Allen v Gold Reefs of West Africa, Ltd., [1900] 1 Ch. 656
Faubillaud
*656 Allen v Gold Reefs of West Africa, Limited.
Same. v Same.
[1900] 1 Ch. 656
[1897 A. 585.][1897 A. 977.]
19 February 1900
Lindley M.R., Vaughan Williams L.J. and Romer L.J.
1900 Jan. 18, 19, 20; Feb. 19.
CompanyãArticles of AssociationãShareholderãVendor's SharesãFully Paid
SharesãUnpaid SharesãCallsãArrearsãDebtsãLien of Company on Unpaid
SharesãAlteration of ArticlesãSpecial ResolutionãLien on Fully Paid Shares
for Arrears of Calls on Unpaid SharesãContractãRetrospective Effect of
Altered ArticlesãCompanies Act, 1862 (25 & 26 Vict. c. 89), s. 50ãGeneral
MeetingsãNoticeãServiceã≥Member≤ãDeceased MemberãLegal Personal
Representatives.
A limited company by one of its articles provided that it should have a lien
for all debts and liabilities of any member to the company ≥upon all shares
(not being fully paid) held by such member.≤
The company, by way of purchase-money for the property acquired by it,
allotted fully paid shares to Z., a nominee of the vendor to the company. Z.
also applied for and had allotted to him shares not paid up. He was the only
holder of fully paid-up shares. At his death he was indebted to the company
in arrears of calls on the unpaid shares, but his assets were insufficient
to pay the arrears. Thereupon the company, by special resolution under s. 50
of the Companies Act, 1862, altered the above articles by omitting therefrom
the words ≥not being fully paid,≤ thus creating a lien on Z.'s fully paid
shares:ã
Held, by the Court of Appeal (Lindley M.R., Vaughan Williams and Romer
L.JJ.), that the company had power to alter its articles by extending its
lien to fully paid shares:
Held, also, by Lindley M.R. and Romer L.J. (Vaughan Williams L.J.
dissenting), that the lien so extended, having been made in good faith, was
enforceable against Z.'s fully paid shares, since he took them subject to
the original articles and the power of altering them given to the company by
s. 50 of the Act, and did not make any special or implied bargain that they
should not be affected by any subsequent alteration of the articles; and
that the fact of those shares being vendor's shares allotted in payment for
the property purchased by the company, instead of being shares paid for in
cash in the ordinary way, was immaterial.
James v. Buena Ventura Nitrate Grounds Syndicate, [1896] 1 Ch. 456, and
Andrews v. Gas Meter Co., [1897] 1 Ch. 361, considered as to the
≥retrospective≤ effect of an alteration by a company of its articles.
Where, under a company's articles, notice of general meetings is to be given
to ≥members,≤ and such notice may be served upon any ≥member≤ either
personally or by sending it prepaid by post addressed to ≥such *657 member≤
at his registered address, it is not necessary, in the case of a deceased
member, either to send a notice addressed to him at his registered address,
or to serve his legal personal representatives unless they have themselves
become ≥members≤ by formal registration.
Judgment of Kekewich J., [1899] 2 Ch. 40, varied.
APPEAL from the judgment of Kekewich J. 1
The defendant company, the Gold Reefs of West Africa, Limited, was
incorporated on July 2, 1895, under the Companies Acts, 1862 to 1890. Clause
5 of the memorandum of association was as follows: ≥The capital of the
company is 90,000l., divided into 360,000 shares of 5s. each. The said
shares or any shares issued upon an increase of capital or any portion
thereof respectively may be issued fully paid up, at a premium, or at par,
and with such preference, privileges or priority over or postponement to the
remaining or any other shares of the company in respect of dividends or
otherwise as may be determined.≤ The memorandum was accompanied by articles
of association, which provided (art. 2) that the word ≥member≤ should mean a
registered holder of any share or stock of the company; (art. 22) that if
any ≥member≤ failed to pay any call, instalment, or interest, the directors
might serve a notice on such ≥member≤ requiring him to pay the same,
together with further interest from the date of the notice, and all expenses
incurred by the company through such non-payment; (art. 23) that the notice
should name a day on which such call, instalment, or interest was to be
paid, and also state that in the event of non-payment the shares in respect
of which the call was made or the instalment was payable would be liable to
be forfeited; (art. 24) that if the requisitions of the notice were not
complied with, any share in respect of which such notice had been given
might be forfeited by a resolution of the directors to that effect; (art.
25) that any share so forfeited should be deemed to be the property of the
company, and might be disposed of as the directors thought fit; (art. 26)
that any member whose shares had been forfeited should, notwithstanding, be
liable to pay and should forthwith pay to the company all calls,
instalments, interest, and expenses *658 owing upon or in respect of such
shares at the time of the forfeiture, together with interest thereon from
the time of forfeiture until payment, in the same manner as if the shares
had not been forfeited, and to satisfy all (if any) the claims and demands
which the company might have enforced in respect of the shares at the time
of forfeiture, without any deduction or allowance for the value of the
shares at the time of forfeiture; (art. 27) that the forfeiture of a share
should involve the extinction at the time of forfeiture of all interest in
and all claims and demands against the company in respect of the share, and
all other rights and liabilities incidental to the share as between the
shareholder and the company, except only such rights and liabilities as were
by the articles expressly saved, or as were by the statutes given or imposed
in the case of past members; (art. 28) that a record in the minute-book of
the company of the forfeiture of a share should be conclusive evidence as
against all persons claiming to be entitled to the share as forfeited; (art.
