Soden v British & Commonwealth Holdings Plc
| Jurisdiction | England & Wales |
| Judge | LORD LLOYD OF BERWICK,LORD STEYN,LORD HOFFMANN,LORD HOPE OF CRAIGHEAD |
| Judgment Date | 16 October 1997 |
| Judgment citation (vLex) | [1997] UKHL J1016-4 |
| Court | House of Lords |
[1997] UKHL J1016-4
HOUSE OF LORDS
Lord Browne-Wilkinson
Lord Lloyd of Berwick
Lord Steyn
Lord Hoffmann
Lord Hope of Craighead
and Another
And Others
My Lords,
In 1988 British & Commonwealth Holdings P.L.C. ("B.& C.") purchased for some £434 million the whole of the share capital of Atlantic Computers P.L.C. ("Atlantic"). The acquisition proved to be disastrous. Atlantic went into Administration in 1990. The Administrators of Atlantic are the appellants in your Lordships' House. B. & C. is also in Administration. It has brought proceedings against, inter alia, Atlantic ("the main action") for damages for negligent misrepresentations said to have been made by Atlantic so as to induce B. & C. to acquire its shares. B. & C. has also brought proceedings against Barclays de Zoete Wedd Ltd. ("the B.Z.W. action") for damages for negligent advice given in relation to the acquisition of the Atlantic Shares. B.Z.W. has issued third party proceedings against Atlantic for contribution and damages.
Quite apart from the claims in the main action and the B.Z.W. action, the liabilities of Atlantic greatly exceed its assets. On 30 March 1994 the court approved a Scheme of Arrangement to which B. & C. was not a party. It provided that, subject to the payment of preferential liabilities, the Scheme assets should be distributed pari passu between the Scheme Creditors broadly on the same basis as if Atlantic were in liquidation.
Neither the main action nor the B.Z.W. action has yet come to trial. In these proceedings the Administrators have applied to the court by originating summons for directions (a) whether the damages and costs recoverable by B. & C. and B.Z.W. if the actions succeed will be subordinated to the claims of the other creditors of Atlantic by virtue of being sums due to a "member of the company (in his character of a member)" within section 74(2)(f) of the Insolvency Act 1986 and (b) if so, whether the subordinated claims of B. & C. and B.Z.W. fall to be treated as Scheme Liabilities under the Scheme of Arrangement. In one sense, the originating summons raises hypothetical questions since, unless the main action and the B.Z.W. action succeed, the priority of those claims will not be a material factor. However, the courts below and your Lordships were satisfied that it is proper to decide these points at the present time. The claims in the main action and the B.Z.W. action, if successful, may give rise to enormous damages (in the region of £500 million). The status of the claims in these actions vis-a-vis the other creditors of Atlantic has an immediate and profound impact on the way in which the Scheme of Arrangement is now to be administered.
The trial judge, Robert Walker J. [1995] 1 B.C.L.C. 686 held, first, that B. & C.'s claim was not subordinated to the claims of the other creditors; second, that B.Z.W.'s claim was not so subordinated; third, that if contrary to his views such claims were subordinated they did not rank as Scheme liabilities under the Scheme of Arrangement. The Administrators appealed to the Court of Appeal against the judge's decision in relation to the B. & C. claim but not against his decision on the B.Z.W. claim. B. & C. cross-appealed against the judge's decision on the question whether its claims were Scheme liabilities. The Court of Appeal ( Russell, Hirst and Peter Gibson L.JJ.) [1997] 2 W.L.R. 206 upheld the judge on both points and dismissed both the appeal and the cross-appeal. B. & C. has not appealed to your Lordships against the decision on its cross-appeal by the Court of Appeal. Therefore the only point remaining for decision by your Lordships is whether B. & C.'s claims in the main action (if successful) are by virtue of section 74(2)(f) subordinated to the claims of the general creditors of Atlantic.
Section 74 of the Act of 1986 is the first of a group of sections cross-headed "Contributories." So far as relevant it provides:
"74(1) When a company is wound up, every present and past member is liable to contribute to its assets to any amount sufficient for payment of its debts and liabilities, and the expenses of the winding up, and for the adjustment of the rights of the contributories among themselves.
"(2) This is subject as follows -
(f) A sum due to any member of the company (in his character of a member) by way of dividends, profits or otherwise is not deemed to be a debt of the company, payable to that member in a case of competition between himself and any other creditor not a member of the company, but any such sum may be taken into account for the purpose of the final adjustment of the rights of the contributories among themselves."
The legislative history of this section can be traced back to section 38 of the Companies Act 1862, in which section 38(7) corresponds to section 74(2)(f) of the Act of 1986.
The critical question is whether any damages ordered to be paid to B. & C. by Atlantic for misrepresentation by Atlantic inducing the purchase by B. & C. of Atlantic shares would constitute a sum due to a member of Atlantic (i.e. B. & C.) in its character of a member by way of dividends, profits or otherwise within the meaning of section 74(2)(f). If so, B. & C.'s claim will be subordinated to that of Atlantic's general creditors.
Mr. Potts Q.C., for the Administrators of Atlantic, submitted that the basic principle applicable was that "members come last", i.e. the members of a company can take nothing until the outside creditors have been paid in full. He further submitted that in the present case there would be a manifest absurdity if B. & C., as shareholder in its wholly owned subsidiary Atlantic, could circumvent that rule by claiming as damages sums quantified by reference to the worth of the Atlantic shares payable in respect of a misrepresentation leading to the acquisition of such shares. This would be to enable B. & C. to convert its position from that of a holder of worthless shares in its wholly owned subsidiary into that of a creditor ranking pari passu with ordinary creditors of that subsidiary.
Mr. Potts, of course, accepted that there could be sums due to a member otherwise than in his character of a member, e.g. loans made by a member to the company or sums due to a member under a contract for the sale of goods by the member to the company. He submitted that a claim is not a claim "in his character of a member" where it arises on an independent dealing or contract with the company and relies on section 149(2)(a) of the Act of 1986. That section permits the set-off against calls made on a contributory of "any money due to him … on any independent dealing or contract with the company, but not any money due to him as a member of the company in respect of any dividend or profit …" He submitted that a dealing or contract is not independent of the corporate nexus of membership or of the character of membership where such dealing or contract itself brings about the status of membership whether by way of subscription for shares or transfer of shares. In particular, he submits, a claim is maintained in the character of a member where the claimant seeks to recover from the company the price which he has paid for his shares on the basis that such shares are not worth what they were warranted or represented by the company to be worth. The claimant who is induced to acquire his shares by subscription falls within the class of those who are not allowed to compete with general creditors: see In Addlestone Linoleum Company (1887) 37 Ch. D. 191, and Webb Distributors (Aust.) Pty. Ltd. v. State of Victoria (1993) 11 A.C.S.R. 731. There is no reason, he submitted, why a claimant who is induced to acquire his shares by purchase (as opposed to allotment) should be in a different position. In short, he submits that a sum is due to a person in his character as a member of a company where it is due to him under the bundle of rights which constitute his shares in the company or by reason of a warranty or misrepresentation on the part of the company going to the characteristics or value of the shares which induces him to acquire those shares.
I cannot accept these submissions. Section 74(2)(f) requires a distinction to be drawn between, on the one hand, sums due to a member in his character of a member by way of dividends, profits or otherwise and, on the other hand, sums due to a member otherwise than in his character as a member. In the absence of any other indication to the contrary, sums due in the character of a member...
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