Taylor v Reid [1929] HCA 32; (1929) 42 CLR 371 (4 November 1929)

HIGH COURT OF AUSTRALIA

Taylor and Others Defendants, Appellants; and Reid Plaintiff, Respondent.

H C of A

On appeal from the Supreme Court of South Australia.

4 November 1929

Knox C.J., Isaacs, Gavan Duffy, Rich and Dixon JJ.

E. E. Cleland K.C. (with him C. L. Jessop), for the appellants.

F. Villeneuve Smith K.C. (with him H. G. Alderman), for the respondent.

The following written judgments were delivered:—

Nov. 4

Knox C.J.,

Gavan Duffy, Rich and Dixon JJ.

On 28th April 1927 the respondent was appointed trading manager of James Marshall & Co. Ltd. for six years from 1st August 1926. At that time the appellants were directors of the Company and held the controlling interest therein. On the same 28th April 1927 the appellants by agreement in writing agreed to sell to the respondent 26,000 ordinary shares in the Company. By clause 4 of this agreement it was provided that if the respondent should at any time before 26th November 1932 cease to be trading manager of the Company otherwise than by death the appellants should have the option of purchasing all or part of the said 26,000 shares at the price thereby fixed. By clause 3 it was provided that if the respondent should die before 26th November 1932 and the appellants should not prior thereto have exercised the option given them by clause 4, the shares in question should be purchased by the appellants from the respondent's executors. By clause 5 the appellants were given the option of buying the said shares in the event of the bankruptcy of the respondent before 26th November 1932. By clause 6 the appellants jointly and severally guaranteed to the respondent dividends on the said shares at the rate of at least 6½ per cent per annum for the three financial years of the Company ending 31st July 1927, 1928 and 1929 respectively. By clause 7 it was provided that the share certificates for the said shares should be held by the appellants during the continuance of the agreement and that the respondent should not transfer the shares without the consent in writing of the appellants. Clause 8 provided that if at any time during the continuance of that agreement and the service agreement the appellants should sell all their ordinary shares in the Company, or such a proportion thereof as would deprive them of their controlling interest therein, they should obtain for the respondent the option of selling his shares or a corresponding proportion of them to their purchaser at the same price, and that on such a sale by the appellants the provisions of clauses 3, 4, 5 and 7 of the agreement should cease and determine.

The purchase-money for the shares was paid and the shares were transferred by the appellants to the respondent in accordance with the agreement. At the time of entering into the agreement all parties knew that it was the practice of the Company to declare dividends (if any) at the annual meeting of the Company held in the month of November in each year for the financial year of the Company ending on the preceding 31st July and to pay all dividends (if any) in the said month of November in each year.

On 21st September 1928 the appellants and the respondent agreed to sell and sold to the Myer Emporium (Melbourne) Ltd. all the ordinary shares in the Company, including the said 26,000 shares, and such shares were thereupon transferred to the purchaser. No dividend had been declared on or before the said 21st September on the ordinary shares of the Company for the year ending 31st July 1928, nor was any dividend thereafter declared on such shares for that year. The respondent seeks in these proceedings a declaration that he is entitled to receive from the appellants an amount equal to a dividend at the rate of 6½ per cent per annum on the said 26,000 shares for the year ending 31st July 1928. In the Supreme Court Richards J. held that he was entitled to receive the amount claimed, and from that decision this appeal is brought.

In our opinion the appellants are entitled to succeed. The obligation undertaken by the appellants was to "guarantee to the purchaser dividends on the said 26,000 ordinary shares at the rate of at least 6½ per cent per annum for" each of the three years. The use of the word "guarantee" shows that the liability of the appellants was to arise only in the event of the respondent not receiving a dividend on his shares at the rate mentioned. The expression "dividends on shares" imports a payment by a company to a person who holds shares in the company at the date when the dividend is, or ought in the ordinary course to be, declared. For a company cannot lawfully pay "dividend" to a person who is not a member of the company at the date when the dividend is declared. The options given by clause 4 to each of the vendors to repurchase a proportion of the shares in the event of the respondent ceasing before 26th November 1932 to be trading manager necessitated his retention of the shares until that date unless the vendors consented to their sale or the operation of clause 4 terminated earlier. Clause 7 refers apparently to this provision when it speaks of the continuance of this agreement as a period during which the respondent may not transfer. It is, therefore, quite clear that the basis of the warranty or guarantee of dividends at the rate of at least 6½ per cent per annum was his continued ownership of the shares.

