Winding-up priority rights for cumulative preference shares, calls on ordinary shareholders, and no set-off against call liability.
In winding up, 5% cumulative preference shareholders were entitled under the articles to repayment of paid-up capital and arrears of dividend in priority to ordinary A and B shareholders, because the preference terms were read as applying to liquidation as well as going concern dividends. The court also treated the statutory machinery for calls and adjustment of contributories' rights as wide enough to enforce those class priorities, so a call on ordinary shareholders was permissible for that purpose. However, amounts payable to an ordinary shareholder in the character of a preference holder were not a debt available for statutory set-off against the call liability.
Issues: (i) whether the holders of 5% cumulative preference shares were entitled, in winding up, to repayment of paid-up capital and arrears of cumulative dividend in priority to the holders of ordinary A and B class shares; (ii) whether a call could be made on ordinary shareholders for adjustment of the preferential rights of the preference shareholders; and (iii) whether ordinary shareholders who also held preference shares could set off their call liability against amounts payable to them in respect of the preference shares.
Issue (i): whether the holders of 5% cumulative preference shares were entitled, in winding up, to repayment of paid-up capital and arrears of cumulative dividend in priority to the holders of ordinary A and B class shares.
Analysis: The articles conferred on the preference shareholders a fixed cumulative dividend and, on winding up, a priority right to payment of capital and arrears of dividend up to the commencement of winding up, while excluding any further participation in profits or assets. The words relating to arrears of dividend were read as applying to the winding-up situation and not as being confined to dividends declared out of distributable profits while the company was a going concern.
Conclusion: The preference shareholders were entitled in winding up to repayment of paid-up capital and arrears of dividend at 5% in priority to the ordinary shareholders.
Issue (ii): whether a call could be made on ordinary shareholders for adjustment of the preferential rights of the preference shareholders.
Analysis: The statutory provisions empowering the court to make calls and adjust the rights of contributories were held to extend to the adjustment of rights between different classes of shareholders under the memorandum and articles. Since the preferential rights could only be enforced through adjustment of contributories' rights in winding up, a call on the ordinary shareholders was permissible for that purpose.
Conclusion: A call could validly be made on the ordinary shareholders for adjustment of the preferential rights of the preference shareholders.
Issue (iii): whether ordinary shareholders who also held preference shares could set off their call liability against amounts payable to them in respect of the preference shares.
Analysis: The amount payable to preference shareholders in winding up was not treated as a debt due to them in their character as members, but as part of the final adjustment of rights among contributories. It therefore did not fall within the statutory set-off provision permitting set-off of money due to a contributory, except in cases of debt or money due in a form cognisable for set-off.
Conclusion: The ordinary shareholders were not entitled to set off their call liability against the amounts payable to them as preference shareholders.
Final Conclusion: The liquidation rights were construed so that preference shareholders ranked ahead of the ordinary shareholders for capital and cumulative dividend, the court could enforce those rights by calls on the ordinary shareholders, and no set-off was available against the call liability.
Ratio Decidendi: In winding up, the court may construe the articles and apply the statutory machinery for calls and adjustment of contributories' rights so as to enforce class priorities created by the articles, and sums payable by way of final adjustment to members are not necessarily debts available for set-off.
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