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creditors. For this purpose, however, it is sufficient that the vote of the Royal Bank should be excluded as (of the trade creditors proper) £3910 voted against, while only £2297 voted for, the compromise, and of the depositors £1300 voted against the scheme.
In Sovereign Life Assurance Co. v. Dodd ( 2 Q.B. 573) the Court of Appeal in England had to consider the effect of section 2 of the Joint Stock Companies Arrangement Act, 1870-a provision similar to section 120 of the Act of 1908. Lord Justice Bowen, at p. 582, said: What is the proper construction of that statute? It makes the majority of the creditors, or of a class of creditors, bind the minority; it exercises a most formidable compulsion upon dissentient, or would-be dissentient, creditors; and it therefore requires to be construed with care, so as not to place in the hands of some of the creditors the means and opportunity of forcing dissentients to do that which it is unreasonable to require them to do; or of making a mere jest of the interests of the minority." In the same case Lord Esher M.R. said, at p. 579: "The Act says that the persons to be summoned to the meeting (all of whom, be it said in passing, are creditors) are persons who can be divided into different classes-classes which the Act of Parliament recognises though it does not define them. This, therefore, must be done: they must be divided into different classes. What is the reason for such a course? It is because the creditors composing the different classes have different interests; and, therefore, if we find a different state of facts existing among different creditors which may differently affect their minds and their judgment, they must be divided into different classes."
In the approximate statement of affairs submitted by the company to its creditors, the Royal Bank of Scotland appear as partly secured creditors for £20,800. From this sum three sums are deducted in respect of the estimated value of certain securities held to the extent of £11,600 by the bank, and to the extent of £1500 by guarantors of the company to the bank, leaving a sum of £7700 in respect of which the bank is treated as an ordinary trade creditor. Under Article 5 of the minute of agreement between the company and its directors and a Mr Hepburn, to whom the company's shares and assets are to be transferred, it is provided: "The second parties will pay to the Royal Bank of Scotland, Aberdeen, the sum of Six thousand pounds sterling (£6000) in full settlement of all claims which the said bank have against them in respect of a guarantee for £12,000 undertaken by them for behoof of said company, and on said sum of £6000 being paid to said bank by the second
parties, the third party will undertake all 2nd Div. further liability to said bank in respect of said La guarantee, and he will also issue to the second Lainiere parties deposits with the company of the value de of 6s. 8d. for every £1 paid by the second parties Roubaix to the said bank in respect of said guarantee.' Anonyme The object and purpose of this provision is to v. Glen secure payment to the Royal Bank of 20s. in the Glove and £ in respect of their whole trade indebtedness. Hosiery Apparently the interest of a creditor in a settlement under which he is to receive 20s. in the £ is different from the interest of a creditor who is only to receive 5s. The company, however, argue that the fact that a creditor may receive from outside sources full payment of his debt does not prevent him from being regarded as an unsecured creditor so far as the company itself is concerned. This may be true enough, and might have justified the Royal Bank voting in a question of compromise along with trade creditors if the compromise was one whereby they were only to receive 5s. in the £ and were to be left, so far as the balance of their claim is concerned, to recourse against the guarantors. That, however, is not the situation upon the face of the agreement. I do not think that it can be said that the bank should be treated, so far as the excess of 5s. in the £ is concerned, as coming in the place of guarantors. These guarantors are not strangers to the company but are directors, and from the documents produced it appears that they have security-whether valid or not may be a question-not only over the reversion of the heritable property but over other assets of the company, as to which there does not appear to me to be any complete or satisfactory disclosure in the figures adduced by the company. It was incumbent on the company to make a full and complete disclosure of the position of the Royal Bank and of the directors who guaranteed the company's indebtedness. This has not been done. I am not satisfied, therefore, that the vote of the Royal Bank ought to have been regarded in considering whether the statutory majority in value of trade creditors voted for the scheme. In this view it is unnecessary to consider whether the depositors and the trade creditors belonged to the same class. I assume that in a winding-up they would have equal rights. It is, however, not without significance that, while the trade creditors are to receive 5s. in the £, the depositors are to have the option under the agreement of receiving this amount of their claim or of obtaining deposits of 6s. 8d. for each £
the deposits being repayable at the end of five years and meantime carrying interest at the rate of 5 per centum per annum. Presumably the option has some value, and it is not clear that the objection to such differential
themselves. For the purposes of the present application it is sufficient that the compromise appears to be open to objections which the dissentient creditors may reasonably take to it. I think, therefore, that the compromise ought not to be approved, and that an order for windingup the company ought to be pronounced.
