Re TXU Europe Group Plc

A payment by a company to a shareholder is not necessarily a distribution. The court must characterise the payment by reference to its substance and the rights giving rise to it. Payments made to a shareholder in respect of its shareholding, and described as equity payments, are distributions even where creditors have been paid in full and the payment is required by a contractual arrangement such as a CVA.

The restrictions in Part 23 of the Companies Act 2006 apply irrespective of whether creditors’ interests are at risk in the particular case. A contractual obligation does not prevent a payment from being a distribution. The statutory exception for distributions on a winding up has no equivalent for payments by administrators or CVA supervisors.

TXU Europe Group plc was in administration and subject to a CVA approved by creditors. Its creditors had been paid the principal amounts of their admitted claims in full. Approximately £186 million remained held for TXU Europe and, under the CVA and its distribution model, was to be paid to its parent company, The Energy Group Limited, in respect of its shareholding.

The CVA supervisors and administrators applied for directions confirming that the payment could lawfully be made without a liquidation. The central issue was whether the payment constituted an unlawful return of capital or a distribution within Part 23 of the Companies Act 2006.

1. The application for directions was refused. The proposed payment could not lawfully be made by the CVA supervisors while TXU Europe remained outside liquidation.

2. A payment to a shareholder does not necessarily constitute a distribution. Proper remuneration for services is not a distribution, and payment of the purchase price for an asset is not, without more, a distribution. The court must examine the substance of the transaction rather than treating the parties’ label as decisive.

3. Here, the CVA provided that the payment was to be made to The Energy Group in respect of its shareholding in TXU Europe. The model described it as an equity payment. The CVA distinguished that payment from amounts payable to The Energy Group as a creditor, and there was no basis for recategorising it. The payment was therefore a distribution to a member.

4. Part 23 of the Companies Act 2006 applied notwithstanding that TXU Europe’s creditors had been paid in full and could not be prejudiced. The statutory restrictions operate regardless of whether creditors’ interests could be prejudiced on the facts of an individual case.

5. The existence of a contractual obligation to make a payment does not prevent the payment from being a distribution. Section 829(2)(d), which excludes distributions on a winding up, reinforced the conclusion that no equivalent exception applied to payments by administrators or CVA supervisors.

6. TXU Europe might therefore need to enter liquidation before the payment could be made. The court did not grant the relief sought.

First-instance application for directions in the High Court (Chancery Division). No earlier decision is stated in the judgment.