Progress Property Company Ltd v Moorgarth Group Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Justice Mummery,Lord Justice Toulson,Lord Justice Elias |
| Judgment Date | 26 June 2009 |
| Neutral Citation | [2009] EWCA Civ 629 |
| Date | 26 June 2009 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | Case No: A3/2008/2636 |
[2009] EWCA Civ 629
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
MR DAVID DONALDSON QC SITTING AS A DEPUTY HIGH COURT JUDGE
HC06C03470
Lord Justice Mummery
Lord Justice Toulson and
Lord Justice Elias
Case No: A3/2008/2636
MR MATTHEW COLLINGS QC and MS GABRIELLE HIGGINS (instructed by Olswang) for the Appellant
MR JOHN McGHEE QC and MR RICHARD FOWLER (instructed by Eversheds LLP) for the Respondent
Hearing dates: 30 th April & 1 st May 2009
Lord Justice Mummery:
Introductory
This appeal raises a short, but quite basic, company law point. What are the circumstances in which a sale of assets at an undervalue by a company to, or at the behest of, a shareholder in the company should be held ultra vires on the ground that, in substance, the sale is an unlawful distribution in disguise?
The order under appeal is that of Mr David Donaldson QC dated 15 October 2008. Sitting as a deputy judge in the Chancery Division he dismissed claims by Progress Property Company Limited (PPC), a company holding properties through wholly owned subsidiaries, against Moorgarth Group Limited (Moorgarth). The principal claim was for the return of shares previously held by PPC in one of its subsidiaries, YMS Properties (No 1) Limited (YMS1), or for compensation.
No less than three actions were tried over a period of 14 days, which is an unusual stint to be undertaken by a deputy judge. Other parties and allegations were involved in the actions, mainly in connection with unsuccessful claims against a director of PPC for breach of fiduciary duty. The decisions on those and other claims have not been appealed.
Permission to appeal, which the deputy judge refused, was granted by Jacob LJ on 11 December 2008. The appeal is on one point only: whether PPC's sale of its shares in YMS1 to Moorgarth was ultra vires. Although it was accepted that the transaction took the form of a sale of the shares, PPC alleged that the price was a gross undervalue and that the transaction was, in truth, a dressed-up unlawful distribution of its assets.
The common law rule on the maintenance of the capital of a company and against distributions to members was expounded by two future Law Lords each held in high regard for wise judgments on company law—Oliver J in Re Halt Garage (1964) Limited [1982] 3 All ER 1016 and Hoffmann J in Aveling Barford Limited v. Perion Limited & Ors [1989] BCLC 626. Those judgments were cited in support of an attack on the validity of the sale of PPC's shares in YMS1.
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.
PPC adduced expert evidence at trial that the sale consideration was an undervalue by as much as between £2m and £4m. This was disputed by Moorgarth which also relied on expert valuation evidence. However, the deputy judge did not find it necessary to decide the valuation point. For the purposes of ruling on PPC's ultra vires claim he was prepared to assume that the share sale was at an undervalue. He concluded that, even on that assumption, the sale of the shares was not ultra vires PPC. It was a genuine sale. It neither purported to be nor was it in reality a distribution of PPC's assets to, or at the behest of, one of its members.
As for the remaining issues litigated at trial the deputy judge rejected allegations of breaches of duty on the part of PPC's directors. Any breaches of directors' duties were ratifiable by the shareholders in general meeting. They were in fact so ratified. It was agreed that ultra vires acts of PPC were different. They could not be ratified: see Rolled Steel Products (Holdings) Limited v. British Steel Corporation [1986] Ch 246 at 296G-H per Slade LJ.
Background facts
The key question on this appeal is whether, on his assumption of an undervalue, the deputy judge was wrong to reject the claim that the sale of the shares by PPC was in substance an unlawful distribution of assets. On PPC's case it was significant that, at the date of the sale, both PPC, the vendor, and Moorgarth, the purchaser, were under the control of the same holding company, Tradegro (UK) Limited (Tradegro). Further, the sale terms were negotiated by Mr Cornus Moore, who was a director of both the vendor and the purchaser companies and the right hand man of the chairman of Tradegro's ultimate parent company (Dr Christo Wiese).
At the date of the sale Tradegro owned 75.1% of the shares in PPC. The remaining 24.9% of the shares were held by Mr Charles Price. Mr Cornus Moore was the individual principally responsible for negotiating the sale of PPC's shares in YMS1 to Moorgarth (previously Foldfree). Tradegro owned all the shares in Moorgarth. As the vendor and the purchaser of the shares were under the same control the situation was no different, in principle, from that of a transfer of assets direct to a member of the company.
Legal proceedings followed on the change in the control of PPC that took place as a result of a Sale Agreement dated 3 October 2003. Tradegro agreed to sell its shareholding in PPC to a company wholly owned by its then fellow shareholder in PPC, Mr Charles Price, who negotiated with Mr Moore acting on behalf of Tradegro. Mr Price's company was Wigmore Street Investments Limited (WSIL, previously Real Estate Property Corporation). Mr Price indirectly became the owner of PPC. It was a term of that agreement that, prior to completion, Tradegro would procure the transfer to its subsidiary Moorgarth of the entire issued share capital in PPC's subsidiary YMS1. That transfer was effected on 20 October 2003.
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.
The deputy judge referred to the conflict of expert evidence on the value of the shares. His view was that, for the purposes of his analysis of the claim, it was more convenient
“….to proceed on the undetermined assumption that the sale price was based on an undervaluation of the YMS portfolio and was in consequence less than the market value of the shares of YMS-1.”
It is common ground that, if his decision reached on the assumption of an undervalue was wrong in law, it will be necessary for the issues of valuation and possibly also of what Mr Moore ought to have known to be remitted for determination at another trial.
Under the heading “Unlawful distribution of assets” the deputy judge considered together the claims against Mr Moore for breach of duty as a director and against Moorgarth for the return of shares transferred under an ultra vires transaction. In rejecting both heads of claim he said this—
“38. PPC contended that the disposal of the shares at an undervalue constituted an unlawful distribution of the assets of the company to a shareholder and was therefore ultra vires. This allegation formed the basis of a claim for breach of duty against Mr Moore, and a consequent claim against Moorgarth for the return of the shares or monetary relief.
39. PPC submitted that a transaction is not only illegal but ultra vires whenever the company has entered into a transaction with a shareholder which results in a transfer of value not covered by distributable profits, and regardless of the purpose of the transaction. This proposition was said to be vouched by the decision of Hoffmann J in Aveling Barford Ltd v. Perion Ltd [1989] BCLC 626.
40. PPC's submission is not supported, and indeed is positively belied, by Aveling Barford. In that case the plaintiff company sold a property at what was known to be an undervalue to a company controlled by an individual who also controlled the plaintiff company. The sale was approved by all the shareholders. That would not...
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