MCRUER,
C.J.H.C.:—This
is
an
application
by
the
executors
of
the
estate
of
the
late
Henry
James
McIntyre,
for
advice.
Three
questions
are
propounded
for
the
opinion
of
the
Court.
They
are
as
follows:
“1.
Whether
upon
the
true
construction
of
the
said
Will
and
in
the
events
which
have
happened,
the
sum
of
$13,575
being
the
sum
received
by
the
Trustee
upon
the
redemption
of
13,575
non-cumulative
5%
Redeemable
Preference
Shares
of
The
Hamilton
Jockey
Club
(Limited)
which
were
issued
as
a
stock
dividend
by
the
said
Company
to
the
Trustee
on
April
9,
1951,
is
corpus
or
income
in
the
hands
of
the
Trustee
for
the
purpose
of
administering
the
said
Estate.
2.
Whether
upon
the
true
construction
of
the
said
Will
and
in
the
events
which
have
happened,
the
sum
of
$3,000
being
the
sum
received
by
the
Trustee
upon
the
redemption
of
3,000
non-
cumulative
5%
Redeemable
Preference
Shares
of
The
Hamilton
Jockey
Club
(Limited)
which
were
issued
as
a
stock
dividend
by
the
said
Company
to
the
Trustee
on
October
25,
1951,
is
corpus
or
income
in
the
hands
of
the
Trustee
for
the
purpose
of
administering
the
said
Estate.
3.
Whether
upon
the
true
construction
of
the
said
Will
and
in
the
events
which
have
happened,
the
sum
of
$26,250
being
the
sum
received
by
the
Trustee
upon
the
redemption
of
26,250
non-cumulative
5%
Redeemable
Preference
Shares
of
The
Hamilton
Jockey
Club
(Limited)
which
were
issued
as
a
stock
dividend
by
the
said
Company
to
the
Trustee
on
October
26,
1951,
is
corpus
or
income
in
the
hands
of
the
Trustee
for
the
purpose
of
administering
the
said
Estate.”
The
Hamilton
Jockey
Club
(Limited)
was
incorporated
under
the
Ontario
Compames
Act
in
the
year
1893.
On
March
9,
1936,
the
authorized
capital
was
$500,000
divided
into
5,000
shares
of
a
par
value
of
$100.00
each,
of
which
4,850
shares
were
issued
at
that
date.
The
fiscal
year
of
the
Club
ended
on
October
31
in
each
year
and
the
balance
at
the
credit
of
the
Profit
and
Loss
Account
on
October
31,
1935,
was
$9,696.98.
On
October
31,
1939,
this
had
been
increased
to
$61,236.54.
On
December
1,1947,
pursuant
to
the
provisions
of
the
Income
War
Tax
Act
the
directors
of
the
Club
elected
to
pay
a
tax
of
$9,185.46
on
the
aforementioned
balance
and
declare
a
dividend
of
$52,051.08
for
division
pro
rate
among
the
shareholders
of
the
Club.
This
dividend
was
paid
on
December
20,
1947.
In
the
month
of
February,
1948,
the
Company
sold
‘‘The
Jockey
Club
Hotel’’
for
$250,000.00
realizing
a
profit
on
the
sale
of
$169,900.38.
This
amount
was
carried
into
the
balance
sheet
of
the
Company
as
a
liability
and
shown
‘‘Capital
Surplus
(Re-
Sale
of
Hotel)
$169,900.38”.
On
October
30,
1950,
the
Directors
of
the
Company
by
by-law
authorized
an
application
to
the
Lieutenant-Governor
of
Ontario
for
Supplementary
Letters
Patent
for
the
increase
of
the
capital
of
the
Company
by
the
creation
of
500,000
5%
non-cumulative
redeemable
preference
shares
of
a
par
value
of
$1.00
each
ranking
in
priority
to
the
common
shares
of
the
Company.
The
bylaw
was
ratified
and
confirmed
by
the
shareholders
on
December
4,
1950.
In
accordance
with
the
application
Supplementary
Letters
Patent
were
issued
on
February
9,
1951,
and
certificates
for
the
preference
shares
which
were
ultimately
issued
were
in
the
form
set
out
in
the
material.
The
respective
rights
of
the
common
and
preference
shares
as
endorsed
on
the
back
of
the
certificate
included
paragraphs
*
‘
(4)
In
the
event
of
the
winding
up
or
the
dissolution
of
the
Company
the
preference
shares
shall,
in
preference
and
priority
to
any
payment
on
the
common
shares,
be
entitled,
out
of
the
assets
of
the
Company
available
for
distribution
to
shareholders,
to
the
payment
in
full
at
par
of
the
amount
paid
up
on
the
preference
shares,
together
with
the
amount
of
all
dividends
declared
thereon
and
unpaid,
but
shall
not
be
entitled
to
any
further
participation
in
any
assets
:
’
’
and
°
(5)
The
directors
may
at
any
time
and
from
time
to
time
redeem
the
whole
or
any
portion
of
the
preference
shares
by
compulsory
redemption
at
a
price
per
share
equal
to
the
amount
paid
thereon,
together
with
the
amount
of
all
dividends
declared
thereon
and
unpaid;
in
the
event
that
less
than
all
the
outstanding
preference
shares
are
being
redeemed,
the
shares
to
be
redeemed
shall
be
selected
pro
rate.”
At
a
meeting
of
the
directors
of
the
Company
held
on
April
2,
1951,
a
resolution
was
passed
which
recited
that
the
Club
had
tax
free
undistributed
earned
income
as
of
October
31,
1949,
and
that
redeemable
non-cumulative
preference
shares
of
a
par
value
of
$1.00
each
had
been
created—
“And
Whereas
it
is
desirable
to
declare
a
stock
dividend
to
exhaust
the
balance
of
the
capitalized
earned
surplus
of
the
Club
after
deducting
the
15
%
tax
payable
to
the
Federal
Government.
A
stock
dividend
of
shares
of
the
preferred
stock
of
the
Club
of
the
par
value
of
$1.00
each
representing
$18.10
per
common
share
be
declared
and
paid
as
of
April
9,
1951
and
that
such
shares
of
the
Preferred
Stock
of
this
Club
be
issued
and
distributed
as
a
stock
dividend
to
the
holders
of
Common
shares
of
the
Club
pro
rata
in
accordance
with
their
respective
holdings
of
record
on
the
books
of
the
Club
at
the
close
of
business
on
April
7,
1951.
Provided,
however,
that
no
fractional
share
of
preferred
stock
shall
be
issued.’’
(Italics
are
mine.)
At
the
same
meeting
a
resolution
was
passed
that
the
Club
redeem
all
the
issued
and
outstanding
fully
paid
preference
shares
at
their
face
value
as
of
April
9,
1951,
and
in
accordance
with
the
terms
of
redemption
of
the
said
preference
shares.
On
October
11,
1951,
the
Company’s
auditors
made
a
report
to
the
directors,
the
opening
paragraph
of
which
reads
as
follows:
‘“We
have
been
asked
by
Mr.
J.
J.
Conway,
your
Managing
Director,
to
report
to
you
on
the
possibilities
which
exist
of
making
a
distribution
to
the
shareholders
of
your
Company
of
the
Capital
Surplus
now
standing
on
the
books
of
the
Company
at
$172,551.07.”’
The
report
proceeds
to
outline
the
steps
required
to
be
taken
at
the
least
cost
to
the
Company
and
its
shareholders,
to
effect
the
distribution
and
points
out
that
the
principal
point
to
bear
in
mind
is
that
in
order
to
place
a
Capital
Surplus
in
the
hands
of
the
shareholders
of
a
Company
tax
free,
the
Earned
Surplus
Account
of
the
Company
must
either
have
a
nil
or
a
debit
balance,
since
if
there
is
any
undistributed
Earned
Surplus
on
hand
at
the
time
a
Company
proposes
a
distribution
of
Capital
Surplus
then
in
view
of
the
Tax
Department,
the
Earned
Surplus
is
distributed
first,
and
only
the
amount
by
which
the
distribution
exceeds
the
Earned
Surplus
is
deemed
Capital
Surplus.
The
report
estimates
that
the
balance
of
the
Earned
Surplus
available
for
distribution
at
the
end
of
the
fiscal
year
of
1951
would
be
$63,919.83
and
states
that
this
balance
must
be
vacated
before
any
tax
free
distribution
of
Capital
Surplus
can
be
made
to
the
shareholders.
In
the
computation
a
proposed
annual
dividend
of
$24,250.00
was
deducted,
a
sum
of
$3,638.00
being
a
payment
of
15%
tax
on
an
amount
equal
to
the
dividend
paid
in
the
fiscal
year
ending
in
1950,
and
a
transfer
to
tax
free
surplus
of
$20,612.00,
leaving
a
balance
of
$15,419.83
which
would
require
to
be
paid
to
the
shareholders
as
a
cash
dividend
if
the
Earned
Surplus
Account
was
to
be
cleared.
The
payment
of
15%
tax
and
the
transfer
to
Tax
Free
Surplus
were
made
because
the
Company
had
elected,
under
the
provisions
of
the
Income
Tax
Act
to
pay
tax
on
its
undistributed
surplus
at
the
end
of
the
1949
fiscal
year.
The
report
and
seven
schedules
attached
to
it
show
the
steps
to
be
taken
by
the
Company—
Schedule
“A”
outlined
the
amount
required
for
the
payment
of
the
annual
dividend,
the
proposed
payment
of
15%
tax
and
the
proposed
transfer
to
the
Tax
Free
Surplus,
and
showed
a
balance
required
to
be
distributed
as
a
special
dividend
of
$15,419.93,
so
as
to
reduce
the
Earned
Surplus
to
nil.
Schedule
‘‘G’’
was
entitled
“Capital
Surplus
Adjusted
for
the
Purpose
of
Distribution
to
Shareholders’’
and
showed
a
balance
of
$172,551.07.
Schedule
“B”
is
entitled:
‘‘Proposed
Distribution
of
Capital
Surplus’’.
The
Auditors’
statement
is:
“Provided
that
the
steps
outlined
in
Schedule
‘A’
have
been
taken
before
October
31,
1951,
the
Capital
Surplus
of
$172,-
551.07
may
be
distributed
to
the
shareholders
by
way
of
a
cash
or
a
stock
dividend,
which
will
be
tax-free
if
made
before
October
31,
1951.
If
made
on
or
after
November
1,
1951,
the
shareholders
will
be
taxable
to
the
extent
that
profits
are
earned
in
the
year
ended
October
31,1952.”
(Italics
are
mine.)
Schedule
“
F
”
sets
out
the
adjustments
of
the
Earned
Surplus
Account
for
the
purpose
of
distribution
of
Capital
Surplus.
The
minutes
of
the
Company
record
that
on
October
24,
1951,
the
Board
of
Directors
had
placed
before
it
the
report
of
the
Company’s
auditors
‘‘
which
dealt
with
a
method
of
distributing
to
the
shareholders
the
Capital
Surplus
on
the
books
of
the
Company
in
the
sum
of
$172,041.07’’.
(sic?)
By
resolution
of
the
Board
of
Directors
the
auditors’
report
was
made
part
of
the
Minutes
of
the
Meeting,
and
it
was
resolved
that
the
method
of
procedure
outlined
in
the
auditors’
report
be
followed.
The
Company
elected
to
pay
in
accordance
with
Section
95(a)
of
the
Income
Tax
Act,
a
15%
tax
on
its
undistributed
income
of
$24,250.
A
stock
dividend
of
19,400
shares
of
preference
stock
of
the
Company
of
a
par
value
of
$1.00
per
share
was
declared
and
a
resolution
provided
that
the
shares
be
issued
and
distributed
‘‘as
a
stock
dividend
to
the
holders
of
common
shares’’
pro
rata
in
accordance
with
their
respective
holdings
at
the
close
of
business
on
October
24,
1951.
