MT Realisations Ltd ((in Liquidation)) v Digital Equipment Company Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Justice Mummery,Lord Justice May,The President |
| Judgment Date | 10 April 2003 |
| Neutral Citation | [2003] EWCA Civ 494 |
| Docket Number | Case No: A3/2002/1916 |
| Court | Court of Appeal (Civil Division) |
| Date | 10 April 2003 |
[2003] EWCA Civ 494
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM MR JUSTICE LADDIE
CHANCERY DIVISION
The President
Lord Justice Mummery and
Lord Justice May
Case No: A3/2002/1916
MR CHARLES PURLE QC (instructed by Withers) for the Appellant
MR PHILIP MARSHALL (instructed by Baker & McKenzie) for the Respondent
Introduction
This appeal from the order of Laddie J dated 31 July 2002 is about the application of ss 151 and 152 of the Companies Act 1985 (the 1985 Act). The provisions date from the Companies Act 1929 and have been modified by subsequent Companies Acts. In response to notorious scandals and great dissatisfaction caused by the speculative activities of asset strippers after the First World War, Parliament decided to criminalise the giving of financial assistance by a company for the purpose of acquiring its own shares: see Re VGM Holdings Limited [1942] Ch 235 at 239 per Lord Greene MR.
The most up-to-date account of the intentions of Parliament, the legislative history of the provisions and their judicial interpretation is in the leading judgment handed down by Arden LJ (Buxton and Ward LJJ concurring in separate judgments) in Chaston v. SWP Group plc [2002] EWCA Civ 1999 (Chaston). The judgment comments on aspects of Laddie J's decision in this case and quotes from a commentary on it in Buckley on the Companies Acts (15 th Ed) at paragraph 151.21A. An unusual situation has now arisen in which both sides confidently claim that the Court of Appeal in Chaston has already treated the first instance decision in this case in a manner consistent with, and even supportive of, their competing arguments on this appeal.
The disputed questions have arisen on applications for summary judgment by the defendants in this action and in six related sets of proceedings. The actions have been brought against them by the claimant target company, acting by its liquidator. Breaches of the statutory prohibition are alleged to have occurred in 1995.
The judge granted the applications, struck out the Particulars of Claim and dismissed all the actions. The claimant company appeals, contending that the actions have a real prospect of success and that they should be allowed to proceed to trial; alternatively, that summary judgment should be given against the defendants. There is an appeal against the order striking out a claim for knowing receipt against one of the defendants. There is also a respondent's notice seeking to uphold the judge's order on different or additional grounds.
The Facts
The claimant company is now called MT Realisations Limited (MTR). In 1994 MTR was a loss making, insolvent subsidiary company in the Digital group of companies, suppliers of Compaq computer equipment. MTR was dependent on substantial funding (to the tune of about £8m) in the form of loans advanced under loan agreements by the holding company in the group, Digital Equipment Co Limited (Digital UK). The loans were re-payable on demand. The defendants claimed that MTR's liability to repay the loans made by Digital UK was secured by debentures created by MTR in favour of Digital UK in 1992 and 1994. This was also expressly alleged in MTR's Particulars of Claim (paragraph 12.2), as was the assignment of the benefit of the security documents attached to the Loan Assignment by Digital UK referred to below (paragraph 13.4).
In the autumn of 1994 there were negotiations for the sale of the shares in MTR. Under Heads of Agreement dated 9 December 1994 the whole of the issued share capital in MTR was to be sold for £6.5m on the basis that the inter-company loan of £8m would be released. The deal was then re-structured so that there were two agreements.
The first was a Stock Purchase Agreement dated 22 December 1994 under which MTI Holdings (UK) Ltd (MTI), which is related to an American company, Management Technology Inc, acquired the shares in MTR from the holding companies, for £1. It was recited that the acquisition of the stock was subject to the obligations of MTI to pay the purchase price for the Loan Assignment.