Lord Ormidale.—I concur with Lord Hunter's opinion, which I have had an opportunity of reading, and I have little to add. I rest my own opinion that the proposed compromise or arrangement should not be sanctioned mainly on the ground that, in equity, no effect should be given to the vote of the Royal Bank as an unsecured trade creditor to the extent of £7700. It may be that technically, as in a question with the company, the claim of the bank is not fully secured, and that the bank was properly entered in the class of trade creditors to the
Roubaix On the assumption that I am wrong in conAnonyme sidering that the vote of the Royal Bank ought v. Glen to have been excluded, I think that there are Glove and present in this case circumstances which would Hosiery justify the Court in refusing its approval to the Co. Ltd. proposed scheme. Even after there has been November 7, compliance with the statutory requirements as to consents, the Court has to consider "whether the scheme is a reasonable one or whether there is any reasonable objection to it, or such an objection to it as that any reasonable man might say that he could not approve of it." In their objections to the arrangement the objecting creditors have stated circumstances which appear to have some apparent force, though I am far from saying that they are conclusive. They point to the special treat-extent it was. But it is not enough for the ment meted out to the Royal Bank, to the statutory prerequisites to be complied with if absence of explanation as to the position of the Court is satisfied, on a careful scrutiny of the security given to the directors who guaran- the whole situation, that it would not be just teed the advances made by the bank, and to or equitable to allow the scheme to go through. the apparent granting of preferences after the Now, we know that the bank in truth or, perdirectors had indicated that none would be haps I should say, in the result, whatever given. These matters may be susceptible of happens, will be paid 20s. in the £, while the complete explanation, but I have been unable remaining creditors in the same class will get no to find that this is contained in the averments more than 5s. in the £ under the scheme. In made by the company. As I understand it, approaching the consideration of the scheme, the objecting creditors contend that the bank therefore, the mental attitude of the bank must or the directors did not obtain valid security be entirely different from that of the other to the extent claimed by them. Sanction of the creditors. Its attitude must be one of comproposed arrangement would preclude investiga-plete indifference, it being quite immaterial tion of this matter.
In recommending the Court to approve of the proposed compromise the reporter appears to me to have attached too great importance to the views of the directors. He says: The directors of a company may be presumed to have the best knowledge of its concerns and what is the best course to follow in any given circumstances, and in the present case, with that knowledge and that of local conditions, they have formulated a scheme of arrangement which they consider the best that can be made." I do not think that directors of a company who represent the debtors are necessarily the best judges of what creditors should accept in the way of compromise of claims which the debtors cannot pay in full. The terms of the proposed compromise appear to me to disclose the existence, or possible existence, of adverse interests as between the directors, on the one hand, and the trade creditors, on the other hand.
It is, of course, matter of speculation whether or not the dissentient creditors will benefit by opposing the proposed compromise and putting the company into liquidation. This is a matter upon which they must make up their minds for
to it whether the dividend be 5s. or 5d. The guarantors will make up the difference between the dividend, whatever it may be, and 20s. How, then, can it be said that the bank has a common interest with the other trade creditors, for the latter might quite well prefer to risk a liquidation in the hope of securing a larger payment than they are offered. In the Sovereign Life Assurance Co. v. Dodd ( 2 Q.B. 573), Lord Justice Bowen, at p. 583, in determining what meaning must be given to the term
class," says this: "It must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest." In the same case Lord Esher M.R., at p. 580, in stating the reason why creditors are divided into different classes, says this: 'It is because the creditors composing the different classes have different interests; and, therefore, if we find a different state of facts existing among different creditors which may differently affect their minds and their judgment, they must be divided into different classes."
Accordingly, even though the statutory formalities have been satisfied, it is not in
cumbent on the Court to treat the voting as conclusive when it appears that, in reality, the largest trade creditor, on whose vote the result depended, was not, in any reasonable sense, a fair representative of the class and had no practical interest in common with the other creditors in the class. If the consideration to which I have referred is not sufficient of itself to warrant the Court in holding that the scheme should not be sanctioned, it is amply sufficient if taken along with the other considerations referred to by Lord Hunter, with all of whose observations I entirely agree.
