Law and Accounting (RLE Accounting)

Pre-1889 British Legal Cases

Jean Reid

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781317962700
• Edition: 1
• Topic: Business
• Subtopic: Accounting
• Index: Business

This book contains edited versions of thirty British legal cases involving accounting issues decided from 1849-1888. These cases are a valuable source of information about the development of accounting principles and practices in nineteenth-century Great Britain. The thirty cases show that the court decisions involved a rich variety of accounting issues. In some cases courts upset private contractual stipulations regarding accounting and dividend matters. In others, management was held to have used incorrect principles in computing profits. Whether or not a contract or management decision was upset, the courts often discussed at some length the principles that management should apply in the preparation of balance sheets or income statements. It is therefore obvious that in resolving issues of equity among participants in British companies, the courts were applying normative accounting principles.

HENRY v. THE GREAT NORTHERN RAILWAY COMPANY

4 Kay & John. 1 (1857)
Vice Chancellor — Chancery

THE Plaintiffs were holders of preference stock in the Great Northern Railway Company. The Defendants were the Company and its Directors.

Dividends were duly paid in full upon the Plaintiffs' stock by half-yearly payments, up to the 30th of June, 1856, inclusive. But before another half-year's interest became due, it was discovered that at various times during the eight preceding years stock and shares of the Company, including preference stock similar to that held by the Plaintiffs, had been fraudulently created and issued by Leopold Redpath, a servant of the Company, by means of false entries in the books of the Company, and by fictitious transfers and otherwise, to the amount of £221,070, or thereabouts.

Under these circumstances, at the next half-yearly general meeting of the Company, held on the 12th of March, 1857, and which had been specially convened for the purpose, a report from the directors on the subject of Redpath's forgeries and frauds was read, together with a statement of the nett revenue of the Company, which shewed a balance of 243,923l. 5s. 8d. for the half year ending on the 31st of December, 1856; and it was resolved that no dividend should be declared, but that the meeting considered it desirable that the balance of 243,923l. 5s. 8d. should be applied to meet the losses caused by the frauds and forgeries referred to in the Directors' Report; and that the directors should be, and they thereby were, requested and authorised to apply the said balance, when and in such manner as they might consider most beneficial for the Company, and to take such proceedings in Parliament and otherwise as they might deem most conducive to the interests of the Company. …

The net revenue of the Company for the half year ending the 30th of June, 1857, amounted to upwards of £200,000, and was more than sufficient to pay to the Plaintiffs and the other holders of the preference stock their several dividends, to be computed from the 30th of June, 1856, to the 30th of June, 1857.

The half-yearly ordinary general meeting of the Company being now about to be held on the 29th of August, 1857, the Plaintiffs filed their bill on behalf of themselves and all other holders of preference stock in the Company, charging that the Defendants intended at the meeting to declare a dividend out of the net profits of the Company made since the last dividend was declared, and to pay dividends to the holders of original ordinary stock in the Company, without regard to the claim of the holders of preference stock to be paid, as the Plaintiffs charged they were entitled to be paid, the full amount of the dividends payable in respect of such preference stock from the 30th of June 1856, before any dividend or payment should be made in respect of the original ordinary stock, and praying that it might be declared that the holders of preference stock in the Company were entitled to be paid interest or dividends on the amount of preference stock held by them from the 30th of June, 1856, according to the amount of interest or dividends which the classes of preference stock respectively carried, before any payment in respect of dividends or otherwise should be made to any of the holders of ordinary stock;….

VICE-CHANCELLOR SIR W. PAGE WOOD:—

The 3rd section of the Act of Parliament of 1857 has created a difficulty requiring much consideration. I was, therefore, anxious that the whole of this case should be most fully argued.

Whether the shares in question were preference shares, in such a sense as to entitle them to arrears, or not, in cither event, except for the 3rd section of the Act, I should not have found any difficulty in the case; because it appears to me, that the purport and scheme of the Act are simply to carry into effect an arrangement, by which, out of the ordinary profits realised by the Company in a [illegible text in source], and which would otherwise have been appropriated among the shareholders, a common calamity which has befallen the whole Company would be set right.

As regards that calamity, I entirely coincide in the view taken by the counsel who first advised the Company, that it is to be viewed as any other calamity—the fall of a tunnel, the effect of an inundation, or the like; and although, at first, it occurred to me that there might be some special case made for saying that the preference shareholders, as they are termed, ought to bear a proportion of the loss, regard being had to the forgery of their preference stock, which let in other persons to share in that stock, as well as to the difficulty by which they, in common with the other shareholders, were met in getting any dividend at all, independent of the Act, yet, upon further consideration—and even before hearing a reply—it did not appear to me that any such equity could attach to them. It appeared to me, that it was simply equivalent to a loss occasioned by the fraudulent conduct of a clerk, who might have absconded with a box containing the money that has been lost to the Company. Such a loss could be treated only as a common calamity, and could not, in the slightest degree, vary the position of the several proprietors of stock as between themselves. Like any other calamity, it would have to be met before profit could be realised; and any profit which would afterwards be realised would be applied, like any other profit, in payment of shareholders according to their priorities of dividend. …

