Re TXU Europe Group Plc

The court refused an application for a direction authorising Supervisors of a company voluntary arrangement to pay sums held by TXU Europe Group plc to its parent, The Energy Group Limited, because those payments were properly characterised as distributions to a shareholder and would therefore offend the restrictions in Part 23 of the Companies Act 2006. The judge applied the common law rule against unlawful returns of capital and section 829 of the Companies Act 2006 in deciding that the CVA and its Model, which described the sums as "in respect of [TEG's] shareholding" and an "equity payment", could not be recharacterised so as to avoid Part 23.

The court rejected arguments that the practical absence of creditor prejudice or the contractual origin of the payment prevented it being a distribution, noting that Part 23 applies regardless of whether creditors remain unpaid and that there is no statutory exception for Administrators or Supervisors analogous to a distribution on winding up. The judge observed that liquidation might be required to enable such payments lawfully to be made.

Background and parties:

• TXU Europe Group plc ("TXUEG") entered administration on 19 November 2002. A number of subsidiaries and the parent, The Energy Group Limited ("TEG"), are also in administration.
• To resolve intercompany disputes, TXUEG and several subsidiaries entered into company voluntary arrangements (CVAs) approved on 28 January 2005 with over 99% in value of creditors voting in favour. Approximately 2 billion has been distributed to creditors and TXUEG has paid 100p in the pound on the principal amounts of allowed claims.

Nature of the application:

• The Administrators and Supervisors sought a court direction sanctioning the payment of approximately 186 million held under the TXUEG CVA to TEG, pursuant to the CVA's Model and clause 21.7, because the Supervisors were concerned that such payment might amount to an unlawful return of capital or distribution.

Issues framed by the court:

• Whether the proposed payments were properly characterised as distributions to a member/shareholder under the common law rule against unlawful returns of capital.
• Whether the payments fell within the statutory restrictions on distributions in Part 23 of the Companies Act 2006, in particular the meaning and effect of section 829.
• Whether any contractual description of the payments in the CVA and Model or the absence of creditor prejudice could permit the Supervisors to make the payments lawfully without liquidation.

Decision and reasoning:

• The judge held that the CVA and Model expressly described the sums as being payable "in respect of [TEG's] shareholding" and as an "equity payment" and that those descriptions were entitled to be treated as reflecting the true character of the payments.
• Accordingly, the payments were to be made because TEG was a shareholder and in that capacity, so they were distributions or returns of capital. While some payments by a company to a shareholder may not be distributions (for example proper remuneration or a purchase price in certain circumstances), the payments here were not for services or for an asset.
• Part 23 of the Companies Act 2006 applies irrespective of whether creditors would in fact be prejudiced on the particular facts; there is no exception for Administrators or Supervisors comparable to the winding-up exception in section 829(2)(d). The contractual basis for the payment did not negate its character as a distribution.
• For those reasons the court refused to grant the direction; the judge noted that liquidation of TXUEG might be necessary to permit such payments to be made lawfully, despite disadvantages of liquidation.

Other observations:

• The judge did not criticise the applicants for seeking the direction and acknowledged the pragmatic reasons for the application.

The application for a direction was refused. The court held that the proposed payments were distributions "in respect of" the parent company's shareholding and described as "equity payments" in the CVA and Model; such payments would contravene Part 23 of the Companies Act 2006 and therefore the Supervisors could not lawfully make them. The judge noted that liquidation may be required to enable the payments to be made lawfully.