In Re Theatrical Trust Limited (Chapman's Case)

[1895] 1 Ch. 771
1895 WL 9633 (Ch D)

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(Judgment by: Vaughan Williams J)

In Re Theatrical Trust Limited (Chapman's Case)

Court:

Judge:
Vaughan Williams J

Subject References:
Company
Shares
Payment not in Cash
Illusory Consideration

Legislative References:
Companies Act 1867 - 25

Hearing date: 21 March 1895
Judgment date: 22 March 1895

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Judgment by:
Vaughan Williams J

If the consideration payable for shares issued by a company is illusory, or permits an obvious money measure to be made shewing that discount has been allowed, filing the contract under which the shares were issued with the Registrar of Joint Stock Companies will not relieve the allottee from the obligation to pay the nominal value of the shares, or the amount of the discount, in cash; but the Court is not bound to inquire in each case whether the price was reasonable, or whether what was given for the shares had a cash value in the market equal to the nominal value of the shares.

THE Theatrical Trust, Limited, was incorporated on the 22nd of December, 1891, under the Companies Acts, 1862 to 1890, one of its objects being to acquire the benefits of certain dramatic copyrights and agency contracts from W. E. Chapman.

Chapman, one Brandon, and two other persons were the first directors of the company.

On the 26th of July, 1892, Chapman entered into an agreement with Brandon to transfer to the latter 400 fully paid vendors' shares in the company, in consideration of Brandon acting as its solicitor.

On the 10th of August, 1892, a resolution was passed by a meeting of directors, composed of Chapman, Brandon, and another person, to enter into the agreement of that date to be next mentioned.

By an agreement in writing dated the 10th of August, 1892, and made between Chapman (thereinafter called "the vendor") of the one part, and the company of the other part, after reciting that the company was desirous of commencing business in conformity with its memorandum and articles of association, and was also "desirous of appointing ... Chapman as the company's managing director at a salary to be agreed upon," it was witnessed that "in consideration of the foregoing and in consideration of the further work and trouble and expense" of Chapman in and about a scheme formulated by Chapman for the purpose of dealing with certain theatrical matters, and in further consideration of Chapman transferring to the company the benefit of all contracts in respect of agency and other business (if any) which he had either entered into or was in negotiation for, and in consideration also of Chapman paying all expenses in connection with the formation and registration of the company up to allotment, it was agreed

(1.)

that the amount to be paid to Chapman, or his assigns or nominees, in consideration of the premises, should be £4000, to be paid as to £100 in cash, as to £3200 in fully paid ordinary shares of the company of £1 each, and as to the remaining £700 in fully paid founders' shares of £10 each;

(2.)

that Chapman should serve the company for five years as its managing director at a salary to be agreed upon between him and the other directors.

On the 26th of August, 1892, the agreement last mentioned was filed with the Registrar of Joint Stock Companies, and the 3900 shares were afterwards allotted to Chapman, who was registered in the company's books as the holder of the shares, which were described as fully paid up. The certificates for the shares were issued on the 22nd of September, 1892.

On the 1st of September, 1892, Chapman transferred 400 of the shares to Brandon, and in October, 1892, Chapman transferred 200 of the shares to Greville. Chapman never assigned or handed over to the company any dramatic copyrights or agency contracts.

In June, 1893, the company resolved to wind up voluntarily, and the voluntary winding-up was continued under the supervision of the Court.

The liquidator placed the names of Chapman, Brandon, and Greville on the list of contributories, and the alleged contributories applied to have their names removed from the list.

W. E. Vernon, for Chapman and Brandon, and P. Rose-Innes, for Greville: --

The shares, though not paid for in cash, were issued as fully paid up for a valuable consideration, in pursuance of an agreement filed under sect. 25 of the Companies Act, 1867; and failure of consideration is not a ground for putting a shareholder on the list of contributories: Mege and Angier's Case W. N. (1875) 208.. The transferees only agreed to take fully paid shares, and neither Chapman nor either of his transferees is liable as a contributory.

