TMI Blog1958 (7) TMI 29X X X X Extracts X X X X X X X X Extracts X X X X ..... ufacture and merchanting of rayon fabrics. The respondents, formerly of German but now of British nationality, who had left Germany when the Nazis obtained power in that country, had a large experience and extensive connexions in the continent of Europe in the rayon trade, and one of them, Dr. Meyer, had already in 1945 been appointed textile adviser to the appellant society. Into this trade the society wished to enter and, though they would have preferred to carry it on as a branch of their own business, this was for more than one- reason not practicable. The respondents were unwilling to act merely as employees of the society and, since at that time licences had to be obtained for the manufacture of rayon, and were granted only to persons who could satisfy the cotton control authorities that they commanded the necessary skill and experience, it was mutually advantageous to the society and the respondents that a subsidiary company should be formed in which they should both be interested. The company was accordingly formed and 7,900 shares were issued, 4,000 to the society, 3,450 to Meyer, 450 to Lucas. Thus the society had such control as a majority shareholding could give. Moreov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vice being sought. The solicitor to the society and the company advised that the shares should be valued and bought at a valuation: they were valued by the company's auditors at no less than 60s. 11d. a share and thereafter the society proceeded no further in the matter. It is impossible after reading the voluminous evidence in this case not to see that the society, thus foiled in their attempt to obtain a grossly unfair advantage of the respondents, determined to seize any opportunity of procuring for themselves the benefit of the trade which had been largely built up by their efforts. It is at this stage convenient to refer to the section of the Act under which the respondents petitioned the court for relief and obtained the order, against which this appeal is brought, that the society should buy their shares in the company at 315s. 0d. per share. It is, so far as relevant, as follows : [His Lordship read section 210(1) and (2) and continued:] It is common ground that at the date of presentation of the petition July 13, 1953, it was just and equitable that the company should be wound up. It could hardly be denied that to wind up the company would unfairly prejudice the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to visit Germany with a view to increasing the company's trade in that country but was prevented by his co-directors from doing so. This was undoubtedly the cause of much ill-feeling and was itself a matter of complaint in the original petition, but, as the averment in regard to it was struck out, I say no more about it. During the same period other incidents occurred which aggravated the hostile relations between Meyer and Schofield, the manager of the society's Falkland Mill. An important consequence of the removal of cotton control was this. In or about June, 1951, a new department of the society had been formed called the merchant converting department. It was under the control of a Mr. Wand, the manager of the drapery department, and its function was to convert loom state cloth by dyeing, printing and finishing into material for manufacture into garments. It therefore became possible upon the removal of cotton control and upon a revival of the rayon trade for the society to divert to their own converting department the product of their Falkland Mill. It was the fact, as they were well aware, that the company, which had throughout been practically tied to them for the greate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot learn, until in these proceedings the minute was produced, that the society had decided that "the company had served its purpose" and should be liquidated if possible. At this time the three nominee directors of the company were aware (Taylor by his own confession) of the policy of the society. It is undeniable that persons so placed may find themselves in a difficulty. But in all the evidence I have not been able to find the least trace that they regarded themselves as owing any duty to the company of which they were directors. They were the nominees of the society and, if the society doomed the company to destruction, it was not for them to put out a saving hand. Rather, they were to join in that work, and, when a frank and prompt statement to their co-directors might have enabled them to retrieve its fortunes, they played their part by maintaining silence. That is how they conducted the affairs of the company, and it is impossible to suppose that that was not part of the deliberate policy of the society. As I have said, nominees of a parent company upon the board of a subsidiary company may be placed in a difficult and delicate position. It is, then, the more incumbent on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itself to blame if, through its neglect to get a contract with the society, it failed in a crisis to obtain from the Falkland Mill the supply of cloth that it needed. The short answer is that it was the policy of the society that the affairs of the company should be so conducted and the minority shareholders were content that it should be so. They relied how unwisely the event proved upon the good faith of the society, and, in any case, they were impotent to impose their own views. It is just because the society could not only use the ordinary and legitimate weapons of commercial warfare but could also control from within the operations of the company that it is illegitimate to regard