Re Liberty International plc

The court sanctioned Liberty International plc's proposed reduction of capital effected by cancellation of its share premium account to enable a demerger that creates Capital & Counties Properties plc (Capco). The court applied the Companies Act 2006 regime for court-sanctioned reductions, in particular sections 646(1) and 648(2), holding that entitlement to object depends on (i) a debt or claim admissible in proof at the date fixed by the court and (ii) proof that there is a "real likelihood" that the reduction would render the company unable to discharge that debt when it falls due.

The court held that theoretical contingent pension claims dependent on the Pension Regulator's exercise of statutory discretions under the Pensions Act 2004 (section 38(2), section 43(2) and section 47(2)) were not "admissible in proof" because liability depended on the prior, unexercised discretion of the Regulator. The court identified the statutory "real likelihood" test as requiring evidence-based assessment grounded in present facts, a sensible temporal boundary for prediction and a degree of persuasion above mere possibility but short of probability.

Having regard to the company's evidence, including a Working Capital Model forecasting available working capital and the fact that many creditors had consented or been secured, the court was satisfied that no creditor could show the requisite "real likelihood" and therefore confirmed the reduction. The court also decided that merger reserve arising from the demerger (an unrealised profit under section 612 CA 2006) should not be attributed as paid-up premium per share in Capco's Statement of Capital under section 649(2)(d); section 610 treatment applies only where the share premium account arises under section 610.

Background and relief sought: Liberty International plc proposed a conventional demerger by reduction of capital achieved through cancellation of its share premium account and the issue to each Liberty shareholder of one new share in a newly formed company, Capital & Counties Properties plc (Capco). The application sought the court's sanction of the reduction of capital and approval of the Statements of Capital required by the Companies Act 2006, including treatment of an effective premium in the assets transferred to Capco.

Factual context: Liberty is listed in London with a secondary listing in Johannesburg, giving rise to a longer interval between sanction and commencement of dealings in Capco shares; arrangements for "when issued" trading on the London Stock Exchange were made and disclosed. The demerged assets included indirectly held subsidiaries (the ECO companies) that participate in a pension scheme with an estimated deficit; because Liberty was the ultimate controller pre-demerger there existed a theoretical possibility that the Pensions Regulator could impose liability on Liberty.

Issues framed:

• Which creditors are "entitled to object" to a reduction of capital under section 646(1) CA 2006, and in particular whether theoretical pension claims contingent on the Pensions Regulator's future exercise of discretion are "admissible in proof" at the relevant date;
• What is the statutory test of a "real likelihood" that a reduction would render the company unable to discharge a creditor's debt when it falls due;
• How a premium arising on the issue of Capco shares in the course of the demerger (carried to a merger reserve under section 612 CA 2006) should be reflected, if at all, in Capco's Statement of Capital under section 649(2)(d).

Court's reasoning: The court reviewed authority establishing that obligations contingent on the exercise of an unexercised discretion are not liabilities "admissible in proof". Applying that principle, the possibility of contribution notices or financial support directions by the Pensions Regulator did not produce claims admissible in proof at the relevant date. On the statutory second limb, the court explained the "real likelihood" standard as an evidence-based forward-looking assessment that (a) must be grounded in present facts, (b) is sensitive to the temporal horizon appropriate to the liability, and (c) requires persuasion beyond mere possibility but below probability. Liberty's Working Capital Model, the quantum of consenting and secured creditors, and forecast net assets provided a credible foundation to conclude that no creditor could show the required real likelihood. Accordingly the court confirmed the reduction and approved the Statement of Capital.

Treatment of the merger reserve: The court held that the unrealised profit carried to the merger reserve under section 612 should not be attributed as paid-up premium per share in Capco's Statement of Capital for the purposes of section 649(2)(d). Section 610 (requiring a share premium account where shares are issued at a premium) does not apply to merger relief under section 612; the Statement of Capital should reflect the share premium account treated as part of capital under section 610, not unrealised merger reserves, and thus the court approved a Statement of Capital that did not attribute the demerger reserve as per-share paid-up premium.

Procedural notes: The Registrar had previously considered the matter and dispensed with settling a list of creditors. Mr Martin Moore QC drew creditor issues to the judge's attention before sanction. The court made formal orders confirming the cancellation and approving the Statements of Capital in the form sought.

First instance: The court confirmed (sanctioned) the reduction of Liberty's capital and approved the Statement of Capital in the form sought. Rationale: pension claims contingent on the Pension Regulator's future exercise of discretion are not "admissible in proof" at the relevant date; no creditor could show the statutory "real likelihood" that the reduction would prevent payment of debts when due given the evidence (including the Working Capital Model, consenting and secured creditors); and the merger reserve arising on the demerger need not be attributed as paid-up premium per share in Capco's Statement of Capital under section 649(2)(d).