Progress Property Company Ltd v Moorgarth Group Ltd

The court considered whether a sale of a company's asset to, or at the behest of, a shareholder at an undervalue is ultra vires because it is in substance a disguised distribution. The Court of Appeal upheld the deputy judge's conclusion that a sale at an undervalue will be an unlawful distribution only where, objectively, the transaction was not a genuine exercise of the company's power to sell its assets — in particular where it was known and intended to be a sale at an undervalue so as to effect a return of capital. The court rejected a strict liability approach and held that honest belief in the sale price and genuine commercial character of the transaction are material.

Background and procedural posture:

• Progress Property Company Limited (PPC) appealed against a High Court (Chancery Division) decision of Mr David Donaldson QC dismissing PPC's claims against Moorgarth Group Limited for return of shares or compensation following a sale of PPC's shares in a subsidiary (YMS Properties (No 1) Limited, YMS1). Permission to appeal was granted by Jacob LJ on 11 December 2008.

Facts and parties:

• PPC, a property holding company, sold its shares in YMS1 to Moorgarth under a sale and purchase agreement dated 20 October 2003 for £63,225.72. The sale price was calculated by deducting liabilities and a claimed £4m repairing liability that in fact did not exist. The sale occurred while both vendor and purchaser were under the control of the same ultimate holding company, Tradegro (UK) Limited; negotiations were conducted principally by Mr Cornus Moore, a director of both companies.

(i) Nature of the claim:

• PPC sought the return of the shares or compensation, alleging that the sale was at a gross undervalue and in substance an unlawful distribution (a return of capital) which was ultra vires and not capable of being ratified.

(ii) Issues framed by the court:

• Whether the sale, assuming an undervalue, was in substance a disguised distribution and thus ultra vires;
• whether the director (Mr Moore) subjectively knew or ought to have known the sale was at an undervalue;
• whether the transaction was a sale for a collateral improper purpose and whether statutory provisions (section 263 of the Companies Act 1985) or the common law rule on maintenance of capital were infringed.

(iii) Court's reasoning and conclusions:

• The deputy judge had accepted, for present analysis, an assumption that the sale was at an undervalue but found the transaction to be a genuine commercial sale entered into in the honest belief that the price was market value.
• The Court of Appeal endorsed the approach in Aveling Barford and Re Halt Garage that the court looks to substance rather than form; however, those authorities require that the vendor company or its controllers knew and intended the transaction to be at an undervalue so as to effect an unauthorised return of capital. Absent such knowledge and intention, a sale at an undervalue, if genuinely commercial, is not automatically ultra vires.
• The court rejected a strict liability rule that any failure to obtain full value would render the sale ultra vires and noted that the presence of an honest, genuine commercial sale precludes characterisation as a disguised distribution. Section 263 and subsequent statutory reform were discussed but were not determinative of this appeal.

Subsidiary findings: the deputy judge did not resolve competing expert valuations; if the legal conclusion had been different, valuation and related issues would need remittance.

The appeal was dismissed. The Court of Appeal held that, even assuming the sale price was an undervalue, the sale was a genuine, intra vires commercial transaction. Following Aveling Barford and Re Halt Garage, an undervalue will constitute an unlawful distribution only where the sale was known and intended to be at an undervalue such that it was not a genuine exercise of the company's power to sell; that was not shown here.

Appeal from the High Court of Justice, Chancery Division (Mr David Donaldson QC sitting as Deputy High Court Judge) (HC06C03470). Permission to appeal was initially refused by the deputy judge but granted by Jacob LJ on 11 December 2008; the appeal was heard in the Court of Appeal and dismissed on 26 June 2009 ([2009] EWCA Civ 629).