assets of the company. There had thus come to the hands of the company £900,000, which had been invested in various securities authorised by the memorandum of association. The present market value of such investments was only £654,776, showing a depreciation of £240,000. According to the evidence of the plaintiff it appeared that "of such depreciation £75,000 or thereabouts represented the amount which there was no prospect of recovering within any reasonable period of time." During the past year the receipts of the company in respect of income derived from their investments had exceeded the expenditure by upwards of £23,000. The question for the Court upon the motion was whether, there being a loss of capital to the amount of £75,000 and an excess of profits over expenditure of £23,000, a dividend could lawfully be declared and paid. The company was formed for the purpose of raising money and investing the same in various investments mentioned in the memorandum of association, and one of the objects of the company was to receive the dividends, income, profits, bonuses, and advantages of every description from time to time payable or receivable in respect of the company's investments, and to apply the same respectively according to the provisions of the articles of association in force for the time being." The articles provided:-(84) "Subject to the rights of members holding share capital issued upon special conditions the receipts of the company from the dividends, income, profits, bonuses, and advantages payable or receivable in respect of the company's investments shall be applicable as follows:First, to the payment of a dividend for the particular year at the rate of 5 per cent. per annum on the preferred stock; second, to the payment of such a dividend on the deferred stock as the same shall suffice to pay, and the trustees may, with the sanction of the company in general meeting, declare a dividend to be paid to the members accordingly.” (85) "The trustees may, before recommending any dividend, set aside out of the profits of the company such sum as they think proper as a Reserve Fund to meet contingencies, or for equalising dividends, or for any other purposes of the company; and may from time to time apply the whole or any part of such fund for any purposes of the company." Mr. Justice Stirling, having regard to the nature of the constitution of this company, held that there was no legal obligation on the part of the company to make good the loss arising from the diminution in the value of the investments before declaring a dividend, and he dismissed the action. The plaintiff appealed.

Mr. Graham Hastings, Q.C., and Mr. Kirby were for the appellant ; Mr. Buckley, Q.C., and Mr. Eve were for the respondents.

The Court dismissed the appeal.

Lord Justice Lindley delivered the judgment of himself and Lord Justice A. L. Smith as follows:-The broad question raised by this appeal is whether a limited company which has lost part of its capital can lawfully declare or pay a dividend without first making good the capital which has been lost. I have no doubt it can-that is to say, there is no law which prevents it in all cases and under all circumstances. Such a proceeding may sometimes be very imprudent, but a proceeding may be perfectly legal and may yet be opposed to sound commercial principles. We, however, have only to consider the legality or illegality of what is complained of. As was pointed out in Lee v. Neuchatel Asphalte Company (41 Ch.D. 1), there are certain provisions in the Companies Acts relating to the capital of limited companies; but no provisions whatever as to the payment of dividends or the division of profits. Each company is left to make out its own regulations as to such payment or division. The statutes do not even expressly and in plain language prohibit a payment of dividend out of capital. But the provisions as to capital, when carefully studied, are wholly inconsistent with the return of capital to the shareholders, whether in the shape of dividends or otherwise, except, of course, on a winding-up, and there can, in my opinion, be no doubt that even if a memorandum of association contained a provision for paying dividends out of a capital such provision would be invalid. The fact is that the main condition of limited liability is that the capital of a limited company shall be applied for the purposes for which the company is formed, and that to return the capital to the shareholders either in the shape of dividend or otherwise is not such a purpose as the Legislature contemplated. But there is a vast difference between paying dividends out of capital and paying dividends out of other money belonging to the company, and which is not part of the capital mentioned in the company's memorandum of association. The capital of a company is intended for use in some trade or business, and is necessarily exposed to risk of loss. As explained in Lee v. Neuchatel Asphalte Company, the capital even of a limited company is not a debt owing by it to its shareholders, and if the capital is lost the company is under no legal obligation either to make it good or, on that ground only, to wind up its affairs. If, therefore, the company has any assets which are not its capital within the meaning of the Companies Acts, there is no law which prohibits the division of such assets amongst the shareholders. Further, it was decided in that case, and, in my opinion, rightly decided, that a limited company formed to purchase and work a wasting property, such as a leasehold quarry, might lawfully declare and pay dividends out of the money produced by working such wasting property without setting aside part of that money to keep the capital up to its original amount. There is no law which prevents a company from sinking its capital in the purchase or production of a money-making property or undertaking,

and in dividing the money annually yielded by it without preserving the capital sunk so as to be able to reproduce it intact either before or after the winding-up of the company. A company may be formed upon the principle that no dividends shall be declared unless the capital is kept undiminished, or a company may contract with its creditors to keep its capital or assets up to a given value. But in the absence of some special article or contract there is no law to this effect, and, in my opinion, for very good reasons. It would, in my judgment, be most inexpedient to lay down a hard and fast rule which would prevent a flourishing company either not in debt or well able to pay its debts from paying dividends so long as its capital sunk in creating the business was not represented by assets which would, if sold, reproduce in money the capital sunk. Even a sinking fund to replace lost capital by degrees is not required by law. It is obvious that dividends cannot be paid out of capital which is lost they can only be paid out of money which exists and can be divided. Moreover, when it is said, and said truly, that dividends are not to be paid out of capital the word “capital" means the money subscribed pursuant to the memorandum of association, or what is represented by that money. Accretions to that capital may be realised and turned into money which may be divided amongst the shareholders, as was decided in Lubbock v. British Bank of South America (1892, 2 Ch. 199). But, although there is nothing in the statutes requiring even a limited company to keep up its capital, and there is no prohibition against payment of dividends out of any other of the company's assets, it does not follow that dividends may be lawfully paid out of other assets regardless of the debts and liabilities of the company. A dividend pre-supposes a profit in some shape, and to divide as dividend the receipts, say, for a year, without deducting the expenses incurred in that year in producing the receipts, would be as unjustifiable in point of law as it would be reckless and blameworthy in the eyes of business men. The same observation applies to payment of dividends out of borrowed money. Further, if the income of any year arises from a consumption in that year of what may be called circulating capital, the division of such income as dividend without replacing the capital consumed in producing it will be a payment of a dividend out of capital within the meaning of the prohibition which I have endeavoured to explain. It has been already said that dividends pre-suppose profits of some sort, and this is unquestionably true. But the word "profits " is by no means free from ambiguity. The law is much more accurately expressed by saying that dividends cannot be paid out of capital than by saying that they can only be paid out of profits. The last expression leads to the inferences that the capital must always be kept up and be represented by assets which, if sold, would produce it; and this is more than is required by law. Perhaps the shortest way of expressing the distinction which I am endeavouring

