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FARNHAM v. MILWARD. (a.) Lunatic-Action by committee-Subsequent bankruptcy of lunatic-Trustee in bankruptcy added as defendant -Application by trustee to stay preceedings grantedBankruptcy Act, 1883 (46 & 47 Vict. c. 52), s. 132– Lunacy Act, 1890 (53 Vict. c. 5), 88. 117, 120R. S. C., 1883, ord. 16, r. 17.

A., the committee of B., a lunatic, commenced an action against C. B. was subsequently adjudicated a bankrupt, whereupon, at the instance of C., the writ was amended by adding B.'s trustee in bankruptcy as a defendant to the action. On an application by the trustee that the action might be stayed as against him on the ground that it was vexatious,

Held, that the right of action vested in the trustee on the bankruptcy of the lunatic; that the trustee could not be added as a defendant to the action against his will; and that he was entitled to have the action stayed as against him.

This was a summons taken out by the defendant Norris, the trustee in bankruptcy of the plaintiff William Farnham, asking for a stay of proceedings as against him on the ground that they were

vexatious.

The plaintiff W. Farnham was found a lunatic in

1893, and his wife Catherine Farnham was appointed

committee of his property.

On the 7th of September, 1893, she commenced this action, in her own name and that of her husband, against the defendants Milward & Co., the confidential solicitors and agents of W. Farnham, for an account of all moneys passing through the hands of Milward & Co. for or on his account. The writ also asked for a receiver, damages, and costs. In due course the account was ordered to be taken, the order being made upon motion in November, 1893.

On the 19th of May, 1894, W. Farnham was adjudicated a bankrupt, and on the 26th of May following the defendant Norris was appointed his trustee in the bankruptcy. Nothing further was done in the action until the 23rd of April, 1895,

when an order was made in chambers on a summons taken out by Milward & Co., whereby leave was given to amend the writ by adding Norris as a defendant in the action, and it was ordered that the taking of accounts should be proceeded with.

The writ was not finally amended until the 2nd of May; and on the 15th of June, 1895, Norris took out this summons. In the meantime, however, Norris had attended proceedings in chambers in connection with the taking of the account.

R. J. Parker, for the summons.-Your lordship made the order in chambers on the authority of In re_Whatman, W. N., 1889, p. 213. In that case the official receiver allowed his name to be used. A bankrupt cannot proceed with an action when the cause of action has passed to his trustee : Jackson v. North-Eastern Railway Co., 25 W. R. 518, 5 Ch. D. 844; Warder v. Saunders, 10 Q. B. D. 114, 31 W. R. Dig. 154; Selig v. Lion, 39 W. R. 254, [1891] 1 Q. B. 513; Kellaway v. Bury, 66 L. T. N. S. 599, 40 W. R. Dig. 190; Rochfort v. Battersby, 2 H. L. Cas. 388.

HIGH COURT.

Willis Bund, for the defendants.-The trustee was properly made a party to this action.

Hastings, Q.C., and Church, for the plaintiffs.The trustee has already done so much in the action that he cannot now object, even if he is right on the cases, which, however, do not apply to the case of a lunatic plaintiff. The jurisdiction in lunacy is paramount to that in bankruptcy: In re Farnham, [1895] 2 Ch. 799. [STIRLING, J.-That case is different to the present one, for there the court refused to give up property in the custody of the court, on the ground that it might be required for the maintenance of the lunatic, whilst here, if the bankruptcy is valid, the trustee has a right to bring this action.] Possibly leave ought to be first obtained from the lunacy jurisdiction. The question is whether the ceedings already commenced in a paramount jurisinferior jurisdiction in bankruptcy can stay the pro

diction.

R. J. Parker, in reply.-There has been no delay sufficient to preclude relief. The case of In re Farnham does not apply here, as the property was in court, and the trustee coming to the judge in lunacy could only get it on terms. Here the trustee is not proceeding in lunacy or interfering with the jurisdiction thereof. He only asks your lordship for a stay of proceedings, and that a plaintiff who is bankrupt be not allowed to carry on an action and make his trustee in bankruptcy a party thereto.