the conduct of the company's affairs as a matter for which they had no responsibility. After much consideration of this question, I do not think that my own views could be stated better than in the late Lord President Cooper's words on the first hearing of this case. "In my view," he said 1954 SC 381, 391, "the section warrants the court in looking at the business realities of a situation and does not confine them to a narrow legalistic view. The truth is that, whenever a subsidiary is formed as in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atter of policy thereafter proceeded, as the subsequent events demonstrated only too clearly, to endeavour to force down the value of the company's shares, and in the process in effect to transfer the goodwill of the company's business to the society itself." The conduct thus described was, no doubt, oppressive to the company and to the respondents' minority shareholders in the company. It is necessary, however, to consider what was the nature of the steps taken by the society in furtherance of the policy thus described, in order to see whether they bring the case within section 2ro of the Companies Act, 1948. The respondents, as members of the company, can only succeed if they prove that "the affairs of the company" and I emphasize the words "of the company" were "being conducted in a manner oppressive to some part of the members," i.e. , to themselves. I cannot improve upon the learned Lord President's summary of the steps taken by the society and I gratefully adopted it. After referring to the fact that cotton control, and its attendant licensing system, came to an end in June, 1952, the learned Lord President continued 1957 SC 110, 124 : "The door was then open for the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me when Dr. Meyer was finding the mill consistently quoting these high prices to him, the society decided that the merchant converting department should obtain deliveries of rayon goods from the Falkland Mill. This was not a mere departmental matter arranged between managers, but was raised to a policy level by a direct approach to the merchant converting department by the manager of Falkland Mill. This is clear on the evidence both of Mr. Schofield and Mr. Wands. The board of the society and the society's nominee directors on the board of the company were, therefore, fully advised of the decision. "Moreover, the arrangement made was that the mill would supply woven rayon cloth to the merchant converting department and that the mill would 'accept the prices which the department was prepared to pay, and see the manager of the department about it later if the prices were not economical ones.' To start with, experimental orders only were given and accepted. But the manager of the department said in evidence that he gave Falkland Mill in 1952 enough orders to keep the looms going for six months. In 1953 and 1954 all the rayon looms at Falkland were operating for the merchant converti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to cause hardship to the company and to force down the value of its shares however regrettable such conduct may be, and whether or not it may be actionable. I turn now to consider whether there is any other ground upon which the present case comes within section 210. Counsel for the respondents contend that certain directors of the company, nominated by the society and constituting a majority of the company's directors, or the society acting by these directors, "conducted" the' affairs of the company "in a manner oppressive" to the respondents. As these directors of the company were also directors of the society, they must, no doubt, be treated as parties to the oppression by the society in the conduct of its own affairs ; but I have had great difficulty in arriving at a conclusion upon the question just posed, which is directed only to the affairs of the company. The inaction of these directors at a critical time was pointed out by the Lord President in a passage which I have already quoted from his judgment, and their conduct throughout the relevant period is open to severe criticism. My difficulty is that the conduct of which complaint is made consists rather of sins of omissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation, and appointed the proof to proceed before Lord Carmont, one of their number. The proof, which commenced on March 25, 1955, was lengthy and voluminous and extended, with many interruptions, for a period of over a year, though the actual number of days occupied was only twelve. After a hearing lasting 13 days, the First Division gave judgment on March 20, 1957, ordaining the society to purchase the shares of the petitioners in the Scottish Textile and Manufacturing Co. Ltd. (hereinafter called "the company") at a price of 315s. per share. It is difficult to compress the salient features of the case even in broad outline. The petitioners, who were originally of German nationality and are now naturalized British subjects, came to this country in 1939. Through an advertisement Dr. Meyer (one of the petitioners) got into touch with the society in 1945 and got employment from them as textile adviser. He had considerable knowledge of rayon trade and production and conceived the idea that one of the society's weaving mills at Falkland could be profitably employed in the weaving of rayon goods, which would be for it a new line of manufacture. He had great experience of the proces ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act as directors of the said Scottish Textile and Manufacturing Co. Ltd. along with [Dr. Meyer] and [Mr. Lucas] who already have been elected directors of the company and appointed managing directors thereof. "Seventh. [Dr. Meyer's