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Borland s Trustee v Steel Brothers

Business Association case suitable for fourth year of LLB

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Business Associations (Law 434)

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BORLAND'S TRUSTEE v STEEL BROTHERS & CO., LIMITED.

[1900 B. 1253.]

[CHANCERY DIVISION]

[1901] 1 Ch 279

HEARING-DATES: 13, 14 November 1900

14 November 1900

CATCHWORDS: Company - Articles of Association - Shares - Restrictions on Transfer - Compulsory Transfer at specified Price in Event of Shareholder's Bankruptcy - Repugnancy - Rule against Perpetuity - Fraud on Bankruptcy Law - Companies Act, 1862 (25 & 26 Vict. c. 89), s. 16.

HEADNOTE: Provisions in a company's articles of association compelling a shareholder at any time during the continuance of the company to transfer his shares to particular persons at a particular price are not void as being repugnant to absolute ownership, or as tending to perpetuity.

There is nothing obnoxious to the bankruptcy law in articles which bona fide provide that a shareholder shall, in the event of his bankruptcy, sell his shares to particular persons at a particular price, which is fixed for all persons alike, and is not shewn to be less than the fair price which might otherwise be obtained.

A share in a company cannot properly be likened to a sum of money settled upon and subject to executory limitations to arise in the future; it is rather to be regarded as the interest of the shareholder in the company, measured, for the purposes of liability and dividend, by a sum of money,

but consisting of a series of mutual covenants entered into by all the shareholders inter se in accordance with s. 16 of the Companies Act, 1862, and made up of various rights and liabilities contained in the contract, including the right to a certain sum of money.

The rule against perpetuity has no application to personal contracts.

INTRODUCTION:

TRIAL OF ACTION.

The plaintiff was the trustee in bankruptcy of Mr. J. E. Borland, and he claimed a declaration that the defendant company were not entitled to require the transfer of certain shares held by the bankrupt at any price whatever, and that the transfer

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articles of the company purporting to give them power to compel such transfer were void. He also claimed an injunction to restrain the company, their officers and agents, from calling for, enforcing, or effecting, a transfer of all or any of the bankrupt's ordinary shares at any price, or, alternatively, at any price less than the fair and actual value of such shares.

The defendant company was a private company formed in 1890 to acquire the business of Steel Brothers & Co., East India merchants, in which the bankrupt had been a partner. The capital of the company at its incorporation was 400,000l. in 4000 shares of 100l. each. At the date of the incorporation Mr. Borland had 20,000l. capital in the business.

The company carried on business as merchants and commercial agents and rice millers in Burma and other countries in the East, and in London. The business was carried on abroad by agents, called managers and assistants, and in London by managing directors; and its success depended to a very large extent upon the exertions of the managers and assistants in the East.

Prior to the year 1897 the managers and assistants were paid for their services by way of salary and commission, and some discontent appeared to have existed among them as to the sufficiency of their remuneration, having regard to the large profits which were enjoyed by the shareholders. This led to the adoption of new articles of association to the exclusion of the then existing articles, the alteration being approved by special resolution duly passed and confirmed at extraordinary general meetings of the company held on May 24 and June 11

respectively. It was admitted that the adoption of the new articles was rendered necessary by the position of the company in 1897, and there was no suggestion of mala fides with regard to any part of the transaction.

The memorandum of association stated (clause 3 (d)) that one of the objects for which the company was established was "to transact and carry on all kinds of agency business."

By the new articles the original capital was divided into preference and ordinary shares. Of the 3200 shares already issued 1600 (upon which 100l. per share had been paid up) were to be preference shares, and 1600 (upon which 80l. per share had been paid up) were to be ordinary shares. The bankrupt received in exchange for his original shares 160 preference and 80 ordinary shares.

Art. 47 provided that as regards all the ordinary shares (specified in a certain table) each of the respective then holders thereof (of which Mr. Borland was one) should be entitled to continue to hold the shares then held by him or any of them until he should die or voluntarily transfer the same or become bankrupt.

Art. 48 provided that no preference or ordinary share which should for the time being remain entitled to the exemption or special right conferred by art. 47 should be liable to be compulsorily taken or purchased under any provision of the articles enabling shares to be compulsorily taken or purchased.

