Harlow and Another v Loveday and Another Re Hill and Tyler Ltd ((in Administration))
| Jurisdiction | England & Wales |
| Judge | Mr Richard Sheldon QC (sitting as a Deputy Judge of the High Court),Richard Sheldon QC |
| Judgment Date | 28 May 2004 |
| Neutral Citation | [2004] EWHC 1261 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: 0686 of 2004 |
| Date | 28 May 2004 |
[2004] EWHC 1261 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
Mr Richard Sheldon QC (Sitting as a Deputy Judge of the High Court)
Case No: 0686 of 2004
In the Matter of Hill & Tyler Limited (in Administration) and
In the Matter of the Insolvency Act 1986
TINA KYRIAKIDES (instructed by Freethcartwright LLP) for the Applicants
LINDEN IFE (instructed by Browne Jacobson) for the First Respondent
MATTHEW COOK (instructed by DLA LLP) for the Second Respondent
Hearing dates : 6 and 7 May 2004
I direct pursuant to CPR PD 39A para 6.1 that no official shorthand note shall be taken of this judgment and that copies of this version as handed down may be treated as authentic.
May 2004
The administrators of Hill & Tyler Limited ("the Company") apply to the court for directions pursuant to s14(3) of the Insolvency Act 1986 as to whether arrangements made in the course of the purchase of shares in the Company by a company called Jewelrun Limited ("Jewelrun"), and in particular securities given to the Respondents as part of those arrangements, constituted unlawful financial assistance by the Company under s.151 of the Companies Act 1985 ("the 1985 Act"). Amongst the issues I am asked to decide is whether a statutory declaration purportedly made pursuant to section 155(6) of the 1985 Act is valid and, if not, what consequences this has, if any, on the security provided by the Company to the Respondents and a loan made by the Second Respondent to the Company.
The Background
The background facts are not in dispute and may be summarised as follows.
The Company was incorporated as a private company limited by shares on 29 March 1988. The authorised share capital of the Company was £60,000 divided into 25,160 10% Cumulative Preference Shares of £1.00 each ("the Preference Shares"), 33,040 ordinary shares of £1.00 each ("the Ordinary Shares") and 1,800 Ordinary "A" Shares of £1.00 each ("the A Shares").
Until 15 December 1999, the A Shares were held by John Brian Mills, 19 Ordinary Shares were held by Nancy Mills and 240 Ordinary Shares were held by the First Respondent, Mr Loveday. Mr Mills and Mr Loveday were also the directors of the Company until 15 December 1999.
Mr. Mills wanted to retire from the Company and to sell his shares. On 21 June 1999, an agreement in principle was reached for Mr Loveday to purchase Mr. and Mrs. Mills' shares through a new company to be formed by Mr Loveday for that purpose.
On 6 July 1999 Jewelrun was incorporated as a private company limited by shares with an authorised share capital of £1,000 divided into 1,000 shares of £1.00 each. On 13 December 1999, the one issued subscriber share was transferred to Mr Loveday. At all material times, Mr Loveday was the sole director of Jewelrun.
On 15 December 1999 the authorised share capital of Jewelrun was increased from £1,000 to £1,001 by the creation of one new redeemable special share of £1.00 which was issued to Mr. Mills.
On 15 December 1999 a written agreement was entered into between Mr. and Mrs. Mills, Jewelrun and Mr Loveday whereby Mr. and Mrs. Mills agreed to sell all of the shares held by them in the Company to Jewelrun for the sum of £1,375,000 ("the Sale Agreement"). In accordance with the terms of the Sale Agreement, Mr Mills resigned as a director of the Company on 15 December 1999.
The consideration for the purchase of the shares by Jewelrun was financed as follows:
(a) by a loan of £1,335,122.19 from the Company to Jewelrun ("the Inter-Company Loan") which was provided pursuant to a written loan agreement dated 15 December 1999;
(b) by a loan of £150,000 from Mr Loveday to Jewelrun ("the Loveday Loan") which was provided pursuant to a written agreement dated 15 December 1999. Of this loan, about £39,877.90 was applied towards the balance of the purchase price and some £103,030.10 was advanced to the Company as working capital and subsequently set-off against the Inter-Company Loan. The Loveday Loan was secured by a written guarantee dated 15 December 1999 given by the Company to Mr Loveday ("the Loveday Guarantee") and by a debenture of the same date and made between the Company and Mr Loveday ("the Loveday Debenture").
