Finch (UK) Plc & Ors v Finch & Anor

A transaction is characterised by its legal effect, not by the parties’ description of it. An arrangement under which properties were treated as company assets, with an option for their return, amounted to a sale of the beneficial interests coupled with a call option. Unanimous shareholder approval may cure technical breaches under the Duomatic principle while the company is solvent and creditors are not at risk. It cannot validate an unlawful redemption of shares or transactions undertaken when the company is insolvent or in financial difficulty. A preference arises where a connected person is put in a better position on an insolvent liquidation, subject to the statutory presumptions and requirements. Relief for directors is unavailable where they have acted dishonestly or unreasonably.

The joint liquidators of a property-development company sought declarations and consequential relief against its two directors, who were also the company’s only shareholders. The claims concerned alleged misfeasance, breach of trust, unlawful issue and redemption of redeemable shares, a preference, and beneficial ownership of properties held in the directors’ names.

The directors contended that the properties remained assets of family trusts under a commercial arrangement and that the share issue and redemption were valid. The central issues were the legal characterisation of that arrangement, the validity and consequences of the share redemption, the application of the statutory preference provisions, and the availability of relief for the directors.

1. Commercial arrangement. The arrangement was characterised by its legal effect. The dealings, accounts and representations showed a sale by the relevant trust to the company of the beneficial interest in each property, coupled with a call option enabling the trust to obtain a re-transfer on payment of the assigned value. The arrangement therefore transferred the beneficial interests to the company.
2. Share issue. Any breach of directors’ duties or technical non-compliance with the Companies Act 1985, including the requirement in section 103 for an independent valuation of non-cash consideration, was cured by unanimous shareholder approval under Re Duomatic. The issue and allotment claim therefore failed.
3. Preference. Once Mr Finch demanded redemption, he became a creditor for the purposes of section 239 of the Insolvency Act 1986. Crediting the value of the properties to his director’s loan account placed him in a better position on an insolvent liquidation. The statutory requirements were satisfied: the company entered liquidation within the relevant period, the desire to improve his position was presumed because he was connected with the company, and the liquidators proved that the company could not pay its debts as they fell due. The preference claim succeeded.
4. Unlawful redemption. Under sections 160, 181(a) and 263 of the Companies Act 1985, redeemable shares could be redeemed only out of distributable profits. The audited accounts showed only £240,502 available for distribution. Redemption beyond that amount was unlawful and constituted breach of duty. Unanimous shareholder approval could not validate it because the company was insolvent or in financial difficulty and creditors were at risk.
5. Relief and property claims. Relief under sections 727 of the Companies Act 1985 and 1157 of the Companies Act 2006 was refused because Mr Finch had acted dishonestly and unreasonably, while Mrs Finch had failed to discharge her directorial duties. The claims otherwise failed, save that the share redemption was cancelled and the company retained its beneficial interests in the properties remaining in the commercial arrangement at 31 January 2008. A further hearing might be required to formulate the consequential order.