A
further
resolution
provided
that
a
proper
notice
of
redemption
of
19,400
shares
of
preference
stock
of
the
Club
be
sent
to
all
shareholders
of
record
as
of
the
close
of
business
on
October
24,
1951.
A
cash
dividend
of
$7.50
per
share
was
declared
on
the
outstanding
common
shares
of
the
Company
as
of
that
date.
A
final
resolution
reads
as
follows
:
“A
stock
dividend
of
169,750
shares
of
preference
stock
of
this
Club
of
the
par
value
of
$1.00
per
share
be
and
the
same
is
hereby
declared
and
that
the
said
169,750
shares
of
preference
stock
of
this
Club
be
issued
and
distributed
as
a
stock
dividend
to
the
holders
of
common
shares
of
this
Club,
pro
rata,
in
accordance
with
their
respective
holdings
of
common
stock
of
record
on
the
books
of
this
Club
at
the
close
of
business
on
October
25,1951.”
(Italics
are
mine.)
It
is
to
be
noted
that
there
is
nothing
in
the
minutes
of
this
meeting
that
gives
any
indication
as
to
when
or
how
these
shares
might
be
redeemed.
Prior
to
May
27,
1952,
negotiations
had
been
carried
on
with
the
directors
of
the
Company
which
culminated
in
the
purchase
by
the
Ontario
Jockey
Club
(Limited)
of
all
the
issued
and
outstanding
common
shares
of
the
Company
at
a
price
of
$275.00
per
share.
The
minutes
of
a
meeting
of
the
directors
held
on
May
27,1952,
show
that
‘‘the
Chairman
advised
the
Board
of
the
informal
discussions
held
with
respect
to
the
issued
and
outstanding
preference
shares.’’
The
Secretary
put
before
the
Board
a
statement
showing
the
requirements
of
the
Club
with
respect
to
the
cash
projection
to
the
end
of
the
second
race
meet
for
the
year.
The
minutes
show
this
statement
had
been
submitted
to
the
Manager
of
the
Canadian
Bank
of
Commerce
and
that
the
Manager
had
advised
that
he
would
authorize
credit
on
the
Company’s
note
in
the
amount
of
$175,000
for
the
redemption
of
the
preferred
shares,
and
a
further
credit
in
the
sum
of
$150,000
to
$200,000
for
requirements
of
the
race
meeting
on
an
open
account.
The
minute
goes
on
to
state
:
“It
was
felt
that
the
Executive
Committee
could
determine
the
method
of
financing
both
redemption
of
the
preferred
shares
and
the
two
race
meets.”
This
was
followed
by
the
following
minute
:
“It
was
moved
by
Mr.
Sherman
and
seconded
by
Mr.
R.
P.
Isbister
and
resolved
that
the
169,750
Redeemable
Preference
Shares
of
the
Club
be
redeemed
as
of
May
27,
1952,
and
that
proper
notice
of
the
redemption
of
the
said
shares
be
sent
to
all
Shareholders
of
record
on
the
books
of
the
Club
at
the
close
of
business
on
May
27,
1952.”
The
notice
was
sent
out
accordingly,
and
the
shares
were
redeemed.
Pursuant
to
the
resolutions
passed
at
the
respective
directors’
meetings,
on
December
20,
1947,
the
trustee
received
from
the
company
a
tax
free
dividend
of
$8,049.08,
which
was
paid
out
of
the
undistributed
income
of
the
company
on
hand
at
October
31,
1939.
On
April
9,
1951,
the
trustee
received
from
the
company
certificates
in
the
form
I
have
mentioned
for
13,575
non-cumula-
tive
5%
preference
shares
of
a
par
value
of
$1.00
each
as
a
stock
dividend,
which
shares
were
immediately
surrendered
for
redemption
at
$1.00
per
share.
The
notice
from
the
company
accompanying
the
stock
dividend
recites
the
by-law
passed
on
December
4,
1950,
providing
for
the
stock
dividend
and
the
motion
made
to
redeem
the
stock
forthwith.
The
notice
reads
in
part
as
follows:
44
NOTICE
is
hereby
given
that
The
Hamilton
Jockey
Club
(Limited)
(Herinafter
called
‘the
Club’)
will
on
and
after
Monday,
April
9,
1951,
redeem
the
whole
of
the
presently
outstanding
5%
Non-cumulative
Preference
Shares
of
the
par
value
of
$1.00
each
in
the
Capital
Stock
of
the
Club
(hereinafter
called
the
‘Preference
Shares’)
by
payment
to
the
holders
thereof
at
their
face
value
of
$1.00
per
share.’’
The
shares
were
immediately
surrendered
for
redemption
and
the
trustee
received
$13,575.
On
October
27,
1951,
the
trustee
received
from
the
company
a
letter
addressed
to
the
shareholders
of
the
company
dated
October
25,
1951,
enclosing
3,000
non-
cumulative
5%
preference
shares
of
a
par
value
of
$1.00
each
as
a
stock
dividend.
A
notice
accompanying
an
enclosed
cheque,
a
preferred
share
certificate
and
notice
of
redemption
reads
in
part
as
follows:
‘Your
Directors
have
been
endeavouring
to
place
in
the
hands
of
the
Shareholders,
free
from
personal
income
tax,
a
capital
surplus
which
has
been
chiefly
derived
from
the
capital
gain
obtained
at
the
time
of
the
sale
of
the
Jockey
Club
Hotel.
To
do
this
it
is
necessary
to
wipe
out
entirely
the
earned
surplus.
To
that
end
your
Directors
have
elected
to
pay
a
15%
tax
to
the
Government
and
to
declare
a
preferred
stock
dividend
of
the
value
of
$4.00
for
each
common
share
held
by
you,
which
is
non-taxable
income
to
you.
’
’
In
addition
to
the
stock
dividend,
a
dividend
of
$7.50
per
share
on
the
common
stock
was
paid
at
the
same
time.
The
accompanying
letter
states:
“This
represents
the
usual
dividend
of
$5.00
per
share
plus
$2.50
per
share
which
latter
amount
was
sufficient
to
wipe
out
the
balance
of
the
earned
surplus.
This
dividend
represented
by
the
enclosed
cheque
is
taxable
income
to
you.
Shortly
you
will
be
advised
of
your
Directors’
actions
in
placing
in
your
hands
the
capital
surplus
of
the
Club
by
way
of
a
further
preferred
stock
dividend.”
Attached
to
the
letter
to
shareholders
was
a
notice
of
redemption
of
the
preferred
shares
which
reads
as
follows:
4
Notice
is
hereby
given
that
The
Hamilton
Jockey
Club
(Limited)
(hereinafter
called
‘the
Club’)
will
on
October
24,
1951,
redeem
the
whole
of
the
outstanding
5%
Non-cumulative
Redeemable
Preferred
Shares
of
the
par
value
of
$1.00
each
in
the
capital
stock
of
the
Club
(hereinafter
called
the
4
Preferred
Shares’)
of
date
of
issue
October
24,
1951,
by
payment
to
the
holders
thereof
the
par
value
thereof.
The
Club
will
pay
the
redemption
price
to
or
to
the
order
of
the
registered
holders
of
the
said
Preferred
Shares
on
presentation
and
surrender
of
the
certificates
for
such
shares
at
the
office
of
the
Club,
21
Main
Street
East,
Hamilton,
Ontario.
And
notice
is
also
given
that
from
and
after
October
24,
1951,
the
said
Preference
Shares
shall
cease
to
be
entitled
to
dividends
and
the
holders
thereof
shall
not
be
entitled
to
any
rights
in
respect
thereof
except
that
of
receiving
the
redemption
price.
Dated
at
Hamilton,
Ontario,
October
24,
1951.”
On
October
27,
1951,
the
trustee
received
from
the
company
26,250
non-cumulative
5%
preference
shares
of
a
par
value
of
$1.00
each.
The
notice
from
the
company
accompanying
this
stock
dividend
reads
in
part
as
follows
:
“You
were
advised
in
our
letter
of
the
25th
instant
that
the
earned
surplus
had
been
wiped
out
and
as
a
consequence
the
capital
surplus
could
be
distributed
to
you.
This
can
only
be
done
by
way
of
issuance
of
preference
shares.
Accordingly,
your
Directors
have
declared
a
stock
dividend
and
the
enclosed
preference
share
certificate
represents
your
share
of
the
distribution
among
the
shareholders
of
the
capital
surplus.
Your
Directors
do
not
intend,
at
the
present
time,
to
redeem
this
certificate
but
upon
redemption
at
some
future
time
it
is
our
best
present
advice
that
the
proceeds
therefrom
will
not
be
taxable
income
to
you.”’
On
May
27,
1952,
the
trustee
received
a
notice
of
redemption
of
the
26,250
preference
shares.
The
notice
states
that
the
redemption
price
will
be
paid
to
or
to
the
order
of
the
registered
holders
of
the
preferred
shares
on
presentation
and
surrender
of
the
certificates
for
such
shares.
It
goes
on
to
state:
‘‘Shareholders
were
informed
under
the
dates
of
October
25
and
October
26
last,
that
the
above
Preferred
Shares,
now
called
for
redemption,
represented
a
distribution
of
the
Club’s
Capital
Surplus
and
that
the
proceeds
therefrom
are
not,
we
understand,
taxable
income
to
the
Shareholders.’’
I
prefer
to
deal
first
with
the
last
distribution
of
shares
as
the
facts
surrounding
it
differ
distinctly
from
those
surrounding
the
distribution
and
redemption
of
the
first
two
issues
in
the
following
important
respects
:
(1)
The
fund
which
provided
the
capital
warranting
the
issue
of
the
shares
was,
up
until
the
time
of
the
issue,
treated
by
the
company
as
a
capital
surplus.
(I
do
not
think
this
is
a
material
fact,
but
it
is
a
fact
that
has
been
the
subject
of
much
discussion
in
some
of
the
cases
to
which
I
shall
refer.
)
(2)
The
fund
had
been
so
absorbed
into
the
capital
assets
of
the
company
that
there
were
no
funds
with
which
to
redeem
the
shares
without
pledging
the
general
credit
of
the
company.
(3)
Certificates
for
the
shares
were
issued
on
October
25,
1951,
under
the
seal
of
the
company,
and
from
that
date
the
holders
of
the
shares
had
all
the
rights
of
preferred
shareholders
and
the
obligations
relative
to
those
rights
were
imposed
on
all
the
assets
of
the
company.
(4)
The
shares
were
not
redeemed
until
May
27,
1952.
(5)
The
redemption
of
the
shares
at
any
future
date
was
dependent
on
the
credit
of
the
company
or
the
liquidation
of
its
assets.
(6)
The
company’s
credit
affecting
its
power
or
desire
to
borrow
money
from
the
bank
might
have
been
affected
between
the
time
the
shares
were
issued
and
redeemed
in
many
ways;
for
instance,
legislative
action
affecting
horse
racing
and
betting
on
race-tracks
similar
to
Order-in-Council
1452,
June
7,
1917,
which
repealed
for
the
duration
of
the
war
and
six
months
thereafter
subsection
(2)
of
Section
235
of
the
Criminal
Code,
thereby
making
all
betting
at
race
courses
illegal
;
or
an
emergency
appeal
as
was
issued
in
the
United
States
of
America
by
James
F’.
Byrnes
on
January
3,
1945,
with
instructions
to
prevent
the
use
of
manpower
or
materials
for
the
purpose
of
horse
racing;
or
heavy
taxes
as
were
imposed
in
Statutes
of
Ontario,
10-11
Geo.
V,
c.
9;
or
an
increase
in
the
present
licence
fee
and
tax
of
eight
per
cent
imposed
on
bets
placed
at
a
race-track;
or
action
taken
by
the
proper
legislative
authority
as
was
considered
in
Re
Race-
Tracks
and
Betting,
49
O.L.R.
339
;
or
if
the
company
had
been
a
commercial
or
investment
company,
it
might
have
suffered
severe
loss
through
fire,
unpredicted
competition
or
reverses
in
the
stock
market.
