In re Mayfair Property Company

Facts

1. The holder of a debenture issued by the Mayfair Property corporation[1], charging it’s uncalled money, appealed from a decision of Wright J. that the debenture created no charge upon that portion of the company’s capital that could only be called up on the company’s winding-up.
2. On August 16, 1892, the company was founded and registered as a limited company, with a nominal capital of 50,000l divided into 5000 shares of 10l each. One of the company’s purposes, according to the memorandum of association, was to borrow money and issue debentures secured by “the company’s property and rights, both present and future, including its uncalled stock.”
3. The directors were granted full power to issue debentures charging all of the company’s assets, including its uncalled money, under the articles of association. A special resolution was passed by the corporation on October 12, 1892, under S.5 of the Companies Act, 1879[2], before this control was exercised and it was therefore stated that, except in the case of and for the reason of the company being wound up in compliance with the provisions of the Companies Act, 1879, such portion of the company’s capital as consists of 5L. per share remaining uncalled upon, all ordinary shares of the company shall not be capable of being called up.”

4. 4l. 5s. per share had been called up at the time these debentures were released, while 5l. 15s. per share remained uncalled.
5. On August 8, 1896, a debenture-holder filed suit against the corporation on behalf of himself and all other debenture-holders, and on August 18, 1896, he received judgement in the ordinary manner, and a receiver was named in the proceeding.
6. The company was ordered to be wound up on the same day, and a liquidator was named. Meanwhile, the directors had called up 15s. per share of the 51. 15s. per share that had been uncalled up when the debentures were released, leaving only the 5l. per share, which represented the capital allocated by the resolution, uncalled up at the time of the winding-up.
7. This 5l. per share the liquidator had since called upon the contributaries to pay, and since the company’s assets, including it, were insufficient to cover the costs of the winding-up and the company’s creditors, the question arose as to whether the debentures created a legitimate first fee on the 5l. per share reserved capital, entitling the holders to payment from that fund before the other creditors and the costs of the winding-up.
8. The plaintiff in the debenture-suit holders filed a summons in November 1897, requesting that this matter be determined; the summons was adjourned into court, and Wright Jon heard the case on December 9 and 10, 1897.

Issue

What is the proper construction of S.5 of the Companies Act, 1879, which says “that limited company may by a special resolution declare that any portion of its capital which has not been already called up shall not be capable of being called up, except in the event of and for the purpose of the company being wound up …and thereupon such portion of capital shall not be capable of being called up, except in the event of and for the purposes of the company being wound up“?

Held

1. It is reasonable to conclude that the section implies what it appears to suggest, namely, that once such a resolution has been passed, the company is unable to call up additional capital for any purpose other than the purpose of the company’s winding up.
2. A legislative enactment prohibits the corporation from working with the funds unless it is for a specific reason. The holders of debentures are not entitled to a first charge on the reserve capital, according to the court.

