MT Realisations Ltd ((in Liquidation)) v Digital Equipment Company Ltd
| Jurisdiction | England & Wales |
| Judge | Mr Justice Laddie |
| Judgment Date | 31 July 2002 |
| Neutral Citation | [2002] EWHC 1628 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: HC No. O1C. 03697 (and others) |
| Date | 31 July 2002 |
[2002] EWHC 1628 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
The Honourable Mr Justice Laddie
Case No: HC No. O1C. 03697 (and others)
Mr Charles Purle QC (instructed by Withers for the Claimant)
Mr Philip Marshall (instructed by Baker & McKenzie for the Defendants)
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Hearing dates: 18,19 July 2002
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this judgment and that copies of this version as handed down may be treated as authentic.
Mr Justice Laddie
This is the judgment on various applications in seven related actions. The applications are primarily to strike out and for summary judgment brought by the defendants. A number of other applications were made both by the claimant and the defendants but, as will be explained at the end of this judgment, they have fallen by the wayside. In what may be referred to as the lead action, the claimant is MT Realisations Limited and the defendant is Digital Equipment Co. Limited ("Digital"). In the six related proceedings, claims have been brought by the same claimant against associated companies of Digital ("the Associated Companies"), namely Compaq Computer France SAS, Compaq Computer BV, Compaq Canada Corporation, Compaq Computer Customer Support Center GmbH, Compaq Computer Holdings Srl and Compaq Computer (Schweiz) GmbH.
The factual background
I set out below the basic facts which have given rise to this dispute. In large part it is based on the skeleton argument of Mr Marshall, who appears for the various defendants.
Digital and the Associated Companies are part of the Compaq group of companies, suppliers of computer equipment. In 1994 the claimant was a subsidiary of two associated companies of Digital, namely Digital Equipment International bv and Digital Equipment Holdings bv ("the Holding Companies"). For the purpose of this judgment I will refer to the claimant as MTR-DIGITAL to reflect both its current name and its origin. Its business was principally concerned with the supply of computer software to banks and financial institutions.
MTR-DIGITAL was heavily loss making and dependent on substantial funding from Digital in the form of secured loans. As at December 1994 the loans totalled in aggregate some £8m. They had been advanced under two loan agreements dated 21 December 1992 and 2 April 1994. The security took the form of floating charges created under debentures of the same date.
In about October 1994, it was decided that MTR-DIGITAL should be divested from the Digital Group and attempts were then made to find a purchaser. There were abortive discussions with one potential purchaser, an Irish company called Dealformatics. Following this, in November 1994, another possible purchaser was found. This was Management Technology Inc. ("MTI"), a New York corporation. After certain negotiations, the parties signed "Heads of Agreement" on 9 December 1994 under which it was proposed that MTI would acquire the whole of the issued share capital of MTR DIGITAL for £6.5m. This was, however, premised on the inter-company loan of £8m.due from MTR-DIGITAL to Digital being released prior to any transaction being concluded.
The Heads of Agreement provided for the execution of a legally binding agreement in connection with the acquisition. During the preparation of this document the Chief Financial Officer of Digital indicated his concern at the prospect of Digital simply releasing the debts due to it of £8m and the effect that this would have on Digital's own financial statements. As a result of these concerns the structure of the transaction was altered. The shares in MTR-DIGITAL were to be sold for the nominal sum of £1 and the inter-company loans assigned by Digital for £6.5m (thus representing a discount of some £1.5m from the total debt). This new structure was expressed in two agreements. Under one, the owners of the shares in MTR-DIGITAL would sell them to the purchasers. In the other, the debt owed by MTR-DIGITAL to Digital would be sold to the same purchasers.
These two agreements were drafted and entered into on 22 December 1994. The first was a share sale agreement ("the Sale Agreement") whereby the Holding Companies sold their shares in MTR-DIGITAL to MTi Holdings (UK) Limited ("MTi Holdings") and MTI for £1. The second was a loan assignment under which MTi Holdings acquired from Digital the latter's loan to MTR-DIGITAL. The consideration for this was £6.5m payable in instalments (for which MTI and MTR-DIGITAL acted as surety) ("the Loan Assignment"). MTI thereby became assignee of the Digital/MTR-DIGITAL loan. These transactions were thereafter duly announced under the New York Securities Exchange Act 1934 on 10 March 1995.
