Nokes v Doncaster Amalgamated Collieries Ltd
[1940] A.C. 1014(Judgment by: Lord Romer)
Between: Nokes - Appellant
And: Doncaster Amalgamated Collieries Ltd - Respondent
Judges:
Viscount Simon LC
Lord Atkin
Lord Thankerton
Lord RomerLord Porter
Subject References:
MASTER AND SERVANT
Contract of service
Company
Reconstruction or amalgamation
Order by Court for transfer of property rights, powers and liabilities of transferor company to transferee company
Whether employee bound by transfer
Legislative References:
Companies Act, 1929 (19 & 20 Geo. 5, c. 23) - s. 154
Judgment date: 1 August 1940
Judgment by:
Lord Romer
My Lords, this appeal raises a general question of difficulty and importance as to the construction of s. 154 of the Companies Act, 1929. It is the question whether the Court has power under this section to transfer to or vest in the transferee company, therein mentioned, property and rights of a transferor company which the latter company is itself incapable of assigning, or which it can only assign with the consent of some third party whose consent to the transfer has not been obtained. The question more particularly involved is whether the order made by Mr. Registrar Stiebel on June 4, 1937, was effectual to transfer to the respondent company all the rights and liabilities of the Hickleton Main Colliery Company, Ld., as they subsisted on that date, under and by virtue of the contract of employment entered into by the last mentioned company with the appellant. In other words, was the appellant, as from June 4, 1937, in the employment of the respondent company upon the terms of such contract?
It is plain that the proper answer to be given to these questions can only be discovered after a careful and critical examination of the language employed in s. 154. It is true that the section merely gives effect to an amendment of the law made by s. 54 of the Companies Act of 1928, but that Act was passed for the purpose of amending the law relating to companies with a view to the consolidation of such law effected in the following year, and never itself came into force. In order, therefore, to appreciate the objects that the Legislature had in view when making the amendment embodied in the section, it is necessary to consider how matters stood before 1929. For this purpose it will suffice to consider an amalgamation of a company with another carried into effect by means of an arrangement made between each company and its shareholders under the provisions of s. 120 of the Companies Act, 1908, now represented by s. 153 of the Act of 1929.
The arrangement would provide for each company going into voluntary liquidation and for the sale of the whole undertaking and assets of each company by its liquidator to a third company to be formed for the purpose of acquiring them. It would also provide that the purchasing company should undertake and indemnify the liquidators against the liabilities of the two amalgamating companies. The arrangements having been sanctioned by the Court, and each company having gone into voluntary liquidation, the undertaking and assets of each company would be assigned to the new company by appropriate methods. Where any particular asset could only be transferred with the consent of some third party, it would be the duty of the liquidator of the transferring company to obtain that consent.
Such an asset might consist of leasehold premises held subject to a covenant against assignment without the lessor's consent. I have never heard of a lessor's consent being refused in such a case, and it seems most unlikely that such a thing would occur in practice. But if it did, then, unless the covenant extended to parting with the possession of the demised premises, the difficulty might be got over by the transferor company executing a declaration of trust in favour of the new company, a step that would, upon the final dissolution of the transferor company, involve the appointment of a new trustee and a vesting order being made by the Court under the provisions of ss. 41 and 44 of the Trustee Act, 1925. Any difficulty encountered in dealing with shares in another company which were subject to restrictions on transfer could be overcome in like manner, the vesting order in the new trustee being effected under s. 51 of the last mentioned Act.
Another asset of the transferor company might be a trading contract for the purchase of the raw materials of its business. Unless it appears from the express terms of the contract or by necessary implication that it is to enure for the benefit of the assigns of the contracting parties, such a contract is not assignable at law: see Tolhurst v. Associated Portland Cement Manufacturers. [F21] If, therefore, the new company were desirous of obtaining the benefit of the contract the liquidator of the transferor company would do his best to obtain a novation of the contract by arrangement between himself as representing the transferor company, the other party to the contract in question, and the new company.