Cur, adv. vult.

continued:-] On the taking of accounts in chambers, Messrs. Millward & Co. raised the objection that they were liable to be sued both in this action and in the bankruptcy, and that, therefore, the trustee in bankruptcy should be made a party to the action. The trustee declined to prosecute the action and the matter came before me in chambers, when, acting on the authority of In re Whatman, I thought myself justified in allowing the amendment of the writ by making Mr. Norris a defendant.

August 10.-STIRLING, J. [after stating the facts,

I am perfectly satisfied I was wrong in giving that leave. In truth I misread the account of the case given in the Weekly Notes. I think I ought to have inferred from that report, which, however, is not very clear, that the order made in that case did not authorize proceedings such as I was asked to permit in the present case. Having since seen the registrar's book I am satisfied that, in fact, no such order was made. But for the authority of that case, which I thought I was bound to follow, I should not have allowed the amendment. The trustee being duly added as a defendant, there followed some correspondence between the solicitors of the plaintiffs and the solicitors of Mr. Norris, and I think it is clear from that correspondence that Mr. Norris' solicitors were seeking to discover on what grounds he had been added as a defendant. They pointed out that he ought to be sued as trustee in bankruptcy, and that the writ ought to be amended by showing what relief was asked for as against him. The writ was finally amended on the 2nd of May, and then the correspondence closes. It appears that subsequently the trustee was present at some proceedings in chambers, but ultimately on the 10th of June he took out the present summons, and the question is whether he is entitled to the order for which he asks.

It was admitted by counsel for the plaintiffs that in the case of a sane bankrupt plaintiff the plaintiff would not be entitled to have his trustee in bankruptcy made (against the will of the trustee) a party

(a.) Reported by ARTHUR MORTON, Esq., Barrister to the action. That is undoubtedly so, but two objec

at-Law.

tions were raised. First, it is said that the law laid

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down in Jackson v. North-Eastern Railway Co. as applicable to the case of a sane bankrupt, does not apply in the case of a lunatic; and, secondly, it is said that by reason of delay the trustee is precluded from relief.

First of all, I must consider the position of a lunatic when he sues in this court. By ord. 16, r. 17, it is prescribed that "where lunatics and persons of unsound mind not so found by inquisition might respectively, before the passing of the principal Act, have sued as plaintiffs, or would have been liable to be sued as defendants, in any action or suit, they may respectively sue as plaintiffs in any action by their committee or next friend according to the practice of the Chancery Division, and may in like manner defend any action by their committees or guardians appointed for that purpose." Therefore the practice now followed in the case of a lunatic plaintiff is the same as used to be followed in the Court of Chancery. The basis of that procedure, so far as it permitted a lunatic to sue by a next friend, is clearly stated by James, L.J., in the well-known case of Beall v. Smith, 9 Ch. D. 85. [His lordship read from the judgment at p. 91, "The law of the Court of Chancery any person as his next friend," and at p. 92, It is to be borne in mind person himself, if of unsound mind," and continued:] That is a clear statement of the jurisdiction exercised by the court in a case where a lunatic is plaintiff, and, though in that case the lunatic. was suing by a next friend, the remarks are equally applicable to a case where he is suing by a committee. There is a difference in the practice in these two cases, however, for it has long been held that in the case of a lunatic suing by his committee the proper course is to add the committee as a co-plaintiff. That was laid down in Fuller v. Lance, 1 Ch. Cas. 18, in the reign of Charles II. The reason for that is, I think, that a committee, being entrusted by law, under the authority of the Crown, with the care, management, and disposition of the lunatic's effects, is in a position to receive and give a good discharge for all property which may be recovered in an action brought in the name of the lunatic, whereas a next friend, who simply intervenes and invokes the jurisdiction of the court, would not be able to do so. Otherwise, however, I think the principles which govern the procedure in actions by lunatics are the same in both cases. It follows from that that the lunatic having been adjudicated a bankrupt, and that adjudication being binding upon me, the right of action which at the beginning of these proceedings existed in the plaintiff is now vested in his trustee in bankruptcy, and though the committee may sue in the name of the lunatic, and in his own name enforce rights of action which are vested in the lunatic, I cannot find any authority, and it seems to me to be wrong on principle, that he should be allowed to enforce a right of action which, by due process of law, I assume has become vested in someone else, and has ceased to be the right of the lunatic. In support of the view, urged on behalf of the plaintiff's, the case of In re Farnham was cited. I have read and studied to the best of my ability a shorthand note of the judgment given in that case in the Court of Appeal. The case was a remarkable one. Part of the lunatic's property was some valuable plate which had been deposited in court in the lunacy prior to the application which I am now about to mention. The trustee in bankruptcy sought to have it delivered out of court to him, on the ground that the legal title was vested in him. The question was raised and left open whether a lunatic could be adjudicated a bankrupt, the Lords Justices, though somewhat doubtful on the subject, assuming that he could be so adjudicated. Lindley, L.J., in his

