Ultra vires capital reduction: guarantee clause void where it created creditor rights beyond preference shareholder entitlements.

Clause 7 of a deed of guarantee was beyond the company's powers and void because it would let the guarantor, on paying the trustee for preference shareholders, sue the company as a creditor and obtain rights different from those attached to preference shares. That mechanism was treated as an impermissible reduction of capital rather than a valid payment for the company's objects. The clause was not accepted as true subrogation, although any separate claim to subrogation for preference dividend payments or winding-up rights was left open.

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Issues: Whether clause 7 of the deed of guarantee, which enabled the guarantor to recover from the company sums paid to the trustee for preference shareholders, was binding on the company or was ultra vires and void.

Analysis: The clause would permit the guarantor, immediately upon payment to the trustee, to sue the company as if he were a creditor and thereby obtain rights different from those of a preference shareholder. That arrangement would effectively reduce the company's capital otherwise than by proper expenditure on the objects of the company and was inconsistent with the principle that a company cannot, without authority, make payments in reduction of capital. The clause was not treated as a true case of subrogation, though the possibility of subrogation to preference shareholders' rights in respect of dividend payments or winding-up rights was left open.

Conclusion: Clause 7 was wholly ultra vires and void. The declaration did not prejudice any separate claim to subrogation in respect of preference dividend payments or winding-up rights.

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