29) ≥that the company shall have a first and paramount lien for all debts,
obligations, and liabilities of any member to or towards the company upon
all shares (not being fully paid) held by such member. ä Provided always
that if the company shall register, or agree to register, any transfer of
any share upon which it has such lien as aforesaid without giving to the
transferee notice of its claim, the said share shall be freed and discharged
from the lien of the company≤; (art. 30) that the directors might serve upon
any member who was indebted or under obligation to the company a notice
requiring him to pay the amount due to the company, or satisfy the said
obligation, and stating that if payment were not made, or the obligation
satisfied, within a time (not less than fourteen days) specified in such
notice, the share held by such member would be liable to be sold; and that
if such member should not comply with such notice, the directors might sell
such share without further notice; (art. 38) that the directors might, in
their discretion, refuse to register the transfer of any shares upon which
the company had a lien, and in case the shares proposed to be transferred
should be not fully paid up might decline to register a transfer of the same
to any person not in *659 their opinion a responsible person; (art. 41) that
≥the executors or administrators of a deceased member (not being one of
several joint holders) shall be the only persons recognised by the company
as having any title to the shares registered in the name of such memberä≤;
(art. 42) that any person becoming entitled to a share in consequence of the
death of any member might elect either to be registered himself as a holder,
or to have some person nominated by him registered as a transferee thereof;
(art. 45) that a person so becoming entitled should, subject to any lien of
the company, be entitled to receive dividends, bonuses, or other moneys
payable in respect of the share, but should not be entitled to receive
notices of, or to attend or vote at meetings of the company, or, save as
aforesaid, to any of the rights or privileges of the members, unless and
until he should have become a member in respect of the shares; (art. 74)
that notice of general meetings should be given to such members as were,
under the provisions therein contained, entitled to receive notices; but the
accidental omission to give such notice to, or the non-receipt of such
notice by, any member, should not invalidate any resolution passed at any
such meeting; (art. 88) that no member should be entitled to be present or
vote at any meeting unless he had paid all calls and other moneys due from
him to the company; and (art. 170) that ≥a notice may be served by the
company upon any member either personally, or by sending it prepaid by post
addressed to such member at his registered address as appearing in the
register of the members of the company.≤ The articles contained no special
provision for service of notices in the case of a deceased member. With
reference to art. 29, it seems that a lien on fully paid-up shares of a
company, or the possibility of such a lien, renders them unquotable on the
Stock Exchange.
Shares, both fully paid up and not fully paid up, were issued by the
company. One Emilio Zuccani, as the nominee of the vendor to the company,
had a number of fully paid-up shares allotted to him by way of
purchase-money for the property acquired by the company under their
memorandum of association, and he held 27,885 of these shares at the time of
his *660 death, these shares being his own property. It did not appear that
when Zuccani took these shares he entered into any special bargain
conferring upon him any special rights in respect of them.
In addition to these fully paid-up shares, Zuccani applied for and had
allotted to him 60,000 ordinary 5s. shares, not paid up. These were applied
for and allotted on the terms of the company's prospectus (on which no
question turned) and articles of association. Calls were from time to time
made in Zuccani's lifetime on these unpaid-up shares, but he did not pay the
calls when they became due, and as early as May, 1896, and thenceforward
during his life letters were sent to him pressing for payment of his
arrears. Although he did not pay his calls, he constantly paid up quantities
of shares in full before their amounts had been called up: in other words,
he from time to time not only paid all the calls due on some of his shares,
but also prepaid the uncalled-up amounts of the same shares. He did this
constantly all through 1896, and in that way he was able to sell and
transfer the shares so paid up free from all liability to calls and from all
lien in favour of the company. From the money so obtained by him he made
remittances to the company on account of his calls in arrear. His object in
fully paying up batches of these shares in the way described was to obtain
shares which he could put on the market free from all claims and demands by
the company. This, it appeared, the directors allowed him to do as a favour
or accommodation to him. All the shares thus paid up were transferred by him
in his lifetime; he did not hold any of them at the time of his death.
Zuccani died on February 4, 1897, leaving a will which was proved by the
plaintiffs, his executors.
At the time of his death he was the registered holder of the 27,885 fully
paid-up vendor's shares, and also of 36,435 other shares partly paid up, and
he owed the company 6072l. 10s. for calls in respect of these, besides
interest to a considerable amount.
The plaintiffs did not get themselves registered as members of the company
in respect of any of Zuccani's shares, and they *661 had not sufficient
assets to answer his liabilities. Steps were taken to have his estate
administered in the Chancery Division, but the company, instead of electing
to carry in a proof for its debt, proceeded to take more summary measures
for recovering it.
In the first place, on February 9, 1897, a notice was sent out of an
extraordinary general meeting of the company to be held on February 18, for
the purpose of passing a special resolution to alter art. 29 of the articles
of association (being the article giving a lien for all debts, &c., upon
shares ≥not being fully paid≤) by omitting the words ≥not being fully paid.≤
This notice was posted to Zuccani at his registered address, although the
directors were then aware of his death. The meeting was held on February 18,
and the special resolution was then passed. Thereupon notice of a
confirmatory meeting to be held on March 8 was, as before, sent to Zuccani's
registered address. Both notices, addressed to Zuccani personally, came to
the knowledge of the plaintiffs, his executors. On March 8 the confirmatory
meeting was held and the resolution confirmed. Thus the company claimed to
extend their lien to all fully paid-up shares. There were in fact no fully
paid-up shares except those belonging to Zuccani.
The next step the company took was this. On June 4, 1897, the directors,
purporting to act under arts. 22, 23, and 24, posted to Zuccani at his
registered address a notice requiring payment by June 21 of the 6072l. 10s.
due for calls on the 36,435 shares, a sum of 804l. 6s. 11d. for interest on
arrears of calls, and further interest from the date of the notice; the
notice also stating that in the event of non-payment by the time appointed
those shares would be liable to be forfeited. This notice was sent also to
the plaintiffs, Zuccani's executors, who had not then lodged the probate of
his will with the company for registration. The amounts demanded were not
paid, and on June 23 the directors passed a resolution purporting to forfeit
the 36,435 partly paid-up shares.
On January 29, 1897, the directors had refused to register a transfer of
some of Zuccani's fully paid-up shares, but ultimately, finding that the
articles gave no power to the company or its *662 directors to refuse to
register a transfer of fully paid-up shares, they passed the transfer.
The object of the plaintiffs in bringing these consolidated actions was to
obtain a declaration that the defendant company had no lien upon the fully
paid-up shares, and an injunction to restrain the forfeiture of the partly
paid-up shares.
