Soden and Another v. British & Commonwealth Holdings Plc and Others

The House of Lords held that sums payable to a member "in his character of a member" within section 74(2)(f) of the Insolvency Act 1986 are limited to rights founded on the statutory contract between company and members (section 14(1) Companies Act 1985 and related statutory rights). Damages for negligent misrepresentation by a company inducing the purchase of already-issued shares from a third party do not arise from the statutory contract and therefore are not sums due in the member's character as a member under section 74(2)(f). Accordingly such claims are not subordinated to the claims of the company's general creditors. The court distinguished authorities dealing with claims arising on the issue or subscription of shares (for example Addlestone and Webb) as concerned with protection of capital and creditor interests where recovery would indirectly reduce capital.

Background and procedural history:

• In 1988 British & Commonwealth Holdings plc acquired Atlantic Computers plc. Atlantic went into administration in 1990. The administrators of Atlantic (the appellants) sought directions on whether damages and costs recoverable by British & Commonwealth (B. & C.) in an action for negligent misrepresentation inducing the acquisition of Atlantic shares would be subordinated by virtue of section 74(2)(f) of the Insolvency Act 1986, and whether any such subordinated claims would rank as liabilities under a court-approved Scheme of Arrangement. The administrators also raised the position of Barclays de Zoete Wedd (B.Z.W.) who had third-party claims.
• The trial judge (Robert Walker J) [1995] 1 B.C.L.C. 686 held that the claims were not subordinated and, alternatively, that if subordinated they would not be Scheme liabilities. The Court of Appeal [1997] 2 W.L.R. 206 upheld that decision. The only remaining issue before the House of Lords was whether B. & C.'s potential damages (if proved) were sums due "in his character of a member" under section 74(2)(f).

Nature of the application and issues:

• The administrators sought declaratory directions on priority and treatment under the Scheme. The principal legal issue was the proper construction of section 74(2)(f) Insolvency Act 1986: whether damages for misrepresentation inducing the purchase of existing shares from a third party are sums due to a member "in his character of a member".

Court's reasoning:

• The court explained that sums "in his character of a member" must, absent contrary indication, be sums founded on the statutory contract constituted by section 14(1) Companies Act 1985 together with statutory rights and obligations. The words "by way of dividends, profits or otherwise" in section 74(2)(f) are illustrative of such membership-based rights and not a separate genus to be expanded by ejusdem generis reasoning.
• The Lords contrasted claims founded on the statutory contract with claims arising from independent dealings or contracts between member and company. Where a cause of action is independent of the statutory contract (for example a tort or contract claim arising from an ordinary commercial dealing or a purchase of existing shares from a third party), the claimant ranks as an ordinary creditor, not as a contributory entitled only after other creditors.
• Authorities dealing with misrepresentations on the issue or subscription of shares (Addlestone; Webb) were accepted as applicable in their context because such claims could indirectly reduce capital and therefore engage protection of creditors, but they do not extend to claims based on purchases of already issued shares from third parties.
• The decision followed the trial judge and Court of Appeal: B. & C.'s potential damages for misrepresentation inducing the purchase of issued shares did not fall within section 74(2)(f) and therefore would not be subordinated.

Wider context: The Lords recognised that the questions were in part hypothetical but justified determination because any successful claims could be very large and would materially affect administration and distribution under the Scheme.

Appeal dismissed. The House of Lords held that the phrase "a sum due to any member of the company (in his character of a member)" in section 74(2)(f) of the Insolvency Act 1986 refers to rights founded on the statutory contract between company and members (section 14(1) Companies Act 1985 and related statutory rights). Damages for misrepresentation inducing the purchase of already-issued shares from a third party do not arise from that statutory contract and therefore are not subordinated to other creditors under section 74(2)(f). Authorities concerning subscriptions or the issue of shares were confined to their proper context where recovery would affect capital and creditor protection.

Trial: Robert Walker J, [1995] 1 B.C.L.C. 686 (trial judge). Court of Appeal (Russell, Hirst and Peter Gibson L.JJ.), [1997] 2 W.L.R. 206 (appeal dismissed). House of Lords: [1997] UKHL 41 (appeal dismissed).