Progress Property Co Ltd v Moore and another; [2009] EWCA Civ 629; [2009] WLR (D) 214

COMPANY — Assets — Sale — Sale of company assets at undervalue or at behest of shareholder — Controlling company selling assets of its subsidiary at undervalue — Sale engineered by director of selling and buying companies believing it to be genuine transaction — Whether transaction being dressed-up unlawful distribution of company assets — Whether transaction ultra vires company — Companies Act 1985, s 263

Progress Property Co Ltd v Moore and another

[2009] EWCA Civ 629; [2009] WLR (D) 214

CA: Mummery, Toulson, Elias LJ: 26 June 2009

The sale of a company’s assets at an under value by a company having control of selling and buying companies did not make the sale a dressed up unlawful distribution of its assets or ultra vires the company if the person arranging the sale honestly believed the transaction to be other than a gratuitous distribution of the company’s assets to shareholder, even though that person was the director of the selling and buying companies.

The Court of Appeal so held in a reserved judgment in dismissing the appeal of the claimant, Progress Properties Co Ltd, from the decision of David Donaldson QC who, sitting as the deputy judge of the Chancery Division on 15 October 2008, had dismissed the claimant’s claim against the first defendant, Cornus Moore, for damages for breach of fiduciary duty as a director of the claimant company and against the second defendant, Moorgarth Group Ltd, for the return of shares previously held by the claimant in one of its wholly owned subsidiaries, YMS Properties (No 1) Ltd (“YMS1”) or for compensation.

The claimant and the second defendant were under the control of Tradegro (UK) Ltd which owned about 75% of the shares in the claimant and the entirety of the second defendant’s shares; YMS1 was wholly owned by the claimant. On 20 October 2003, when the first defendant had been both a director of the claimant and also the director of the second defendant he had caused the sale of the shares in YMS1 to the second defendant. The claimant commenced the proceedings on the ground that the sale of the shares in the claimant company to the second defendant was at an undervalue and further ultra vires the company and that the first defendant had acted in breach of his fiduciary duty to the claimant. The appeal related only to the dismissal of the claim against the second defendant.

MUMMERY LJ said that the common law rule on the maintenance of the capital of a company and against distribution to members had been expounded by Oliver J In re Halt Garage (1964) Ltd [1982] 3 All ER 1016 and Hoffmann J in Aveling Barford Ltd v Perion Ltd [1989] BCLC 626. Those judgments had been cited in support of an attack on the validity of the sale of the claimant’s shares in YMS1. The common law rule, devised for the protection of the creditors of a company, was well settled: a distribution of a company’s assets to a shareholder, except in accordance with specific statutory procedures, such as a winding up of the company, was a return of capital which was unlawful and ultra vires the company. The deputy judge had been right in holding that the sale of YMS1 shares was not a disguised distribution of assets either in breach of the common law rule or of s 263 of the Companies Act 1985 or as being for a collateral purpose. It was an intra vires sale of shares for a proper purpose, even if, as was assumed, it was at an undervalue, and even if the first defendant ought to have appreciated that fact. The authorities demonstrated that the issue was whether, on the facts as they had been genuinely perceived by the first defendant to be, and having regard to the nature and character of the payment, it could properly be characterised as something other than a gratuitous distribution to shareholders. In the Aveling Barford case and the Halt Garage case the payment (or at least part of it) could not. Here the payment could only properly and objectively be characterised as consideration for the sale of an asset without any element of gratuitous benefit.

TOULSON and ELIAS LJJ agreed.

Appearances: Matthew Collings QC and Gabrielle Higgins (instructed by Olswang) for the claimant; John McGhee QC and Richard Fowler (instructed by Eversheds LLP) for the second defendant;.the first defendant did not appear and was not represented.

Reported by: Ken Mydeen, barrister.