Progress Property Company Ltd v Moorgarth Group Ltd

A sale of company assets to, or at the behest of, a shareholder is not an unlawful distribution merely because it is made at an undervalue. The court examines the substance and genuineness of the transaction. The critical question is whether the asset was genuinely sold as consideration for a commercial transaction, or whether the sale was known and intended to confer a gratuitous benefit on a shareholder. An objective mistake, negligence, or an improper-purpose allegation does not by itself convert a genuine sale into a disguised return of capital. A genuine intra-group sale may therefore be intra vires even where the price is below market value.

Progress Property Company Limited appealed from the decision of Mr David Donaldson QC, sitting as a deputy judge of the Chancery Division, dismissing its claim concerning the transfer of its shares in YMS Properties (No 1) Limited to Moorgarth Group Limited. The companies were under common control, and the price was calculated after deducting a liability which did not in fact exist. The deputy judge assumed, without deciding, that the sale was at an undervalue, but held that it was a genuine commercial sale rather than an unlawful distribution. The appeal concerned whether that conclusion was wrong in law, including under the common law rule against unauthorised returns of capital and section 263 of the Companies Act 1985.

1. Appeal dismissed. Lord Justice Mummery, with whom Lord Justices Toulson and Elias agreed, upheld the deputy judge’s conclusion that the sale was genuine, lawful and intra vires, even assuming that it was at an undervalue.
2. The common law rule protects creditors by prohibiting a distribution of a company’s assets to a shareholder, except through specific statutory procedures such as a winding up. Such a distribution is an unauthorised return of capital and is ultra vires.
3. Following Aveling Barford Limited v Perion Limited ([1989] BCLC 626) and Re Halt Garage (1964) Limited ([1982] 3 All ER 1016), the court must look at the true nature and substance of the transaction rather than its description. The issue is whether the payment was genuinely consideration for an asset or remuneration, or was in substance a gratuitous distribution dressed up as something else. In Aveling Barford, knowledge and intention that the sale was at an undervalue were an essential part of the reasoning. In Re Halt Garage, payments could not reasonably be characterised as genuine remuneration and were disguised gifts out of capital.
4. A sale does not become unlawful merely because it was objectively at an undervalue, because the responsible director ought to have recognised the undervalue, or because the transaction was made for a collateral purpose. Those considerations do not determine vires where the transaction was genuinely perceived and entered into as a commercial sale. The court rejected a strict-liability approach.
5. On the accepted facts, Mr Moore believed that the agreed price represented market value. The shares were therefore sold as consideration for an asset sale, without a gratuitous benefit to shareholders. The sale did not breach the common law rule, section 263 of the Companies Act 1985, or the rule against transactions for collateral purposes.

• Court of Appeal (Civil Division): [2009] EWCA Civ 629. Appeal from the Chancery Division dismissed.
• High Court of Justice, Chancery Division: Mr David Donaldson QC, sitting as a Deputy High Court Judge, dismissed the claims on 15 October 2008. No citation is stated in the judgment.