Lord Anderson.-I am unable to agree with the judgment proposed, as I am against the objectors to the scheme on both of the points relied on by them.
Taking the second point first, namely, that the scheme is inequitable and unreasonable, and therefore should not be sanctioned by the Court, I am clearly of opinion that the objectors have failed to substantiate this ground of attack. The bona fides of the scheme is not challenged; all that is said is that the scheme makes an unfair differentiation between different classes of creditors. Now, I am not prepared to hold that a mere differentiation of treatment between different classes of creditors will warrant the Court in refusing to sanction a scheme of compromise. It may be necessary, in order to get a scheme adopted, that it should make different proposals to different classes of creditors. It seems to me that there must be something more than differentiation of treatment-to wit, unfair or unreasonable preference of one class of creditors over another class. In the present case I am not prepared to hold, as maintained by the objectors, that depositors obtain more favourable terms under the scheme than trade creditors. I think these two classes are treated in practically the same way, the option given to the depositors being a choice between two alternatives which, in the opinion of those who offer the option, and, in fact, are of equal worth. But even if there be differentiation of treatment as between those two classes, it does not appear to me to be so unreasonable or inequitable as to justify the Court in rejecting the scheme. As to the Royal Bank, there is no doubt that they are in a much more favourable position than any other class of creditor, but this favourable position is ensured, not by the scheme, but by reason of the fact that the bank are so secured that they will receive 20s. in the £. Whether the scheme is adopted or not, the bank, assuming the solvency of the guarantors, are bound to get 20s. in the £. This circumstance, then, has no bearing on the question of the reasonableness or unreasonableness of the proposals made by the scheme.
On this part of the case it is manifest that the 2ND DIV. onus probandi is on the objectors. It is for them La to satisfy the Court that a scheme ex hypothesi Lainiere approved by the statutory majority of the de creditors ought not to be sanctioned. In my Societe opinion the objectors have not succeeded in Anonyme discharging this onus, and therefore this ground v. Glen of challenge of the scheme entirely fails. There is greater difficulty in connection with Hosiery the other contention of the objectors—to wit, that the statutory conditions prescribed by November 7, section 120 of the Companies (Consolidation) Act, 1908, have not been satisfied.
As to the matter of proxies, it is plain that the chairman gave a wrong decision. He evidently thought that Article 65 of Table A of the Act of 1908 applied to creditors' proxies, whereas that article deals solely with votes of members of the company. But this error of the chairman did not affect the result if the vote of the Royal Bank was valid. Even if the rejected proxies had been admitted, the scheme would have received the necessary statutory majority if the bank were entitled to vote.
Section 120 suggests that, in the appropriate circumstances, creditors should vote in classes. The interlocutor of the Court, appointing a meeting of creditors to be held, makes no attempt to divide the creditors of this company into classes; and rightly so, because the Court cannot know, ab ante, what classes of creditors will attend a meeting. It is for the chairman of a creditors' meeting, under proper advice, to segregate the creditors into classes for the voting purposes of section 120. No general statement, in my opinion, can be made as to when this segregation must be made, but this proposition seems to be unimpeachable-that it is improper for a creditor whose debt is wholly secured, and who has therefore no interest in the assets of the debtor, to vote as to the distribution of those assets. In the present case, for reasons which I have already adduced, I am unable to hold that there was any impropriety or invalidity in the trade creditors and the depositors voting as one class. The sole difficulty in the case is created by the vote of the Royal Bank. Now, as I have pointed out, the bank, if the guarantors are solvent, are completely secured. Their claim (in round figures £20,000) was secured to the extent of £13,000 by realisable securities, heritable and moveable. As to the balance of £7000, the bank had the personal security of the guarantors. Now, if there had been nothing more in the case than that, the bank would, according to settled practice, have been entitled to claim against the general assets of the debtor in respect of the guaranteed balance, draw a dividend as a trade creditor in reference to this sum, and exact any deficiency from the guarantors. The company is the principal debtor of the bank,