At the trial of the actions Kekewich J. held, as already reported 2, (1.)
that the notice threatening forfeiture was bad upon the grounds (among
others) that, as the company or its directors were aware of Zuccani's death
at the time they served the notice by registered letter addressed to him at
his registered address, this service was not sufficient to bind his estate,
and that the service of the notice upon his executors was also ineffectual,
an executor of a deceased member of a company not being a ≥member,≤ unless
duly registered as such; and (2.) that the notices of the meeting of the
company to pass the resolution altering art. 29 were also ineffectual as
having been addressed to Zuccani after the directors had become aware of his
death. His Lordship therefore considered it unnecessary to decide the
further question whether the company could alter its articles so as to
create a lien upon Zuccani's fully paid-up shares. His Lordship accordingly
gave judgment granting an injunction restraining the defendant company from
enforcing the lien.
From that judgment the company appealed. The appeal was heard on January 18,
19, 20, 1900.
Their Lordships held that owing to mistakes on the part of the company there
had been no effective forfeiture of the unpaid-up shares, and on that point
affirmed the judgment of the Court below. The main question on which the
case is now reported was whether the company had power to alter its original
articles by giving itself a lien upon Zuccani's fully paid-up shares; and
there was also the minor question as to the validity of the notices sent to
Zuccani's registered address of the meetings of February 18 and March 8, at
which the special resolution altering the articles was passed and confirmed.
*663
Warrington, Q.C., and Dunham, for the defendant company. First, there was no
irregularity in the proceedings for passing and confirming the resolution
altering art. 29. Zuccani the ≥member≤ being dead, sending a notice to his
registered address was merely superfluous; and art. 45 dispenses with the
necessity of serving the executors of any deceased member with notice. The
proceedings for passing the resolution being then perfectly regular, the
next and most important question is whether the company could by special
resolution alter its articles so a's to impose a lien upon Zuccani's fully
paid-up shares. The articles of a company constitute a contract as between a
company and each member of it: Companies Act, 1862 (25 & 26 Vict. c. 89), s.
16. Under s. 50 3 a company may at any time alter its articles, and a
member, by virtue of his contract, takes his shares subject to that right.
The present question as affecting the powers of a company has not been
actually decided in any reported case, but in the case of a building society
it has been held that such a society can divest the previously existing
rights of a member by altering its articles: Pepe v. City and Suburban
Permanent Building Society 4; and we submit that in principle that case
covers the present.
[ROMER J. Can you alter articles so as to affect past transactions?]
We do not propose to alter the relation of debtor and creditor as between
Zuccani and the company: qu‚ debtor, his position remains the same as
before; all that happens is that, qu‚ *664 holder of fully paid shares, we
seek to impose a certain liability upon his holding.
[ROMER L.J. In Menier v. Hooper's Telegraph Works 5it was held that, where
the majority of a company propose to benefit themselves at the expense of
the minority, the Court may interfere to protect the minority.]
In that case the majority were proposing to put a large sum into their
pockets in fraud of the minority; that is not the case here.
[LINDLEY M.R. In Andrews v. Gas Meter Co. 6 it was held that the
constitution of a company could be altered by special resolution under the
powers conferred by ss. 50 and 51 of the Companies Act, 1862.]
Suppose a company, instead of having articles of association, started with
Table A, under the power contained in s. 15, it would have the power of
altering those statutory articles under the statutory provision.
[VAUGHAN WILLIAMS L.J. Do you say that, if a company adopts the provisions
of Table A, it could afterwards alter them so as to alter accrued rights?]
Yes; for the contract made by the shareholder with the company is that the
regulations of the company may be altered in accordance with the statutory
provision. Under Table A, clause 10, the company may decline to register any
transfer of shares made by a member who is indebted to them; and clause 75
empowers the directors to deduct from the dividends payable to any member
all debts due to the company for calls or otherwise. That clause, though not
providing for lien in terms, has that effect. Therefore Table A does
contemplate giving the company certain rights as against its members who may
be indebted to it; and what is included in the statutory Table A is surely a
proper subject for articles of association. If by Table A, or by the
original articles of association, the company can give itself a charge on
the shares of its members, it can, by special resolution under s. 50, alter
its regulations so as, if necessary, to give itself that right. In other
words, a *665 company can by its new articles do what it could have validly
done by its original articles.
[VAUGHAN WILLIAMS L.J. But the new articles do not take effect as from the
date of the incorporation of the company.]
We do not say that the new articles are to have any retrospective effect so
as to affect the validity or invalidity of what has been done in past years.
They have no more retrospective effect than they had in Andrews v. Gas Meter
Co. 7, though it may be said that there is nothing in the Act to prevent
their having a retrospective effect. An alteration of the articles cannot be
capricious or arbitrary, for all the shareholders affected have the
opportunity of being present and discussing and voting on the resolution for
that purpose.
Renshaw, Q.C. , and Kerly, for the plaintiffs. First, we submit that this
resolution creating a lien upon Zuccani's fully paid-up shares was an
oppressive act as against him, he being the only holder of fully paid-up
shares in the company. Secondly, we contend that a company cannot, by
resolution under s. 50, do any act retrospectively affecting the rights of
any shareholder, nor can such a resolution operate upon the general body of
shareholders unequally. Now it is absurd to say that all the shareholders
here have been dealt with on an equality. In Andrews v. Gas Meter Co. 8 all
the members of the company were dealt with alike - there was equal
treatment. To say that the articles can be altered because the contract to
which the shareholder is a party is that the articles may be altered, is
begging the question. The authorities shew that a resolution altering the
regulations of a company cannot retrospectively affect existing rights:
Buckley on Companies, 7th ed. p. 206; per Rigby L.J. in James v. Buena
Ventura Nitrate Grounds Syndicate 9; Swabey v. Port Darwin Gold Mining Co.
10 The same principle is applied in the construction of statutes: Maxwell on
the Interpretation of Statutes, 3rd ed. p. 298. Pepe v. City and Suburban
Permanent Building Society 11 was a building society case, and there is a
distinction *666 between such a case and the present. A building society is
a mutual trading concern; its members are not merely a corporation, but are
persons carrying on business with each other through the society upon
certain rules governing their rights in their relations to each other. By s.