The Inter-Company Loan was financed as follows:
(a) by a sum of £98,122.19 which was part of a loan of £445,000 made to the Company by the Royal Bank of Scotland Plc pursuant to a written agreement dated 15 December 1999. This loan was secured by, inter alia, an existing debenture from the Company dated 15 June 1990, unlimited inter company guarantees dated 15 December 1999 given by the Company and Jewelrun, a debenture from Jewelrun of the same date and an assignment also of the same date by the Company of a keyman policy on the life of Mr Loveday;
(b) by a loan of £252,000 from the Second Respondent, Royscot Trust plc ("RoyScot") pursuant to the terms of a facility letter dated 11 August 1999 ("the RoyScot Loan"). The RoyScot Loan was secured, inter alia, by a fixed charge granted by the Company dated 15 December 1999 on two printing presses ("the RoyScot Charge");
(c) by an invoice discounting facility from Barclays Commercial Services Limited ("Barclays") pursuant to a written agreement dated 3 September 1990 as amended by a letter dated 26 August 1999. Pursuant to this amendment, the Company drew down the sum of £985,000. The facility from Barclays was secured inter alia by a fixed and floating charge on debts dated 2 June 1999.
In addition to the Sale Agreement, by a written agreement made on 15 December 1999 between Mr Loveday and Jewelrun, Mr Loveday agreed to exchange his 240 Ordinary Shares in the Company in consideration for the issue and allotment to him of 999 fully paid up ordinary shares of £1.00 each in the capital of Jewelrun. The share exchange took place with the result that, save for the newly created redeemable special share held by Mr. Mills, Mr Loveday held all the shares in Jewelrun; Jewelrun in turn came to hold all the shares in the Company.
Professional advice in relation to the above transactions was taken by the Company from well known firms of accountants and solicitors, namely BDO Stoy Hayward and Nelsons. The Company was advised that the way that it was proposed to finance the purchase of the shares in the Company by Jewelrun amounted to the giving of financial assistance by the Company and that accordingly, if the assistance was to be lawful, the Company would have to comply with the "whitewash" requirements set out in sections 155 to 158 of the 1985 Act.
Having regard to the provisions of sections 155 to 158 of the 1985 Act:
(a) the Company and its auditors decided that, save for the obligations imposed by clause 6.5 of the Sale Agreement amounting to about £18,000 (which could be met out of distributable profits) the proposed financial assistance did not reduce the net assets of the Company;
(b) a special resolution was passed on 15 December 1999 at an extraordinary general meeting of the Company approving the proposed financial assistance;
(c) a composite statutory declaration dealing with all of the transactions, which were believed to amount to financial assistance, was made on 15 December 1999 by Mr Loveday as the sole director of the Company purportedly in compliance with section 155(6) of the 1985 Act ("the Declaration");
(d) an auditors' report was obtained on 15 December 1999 pursuant to section 156(4) of the Act; and
(e) the auditors' report, the Declaration and the special resolution were all filed at Companies House.
I shall have to consider the Declaration in some detail later in this judgment.
Completion took place on 15 December 1999. RoyScot and Barclays, pursuant to the facilities made available to the Company, transferred £252,000 and £985,000 respectively (a total of £1,237,000) into Nelsons' account on behalf of the Company. The monies were then transferred to the account of Browne Jacobson, solicitors acting on behalf of Mr. and Mrs. Mills, at the direction of Jewelrun. Nelsons were only authorised by RoyScot to release the monies loaned by them on condition that Nelsons provided RoyScot with confirmation that s151 of the 1985 Act had been complied together with a copy of the relevant statutory declaration, special resolution and auditors report. These were provided by Nelsons on 15 December 1999.
The sources of the balance of the purchase price of the shares appears to have been Royal Bank of Scotland (£98,122.19), which seems to have been transferred directly to Mr & Mrs Mills' solicitors at the Company's direction, and Jewelrun (£39,877.90) representing part of the proceeds of the Loveday Loan.
I should make it clear at the outset that Mr Loveday and RoyScot entered into the transactions in good faith in the belief that the "whitewash" procedure had been fully complied with. The Company also acted throughout on the basis of advice from its professional advisers and bona fide believed that this procedure had been complied with.
The Issues
Counsel for the parties have helpfully provided an agreed list of issues. In summary, as the argument has developed before me, the principal live issues are:
(1) whether the grant of the RoyScot Charge constituted financial assistance within the meaning of s.151 of the 1985 Act;
(2) whether the Declaration was invalid;
(3) the consequences which follow if I were to hold that the Declaration was invalid. In particular, does it follow that the RoyScot Charge, the Loveday Guarantee and/or the Loveday Debenture are void or unenforceable in whole or in part? Even...
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