It may not bo the case with this, which is a successful Compnny, supported by wealthy men, who may have absorbed, to a great extent, the preferential shares; but in many, I may say, in the majority of Companies, strangers are brought in as holders of such shares when the original, shareholders are nearly ruined. The original shareholders take the benefit of the capital so brought in, and stipulate to pay preferential dividends at 5 per cent. The majority clearly can have no right, as every one must see, to alter that bargain; hut what they cannot do directly, they may do with the greatest ease and without fraud by another course. To put the case beyond all question of fraud, suppose them to have half-yearly dividends, not making them for the occasion, but dividing half yearly, and repeating that division from year to year. Suppose, then, that they wish to speculate upon a larger amount of profit, by carrying on business to a larger extent with an increased number of carriages and locomotives. All this would be fair. Now suppose they were to say, ‘let us make this outlay whenever there is only just enough to pay the preferential shareholders, and nothing to pay us;’ and suppose this to be done;—the preferential shareholders would bear the whole burthen of paying for the whole of the rolling stock; they would lose, to that extent, their dividends for that half year; and the next half year, if this construction be correct, they would have no claim whatever in respect of their loss. Presently, when the outlay had been made, and the business had increased in consequence, the Company might have a large fund coming in, and the ordinary shareholders would be entitled to divide it; in other words, they would get, by force of this construction, a dividend—that is, a share of the profits—before the holders of the preference shares had received dividends, or a share of the profit amounting to the [illegible text in source] cent, per annum.

For these reasons, I am very strongly of opinion, that if you announce, that, by an Act of Parliament, certain shareholders are to have dividends amounting—some to 41/2 per cent., others to 5 per cent, per annum (that is to say, a share of the profits to that amount)—in preference to the payment of any dividend upon the ordinary shares of the Company, you must take care that the persons to whom you give this preference receive dividends to these amounts out of the profits of the Company (whenever accruing), before you take one sixpence for any dividend to the shareholders, whom I may term the ordinary shareholders of the concern. Having come to that conclusion as to the rights of the preference shareholders, independently of the Act of 1857, it appears to me, for the reasons I have already given, that no intention to the contrary is apparent on the face of that Act. There is no natural equity but what is the other way. The calamity which has befallen the Company does not affect the rights of the shareholders inter se, but is a common loss, to be paid for out of the general assets of the Company; and such being the loss, the profit is diminished accordingly. What remains of profit should be divided according to the stipulation made between the parties; . …

CORRY v. THE LONDONDERRY AND ENNISKILLEN RAILWAY COMPANY

29 Beav. 263 (1860)
Master of the Rolls – Chancery

This railway was constructed under the powers of an act passed in 1845, and the preference shares were created under the powers contained in subsequent acts passed in 1848, 1852, 1854 and 1856,…

The undertaking was unsuccessful, and though some dividends were declared, the income was insufficient to pay the preference shares in full, and debts had been contracted by the company beyond the amount authorized to be borrowed by the acts of parliament to an extent, as the bill alleged, of about 30,000l.

In March, 1860, the company, under powers obtained for that purpose, granted a lease of the railway to another company for thirty-five years, renewable, at a certain rent of 26,000l. a year, subject to increase. This rent (subject to the question as to payment thereout of the debts) became divisible amongst the shareholders.

The bill was filed by Corry (a preference shareholder) on behalf of himself and all other preference half shareholders against the company, against the directors, and Eckersley and Wright, who represented the interests of the ordinary shareholders, and it prayed, in substance, a declaration that the income of the company, as the same should be received, ought to be applied, first, in payment of the working expenses of the railway and of the interest on the amount of the moneys authorized by the acts of parliament to be borrowed by the company. Secondly, in payment and satisfaction of the whole or a portion of the debts which had been incurred by the company beyond the amount which the directors were authorized by the acts of parliament to borrow. Thirdly in or towards payment to the preference shareholders, according to their priorities, of their dividends and arrears, and lastly in payment of the dividends to the ordinary shareholders.…

The MASTER of the ROLLS.

This is a suit instituted for the purpose of determining what constitutes the profits of the company, and, secondly, how those profits ought to be applied.…

The first question is, what constitutes profits, and whether the Defendants are entitled to pay any and what debts out of this sum before they divide it among the shareholders.

Upon this point I expressed my opinion during the argument, and I am confirmed in what I then stated by the further attention I have given to it. I am of opinion that all the debts of the company are first payable, other than those which, for want of a better expression, may be called funded debts; for instance, if the Defendants have raised money by mortgage, under the powers contained in their act, for the purpose of completing their line, this does not constitute such a debt as can be paid off out of the profits, before the profits are divided. But, on the other hand, any debts which have been incurred, and which are due from the directors or the company, either for steam engines, for rails, for completing stations, or the like, which ought to have been and would have been paid at the time, had the Defendants possessed the necessary funds for that purpose, those are so many deductions from the profits, which, in my opinion, are not ascertained till. the whole of them are paid….

