ABSTRACT
[1916 A. 624.]
Company Director—.Vittfctisauec—Payment of iHvuJemfs oat of CapihlIiOvl Capital on Ur.rc.HH0 Account—Appreciation of Capitol Awt —Snbscipicnt Pro fit a—!/lability to recoup tosl Capitol before Vot/mnl Diridctiih Fi.rcrl Capital—Floating Cnpitai.
The Companie (Consolidation) Act, 1908, docs noi, nor does the general Jaw, prohibit a company from distributing the, clear net profit of its trading in any year unless its paid-up capital is infant or uni il it has first made good all trading losses incurred in previous years.
There is no rule of law which forbids a company from sei ting off an appreciation in (lie value oí its capital assets, as ascertained by a bona fide valuation, against losses on revenue account.
A manufacturing company carrying on a newly-establisli’î business incurred losses on its trading account, for some years ai’»r its incorporation and subsequently made profil*. The director* sH o IT the losses against an appreciation of the company V capital assets as ascertained by a valuation made by two of their mimVr who we-re. not expert valuers and approved by the company ia general meeting, and paid dividends out of the subsequent ml profits without any further provision for replacing the Jt.v»>r«. Depreciation <>f buildings, machinery, and plant had been chnriH in revellín1 account to an amount exceeding the losses:
Held by Peterson J.: (1) that in considering whether or not the dividends were paid out of capital the sums charged for deprcciaf i could bo written back to capital;
(2.) that as the valuation was in fact made bona fide, and was approved by the company in general meeting, the appicciatici value could properly be set off against losses.
Held by the Court of Appeal and Peterson J.: (1.) that there 217 no objection in law to such a revaluation and such a treatment of the appreciation in value ascertained thereby;
C. A. 1917
Ammonia Soda Company v. Chamberlain.
(2.) that, apart from any question m to the depreciation allowed for buildings, &c., and whether or not the revaluation could be juaufied, the dividends were not in fact paid out of capital but out of current profits.
Lee v. Nenchalel Asphalte Co. (1889) 41 Ch. D. I, 15; Verner v. General and Commercial Investment Trust [1894] 2 Ch. 239, 266; In re National Bank of Wales [1899] 2 Ch. 629, 669, considered and applied.
The observations of the Lords in Dovey v. Cory [1901] A. C. 477 cannot be considered as having overruled or qualified the previous decisions of the Court of Appeal in the above-mentioned cases.
Per Swinfen Eady L.J.: The fixed capital of a company is what the company retains in the shape of assets upon which the subscribed capital has been expended, and which assets either themselves produce iucome independent of any further action of the company, or, being retained by the company, are made use of to produce income or gain profits. The circulating capital of a company is a portion of the subscribed capital intended to be used by being temporarily parted with and circulated in business in the form of using goods or other assets which, or the proceeds of which, are intended to return to the company with an increment and to be used again and again and always return with accretions. When circulating capital is expended in buying goods which are sold at a profit or in buying raw materials from which goods are manufactured and sold at a profit the amount so expended must be charged against or deducted from receipts before the amount of any profit can be considered.