Art. 49 provided that no share should, save as therein provided, be transferred to any person not being a manager or assistant, so long as any manager or assistant should be willing to purchase the same at the fair value. "Managers or assistants" were

Art. 58A provided that no notice should be given under the two last preceding articles requiring the transfer of any ordinary share which was for the time being entitled to any of the exemptions or special rights conferred by arts. 47 and 48, and also that no such notice should be given in respect of any ordinary share whatever, except during the one month next after a general meeting of the company at which an annual dividend on the ordinary shares had either been declared, or, profits permitting, would have been declared.

Art. 72 provided that general meetings should be held once in every year, at such time and place as might be prescribed by the company in general meeting; and if no other time or place should be prescribed, in the month of April in every year, at such time and place as might be determined by the directors.

It appeared that a general meeting at which an annual dividend on the ordinary shares had been declared had been held on February 16, 1900, but that the time and place of such general meeting had not previously been prescribed by the company in general meeting in accordance with art. 72.

On February 22, 1900, Borland was adjudicated bankrupt, and the plaintiff was appointed trustee of his estate. At this date he had parted with all his preference shares; but he still held seventy-three ordinary shares. He was then neither a "manager" or "assistant."

On March 7, 1900, notice was served by the company upon

the plaintiff under art. 58 requiring him forthwith to give to the company a transfer notice within the meaning of art. 50 in respect of the bankrupt's seventy-three ordinary shares; and further notice that, unless, within fourteen days from the receipt thereof, he should give to the company such transfer notice in respect of the said shares, he would, at the expiration of that period, pursuant to the said art. 58, be deemed to have given such transfer notice in accordance with art. 50, and to have specified the par value of the shares as defined by art. 53 as the sum he had fixed as the fair value thereof, and that the subsequent proceedings would be taken on that footing.

It appeared that the par value of the bankrupt's seventy-three shares, calculated according to art. 53, would be about 8650l., whereas the real value of them, as the plaintiff alleged, having regard to the amount of the dividend paid upon them between the years 1892 and 1899, and to the general financial position of the company, would be about 34,000l.

The company had paid large dividends in some years, but the dividends had fluctuated from 51l. per share in 1893 to 2l. 12s. 6d. per share in 1896; the average dividend for the years 1892-1899 was about 45l. per share.

It further appeared that Mr. Borland had in January, 1899, sold seven of his shares under the terms of the articles to a "manager" at 115l. 7s. 6d. per share. The plaintiff, being dissatisfied with the price to be paid for the shares as calculated according to the articles, brought this action on March 21, 1900, claiming the above-mentioned relief.

COUNSEL:

Jenkins, Q., and W. H. Cozens-Hardy, for the plaintiff. The company is not entitled to act upon these articles. The transfer articles which impose restrictions upon the free transfer of the shares, and the article (58) which makes sale compulsory under certain circumstances, are repugnant to the legal conception of the nature of personal property, and are, consequently, invalid. They constitute an attempt to create an interest in personal estate which is unknown to the law. An absolute right to personal property, coupled with repugnant restrictions such as these, is not recognised by the law: Attwater v.

Attwater n(1) ; In re Macleay n(2) ; In re Rosher n(3) ; In re Dugdale n(4) ; In re Elliot. n(5) These are chiefly cases dealing with real property, but there is no distinction in principle. In re Dugdale n(4) involved personalty as well as realty. Here, the shares are to be held on conditions which prevent the holder from realizing them at their true value. The articles impose an absolute fetter on alienation except to a limited class. Such conditions are repugnant to the law: Billing v. Welch. n(6) Under s. 22 of the Companies Act, 1862, shares are personal estate capable of being transferred in manner provided by the regulations of the company. Provisions as to transfer are mere machinery. Table A n(8) , n(9) , and n(10) , shews that there may be restrictions on the registration of transfers. No doubt qualified restrictions such as those may be valid, but the restrictions sought to be imposed by these articles are upon the right of transfer, and cannot be upheld.

[FARWELL J. referred to New London and Brazilian Bank v. Brocklebank. n(7) ]

Further we submit, as to art. 58, it is either personal to the registered holder, or it is not. If it be, it is not binding on the trustee in bankruptcy; if it be not, then it must attach to the share, and in that case it is void, as transgressing the rule against perpetuity: London and South Western Ry. Co. v. Gomm. n(8)

[FARWELL J. The question of perpetuity might have been raised, but was not, in Witham v. Vane n(9) ; and Walsh v. Secretary of State for India n(10) was even a stronger case.]