16 of the Building Societies Act, 1874 (37 & 38 Vict. c. 42), the contract
which a member of a building society is to enter into is required to be set
out in the rules of the society, and the rules are to state the manner of
altering or rescinding the rules. Then s. 17 requires copies of the rules -
which include the power of alteration - to be sent to the registrar, who, if
he finds that the rules comply with s. 16, is to register them; and by s. 18
any alteration is to be certified by him. Thus the parties enter into the
contract well knowing that the rules may be altered - a circumstance which
makes a great difference between a building society and a company. Then,
even to the power of a building society to alter its rules there must be a
limit, in that the alteration must not be directed against an individual
member: all the members must be affected equally: Strohmenger v. Borough of
Finsbury Permanent Investment Building Society 12; so that even in the case
of a building society an alteration of the rules may be bad through being
inequitable as between the members. This is illustrated by Sixth West Kent
Mutual Building Society v. Shove 13; and it is on that ground that Pepe v.
City and Suburban Permanent Building Society 14 can stand. That case does
not affect our contention that there must be equality among the members of
the company.
Again, we charge the company with bad faith in passing this resolution for
an alteration of the articles which was intended to operate as against a
single shareholder. The majority of shareholders in a company cannot
appropriate to themselves the advantages of having the shares of a single
shareholder or of a minority of the shareholders tied up for their own
benefit and at their own discretion. Here, but for this alteration,
Zuccani's paid-up shares might have been sold, and with the proceeds his
partly paid shares might have been *667 fully paid up. If he had been alive
to vote on that resolution, it would not have been passed. Why was the
notice of the meeting to pass the resolution delayed until immediately after
his death? Because those who fathered it thought this would result in an
advantage to themselves. It was in fact an attempt by a majority of partners
to do a particular act without consulting the others - a proceeding which
was disapproved by Lord Eldon in Const v. Harris. 15
Warrington, Q.C., in reply. As to the argument that if Zuccani had been
living the resolution would not have been passed, he would, through being
indebted to the company, have been precluded from being present at the
meeting by art. 88.
With regard to the resolution itself, I admit that the alteration in the
articles was expressly intended to enable the company to recover from
Zuccani a large sum of money which he could not otherwise pay, although the
company had been repeatedly pressing him.
[ROMER L.J. I do not see that the directors were to be blamed for doing
their best to recover for the company this very large sum of money.]
They were doing what, if the law allowed them to do it, would enable them to
recover this money. Does then the law allow a company to alter its articles
by imposing a lien on its fully paid-up shares? Take the case by steps. In
the first place, by s. 14 of the Companies Act, 1862, a company may adopt
and register articles of association. Then, by s. 15, if no articles are
registered, Table A is to constitute the regulations of the company. Now
Table A contains several provisions, such as clauses 10 and 75, giving a
company certain rights as against shareholders who are indebted to it and so
enabling it to control their interests in their shares. A company can
undoubtedly create a lien on its shares by its original articles: Buckley on
Companies, 7th ed. p. 97; Bradford Banking Co. v. Briggs 16; Bank of Africa
v. Salisbury Gold Mining Co. 17 If, then, a company has power to create a
lien by its original articles, surely it has power to do so by special
resolution under *668 s. 50. What is the effect of a company's articles of
association? Sect. 16 of the Act says that ≥when registered, they shall bind
the company and the members thereof to the same extent as if each member had
subscribed his name and affixed his seal thereto, and there were in such
articles contained a covenant on the part of himself, his heirs, executors,
and administrators, to conform to all the regulations contained in such
articles, subject to the provisions of this Act.≤
Then the next step is to s. 50, under which it is clearly competent to the
company to alter its original articles in any way, and there is nothing
there excluding the power of altering them by creating a lien on any of the
shares. The section goes on to provide expressly that the new regulations
shall have ≥the same validity as if they had been originally contained in
the articles of association.≤ It is thus part of the contract entered into
by any shareholder that the articles may be altered and that any new
articles shall be of the same validity as if they had formed part of the
original articles.
[VAUGHAN WILLIAMS L.J. The section only says that the new articles shall
have ≥the same validity≤ as the original articles, not ≥the same effect.≤]
The section means that the company can by any new articles do that which it
could have validly done by its original articles; and the creation of a lien
upon any of its shares, whether paid up or not, by its original articles is
clearly valid, as appears from the two cases in the House of Lords I have
already cited. I concede that the shareholder on taking his shares might
make a special bargain that the articles should not be altered so as to
affect his shares, and that the company could not thereafter do anything
affecting that special contract; but here there was no special contract
outside the articles.
[VAUGHAN WILLIAMS L.J. Suppose the original articles provided for the
priorities of different classes of shares: could that afterwards be altered
by special resolution under s. 50?]
I am not satisfied that such a thing could not be done by special
resolution.
[VAUGHAN WILLIAMS L.J. Surely, if the original articles constitute the
materials for a binding contract, the company *669 has lost its power of
altering the articles in such a manner as to alter that contract.
ROMER L.J. The company has held out by its articles that if you pay up your
shares in full you shall have special privileges. Can the company after that
take those privileges away?]
Here Zuccani was a vendor taking fully paid-up shares as purchase-money,
knowing, as he must be taken to have known, that the company might
afterwards alter its articles so as to apply to all fully paid-up shares,
including his own. The resolution altering the articles is not really
retrospective: it is in a sense, because it alters the shareholder's
original position; but it takes effect only from the time it is passed.
As to the alleged distinction between building society cases and company
cases, for the purpose of applying legal principles no true distinction can
be drawn. There is practically no difference between the two classes of
cases.
LINDLEY M.R. This is an important case, and requires consideration.
Cur. adv. vult.
Feb. 19. LINDLEY M.R.
This is an appeal from a judgment of Kekewich J. granting an injunction
restraining the defendants from enforcing a lien on some fully paid-up
shares in the company and belonging to a deceased shareholder named Zuccani.
The appeal is not only important to the parties to it, but it raises several
questions of great general interest relating to the power of limited
companies to alter their articles, and especially to their power to alter
their articles so as to affect shares standing in the names of deceased
shareholders, and to the effect of an alteration duly made on vendors' fully
paid-up shares issued before the alteration is made.