Failing this the other party to the contract would be entitled to treat the sale of the transferor company's undertaking as a repudiation of the contract by that company, and prove in the liquidation for such damages as he might have suffered by reason of the repudiation. The contract, however, might be one that was essential to the success of the undertaking. In such a case the parties to the scheme of amalgamation would, if there were any risk of failure to obtain a novation of the contract have adopted an alternative scheme of arrangement that is not an amalgamation in its strict sense but is one for all practical purposes. The new company would not purchase the undertakings of the two companies in question, but would purchase the shares in those companies in consideration of the allotment to the shareholders of fully paid shares in the new company. The two companies would not go into liquidation but would continue in existence as going concerns, each carrying on business in its own name; but the management of its affairs and the control of its assets would be in the hands of the new company.
Under such a scheme there would of course be no transfer to the new company of any assets of the two amalgamating companies, but for every practical purpose the result would be the same as if every asset of those companies had been transferred whether by deed, declaration of trust, novation of contract or otherwise. For the scheme of arrangement with which I am contrasting a sale of the shares in the companies, would have been dependent upon the sanction of the court being obtained, and such sanction would never be given to an amalgamation of a solvent company with one which was commercially insolvent or concerning whose commercial solvency there was any reasonable doubt.
It remains to consider another class of contracts into which an amalgamating company may have entered, namely, contracts of service. So far as concerns its contracts with the more highly placed officials there will not in practice be found any difficulty. Whether the amalgamation being negotiated is one to be effected by a transfer to the new company of the undertaking and assets of the amalgamating companies or the purchase by the new company of the shares in those companies, one of the first things to be settled is who are to be the directors, managing directors, solicitors, auditors and so forth of the new company, or who are the persons who are to continue to occupy those positions in the amalgamating companies as the case may be. Compensation for those who are displaced, sometimes on what may appear to be a generous scale, will be provided by the scheme of arrangement. All of this is an essential commonplace of such schemes.
But the contracts of service of those in a more humble situation, as for example, those serving behind the counter in a shop or those working underground in a colliery and whose services can be usually terminated by a comparatively short notice, will be left to the liquidator to deal with in the case of amalgamation proper, and will not need to be dealt with at all where the new company merely purchases the shares in the amalgamating companies. The making of an order for winding up by the Court operates no doubt as a notice of dismissal of a company's employees. But this is not the result, or at any rate is not necessarily the result, of the passing of a resolution for voluntary winding up: see Midland Counties District Bank, Ld. v. Attwood, [F22] and Reigate v. Union Manufacturing Co. [F23] It would certainly not be the result of a voluntary liquidation of a company entered upon merely for the purpose of carrying through an amalgamation with another company by means of a sale of the company's undertaking and assets. In such a case the liquidator would carry on the business as before, making use of the employees' services and paying their wages, until the time came for a transfer of the undertaking to the new company.
The transfer would unquestionably operate as a notice of dismissal of the employees and the liquidator before making it should in strictness take timely steps to determine the existing contracts of service and give the employees the opportunity of entering into fresh contracts with the new company. In practice, I suspect, he does no such thing, relying on the willingness of the employees to serve the new company in spite of the fact that it might be governed by an entirely different lot of directors and managers and might be carrying on business under an entirely different name from those of the company whom he had contracted to serve. But such changes as these might well occur in the case of his original employers. Directors and managers may come and go. The whole policy and methods of trading of his employers may be changed in the space of a very short time by a new body of shareholders obtaining control of the company. Its very name may be changed: see s. 19 of the Act of 1929. Such changes as these must be expected by those who serve limited companies. The liquidator might well think, therefore, that an employee would not pay any regard to the fact that after the transfer he was serving a different legal entity, even assuming that the fact was one that he was capable of appreciating. The employee would serve and be paid by the new company in the same way as he had served and been paid by the old one. In such circumstances a novation of his contract of employment would be readily implied.
With the general creditors of the company the liquidator could take no risks. Except in so far as they might have become bound by the scheme of arrangement to accept other provisions they would be entitled to be paid by the liquidator, and, until they had been paid, the liquidator could not hand over the assets to the new company nor could the company be deemed to be dissolved under what is now s. 236 of the Act.
It will be manifest from the foregoing observations that many months might elapse after the Court had sanctioned an arrangement which provided for the amalgamation of two companies before the amalgamation would be "fully and effectively carried out." It was in these circumstances that the amendment of the law embodied in s. 154 of the Act of 1929 was made.