Here, as in London and South Western Ry. Co. v. Gomm n(8) , there is an executory estate or interest in the shares which is liable to arise at any time, apart from the will of the owner. The right of pre-emption constitutes a kind of equity attaching to the shares themselves - running with them. That is more

n(1) (1853) 18 Beav. 330.

n(2) (1875) L. R. 20 Eq. 186.

n(3) (1884) 26 Ch. D. 801.

n(4) (1888) 38 Ch. D. 176.

n(5) [1896] 2 Ch. 353.

n(6) (1871) Ir. R. 6 C. L. 88.

n(7) (1882) 21 Ch. D. 302.

n(8) (1882) 20 Ch. D. 562.

n(9) (1883) Challis on Real Property, 2nd ed., App. V. p. 401.

n(10) (1863) 10 H. L. C. 367.

conceive there is any fraud on the bankruptcy laws." On the question of perpetuity, we submit that the rule against perpetuity has no application to a case of personal contract such as is constituted between a company and its shareholders: Witham v. Vane n(4) and Bradford Banking Co. v. Briggs. n(5) There is here no trafficking by the company in its own shares.

Jenkins, Q., in reply. Borland's bargain with the company was made in contemplation of bankruptcy, and with the express view that his trustee should be in a different position from himself. It is of the essence of the scheme that the managers and assistants shall acquire the shares at less than the price which might be obtained on a sale to a person outside the company. The trustee is bound to accept an arbitrary price. Whitmore v. Mason n(6) does not apply, because here we are not attacking a valuation. As to the compulsory clauses, if these conditions attach to the shares, then there is a perpetuity; if not, then the plaintiff is not bound.

PANEL: FARWELL J

JUDGMENTBY-1: FARWELL J

JUDGMENT-1:

FARWELL J: (after stating the facts and referring to the articles of association). It is said that the provisions of these articles compel a man at any time during the continuance of

n(1) 1 Swans. 471; 18 R. R. 118.

n(2) [1893] 1 Ch. 578.

n(3) 2 J. & H. 216.

n(4) Challis on Real Property, 2nd ed., App. V. p. 401.

n(5) (1886) 12 App. Cas. 29.

n(6) 2 J. & H. 204.

this company to sell his shares to particular persons at a particular price to be ascertained in the manner prescribed in the articles. Two arguments have been founded on that. It is said, first of all, that such provisions are repugnant to absolute ownership. It is said, further, that they tend to perpetuity. They are likened to the case of a settlor or testator who settles or gives a sum of money subject to executory limitations which are to arise in the future, interpreting the articles as if they provided that if at any time hereafter, during centuries to come, the company should desire the shares of a particular person, not being a manager or assistant, he must sell them. To my mind that is applying to company law a principle which is wholly inapplicable thereto. It is the first time that any such suggestion has been made, and it rests, I think, on a misconception of what a share in a company really is. A share, according to the plaintiff's argument, is a sum of money which is dealt with in a particular manner by what are called for the purpose of argument executory limitations. To my mind it is nothing of the sort. A share is the interest of a shareholder in the company measured by a sum of money, for the purpose of liability in the first place, and of interest in the second, but also consisting of a series of mutual covenants entered into by all the shareholders inter se in accordance with s. 16 of the Companies Act, 1862.

The contract contained in the articles of association is one of the original incidents of the share. A share is not a sum of money settled in the way suggested, but is an interest measured by a sum of money and made up of various rights contained in the contract, including the right to a sum of money of a more or less amount. That view seems to me to be supported by the authority of New London and Brazilian Bank v. Brocklebank. n(1) That was a case in which trustees bought shares in a company whose articles provided "that the company should have a first and paramount charge on the shares of any shareholder for all moneys owing to the company from him alone or jointly with any other person, and that when a share was held by more persons than one the company should have a like lien

n(1) 21 Ch. D. 302.

