Anglo Petroleum v TFB (Mortgages)
| Jurisdiction | England & Wales |
| Judge | Lord Justice Toulson,Lady Justice Smith,Lord Justice Mummery |
| Judgment Date | 16 May 2007 |
| Neutral Citation | [2007] EWCA Civ 456 |
| Docket Number | Case No: A3/2006/0736 |
| Court | Court of Appeal (Civil Division) |
| Date | 16 May 2007 |
[2007] EWCA Civ 456
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
MR JUSTICE PETER SMITH
HC04C00179
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Mummery
Lady Justice Smith and
Lord Justice Toulson
Case No: A3/2006/0736
MR JOHN MARTIN QC & MR EDWARD DAVIES (instructed by Stockler Brunton) for the Appellants
MR MICHAEL TODD QC (instructed by Byrne & Partners) for the Respondent
Hearing dates: 15 March 2007
This appeal is from the order of Peter Smith J dated 24 February 2006 at the trial of preliminary issues arising in three actions between the parties concerning the impact of s 151 of the Companies Act 1985 on the validity of three agreements dated 23 February 2001. The three agreements (“the credit transactions”) were a Credit Agreement made between Anglo Petroleum Limited (“APL”) as borrower and TFB (Mortgages) Limited (“TFB”) as lender, a Security Agreement made between the same parties, and a Guarantee given to TFB by Mr Paul Sutton.
Three months before the credit transactions, APL's shares had been the subject of an acquisition. It is contended by APL that it gave financial assistance for the acquisition in breach of s 151 and that this tainted the credit transactions. The judge rejected these contentions. Permission to appeal was refused by the judge but granted by Neuberger LJ.
The Share Purchase transaction
APL's parent company was Repsol (UK) Limited (“Repsol”).
Under a Share Purchase Agreement dated 15 November 2000, Kaluna Limited (“Kaluna”) agreed to purchase from Repsol the entire share capital of APL for £1.
Under a Compromise Agreement made on the same date, APL (then called Repsol Petroleum Limited) agreed to pay Repsol £6m immediately and £9m six months later, and Repsol agreed to release APL from the balance of its indebtedness to Repsol in the sum of about £30m (none of which was secured).
APL simultaneously granted a charge to Repsol (“the APL/Repsol charge”) over a number of petrol stations to secure the debt of £15m remaining due to Repsol under the Compromise Agreement.
Under the Share Purchase Agreement, Kaluna guaranteed the performance by APL of its obligations under the Compromise Agreement. The guarantee was secured by a charge simultaneously granted by Kaluna to Repsol (“the Kaluna/Repsol charge”) over the shares which were the subject of the Share Purchase Agreement.
APL paid Repsol the initial £6m on completion of the Share Purchase Agreement.
The credit transactions
Under the Credit Agreement, APL borrowed £15m from TFB repayable on 22 August 2001. APL agreed to pay TFB an arrangement fee of £1.75 million payable in six monthly instalments (equivalent to an interest rate of 23.33%). On 22 August 2001 the Credit Agreement was extended to 22 February 2002 on terms that APL made an immediate pre-payment of £750,000 and agreed to an increase in the arrangement fee.
Under the Security Agreement, APL granted TFB a floating charge over its assets and mortgaged its portfolio of petrol stations to TFB as security for its liability under the Credit Agreement.
Under the Guarantee, Mr Paul Sutton guaranteed the liabilities of APL under the Credit Agreement subject to a maximum of £15m plus interest and costs in enforcing the Guarantee.
On the day before the completion of the credit transactions APL stated in a fax sent to TFB:
“For your information, a condition of the acquisition [by Kaluna] was that the £30 million of loans from the parent… was to be paid off as to part and written off as to part, in its entirety, (the final balance to be paid off from the proceeds of the loan to be provided by your company).”
The Security Agreement was over the same or substantially the same properties as the APL/Repsol charge, which was released.
£9m of the £15m advanced by TFB under the Credit Agreement was used to effect early payment of the outstanding £9m due to Repsol under the Compromise Agreement.
On 9 November 2001 TFB demanded payment by APL of £14,250,000 outstanding under the Credit Agreement and appointed administrative receivers over APL's assets.
On 7 December 2001 TFB demanded payment by Mr Sutton of £14,250,000 under the Guarantee.