The facts are as follows: [His Lordship then stated the facts leading up to
the steps for passing the special resolution, and referred to the memorandum
and articles of association as above set out. He observed that the lien
conferred by art. 29 clearly extended to all Zuccani's unpaid shares, and
did not cease on his death, but continued to be as available against *670
his executors (though not themselves members) as it had been against him in
his lifetime; as, independently of any article, a lien on property did not
cease on the death of the owner of the property. So far, therefore, as
Zuccani's unpaid-up shares were concerned, his Lordship held that the
company was entitled to the lien and power of sale conferred by arts. 29 and
30 - a right that had not in fact been disputed. His Lordship then
proceeded:ã]
The directors, however, desired to extend the lien and power of sale and
power to refuse to register transfers to Zuccani's fully paid-up shares. I
say, to his shares, for he was the only person entitled to fully paid-up
shares from whom any calls were due. Accordingly steps were taken to pass a
special resolution to alter art. 29 by striking out the words ≥not being
fully paid,≤ and a resolution to that effect was passed on February 18,
1897, and was confirmed on March 8, 1897. Notice convening these meetings
was sent addressed to Zuccani at his registered place of address; and the
notice came to the knowledge of his executors. The directors knew that he
was dead; but I cannot agree with the learned judge that the resolution is
invalid by reason of any defect in the notice. Notices of meetings have only
to be given to members, and the executors were not members. If no notice at
all had been sent to the executors or to Zuccani's registered address, the
omission would not, in my opinion, have affected the propriety of holding
the meetings or the validity of the resolutions passed at them. Art. 45
expressly provided that notices of meetings need not be sent to executors
who had not become members. To hold that meetings of companies could not be
properly held unless the notices convening them were given to the
unregistered legal personal representatives of all deceased members would be
to paralyze the transaction of business, and would be contrary to the
ordinary principles applicable to corporate bodies and, indeed, to other
associations as well. The regularity of the proceedings to alter the
articles by no means, however, disposes of the matters in controversy
between the parties.
The facts above stated raise the following very important questions, namely,
(1.) Whether a limited company, registered *671 with articles conferring no
lien on its fully paid-up shares, can by special resolution alter those
articles by imposing a lien on such shares? (2.) Whether, if it can, the
lien so imposed can be made to apply to debts owing by fully paid-up
shareholders to the company at the time of the alteration of the articles?
(3.) Whether, if it can, fully paid-up shares allotted to vendors of
property to the company are in any different position from other fully
paid-up shares issued by the company? (4.) Whether, assuming the altered
articles to be valid and to be binding on the general body of the holders of
fully paid-up shares in the company, there are any special circumstances in
this particular case to exclude the fully paid-up shares held by Zuccani
from the operation of the altered articles?
The articles of a company prescribe the regulations binding on its members:
Companies Act, 1862, s. 14. They have the effect of a contract (see s. 16);
but the exact nature of this contract is even now very difficult to define.
Be its nature what it may, the company is empowered by the statute to alter
the regulations contained in its articles from time to time by special
resolutions (ss. 50 and 51); and any regulation or article purporting to
deprive the company of this power is invalid on the ground that it is
contrary to the statute: Walker v. London Tramways Co. 18
The power thus conferred on companies to alter the regulations contained in
their articles is limited only by the provisions contained in the statute
and the conditions contained in the company's memorandum of association.
Wide, however, as the language of s. 50 is, the power conferred by it must,
like all other powers, be exercised subject to those general principles of
law and equity which are applicable to all powers conferred on majorities
and enabling them to bind minorities. It must be exercised, not only in the
manner required by law, but also bon‚ fide for the benefit of the company as
a whole, and it must not be exceeded. These conditions are always implied,
and are seldom, if ever, expressed. But if they are complied with I can
discover no ground for judicially putting any other restrictions on the
power conferred by the section than those *672 contained in it. How shares
shall be transferred, and whether the company shall have any lien on them,
are clearly matters of regulation properly prescribed by a company's
articles of association. This is shewn by Table A in the schedule to the
Companies Act, 1862, clauses 8, 9, 10. Speaking, therefore, generally, and
without reference to any particular case, the section clearly authorizes a
limited company, formed with articles which confer no lien on fully paid-up
shares, and which allow them to be transferred without any fetter, to alter
those articles by special resolution, and to impose a lien and restrictions
on the registry of transfers of those shares by members indebted to the
company.
But then comes the question whether this can be done so as to impose a lien
or restriction in respect of a debt contracted before and existing at the
time when the articles are altered. Again, speaking generally, I am of
opinion that the articles can be so altered, and that, if they are altered
bon‚ fide for the benefit of the company, they will be valid and binding as
altered on the existing holders of paid-up shares, whether such holders are
indebted or not indebted to the company when the alteration is made. But, as
will be seen presently, it does not by any means follow that the altered
article may not be inapplicable to some particular fully paid-up
shareholder. He may have special rights against the company, which do not
invalidate the resolution to alter the articles, but which may exempt him
from the operation of the articles as altered.
The conclusion thus arrived at is based on the language of s. 50, which, as
I have said already, the Court, in my opinion, is not at liberty to
restrict. This conclusion, moreover, is in conformity with such authorities
as there are on the subject. Andrews v. Gas Meter Co. 19 is an authority
that, under s. 50 of the Companies Act, 1862, a company's articles can be
altered so as to authorize the issue of preference shares taking priority
over existing shares, although no power to issue preference shares was
conferred by the memorandum of association or by the original articles. The
answer to the argument that the company could not alter existing rights is
that, within the *673 limits set by the statute and the memorandum of
association, the rights of shareholders in limited companies, so far as they
depend only on the regulations of the company, are subject to alteration by
s. 50 of the Act.
The decision of the late Lord Justice Chitty in Pepe v. City and Suburban
Permanent Building Society 20 is, in principle, also closely in point. A
member of a building society, who had given notice of withdrawal, and who by
the rules, as they then stood, became entitled to a certain sum of money,
was held to be deprived of his right to that sum by an alteration made in
the rules before he had ceased to be a member. This case went very far, but
it has been treated as correct in Botten v. City and Suburban Permanent
Building Society. 21
It was urged that a company's articles could not be altered retrospectively,
and reliance was placed on Rigby L.J.'s observations in James v. Buena
Ventura Nitrate Grounds Syndicate. 22 The word ≥retrospective≤ is, however,
somewhat ambiguous, and the concurrence of Rigby L.J. in Andrews v. Gas
Meter Co. 23 shews that his observations in James v. Buena Ventura Nitrate
Grounds Syndicate 24 are no authority for saying that existing rights,
founded and dependent on alterable articles, cannot be affected by their
alteration. Such rights are in truth limited as to their duration by the
duration of the articles which confer them.