66

HIGH COURT.

judgment, says: Assuming that, Mr. Swinfen Eady says that everything follows in his favour and that the court ought to direct this plate to be handed over to the trustee, but it has been pointed out, and I think very properly, that inasmuch as this lunatic was adjudicated a bankrupt some time after he was found a lunatic by inquisition, the trustee in bankruptcy must take subject to the powers of the judge in lunacy conferred by the Lunacy Act, 1890; and the Lunacy Act, 1890, in sections 117, 120, vests in or confers upon the judge in lunacy various powers, and, amongst others, the power to apply the estate of the lunatic in discharge of his debts; and, although I believe it is perfectly well settled that a lunatic can be adjudicated a bankrupt under the direction of the committee acting under direction of the judge in lunacy, there is a question whether he can be validly adjudicated apart from that. Now, supposing that the trustee takes subject to the statutory powers, the main point in Mr. Eady's argument is answered, and I think Mr. Warrington was quite right in saying that, whatever may be true of the actual vesting of the property in the trustee, it does not follow that the trustee may take the property which is so vested in him, except subject always to the jurisdiction which has accrued before the bankruptcy to the judge in lunacy under the inquisition. I think that is a good answer to his argument as far as that goes."

The Lords Justices did not dispute that the property, and the legal right thereof, was vested in the trustee in bankruptcy, but they asserted that they had a higher power, and could direct the application of the property. How far that may apply here it is not for me to say; but I have read the sections of the Lunacy Act, 1890, which were referred to in the judgments, and the judgments themselves, with very great care, and they do not, in my opinion, go to this-i.e., that the committee can bring an action to assert a right which is vested in the lunatic's trustee in bankruptcy. in bankruptcy. Hence it follows, I think, that the defendant Norris is, on principle, entitled to the order that he asks for.

It now remains for me to deal with the question of delay. It must be borne in mind that the amendment was sanctioned by me in chambers, and that the proceedings in the action had been sanctioned by the Master in Lunacy. The question is one of some novelty; but I think that, under the circumstances, the trustee has not come too late to obtain relief, and I do not think that the fact that he attended the proceedings to settle accounts should prejudice him so far as obtaining relief is concerned. It may be that he would be precluded from raising his objection if it did not go directly to the root of the proceedings. These proceedings, however, are, I think, entirely wrong, and can only be set right by making the trustee a co-plaintiff. The trustee will not allow that to be done, and I think that, under the circumstances, he is not too late, and that his application should be acceded to, and the action stayed as against him. At the same time I do not think that this is a case for giving any costs.

Solicitors, Field, Roscoe, & Co., for Deane & Hands, Loughborough; Spencer Whitehead; Prior, Church,

& Adams.

HIGH COURT.

Chan. Div.
Stirling, J. J

IN RE LONDON and New YORK INVESTMENT CORPORATION.

June 22, 29;
July 2, 23, 1895.
CORPORATION. (a.)

In re LONDON AND NEW YORK INVESTMENT

HIGH COURT.

Subsequently the holders of these preferred shares learned that no special resolutions had actually been passed to give them their promised preference as to capital and they demanded that this should be done. The directors accordingly convened extraordinary Company-Reduction of capital-Founders' shares-general meetings of the company to put the matter Extinguishment Companies Act, 1867 (30 & 31 Vict. right, and by special resolutions passed and confirmed by the requisite statutory majorities it was resolved: (1) "That the cumulative preferential dividend, not exceeding £5 per cent. per annum, payable under the memorandum of association of the corporation to the holders of the 50,000 preferred shares be at the rate of £5 per cent. per annum.

c. 131), 8. 9.