and Lucas's] appointment as joint managing directors shall subsist for a period of three years as from May 7, 1946, notwithstanding the date hereof, and on the expiry of said period unless terminated as hereinafter provided, or unless renewed for a further period, shall thereafter continue from year to year. [Dr. Meyer's and Mr. Lucas's] appointments as managing directors or one or other of them may be terminated by the company on three months' previous notice in writing being given to that effect, but said notice shall not prejudice their status to act as ordinary directors of the company if so elected. "Eighth. [Dr. Meyer and Mr. Lucas] in the performance of their duties as joint managing directors shall promote and safeguard the company's interests faithfully and with due diligence and they shall devote their whole time to the management and supervision of the company and in particular they shall apply without reservation in any respect their spec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operations it was necessary for the company to secure three things sources of supply of rayon yarn, a licence from cotton control to obtain and weave the yarn, and a place at which to weave it. Dr. Meyer was the chief, if not the sole instrument, in obtaining the first two of these things and he was largely responsible for securing the third. It was contemplated apparently that the company might obtain a factory of its own. On December 29, 1945, before the company was incorporated, the society minuted approval of a recommendation by its furnishing sub-committee "that steps should be taken without delay to rent a suitable factory. When we are successful in obtaining premises, sub-committee would consider transferring to them [the company] several looms (say 24) from the linen works at Falkland. Until such time as a factory becomes available, production would be carried on at Falkland and elsewhere." At a meeting of the company's board on January 14, 1947, Dr. Meyer reported disappointment that the 24 looms promised at the outset had not been altogether made available and that not more than 10 looms were running on the company's behalf at Falkland. He stressed the fact that "sales to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the mill making cloth to be accumulated by the company with no orders in sight and with no money coming in to pay for it. The last bulk order for cloth given by the company to the mill in 1951 was on August 22, 1951, and a dispute arose about the mill continuing to weave to this order, which was not settled till April, 1952. There are indications in the evidence that even before this Mr. Schofield was not particularly well disposed to Dr. Meyer and I think that from this time onwards his attitude unjustifiably hardened against him. Another event took place about this time which is crucial in this case. The society, stimulated presumably by the prosperity of the company and desiring to have a share interest in the company corresponding to what they were entitled to under the original agreement, decided to seek what was described as a proper alignment of the shareholding. The matter came before the society first on August 20, 1951, and their representatives on the company's board were thereafter asked to raise the matter with the company. At a board meeting of the company on November 5, 1951, proposals were continued for further consideration at a meeting to be held on November 22. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were personally or as representatives of the society the whole shareholders and that the company was a private company. No appeal to a shareholders' meeting would alter the situation because the composition of board and shareholders' meeting would be the same. The recession deepened through the major part of 1952 and manufacture by the mill for the company was non-existent. It would seem likely that the recession was felt by other mills of the society than Falkland Mill, but a veil is drawn over much of the society's and the petitioners' activities in 1952 by the exclusion from probation by the Court of Session of inquiry into certain happenings of which complaint was made by the petitioners in their pleadings. In June, 1952, cotton control was abolished. This has a material effect on what followed for it left the society free to procure rayon yarn and weave rayon cloth without any licences. No orders had passed from the company to Falkland Mill since 1951. But trade began to pick up in the autumn of 1952 and it is clear that Dr. Meyer was anxious for the mill to resume weaving for the company. The mill itself was at a low ebb. There were no looms working on rayon cloth. It was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of rayon cloth was supplied by the mill and for the year 1954 11,776 worth. From transfer invoices produced for these years it is shown that a line of rayon cloth known as 1009 was throughout debited by the mill to the merchant converting department at 1s 6 d. a yard. The lowest price quoted by Mr. Schofield to the company for this quality on November 24, 1952, was 1s. 7d. a yard, and Dr. Meyer was never able to secure a better quotation. Indeed, much later, in July, 1953, when the society was not prepared to provide cloth for the company except on a weaving commission basis, Mr. Schofield was quoting prices which, on a manufacturing basis, worked out as high as 1s. 9 d. a yard. In December, 1952, when Dr. Meyer was endeavouring to resume business with the mill he was able to buy this quality cloth from other sources at about 1s. 56/8d. and from a merchant converter at 1s. 6 d. In these circumstances, the judges of the First Division all took the view that there was a policy