The second was a Loan Assignment also dated 22 December 1994 under which MTI agreed to pay to Digital UK a discounted price of £6.5m, payable by instalments, for an assignment to it of the £8m loans repayable to Digital UK by MTR. It was recited that, as security for its obligations under the loan agreements, MTR had granted to Digital UK a security interest in all its tangible and intangible assets. The Loan Assignment referred to "Security Documents" being attached agreements entered into by MTR for all the sums payable to Digital UK under the loan agreements. Debentures containing fixed and floating charges granted by MTR to Digital UK to secure inter-company loans were dated December 1992 and 2 April 1994 and were annexed to the Loan Assignment.
It is common ground that the transactions did not at that date involve the giving of any "financial assistance" by MTR for the acquisition of its shares. It is, however, contended by MTR that the liability to pay the sum of £6.5m for the assignment of the loans by Digital UK to MTI was incurred by MTI "for the purpose of" the acquisition of the shares in MTR because, but for the acquisition of the shares in MTR, MTI would not have entered into the Loan Assignment. This analysis of the position is disputed by the defendant Digital UK and other members of the Digital group.
MTI was unable to meet its obligation to pay instalments due under the Loan Assignment. The terms were varied in March 1995. Then a Re-scheduling Agreement was made on 29 August 1995. The effect of that agreement was that further time was allowed for payment of the purchase price under the Loan Assignment. The method of payment was also varied so that sums due from Digital UK (or any member of its group), to MTR, would be directed to be paid to Digital UK, instead of to MTR, in reduction of the outstanding instalments of the purchase price under the Loan Assignment.
MTR contends that this re-arrangement constituted the giving of "financial assistance" by MTR. That was unlawful, as the assistance was given for "the purpose of reducing or discharging the liability so incurred" contrary to section 151(2) i.e. the liability of MTI under the Loan Assignment, which had been "incurred… for the purpose of" the acquisition by MTI from Digital UK of the shares in MTR.
The total of £2,131,124.20 directed to be paid to Digital UK included substantial sums owed by companies in the Digital group, to MTR. As the judge explained (paragraph 10)
"Therefore, in respect of these debts, sums owed by companies in the Digital group to MTR…were set off against what MTI owed Digital under the Loan Agreement, thereby facilitating the reduction of MTI's indebtedness under the latter agreement. It is this mechanism for the reduction of MTI's indebtedness which lies at the heart of the various claims made by MTR… in these proceedings."
In this way sums of money due to MTR from companies in the Digital group, were made available to discharge liabilities incurred by MTI to Digital UK under the Loan Assignment, which was entered into when MTI agreed to purchase from Digital UK the shares in MTR.
By September 1996 all sums owing by MTI under the Loan Assignment were treated as paid.
MTR subsequently went into liquidation. It claimed through its liquidator that the re-scheduling of MTI's obligations by way of set off in this agreed fashion constituted an offence under s 151, with the result that the agreement of 29 August 1995 is liable to be set aside and that all the debts owing by members of the Digital group to MTR are to be treated as still due and owing by members of the Digital group, to MTR. Alternatively, damages are claimed for the loss suffered by the cancellation of the debts due to MTR. The claims against the group member in question are for knowing receipt based on breach of fiduciary duty on the part of the directors of MTR in allowing its assets to be used to discharge the liabilities of another company, MTI; for unlawful interference with the contractual relations between MTR and the companies in the Digital group, who were induced not to pay to MTR what was due to it; and absence of consideration for the transfer to of the debts due to MTR.
The Judgment
Laddie J held that there was no breach of s 151. He struck out MTR's Particulars of Claim and dismissed all the claims in this action and in six related actions by the liquidator of MTR against Digital UK and its associated companies.
He held that MTR did not give financial assistance "for the purpose of" acquiring its own shares. The agreement by MTI to pay £6.5m under the assignment was not a liability incurred "for the purpose of" the acquisition of MTR's shares. There was no evidence that MTI could not pay the price of £1 for the shares or that MTR's shares were worth more than £1. The £6.5m was agreed to be paid for the acquisition of the inter-company loans, not for the acquisition of the shares in MTR.
On the issue whether the agreement of 29 August 1995 was made for the purpose of discharging a "liability incurred" for the purpose of acquiring shares in a company, he drew a distinction between "incentives to enter into an agreement or concurrent benefits" and the acquisition of shares in MTR.
On the issue of giving "financial assistance", he held that there was no distinction between a company which had net...
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