The shares in a company were divided into ordinary, preference, and founders' shares. Under the memorandum and articles of association the ordinary and founders' shares ranked equally for dividend, but the founders' shares entitled the holders thereof only to such capital as should be paid up on them, except in the event of the winding up of the company, in which event the holders of founders' shares were to be entitled to one moiety of any surplus assets remaining after discharging all liabilities. The memorandum of association authorized the issue of preference shares upon such terms as the company should by special resolution determine. The directors issued and allotted shares preferred both as to capital and dividend, without any special resolution having been passed; but at general meetings afterwards held of all classes of shareholders resolutions adopting the terms under which the preference shares had been issued were adopted.

A large loss of capital had been sustained by the depreciation of investments, and there was no reasonable prospect of anything going to the holders of founders' shares in respect of dividend or capital. The company presented a petition for the confirmation of resolutions for reduction of capital involving the extinction of the founders' shares and throwing the rest of the loss upon the ordinary shares.

(2) "That as against both the founders' shares and the ordinary shares of the corporation such preferred shares shall confer a right to priority in the return of capital upon a winding up of the corporation or otherwise, but such preferred shares shall not confer or have any other right or interest in the distribution of the surplus assets of the corporation."

At these meetings, held on the 27th of April and 15th of May, 1893, holders of ordinary, preferred, and founders' shares were present in person or by proxy, and the resolutions were carried unanimously on both occasions.

The rights of shareholders to dividend were as follows: Under the terms of the prospectus relating to the issue of preferred shares, the preferred shares were to carry a cumulative dividend of 5 per cent. per annum on the amount paid up; next after them, the ordinary shares were to carry a dividend of 7 per cent. per annum, and any surplus net profits were to be divided equally between ordinary and founders' shares.

From the commencement of the company down to Held (1), that the issue of preference shares without 1894 dividends had been paid regularly on the prethe passing of a special resolution was capable of ratifica-ferred shares at 5 per cent. per annum. The ordinary tion by the company, and had been ratified. shares received in 1890 8 per cent., in 1891 7 per cent., in 1892 5 per cent., and in the first half of 1893 5 per cent. Since that date the ordinary shares had received no dividend.

Held, further, that the loss should, in the first instance, be thrown on the holders of founders' shares. This was a petition presented by the company with the object of obtaining the sanction of the court to a resolution which had been passed for the reduction of the capital on the ground that paid up capital to the amount of £251,000 had been lost.

The company was registered under the Companies Acts on the 11th of October, 1889. The objects of the company as set out in the memorandum of association were numerous, but the main object was to raise money by issuing share capital and investing

it in various securities.

The nominal capital of the company fixed by the memorandum of association was £1,000,000 divided into 100,000 shares of £10 each, of which 200 were to be founders shares, 50,000 preferred shares and the remaining 49,800 ordinary shares. All this capital was issued and fully paid up. The founders shares and ordinary shares were issued at once under a prospectus which stated that "it is proposed hereafter to issue 50,000 preferred shares of £10 each (preferred both as to capital and dividend) carrying such rate of interest not exceeding five per cent. as the directors may determine."

In June, 1890, the directors passed a resolution for the issue of these preferred shares and a second prospectus was circulated with that view stating that "these shares are preferred as to capital and are entitled to a cumulative dividend of five per cent. per annum in advance of the ordinary shares."

These preferred shares were all taken up, but no special resolutions authorising the preference were passed before their allotment.

(a.) Reported by WM. SCOTT THOMPSON, Esq., Barrister-at-Law.

On the founders' shares nothing had been paid by way of dividend since the first year, when a sum equal to the amount of dividend at the rate of 1 per cent. upon the ordinary shares was paid as dividend upon the founders' shares.

In October, 1894, the directors caused a general valuation of the securities and investments held by the company to be made. These consisted of two classes: (1) those in North America, and (2) those in this country and elsewhere. The securities were accordingly valued; as to those in North America by two brokers on the New York Stock Exchange, who valued as of the 31st of October, 1894, according to the market price of that day; as to the other securities, by the board of the company in England, who, in the case of securities quoted in the official list of the London Stock Exchange, took the selling quotation on the 31st of October, 1894, and, in the case of securities not so quoted, made inquiries in each case, and fixed what they thought to be the fair value.