Turning now to the section, the first thing to be noticed is that the Court may by order provide for the dissolution of the transferor company without winding up, and that this order may be made at the same time as the order sanctioning the compromise. In the present case the order providing for the dissolution of the Hickleton Main Colliery Company, Ld., was not in fact made until nearly two and a half months after the order sanctioning the arrangement. This, however, is immaterial. The important thing is that the Legislature contemplated that the two orders might be made at the same time.
Now it is plain that until the arrangement is sanctioned by the Court, there can be no transfer to the transferee company of the undertaking or property of the transferor company. It is equally plain that if the dissolution of the transferor company takes place the moment that the arrangement is sanctioned, there can be no transfer thereafter of such undertaking or property whether by way of deed of assignment or declaration of trust or novation of contract or otherwise. The transferor company will have ceased to exist. The Court, has, no doubt, power under s. 294 of the Act to declare the dissolution of a company "to have been void." But the section would seem to be applicable only to cases where the company has been in compulsory or voluntary liquidation and the dissolution has been effected under the provisions of ss. 221, 236 or 245. Under those sections it is a condition precedent of dissolution that the affairs of the company have been completely or fully wound up; and where, owing to some liability or some asset of the company having been overlooked the condition precedent has not been fulfilled the Court can properly declare the dissolution "to have been void."
But where the Court has under s. 154 brought about the dissolution of the company without a winding up I can see no grounds upon which the Court could possibly thereafter declare such dissolution "to have been void." It is moreover to be observed that the order under s. 294 is to be made upon an application by "the liquidator of the company or by any other person who appears to the Court to be interested"; words that seem quite inapplicable to the case of a dissolution without a winding up. In these circumstances I should expect to find in the section some provision for vesting in the transferee company the whole of the undertaking and assets of the transferor company, lock, stock and barrel, and I shall not have expected in vain. For under sub-s. 1 (a) the Court is given power to make provision for the transfer to the transferee company of the undertaking property and liabilities of the transferor company and by sub-s. 2 the effect of making such provision is that the property thereupon becomes transferred to and vested in and the liabilities are transferred to and become the liabilities of the transferee company.
Now it is to be noticed that by virtue of sub-s. 4 the expression "property" includes property, rights and powers of every description. It includes therefore the rights of the transferor company under trading or service contracts, for the transferor company undoubtedly possesses rights under such contracts as well as liabilities, and such rights and liabilities become by virtue of the order transferred to and vested in the transferee company. Property passing by the order will also include assets that were only transferable by the transferor company with the assent of a third party, for such assets are property notwithstanding any restrictions upon their assignability. I cannot for myself think of any item of a company's undertaking and assets that would not be covered by the expression "property, rights and powers of every description."
If there were any, the Court could vest them in the transferee company under the power conferred upon it by sub-s. 1 (f) of making provision for such incidental consequential and supplemental matters as are necessary to secure "that the reconstruction or amalgamation shall be fully and effectively carried out." These words are of great importance. Of equal importance is the very remarkable provision contained in sub-s. 1 (c). The Court apparently under that provision can by the order that puts an end to the transferor company enable the transferee company to continue any legal proceedings that have been instituted by or against the transferor company.
My Lords, the more closely I examine the section the more I am convinced that the object of the Legislature was to enable the Court by an order to make a complete substitution of the transferee company for the transferor company as regards the whole of the rights and liabilities of the latter without exception, and thus to secure, without delay and without the tedious formalities attendant upon a voluntary liquidation of transferor companies, that full and effective carrying out of the amalgamation that previously occupied so much time and involved the execution of so many documents and the making by the liquidators of so many arrangements with creditors, employees and others. Such, in my opinion, was the effect of the order made on June 4, 1937, by Mr. Registrar Stiebel in the present case. It follows that in my judgment the respondents were, as from that date, substituted for the Hickleton Main Colliery Company, Ld., in the contract of service made between the appellant and that company, as was held both by the Divisional Court and the Court of Appeal, and that the judgment of the Court of summary jurisdiction of November 19, 1937, was rightly made.