(7)
Before
the
shares
were
redeemed,
the
company
was
negotiating
for
the
sale
of
all
its
assets.
Counsel
for
the
life
tenants
argued
that
the
decisions
in
Re
Fleck,
[1952]
O.R.
113;
[1952]
C.T.C.
196,
205
and
Re
Mills,
[1953]
O.R.
197;
[1953]
C.T.C.
115,
apply
to
this
case
and
that
without
further
consideration
the
matter
should
be
disposed
of
in
favour
of
the
life
tenants.
In
both
of
those
cases
the
shares
in
question
were
shares
in
a
company
incorporated
under
the
Dominion
Companies
Act
and
for
reasons
which
I
shall
give
in
due
course
the
provisions
of
the
Dominion
Companies
Act
so
differ
from
the
Ontario
Companies
Act
that
it
makes
it
necessary
for
me
to
consider
this
case
solely
in
the
light
of
the
rights
of
the
parties
with
respect
to
shares
in
a
corporation
that
exists
under
the
Act
authorizing
its
incorporation.
I
find
I
must
therefore
review
in
some
detail
many
of
the
decided
cases
that
bear
on
the
subject.
These
cases
may
best
be
considered
in
their
chronological
order.
In
so
far
as
there
may
be
any
apparent
conflict
in
those
decisions,
I
must
regard
the
decisions
in
the
Judicial
Committee
as
binding,
at
the
same
time
following
any
interpretation
of
those
decisions
by
our
own
Courts,
where
questions
of
law
are
involved.
Three
cases
form
the
background
of
the
discussion
in
later
eases:
Irving
v.
Houstoun,
4
Pat.
Se.
App.
521,
Paris
v.
Paris,
10
Ves.
Jr.
185,
and
In
re
Barton’s
Trust,
5
Eq.
238.
In
Irving
v.
Houstoun
by
a
testamentary
deed
it
was
directed
that
the
widow
of
the
deceased
should
have
a
life
interest
in
144
shares
held
in
the
Bank
of
Scotland
stock
‘
1
to
receive
the
dividends
when
due,
or
becoming
due
thereon’’.
Recently
before
his
death
the
testator
had
subscribed
for
a
certain
number
of
these
shares
and
at
his
death
a
considerable
part
of
the
subscriptions,
which
were
repayable
by
instalments,
was
unpaid.
The
Bank
of
Scotland
declared
a
bonus
or
extraordinary
dividend
arising
from
accumulated
capital
and
not
as
an
ordinary
dividend
arising
from
profits.
The
bank
detained
this
bonus
to
answer
the
instalments
not
then
paid
up
of
the
stock
which
had
been
subscribed
for,
but
Lord
Eldon
stated
that
the
question
remains
the
same
between
the
life
tenant
and
the
remaindermen
as
if
the
calls
or
instalments
had
been
regularly
paid
up
when
they
became
due.
In
the
Court
below
it
was
held
that
the
life
tenant
was
entitled
to
the
whole
sum
as
a
dividend
falling
due
on
the
bank
stock
of
her
deceased
husband.
The
House
of
Lords
reversed
the
decision,
holding
that
the
bonus
dividend
belonged
to
the
capital
of
the
estate.
As
I
read
the
case,
and
as
it
has
been
interpreted
in
later
cases,
the
decision
in
this
case
turned
on
the
fact
that
the
Bank
of
Scotland
had
what
was
called
a
‘‘floating
capital
which
was
laid
out
in
the
purchase
of
exchequer
and
navy
bills,
in
discounts
and
in
every
species
of
property
that
can
be
turned
into
cash
at
pleasure’’.
Lord
Elton
said
at
page
530:
“Every
person
who
buys
bank
stock
is
aware
of
this;
and
if
he
gives
the
life
interest
of
his
estate
to
any
one,
it
can
scarcely
be
his
meaning
that
the
liferenter
should
run
away
with
a
bonus
that
may
have
been
accumulating
on
the
floating
capital
for
half
a
century.
’
’
In
Paris
v.
Paris
Lord
Eldon
held,
following
prior
decisions,
that
an
extraordinary
dividend
declared
by
the
Bank
of
England
was
capital
in
the
hands
of
the
trustee
and
refused
to
draw
a
distinction
between
a
dividend
distributed
in
cash
and
one
distributed
by
an
issue
of
stock
and
he
did
not
consider
the
fact
that
the
fund
out
of
which
the
dividend
was
declared
was
earned
during
the
lifetime
of
the
tenant
was
relevant.
In
In
Re
Barton’s
Trust
shares
in
a
company
were
settled
upon
trust
to
pay
A
during
her
life
‘
4
the
interest,
dividends,
share
of
profits,
or
annual
proceeds,
’
’
and
after
her
death
in
trust
for
her
children.
During
the
lifetime
of
the
life
tenant
the
company
by
resolution
applied
a
portion
of
‘‘the
net
earnings
during
the
half-
year’’
to
necessary
works
and
issued
new
shares
to
represent
the
money
so
applied.
Vice-Chancellor
Sir
W.
Page
Wood
held
that
the
shares
so
issued
were
capital
in
the
hands
of
the
trustee.
This
case,
like
others
I
shall
discuss,
dealt
with
an
ordinary
issue
of
shares
to
which
surplus
earnings
were
credited.
No
question
of
redemption
arose.
These
cases
were
carefully
considered
in
Bouch
v.
Sproule
(1885),
29
Ch.D.
635,
and
in
the
House
of
Lords,
12
App.
Cas.
385.
This
is
a
much
discussed
case.
In
order
to
appreciate
the
force,
meaning
and
effect
of
the
language
used
by
the
learned
law
lords
in
the
House
of
Lords,
it
is
necessary
to
examine
the
nature
of
the
argument
before
Kay,
J.,
and
the
learned
Lord
Justices
of
Appeal.
The
directors
of
the
company,
in
which
the
testator
held
shares,
had
power,
before
recommending
a
dividend,
to
set
apart
out
of
the
profits
such
sum
as
they
thought
proper
as
a
reserve
fund,
for
meeting
contingencies,
equalizing
dividends,
or
repairing
or
maintaining
the
works.
The
directors
recommended
that
the
reserve
fund
and
‘‘undivided
profit’’
be
distributed
as
a
“bonus
dividend’’
of
£2
10s.
per
share,
and
that
there
should
be
created
new
£10
shares
amounting
in
number
to
one-
third
of
the
original
shares,
on
which
£7
10s.
had
been
paid
up,
so
that
one
new
share
might
be
allotted
to
each
shareholder
for
every
three
original
shares
which
he
held,
£7
10s.
per
share
to
be
paid
on
allotment,
which
£7
10s.
the
bonus
would
enable
him
to
pay.
The
recommendation
of
the
directors
was
adopted,
and
at
a
general
meeting
of
shareholders
a
warrant
was
issued
to
each
shareholder
for
the
bonus
to
which
he
was
entitled,
in
the
following
form:
i
Consett
Iron
Company
Limited
Bonus
dividend
warrant
of
£2
10s.
per
share,
payable
on
the
30th
of
September,
1880,
to
the
members
registered
in
the
company’s
books
on
the
25th
of
September,
1880.
No.
102
Name
of
member
:
Thomas
Bouch,
Esq.
Number
of
shares:
:
600.
Amount
of
bonus
dividend
:
£1500.
William
Cockburn,
Registrar.
I
hereby
authorize
and
request
you
to
apply
the
above
amount
in
payment
of
the
call
of
£7
10s.
per
share
on
the
200
new
shares
that
have
been
alotted
to
me
pursuant
to
the
special
resolutions
passed
etc.
Signature
of
member,
.”
The
trustee
accepted
the
dividend
warrant
and
the
shares,
signed
the
memorandum
and
returned
it
to
the
company.
The
200
shares
in
the
company
allotted
to
the
trustee
were
thereupon
registered
in
his
name
with
£7
10s.
credited
on
each
share.
The
argument
presented
before
Kay,
J.,
on
behalf
of
the
life
tenant
was
that
the
form
of
the
resolution
and
the
form
of
the
warrant
showed
that
the
bonus
was
against
dividends
and
that
the
monies
arising
from
the
undivided
profits
were
expressly
divided
by
the
directors
as
a
bonus
dividend.
Kay,
J.,
considered
that
the
case
was
extremely
like
Paris
v.
Paris
and
it
was
doubtful
if
the
bonus
dividend
would
in
any
case
have
gone
to
the
life
tenant.
He
pointed
out
that
the
shares
had
been
allotted
when
the
bonus
dividend
was
issued
to
the
trustee
and
if
the
trustee
had
refused
to
accept
the
shares
under
the
articles
of
association,
the
company
might
have
cancelled
the
shares
and
the
shares
would
have
been
forfeited,
and
accordingly
he
held
against
the
life
tenant.
In
the
Court
of
Appeal,
the
argument
was—Whether
a
bonus
is
capital
or
not,
depends
upon
whether
the
company
makes
it
capital
or
income;
a
bonus
dividend
is
income,
unless
the
company
does
something
to
make
it
capital;
here
the
company
did
not,
it
was
only
the
act
of
the
trustee
that
made
it
capital;
the
bonus
dividend
came
to
the
hands
of
the
trustee
as
money,
he
applied
it
in
taking
up
shares,
and
the
shares
therefore
belonged
to
the
life
tenant.
The
case
of
Barton’s
Trust
was
distinguished
on
the
ground
that
the
company
simply
allotted
new
paid-up
shares.
In
addition,
much
of
the
argument
in
the
Court
of
Appeal
was
addressed
to
whether
the
fund
from
which
the
distribution
was
made
was
earned
during
the
lifetime
of
the
testator
or
not
and
the
effect
of
the
decisions
on
this
question.
The
arguments
dealt
with
were
stated
by
Fry,
L.J.,
as
follows
:
‘
‘
In
addition
to
the
argument
from
acquiescence
or
conduct,
two
other
arguments
have
been
adduced
on
behalf
of
the
defendants.
First,
that
independently
of
the
way
in
which
the
company
associated
the
declaration
and
payment
of
the
bonus
with
the
issue
of
new
share
capital,
the
bonus
had
become
capital
;
and
secondly,
that
if
not
so,
yet
that
in
the
present
case
the
bonus
was
in
fact,
by
the
proceedings
of
the
company,
converted
into
share
capital.”
The
learned
Lord
Justice
then
reviewed
in
detail
the
relevant
cases
and
particularly
the
statement
of
Lord
Hatherley
in
I
n
re
Barton’s
Trust
where
he
said:
“Where
the
company,
by
a
majority
of
their
votes,
have
said
that
they
will
not
divide
this
money,
but
turn
it
all
into
capital,
capital
it
must
be
from
that
time.
I
think
that
is
the
true
principle.”
And
at
p.
655
he
said
:
“Furthermore,
the
question
whether
profits
remain
income
or
have
been
capitalized
is
in
its
nature
a
mere
question
of
fact,
and
unless
a
series
of
decisions
as
to
the
effect
of
similar
proceedings
by
companies,
has,
so
to
speak,
turned
this
question
of
fact
into
a
question
of
law,
we
should
not
regard
the
decisions
as
binding
on
the
inquiry.
’
’
And,
after
dealing
with
a
number
of
decisions
dealing
with
bank
stocks,
at
p.
656
he
said:
“These
cases,
however
binding
they
may
be
under
similar
circumstances
with
regard
to
the
same
stocks,
certainly
do
not
appear
to
us
to
support
to
any
extent
the
proposition
now
under
investigation.”
And
at
p.
658
:
“These
cases
are
sufficient
to
show
that
there
has
been
no
such
continuous
and
unbroken
current
of
authorities
as
would
be
required
to
establish
such
a
doctrine
as
was
contended
for,
viz.,
that
payments
out
of
accumulated
profits
were
necessarily
to
be
treated
as
payments
out
of
capital.
On
the
contrary,
as
is
reasonable,
the
authorities
leave
the
inquiry
as
one
of
fact
upon
the
circumstances
of
each
case.