The result of this valuation was to bring out a loss of £251,000. Further, it appeared that there had been an actual loss on sales to the amount of

£73,397 6s. 4d., which was included in the £251,000.

A second valuation was made as of the 28th of

February, 1895; as to the North American securities in the same way as before; as to the others by Messrs. Deloitte, Dever, Griffiths, & Co., who prepared a balance-sheet as of that date.

The result showed no substantial difference in the position of the company.

In consequence of the result of the said first valuation the company duly passed two special resolutions

HIGH COURT.

IN RE LONDON AND NEW YORK INVESTMENT CORPORATION.

to which the sanction of the court was now sought to be obtained.

By the first of such special resolutions the company took power to reduce its capital.

The second of such special resolutions (passed at meetings held on the 14th of November and the 23rd of December, 1894) to the following effect:

"That the capital of the London and New York Investment Corporation be, and the same is hereby reduced, from £1,000,000 divided into 100,000 shares of £10 each, of which 200 are founders' shares, 50,000 preferred shares, and the remainder are ordinary shares, to £749,000 divided in 50,000 preferred shares of £10, and 49,800 ordinary shares of £5 each, and that such reduction be effected by cancelling as capital which has been lost or is unrepresented by available assets the following paid-up capital, that is to say (1) the whole of the £10 per share paid-up on the 200 founders' shares; and (2) £5 of the £10 per share paid-up on each of the ordinary shares."

A petition was accordingly presented for the sanction of the court to the reduction of capital in accordance with these resolutions.

The articles which referred to the founders' shares were:

(7) The founders' shares shall entitle the holders thereof to such dividends and other interest in the profits of the company as is defined by the memorandum and articles of association, but except in the case of liquidation, they shall not entitle the holders thereof to any share in the capital of the company, beyond the actual amount paid up, or duly accredited as paid up upon them.

(169) In any winding up of the company the holders of founders' shares shall be entitled (as between themselves and the holders of the preferred and ordinary shares) to one moiety of any assets of the company remaining after the payment and discharge of the debts and liabilities, and the repayment to the holders of preferred and ordinary shares of the amount paid up, or credited as paid-up, on such shares, together with the costs of winding up. Provided always that in the division of any reserve fund under this clause, the founders' shares shall be entitled to one moiety of any portion of such reserve fund arising from the issue of any shares in the company at a premium, but as to any other reserve fund, shall be entitled to one moiety of such reserve fund, up to twenty per cent. of the subscribed capital, and no more.

The following are the material clauses of the memorandum and articles of association with reference to the preferred shares.

(76) There shall first be paid out of the net profits of the company, in each year to the holders of the preferred shares, a cumulative preferential dividend at a rate not exceeding £5 per cent. per annum on the amount paid up thereon for the time being.

(f) Any of the original shares, and any new shares from time to time to be created may (but subject always, and without prejudice to the rights of the holders of the founders's shares, who shall in each and every year receive their interest or dividends as herein expressed), from time to time be issued with any such guarantee or any such right of preference, whether in respect of dividends or repayment of capital, or both, or any such other special privilege or advantage over any shares previously issued, or then about to be issued, or at such a premium, or with such deferred rights as compared with any shares previously issued, or then about to be issued, or subject to any such conditions or provisions, and with any special right, or without any right of voting, and generally on such terms as the company may from time to time, by special resolution, deter

mine.

HIGH COURT.

Provided always that any premium to be received from the issue of any shares shall be carried under the provisions of sub-section (d) hereof to the reserve fund.

Article 10. Subject to the memorandum of association, the shares shall be under the control of the directors, who may allot or otherwise dispose of the same to such persons, on such terms and conditions, and at such times as the directors think fit.

Article 107. The business of the company shall be managed by the directors, as herein provided, and all such powers of the company as are not by statute or by these presents required to be exercised by the company in general meeting, are hereby vested in the directors, pursuant to these articles, subject, nevertheless, to such regulations as may be from time to time duly prescribed by the company, but no regulation of the company shall invalidate any prior act of the directors, which would have been valid if such regulation had not been made.