and charge thereon in respect of all moneys so owing to them from all or any of the holders thereof alone or jointly with any other person." One of the trustees was a partner in a firm which afterwards went into liquidation, at a time at which it owed the company a debt which had arisen long after the registration of the shares in the names of the trustees. It was held that the shares were subject to the lien mentioned for the benefit of the company, notwithstanding the interest of the cestuis que trust which was said to be paramount. If there had been any substance in the suggestion now made, namely, that the right to the lien was the right to an executory lien arising from time to time as the necessity for it arose, it might have been put forward in that case; but the decision was based on a ground inconsistent with any such contention, namely, that the shares were subjected to this particular lien in their inception and as one of their incidents. Jessel M. likened it to the case of a lease. Holker L. said n(1) : "It seems to me that the shares having been purchased on those terms and conditions, it is impossible for the cestuis que trust to say that those terms and conditions are not to be observed."

Then it is said that this is contrary to the rule against perpetuity. Now, in my opinion the rule against perpetuity has no application whatever to personal contracts. If authority is necessary for that, the case of Witham v. Vane n(2) is a direct authority of the House of Lords; and to my mind an even stronger case is that of Walsh v. Secretary of State for India. n(3) A stronger instance of the unlimited extent of personal liability could hardly be cited; the Old East India Company in 1760, or thereabouts, entered into a covenant with the first Lord Clive, that in the event of the company ceasing to be the possessors of the Bengal territories they would repay to Lord Clive, his executors or administrators, a sum of about eight lacs of rupees, which had been transferred to them for certain particular purposes. The actual event did not happen till nearly a century later; and, as Lord Selborne pointed out in Witham v. Vane n(2) , the question of perpetuity was put

n(1) 21 Ch. D. 308.

n(2) Challis on Real Property, 2nd ed., App. V. p. 401.

n(3) 10 H. L. C. 367.

forward tentatively in argument in the House of Lords; but Lord Cairns with his usual discretion did not press it.

I have said that these articles are nothing more or less than a personal contract between Mr. Borland and the other shareholders in the company under the 16th section of the Companies Act, 1862. Mr. Borland was one of the original shareholders,

figure, as to which it may be said it is clear that that is the value, or something within a few pounds of the value. Having regard to the fluctuation in profits that has occurred, it is

impossible to say the value can be ascertained upon a 10 or 20 per cent. basis - that must be illusory. If it were necessary - I do not think it is - I should be prepared to hold upon the evidence that the price offered by the company in this particular case represents the fair value. I think that by no means an unfair test is afforded by the fact that Mr. Borland himself in January, 1899, sold some of his shares at about the same price. It is not immaterial to consider that two other persons under the compulsory power have been compelled to sell and have not objected. So far as I can see, the terms are reasonably fair, and, assuming that it is a fair mode of arriving at the value - and I think it is - I do not see that it differs from the ordinary provision for valuation such as I find in Whitmore v. Mason n(1) applicable to those cases where assets are capable of valuation. I have to bear in mind that I am dealing with a company whose assets are really in a sense incapable of valuation, but in which the parties have agreed on a basis of valuation which seems to me to be fair. I think I should be straining the principle of the cases on fraud in bankruptcy if I came to the conclusion that an agreement like this, which was come to between the parties after discussion and discontent on the part of some of them, ought to be set aside on the suggestion that it might result in an unfair price. The particular passage to which counsel for the defendant referred in the case of Whitmore v. Mason n(1) was at the end of the judgment. In that case Page Wood V.-C. had before him a partnership deed which contained an article under which, in case of bankruptcy, the partners were to forfeit the whole value of a certain lease. That was held to be bad, and if there had been anything of the sort here I should, of course, have held it bad too. But there was also a provision, which was held to be good, that there was to be a valuation of the share of the bankrupt partner, and the Vice-Chancellor says at the end of this judgment: "Where there is a bona fide intention to secure the going on of the concern, by the other parties handing over to the creditors all that the creditors ought to take, I cannot conceive there is any fraud on the bankruptcy laws." In my opinion that

n(1) 2 J. & H. 204, 216.

exactly expresses the facts of the present case as proved to me, and I think I am following that case when I hold that there is no fraud on the bankruptcy law here.