The
authorities
appear
to
us
further
to
establish
this
proposition,
that
in
most,
if
not
in
all,
cases
the
inquiry
as
to
the
time
when
the
profits
were
earned
by
the
company
is
an
immaterial
one
as
between
the
tenant
for
life
and
remainderman.
Their
rights
have
been
made
dependent
on
the
legitimate
action
of
the
company,
and
(subject
to
any
rights
arising
from
the
law
of
apportionment,
with
which
we
are
not
now
dealing)
we
are
of
opinion
that
their
rights
are
determined
by
the
time,
not
at
which
the
profits
are
earned
by
the
company,
but
at
the
time
at
which
they
are
by
the
action
of
the
company
made
divisible
amongst
its
members.’’
(Italics
are
mine.)
He
concluded
that
the
trustee
had
a
right
to
demand
the
dividend
and
it
was
not
contingent
upon
accepting
the
shares
and
they
therefore
accrued
to
the
benefit
of
the
life
tenant.
At
p.
659,
he
said
:
‘“The
resolution
of
the
company
as
to
the
payment
of
the
bonus
is
a
substantive
and
independent
resolution,
and
we
do
not
think
that
it
authorized
the
directors
to
make
the
payment
of
the
dividend
contingent
on
the
acceptance
of
the
new
shares.
Nor
do
we
think
that
the
directors
did
by
their
acts
make
the
payment
of
the
dividend
contingent
on
the
acceptance
of
the
shares.
’
’
This
statement
throws
in
clear
relief
the
precise
problem
dealt
with
in
the
House
of
Lords.
There
is
was
argued
on
behalf
of
the
appellant
that
(1)
Whenever
out
of
accumulated
profits,
which
are
part
of
the
capital
of
the
company,
a
dividend
or
bonus
is
declared
in
addition
to
the
ordinary
dividend,
it
is
an
accretion
to
the
capital,
and
the
corpus
belongs
to
the
remainderman.
(2)
If
it
be
not
all
capital
there
should
be
an
apportionment
according
as
the
profit
accrued
during
the
testator’s
life
or
afterwards.
On
behalf
of
the
respondent
it
was
argued
that
a
bonus
dividend
becomes
income
as
soon
as
it
is
declared
whether
as
bonus
or
dividend,
unless
the
company
makes
it
capital.
In
this
case
it
was
made
capital
by
the
trustees,
not
by
the
company,
and
it
makes
no
difference
that
the
dividend
arose
from
accumulations
made
during
the
testator’s
life.
It
is
to
be
emphasized
that
counsel
did
not
argue
that
if
the
company
made
the
dividend
capital,
it
could
in
any
sense
be
regarded
as
income.
Lord
Herschell
discussed
all
the
antecedent
cases
and
particularly
Irving
v.
Houstoun,
4
Pat.
Se.
App.
521,
and
at
p.
397
stated
that
it
*
1
.
.
.
must
still
be
regarded
as
good
law,
unaffected
by
any
counter-current
of
authority.
But
it
is,
in
my
opinion,
an
authority
governing
only
a
case
similar
in
its
facts;
that
is
to
Say,
a
case
where
the
company
has
no
power
to
increase
its
capital,
but
has
accumulated
profits
and
used
them,
in
fact,
for
capital
purposes,
and
afterwards
distributes
these
profits
amongst
the
proprietors.
I
think
it
will
be
seen
that
there
is
a
substantial
reason
for
the
limitation
I
have
suggested.’’
The
Lord
Chancellor
went
on
to
say
“I
quite
agree
with
the
Court
below
that,
apart
from
the
authorities
to
which
I
have
alluded,
the
general
principle
for
for
the
determination
of
such
a
question
as
that
before
us,
and
in
my
opinion
the
only
sound
principle,
is
that
which
is
well
expressed
in
the
judgment
of
Lord
Justice
Fry
:
‘
When
a
testator
or
settlor
directs
or
permits
the
subject
of
his
disposition
to
remain
as
shares
or
stocks
in
a
company
which
has
the
power
either
of
distributing
its
profits
as
dividend
or
of
converting
them
into
capital,
and
the
company
validly
exercises
this
power,
such
exercise
of
its
power
is
binding
on
all
persons
interested
under
the
testator
or
settlor
in
the
shares,
and
consequently
what
is
paid
by
the
company
as
dividend
goes
to
the
tenant
for
life,
and
what
is
paid
by
the
company
to
the
shareholder
as
capital,
or
appropriated
as
an
increase
of
the
capital
stock
in
the
concern,
enures
to
the
benefit
of
all
who
are
interested
in
the
capital’.
And
it
appears
to
me
that
where
a
company
has
power
to
increase
its
capital
and
to
appropriate
its
profits
to
such
increase,
it
cannot
be
considered
as
having
intended
to
convert,
or
having
converted,
any
part
of
its
profits
into
capital
when
it
has
made
no
such
increase,
even
if
a
company
having
no
power
to
increase
its
capital
may
be
regarded
as
having
thus
converted
profits
into
capital
by
the
accumulation
and
use
of
them
as
such.’’
(The
italics
are
mine.)
He
then
proceeded
to
consider
whether
the
company
did
distribute
the
accumulated
profits
as
dividend
or
convert
them
into
capital,
and
decided
that
in
the
form
of
the
transaction
it
was
not
contemplated
that
any
money
would
pass
to
the
shareholders,
and
his
conclusion
was
that
the
substance
of
the
whole
transaction
was,
and
was
intended
to
be,
to
convert
the
undivided
profits
into
paid-up
capital
upon
newly-created
shares,
and
that
the
company
did
not
pay,
or
intend
to
pay,
any
sum
as
dividend,
but
intended
to
and
did
appropriate
the
undivided
profits
dealt
with
as
an
increase
of
the
capital
stock
in
the
concern.
Lord
Watson
at
p.
402
said
:
“In
these
circumstances
it
was
undoubtedly
within
the
power
of
the
company,
by
raising
new
capital
to
the
required
amount
to
set
free
the
sums
thus
spent
out
of
the
reserve
fund
and
undivided
profits
for
distribution
among
the
shareholders.
It
was
equally
within
the
power
of
the
company
to
capitalise
these
sums
by
issuing
new
shares
against
them
to
its
members
in
proportion
to
their
several
interests.
I
am
of
opinion
that
the
latter
alternative
was,
in
substance,
that
which
was
followed
by
the
company.”’
Lord
Bramwell
placed
his
judgment
on
the
basis
that
the
£7
10s.
received
for
each
of
the
three
common
shares
could
not
be
said
to
have
bought
a
new
share
for
the
price
of
the
new
shares
was
that
sum
and
the
diminished
value
of
the
old
shares.
Lord
FitzGerald
did
not
disagree
with
the
Court
of
Appeal
as
to
the
law
but
as
to
the
inferences
to
be
deduced
from
the
admitted
facts,
and
held
that
the
declaration
of
a
bonus
or
dividend
was
coupled
with
the
creation
of
new
capital
and
amounted
to
a
capitalisation
of
the
bonus,
and
the
reasoning
in
I
n
Re
Barton’s
Trust
directly
applied.
Commissioners
of
Inland
Revenue
v.
Blott,
[1921]
2
A.C.
171,
was
a
case
involving
taxation
and
whether
the
recipient
of
second
preference
shares
that
had
been
issued
as
fully
paid
in
satisfaction
of
a
bonus
dividend
declared
was
liable
for
super
tax.
Viscount
Haldane
said,
at
p.
179
:
14
What
we
have
to
decide
is
whether
the
allotment
of
bonus
shares
to
the
respondent
was
capital,
or
was
in
reality
an
allotment
of
annual
profits
which
conferred
a
benefit
chargeable
in
his
hand
with
income
tax,
for
if
so
it
is
not
in
controversy
that
the
super-tax
provisions
will
apply.”
After
discussing
Bouch
v.
Sproule
(1887),
12
App.
Cas.
385,
and
stating
his
views
of
the
effect
of
corporate
action
he
said,
at
page
182:
“The
Company,
acting
with
the
assent
so
given
of
the
shareholders,
can
decide
conclusively
what
is
to
be
done
with
accumulated
profits.
It
need
not
pay
these
over
to
the
shareholders.
It
can
convert
them
into
capital
as
against
the
whole
world,
including
as
I
think
the
principle
plainly
applied,
the
Crown
claiming
for
taxing
or
for
any
other
purposes.
The
only
question
open
is,
therefore,
whether
the
company
has
really
done
so.’’
And
at
page
184:
“My
Lords,
for
the
reasons
I
have
given
I
think
that
it
is,
as
matter
of
principle,
within
the
power
of
an
ordinary
joint
stock
company
with
articles
such
as
those
in
the
case
before
us
to
determine
conclusively
against
the
whole
world
whether
it
will
withhold
profits
it
has
accumulated
from
distribution
to
its
shareholders
as
income,
and
as
an
alternative
not
distribute
them
at
all,
but
apply
them
in
paying
up
the
capital
sums
which
shareholders
electing
to
take
up
unissued
shares
would
otherwise
have
to
contribute.
If
this
is
done
the
money
so
applied
is
capital
and
never
becomes
profits
in
the
hands
of
the
shareholders
at
all.”
At
page
186
in
discussing
the
effect
of
the
judgments
in
Bouch
v.
Sproule
the
learned
Lord
Chancellor
reaffirmed
the
principle
of
law
to
be
applied
as
that
set
out
by
Lord
Justice
Fry
which
I
have
already
quoted
in
the
passage
from
the
judgment
of
Lord
Herschell.
At
page
197
Viscount
Finlay
considered
Bouch
v.
Sproule
and
said
:
“The
incidence
of
the
taxation
depends
upon
the
question,
What
is
in
fact
the
nature
of
the
property
on
which
the
tax
is
claimed?
If
it
is
income
it
is
liable
to
tax
upon
income;
if
it
is
capital
it
is
not
so
liable.
The
liability
follows
from
the
nature
of
the
property,
and
it
seems
impossible
to
me
to
say
that
the
answer
to
the
question
whether
it
is
income
or
not
is
to
depend
upon
the
purpose
with
which
the
question
is
asked.
The
circumstances
which
gave
rise
to
the
case
of
Bouch
v.
Sproule
are
very
like
those
in
the
present
case.’’
And
at
page
198
he
points
out
that
the
option
left
to
the
shareholder
to
accept
the
dividend
warrant
was
a
nominal
one
and
in
the
present
case
there
is
no
option
at
all.
The
application
of
the
bonus
to
increase
the
capital
was
compulsory.
This
last
observation
may
be
applied
with
emphasis
to
the
case
I
am
considering.
Lord
Dunedin
dissenting
held
the
decision
in
Bouch
v.
Sproule
did
not
apply
where
taxation
was
involved.
Lord
Sumner,
also
dissenting,
dealt
at
length
with
Bouch
v.
Sproule
and
accepted
everything
laid
down
in
it
but
held
that
it
did
not
apply
to
a
taxing
statute.
At
page
220,
in
interpretating
the
language
of
Lord
Herschell
in
that
case,
he
said:
“What
he
meant
was
something
highly
germane
to
the
issue
—namely,
that
the
plan,
which
the
company
carried
out,
was
not
a
mere
plan
for
paying
the
usual
dividend
in
a
novel
form,
but
was
a
more
far-reaching
design
to
bring
about
an
increase
in
statutory
capital
without
physically
parting
with
cash.
Such
a
design
has
a
legal
effect
on
those
whose
rights
only
arise
on
the
footing
that
the
design
has
been
accepted
and
affirmed
;
it
has
none
on
the
officers
of
the
revenue,
whose
rights
are
statutory
and
independent,
and
intervene
before
the
point
is
reached,
at
which
the
interests
of
parties
like
those
in
Bouch
v.
Sproule
become
concerned.’’
In
Inland
Revenue
Commissioners
v.
Fisher’s
Executors,
[1926]
A.C.
395,
Blott’s
case
was
considered
and
applied
in
the
House
of
Lords
to
the
distribution
of
debenture
stock
out
of
earned
profits.