Manson, and James Roberts, for the liquidator:--

Sect. 25 of the Companies Act, 1867, only regulates the mode of payment, and contains no provision exempting shares from being paid up in full: per Lord Justice Lindley, In re Addlestone Linoleum Company 37 Ch. D. 191 , 205.. The section may qualify and cut down the form of payment, but there must be payment: Ooregum Gold Mining Company of India v. Roper [1892] A. C. 125 , 134.. The filing of a contract with the Registrar of Joint Stock Companies does not relieve a shareholder from the obligation of paying for shares issued as a free gift or bonus, even when they have been honestly allotted in recognition of past services to the company: In re Eddystone Marine Insurance Company [1893] 3 Ch. 9 . No copyrights or agency contracts were ever handed over to the company, and the consideration for the shares was illusory. In such a case the filing of a contract does not relieve the shareholder from the obligation to pay for the shares in cash. Where the contract is that the person taking the shares is to give the company something which, admittedly, is not worth the amount of the shares, he will have to pay up the difference in a winding-up: per Lord Justice Cotton, In re Almada and Tirito Company 38 Ch. D. 415 , 423. The Court may direct an inquiry as to the real value of what is given for the shares: Pell's Case Law Rep. 8 Eq. 222; 5 Ch. 11. [They also referred to In re London Celluloid Company 39 Ch. D. 190. ]

Vernon and Rose-Innes, in reply.

[Other questions of law were argued and decided, but do not call for a report. The learned Judge held that the contract had in fact been filed before the shares were issued to Chapman, and then delivered judgment, as reported below, on the only question of which the argument has been reported.]

Vaughan William J

The next question is whether the shares were issued to Chapman subject to payment, or without any intention that he should pay for them or be under any liability to pay for them.

It was contended that there was never any intention that they should be paid for, and the argument addressed to me on behalf of the liquidator is based on In re Eddystone Marine Insurance Company [1893] 3 Ch. 9 , and In re Almada and Tirito Company. The effect of these cases is that sect. 25 of the Act of 1867 only points out the mode in which payment for shares is to be made, and that if a person complies with that section, the result is that he may pay otherwise than in cash; but they do not decide that where an agreement is registered the shareholder is altogether relieved from payment. When one has to consider what is payment, it is plain that the moment the shareholder is relieved from the obligation of paying in cash, he may pay in goods, or in things without a physical existence, such as a goodwill or a licence. But the cases decide that a man must really pay for the shares, and further, that if the contract makes it manifest on its face that the taker of shares is paying less than their nominal cash value, he may be liable for the balance. I do not think the cases go further than that. They do not say that the Court can take each contract and say whether the price given was fair and reasonable, or whether the thing given for the shares had a cash value in the market equal to the nominal value of the shares. I do not think the Court is concerned with that question, or that it is bound to measure considerations in that way. There was no difficulty in In re Eddystone Marine Insurance Company [1893] 3 Ch. 9 , because no consideration was given; the shares were bonus shares. And there was no difficulty in In re Almada and Tirito Company 38 Ch. D. 415 , because there £1 shares were issued with a part fully paid up, namely, at a discount, and there was no consideration for the discount. But if the consideration is illusory, or if it permits an obvious money measure to be made shewing that discount was allowed, or if the shares are openly issued at a discount, the mere fact that the contract has been filed will not put the allottee in a position to relieve himself from the payment which the Act of 1862 requires to be made for the shares. In the present case, however, I am of opinion that the liquidator has not sustained the onus, which is on him, of shewing that the consideration was illusory. In paragraph 8 of his affidavit, filed the 8th of February, 1895, the liquidator says: "The consideration purporting to be assigned to the company by ... Chapman under the said agreement of the 10th of August, 1892, and stated therein to consist of certain contracts and copyrights in plays, was never in fact assigned to the company by ... Chapman, and was wholly illusory"; but he gives me no reason for supposing so. There are no materials enabling me to judge of the value of the property agreed to be handed over by Chapman, and the agreement shews that a premium was offered to Chapman to assume the office of managing director.