Anglo Petroleum Ltd & Anor v TFB (Mortgages) Ltd

The prohibition on financial assistance requires attention to commercial realities and the company’s purpose. Its penal character means that it should not be strained to catch transactions fairly outside it. A company’s lawful repayment of its own debt ordinarily is not financial assistance to a share purchaser. The source and cost of borrowing do not change that character, and security supporting a commercially justified repayment may likewise be lawful. A debt compromise and security for reduced debt do not become assistance merely because they make an acquisition easier. Where lawful contractual performance is possible, illegality requires a common unlawful design or active participation; knowledge alone is insufficient. A generic loan-purpose clause did not require an illegal payment, and the lender’s knowledge did not make the agreements unenforceable.

This was an appeal from Peter Smith J’s order of 24 February 2006 on preliminary issues in three actions. The actions concerned a £15 million loan by TFB to Anglo Petroleum, security over Anglo Petroleum’s assets, and Paul Sutton’s guarantee. Anglo Petroleum’s shares had been acquired by Kaluna after a debt compromise with its former parent, Repsol. £9 million of TFB’s loan was used to repay the remaining Repsol debt. Anglo Petroleum contended that the compromise, security and repayment contravened section 151 of the Companies Act 1985, and that TFB could not enforce the credit transactions for illegality. The central questions were whether the repayment amounted to financial assistance under either route advanced, and whether any resulting illegality defeated enforcement.

Appeal dismissed. Lord Justice Toulson gave the substantive judgment. Lady Justice Smith and Lord Justice Mummery agreed.

1. Financial assistance. Section 151 of the Companies Act 1985 has no precise definition of financial assistance. The court must examine commercial realities and the transaction’s central purpose. The penal character of the provision requires caution in doubtful cases. The approach was supported by Chaston v SWP Group Plc [2002] EWCA Civ 199 and Charterhouse Investment Trust Limited v Tempest Diesels Limited [1986] BCLC 1.
2. Routes 1 and 2. The Compromise Agreement reduced Anglo Petroleum’s indebtedness to Repsol. It was not financial assistance to Kaluna merely because it made the acquisition easier. The APL/Repsol charge secured that reduced indebtedness and was not assistance in the circumstances. Repayment of Anglo Petroleum’s own lawful debt did not become financial assistance because the borrowing involved an arrangement fee or reduced net assets. The source of the money was irrelevant. Security supporting a lawful repayment with genuine commercial justification was likewise lawful. Re Hill and Tyler Limited [2005] 1 BCLC 41 was distinguishable.
3. The repayment of Anglo Petroleum’s own debt was not assistance for the purpose of discharging Kaluna’s liabilities. Both routes therefore failed.
4. Illegality. A contract may be illegal because its formation is prohibited, because it requires an act prohibited by statute, or because it is entered into to achieve such an act. Where a contract can lawfully be performed, illegality requires a wicked intention or common unlawful design. Active participation may establish that design, but knowledge alone does not. J M Allan (Merchandising) Limited v Cloke [1963] 2 QB 340 was treated as stating a ratio binding on this court, while Waugh v Morris (1873) LR 8 QB 202 supported the distinction between knowledge and participation.
5. Clause 3(a) of the Credit Agreement was a generic restriction to refinancing indebtedness and providing working capital. It did not require repayment of any particular debt and therefore did not require an illegal act. TFB had no positive purpose to procure unlawful conduct. Its knowledge of the intended repayment did not establish participation or a shared unlawful design. Even assuming a breach of section 151, the Credit Agreement, Security Agreement and Guarantee were not illegal. The court also noted that the statutory whitewash procedure could mean that potential engagement of section 151 would not necessarily establish a breach.

• Court of Appeal (Civil Division) In [2007] EWCA Civ 456, the court dismissed the appeal and upheld the decision on the preliminary issues.
• High Court of Justice, Chancery Division Peter Smith J, by order dated 24 February 2006, rejected the arguments that the credit transactions contravened section 151 of the Companies Act 1985 or were unenforceable for illegality.