This
was
no
doubt
done
so
that
the
shareholders
would
not
be
subject
to
income
tax
on
it.
Lord
Shaw
of
Dunfermline,
at
p.
406,
said:
“Upon
the
legal
side
of
the
matter
it
must
not
be
forgotten
that
all
the
necessary
resolutions,
confirmations,
new
articles
of
association,
etc.,
required
to
regularize
the
transaction
have
been
carried
through.
It
is
a
transaction
in
itself
unassailable
in
law.
The
result
of
it
was
to
negate
emphatically
the
idea
of
distribution
to
shareholders
as
income;
on
the
contrary,
it
was
to
withdraw
from
each
shareholder
the
sum
which
might
have
been
given
to
him
as
income
and
to
withdraw
it
definitely
from
an
income
fund.
It
was
stamped
as
a
capitalization
transaction.
Such
a
transaction
was
within
the
power
of
the
shareholders
of
the
company,
and
all,
including
the
Crown,
are
bound
by
that.
Zt
is
incorrect
in
principle
to
attempt
to
get
behind
that
transaction,
legal
and
competent
and
regular
in
form,
and
to
endeavour
to
construct
a
canon
of
liability
to
income
tax
out
of
conjecture
as
to
the
motive
or
scheme
for
the
defeat
of
the
revenue
which
underlay
its
various
stages.
The
money
so
capitalized
could
not
pass
to
a
tenant
for
life.
If
the
company
were
wound
up,
the
whole
would
still
be
treated
as
its
existing
assets.
’
’
At
pp.
410
and
411
Lord
Sumner
refers
to
certain
expressions
in
Bouch
v.
Sproule
as
to
form
and
substance
and
at
p.
411
said
:
‘‘The
proposition,
that
the
substance
of
a
transaction
must
be
looked
to
and
not
merely
the
form,
is
generally
invoked
against
those
who
have
carried
it
out.
I
think
it
is
unusual,
where
the
form
of
a
transaction
is
against
those,
whose
transaction
it
is,
to
invoke
the
substance
in
their
favour,
in
order
to
eke
out
what
they
have
left
defective
in
form.
Sometimes
again
it
is
the
‘intention’
of
the
company
that
is
said
to
be
dominant:
Burrell’s
case
([1924]
2
K.B.
at
p.
68)
;
sometimes
it
is
what
the
company
‘desired’
to
do
([1921]
2
A.C.
at
p.
200).
In
any
case
desires
and
intentions
are
things
of
which
a
company
is
incapable.
These
are
the
mental
operations
of
its
shareholders
and
officers.
The
only
intention,
that
the
company
has,
is
such
as
is
expressed
in
or
necessarily
follows
from
its
proceedings.
It
is
hardly
a
paradox
to
say
that
the
form
of
a
company’s
resolutions
and
instruments
is
their
substance.”
Any
consideration
of
the
relevant
cases
must
involve
reference
to
In
re
Mountain
v.
Bates,
[1928]
Ch.
682,
a
decision
of
Eve,
J.,
a
judge
whose
judgments
have
always
carried
great
weight.
A
director
of
a
company
owning
and
operating
steam
trawlers
sold
some
of
their
vessels
for
sums
exceeding
the
values
at
which
they
stood
in
the
Company’s
balance
sheet
and
carried
the
proceeds
to
a
suspense
account,
and
afterwards
distributed
them
as
cash
bonuses
to
the
shareholders
with
a
covering
letter
stating
that
such
bonuses
were
capital
payments
and
not
liable
to
income
tax.
In
distribution
of
the
warrants
prominence
was
given
to
the
statement
that
the
payments
were
being
made
out
of
capital
and
were
not
in
the
nature
of
a
dividend
or
bonus
of
shares.
This
was
to
protect
the
recipients
from
liability
of
taxation.
At
p.
687
Eve,
J.,
said:
“
.
..
but
the
mere
impressing
of
these
distributions
with
the
appellation
of
‘capital
distributions’
cannot
in
my
opinion
determine
their
true
character.
One
must
inquire
a
little
closer
for
the
purpose
of
ascertaining
whether
they
were
in
fact
distributions
of
capital
or
distributions
of
something
which,
although
in
one
sense
capital,
in
that
it
originated
by
the
realization
of
assets
and
not
from
the
ordinary
income
of
the
company’s
business,
could
not
properly
be
regarded
as
capital
for
all
purposes.
The
suspense
account
represented
realized
profit
on
the
company’s
capital
assets,
and
inasmuch
as
the
equilibrium
between
capital
and
liabilities
on
the
one
side
and
assets
on
the
other
was
maintained
without
any
necessity
to
resort
to
this
fund,
it
represented
what
I
think
is
spoken
of
in
one
of
the
cases
as
‘the
total
appreciation
of
the
capital
assets’
;
that
is
to
say,
if
you
take
on
one
side
the
liabilities
of
the
company
and
on
the
other
the
whole
of
its
assets
the
latter
exceed
the
former
by
a
sum
which
is
in
excess
of
the
whole
of
this
suspense
fund,
or,
in
other
words,
no
part
of
it
is
required
to
satisfy
either
the
creditors
or
shareholders
of
the
company.
In
this
state
of
affairs
it
was
a
fund
which
the
company
could
treat
as
available
for
dividend
and
could
distribute
as
profits,
or
having
regard
to
its
power
to
increase
capital
could
apply
to
that
purpose
by,
for
example,
increasing
the
capital,
declaring
a
bonus
and
at
the
same
time
allotting
to
each
shareholder
shares
in
the
capital
of
the
company
paid
up
to
an
amount
equivalent
to
his
proportion
of
the
bonus
so
declared.
Unless
and
until
the
fund
was
in
fact
capitalized
it
retained
its
characteristics
of
a
distributable
profit,
and
on
the
authority
of
the
passages
which
have
been
read
from
Lord
Herschell’s
speech
in
Bouch
v.
Sproule,
the
only
method
by
which
a
company
with
power
to
increase
its
capital
can
capitalize
such
a
fund
is
to
increase
its
capital
by
an
amount
equivalent
to
the
sum
sought
to
be
capitalized.”
(The
italics
are
mine.)
In
À.
A.
Hill
and
Others
v.
Permanent
Trustee
Company
of
New
South
Wales,
Limited,
[1930]
A.C.
720,
all
cases
to
which
I
have
referred
were
comprehensively
considered
by
the
Judicial
Committee
of
the
Privy
Council
and
Lord
Russel
of
Killowen,
writing
the
judgment,
appeared
to
endeavour
to
set
at
rest
any
confusion
that
may
have
arisen
in
the
interpretation
of
the
language
used
in
the
Sproule
case
and
succeeding
cases.
At
p.
730
he
referred
to
the
basis
of
the
judgment
in
the
Australian
courts
where
the
decision
assumed
the
answer
to
the
question
of
whether
the
dividend
was
capital
or
income
depended
upon
‘“what
was
the
intention
of
the
company
in
making
the
distribution.”
Upon
the
whole
evidence
the
trial
Judge
came
to
the
conclusion
that
the
distribution
was
in
fact
and
was
intended
by
the
company
to
be
a
distribution
of
capital
assets
in
anticipation
of
liquidation.
He
further
held
that
in
order
to
convert
the
profits
into
corpus
as
between
tenant
for
life
and
remainderman,
no
conversion
by
the
company
of
the
profits
into
share
capital
was
necessary
but
that
profits
distributed
might
be
corpus
as
between
tenant
for
life
and
remainderman,
even
though
no
formal
part
of
the
fund
was
retained
by
the
company
in
a
capitalized
form.
He
realized
this
was
in
conflict
with
In
re
Bates
but
he
felt
bound
by
previous
decisions
of
the
High
Court
of
Australia
;
Knowles
v.
Ballarat
Trustees,
Executors
and
Agency
Co.,
22
C.L.R.
212
and
Fisher
v.
Fisher,
23
C.L.R.
337.
The
learned
law
lord,
before
referring
in
detail
to
the
cases,
laid
down
five
principles
of
law,
at
pp.
730
et
seq.:
“
(1)
A
limited
company
when
it
parts
with
moneys
available
for
distribution
among
its
shareholders
is
not
concerned
with
the
fate
of
those
moneys
in
the
hands
of
any
shareholder.
The
company
does
not
know
and
does
not
care
whether
a
shareholder
is
a
trustee
of
his
shares
or
not.
It
is
of
no
concern
to
a
company
which
is
parting
with
moneys
to
a
shareholder
whether
that
shareholder
(if
he
be
a
trustee)
will
hold
them
as
trustee
for
A.
absolutely
or
as
trustee
for
A.
for
life
only.
(2)
A
limited
company
not
in
liquidation
can
make
no
payment
by
way
of
return
of
capital
to
its
shareholders
except
as
a
step
in
an
authorized
reduction
of
capital.
Any
other
payment
made
by
it
by
means
of
which
it
parts
with
moneys
to
its
shareholders
must
and
can
only
be
made
by
way
of
dividing
profits.
Whether
the
payment
is
called
‘dividend’
or
‘bonus’,
or
any
other
name,
it
still
must
remain
a
payment
on
division
of
profits.
(3)
Moneys
so
paid
to
a
shareholder
will
(if
he
be
a
trustee)
prima
facie
belong
to
the
person
beneficially
entitled
to
the
income
of
the
trust
estate.
If
such
moneys
or
any
part
thereof
are
to
be
treated
as
part
of
the
corpus
of
the
trust
estate
there
must
be
some
provision
in
the
trust
deed
which
brings
about
that
result.
No
statement
by
the
company
or
its
officers
that
moneys
which
are
being
paid
away
to
shareholders
out
of
profits
are
capital,
or
are
to
be
treated
as
capital,
can
have
any
effect
upon
the
rights
of
the
beneficiaries
under
a
trust
instrument
which
comprises
shares
in
the
company.
(4)
Other
considerations
arise
when
a
limited
company
with
power
to
increase
its
capital
and
possessing
a
fund
of
undivided
profits,
so
deals
with
it
that
no
part
of
it
leaves
the
possession
of
the
company,
but
the
whole
is
applied
in
paying
up
new
shares
which
are
issued
and
allotted
proportionately
to
the
shareholders,
who
would
have
been
entitled
to
receive
the
fund
had
it
been,
in
fact,
divided
and
paid
away
as
dividend.
(5)
The
result
of
such
a
dealing
is
obviously
wholly
different
from
the
result
of
paying
away
the
profits
to
the
shareholders.
In
the
latter
case
the
amount
of
cash
distributed
disappears
on
both
sides
of
the
company’s
balance
sheet.
It
is
lost
to
the
company.
The
fund
of
undistributed
profits
which
has
been
divided
ceases
to
figure
among
the
company’s
liabilities;
the
cash
necessary
to
provide
the
dividend
is
raised
and
paid
away,
the
company’s
assets
being
reduced
by
that
amount.
In
the
former
case
the
assets
of
the
company
remain
undiminished,
but
on
the
liabilities’
side
of
the
balance
sheet
(although
the
total
remains
unchanged)
the
item
representing
undivided
profits
disappears,
its
place
being
taken
by
a
corresponding
increase
of
liability
in
respect
of
issued
share
capital.
In
other
words,
moneys
which
had
been
capable
of
division
by
the
company
as
profits
among
its
shareholders
have
ceased
for
all
time
to
be
so
divisible,
and
can
never
be
paid
to
the
shareholders
except
upon
a
reduction
of
capital
or
in
a
winding
up.
The
fully
paid
shares
representing
them
and
received
by
the
trustees
are
therefore
received
by
them
as
corpus
and
not
as
income.’’
(The
italics
are
mine.)
Bouch
v.
Sproule
was
referred
to
at
p.
732
where
Lord
Russell
stated
“It
is
not
an
authority
which
touches
a
case
in
which
a
company
parts
with
moneys
to
its
shareholders.
