Chaston v SWP Group Plc

Financial assistance under sections 151 and 152 of the Companies Act 1985 is a commercial concept assessed by the commercial substance and reality of the transaction. It is not confined to assistance that enables the purchaser to pay the share price, and it may be given to a purchaser, vendor or another person connected with the transaction.

Assistance may be unlawful even if it benefits the target company, is given in good faith, or occurs before completion. The relevant question is whether the assistance was given directly or indirectly for the purpose of the acquisition. The statutory principal-purpose defence applies only where there is another larger corporate purpose.

SWP Group plc acquired the parent company of Dunstable Rubber Company Ltd. Dunstable Rubber Company Ltd incurred liabilities to Deloitte and Touche for work connected with SWP’s due diligence exercise and paid some of those fees.

SWP, as assignee of Dunstable Rubber Company Ltd’s claims, brought a Part 20 claim against Robert Chaston for breach of fiduciary duty arising from alleged contravention of section 151 of the Companies Act 1985. The trial judge rejected the claim on the statutory issue, holding that the fees were incurred in the company’s interests and were not given for the purpose of the acquisition. SWP appealed. The central issues were whether the fees constituted financial assistance, to whom it was given, and whether it was given for the purpose of the acquisition.

1. Appeal allowed. The unanimous court held that the liabilities incurred to Deloitte and Touche, and the payments made, constituted financial assistance for the purposes of section 151.
2. The expression “financial assistance” has no technical meaning. Its meaning is determined by the commercial substance and reality of the transaction, consistently with Charterhouse Investment Trust Ltd v Tempest Diesels Ltd [1986] BCLC 1, as approved in Barclays Bank plc v British Commonwealth Holdings plc [1996] 1 BCLC 1. The penal character of section 151 requires the language not to be strained, but does not exclude a transaction fairly within its ordinary commercial meaning.
3. There is no statutory limitation confining assistance to assistance given to the purchaser or to assistance affecting the share price. Payment by the target company relieved both purchaser and vendors of expenditure which would otherwise have been incurred in the due diligence process. That was financial assistance, and it was sufficient that parties to the transaction were assisted.
4. Diminution or detriment is not generally required. The forms of assistance specified in section 152(1)(a)(i)–(iii) are prohibited irrespective of diminution, subject to section 153. For assistance falling within section 152(1)(a)(iv), material reduction of actual net assets is required where the company has positive net assets. The court respectfully disagreed with the contrary reasoning on this point in MT Realisations Ltd (in liquidation) v Digital Equipment Co Ltd [2002] EWHC 1628 (Ch).
5. The court rejected a bright-line distinction between pre-transactional assistance and assistance given during the acquisition. The words “directly or indirectly” and the reference to a person “proposing to acquire” shares are sufficiently wide to include assistance given before completion.
6. Performance of fiduciary duties and good faith are not, by themselves, a defence. Section 153 supplies the relevant principal-purpose defence, but it requires a larger corporate purpose distinct from the acquisition. The company’s desire to secure the acquisition was a reason for the transaction, not an independent larger purpose, applying Brady v Brady [1989] 1 AC 755.
7. Lord Justice Buxton agreed that payment of the due diligence costs was assistance to SWP and was for the purpose of furthering the acquisition. Lord Justice Ward agreed, adding that the statutory policy also protected non-selling shareholders and creditors from the use of company funds in support of a bid.

• Court of Appeal (Civil Division): appeal from the Queen’s Bench Division allowed. The order dismissing SWP’s Part 20 claim on the section 151 issue was reversed.
• Queen’s Bench Division: Mr Justice Davis held that the fees did not constitute financial assistance given for the purpose of the acquisition and dismissed the relevant claim.