Preference shareholders' winding-up participation and reserve capitalisation upheld under the articles, with voting rights confirmed

Preference shareholders were held, on the articles as a whole, to have a rateable right to share in the residual assets on winding up after payment of debts, liabilities, costs, arrears of preference dividend, and repayment of paid-up capital. Article 140 was treated as permitting capitalisation of reserves, including a reserve arising from bona fide revaluation of capital assets, provided the sum could lawfully be distributed and no class rights were infringed. The Court also accepted that the later share subdivision and voting adjustments enlarged the voting entitlements reflected in the declaration, and that the preference rights in the memorandum were not varied.

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Issues: (i) Whether preference shareholders were entitled, on a winding up, to participate rateably with other shareholders in the assets remaining after payment of debts, liabilities, costs, arrears of preference dividend, and repayment of paid-up capital; (ii) whether article 140 authorised capitalisation of reserves including amounts arising from revaluation of capital assets; (iii) whether the voting rights on a poll were as stated in paragraph (a) of question 5.

Issue (i): Whether preference shareholders were entitled, on a winding up, to participate rateably with other shareholders in the assets remaining after payment of debts, liabilities, costs, arrears of preference dividend, and repayment of paid-up capital.

Analysis: The preference rights were treated as fixed by the memorandum and original articles. The expression used in the winding-up clause was construed in context as referring to the fund remaining after external liabilities and winding-up costs, and then after the preferential payments and repayment of paid-up capital. The Court distinguished authorities where the articles made the ordinary shareholders exclusively entitled to undistributed profits while the company was a going concern, and held that the present wording preserved a further participatory right for preference shareholders in the residual fund available on winding up.

Conclusion: The issue was answered in favour of the preference shareholders, who were held entitled to participate rateably in the remaining assets as stated in the declaration.

Issue (ii): Whether article 140 authorised capitalisation of reserves including amounts arising from revaluation of capital assets.

Analysis: Capitalisation was treated as an appropriation of a sum that could be distributed by way of dividend and then applied in paying up shares. The Court held that, as a matter of principle, a reserve arising from a bona fide revaluation of capital assets could be capitalised if the company could lawfully distribute it and if the process did not infringe the preference shareholders' rights. The Court declined to follow the contrary view that unrealised appreciation could never be capitalised.

Conclusion: The issue was answered in favour of the company, and article 140 was held to authorise capitalisation under the heads stated in question 4.

Issue (iii): Whether the voting rights on a poll were as stated in paragraph (a) of question 5.

Analysis: The subdivision of ordinary shares and the later adjustment of voting rights were treated as enlarging, not destroying, the existing rights of the respective classes. The alterations did not vary the preference rights written into the memorandum, and the Court accepted that the later arrangements gave the ordinary and preference shareholders the enhanced voting entitlements reflected in the proposed declaration.

Conclusion: The issue was answered in favour of paragraph (a) of question 5.

Final Conclusion: The company's construction of its articles succeeded on the principal questions, and declarations were made that the preference shareholders had a participatory winding-up right, that the company could capitalise the stated categories under article 140, and that the poll voting rights were as specified in paragraph (a).

Ratio Decidendi: Where the articles of association, read as a whole, confer preference shareholders a right to share in residual assets on winding up beyond repayment of capital and arrears of dividend, accumulated profits not otherwise appropriated remain part of the distributable winding-up fund; and a company may capitalise a bona fide revaluation reserve if the articles permit distributable sums to be capitalised and no class right is infringed.

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