The express discharge of the obligation of clauses 3, 4, 5 and 7 in the event of the vendors parting with a controlling interest does not, when properly understood, weaken this inference, because the reason for this discharge of these provisions is that they would in that event no longer be required to maintain the vendors' control of the Company and would become a useless burden and restriction. If by virtue of clause 4 or of clause 8 the respondent sold and transferred some of his shares, it is evident that the guarantee would operate only in relation to those which he retained. In the case of a transfer pursuant to clause 4 one or more of the vendors would become the transferees, and the agreement could scarcely mean that dividends were guaranteed upon the shares which the guarantors had reacquired. Indeed, it was not disputed that the guarantee did not apply to shares transferred by the respondent before 31st July of the relevant year. The contention was, however, that upon that date the right to a 6½ per cent dividend at least, became absolute. But all parties to the agreement knew that the practice of the Company was to declare the dividend (if any) in November in respect of the financial year ending on 31st July next preceding. The promise by the appellants appears to us to have been that if the Company should not in the ordinary course pay to the respondent as holder of the 26,000 shares a dividend at the rate of 6½ per cent in respect of the financial year of the Company ending on 31st July 1928, the appellants would make good the deficiency. It is only as holder that the respondent could receive a dividend in exoneration of the guarantors. To regard 31st July as a date at which he became entitled in respect of the shares to a definite minimum income for the year, is to look at the transaction from the respondent's point of view to the exclusion of that of the guarantors. They relied on their control of the Company, and it would be only at the annual meeting that they could use this to determine on the rate of dividend which would operate in relief of their personal liability. Dividends could not be declared by the Company in favour of shareholders ascertained as at a past date. An interval must elapse between the closing date of the accounting period and the declaration of the dividend which fixed the guarantors' liability. It may be true that the respondent looked to the guarantee to secure to him a minimum annual return from the shares, but he was content to rely upon receiving it in the character of a shareholder at a later period than 31st July, namely, at the time of the annual meeting. In this view the promise imposed no obligation on the appellants unless the respondent was, at the time when according to the ordinary practice of the Company the dividend (if any) would be declared, the holder of the 26,000 shares or some of them, so that he might be in a position to receive from the Company the amount of any dividend which might be declared. The respondent having transferred all these shares in September 1928 was no longer in a position to receive from the Company a dividend in respect of the financial year ending 31st July 1928 which had not then been declared and would not in the ordinary course of events be declared before November 1928, and it follows, in our opinion, that the appellants incurred no liability under their guarantee in respect of that financial year.

The appeal should be allowed.

Isaacs J.

The guarantee contained in clause 6 of the purchasing agreement is a warranty that the Company will declare and pay dividends in respect of the specifically numbered shares sold to Reid, at the rate and for the financial years mentioned. The warranty is in terms, but for one qualification, absolute, and I am unable to introduce any of the suggested interpolations and additions. The qualification I refer to is expressed by the introductory words "Subject to the provisions aforesaid," which I read as subject only to those provisions: Expressum facit cessare tacitum. Suppose during 1928 the vendors had under clause 7 simply consented to Reid selling 1,000 shares. Surely he could have sold them with a guarantee to his purchaser that a dividend of at least 6½ per cent would be paid for the year ending 31st July 1929. There is not a word to prevent him, and a Court does not imply words of exception that are not necessary. But if that could have been done in reliance on clause 6, it shows that the suggested limitation to Reid's ownership is not legitimate. These "provisions" are found in clauses 3, 4 and 5, and they are provisions under which the appellants have rights in various events to repurchase the shares. The effect, then, of the words "subject to the provisions aforesaid" is to make the period of operation of the warranty conterminous with the period during which the appellants have the rights of purchase under clauses 3, 4 and 5. Clause 8 makes a contractual provision for the termination of such rights. It is when the appellants sell sufficient of their ordinary shares to occasion the loss of their controlling interest in the Company, and this whether the respondent exercises his option under clause 8 or not. If he does not, then as in such a case clause 7 is gone, as well as clauses 3, 4 and 5, he is free to deal with his shares. In that event, the warranty, which is subject only to the provisions of clauses 3, 4 and 5, is ended. The shares being no longer locked up, the respondent must make his own arrangements as to their investment as an ordinary shareholder. But in the event of his accepting the option and disposing of his proportion of his shares—in this case, the whole—the warranty, because clauses 3, 4 and 5 are gone, also ceases, and it ceases a fortiori.

Then comes the more difficult question: What is the legal result of the warranty ceasing as it did in September 1928? No doubt, having regard to the known practice of the Company, a breach could not have been assigned before November. But that only fixes the earliest moment for performance of the guarantee, and it then still remained unfulfilled. If Reid had died in August 1928, clause 3 would have operated; and why not clause 6 up to that time? Strictly speaking, I think there was a breach of the warranty, for the sale of the shares did not prevent the Company from declaring a dividend on the shares. But what damages did Reid sustain? None. (Black v. Homersham[1].) It is not, suggested that the respondent, when he sold his shares in September, retained any claim to a dividend for the past financial year. I do not think clause 8 in any case contemplates such a retention, for the price is to be that which the appellants may receive. Therefore, whether there was a breach or not, the result is the same in substance, and the answers to the questions submitted should be in the negative.

Appeal allowed. Order of Richards J. discharged. Declare that the respondent is not entitled to payment by the appellants under the terms of the guarantee contained in clause 6 of the above-mentioned memorandum of agreement of a dividend at the rate of 6½ per cent per annum for the financial year of James Marshall & Co. Ltd. ending on 31st July 1928 on the 26,000 shares in the said Company then held by the said Donald Reid. Order that the costs of the application to the Supreme Court and of this appeal be paid by the respondent Donald Reid.

Solicitors for the appellants, Edmunds, Jessop & Ward.

Solicitors for the respondent, Alderman, Reid & Brazel.

[1] (1878) 4 Ex. D. 24.