In Re Wragg Limited

Judges: Lindley LJ
A 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 by:
Rigby LJ

In this case the respondents Wragg and Martin were two of the first three directors of the company now in course of being wound up, the third, Harrison, having been also made a respondent to the summons, though not interested in the appeal.

Wragg and Martin had for a considerable time before the incorporation of the company carried on the business of omnibus and cab proprietors at Whitechapel and elsewhere in London.

What their respective interests as between themselves were in the assets of the business we cannot infer from the evidence, nor is it necessary that we should know.

Wragg and Martin were minded to turn their business, as the phrase goes, into a private limited company - that is to say, a limited company in which the vendors were to take, at any rate in the first instance, practically all the shares in the company, which were to be allotted, as part of the consideration for the purchase of the goodwill and assets of the partnership, to the vendors or their nominees, including, as I understand, the subscribers of the memorandum of association.

The property to be sold to the new company consisted of freehold estate of sufficient value to have been accepted as security for a first mortgage debt of 8000l. with interest at 6 per cent., and a second mortgage debt of 2000l. with interest at 5 per cent. These mortgages were apparently treated by the mortgagees as fair security. There were leaseholds of small value, a considerable stock-in-trade consisting, among other things, of omnibuses, cabs, and horses, worth at any rate not less, according to the evidence, than 15,000l.

The business was therefore a very substantial one. The assets (notably the goodwill of the business) could not from the nature of them be said to have any market value; and what they would be worth to a company incorporated to carry on the business would depend upon considerations as to which there would be room for considerable honest difference of opinion.

The vendors were of course able to settle the constitution of the company according to their own wishes, and they determined that it should be brought out with a capital of 20,000l. in 2000 shares of 10l. each, and that there should be an issue of first debentures for 10,000l.

Neither the amount of capital nor the amount proposed to be raised on first debentures can be said to have been on the face of the matter extravagantly large, regard being had to the nature of the business to be transferred.

The only effect, beyond the appearance of greater importance to be given to the company, of putting down 20,000l., instead of, say, 10,000l., as the capital of the company, would be to make the value of each share proportionately smaller. The vendors or their nominees, might be able to dispose of their shares on better terms if the capital were larger; but it is only fair to observe that the vendors in fact retained by far the largest part of the share capital until the winding up of the company.

The vendors determined to fix the price for the property to be sold at 46,300l. How this sum was arrived at we do not know. No doubt it included a large amount of what would be profit to the vendors if they disposed of their shares favourably, but so long as they continued to hold them this would be nominal profit only.

The vendors did not require to be paid a large amount in cash, and arranged that the 46,300l. should be paid as follows: 10,000l. by the company taking over the existing mortgages on the freeholds; 7000l. in cash (which was expected to be raised by means of first debentures for that amount); 3000l., the residue of the first debentures; 20,000l. in shares to be treated as fully paid up.

This left 6300l. to be raised somehow or other, and I think Mr. Eve's suggestion a probable one, that the balance so remaining determines the amount, 6300l., of the second debentures.

This arrangement was carried out by an agreement dated January 10, 1894 (the company having been incorporated just before).

The memorandum of association provided for the execution of this agreement. The agreement was executed by the authority of the board of directors consisting of Wragg and Martin and one Harrison, and its execution by the company was attested by Wragg and Harrison.

A supplementary agreement was executed the same day, whereby the solicitor 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 out of the residue Wragg and Martin covenanted to pay the debts of the partnership.

The last terms of this agreement were plainly insisted upon for the satisfaction of debenture-holders, and were very fair.

So far nothing could be more straightforward or more reasonable, subject always to the question whether the intended ultimate profit to be realized was not fixed too high.

As, however, it is not suggested that there is ground for setting aside the contract, I do not see, subject to the point which I reserve as to appropriation of the purchase-money, how, consistently at any rate with Anderson's Case, ^[FN103] the shares could possibly be treated as not fully paid up. In the present as in Anderson's Case ^[FN104] , the shares allotted were allotted to vendors, or persons representing vendors, and in Anderson's Case ^[FN105] the 150,000l. worth of shares allotted consisted, to an extent of far more than 50 per cent., of profit reserved to the members of the syndicate selling.

That case is undoubtedly binding upon us. It was cited and relied upon in the Ooregum Case ^[FN106] , and was not, I think, in any way disapproved of. Certainly there is nothing in the opinions of the noble and learned Lords to shake the authority of the case.

By saying that Anderson's Case ^[FN107] is an authority binding us, I do not mean to intimate an opinion that there are not other authorities to the same effect.

I think that the series of authorities cited by Lindley L.J., beginning with Pell's Case ^[FN108] , have made it impossible in such a case as above indicated to inquire effectually into the value of the property taken in exchange for shares where the contract itself is not impeached. If these authorities are to be overruled that must be done by the House of Lords. But it is said that a clause in the main agreement of January 10, 1894, namely, clause 3, makes the present case an exception to the general rule.

Before examining that clause I will consider what the actual agreement between the parties was independently of that clause. Clearly it was a purchase of the whole freehold property dealt with at an entire price.

Neither the vendors nor the purchasers would have sold or bought any one of the items independently of the others.

It is not in accordance with the facts that there were a number of independent purchases of separate items, and no one could say that, independently of the clause, it would have been possible to make any appropriation of portions of the purchase-money.

As the vendors would have the full control over the consideration given, and could divide it in accordance with their rights inter se, there could be no object connected with any difference in those rights in making any appropriation. In addition to this, it is manifest that the figures in the clause are not founded on any exact estimate of the rights of the different partners, the figures being throughout round numbers which could hardly by possibility conform to pre-existing rights.

It is obvious that it could not in any way make the slightest difference to the company, except for the stamp duty payable, that part of the consideration should be given for one part of the assets rather than for another.

My conclusion is that the clause was intended to be operative only as regards stamp duty. The apportionment may have been a wrong apportionment, but that cannot alter the nature of the contract or entitle the company to deal exceptionally with it.

I am not prepared to say that in no cases can the consideration in kind given for paid-up shares be inquired into, even although there may be nothing on the face of the contract to shew the insufficiency of the consideration; but I abstain from attempting to define what the cases are. I think it sufficient to say that in my judgment the opinions of the noble and learned Lords in the Ooregum Case ^[FN109] sufficiently indicate that such cases may arise.

They must be dealt with when they do arise.