would not be, I think, fully paid up.
There would be no necessity in such a case for impeaching the agreement, for that the shares were not fully paid up in money or money's worth would be apparent upon its face. Cotton L.J. in In re Almada and Tirito Co. [FN87] points to such a case as this, though he did not decide it.
If, however, the consideration which the company has agreed to accept as representing in money's worth the nominal value of the shares be a consideration not clearly colourable nor illusory, then, in my judgment, the adequacy of the consideration cannot be impeached by a liquidator unless the contract can also be impeached; and I take it to be the law that it is not open to a liquidator, unless he is able to impeach the agreement, to go into the adequacy of the consideration to shew that the company have agreed to give an excessive value for what they have purchased. I will content myself with citing three of the earlier cases, and I will begin with Pell's Case. [FN88] Pell in this case had agreed to sell to a company the goodwill and stock-in-trade of his business in consideration of 1500 20l. shares of the company fully paid up. The company was wound up, and no payment for these shares could be found in the books of the company. Lord Romilly M.R. directed an inquiry as to the value handed over by Pell to the company under his agreement with them, and declared that Pell was entitled to be allowed only the amount of that value. This decision was reversed upon appeal, Sir G. M. Giffard L.J. holding that as the agreement was not impeached the Court had no ground for going behind the agreement.
In the next year (1870), in Forbes and Judd's Case [FN89] , Hatherley L.C. deals with Pell's Case [FN90] , and expressly states that if the consideration is to be impeached the contract must also be impeached. He says:
"The only difference between Giffard L.J. and the Master of the Rolls in Pell's Case [FN91] was this. The Master of the Rolls thought that Pell, being bound to pay the full amount of 20l. per share, was not to be taken to have paid it in full unless the property he handed over was worth that amount. That result, however, could only be arrived at by rescinding the contract to buy Pell's business, and Giffard L.J. thought that the contract not being impeached, must be treated as a good contract, and one that ought to be acted upon so, that no question could be raised as to the actual value of the business made over."
The Lord Chancellor clearly approves, and in no way disapproves, of the decision of Giffard L.J. in Pell's Case. [FN92]
In In re Baglan Hall Colliery Co. [FN93] Giffard L.J. again lays down what he had stated in Pell's Case. [FN94]
It is true that in Leeke's Case [FN95] Stuart V.-C. did not like the decisions in Pell's and Forbes' cases by Lord Hatherley and Giffard L.J.; but many cases have been decided since then all in accord with Pell's Case [FN96] , which Lindley L.J. has referred to, and I do not repeat them, and not a single case has been cited to the contrary.
It appears to me that in the House of Lords, in the Ooregum Case [FN97] , the principle of Pell's Case [FN98] and Forbes and Judd's Case [FN99] was distinctly approved. Lord Watson [FN100] says:
"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 lawfully 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. That state of the law is certainly calculated to induce companies who are in want of money, and whose shares are unsaleable except at a discount, to pay extravagant prices for goods or work to persons who are willing to take payment in shares. The rule is capable of being abused, and I have little doubt that it has been liberally construed in practice."
Lord Herschell [FN101] is very distinct upon this point. He says: "But the contrary has been determined. And not only may a share be allotted as fully paid up in respect of property, goods, or services received by the company, but the Courts will not inquire into the adequacy of the consideration, and certainly have not required it to be proved that the consideration given was equivalent in cash value to the nominal amount of the share"; and Lord Macnaghten [FN102] says:
"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."
In my judgment, whether the facts of this case are looked at, or whether the laws applicable thereto are looked at, the liquidator is in the wrong, and my brother Williams was quite right in dismissing this application.