MTi Holdings and MTI experienced difficulties in paying the purchase price for the assigned loans of £6.5m. Various negotiations took place for the purpose of revising the terms of payment. There were two agreements which afforded MTi Holdings and MTI more time to pay. For present purposes it is only necessary to consider the second agreement which is dated 29 August 1995 ("the Rescheduling Agreement"). It is between Digital and MTI and MTi Holdings and provides for further time to for payment. It also makes provision for an alternative method of payment of the outstanding consideration for purchase of the loans. This was to be done, at least in part, by the transfer to Digital of certain sums due from associated companies of Digital to MTI or its subsidiaries. Thus if an associated company of Digital owed MTI (or one of its subsidiaries) a sum of money, instead of that sum being paid by the associated company to MTI with MTI subsequently forwarding it to Digital to reduce its own indebtedness under the Loan Assignment, the sum due from the associated company was treated as paid directly to Digital and MTI's indebtedness under the Loan Assignment was reduced accordingly.
The relevant provisions of the Rescheduling Agreement are as follows:
"SHARE PURCHASE AGREEMENT AND LOAN ASSIGNMENT DATED 22 DECEMBER 1994 ("AGREEMENTS"')
...this letter records the agreement between Digital UK, in its capacities as Seller and Assigner and MTI and MTI (UK) in their capacities as Purchaser, Assignee and Guarantor, to change the Agreements to the following extent:
1.4 Payment of the instalments (or part thereof) may be made with the consent of Digital on a case by case basis by the unconditional transfer of sums which are Properly Payable (as defined below) by any subsidiaries of Digital Equipment Corporation to MTI (or any of its subsidiaries) and the associated set-off of the amount of such Properly Payable sums against the agreed part of the relevant payment due under the Agreements
A sum which Digital approves for inclusion in this subsection is deemed Properly Payable when the following conditions are satisfied:
(a) the relevant subsidiary of Digital Equipment Corporation is under a legal obligation to pay MTI, or one of its subsidiaries, that sum of money.
(b) the Assignee has the legal right to require its subsidiary to unconditionally transfer the right to that sum to Digital.
(c) the relevant Digital subsidiaries' Project Manager in charge of the Project to which the payment relates, confirms in writing that the invoice is agreed by him and payment can be processed.
...Notwithstanding the foregoing, this Part 1.4 merely facilitates a particular method of making payment by the Assignee and for the avoidance of doubt nothing in this subsection will relieve the Assignee of its obligation to pay the balance of the Purchase Price in accordance with the attached schedule in cleared funds by the time of the relevant payment dates. "
Implementation of these provisions resulted in debts owed by companies in the Digital group to the MTI group totalling £2,131,124.20 being directed to be paid to Digital rather than MTI or its subsidiaries and in return Digital released MTI and Mti Holdings from an equivalent sum outstanding under the Loan Assignment. Some of the debts which were directed to be paid to Digital under this process were owed by the Associated Companies to MTR-DIGITAL. Therefore, in respect of these debts, sums owed by companies in the Digital group to MTR-DIGITAL were set off against what MTI owed Digital under the Loan Assignment, thereby facilitating the reduction of MTI's indebtedness under the latter agreement. It is this mechanism for the reduction of MTI's indebtedness which is at the heart of the various claims made by MTR-DIGITAL in these proceedings.
The process for reducing MTI s indebtedness was one of which the Board of MTR- DIGITAL was aware and of which it approved. The process concluded by September 1996 once all sums owing under the loan assignment had been treated as paid.
It will be appreciated that these arrangements were intended to be financially neutral. What was involved was a pound-for-pound offsetting of debt between the Digital and MTI sides. No doubt it is for this reason that the relevant provision of the Rescheduling Agreement cited above refers to its purpose being to "merely facilitate" the method by which MTI made payments due from it to Digital.
MTR-DIGITAL 's claims
As mentioned above, by September 1996 all sums owing under the Loan Assignment were treated as paid. Presumably nothing would have happened to disturb this outcome had not MTR-DIGITAL not gone into liquidation. The liquidator has looked again at the Sale Agreement, Loan Assignment and the Rescheduling Agreement from the viewpoint of MTR-DIGITAL and its creditors alone, as he is obliged to do. He advances the case that the Rescheduling Agreement was...
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