Buckley, Q.C., and Sargant, for the petitioners, cited In re Floating Dock of St. Thomas (Limited), 43 W. R. 344, [1895] 1 Ch. 691.

Graham Hastings, Q.C., and Macnaghten, for a holder of ordinary shares, opposed the application.They argued that In re Floating Dock of St. Thomas (Limited) did not apply to the present case, that the special resolution was invalid, and that the proposed reduction was unfair and inequitable. That any priority, if given on the creation of new capital, must according to the memorandum of association be conferred by a special resolution duly passed before such new capital was issued.

They cited Ashbury v. Watson, 33 W. R. 882, 30 Ch. D. 376; British and American, &c., v. Couper, 42 W. R. 652, [1894] A. C. 399.

Rowden, for the holder of a founder's share, opposed the application.

G. P. C. Lawrence, for other holders of founders' shares, asked that the founders' shares should not be cancelled.

G. Purcell, for other holders of founders' shares.

Buckley, Q.C., in reply referred to In re Union Plate Glass Co., 37 W. R. 792, 42 Ch. D. 513; In re Gatling Gun Co. (Limited), 38 W. R. 317; 43 Ch. D. 628; Bannatyne v. Direct Spanish Telegraph Co., 35 W. R. 125, 34 Ch. D. 287; and Eichbaum v. City of Chicago Grain Elevators Co., 40 W. R. 153, [1891] 3 Ch. 459.

STIRLING, J., stated the facts, and continued: The first question to be considered is whether it is established that the alleged loss of capital has actually occurred. I have already stated the effect of the evidence in support of the petition. The detailed valuations have at my request been produced to me. Although several shareholders appear in opposition, not one of them has thought fit to adduce any evidence to the contrary, or even to pledge his own belief that the loss has not occurred; nor have the witnesses in support of the petition been crossexamined. The matter is eminently one for decision by commercial men, who have given their judgment on it, and the shareholders of all classes have by large majorities accepted the views put forward by the directors. I hold, then, that the allegations of the petition are sufficiently proved.

The next question is whether the loss ought (as proposed by the resolutions) to be thrown primarily on the founders' shares (which are proposed to be wiped out altogether) and next on the ordinary shares. The case of British and American Trustee and Finance Co. v. Couper, 42 W. R. 652, [1894] A. C. 399, shows that it is the duty of the court to be satisfied before confirm

HIGH COURT.

IN RE LONDON AND NEW YORK INVESTMENT CORPORATION.

ing the resolutions that there is nothing unjust in the proposed reduction. Now it appears from what was laid down by Cotton, L.J., in Bannatyne v. Direct Spanish Telegraph Co., 34 Ch. D. 287, see pp. 299, 300, and by Chitty, J., in In re Floating Dock Co. of St. Thomas (Limited), [1895] 1 Ch. 691, see p. 699, that where there are different classes of shares the loss on a reduction ought to fall on those who would have to bear it if there was a winding up; and taking this to be the rule, I have to see how it is to be applied in the present case.

As regards the founders' shares, 200 in number, they represent a capital of £2,000. The holders take no share of the profits until a dividend of 5 per cent. has been paid on the preference shares, and of 7 per cent. on the ordinary shares. After these dividends are paid, and the directors have been remunerated, the remaining profits are to be paid (according to the memorandum of association) as to one moiety to the holders of the founders' shares and the residue to the holders of the ordinary shares. Upon a winding up the holders of founders' shares are, by article 169, to be entitled to one moiety of any assets of the company remaining after the discharge of the debts and liabilities of the company, and the repayment to the holders of preferred and ordinary shares of the amount paid up on those shares.

