SHAREHOLDERS’ CLAIM

Sun (Auckland), Volume I, Issue 297, 7 March 1928, Page 13

SHAREHOLDERS’ CLAIM

RIGHT TO UNDECLARED DIVIDENDS SUPREME COURT DECISION The rights of preference and of ordinary shareholders in the event of the winding up of a company, to dividends not declared to the preferential shareholders, while the company was a going concern, was the subject of an important judgment delivered in the Supreme Court this morning by Mr. Justice Reed. The case, which concerns a section of the commercial community, was in the nature of an originating summons in the matter of Smeetons, Ltd., in voluntary liquidation. The liquidator, represented by Mr. H. P. Richmond, filed a motion for an order determining the issues in question, and Mr. R. McVeagh appeared for the preference shareholders, and Mr. Hanna for the ordinary shareholders. The nominal capital of the company was £40,000 and consisted of 15,000 cumulative preference shares of £1 each, all of which had been subscribed tor and were fully paid up, and 25,000 ordinary shares, of which 12,600 had been' subscribed for and were fully paid up. There were 95 holders of preference shares and two holders of ordinary shares. On July 4, 1927, the company went into voluntary liquidation. No dividends had been paid in respect of the years ending March 31, 1926, and March 31, 1927, and it was claimed, on behalf of the preference shareholders, that the payment of a dividend to them of 7i per cent, in respect of each of those years was a charge upon the assets of the company payable before any repayment of capital to the ordinary shareholders. This was contested by the ordinary shareholders, and the liquidator asked for an order determining whether the holders of preference shares were entitled to be paid any and if so what moneys by way of dividend or interest oil their said shares for periods during which no dividends were declared by the company. . There having been no special resolution, the terms of the bargain between the company and the preference shareholders was contained in the articles of association, which stated that: (1) The preference shareholders have the right to a fixed cumulative preferential dividend of la per cent: (2) upon a winding up they have a right to repayment of capital in priority to the ordinary shares. His Honour said it was settled law that once liquidation had started no dividend could be declared or paid. , DIRECTORS’ DUTY Pointed attention was directed to the fact that the balance-sheet disclosed a reserve fund of £4,000, and It was claimed that this represented surplus profits and should be available for payment of preferential dividend. The reserve fund was built up in the years preceding 1926 and 1927 and really represented the undrawn profits of the ordinary shareholders which might have been divided among themselves, but which it was considered judicious not to divide so long as the company was carrying on business. The contention was that the directors were guilty of a breach of duty in not recommending the declaration of a dividend in 1926 and 1927, but he failed to see in what the breach of duty consisted. There were losses in each of those years, and prima facie, dividends should only be paid out of profits. It was contended that a dividend should have been declared and paid out of the reserve fund, but the court would not interfere with the discretion of the directors in that respect. ‘‘The preferential shareholders, therefore" concluded his Honour, ‘‘have no claim in respeot of undeclared dividends, nor have they any other claims upon the assets save as provided in Article 30, that is to say, a right to a return of their capital in preference to the ordinary shareholders.”