Dyment v Boyden & Ors

Financial assistance is prohibited only where the assistance is given for the purpose of acquiring shares, not merely because it is connected with the acquisition. The court must examine the commercial substance and reality of the transaction. An excessive obligation undertaken by a company may constitute financial assistance if it materially reduces the company’s net assets, but the statutory purpose requirement remains decisive. A lease entered into to secure premises and preserve the company’s business is not assistance given for the purpose of acquiring shares merely because the shareholders’ transfer and the lease formed part of the same overall arrangement.

The applicant, a creditor and shareholder of an insolvent company, challenged proofs submitted in its liquidation by the respondent former shareholders. The proofs included judgment debt and rent allegedly payable under a long lease of the company’s premises. She argued that the lease contravened section 151 of the Companies Act 1985 because its rent exceeded market value and the arrangement formed part of the acquisition of the respondents’ shares.

The court considered whether the company’s liability under the lease had been incurred before or at the time of the share acquisition, or had subsequently discharged a liability incurred for that purpose.

1. The applicant’s case under section 151(1) of the Companies Act 1985 failed. When the shares were transferred, the company had not yet become liable under the lease and was not legally bound to enter into it.

2. The company’s entry into an onerous lease could in principle amount to financial assistance under section 151(2), if the applicant had undertaken an obligation to procure the lease for the purpose of acquiring the shares. The excessive rent materially reduced the company’s net assets, satisfying the potential financial-assistance element under section 152(1)(a)(iv).

3. The statutory purpose requirement was not satisfied. On the commercial substance and reality of the transaction, the lease was entered into to obtain premises and secure the company’s continued operation. The respondents’ ownership of the freehold, the company’s need for a long lease, and the applicant’s desire to continue the business gave them bargaining power to demand the excessive rent. The lease was therefore connected with, but not entered into for the purpose of, the share acquisition.

4. The observations in Macpherson and another v European Strategic Bureau Ltd, [2000] BCLC 683, Chaston v SWP Group plc, [2002] EWCA Civ 1999; [2003] 1 BCLC 676, and MT Realisations Ltd (in Liquidation) v Digital Equipment Co, [2003] EWCA Civ 494; [2003] 2 BCLC 117, concerning commercial substance and the irrelevance of shares having no value, were not inconsistent with that conclusion.

5. Having decided that section 151 was not infringed, the court found it unnecessary to determine the remaining issues concerning the proofs and the liquidator’s powers.