The
essense
of
the
case
was
that
the
company,
not
by
its
statements,
but
by
its
acts,
showed
that
what
the
shareholders
got
from
the
company
was
not
a
share
of
profits
divided
by
the
company,
but
an
interest
in
moneys
which
had
been
converted
from
divisible
profits
into
moneys
capitalized
and
rendered
for
ever
incapable
of
being
divided
as
profits.
In
those
circumstances
it
was
held
that
shares
which
were
issued
to
a
trustee
shareholder,
and
which
represented
the
moneys
so
capitalized,
were
as
between
his
cestuis
que
trust
corpus
and
not
income,
because
the
company
had
decided
that
the
profits
in
question
should
be
permanently
added
to
the
company’s
capital.”
The
ratio
decidendi
of
that
decision
as
I
conceive
it
to
be
is
that
where
a
shareholder
is
a
trustee
what
is
in
the
minds
of
the
directors
or
shareholders
when
a
distribution
is
made
is
not
relevant
in
considering
what
are
the
respective
rights
of
life
tenant
and
remainderman.
The
company
manifests
its
intention
by
its
acts
and
its
acts
only.
Injustice
may
result
but
if
a
testator
makes
no
provision
in
his
will
with
respect
to
this
aspect
of
his
estate,
the
law
must
take
its
course
and
it
is
not
for
the
Court
to
do
other
than
give
effect
to
the
legal
acts
of
the
company.
In
the
ease
before
the
Judicial
Committee
there
was
no
issue
of
shares
and
no
increase
in
capital
and
it
was
decided
that,
notwithstanding
that
there
was
a
declaration
that
the
company
was
paying
a
dividend
for
the
purpose
of
making
a
distribution
of
its
capital
assets
in
advance
of
winding
up,
the
dividend
nevertheless
belonged
to
the
life
tenant.
The
last
judgment
of
the
Judicial
Committee
dealing
with
the
subject
matter
is
Commissioner
of
Income-Tax,
Bengal
v.
Mercantile
Bank
of
India,
Limited,
[1986]
A.C.
478.
This
was
a
revenue
case
and
was
decided
under
the
provisions
of
the
Indian
Income
Tax
Act,
but
certain
statements
of
Lord
Thankerton
are
relevant
to
the
question
here
under
consideration.
He
referred
to
Blott’s
case
at
p.
493
and
adopted
the
interpretation
of
the
principle
of
that
case
placed
on
it
by
Lord
Cave
in
Fisher’s
Case,
[1926]
A.C.
325,
who
quoted
from
the
opinion
of
Lord
Haldane
which
I
have
already
quoted
in
considering
the
Blott
case,
and
at
p.
495
said:
‘*
Lastly,
their
Lordships
are
clearly
of
opinion
that
the
personal
motive
or
purpose
of
the
individual
shareholders,
even
if
they
hold
a
controlling
interest
in
the
company,
is
irrelevant,
if
it
is
made
out
that
the
company
has
in
fact
capitalized
the
accumulated
profits.”
(The
italics
are
mine.)
And
at
p.
496:
‘
4
It
is
hardly
a
paradox
to
say
that
the
form
of
a
company’s
resolutions
and
instruments
is
their
substance.’’
Aykroyd
v.
Commissioners
of
Inland
Revenue,
[1942]
2
All
E.R.
667,
is
another
revenue
case
and
the
decision
of
a
single
Judge.
Counsel
for
the
life
tenants
relies
on
the
statement
of
the
learned
Judge
where
he
said
at
page
668,
‘‘
.
.
.
the
question
whether
the
debentures
issued
by
the
Firth
Carpet
Co.
should
be
regarded
as
capital
or
as
income
depends
to
some
extent
on
the
prospect
of
their
redemption—a
matter
which
Lord
Sumner
considered
to
be
immaterial.’’
The
learned
Judge
was
referring
to
the
opinion
of
Lord
Sumner
in
the
Fisher
case.
With
great
respect,
I
cannot
entirely
agree
with
the
interpretation
that
the
learned
Judge
put
on
the
judgments
of
the
learned
law
lords
in
the
Fisher
case,
nor
do
I
treat
the
language
of
Lord
Sumner
in
the
same
manner.
It
is
not
clear
to
me
that
the
other
learned
law
lords
were
in
disagreement
with
him.
The
passage
quoted
from
the
judgment
of
Viscount
Cave
at
p.
668,
in
my
view
tends
to
support
the
view
of
Lord
Sumner
where
it
is
said
:‘
‘
The
company
was,
therefore,
master
of
the
situation,
and
it
elected
definitely
and
irrevocably
not
to
distribute
the
fund
as
income,
but
to
impound
and
apply
it
as
income-producing
capital;
and
that
election,
if
made
(as
I
do
not
doubt
that
it
was
made)
in
good
faith,
was
binding
on
the
shareholders
and
could
not
be
questioned
by
the
Crown
.
.
.
The
whole
transaction
was
‘bare
machinery’
for
capitalizing
profits
and
involved
no
release
of
assets
either
as
income
or
as
capital.
’
’
In
In
re
Doughty,
[1947]
1
Ch.
263,
a
company
having
power
by
its
articles
of
association
to
distribute
dividends
in
specie,
and,
in
particular,
dividends
by
way
of
capitalization
of
profits
by
the
distribution
of
paid-up
shares,
debentures
or
debenture
stock
of
the
company,
did
not
act
under
this
power
but
under
another
power
given
by
its
articles
of
association
that
‘‘
.
.
.
the
company
in
general
meeting
of
the
directors
.
..
may
.
.
.
pass
a
resolution
.
.
.
that
any
surplus
capital
moneys
or
capital
profits
in
the
hands
of
the
company
whether
arising
from
the
réalisa-
tion
of
capital
assets
.
.
.
or
received
in
respect
of
any
capital
assets
.
.
.
shall
be
divided
among
the
members
of
the
company
by
way
of
capital
distribution
in
proportion
to
their
rights.’’
It
was
held
that
the
power
under
which
the
company
acted,
on
its
true
construction,
merely
authorized
the
distribution
of
capital
profits
and
did
not
purport
to
fix
their
character
as
between
tenant
for
life
and
remainderman;
and
that
accordingly
the
sums
received
by
the
executors
were
to
be
treated
as
income.
Lord
Justice
Choen
at
page
270
set
out
in
full
the
principles
that
I
have
already
quoted
from
the
judgment
of
Lord
Russell
of
Kil-
lowen
in
Hill
v.
Permanent
Trustee
Co.
of
New
South
Wales,
and
at
page
271
emphasized
that
the
moneys
were
clearly
not
capitalized
under
the
first
paragraph
of
the
articles
to
which
I
have
referred.
From
a
careful
reading
of
the
judgment
it
would
appear
that
if
they
had
been,
no
difficulty
would
have
arisen
in
the
ease.
In
In
re
Harrison’s
Will
Trusts,
[1949]
1
Ch.
678,
Roxburgh,
J.,
considered
a
case
where
a
company,
having
no
power
in
its
articles
to
increase
its
capital,
adopted
an
article
enabling
it
at
any
time
to
resolve
that
any
surplus
moneys
in
its
hands
representing
moneys
received
or
recovered
in
respect
of
or
arising
from
any
of
its
capital
assets
or
investments
representing
them
to
be
distributed
among
its
members
on
the
footing
that
they
receive
them
as
capital.
The
company
made
distributions
under
the
article
and
the
question
was
raised
as
to
whether
the
proceeds
were
held
by
the
trustees
as
capital
or
income.
The
learned
Judge
followed
In
re
Doughty.
In
In
re
Sechiari,
Deceased:
Argenti
v.
Sechiari
(1950),
66
T.L.R.
(Part
1)
531,
Romer,
J.,
held
that
where
a
company
has
sold
its
assets
and
taken
shares
in
payment
therefor
in
another
company,
and
distributed
the
same
to
its
shareholders
in
specie,
in
proportion
to
their
holdings,
the
trustees
held
the
shares
as
income
in
their
hands.
He
relied
on
the
second
principle
enumerated
by
Lord
Russell
of
Killowen
in
the
Hill
case.
In
re
Duff’s
Settlements
:
National
Provincial
Bank
Ltd.
v.
Gregson
and
Others,
[1951]
1
Ch.
923,
is
the
most
recent
decision
of
the
English
Court
of
Appeal
and
it
contains
reasoning
that
I
think
is
very
applicable
to
the
case
before
me,
notwithstanding
the
fact
that
the
facts
are
dissimilar.
The
trustees
were
holders
of
shares
in
a
company
from
which
from
time
to
time
allotted
shares
at
a
premium
and,
in
accordance
with
Section
56
of
the
Companies
Act,
1948,
transferred
the
aggregate
of
the
premiums
to
a
share
premium
account.
In
1950
the
company
passed
a
resolution
to
pay
thereout
2s.
6d.
in
respect
of
each
fully
paid
share.
The
resolution
was
sanctioned
and
the
trustees
received
a
proportionate
sum
in
respect
of
the
shares
held
by
them.
Section
56
of
the
English
Companies
Act
reads
as
follows
:
“56.
(1)
Where
a
company
issues
shares
at
a
premium,
whether
for
cash
or
otherwise,
a
sum
equal
to
the
aggregate
amount
or
value
of
the
premiums
on
those
shares
shall
be
transferred
to
an
account,
to
be
called
‘the
share
premium
account’,
and
the
provisions
of
this
Act
relating
to
the
reduction
of
the
share
capital
of
a
company
shall,
except
as
provided
in
this
section,
apply
as
if
the
share
premium
account
were
paid
up
share
capital
of
the
company.
(2)
The
share
premium
account
may,
notwithstanding
anything
in
the
foregoing
subsection,
be
applied
by
the
company
in
paying
up
unissued
shares
of
the
company
to
be
issued
to
members
of
the
company
as
fully
paid
bonus
shares
.
.
.
(3)
Where
a
company
has
before
the
commencement
of
this
Act
issued
any
shares
at
a
premium,
this
section
shall
apply
as
if
the
shares
had
been
issued
after
the
commencement
of
this
Act...
”
At
page
926
Jenkins,
L.J.,
giving
the
judgment
of
the
Court,
stated
that
had
it
not
been
for
the
provision
of
Section
56
of
the
Companies
Act,
if
the
company
had
distributed
among
its
shareholders
any
of
the
sums
representing
premiums
received
on
the
distribution
of
shares,
the
proportion
of
such
distribution
attributable
to
any
trust
holding
of
shares
would
have
been
income
and
not
capital
as
between
persons
successively
interested
under
the
trust,
following
In
re
Bates,
Hill
v.
Permanent
Trustee
Company
of
New
South
Wales
Ltd.,
In
re
Doughty
and
In
re
Sechiari.
He
however
went
on
to
say
:
“The
share
premiums
would
have
been
profits
available
for
dividend
(see
Drown
v.
Gaumont-British
Picture
Corporation,
[1937]
Ch.
402),
and
if
any
part
of
them
had
been
distributed
by
the
company
otherwise
than
in
liquidation
the
amount
received
by
trustees
in
respect
of
a
trust
holding
would
necessarily
have
been
income
in
their
hands,
because
it
was
neither
a
payment
in
reduction
of
paid
up
share
capital
nor
an
addition
to
the
shareholders’
capital
investment
in
the
company,
but
simply
a
cash
distribution
which,
no
matter
how
described,
and
notwithstanding
that
in
the
hands
of
the
company
it
bore
the
character
of
a
capital,
not
an
income,
profit
could
not
in
law
be
anything
else
in
the
hands
of
the
recipients
than
income
derived
from
their
shareholdings.’’
(The
italics
are
mine.)
At
page
928
the
learned
Lord
Justice
deals
with
the
effect
of
Section
56
of
the
Compames
Act
and
holds
that
the
section
takes
the
share
premium
account
out
of
the
category
of
divisible
profit
and
prevents
it
from
being
distributed
by
way
of
dividend.