On March 24, 1898, the appeal was heard by LORD LINDLEY MR

1. The appellant contends that a small charge on its uncalled capital may be validly made by a company’s memorandum of association or articles of incorporation if it is approved; and that the capital or money that can only be called up under the Act of 1879 in the event of and for the purposes of the company being wound up is part of the company’s capital in the full and proper sense of the word; and that, since there is no restriction against making charges upon it, the power to do so follows logically.
2. This point is based on the decision in In re Pyle Works[3], which held that uncalled capital of a limited company controlled by the Companies Act, 1862, could be validly charged in favour of Cox specific individuals.
3. It’s also argued that paying a company’s secured debts is just as important as paying its other debts; that there’s no legal requirement for the Court to hold reserve capital that can’t be used to pay specific debts; and that there’s no need for the Court to hold reserve capital that can’t be used to pay specific debts and that preventing a corporation from obtaining temporary relief from pressure by raising capital on the protection of its most valuable asset may be disastrous.
4. Despite how compelling this claim is, the Court is persuaded that it is unsound, and that giving in to it would defeat and fail to carry out the aim for which the Act of 1879 was passed.
5. It is as appropriate now as it was when Lord Coke recorded Heydon’s Case[4] to remember how the law stood at the time the statute to be construed was enacted, what the trouble was that the old law did not provide for, and the remedy given by the statute to cure the mischief.
6. The Companies Act of 1879 was enacted to correct certain flaws in the legislation governing unrestricted corporations, flaws that, although well-known to lawyers, surprised the public when the City of Glasgow Bank stopped accepting payments in 1878. This was the situation for owners of limitless corporations.
7. For starters, they were subject to calls on their shares in the sum of their nominal value. When the company was in operation, this was the only responsibility that could be enforced by the company or its directors. This liability, but no other liabilities, was a corporate asset with which the Y company could do business.
8. Second, in addition to this restricted liability, the members had an unlimited liability to the company’s creditors, which creditors may impose, despite the fact that this unlimited liability was not an asset of the company that the company or its directors may compensate, alienate, or dispose of in some manner to the detriment of any creditor.
9. What was desired was the ability to establish a corporation with a small reserve capital that would be available to creditors in the case of a winding-up, and which would not be under the control of the directors any more than the funds that creditors could access but the directors could not under the old law. The Act of 1879 was responsible for this change in the law.
10. The Court noted that S.5 was drafted with two goals in mind: first, to retain for the company’s general creditors funds that the members were liable to pay but that the directors couldn’t access; and second, to enable the members to restrict their liability on a winding-up to pay the creditors more than the sum retained for them.

Now, if the appellant’s argument is right, the first of these objectives would be completely undermined, despite the fact that there is no indication that the Legislature intends to make such a significant improvement in the law, Despite the fact that such a move would or may be disastrous to the vast majority of a company’s creditors and destroy the credit that the protection intact of reserve capital confers on those companies that take advantage of the Act of 1879.

11. To effect such a reform in the law, some provision is desired to confer on companies carrying on business power to deal with what the members are only liable to pay when the winding-up occurs.
12. Such a power would be completely new, and the absence of any terms banning it cannot be inferred. The Court focused on the effect of the Act of 1879 on unlimited corporations that profit from it, since the effects on them and limited corporations are derived from the use of nearly identical words.
13. It was obviously beneficial to allow limited companies founded and registered as Po to have reserve capitals, rather than limiting that benefit to unlimited companies registering as BAR as limited companies. The object of the last part of the segment is identical to the first part’s object.
14. In terms of reserve capital, all groups of companies are placed on an equal footing. The prohibition against calling up reserve capital in limited companies is inserted for the same reason as it is in unrestricted companies: to retain such capital for the company’s general purposes until it is wound up.
15. To interpret the section in such a way that a corporation can defeat its goal by pledging or otherwise disposing of its reserve capital is, in the Court’s view, to completely misunderstand the true meaning of the Legislature’s language.
16. Neither the Act of 1879 nor the other Companies Acts grant a corporation the authority to sell assets that will not be created until the company is wound up. Giving the reserve capital, or any portion of it, to a prior assignee or a mortgagee who has no claim against the assets until he has discovered or given up his security, is not applying the reserve capital for the purposes of the business being wound up within the true sense of that term as used in s. 5, but rather preventing such application.
17. This was the view of Wright J., and it is Lord Lindley also. It should be noted that Newton v. Anglo-Australian Investment, Finance and Land Co.[5] was not a decision on the Act of 1879, but rather a decision on an article of association, so worded as not to retain, nor indeed to show any intention to preserve, the reserve capital in the event of liquidation for the benefit of the general creditors.
18. The appeal dismissed with costs.

References:

[1] Herbert H Bartlett v Mayfair Property Co Ltd., 1896 M 2261.

[2] The Companies Act, 1879, s.5.

[3] In re Pyle Works: CA 1890.

[4] Heydon’s Case (1584) 76 ER 637.

[5] Newton v. Anglo-Australian Investment, Finance and Land Co. (1895) A.C. 244.