2ND DIV. the guarantors being only liable subsidiarie as cautioners. The bank are accordingly entitled, Lainiere if not bound, to discuss, in the first instance, the de company before having recourse against the Roubaix guarantors. In effect, the claim made, in the Societe case supposed, is one in relief of the guarantors. v. Glen But then, say the objectors, there is more in the Glove and present case than that. The guarantors, it is Hosiery alleged, have abstracted from the company's Co. Ltd. assets a sufficient quantity of moveable property November 7, to cover any payment which they, as guarantors, may have to make to the bank. In other words, the objectors maintain that the whole claim of the bank is secured, directly or indirectly, by the assets of the company. If this were so, then undoubtedly the bank's vote would be invalid. Now, it is this part of the case which is left so obscure, on the documents and on the statements of counsel, that it seems to me to be unsafe to make it a ground for rejecting a scheme which, ex facie, has the necessary statutory sanction and which has received the approval of the official reporter. The conclusions of the reporter are, doubtless, not sacrosanct, but they are not to be discarded save on cause shewn; otherwise there would be little use in remitting a case to a reporter. There is no doubt that the guarantors had obtained some security (see Article 3 (d) of the proposed scheme of arrangement appended to the petition of the company of 16th July 1925). But I find myself entirely in the dark as to two matters: (1) As to what was the value of this security; and (2) as to whether, under the proposed scheme of arrangement, the property held by the guarantors was or was not to be returned to the assets of the company to be held for behoof of certain creditors, including the guarantors themselves if they should be called on to pay the bank. Now, whose duty was it to make these matters plain? I think this duty lay on the objectors. No doubt there was an initial onus on the supporters of the scheme to satisfy the Court that the statutory conditions of voting had been fulfilled. That onus, in my opinion, was discharged when it was established, ex facie of the chairman's report, that these conditions had been fulfilled, and when the supporters of the scheme succeeded in getting it approved by the official reporter. In other words, a prima facie case for the scheme had been made out. Thereafter, as it seems to me, the onus shifted to the objectors, and I am unable to hold that they have made it plain that the bank were not entitled to vote in respect of the sum of £7000 or of such part thereof as would result in the statutory conditions having been unfulfilled.
I accordingly think that the objectors have failed to establish their second ground of challenge of the scheme of arrangement, which, therefore, ought to be sanctioned by the Court.
I reach this conclusion the more readily as I think that the proposals of the scheme would be far more advantageous to all concerned-creditors, depositors, and employees-than the realisation and distribution of the assets in a liquidation.
The Lord Justice-Clerk (Alness).—I concur with Lord Hunter.
On 23rd May 1925 La Lainière de Roubaix, as trade creditors to the amount of £675, 9s. 10d. of the Glen Glove and Hosiery Co. (hereinafter called "the company"), presented a petition craving the Court to order that the company should be wound up, and to appoint an official liquidator. William Archibald Son & Co., as trade creditors of the company to the amount of £1331, 2s. 7d., support the prayer of the petition, and have been sisted as parties to the process. On 6th June 1925 the company lodged answers to the petition of La Lainière de Roubaix resisting its prayer, and indicating that a scheme of arrangement would in due course be submitted to the Court for approval, which would avoid the necessity of liquidation. On 16th July the company presented a petition to the Court praying for authority to call and hold meetings of the creditors and the shareholders of the company for the purpose of sanctioning a scheme of arrangement then proposed by them. The Court pronounced an interlocutor ordering these meetings to be held, and directing the chairman of the meetings to report to the Court. The meetings were duly held, and the chairman, as enjoined by the Court, reported the result of the meetings. La Lainière de Roubaix and William Archibald Sons & Co., as creditors of the company, tabled objections to the report, and to these objections the company lodged replies. The Lord Ordinary on the Bills remitted the case to a reporter, and directed him to enquire into the regularity of the proceedings, and the facts and circumstances set forth in the petition, the report of the chairman, and the objections and replies, and to report. The reporter (Mr Winchester, W.S.) has now lodged his report, which suggests approval of the scheme of arrangement, and we have heard parties on that report, and the various documents referred to in it. Let me say, in parenthesis, that, while the report of a reporter is always deserving of respect, and always receives it from the Court, the report is by no means conclusive on the merits of the case-particularly where, as here, it is manifest that the arguments of parties have developed in a manner which renders them quite different from the arguments submitted to the reporter.