My Lords, I am by no means unconscious of the fact that the construction that I have placed upon s. 154 means that third parties who are in no way bound by the arrangement made by a company with its shareholders or creditors can be deprived by the Court of their rights without their consent. A landlord who has stipulated with his lessee that the demised premises shall not be assigned without his consent may find that the lease has become vested in a different lessee without his consent having been asked or obtained. A person who has contracted to supply goods or materials to one company, may find that without his consent he has become bound to supply the goods or materials to a different company. A servant may suddenly find himself obliged to render his services to a new master without his wishes having been consulted. It is said that in these and similar cases an injustice will be done by the section if it be construed as I have construed it. I must, of course, concede that, if there are two possible constructions of a statute of which the one will cause what seems to be an injustice and the other will not, the latter is to be preferred.
"But,"
as was said by Lord Herschell in Arrow Shipping Co. v. Tyne Improvement Commissioners [F24]
"a sense of the possible injustice of legislation ought not to induce your Lordships to do violence to well-settled rules of construction, though it may properly lead to the selection of one rather than the other of two possible interpretations of the enactment."
With all respect to those who think differently I cannot, consistently with well settled rules of construction, so read the section as to avoid causing the alleged injustices to which I have referred. Take the case of the landlord. The lease is without question part of the property of the transferor company. How is it possible consistently with well settled rules of construction to exclude that property from the operation of the section? Property, moreover, for the purposes of the section includes rights of every description. Under its trading contracts and its service contracts the transferor company, as I have already said, undoubtedly possesses rights. What rule of construction will permit such rights to be excluded?
It is contended that an answer to these questions favourable to the appellant is to be found in sub-s. 1 (a), under which the Court may by the order make provisions for the transfer to the transferee company of the property and liabilities of the transferor company. The use of the word "transfer," so runs the argument, shows that the only property that can be affected by the order is property that the transferor company can by itself transfer. But there seem to me to be several objections to this argument. In the first place the transfer for which provision may be made is not a transfer by the transferor company at all. It is not, indeed, a transfer that is to be made by anybody.
The making of the provision for a transfer is merely the machinery for bringing into operation the vesting of the property in the transferee company under sub-s. 2. In the next place, the provision for transfer extends not only to property but to liabilities; and the transferor company could not by itself transfer its liabilities to the transferee company so that, to use the words of sub-s. 2, they become the liabilities of the transferee company. The word transfer cannot have one meaning when applied to liabilities and a more restricted meaning when applied to property. Finally the section contemplates that the order that provides for the transfer may also provide for the contemporaneous dissolution of the transferor company, in which case any property of that company of which the transfer is not provided for by the order can never be transferred to and vested in the transferee company at all. The words of the section seem to me to be quite unambiguous, and I am not prepared to depart from what appears to me to be the plain meaning of the section by reason of the possible injustices that it may cause.
Nor can I see any good reason for supposing that the injustices to which I have referred, if they can properly be so called, were not within the contemplation of the Legislature. No one can doubt that by an order under s. 154 the Court can vest the liability of the transferor company for a simple contract debt in the transferee company by the same order that causes the extinction of the former company. The result is that a man who has given credit to a company that he knows suddenly finds that he has to rely upon the credit of a company of which he knows nothing and without any remedy against his former debtor. The injustice, such as it is, inflicted upon him differs in no material respect that I can see from that inflicted upon the landlord, the contractor, and the servants of the company. If the injustice in the former case was within the contemplation of the Legislature, as it must, in my opinion, be assumed to have been, I can see no reason for thinking that the injustice in the latter cases was not equally within its contemplation.
But in truth it is an exaggeration to use the word injustice in such a connection as the present. If all or the large majority of the shares in one company are acquired by another, the first company will almost certainly come under the control of new directors and managers carrying out a policy that may differ widely from that of their predecessors. Yet no one could possibly say without gross exaggeration that the landlord, the contractors, or the servants of the first company had suffered an injustice. Their position nevertheless would differ little for any practical purpose from the position they would be in had the first company become amalgamated with the second company by means of an exercise of the powers conferred on the Court by s. 154 of the Act, construing those powers as I think they should be construed.
My Lords, for these reasons I would dismiss this appeal.