on the part of the society to starve the company of cloth, and I do not find it possible, in the circumstances proved, to differ from this view. It is said that during 1953 and 1954 the society made a contri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision is forced upon us." The letter, dated January 27, 1953, that was sent by Dr. Meyer was couched in somewhat different language and in particular refers to a price to be negotiated for the petitioners' shares. It runs : "Dear Mr. Stirling, "In our conversation last Friday we covered all events from the negotiations regarding the ratio of shareholding up to today. I explained to you how the very harmonious and friendly relations which were the guiding principle in all our dealings started to deteriorate rapidly, and certain actions taken during the last fifteen months did serious harm to our prosperity and goodwill. "Mr. Lucas and myself regret this turn of events most deeply as it affects not only our livelihood which we built up with so much pain and labour, but also our sentiment and affection which we gave wholeheartedly to the co-operative idea in spirit and actions. "In spite of all these happenings we still feel that a friendly settlement is very much desired at least from our side and we have therefore decided to offer to you shareholding of 3900 shares at a price to be negotiated between us. "As we have to take certain important decisions very soon we would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... managing directors should terminate on November 30, 1953. They were, I think, still anxious to do what they could to promote the trade of the company and conserve its goodwill and did in fact do some business through other sources than the mill. Under their agreement, they were in any case bound to do so and had been told to do so at a board meeting on August 24, 1953. But excessively high commission weaving rates quoted by Mr. Schofield prevented business on any scale being done with the mill and disputes arose also with regard to a special order where the price charged was of no consequence. The evidence suggests to me the continuance of a policy of hostility to and discouragement of the petitioners by the society. This period produces an instance of support of the petitioners by their fellow directors. Following a meeting of the company's board on October 5, 1953, at which Dr. Meyer complained of the rates quoted by the mill, the company's secretary, on the board's authority, wrote to the society's secretary that "my board would like to inquire if there is any possibility of the quoted commission weaving charges from the linen works, Falkland, being reduced," an inquiry which pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the mill to show favour to the merchant converting department which it could equally have shown to its old customer the company. But I prefer the view that the mill was giving the merchant converting department rayon cloth at prices which it was prepared to quote on an ordinary commercial and competitive basis. I have already dealt with the evidence by which the society seeks to escape this natural inference. Mr. Schofield's own evidence was that he was expected to show a profit at his mill. It is to be remembered that the company was, shortly, before, giving full employment to the rayon looms and that, if it had been allowed the opportunity to place orders after the recession passed, there was every reason to think it would do so again. According to the evidence trading prospects were good and the results shown in the production of rayon for the merchant converting department bear out this evidence. According to a report of the manager of the drapery department dated August 8, 1953, the cost prices of the mill were based on covering overheads on reduced production and it was anticipated "that if full productive capacity can be obtained mill cost prices will be lowered." From ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d written, which they had received, with reference to the alignment of the shareholding and the taking over of shares from the petitioners, and the general attitude of the society's directors on the company's board. On the vital matters affecting the company's prosperity known to the nominee directors the fee directors remained silent, concealed the facts from the petitioners and took no action and gave no advice helpful to the company. As Lord Sorn put it, their conduct as directors was a negative one to "let the company drift towards the rocks." My Lords, if the society could be regarded as an organisation independent of the company and in competition with it, no legal objection could be taken to the actions and policy of the society. Lord Carmont pointed this out in the Court of Session. But that is not the position. In law the society and the company were, it is true, separate legal entities. But they were in the relation of parent and subsidiary companies, the company being formed to run a business for the society which the society could not at the outset have done for itself, unless they could have persuaded Dr. Meyer and Mr. Lucas to become servants of the society. This th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, is what happened here. Nor do I think what I have said is materially different from the views expressed by all their Lordships in the Court of Session. The Lord President considered 1957 S.C. 110 136 that there was a policy by the society's nominees on the company s board of "uniform silence" in face of the progressive deterioration in the company's activities; of failure to disclose to the petitioners the explanation of the deterioration; unwillingness to encourage the company to seek other