Progress Property Company Limited v Moorgarth Group Limited

The Supreme Court considered whether a sale by a company of the whole issued share capital of a wholly owned subsidiary was in truth an unlawful return of capital disguised as a sale. The court reiterated the established principle that a company not in liquidation cannot return capital except by court-approved reduction and that characterisation depends on substance not form. The court held that investigation of substance may require inquiry into the parties' state of mind, but that a genuinely conceived commercial sale negotiated at arm’s length will not be re‑characterised as an unlawful distribution merely because, with hindsight, the seller got a poor bargain.

Applying those principles to the assumed facts, the court concluded that the transaction was a genuine commercial sale entered into in the honest belief that the price reflected market value and that there was no basis for re‑categorising it as an unlawful distribution. The appeal was therefore dismissed.

Background and parties: The appellant, Progress Property Company Ltd (PPC), owned the whole of the share capital of YMS Properties (No. 1) Ltd (YMS1). The respondent, Moorgarth Group Ltd (Moorgarth), controlled by the same ultimate investor, purchased YMS1. The companies were indirectly controlled by the same person and had a complex intra-group structure involving property occupied under full repairing and insuring leases.

Nature of the claim and relief sought: The appellant attacked the sale on the ground that it was at an undervalue and thus amounted to an unlawful distribution of capital. (Relief sought: Not stated in the judgment.)

Procedural posture: The case was tried before Deputy Judge David Donaldson QC, who dismissed the action. The dismissal was upheld by the Court of Appeal ([2009] EWCA Civ 629). The matter came on appeal to the Supreme Court.

Issues framed by the court:

• Whether the sale amounted in substance to an unlawful return of capital not permitted by company law.
• What role the subjective beliefs of directors and officers play in the characterisation of an allegedly disguised distribution.
• How to approach characterisation where there is a common human interest on both sides of the transaction and contested or uncertain valuations and indemnities.

Court’s reasoning: The court restated the fundamental company law rule that distributions must conform with statutory procedures and that the court examines substance over form. It reviewed authority showing that transactions labelled as commercial may be re‑characterised if they are in reality disguised returns of capital. The court explained that the inquiry requires examination of all relevant facts, which in some cases includes the state of mind of the human actors. However, it rejected a rigid objective rule that any transfer of value to a shareholder that cannot be shown to be covered by distributable profits is necessarily an unlawful distribution. On the assumed facts the relevant director, Mr Moore, genuinely believed the sale price to be market value; there was no pleaded or proven sham. The Supreme Court agreed with the deputy judge and Court of Appeal that the transaction was a genuine commercial sale and should not be re‑characterised as an unlawful distribution.

Wider context: The court emphasised the rarity and undesirability of re‑characterising commercially negotiated sales as distributions absent clear indicia of pretence, fraud on creditors or other features establishing that the transaction's substance was a return of capital.

Appeal dismissed. The Supreme Court held that although company distributions must comply with statutory procedures and transactions are to be characterised by substance not form, the sale of YMS1 was a genuine commercial transaction entered into in the honest belief that the price represented market value and there was no proper basis to re-characterise it as an unlawful distribution of capital.

First instance: action tried before Deputy Judge David Donaldson QC, who dismissed the action. Court of Appeal: dismissal upheld ([2009] EWCA Civ 629; [2010] 1 BCLC 1). Supreme Court: appeal dismissed ([2010] UKSC 55).