After
referring
to
the
cases
I
have
already
quoted,
he
said
:
4
'Moreover,
the
terms
of
the
section
seem
to
us
to
show
that
where
(as
in
the
present
case)
the
transaction
in
question
is
a
distribution
amongst
shareholders
of
the
share
premium
account,
or
part
thereof,
that
transaction
is
to
be
treated
as
if
the
company
was
reducing
its
capital
by
paying
off
paid
up
share
capital.’’
And
at
page
929:
‘What
reason
is
there
for
holding
that
the
capital
character
with
which
the
trustees’
proportion
of
the
amount
was
thus
impressed
when
it
left
the
company
was
effaced
and
replaced
by
an
income
character
when
it
reached
the
hands
of
the
trustees?
For
our
part
we
can
see
none.
We
think
the
hypothesis
enjoined
by
the
section
must
follow
the
amount
received
by
the
trustees
and
determine
its
character
and
destination
in
their
hands
also.
The
cases
to
which
we
have
referred
show
that
the
character,
as
a
matter
of
company
law,
of
any
given
distribution
as
it
leaves
a
company
determines
its
character
in
the
hands
of
the
recipient.
The
relevant
company
law
in
the
present
case
seems
to
us
to
require
that
the
distribution
here
in
question
should
be
treated
from
the
point
of
view
of
the
payer,
that
is,
the
company,
as
a
distribution
by
way
of
return
of
capital.
It
follows,
to
our
minds,
that
the
trustees’
proportion
of
the
distribution
should
similarly
be
treated
in
their
hands
as
paid
up
capital
returned
by
the
company.”
(The
italies
are
mine.)
At
page
930
the
learned
Lord
Justice
makes
a
comment
very
relevant
to
the
case
before
me:
"The
section,
as
we
read
it,
produces
the
same
result
on
a
direct
distribution
of
a
share
premium
account
as
if
the
company
had
first
gone
through
the
formality
of
actual
capitalization
by
bonus
shares
and
then
paid
off
the
bonus
shares
by
way
of
reduction
of
capital.”
And
on
the
same
page
he
dealt
with
the
argument
with
reference
to
the
‘‘mechanics’’
(provided
by
Section
56)
in
these
words:
“
.
.
.
still
the
'mechanics’
are,
in
our
judgment,
an
essential
factor
in
determining
the
character
as
between
capital
and
in-
come
of
the
sum
distributed.
A
company,
having
an
artificial
person,
can
(as
it
has
been
laid
down)
make
a
distribution
amongst
its
members
(otherwise
than
in
a
winding
up)
in
one
of
two
ways—but
only
in
one
of
two
ways:
that
is,
by
a
distribution
of
divisible
profit,
that
is
by
way
of
dividend;
and
by
way
of
a
return
of
capital
pursuant
to
an
order
of
the
court
upon
a
petition
for
reduction
of
capital
in
accordance
with
the
Act.”
Under
Section
61
of
the
Dominion
Companies
Act,
25
Geo.
V,
c.
33,
the
redemption
of
fully
paid
up
preference
shares
in
accordance
with
the
letters
patent
or
supplementary
letters
patent
or
by-laws,
shall
not
be
deemed
to
be
a
reduction
of
capital
in
certain
defined
circumstances,
and
in
these
circumstances
alone.
They
are
these
:
(1)
If
the
redemption
is
made
out
of
the
proceeds
of
an
issue
of
shares
made
for
the
purchase
of
such
redemption;
or
(2)
Where
no
cumulative
dividends
on
preferred
shares
or
shares
of
the
same
class
are
in
arrears,
and
(a)
the
redemption
is
made
without
impairment
of
the
com-
payn’s
capital
out
of
ascertained
net
profits
of
the
company
that
have
been
set
aside
by
the
directors
for
the
purposes
of
the
redemption,
and
(b)
Such
net
profits
are
available
to
be
applied
for
the
redemption
of
the
shares
in
liquid
form
as
certified
by
the
company’s
last
balance
sheet
being
made
up
to
date
not
more
than
ninety
days
prior
to
the
redemption,
after
giving
effect
to
the
redemption.
Where
shares
are
so
redeemed,
the
surplus
resulting
therefrom
shall
be
designated
as
a
capital
surplus
and
shall
not
be
reduced
or
distributed
by
the
company
except
as
provided
in
Sections
49
to
58
which
deal
with
means
of
reducing
capital.
It
is
to
be
noted
that
what
Section
61
provides
for
is
the
redemption
or
purchase
for
cancellation
of
fully
paid
preferred
shares.
At
page
330
the
learned
author
of
Masten
&
Fraser,
Company
Law
of
Canada,
4th
ed.,
comments
on
this
and
states
that
“By
implication
the
section
appears
to
require
compliance
with
Sections
49
and
following
in
respect
of
a
reduction
of
capital
in
the
case
of
a
redemption
or
purchase
for
cancellation
of
preferred
or
other
redeemable
shares,
made
otherwise
than
in
accordance
with
the
conditions
set
out
in
the
section.’’
It
is
stated
:
“It
will
be
noted
that
the
shares
to
be
purchased
or
redeemed
must
be
fully
paid
and
that,
unless
the
redemption
or
purchase
is
made
out
of
the
proceeds
of
a
fresh
issue
of
shares,
there
must
be
no
arrears
of
cumulative
dividends
and
the
redemption
or
purchase
must
be
made
out
of
ascertained
net
profits,
available
as
liquid
assets,
set
aside
by
the
directors
for
the
purpose.
In
order
to
comply
with
the
section
it
is
necessary
to
have
a
balance
sheet
certified
by
the
company’s
auditors
made
up
to
a
date
not
more
than
ninety
days
prior
to
the
redemption
or
purchase
showing
the
requisite
available
net
profits
and
that
the
directors
should
have
set
aside
ascertained
net
profits
of
the
company
for
the
purpose.”
The
question
was
not
argued
before
me
and
has
no
bearing
on
the
subject
I
have
to
decide
except
as
to
whether
Re
Fleck
and
Re
Mills
are
binding
upon
me
in
this
case,
but
in
the
absence
of
argument
if
this
procedure
is
followed
it
is
difficult
for
me
to
see
how
a
company
can
appropriate
from
its
profits
a
fund
to
be
applied
as
the
capital
of
fully
paid
preference
shares
and
so
draw
its
balance
sheet
and
then
use
the
same
fund
to
redeem
the
shares
without
reduction
in
capital
in
compliance
with
Sections
49-58
of
the
Act.
On
the
other
hand,
the
provision
in
Section
61
is
that
the
redemption
of
preference
shares
is
not
to
be
taken
as
a
reduction
of
capital,
if
in
fact
the
shares
after
having
been
fully
paid
up
are
redeemed
out
of
profits
that
have
not
been
appropriated
to
create
the
fully
paid
up
preference
shares.
There
is,
however,
no
similar
provision
in
the
Ontario
Companies
Act
to
that
contained
in
Section
61
of
the
Dominion
Act.
Sections
78
to
82
deal
with
preference
stock.
Section
78(2)
states
:
“The
directors
of
a
company
may
make
by-laws,
(a)
for
creating
and
issuing
any
part
of
the
capital
as
preference
shares.”
Section
80
provides
for
the
creation
or
issuance
of
preference
shares
and
that
the
by-law
‘
1
may
provide
for
the
purchase
or
redemption
of
such
shares
by
the
company
as
therein
set
out.’’
The
limitation
of
the
rights
of
holders
of
the
shares
must
be
fully
set
out
on
the
certificate.
Subsection
(2)
is
important:
4
No
such
by-law
which
has
the
effect
of
increasing
or
decreasing
the
capital
of
the
company,
or
increasing
the
amount
of
the
preference
stock
authorized
by
the
special
Act,
letters
patent.
.
.
shall
be
valid
or
acted
upon
until
confirmed
by
supplementary
letters
patent.’’
(The
italics
are
mine.)
Subsection
(3)
qualifies
subsection
(2)
in
that
it
does
not
apply
to
a
by-law
which
creates
or
attempts
to
create
redeemable
or
con-
vertible
preference
shares,
but
a
certified
copy
of
the
by-law
must
be
filed
forthwith
with
the
Provincial
Secretary
Coupled
with
these
sections
is
to
be
read
Section
96
:
“For
the
amount
of
any
dividend
which
the
directors
may
lawfully
declare
payable
in
money,
they
may
declare
a
stock
dividend
and
issue
therefor
shares
of
the
company
as
fully
paid
or
partly
paid,
or
may
credit
the
amount
of
such
dividend
on
the
shares
of
the
company
already
issued
but
not
fully
paid,
and
the
liability
of
the
holders
of
such
shares
shall
be
reduced
by
the
amount
of
such
dividend.
’
’
This
brings
me
to
consider
the
two
cases
bearing
on
the
subject
in
our
own
Courts.
Re
Fleck,
supra,
a
decision
of
Hogg,
J.A.,
affirmed
in
the
Court
of
Appeal,
[1952]
O.W.N.
260;
[1952]
C.T.C.
205.
Some
of
the
facts
in
this
case
are
similar
to
the
case
I
have
under
consideration
and
some
are
dissimilar.
There
Hogg,
J.A.,
was
dealing
with
a
so-called
dividend
of
a
Company
incorporated
under
the
Dominion
Companies
Act.
A
resolution
of
the
directors
recited
(a)
that
the
company
had
on
hand
$606,488.60
‘
‘
undistributed
income
’
9
at
the
end
of
the
taxation
year
of
1949
;
(b)
that
dividends
of
$606,000.00
had
been
paid
since
the
commencement
of
business
in
1943
to
1950
;
and
(c)
the
provisions
of
the
Income
Tax
Act
whereby
upon
the
payment
of
15%
of
the
amount
of
undistributed
income
at
the
end
of
the
1949
taxation
year
the
balance
of
such
undistributed
income
might
rank
as
tax
paid
on
distributed
income
in
the
form
of
redeemable
shares
which
will
be
tax
free
to
the
shareholders
and
the
company
may
thereafter
redeem
the
said
shares
subject
to
the
powers
of
the
Companies
Act;
and
(d)
:
“And
whereas
the
Company
may,
after
first
paying
the
aforementioned
special
tax
in
respect
of
its
undistributed
income
as
at
December
31,
1949,
pay
a
like
special
tax
on
that
portion
of
income
earned
in
1950
and
subsequent
years
that
is
equivalent
to
the
amount
of
ordinary
dividends
paid
in
such
years
and
thereby
have
the
balance
of
said
portion
of
income
rank
as
tax
paid
undistributed
income
which
may
thereupon
be
distributed
in
the
form
of
redeemable
shares
tax
free
to
the
shareholders
and
be
thereafter
redeemed
subject
to
the
provisions
of
the
Companies
Act.
"
The
company
then
passed
a
by-law
authorizing
the
issue
of
a
stock
dividend
and
passed
a
resolution
declaring
a
stock
dividend
out
of
the
undistributed
income
and
on
the
same
date
passed
a
resolution
reciting
that
the
company
had
issued
1,000
non-cumu-
lative,
redeemable
5%
preferred
shares
of
the
par
value
of
$100.00
each
and
resolved
that
the
shares
be
redeemed
and
they
were
accordingly
redeemed.
It
does
not
appear
that
any
share
certificate
was
actually
issued
or
any
evidence
of
title
to
the
shares
ever
came
into
the
hands
of
the
shareholders.
The
learned
Judge,
after
discussing
some
of
the
cases
to
which
I
have
referred,
stated
the
principal
of
law
to
be
applied
in
all
these
cases
at
p.
119
:
‘“The
principle
to
be
deduced
from
these
judgments
is
that
there
must
be,
in
fact,
a
conversion
by
the
company
of
its
profits
or
surplus
into
share
capital
in
order
that
they
shall
be
regarded
as
corpus
and
not
income
in
the
hands
of
a
trustee,
or
as
between
a
life
tenant
and
a
remainderman.