Two questions arise for consideration: (1) Have the statutory formalities which are a prerequisite to the sanction of a scheme such as
this been complied with? If they have not, that is an end of the matter. If they have, the Court must consider the further question, which is (2) Is the scheme proposed one which, on its merits, the Court ought to sanction? (1) On the first question, the compearing creditors of the company maintain that the statutory requirements have not been complied with in respect (a) that, at the meeting of creditors, the chairman rejected certain proxies which he ought to have admitted; and (b) that the creditors of the company voted en masse, whereas they should have been divided for voting purposes into three groups, viz.: (A) Secured creditors; (B) trade creditors; depositors.
As regards (a) it appears from the report of the meeting furnished by the chairman that he disallowed certain proxies because they had not been lodged at the registered office of the company at least forty-eight hours before the date and hour of the meeting. For the course adopted by the chairman it appears to me that there is no statutory or other sanction. It seems likely that the chairman was misled into giving this ruling because he thought that paragraph 65 of Table A in the First Schedule appended to the Companies (Consolidation) Act, 1908, applied to these proxies. But that provision, as is evident from the heading of the fasciculus of clauses in which it appears, applies only to the votes of members-i.e. shareholders of the company, and it has no application to the votes of creditors. In point of fact, there is no provision of a similar, or indeed of any kind with regard to the votes of creditors of the company. The fact that express provision is made regarding the timeous lodging of the votes of members of the company, and that there is no corresponding provision with reference to the votes of creditors of the company, is highly significant. The differential statutory treatment of these two classes suggests that proxies of creditors may be lodged at any time. However that may be, it seems plain that there is no statutory or other requirement to the effect that proxies by creditors shall be lodged fortyeight hours before the meeting of creditors; that the chairman thought that there was; and that, in any event, his ruling was erroneous. It is said that the rejected proxies would not affect the result of the vote. But that, as Lord Hunter has pointed out, depends on whether all the creditors who voted had a right to vote, and to have their votes counted in computing the necessary three-fourths majority. I must therefore consider whether all the creditors who voted at the meeting were entitled to do so.
(b) Here the case for the objecting creditors is that, inasmuch as (1) the Royal Bank of Scotland are, under the proposed arrangement,
to receive 20s. in the £; (2) the trade creditors, 2ND DIV. strictly so called, are offered 5s. in the £; and La (3) the shareholders have the option of receiving Lainiere 5s. in the £ now, or 6s. 8d. in the £ if they con- de sent to allow their money to remain at interest Societe with the company for five years, these three Anonyme classes ought to have voted on the proposed v. Glen scheme separately-not, as they did, together Glove and and that, if they had voted separately, the Hosiery requisite three-fourths majority would not have been obtained.
As regards the alleged difference between the position of the last two classes of creditors, I am of opinion that the argument of the objectors is not well founded. Their counsel was unable to point to anything in the Act or in the decisions following upon it which warrants, far less enjoins, us to disintegrate two classes such as these for the purposes of voting upon a scheme of arrangement. It seems to me that the fact that the company offered the depositors a choice between 5s. and 6s. 8d., subject to the conditions which I have stated, strongly suggests that there is no substantial difference between the two offersno obvious advantage connected with the one as distinguished from the other-and that the idiosyncracy of the creditor was considered rather than any definite advantage accruing to him by reason of acceptance of the one alternative as compared with the other. However that may be, I am meantime considering a failure by the company to comply with the statutory formalities, and it is sufficient to say that there is, in my opinion, nothing before us to warrant the conclusion that a failure to segregate these two classes of creditors for the purpose of voting on the scheme infers a breach of any requirement of the law-statutory or otherwise. This objection accordingly fails.
When, however, one comes to the position of the Royal Bank vis-à-vis of the other creditors of the company, the matter is not so simple. The objecting creditors urge that section 120 of the Companies Act, 1908, contemplates that creditors should in certain circumstances vote in classes that, inasmuch as the bank are under the scheme to receive 20s. in the £, while the other creditors are offered only 5s. or 6s. 8d. in the £, the bank should not have voted in the same class with the other trade creditors, and that, if the bank disappears as a voting creditor, the necessary three-fourths majority of creditors in favour of the scheme would not have been obtained.
Here one comes to the kernel of the case. decision, whether on the first or the second ground urged by the objecting creditors, seems to me to turn on the position of the bank. That position is somewhat obscure on the documents before us. This, at any rate, is plain: that the bank voted at the meeting on a debt of £7700 as