manufacturers, leading to the conclusion that the society was extending to the conduct of the affairs of the company the same policy that was being operated by the society itself. Lord Carmont considered that the society's nominees conducted the affairs of the company oppressively as from the time when being aware of the society's policy they continued to sit on the company's board and to control its affairs. They could not, he says 1957 S.C. 110 136, in the circumstance of their relation to the society be anything other than active or at best passive, supporters of the society's policy when dealing with the company's affairs, and even their continuance in office as directors of the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ine of utmost good faith between partners. He is also acting in a manner which, I think, may be regarded as oppressive to his partners for he is doing them an injury in their business. In the same way there was here, in my opinion, oppression by the society of the minority shareholders and it was, I consider, oppression in the conduct of the affairs of the company. Oppression under section 210 may take various forms. It suggests, to my mind, as I said in Elder v. Elder and Watson 1952 S.C. 49 lack of probity and fair dealing in the affairs of a company to the prejudice of some portion of its members. The section introduces a wide power to the court to deal with such a situation in an equitable manner which it did not have in the case of a company prior to the passing of the Act of 1948. The court has here acted, in my opinion, within the powers conferred upon it. It was said that appeal could not be made to section 210 unless the company had a continuing life ahead of it and here it was clear that the company would have to be wound up. But that means that if oppression is carried to the extent of destruction of the business of the company no recourse can be had to the remed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed were, I think, these : The co-operative society set up a competing business. It established its own merchant converting department, engaged in the rayon trade itself, and quoted more favourable terms to its own department than it did to the textile company. It is said that the co-operative society did this with intent to injure the textile company to depress the value of its shares so that the co-operative society could get them cheap but I would not myself go as far as this. It seems to me that the co-operative society all the time was seeking to promote its own interests. It was ready in 1946 to enlist the co-operation of Dr. Meyer and Mr. Lucas when they .were useful to it so as to get an introduction into the rayon trade but it was ready to throw them over when they were no longer useful. By which I mean that it was ready to withdraw all support from them. That was, I think, the state of mind of the co-operative society right from the moment in November, 1951, when Dr. Meyer and Mr. Lucas refused to realign the shares at par. At that time the rayon trade was in a recession and Dr. Meyer and Mr. Lucas were not of so much use to the society as they had been. By the time the ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xtile company three out of five there. So long as the interests of all concerned were in harmony, there was no difficulty. The nominee directors could do their duty by both companies without embarrassment. But, so soon as the interest of the two companies were in conflict, the nominee directors were placed in an impossible position. Thus, when the realignment of shareholding was under discussion, the duty of the three directors to the textile company was to get the best possible price for any new issue of its shares (see per Lord Wright in Lowry v. Consolidated African Selection Trust Ltd. [1940] AC 648, 679 ; 56 TLR 735 ; [1940] 2 All. ER 545 ; 10 Comp. Cas. 200) , whereas their duty to the co-operative society was to obtain the new shares at the lowest possible price at par, if they could. Again, when the co-operative society determined to set up its own rayon department, competing with the business of the textile company, the duty of the three directors to the textile company was to do their best to promote its business and to act with complete good faith towards it ; and in consequence not to disclose their knowledge of its affairs to a competitor, and not even to work for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Your Lordships were referred to Bell v. Lever Brothers Ltd. [1932] AC 161, 195 ; 48 TLR 133 . where Lord Blanesburgh said that a director of one company was at liberty to become a director also of a rival company. That may have been so at that time. But it is at the risk now of an application under section 210 if he subordinates the interests of the one company to those of the other. So I would hold that the affairs of the textile company were being conducted in a manner oppressive to Dr. Meyer and Mr. Lucas. The crucial date is, I think, the date on which the petition was lodged July 14, 1953. If Dr. Meyer and Mr. Lucas had at that time lodged a petition to wind up the company compulsorily, the petition would undoubtedly have been granted. The facts would plainly justify such an order on the ground that it was "just and equitable" that the company should be wound up : see In re Yenidje Tobacco Co. Ltd. [1916] 2 Ch. 426 ; 32 TLR 709 . But such an order would unfairly prejudice Dr. Meyer and Mr. Lucas because they would only recover the break-up value of their shares. So instead of petitioning for a winding-up order, they seek to invoke the new remedy given by section 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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