BALE v. CLELAND

4 F. & F. 117 (1864)
Civil Court

Guildford, Civil Court; coram Martin, B.
BALE v. CLELAND AND OTHERS.

THIS was an action by a shareholder in a joint stock company, the Asphaltum Company, Limited, against the directors and promoters, for representations contained in the prospectus and report and balance sheet, and relating to the supposed profits of the concern, and the declaration of a dividend, which he alleged to have been not only false but fraudulent, and by which, he alleged, that he was induced to take 200 shares; so that, therefore, he was entitled to recover the amount he had paid for the shares. The defendants were seven persons named Cleland, Chap-pell, Harrison, Wilson, Reynolds, Ford, and Ross….

In January, 1859, the company was registered under the Joint Stock Companies Act, 1856^(a).

It was projected by one Tripler, who was acquainted with the two principal defendants Cleland and Chappell, for the working certain strata or mines of asphaltum, for which he had obtained a concession from the Spanish Government in Cuba.

It was registered under the name of the Asphaltum Company, Limited, “to raise, and to import and sell in England, and other parts of Europe and America, a certain substance called asphaltum, and to manufacture it for sale,” the nominal capital to be 100,000l., divided into 10,000 shares of 10l., the registered promoters being Tripler, Cleland, Chappell and several others, not including any of the other defendants.

The articles of association recited that the capital was subsequently altered to 100,000 shares of 1l. each. The defendant Ford had been out to Cuba to view the mines. The company was completely registered in January, 1859, and in 1860 all the defendants became directors. In November, 1860, Cleland ceased to be a director, and became auditor. The defendant Chappell, a solicitor, became secretary, both with seats at the board, and the defendants Reynolds and Harrison became directors. The others were so before September. In September, 1860, a prospectus was issued containing the representations set forth in the first count of the declaration. All the defendants except Harrison and Ross were then directors, and it was drawn up by Ford. It was not until November, 1860, that the plaintiff saw it. On 30th November, 1860, Cleland and Chappell ceased to be directors, and were appointed—the former auditor, the latter secretary—both with seats at the board; and at the same...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Original Title Page
• Original Copyright Page
• Acknowledgments
• Table of Contents
• Introduction
• 9 English Reports 1181 (1849), [House of Lords]
• 41 English Reports 1228 (1849), [Lord Chancellor—Court of Appeal]
• 22 L.J.Ch. 226 (1852), [Lord Chancellor—Court of Appeal]
• 26 L.J.Ch. 855 (1857), [Vice Chancellor—Chancery]
• 4 Kay & John. 1 (1857), [Vice Chancellor—Chancery]
• 29 Beav. 263 (1860), [Master of the Rolls—Chancery]
• 4 F. & F. 117 (1864), [Civil Court]
• 2 Hem. & M. 528 (1864), [Vice Chancellor—Chancery]
• 35 L.J.Ch. 363 ( 1866), [Vice Chancellor—Chancery]
• L.R. 3 Ch. App. 337 (1868), [Lord Chancellor—Court of Appeal]
• L.R. 5 Eq. 326 (1868), [Vice Chancellor—Chancery]
• L.R. 6 Eq. 112 (1868), [Master of the Rolls—Chancery]; 20 L.T. 766 (1869), [Lord Chancellor—Court of Appeal]
• 20 L.T. 553 (1869), [Vice Chancellor—Chancery]; L.R. 4 Ch. App. 475 (1869), [Lord Justices—Court of Appeal]
• L.R. 6 Ch. App. 104 (1870), [Lord Justices—Court of Appeal]
• L.R. 5 Ch. App. 621 (1870), [Lord Chancellor—Court of Appeal]
• 20 L.T. 72 (1869), [Vice Chancellor—Chancery]
• 22 L.T. 839 (1870), [Vice Chancellor—Chancery]
• L.R. 14 Eq. 517 (1872), [Vice Chancellor—Chancery]
• 9 L.R. Ch. 685 (1878), [Chancery]
• 16 L.R. Ch. 344, @ 347n. (1879), [Master of the Rolls—Chancery]
• 16 L.R. Ch. 344 (1881), [Master of the Rolls—Chancery]
• 9 Court Session Cases, 4th Series, 535 (1882), [Court of Sessions, Scot.]
• 21 L.R. Ch. 519 (1882), [Court of Appeal]
• 21 L.R. Ch. 149 (1882), [Chancery]
• 51 L.J. Ch. 882 (1882), [Vice Chancellor—Chancery]
• L.R. 23 Ch. 52 (1883), [Court of Appeal]
• 35 L.R. Ch. 502 (1886), [Chancery]
• Unreported (shorthand reporter's notes in Palmer, Company Precedents, 1912, pp. 904–906), (1886), [Chancery]
• 36 L.R. Ch. 787 (1887), [Chancery]
• L.R. 21 (Ire.) Ch. 221 (1888), [Master of the Rolls—Chancery]