Then there are one or two other somewhat minor points made by counsel for the plaintiff. First, he says that these provisions are ultra vires. That point turns upon the provisions of the articles which constitute the machinery by which the compulsory sale is to be carried out. The company is constituted an agent for receiving purchase- money: I do not think it comes to more than that; and the company is constituted the agent for sale of the shareholder who is asked to sell. Counsel for the plaintiff says, first of all, that that is not within the memorandum of association. In my opinion it is within the words of sub-s. (d) of clause 3 of the memorandum - "To transact and carry on all kinds of agency business." Then it is said that it is contrary to the Companies Act, 1862, and is ultra vires in that sense. I cannot see for myself that there is any trafficking in shares in any way, or that the company is in any way mixed up in anything contrary to the Act. In my opinion that objection fails.

The last point is a technical one and turns on art. 58A. [His Lordship read the article, and continued:-] The notice was given on March 7. The general meeting at which the

dividend was declared was held on February 16. It is said that that was not a general meeting properly so called for this purpose, because of art. 72, which provides that "General meetings shall be held once in every year, at such time and place as may be prescribed by the company in general meeting, and, if no time and place is prescribed, in the month of April in every such year at such time and place as may be prescribed by the directors." I am told, however, that a general meeting has never been called in April at all. It was held in February and in March in preceding years. Under those circumstances I consider that the company has waived art. 72, and on the question whether the terms of art. 58A have been complied with, and whether the notice has been given during the first month next after a general meeting of the company at which an annual dividend on the ordinary shares has either been

declared or, profits permitting, would have been declared, it is clear that the only dividend was in this instance declared at the meeting on February 16, and that the plaintiff has either accepted or applied for it.

That, I think, disposes of all the points that have been raised; and the necessary result is that I dismiss the action with costs.

SOLICITORS:

Solicitors for plaintiff: Cox & Lafone.

Solicitors for defendants: Waltons, Johnson, Bubb & Whatton.

G. A. S.

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Borland s Trustee v Steel Brothers

Course: Business Associations (Law 434)

29 Documents

Students shared 29 documents in this course

University: University of Botswana

Was this document helpful?

BORLAND'S TRUSTEE v STEEL BROTHERS & CO., LIMITED.

[1900 B. 1253.]

[CHANCERY DIVISION]

[1901] 1 Ch 279

HEARING-DATES: 13, 14 November 1900

14 November 1900

CATCHWORDS:

Company - Articles of Association - Shares - Restrictions on Transfer - Compulsory

Transfer at specified Price in Event of Shareholder's Bankruptcy - Repugnancy - Rule

against Perpetuity - Fraud on Bankruptcy Law - Companies Act, 1862 (25 & 26 Vict. c.

89), s. 16.

HEADNOTE:

Provisions in a company's articles of association compelling a shareholder at any time

during the continuance of the company to transfer his shares to particular persons at

a particular price are not void as being repugnant to absolute ownership, or as tending

to perpetuity.

There is nothing obnoxious to the bankruptcy law in articles which bona fide provide

that a shareholder shall, in the event of his bankruptcy, sell his shares to particular

persons at a particular price, which is fixed for all persons alike, and is not shewn to

be less than the fair price which might otherwise be obtained.

A share in a company cannot properly be likened to a sum of money settled upon and

subject to executory limitations to arise in the future; it is rather to be regarded as

the interest of the shareholder in the company, measured, for the purposes of liability

and dividend, by a sum of money,

but consisting of a series of mutual covenants entered into by all the shareholders

inter se in accordance with s. 16 of the Companies Act, 1862, and made up of various

rights and liabilities contained in the contract, including the right to a certain sum of

money.

The rule against perpetuity has no application to personal contracts.

INTRODUCTION:

TRIAL OF ACTION.

The plaintiff was the trustee in bankruptcy of Mr. J. E. Borland, and he claimed a

declaration that the defendant company were not entitled to require the transfer of

certain shares held by the bankrupt at any price whatever, and that the transfer

1 1 HIT_1 false

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21_T1537240304

248732 empty close

empty

Borland s Trustee v Steel Brothers

Business Associations (Law 434)

University of Botswana

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INTRODUCTION:

TRIAL OF ACTION.

COUNSEL:

PANEL: FARWELL J

JUDGMENTBY-1: FARWELL J

JUDGMENT-1:

SOLICITORS:

Copyright © 2012 LexisNexis , a division of Reed Elsevier Inc. All rights reserved.

Borland s Trustee v Steel Brothers

Course: Business Associations (Law 434)

University: University of Botswana

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