The proceedings
There are three actions. One is by TFB to enforce the Guarantee against Mr Sutton. Summary judgment was refused on the ground that there might be a defence under s 151. One is by TFB to recover from APL the indebtedness due under the Credit Agreement. The third is by APL claiming damages from TFB on the grounds that the Security Agreement was in breach of s 151 and that the appointment of the receivers over APL was void. An attempt by TFB to obtain summary judgment was unsuccessful.
On 16 March 2005 Master Moncaster directed the trial of certain preliminary issues including the issues determined by Peter Smith J.
Validity issues
APL advanced two arguments (referred to as Routes 1 and 2) in support of the contention that the credit transactions were illegal and void.
The focus of Route 1 was on APL's dealings with Repsol. It was contended that, by entering into the Compromise Agreement and the APL/Repsol charge, APL incurred liabilities and thereby gave financial assistance for the purpose of the acquisition of its shares by Kaluna within the meaning of s 151(1). By borrowing money from TFB and using it to discharge the balance of its indebtedness to Repsol, APL gave financial assistance for the purpose of discharging liabilities incurred for the purpose of the acquisition of the shares within the meaning of s 151(2). TFB knew the purpose of the loan and was therefore not entitled to enforce it.
The judge rejected Route 1. He held, first, that the giving of security by APL to TFB was not financial assistance within s 151 and, secondly, that TFB had no knowledge that its monies were being used for replacement of securities that were financial assistance.
The focus of Route 2 was on Kaluna's dealings with Repsol. It was contended that the guarantee given by Kaluna under the Share Purchase Agreement and the supporting charge over the shares in APL were liabilities incurred by Kaluna for the purposes of its acquisition of the shares in APL, and that APL's repayment of its outstanding indebtedness to Repsol, using money borrowed from TFB, amounted to giving financial assistance for the purpose of discharging Kaluna's outstanding liabilities to Repsol.
The judge rejected Route 2. He held, first, that the repayment of the APL debt was not financial assistance to Kaluna; it was a repayment of APL's reduced indebtedness and was a commercial transaction for the purpose of benefiting APL. Similarly, he held that the security given by APL to TFB was not financial assistance. Thirdly, as he had already held on Route 1, TFB was not aware of any underlying illegality.
The essential issues on the appeal are:
i) Did the payment of £9 million by APL to Repsol (from the TFB loan) in discharge of APL's indebtedness to Repsol constitute the giving of financial assistance within the meaning of s 151, either via Route 1 or via Route 2?
ii) If so, is TFB prevented by the doctrine of illegality from enforcing the credit transactions?
The Statute
In Chaston v SWP Group Plc [2002] EWCA Civ 199, [2003] 1 BCLC 675, at para 31, Arden LJ described the mischief at which s151 is aimed as follows:
“I start with the mischief to which s 151 is directed. Section 151 is derived from s 45 of the Companies Act 1929 which was enacted as a result of the previously common practice of purchasing the shares of a company having a substantial cash balance or easily realisable assets and so arranging matters that the purchase money was lent by the company to the purchaser (see Re: VGM Holdings Limited [1942] 1 All ER 224 at 225–226, [1942] Ch 235 at 239). The prohibition was amended in 1948 and reformulated in 1981. The report of the Company Law Committee (the Jenkins Committee) (Cmnd 1749, 1962) para 180, p 66 expressed the view that it was “unwise” to attempt a precise definition of financial assistance. It is clear from the way in which s 151 and s 152 are drafted that it covers financial assistance in many forms apart from loans (see for example the wide wording of s 152(3)). The general mischief, however, remains the same, namely that the resources of the target company and its subsidiaries should not be used directly or indirectly to assist the purchaser financially to make the acquisition. This may prejudice the interests of the creditors of the target or its group, and the interests of any shareholders who do not accept the offer to acquire their shares or to whom the offer is not made.”
It is understandable that it has not been thought wise for the legislature to lay down a precise definition of financial assistance because of the risk that clever people would devise ways of defeating the purpose of the section while keeping within the letter of the law. However, the absence of a clear definition means that the section can give rise to uncertainties and has the potential to catch transactions which might be considered innocuous. In cases where its application is doubtful, it is important to remember its central purpose, to examine the commercial realities of the transaction and to bear in mind that it is a penal statute.
Recognition of the need to examine the commercial realities, rather than search for a legal formula for...
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