Furthermore,
that
where
a
company
has
the
power
to
deal
with
profits
by
converting
them
into
capital
of
the
company
such
exercise
of
its
power
is
binding
upon
the
person
interested
under
a
trust
of
the
original
shares
set
up
by
the
testator’s
will.”
In
applying
the
principle
he
said
at
p.
120
:
“These
shares
did
not
form
part
of
the
paid-up
capital
of
the
Company
and
therefore
the
surplus
profits
represented
by
them
were
not
capitalized.
The
steps
taken
by
the
Company
were
induced
because
of
the
provisions
of
the
Income
Tax
Act.
When
redeemable
preferred
shares
are
issued
pursuant
to
Section
59
of
The
Companies
Act,
1934
(Can.),
c.
33,
Section
61
provides
that
the
redemption
of
such
shares
is
not
to
be
deemed
a
reduction
of
the
paid-up
capital
stock
of
the
company
if
such
redemption
is
made
according
to
the
conditions
stipulated.”
The
fund
in
the
hands
of
the
trustees
as
a
result
of
the
redemption
of
the
shares
was
held
to
be
for
the
benefit
of
the
life
tenant.
In
the
Court
of
Appeal
the
cases
are
not
discussed
by
the
Court
but
it
was
held
that
the
money
constituted
income
in
the
hands
of
the
trustees
and
went
to
the
life
tenant.
It
is
to
be
observed
that
Hogg,
J.A.,
placed
his
decision
squarely
on
the
provisions
of
the
Dominion
Companies
Act
and
held
that
the
shares
coming
into
the
hands
of
the
trustees
did
not
form
part
of
the
paid-up
capital
of
the
company.
In
Re
Mills,
supra,
my
learned
brother
Gale
followed
Re
Fleck
with
respect
to
the
issue
and
redemption
of
shares
in
a
Dominion
company
where
the
circumstances
were
somewhat
different.
If
I
felt
the
Fleck
case
and
the
Mills
case
applied
to
the
facts
before
me
I
would
unquestionably
follow
them,
but,
with
respect,
I
do
not
think
they
do.
Whether
the
procedure
followed
in
those
cases
complied
with
Section
61
of
the
Dominion
Act
is
not
for
me
to
discuss
as
the
point
was
not
argued
before
me
and
does
not
appear
to
have
been
argued
in
those
cases.
The
Ontario
Act
is,
however,
as
I
have
pointed
out,
distinctly
different
from
the
Dominion
Act.
In
the
ease
before
me
the
directors
applied
to
the
Provincial
Secretary
for,
and
obtained,
Supplementary
Letters
Patent
which,
(a)
designated
the
5,000
shares
of
the
capital
stock
of
the
company
of
$100.00
each
as
5,000
common
shares
of
$100.00
each;
and
(b)
increased
the
capital
stock
of
the
company
from
the
sum
of
$500,000.00
to
the
sum
of
$1,000,000.00,
by
the
creation
of
$500,000.00
5
%
non-cumulative
redeemable
preference
shares
of
$1.00
each
ranking
in
priority
to
the
common
shares.
The
rights
and
conditions
attached
to
the
preference
shares
were
set
out
in
the
letters
patent
and
the
share
certificates
were
evidence
of
an
interest
in
the
capital
of
the
company.
The
balance
sheet
for
the
year
1950
showed
among
the
liabilities
a
capital
surplus
(re
sale
of
hotel)
of
$169,900.38,
a
share
capital
of
4,850
shares
of
$100.00,
amounting
to
$485,000.00.
Following
the
issue
of
the
Supplementary
Letters
Patent
on
February
9,
1951,
the
balance
sheet
as
of
October
31,
1951,
showed
on
the
liability
side:
‘
‘
Capital
Authorized
500,000
Non-Cumulative
Redeemable
Pre-
|
ferred
Shares
of
$1.00
par
value
|
$
500,000.00
|
|
5,000
Common
Shares
of
$100
par
value
_-
|
500,000.00
|
|
$1,000,000.00
|
|
Issued
|
|
|
276,935
Non-Cumulative
Redeemable
Pre
|
|
|
ferred
Shares
|
$
276,985.00
|
|
Less
107,185
Shares
Redeemed
|
107,185.00
|
|
$
169,750.00
|
|
4,850
Common
Shares
|
485,000.00
|
$
654,750.00”
In
the
light
of
the
authorities
which
I
have
discussed
it
seems
to
me
clear
that
the
company
in
fact
and
in
law
capitalized
the
capital
surplus
and
when
the
certificate
for
26,250
shares
came
into
the
hands
of
the
trustee
it
was
evidence
of
a
capital
interest
in
the
company
to
the
extent
of
its
holdings.
Adopting
the
language
of
Griffith,
C.J.,
in
Knowles
and
Haslem
v.
Ballarat
Trustees,
Executors
and
Agency
Company
Limited,
22
C.L.R.
212:
a
share
in
a
joint
stock
company
is
a
legal
entity
which
connotes
a
right
to
an
ascertained
part
of
the
property
of
the
company
and
is
evidenced
by
documents,
which
include
a
share
register
and
share
certificates.
When
the
trustee
received
the
certificate
for
the
shares
which
I
am
now
considering
that
is
precisely
what
it
had.
If
by
reason
of
any
unforeseen
circumstances
such
as
I
have
heretofore
referred
to,
the
shares
had
not
been
redeemed
and
the
company
had
been
wound
up,
the
holders
of
the
preferred
shares
could
not
have
been
denied
their
right
to
be
paid
in
full
the
amount
“paid
up
on
the
preferred
shares’’
together
with
all
the
dividends
declared
and
unpaid,
out
of
the
assets
of
the
company,
as
set
out
in
paragraph
4
of
the
endorsement
on
the
certificates.
In
fact,
the
company
was
doing
nothing
more
than
capitalizing
its
capital
surplus
until
it
should
be
in
liquid
funds
so
that
the
shares
might
be
redeemed
without
any
question
arising
as
to
taxation.
In
fact,
as
I
read
the
Income
Tax
Act,
the
capital
surplus
might
have
been
distributed
in
the
circumstances
in
cash
without
being
taxable.
To
apply
the
language
of
Jenkins,
L.J.,
in
In
re
Duff’s
Settlements,
and
the
language
of
Lord
Russell
of
Killo-
wen
in
the
Hill
case,
the
character,
as
a
matter
of
company
law,
of
any
given
distribution
as
it
leaves
the
company
determines
its
character
in
the
hands
of
the
recipient,
and,
therefore,
when
these
preferred
shares
were
issued
as
against
the
fund
in
question,
the
fund
had
been
rendered
incapable
of
being
distributed
as
profits.
As
between
tenant
for
life
and
remainderman
the
corporate
acts
of
the
company
determine
their
rights,
and
when
I
say
this
I
use
the
words
advisedly
and
I
mean
the
corporate
acts
having
regard
to
their
legal
consequences
in
relation
to
the
corporate
structure
as
distinct
from
a
resolution
or
declaration
which
does
not
affect
the
corporate
structure
of
the
company
as
was
considered
in
many
of
the
cases
to
which
I
have
referred.
I,
therefore,
come
to
the
conclusion
that
the
answer
to
the
third
question
is
that
the
sum
received
by
the
trustee
upon
redemption
of
the
shares
referred
to
therein
is
corpus
of
the
estate.
That
brings
me
to
deal
with
the
first
two
dividends.
Here,
the
directors
were
seeking
to
do
two
things—(1)
to
take
advantage
of
the
powers
conferred
under
the
Income
Tax
Act
to
place
in
the
hands
of
the
shareholders
the
earned
surplus
so
that
it
would
reach
them
in
an
untaxable
form;
and
(2)
to
reduce
the
earned
surplus
to
nil
or
a
debit
balance
so
that
the
capital
surplus
might
be
released
for
distribution
in
some
form
without
attracting
taxation.
Much
argument
was
addressed
to
me
with
reference
to
the
provisions
of
the
Dominion
Income
Tax
Act
and
their
effect.
It
is
not
necessary
for
me
to
point
out
that
no
provision
of
a
Dominion
statute
could
affect
the
rights
as
between
life
tenant
and
remainderman
(unless
some
action
taken
under
emergency
powers),
with
respect
to
shares
in
a
company
incorporated
under
the
laws
of
a
Province.
I
am
refraining
from
entering
upon
any
discussion
with
reference
to
shares
held
in
a
company
incorporated
under
Dominion
laws.
Whether
the
provisions
of
the
two
Dominion
statutes
may
in
any
way
be
read
together
is
not
for
me
to
discuss
in
this
case.
The
matter
before
me
is
to
be
determined
by
provincial
law
and
provincial
law
alone.
It
may
be
that
if
one
is
permitted
to
go
behind
the
corporate
acts
for
the
purpose
of
determining
the
motive
of
those
responsible
for
the
corporate
acts,
the
provisions
of
the
Dominion
Income
Tax
Act
have
some
relevance
but
no
provision
in
it
as
to
what
is
to
be
deemed
“capital”
or
“income”
has
any
bearing
on
the
rights
of
the
parties
in
this
case.
With
reference
to
the
shares
referred
to
in
questions
1
and
2
the
corporate
steps
taken
were
precisely
the
same.
Acting
under
the
provisions
of
Section
96
of
the
Ontario
Act,
a
stock
dividend
was
declared
and
shares
were
issued
as
fully
paid
up
shares.
In
order
to
do
this
the
funds
from
the
surplus
account
must
necessarily
have
been
appropriated
to
the
capital
account
and
credited
on
these
shares.
When
this
was
done,
the
trustee
was
made
the
holder
of
fully
paid
shares
in
the
company
and
the
certificates
issued
were
evidence
of
that
interest.
There
was
not
the
lapse
of
time
during
which
circumstances
might
have
changed
making
it
impossible
for
the
directors
to
carry
out
their
plan
of
redeeming
the
shares.
But
I
cannot
see
how
the
fact
that
the
share
certificate
was
accompanied
by
the
notice
of
redemption
and
the
cheque
alters
the
corporate
character
of
the
transaction.
‘‘The
form
of
a
company’s
resolutions
and
instruments
is
their
substance.”
In
this
case
the
form
and
substance
was
that
the
trustee
was
made
the
holder
of
fully
paid
up
shares
as
soon
as
they
were
issued.
That
being
true,
the
company
had,
by
its
acts,
concluded
the
question
of
whether
the
shares
were
in
fact
and
in
law
corpus
or
income.
The
fund
against
which
the
shares
were
issued
as
fully
paid
up
shares
could
not
thereafter
be
by
judicial
decision
recast
into
distributable
profits.
In
every
case
in
British
jurisprudence
which
I
have
been
able
to
find,
except
Re
Fleck
and
Re
Mills,
which
I
regard
as
decisions
not
binding
on
me,
where
shares
have
been
issued
as
against
accumulated
profits
it
has
been
held
that
they
were
capital
and
not
income.
The
Barton
case,
the
Blott
case
and
the
Fisher
case
are
all
clear
examples.
On
the
other
hand,
much
argument
has
revolved
around
the
question
as
to
whether
distribution
of
profits
in
any
other
form
has
been
capital
or
income,
depending
on
the
declaration
by
the
company
of
“intention”
or
‘‘the
substance’’
of
the
transaction
as
in
the
Sproule
case
and
the
Bates
case.
On
the
facts
of
the
case
before
me
I
find
that
the
company,
by
the
issue
of
the
preferred
shares,
determined
the
answer
to
both
questions
1
and
2
and
my
conclusion
is
that
the
sum
received
by
the
trustee
referred
to
therein
is
corpus
of
the
estate.
The
costs
of
all
parties
will
be
out
of
the
estate,
those
of
the
executor
on
a
solicitor
and
client
basis.
I
may
add
that
this
is
a
matter
of
very
great
importance,
not
only
in
the
administration
of
estates
but
in
the
drafting
of
wills,
and
it
is
to
be
hoped
that
the
law
to
be
applied
in
all
its
aspects
is
settled
with
finality
and
clarity
at
an
early
date
by
the
highest
Court
in
Canada.
Email this Content