But, although the regulations contained in a company's articles of
association are revocable by special resolution, a special contract may be
made with the company in the terms of or embodying one or more of the
articles, and the question will then arise whether an alteration of the
articles so embodied is consistent or inconsistent with the real bargain
between the parties. A company cannot break its contracts by altering its
articles, but, when dealing with contracts referring to revocable articles,
and especially with contracts between a member of the company and the
company respecting his shares, care must be taken not to assume that the
contract involves as one of its terms an article which is not to be altered.
*674
It is easy to imagine cases in which even a member of a company may acquire
by contract or otherwise special rights against the company, which exclude
him from the operation of a subsequently altered article. Such a case arose
in Swabey v. Port Darwin Gold Mining Co. 25, where it was held that
directors, who had earned fees payable under a company's articles, could not
be deprived of them by a subsequent alteration of the articles, which
reduced the fees payable to directors.
I take it to be clear that an application for an allotment of shares on the
terms of the company's articles does not exclude the power to alter them nor
the application of them, when altered, to the shares so applied for and
allotted. To exclude that power or the application of an altered article to
particular shares, some clear and distinct agreement for that exclusion must
be shewn, or some circumstances must be proved conferring a legal or
equitable right on the shareholder to be treated by the company differently
from the other shareholders.
This brings me to the last question which has to be considered, namely,
whether there is in this case any contract or other circumstance which
excludes the application of the altered article to Zuccani's fully paid-up
vendor's shares.
First, let us consider the shares. I am unable to discover any difference in
principle between one fully paid-up share and another. Whether a share is
paid for in cash or is given in payment for property acquired by the company
appears to me quite immaterial for the present purpose. In either case the
shareholder pays for his share, and in either case he takes it subject to
the articles of association and power of altering them, unless this
inference is excluded by special circumstances.
Next let us consider whether a vendor who makes no special bargain except
that he is to be paid in fully paid-up shares is in any different position
from other allottees of fully paid-up shares. I fail to see that he is,
unless he stipulates that his shares shall be specially favoured. Zuccani
bargained for fully paid-up shares and he got them. The imposition of a lien
on them did not render them less fully paid-up than they were before. They
remained what they were. Zuccani did not *675 bargain that the regulations
relating to paid-up shares should never be altered, or that, if altered, his
shares should be treated differently from other fully paid-up shares. I
cannot see that the company broke its bargain with him in any way by
altering its regulations or by enforcing the altered regulations as it did.
I have already drawn attention to clause 5 of the memorandum of association.
Having regard to its plain language no allottee of shares, whether a vendor
or an ordinary applicant, can justly complain of injustice or even hardship
if his rights under the original articles are modified to his disadvantage.
Every allottee was told by the memorandum that his rights as a shareholder
were subject to alteration, and no allottee acquired any rights except on
these terms unless, of course, some special bargain was made with him. If
Zuccani had not been indebted to the company, could he have successfully
maintained that the company had no power to alter the articles and so make
his shares liable to a lien and consequently less marketable than before? I
take it that it is clear that he could not. But I arrive at this conclusion
only because the bargain with him has not been broken. Zuccani's
indebtedness to the company confers on him, or his executors, no rights
against it. But it is his indebtedness which creates the embarrassment from
which they seek to escape. The fact that Zuccani's executors were the only
persons practically affected at the time by the alterations made in the
articles excites suspicion as to the bona fides of the company. But,
although the executors were the only persons who were actually affected at
the time, that was because Zuccani was the only holder of paid-up shares who
at the time was in arrear of calls. The altered articles applied to all
holders of fully paid shares, and made no distinction between them. The
directors cannot be charged with bad faith.
After carefully considering the whole case, and endeavouring in vain to
discover grounds for holding that there was some special bargain
differentiating Zuccani's shares from others, I have come to the conclusion
that the appeal from the decision of the learned judge, so far as it relates
to the lien created by the altered articles, must be allowed. His decision
as to the *676 forfeiture having, however, been affirmed, each party should
be left to pay his own costs.
VAUGHAN WILLIAMS L.J.
I do not know that I differ from my brethren as to the law of this case. We
are all agreed that there was power in the shareholders to pass the
resolution which they did pass. There is no question as to the abstract
validity of the resolution. It falls within the powers of alteration
conferred by s. 50 of the Companies Act, 1862.
We are further all agreed that a company cannot contract itself out of the
statutory power of alteration conferred by s. 50; and the alteration of the
articles in the present case involves no contravention of the memorandum of
association. But I think that we are all agreed that cases might occur in
which a member might have acquired, by contract or otherwise, special rights
against the company which would exclude him from the operation of the
altered article. It is in this sense that I understand the observation of
Rigby L.J. in James v. Buena Ventura Nitrate Grounds Syndicate. 26 A
resolution may alter the regulations of a company but cannot retrospectively
affect existing rights. I also take it to be clear that the alteration must
be made in good faith; and I take it that an alteration in the articles
which involved oppression of one shareholder would not be made in good
faith.
The result is that we have to consider in the present case whether the
alteration, if enforced against Zuccani's executors, would defeat existing
rights or operate oppressively. On this point I confess that I have much
more doubt than my brethren seem to have. It is of course true that Zuccani,
when he took these shares as the price of the property which he was selling,
knew or must be taken to have known of the statutory power of alteration;
but it does not seem to me that it follows that the company could make
alterations which would alter the value, according to the articles in force,
of the consideration which they were giving for the property purchased. For
instance, I doubt very much whether, in a case in which the articles
provided (as they might well do) for the issue of *677 ordinary and
preference shares, and the memorandum of association contained a clause in
the terms of clause 5 of the present memorandum, a company, who had bought a
property by the issue of fully paid preference shares could afterwards, by
altering the articles, issue pre-preference shares and thus reduce the value
of the consideration which they had agreed to give. It is impossible to
suppose that the parties to such contract of sale and purchase could have
contemplated the value of the consideration shifting from time to time at
the will of the purchasers.