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to explain is to say that fixed capital may be sunk and lost, and yet that the excess of current receipts over current payments may be divided, but that floating or circulating capital must be kept up, as otherwise it will enter into and form part of such excess, in which case to divide such excess without deducting the capital which forms part of it will be contrary to law. The Companies Acts do not require even limited companies to keep accounts, still less to keep them in any par ticular form. The only enactment on the subject is section 26 of the Companies Act 1862, and Form D in the third schedule, and these relate solely to the nominal capital and calls. But, although this is so, yet, as a matter of business, accounts of some sort must be kept, and in order to show what has been subscribed by the shareholders and what has become of the money so subscribed, and to show the results of the company's trading or business, it is practically necessary to keep a Capital Account, and what is called a Profit and Loss Account, and as a matter of business these accounts ought to be kept as business men usually keep them. Accordingly, we find provisions for keeping such accounts in Table A in the Appendix to the Companies Act 1862 (see articles 78-82), and in the articles of association of most, if not all, companies. But there is no law which compels limited companies in all cases to recoup losses shown by the Capital Account out of the receipts shown in the Profit and Loss Account, although care must be taken not to treat capital as if it were profit. This is in accordance with Bolton v. Natal Land Company (1892, 2 Ch. 124), which is the latest reported case on the subject. Further, it is obvious that capital lost must not appear in the accounts as still existing intact; the accounts must show the truth and not be misleading or fraudulent. The Acts of 1867 and of 1877 are in no way inconsistent with these observations. They provide for the reduction of the nominal capital mentioned in the memorandum of association. They do not render it obligatory on a company which has lost some of its capital to reduce the nominal amount mentioned in its memorandum. There are advantages in doing so, and the Acts were passed to enable limited companies to obtain these advantages, but there is nothing in these Acts, any more than in the Act of 1862, which prevents a company which has lost part of its capital from continuing to carry on business and declaring and paying dividends. A law forbidding this may well have been considered by the Legislature far too rigid, and in their desire to check dishonest and reckless trading, Courts must be careful not to put tighter fetters on companies than the Legislature has authorised. It follows from what has been said above that the proposed payment of dividend in this particular case cannot be restrained. Mr. Justice Stirling has, in his judgment, examined the memorandum and articles of association so fully that I do not think it necessary to examine them again. It is plain there is nothing in them which requires lost capital to be made good before dividends can be

declared. On the contrary, they are so framed as to authorise the sinking of capital in the purchase of speculative stocks, funds, and securities, and the payment of dividends out of whatever interest, dividends, or other income such stocks, funds, and securities yield, although some of them are hopelessly bad, and the capital sunk in obtaining them is lost beyond recovery. There is no suggestion of any improper juggling with the accounts, and there is no payment of dividend out of capital. There is no insolvency, and we have not to deal with a petition to wind up. Some capital is lost, but that is all that can be truly said, and that is not enough to justify such an injunction as is sought. The appeal must be dismissed.

Lord Justice Kay gave judgment to the same effect.

The case of WILMER v. M'NAMARA & CO.

(Decided before Mr. Justice STIRLING, in the Chancery Division, on 26th April 1895.)

Company-Dividends — Application to restrain payment of DividendDepreciation in Goodwill and Leasehold Property-Liability of Company to make good before payment of Dividend.

This was a motion on behalf of the ordinary shareholders of the defendant company asking for an injunction to restrain the directors from acting upon a resolution passed at a general meeting of the company, that a sum of £5,816 12s. 6d. should be applied in payment of a dividend to the preference shareholders, and also from declaring or paying any dividend for the year ending the 30th June 1894. The real object of the action, which was a friendly one, was to ascertain whether or not the dividend in question could be lawfully paid. The defendant company was formed in 1887 to acquire and develop a carrier's business previously known as Arthur M'Namara & Co., and to carry on the business of general carriers of mails, parcels, goods, &c. The capital of the company was £120,000, divided into 12,000 shares of £10 each, 7,000 of which were preference shares, carrying a fixed preferential cumulative dividend at the rate of 8 per cent. per annum, and the remaining £5,000 were ordinary shares, the holders thereof dividing all surplus profits after payment of the said preferential dividend. By an agreement dated the 8th of July 1887, the company agreed to purchase the business in question, including the goodwill, leasehold premises, horses, vans, plant, &c., thereunto belonging, for the sum of £54,000 in cash and 5,000 ordinary shares, which were to be deemed fully paid-up. The 7,000 preference shares were offered to and taken