Westcoast (Holdings) Ltd v Wharf Land Subsidiary (No 1) Ltd & Anor

The Court of Appeal considered the construction of clause 19 of a shareholders agreement, and in particular the meaning of a proviso which purported to preserve the rights and obligations "to such extent and for so long as may be necessary to give effect to the rights and obligations embodied herein" after termination. The court held that the proviso was ambiguous but should be read in the commercial context of a five-year venture. It preserved accrued rights and enforceable obligations that had arisen during the life of the agreement, but it did not operate to extend or revive ongoing restrictive provisions (notably clause 5.3) after the agreement had validly terminated on its fifth anniversary.

Accordingly the judge at first instance was right to enter summary judgment for Westcoast for repayment of the loan and to declare that Westcoast was entitled to present a creditor's winding up petition based on the judgment debt. The proviso did not bar post-termination presentation of a creditor's winding up petition founded on a debt that fell due at or after the termination date.

Background and parties. Westcoast (formerly Kelido) and Wharf Land Investments Limited were B shareholders and lenders to Wharf Land Subsidiary (No 1) Limited (the company). The parties entered a shareholders agreement dated 7 April 2006 and a shareholder loan agreement by which Westcoast advanced £999,900 repayable on the fifth anniversary of the agreement or earlier termination of the shareholders agreement.

Nature of the claim and procedural history. Westcoast sought repayment of the loan and a declaration that it was entitled to present a winding up petition based on any unsatisfied judgment debt. The company and WL counterclaimed seeking dismissal of Westcoast's claim and injunctions restraining Westcoast from debt recovery proceedings other than by an unfair prejudice petition (section 994 Companies Act 2006) and from presenting a winding up petition. At first instance His Honour Judge Seymour QC granted summary judgment for Westcoast for £999,900 and declared Westcoast entitled to present a winding up petition; he dismissed the counterclaim. Permission to appeal was refused below but the matter reached the Court of Appeal on an adjourned permission application.

Issues framed. The principal issue was the construction of clause 19 of the shareholders agreement, especially whether its proviso preserved clause 5.3 (a bar on shareholders commencing winding-up or similar proceedings) so as to prevent Westcoast presenting a creditor's winding up petition after the shareholders agreement terminated on its fifth anniversary.

Court's reasoning. The court examined the wording of clause 19 in the commercial context of a five-year development venture. It accepted that the proviso was imprecisely drafted but refused to read it as extending the operative restrictions of clause 5.3 beyond the intended five-year term. Doing so would be commercially incoherent because the scheme provided interest-free loans for that finite term and clause 5.3 was plainly designed to prevent disruption during that period. The court adopted the narrower and commercially sensible construction that the proviso preserved only rights and obligations which had accrued during the currency of the agreement, not to continue the general operative terms after termination. On that basis the first instance judge was correct to grant summary judgment and the Court of Appeal dismissed the appeal.

Procedural note. The court observed that extrinsic evidence about the parties' intentions as to drafting negotiations was inadmissible on the point of contractual interpretation before the judge on the Part 24 application. The court granted permission to appeal to WL but dismissed the appeal on the merits.

The Court of Appeal dismissed the appeal. It held that the proviso to clause 19 of the shareholders agreement, though obscurely drafted, should be construed in the commercial context of a five-year development scheme. The proviso preserved accrued rights and enforceable obligations acquired during the life of the agreement but did not extend the bar in clause 5.3 to prohibit the post-termination presentation of a creditor's winding up petition based on debts falling due at or after termination. The first instance order for summary judgment for Westcoast and the declaration permitting a winding up petition were therefore correct.

Appeal from the High Court of Justice, Queen's Bench Division (His Honour Judge Seymour QC) [2011] EWHC 3028 (QB). Permission to appeal was considered on the papers by Sir Mark Potter who adjourned the permission application to the full court; the Court of Appeal (Mummery, Rimer and Pitchford LJJ) heard the appeal and dismissed it. Neutral citation: [2012] EWCA Civ 1003.