Borland’s Trustee v Steel Brothers & Co Ltd [1901] 1 Ch 279 is a UK company

law case, concerning the enforceability of a company's constitution and the nature of a
company share. It is also one of the rare exceptions to the rule that a transfer of assets
which only takes effect upon a person's bankruptcy is normally void.

Facts
Steel Bros Ltd’s articles of association said if a member went bankrupt his shares would
be transferred to designated persons at a fair price not above par value. Mr JE Borland
held 73 £100 shares and went bankrupt, and so the company gave Borland’s trustee in
bankruptcy notice of the transfer. The trustee argued the article was void because it
compromised ownership and property rights which tended to perpetuity, against the rule
against perpetuities. It requested an injunction against the share transfer at all, or at
anything less than a fair value

Judgment
Farwell J rejected Borland Trustee’s argument and held the article was valid. The transfer
could be made, because the contract engendered in the articles of association are prior to
the rights contained in a share. He said the argument that the article was repugnant to
absolute ownership needed to assert, wrongly, that a share is a sum of money dealt with
by executory limitations. But in fact a share is an interest and consists of ‘a series of
mutual covenants entered into by all the shareholders inter se in accordance with section
16 of the Companies Act 1862.’[1] The argument about perpetuity has no application
because the rule against perpetuities does not apply to personal contracts.[2]
It is said that the provisions of these articles compel a man at any time during the
continuance of this company to sell his shares to particular persons at a particular price to
be ascertained in the manner prescribed in the articles. Two arguments have been
founded on that. It is said, first of all, that such provisions are repugnant to absolute
ownership. It is said, further, that they tend to perpetuity. They are likened to the case of
a settlor or testator who settles or gives a sum of money subject to executory limitations
which are to arise in the future, interpreting the articles as if they provided that if at any
time hereafter, during centuries to come, the company should desire the shares of a
particular person, not being a manager or assistant, he must sell them. To my mind that is
applying to company law a principle which is wholly inapplicable thereto. It is the first
time that any such suggestion has been made, and it rests, I think, on a misconception of
what a share in a company really is. A share, according to the plaintiff's argument, is a
sum of money which is dealt with in a particular manner by what are called for the
purpose of argument executory limitations. To my mind it is nothing of the sort. A share
is the interest of a shareholder in the company measured by a sum of money, for the
purpose of liability in the first place, and of interest in the second, but also consisting of a
series of mutual covenants entered into by all the shareholders inter se in accordance with
s 16 of the Companies Act 1862. The contract contained in the articles of association is
one of the original incidents of the share. A share is not a sum of money settled in the
way suggested, but is an interest measured by a sum of money and made up of various
rights contained in the contract, including the right to a sum of money of a more or less
amount. That view seems to me to be supported by the authority of New London and
Brazilian Bank v Brocklebank.[3] That was a case in which trustees bought shares in a
company whose articles provided “that the company should have a first and paramount
charge on the shares of any shareholder for all moneys owing to the company from him
alone or jointly with any other person, and that when a share was held by more persons
than one the company should have a like lien and charge thereon in respect of all moneys
so owing to them from all or any of the holders thereof alone or jointly with any other
person.” One of the trustees was a partner in a firm which afterwards went into
liquidation, at a time at which it owed the company a debt which had arisen long after the
registration of the shares in the names of the trustees. It was held that the shares were
subject to the lien mentioned for the benefit of the company, notwithstanding the interest
of the cestuis que trust which was said to be paramount. If there had been any substance
in the suggestion now made, namely, that the right to the lien was the right to an
executory lien arising from time to time as the necessity for it arose, it might have been
put forward in that case; but the decision was based on a ground inconsistent with any
such contention, namely, that the shares were subjected to this particular lien in their
inception and as one of their incidents. Jessel M.R. likened it to the case of a lease.
Holker L.J. said:
“It seems to me that the shares having been purchased on those terms and conditions, it is
impossible for the cestuis que trust to say that those terms and conditions are not to be
observed.”
Then it is said that this is contrary to the rule against perpetuity. Now, in my opinion the
rule against perpetuity has no application whatever to personal contracts. If authority is
necessary for that, the case of Witham v Vane[4] is a direct authority of the House of
Lords; and to my mind an even stronger case is that of Walsh v Secretary of State for
India.[5] A stronger instance of the unlimited extent of personal liability could hardly be
cited; the Old East India Company in 1760, or thereabouts, entered into a covenant with
the first Lord Clive, that in the event of the company ceasing to be the possessors of the
Bengal territories they would repay to Lord Clive, his executors or administrators, a sum
of about eight lacs of rupees, which had been transferred to them for certain particular
purposes. The actual event did not happen till nearly a century later; and, as Lord
Selborne pointed out in Witham v Vane, the question of perpetuity was put forward
tentatively in argument in the House of Lords; but Lord Cairns with his usual discretion
did not press it.
...the trustee is as much bound by these personal obligations of the bankrupt as the
bankrupt himself, if he were not bankrupt, would be.
In re Exchange Banking Company or Flitcroft's case (1882) LR 21 Ch D 519 is a UK
company law case concerning the payment of dividends. It was decided when the law
was that dividends should only be paid out of a company's profits, although the courts
deferred to company directors to define their own rules for determining when that was so.
Facts
The directors of the Exchange Banking Company had presented account reports before
shareholder meetings, which were untrue. Between 1873 and 1878 they paid half yearly
dividends totalling £3,192 when they knew items in the accounts were bad debts,
irrecoverable and consequently there were no distributable profits. The shareholders
acted on the reports and declared dividends. The liquidator issued a summons against five
former directors.

Judgment
High Court
Bacon VC found that the directors were liable to repay the unlawful dividends.

“ I should say they are trustees and nothing else. They have interests of their own,
but they are trustees of the money which may be collected by subscriptions, and of all the
property that may be acquired; they have the direction and management of that property,
and at the same time they have incurred direct obligation to the persons who have so
entrusted them with their money. ”
Court of Appeal
Lord Jessel MR agreed the directors must repay the money. Capital invested by
shareholders (at this time the aggregate of the nominal share value, not including share
premiums, as legal capital is defined under Companies Act 2006) could not be returned to
them, and dividends should be paid out of profits only. He said the following.

“ It follows then that if directors who are quasi trustees for the company improperly
pay away the assets to shareholders, they are liable to replace them. It is no answer to say
that the shareholders could not compel them to do so. I am of the opinion that the
company could in its corporate capacity compel them to do so, even if there were no
winding up… directors in each case are to be declared jointly and severally liable and not
only jointly liable....
The creditor has no debtor but that impalpable thing the corporation, which has no
property except the assets of the business. [He...] gives credit to the company on the faith
of the representation that the capital shall be applied only for the purposes of the
business, and he has therefore a right to say that the corporation shall keep its capital and
not return it to the shareholders, though it may be a right which he cannot enforce
otherwise than by a winding-up order. It follows then that if directors who are quasi
trustees for the company improperly pay away the assets to the shareholders, they are
liable to replace them…