Soden v British & Commonwealth Holdings Plc

Under section 74(2)(f) of the Insolvency Act 1986, only rights founded on the statutory contract between a company and its members are subordinated as sums due to members in their character as members. A member’s claim arising from an independent cause of action ranks like any other creditor’s claim.

Accordingly, damages for a company’s misrepresentation inducing the purchase of its existing, fully paid shares from a third party are not subordinated. Such a claim neither arises from membership rights nor reduces the company’s capital. Authorities concerning misrepresentations made when a company issues shares are confined to that distinct capital-maintenance context.

British & Commonwealth Holdings plc purchased all the shares in Atlantic Computers plc. After both companies entered administration, British & Commonwealth claimed damages from Atlantic for negligent misrepresentations allegedly inducing the acquisition. Atlantic’s administrators sought directions on whether any damages and costs would be subordinated under section 74(2)(f) of the Insolvency Act 1986.

Robert Walker J held at first instance, [1995] 1 BCLC 686, that the claim was not subordinated. The Court of Appeal, [1997] 2 WLR 206, upheld that decision. The sole issue before the House was whether damages for misrepresentation inducing a purchase of existing shares from a third party were sums due to a member in its character as a member.

1. Appeal dismissed unanimously. Lord Browne-Wilkinson delivered the leading speech. Lord Lloyd of Berwick, Lord Steyn, Lord Hoffmann and Lord Hope of Craighead agreed with his reasons.

2. Per Lord Browne-Wilkinson, section 74(2)(f) of the Insolvency Act 1986 distinguishes rights arising in a person’s character as a member from rights founded on another legal cause of action. A sum is due in the character of a member only where the cause of action is based on the statutory contract constituted by section 14(1) of the Companies Act 1985, together with the statutory rights and obligations of membership.

3. The words “by way of dividends, profits or otherwise” illustrate sums arising under that statutory contract. They neither enlarge nor restrict the governing phrase. The applicable principle is that members’ rights as members rank after general creditors’ rights. It is not a general rule that every claim brought by a member ranks last.

4. Membership may be a necessary qualification for acquiring a claim without being the legal foundation of that claim. Directors’ remuneration illustrates the distinction: even where a director must hold shares, remuneration is recoverable under a separate contract rather than as a membership right.

5. The decisions concerning shares issued by a company, including In re Addlestone Linoleum Co (1887) 37 Ch D 191 and Webb Distributors (Aust) Pty Ltd v State of Victoria (1993) 11 ACSR 731, were distinguished. Their reasoning protected creditors against the direct or indirect return of subscribed capital. That concern does not arise when a claimant purchased existing, fully paid shares from a third party.

6. British & Commonwealth’s damages claim therefore stood on the same footing as any claim independent of its shares. Any sum recovered was not due in its character as a member and was not subordinated by section 74(2)(f). It was unnecessary to decide whether an unliquidated damages claim was a “sum due”.

1. House of Lords: Dismissed the administrators’ appeal unanimously and affirmed that the damages claim was not subordinated under section 74(2)(f) of the Insolvency Act 1986; [1998] AC 298.
2. Court of Appeal: Russell, Hirst and Peter Gibson LJJ dismissed both the administrators’ appeal on subordination and British & Commonwealth’s cross-appeal concerning scheme liabilities; [1997] 2 WLR 206.
3. High Court: Robert Walker J held that neither British & Commonwealth’s claim nor BZW’s claim was subordinated. He also held that, if subordinated, they were not scheme liabilities; [1995] 1 BCLC 686.