Now it appears, from an examination of the balance-sheet prepared by Messrs. Deloitte & Co., that there is required for payment of the abovementioned dividends to the preference and ordinary shareholders a sum of (in round figures) £56,500, while the present investments after deducting interest on debentures, &c., yield a net annual income of about £16,000, leaving a deficiency of about £40,000 to be made up before any dividend can be received by the holders of founders' shares. Further, if all the existing investments were realized at their par value there would be an existing loss of over £73,000. In my judgment there is no reasonable prospect of anything ever coming to the holders of founders' shares, either in respect of dividend or capital, and consequently I cannot consider it unfair to throw on them in the first instance the loss which has actually occurred. The case of the ordinary shareholders raises a different and more difficult question. It is contended on their behalf that regard being had to the circumstances under which the preference shares were issued, the latter do not carry with them any preference as regards distribution of capital on a winding up. [His lordship referred to clause 7 (b) (ƒ) of the memorandum of association and to clauses 10 and 107 of the articles, and proceeded :-] Having regard to these provisions I think it was competent to the directors to fix the rate of preferential dividend so long as it did not exceed five per cent., but it was not competent for them without the sanction of a special resolution to confer any other preferential rights.

On the 12th of October, 1889, a prospectus for ordinary shares was issued, which is important with regard to the statement contained on the first page, that "It is proposed hereafter to issue 50,000 preferred shares of £10 each, preferred both as to capital and dividend, carrying such rate of interest not exeeeding five per cent. as the directors may determine." It is distinctly stated there that the preference shares to be issued were to be preferred both in capital and interest.

On the 11th of June, 1890, the directors passed a resolution for the issue of preference shares at five per cent., and on the 20th of June, 1890, a prospectus for the preference shares was issued, which stated that these shares are preferred as to capital, and are entitled to a cumulative dividend of five per cent. per annum, in advance of the ordinary shares." No

HIGH COURT.

special resolution sanctioning the issue was passed previously to the allotment of the preference shares. Difficulties subsequently arose as to enforcing calls, and some of the shares were surrendered and cancelled. On the 27th of April and the 15th of May, 1893, special resolutions were passed and confirmed. [His lordship read them, and continued:-] It is said that the memorandum of association, according to its true construction, requires that the special resolution defining the preference should be passed previously to the issue of the shares, and that a resolution passed subsequently to the issue of the shares cannot set the matter right, because it is passed by a body of shareholders different from that which would be called upon to sanction the preference before the issue. In the present case, for example, the holders of ordinary and founders' shares were the persons by whom the special resolution ought to have been passed, while the resolutions of 1893 were passed by the whole body of shareholders, including the holders of preference shares, as well as ordinary and founders' shares.

On this, two questions seem to arise: (1) Was the issue of preference shares absolutely incapable of ratification by the company? and (2) if not, has it been duly ratified?

As to (1), if the issue was absolutely beyond the powers of the company, as defined by the memorandum, then it was no doubt incapable of ratification. The vice of the transaction lay in this, that the directors took upon themselves to issue the shares without obtaining the sanction of a special resolution. There is nothing, however, in the memorandum to prevent the company from passing a special resolution, to the effect that it should be left to the directors to determine what rights of preference should be given to the preferred shareholders. It is said that the special resolution ought to be passed before the issue of the shares: but the memorandum does not say so, and I do not think it ought to be construed so as to prevent the company ratifying a slip such as has occurred in the present case, if that can be done consistently with justice. This being so, it seems to me that it cannot be said that the acts of the directors, as regards the issue, were incapable of ratification. It

How, then, is such rectification to be given ? ought, I think, to proceed from the holders of founders and ordinary shares with whom it lay in the first instance to determine what rights of preference shares should be given.

Now the preference shares were plainly offered on the terms that the holders should have a right of preference as regards distribution of capital as well as dividend, and those who applied for shares on the faith of the prospectus would (supposing there are no special circumstances in the case to which I shall say a word in a moment) be entitled to demand either that shares conferring such right should be given them or that the transaction should be set aside and all payments made in expectation of the issue of such shares should be returned, supposing this attitude to be taken up by the preference shareholders. I conceive that it should be competent to the holder of ordinary and preferred and preferred shares to say which alternative should be adopted. It would be right to summon to such a meeting the preference shareholders so that they might express their views, but their votes could not be counted.

At the meetings held on the 27th of April and 15th of May, 1893, holders of preference shares voted as well as holders of ordinary and founders' shares. If 'the résolutions then passed had been carried by the votes of preference shareholders I should have thought that they could not be relied on, but the meetings

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