Griffith v. Paget 27, which was decided prior to Andrews v. Gas Meter Co.
28, is an authority that in the absence of express power in the memorandum
such a thing could not be done. This, of course, is not the present case.
The present case is that the company by the articles then in force reserved
to themselves a lien upon all shares not being fully paid, and then
purchased a property by the issue of fully paid shares; and the question is
whether they could, on the very day after the contract, it might be,
materially affect the consideration given by passing a resolution that the
fully paid shares thus given as a price should be subject to a lien for all
debts, obligations and liabilities of the vendor to the company, whether
such debts, obligations and liabilities should have actually arrived or not,
and thus render the shares unmarketable. I think not. I think that,
notwithstanding the statutory powers of alteration, the basis of the
contract of purchase was that the property should be paid for in marketable
shares. I think that the very object of the exception in art. 29 of fully
paid shares from lien was to render those shares marketable, and, as they
chose to pay for the property in shares thus made marketable, I think that
to allow the company to subject the vendor's shares to a lien would be to
make the alteration of the articles retrospectively affect existing rights.
I think, moreover, that the resolution was not passed in good faith, being
really passed merely to defeat the existing rights of an individual
shareholder.
My observations have no bearing on shares fully paid up in *678 pursuance of
calls in the ordinary way; but it is worthy of observation that Zuccani did,
in respect of shares other than vendor's shares, prepay such shares with the
assent of the company for the purpose of freeing those shares from lien. I
doubt if the company could have subjected these shares to lien after
receiving prepayment.
ROMER L.J.
For the reasons given by the Master of the Rolls in his judgment, I agree
with him that there was no defect in the resolutions altering the articles
of the company as to lien on the ground of absence of notice to Mr. Zuccani
or his representatives, and I have nothing to add to what the Master of the
Rolls has said on this head.
I also agree with him in the conclusions he has come to on the other points
taken by the respondents on this appeal; but, having regard to the
importance of some of the arguments addressed to us, I think it right to
give my reasons for arriving at those conclusions.
A company such as this may undoubtedly by its articles of association
provide for a lien on the shares of its shareholders in respect of any debts
for the time being due from them to the company, and, if the original
articles do not provide for the lien, the company may subsequently, by duly
altering its articles, give itself such a lien; and the fact that the
original articles did not provide for a lien would be in itself no ground
justifying a shareholder who was indebted when the articles were altered in
saying that he contracted the debt or that he took his shares in reliance on
there being no lien, and that the new articles must not operate so as to
make the lien thereby given extend to his existing debt. A shareholder must
be taken to have known that the articles might be so altered as to give the
lien. And certainly a shareholder could not say as against the company that
he was entitled to special rights because he did not pay his debts. And the
same considerations apply to the case where the original articles give only
a limited lien, as, for example, a lien limited to debts due for unpaid
calls. The company might by subsequent articles extend the lien, and a
shareholder would have no right to object to *679 the extended lien because
he happened to be indebted to the company.
Of course, by the above observations I have not been dealing with
exceptional cases. I can imagine a case, for example, where by the
memorandum of association certain provisions as to lien are made part of the
constitution of the company which could not be affected by any alteration of
the articles. And special contracts might be made with particular classes of
shareholders or individuals, or special obligations to them might be
incurred by the company, and that even by virtue of the original articles
alone, which would prevent the articles being altered as against them, or
prevent the alterations being enforceable against them. But, putting aside
such exceptional cases, the observations I have made as to the general law
are in my opinion sound.
I will now consider the circumstances of the case before us. And the first
question is as to the meaning and effect of art. 29 of the company. In my
opinion that article merely provides for a limited lien - that is to say, it
limits the lien so as to exclude fully paid-up shares. There is nothing in
the memorandum of association of the company to prevent that lien being
subsequently extended to fully paid-up shares by an alteration in the
articles. There is nothing in the company's original articles of association
to prevent such extension of the lien. Nor was any shareholder justified in
assuming from art. 29 that fully paid-up shares would never be made subject
to the lien by an alteration in the articles. That article only in substance
stated that the lien thereby given did not extend to fully paid-up shares.
No one was justified in assuming from it that the company thereby held out,
in favour of any person acquiring fully paid-up shares, that those shares
should never be made subject to a lien by an alteration of the articles. If
art. 29 had gone on to state expressly that the lien thereby provided might
be extended later on by an alteration of the articles, no one could venture
to doubt what was the true meaning and effect of the article. But such a
statement is implied though not expressed. It was not, in my opinion,
necessary for the article to say at the end, ≥Caution - remember *680 the
power of the company to alter its articles by extending its lien,≤ or any
words to that effect.
But then it is said that, though holders of shares paid up in the ordinary
way by calls could not complain of an alteration of the articles, yet the
holders of other paid-up shares stand in a different position, though they
were not the subject of any special contract as to lien. I cannot think this
contention sound. Putting aside for the moment, as we are doing, any case of
a special bargain with the company, in my opinion no shareholder was
justified in assuming from art. 29 that if he obtained by allotment fully
paid-up shares, or subsequently paid-up ordinary shares in full in advance
of calls, those shares should be specially distinguished from shares
subsequently paid up in full by ordinary calls, or give him special rights
so as to prevent the company from altering the articles and extending the
lien to fully paid-up shares, or so that he would be able to say that such
an alteration of the articles, if made, could not be enforced as against his
shares. I find nothing in art. 29 to deprive the company of its right, by
altering its articles, to extend its lien to fully paid-up shares generally,
or to limit that right to shares paid up by ordinary calls. Still less, in
my opinion, was any shareholder entitled to assume from the company's
memorandum and original articles that the lien, if extended at all, should
only be extended so as to give a lien for liabilities incurred after the
alteration in the articles. I fail to see why a shareholder, because he
became indebted to the company, should acquire special rights against the
company in respect of that debt as to the alteration of the articles, or why
the company should not, when it obtained its extended lien, use it in
respect of any existing debt as well as in respect of debts subsequently
incurred. In truth, every shareholder was bound to bear in mind, both in
paying up in full his shares, or acquiring fully paid-up shares, and in
incurring a debt to the company, that the company had a legal right by
altering its articles to extend its lien and might exercise that legal right
at any time.
