Progress Property Company Ltd v Moore and another
| Jurisdiction | England & Wales |
| Judge | LORD WALKER,LORD MANCE,LORD PHILLIPS,LORD COLLINS,LORD CLARKE |
| Judgment Date | 08 December 2010 |
| Neutral Citation | [2010] UKSC 55 |
| Court | Supreme Court |
| Date | 08 December 2010 |
[2010] UKSC 55
Lord Phillips, President
Lord Walker
Lord Mance
Lord Collins
Lord Clarke
Appellant
Matthew Collings QC
Gabrielle Higgins
(Instructed by Seddons Solicitors)
Respondent
John McGhee QC
Richard Fowler
(Instructed by Eversheds LLP)
The issue
A limited company not in liquidation cannot lawfully return capital to its shareholders except by way of a reduction of capital approved by the court. Profits may be distributed to shareholders (normally by way of dividend) but only out of distributable profits computed in accordance with the complicated provisions of the Companies Act 2006 (replacing similar provisions in the Companies Act 1985). Whether a transaction amounts to an unlawful distribution of capital is not simply a matter of form. As Hoffmann J said in Aveling Barford Ltd v Perion Ltd [1989] BCLC 626, 631,
"Whether or not the transaction is a distribution to shareholders does not depend exclusively on what the parties choose to call it. The court looks at the substance rather than the outward appearance."
Similarly Pennycuick J observed in Ridge Securities Ltd v Inland Revenue Commissioners [1964] 1 WLR 479, 495,
"A company can only lawfully deal with its assets in furtherance of its objects. The corporators may take assets out of the company by way of dividend, or, with the leave of the court, by way of reduction of capital, or in a winding-up. They may of course acquire them for full consideration. They cannot take assets out of the company by way of voluntary distribution, however described, and if they attempt to do so, the distribution is ultra vires the company."
The sole issue in this appeal is whether there may have been an unlawful distribution of capital when the appellant company, Progress Property Company Ltd ("PPC"), sold the whole issued share capital of a wholly-owned subsidiary, YMS Properties (No. 1) Ltd ("YMS1") to another company, Moorgarth Group Ltd ("Moorgarth"). All these companies were indirectly controlled by Dr Cristo Wiese, a South African investor. The facts have not yet been fully established, which is why the issue must be stated in this inconclusive way.
PPC was originally called Tradegro (UK) Property Holdings Ltd and has since changed its name to BLN Property Company Ltd. Moorgarth was originally called Foldfree Ltd. But it is simplest to use the names used by Mummery LJ in his judgment in the Court of Appeal.
The transaction between PPC and Moorgarth has been vigorously attacked by the appellant PPC on the ground that it was (as must be assumed for the purposes of this appeal) at an undervalue (PPC says, a gross undervalue). YMS1, a company whose net assets might on PPC's most ambitious case have been worth as much as £4m, was sold for little more than £60,000. But the attack has been stoutly resisted on the ground that (as is now no longer in dispute) Mr Cornus Moore (Dr Wiese's right-hand man, and a director of both PPC and Moorgarth) genuinely believed that the sale of the shares in YMS1 was at market value. It is also to be assumed for the purposes of this appeal that Mr Moore was in breach of duty in failing to realise that the transaction was in fact a sale at an undervalue. Had this appeal been allowed, the correctness of these undetermined assumptions (and also issues of valuation and quantum) might have had to be decided in further proceedings.
The facts
The scale of the undervaluation alleged by PPC, in a transaction negotiated between experienced businessmen advised by experienced surveyors, solicitors and accountants, is truly remarkable. It suggests that the circumstances were such as to call for close enquiry; and the deputy judge, Mr David Donaldson QC, did enquire into them closely in the course of a fourteen-day trial of this action (together with two other actions in which there has been no appeal). The deputy judge's task in fact-finding was difficult, as he found Mr Charles Price, the individual indirectly interested (as a minority shareholder in PPC and as prospective purchaser of the majority holding) in the disposal of the YMS1 shares, to be an unreliable witness. PPC's failure to call as a witness its solicitor, Mr Gerber, added to the deputy judge's difficulties in making full and clear findings of fact. He dismissed the action on the basis that it could not succeed even if there had been an unintentional sale at an undervalue, and even if Mr Moore was in breach of duty in failing to recognise it.
