Mt Realisations Ltd. v Digital Equipment Co Ltd.

Sections 151 and 152 of the Companies Act 1985 must be applied by examining the commercial substance of the transaction and the parties’ legal rights. Directing debts owed to a target company to its parent did not constitute financial assistance where the purchaser had acquired secured loans and could enforce security over those debts. The arrangement merely short-circuited repayment and gave the purchaser no asset or resource belonging to the target that it did not already hold as secured creditor. The court did not decide that a reduction in net assets was necessary. The absence of any gift or transfer of the target’s free resources was sufficient. The application of section 151 remains fact-sensitive.

MT Realisations Ltd, an insolvent subsidiary, was acquired for £1 by MTI Holdings (UK) Ltd in December 1994. At the same time, MTI acquired from Digital UK an assignment of loans owed by the subsidiary, secured by debentures, for £6.5 million. A rescheduling agreement in August 1995 directed debts owed to the subsidiary by group companies to Digital UK, reducing MTI’s liability.

Laddie J granted summary judgment, struck out the Particulars of Claim and dismissed the claims, including claims for knowing receipt. The appeal concerned whether the rescheduling arrangements amounted to prohibited financial assistance under sections 151 and 152 of the Companies Act 1985, and whether the related claims had a real prospect of success.

The appeal was dismissed unanimously. Lord Justice Mummery reached the same conclusion as Laddie J, though by a slightly different route. Lord Justice May and the President agreed.

1. Relevant date and approach. The alleged breach occurred, if at all, on 29 August 1995, when the rescheduling agreement operated. No financial assistance was alleged to have been given when the share purchase and loan assignment were concluded in December 1994. The question under section 151(2) had to be assessed by examining the commercial substance and reality of the transaction together with the parties’ legal rights at the relevant date. [1986] BCLC 1 and [2002] EWCA Civ 1999 provided useful illustrations, but neither required the same result on materially different facts.
2. Security and payment route. On the pleaded case, MTR’s book debts were subject to fixed and floating charges securing the inter-company loans, and the benefit of the security had been transferred to MTI. Non-registration under section 395 did not avoid the charges against MTR before liquidation, prevent enforcement by mortgagee remedies, or invalidate the contractual repayment obligation. MTI was therefore entitled to enforce its security over debts owed to MTR. The rescheduling agreement simply directed those debts to Digital UK rather than requiring payment to MTR followed by repayment to its parent.
3. No financial assistance. The arrangement did not involve MTR giving a gift or transferring an asset or resource from its free assets to MTI. MTI was recovering its own secured entitlement. The absence of any negative impact on MTR’s net balance sheet was not treated as decisive; its relevance was left disputed. The absence of financial assistance was sufficient to defeat the section 151 claim.
4. Purpose and consequential claims. The court considered it unnecessary to decide finally whether the arrangement was for paying the loan-assignment price rather than acquiring the shares. The knowing-receipt and other claims were premised on the alleged unlawfulness of the assignment. Since section 151 had not been breached, those claims had no real prospect of success and were properly struck out. The court determined the appeal on the pleadings as they stood; the new security points could not alter the result without a formal evidence-supported application to amend.

• Court of Appeal (Civil Division) — [2003] EWCA Civ 494 dismissed MTR’s appeal unanimously.
• Chancery Division — On 31 July 2002, Laddie J granted the defendants summary judgment, struck out the Particulars of Claim and dismissed the claims in this action and six related actions.