This being so, in my opinion, Mr. Zuccani's shares became bound by the
company's alteration of its articles unless he can *681 shew some special
bargain with the company, or some special obligation incurred towards him by
the company, in respect of his fully paid-up shares. He fails to establish
any such special bargain or obligation. There was certainly no such special
bargain or obligation alleged or proved with regard to the shares allotted
to him as fully paid up; and as already pointed out, no such bargain or
obligation can be implied merely from the wording of art. 29. Nor was there
any special bargain or obligation with regard to the shares paid up in full
by him after allotment. The fact is, with regard to the latter, that being
indebted in very large sums at the time to the company, and paying certain
sums on account, he was permitted, as a favour to him, to attribute the
payment to a few shares so as to make them paid up. No doubt this was done
so as to give him the opportunity, so long as the lien was limited by the
original articles, of disposing of the fully paid-up shares, but if he did
not avail himself of the opportunity before the alteration of the articles
then he could not do so afterwards. I understand that as a matter of fact he
did fully avail himself of the opportunity; but even if he did not do so as
regards some shares, that would not, in my opinion, prevent those shares
from becoming subject to the extended lien. Mr. Zuccani, in respect of all
his fully paid-up shares, whether allotted as paid up or not, in fact has
obtained and enjoyed all the advantages with regard to lien which the
company ever impliedly or expressly promised him - that is to say, the right
to deal with the shares without their being subject to any lien so long as
the articles remained unaltered and did not extend the lien to fully paid-up
shares.
Something was said on behalf of the respondents as to want of good faith on
the part of the company in altering its articles. I fail to see any want of
good faith. In my opinion it is eminently fair for a company to provide by
its articles, as originally framed or as altered by resolutions, that
shareholders who are indebted to the company should not be permitted to
dispose of their shares without paying their debts, and that the company
should have a lien on the shares for the debts. In the ordinary case of a
partnership no partner would be permitted *682 to withdraw or sell his share
in the partnership venture without his debts to the partnership being first
paid thereout. And if the company in the present case had, as I think it
had, the legal right to alter its articles so as to give it the lien it now
claims, I cannot see why, in exercising that legal right, it should be
accused of want of good faith. That the reason for the alteration was the
very existence of the large debt due from Mr. Zuccani, and that the company
had principally in mind this large debt when it made the alteration in the
articles, is no ground for impeaching the action of the company. It appears
to me the shareholders were acting in the truest and best interests of the
company in exercising the legal right to alter the articles so that the
company might as one result obtain payment of the debt due from Mr. Zuccani.
The shareholders were only bound to look to the interests of the company.
They were not bound to consult or consider Mr. Zuccani's separate or private
interests.
Further, I may say that the alteration of the articles giving the extended
lien was, in my opinion, in no true sense retrospective. The lien given was
not made to take effect before the date of the alteration. It operated only
from and after that date.
Again, the alteration of the articles cannot be impeached as being one not
binding on all shareholders alike. It purports to bind, and does bind, all
the shareholders without exception. An article giving a lien cannot be
objected to as made in favour of or against a special class of shareholders
merely because some shareholders only are or may become indebted to the
company.
Lastly, I may say that the contention that there was anything improper in
the way the alteration of the articles was effected falls to the ground on
examination. It is untrue that the company intentionally waited for the
death of Mr. Zuccani before attempting to alter the articles, with the
object of thereby preventing votes in respect of his shares being used in
considering whether the alteration should or should not be made. Besides, as
a matter of fact, under the articles Mr. Zuccani, if living, could not have
voted, seeing that he was indebted to the company.
*683
I have now dealt substantially with the points raised on behalf of the
respondents, and in the result I can find no good or sufficient ground on
which to hold that the lien given by the amended articles was not good
against Mr. Zuccani's executors; and accordingly I think that the appeal
should be allowed.
Representation
Solicitors: Mayo & Co.; Kerly, Son & Verden.
(G. I. F. C.)
1. [1899] 2 Ch. 40.
2. [1899] 2 Ch. 40.
3. Sect. 50 is as follows: ≥Subject to the provisions of this Act, and to
the conditions contained in the memorandum of association, any company
formed under this Act may, in general meeting, from time to time, by passing
a special resolution in manner hereinafter mentioned≤ - i.e. in s. 51 ã
≥alter all or any of the regulations of the company contained in the
articles of association or in the table marked A in the first schedule,
where such table is applicable to the company, or make new regulations to
the exclusion of or in addition to all or any of the regulations of the
company; and any regulations so made by special resolution shall be deemed
to be regulations of the company of the same validity as if they had been
originally contained in the articles of association, and shall be subject in
like manner to be altered or modified by any subsequent special resolution.≤
4. [1893] 2 Ch. 311.
5. (1874) L. R. 9 Ch. 350.
6. [1897] 1 Ch. 361, 368.
7. [1897] 1 Ch. 361.
8. [1897] 1 Ch. 361.
9. [1896] 1 Ch. 456, 466.
10. (1889) 1 Megone, 385.
11. [1893] 2 Ch. 311.
12. [1897] 2 Ch. 469, 480.
13. (1895) [1899] 2 Ch. 64, n.
14. [1893] 2 Ch. 311.
15. (1824) T. & R. 496, 525; 24 R. R. 108.
16. (1886) 12 App. Cas. 29.
17. [1892] A. C. 281.
18. (1879) 12 Ch. D. 705.
19. [1897] 1 Ch. 361.
20. [1893] 2 Ch. 311.
21. [1895] 2 Ch. 441.
22. [1896] 1 Ch. 466.
23. [1897] 1 Ch. 361.
24. [1896] 1 Ch. 466.
25. 1 Megone, 385.
26. [1896] 1 Ch. 456, 466.
27. (1877) 5 Ch. D. 894.
28. [1897] 1 Ch. 361.