The Court of Appeal (Mummery, Toulson and Elias LJJ) [2009] EWCA Civ 629, [2010] 1 BCLC 1 unanimously upheld the deputy judge's dismissal of the action. In doing so Mummery LJ (with whom Toulson and Elias LJJ concurred) did not find it necessary to go far into the factual circumstances. He summarised the essential facts with admirable brevity in paras 6 and 12 of his judgment:
"The sale and purchase agreement was made on 20 October 2003 at an agreed price of £63,225.72. The sale price was calculated on the basis of the open market value of the YMS1 properties (£11.83m), from which there was subtracted liabilities for creditors approaching £8m and the sum of £4m in respect of a repairing liability. The subtraction of £4m was made in the belief that PPC had given an indemnity or counter-indemnity under which that liability would ultimately fall on PPC. As part of the transaction that liability of PPC was to be released. In fact, it turned out that there was no such indemnity liability and there was nothing from which PPC could be released. In consequence there was no £4m to subtract from the value of the YMS1 properties. There was no justification for the reduction in the sale price. So it was said that the sale of the shares was at a gross undervalue.
…
There was no dispute before the deputy judge that Mr Moore genuinely believed that the price of the shares in YMS1 sold by PPC to Moorgarth was their market value. It was not alleged that there was any intention on his part to prefer Moorgarth or to commit a fraud on the creditors of PPC. He acted in the honest belief that the sale of the shares in YMS1 was a commercial transaction."
I am reluctant to expand on Mummery LJ's summary unless there is a good reason to do so. But in an appeal which is centrally concerned with the substance and reality of the impugned transaction, I think it is appropriate to set out some of the deputy judge's findings of fact in rather more detail. They help to answer some (but not all) of the questions prompted by Mummery LJ's summary.
At the material time (roughly April to October 2003) Dr Wiese's investments included interests in the "value" (or down-market) sector of the United Kingdom retail market. He indirectly controlled (through Brown & Jackson Plc - "B & J") two retail chains, Poundstretcher and Your More Store. These businesses (especially Your More Store) were not flourishing, and in the early months of 2003 he took various steps intended to improve their prosperity. Your More Store Limited ("YMS"), which ran Your More Store and two other retail businesses, became a subsidiary of Tradegro (UK) Ltd ("Tradegro"), another company controlled by Dr Wiese. Mr Carel Stassen was appointed as managing director of YMS and became a minority shareholder in YMS. Mr Price was appointed as managing director of PPC, which was at that time a wholly-owned subsidiary of Tradegro. Mr Price became the holder of 24.9% of the shares in PPC, leaving Tradegro with 75.1%. The freehold interest in the Your More Store premises was vested in a company called YMS Properties (No. 2) Ltd ("YMS2"). YMS2 was a wholly-owned subsidiary of YMS1, which was a wholly-owned subsidiary of PPC. In the short term YMS continued to occupy its retail premises informally, without any leases from YMS2. There was a similar reorganization of the Poundstretcher business.
YMS's informal occupation of the retail premises did not last long. An essential part of Mr Price's task was to manage and raise finance from YMS2's property portfolio. Mr Price embarked on negotiations with Nationwide Building Society ("Nationwide") and on 2 May 2003 Nationwide entered into a facilities agreement to advance funds of more than £20m secured on the YMS and Poundstretcher freeholds. But Nationwide insisted that formal leases, with tenants' covenants including full repairing and insurance obligations, should be entered into between YMS2 as landlord and YMS as tenant and between the corresponding Poundstretcher companies.
The deputy judge summarised the resulting situation in paras 8 and 9 of his judgment:
"This posed a problem. The properties in the portfolio, and in particular those occupied by YMS, were in significant disrepair. A survey produced by independent surveyors GRD in early 2003 estimated the existing cost of repairs to the YMS properties at more than £4.6m. YMS, whose trading position was already parlous, was in no position to shoulder a liability of this magnitude, and Mr Stassen refused to agree. Moreover, the execution of FRI leases would at a stroke bring about a substantial increase in the value of the [freeholds –the judge wrote 'leases' but this must have been a slip] compared with the vacant possession value at which they currently stood in the books of YMS1. As all parties recognised, commercial logic – and indeed fairness – required that the costs of this benefit should not rest with YMS. It might be that no serious problem would arise so long as both the freeholds and YMS remained within the [Tradegro] group (though a question might still be posed as a result of the minority interests of Mr Stassen and Mr Price in, respectively, YMS and PPC), but that position was always open to change.
In the event, YMS did sign FRI leases. Mr...
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