Satyam Enterprises Ltd v Burton

This Court allowed the appellant's appeal and remitted the matter to the High Court for further hearing. The primary ground was that the trial judge dismissed the claimant's claim against the first defendant on a factual basis that had not been pleaded or argued: namely that the properties had at all material times been beneficially owned by a third party, Mr V Sharma. The Court held that deciding the case on that unpleaded basis was impermissible in the adversarial system.

As an alternative the judge had relied on the Duomatic principle to uphold dismissal, but the Court found that the judge had not made sufficient findings on whether the transfer constituted an unlawful return of capital (a legal bar to ratification by informal shareholder assent). The Court therefore remitted questions of valuation, consideration and whether the transfer was an unlawful return of capital for determination by a different High Court judge.

Background and parties.

The appellant (formerly JVB Five Properties Ltd, now Satyam Enterprises Ltd) sued its former sole director Mr John Burton for breaches of duty in causing a transfer of four Croydon freehold properties from JVB5 to another Burton company, JVB7, alleging the transfer was at an undervalue and caused loss. JVB5 also sued JVB7 for non-payment of an alleged purchase price; that claim was dismissed at first instance and is not part of this appeal.

Procedural posture.

• The action was tried before Deputy Judge James Pickering (High Court) with judgment dated 7 October 2019 and order dated 11 December 2019 dismissing the claimant's claims. Permission to appeal to this Court was granted by Males LJ on 23 June 2020. The appeal was heard on 3 February 2021 and determined on 8 March 2021.

Nature of the claim and relief sought.

• Claim against Mr Burton: damages and interest for breaches of director's duties, principally that the transfer to JVB7 was at a gross undervalue (claim based on true value less credit for loans subsequently discharged).
• Claim against JVB7: alleged non-payment of the purchase price; not pursued on appeal.

Issues framed by the court.

• Whether the Transfer from JVB5 to JVB7 was at an undervalue and, if so, whether JVB5 suffered loss.
• Whether the properties were beneficially owned by Mr V Sharma at all material times or by JVB5, and whether findings about beneficial ownership were open on the pleaded case.
• Whether the Duomatic principle (informal unanimous shareholder assent) could validate or excuse the transfer.
• Whether the transfer amounted to an unlawful return of capital and therefore could not be validated by shareholder assent (with reference to company law principles including the Companies Act regime and Progress Property Co Ltd v Moore).
• Whether the Transfer or related documents were a sham and the consequences for any claim.
• Whether the formal requirements of s. 2 of the Law of Property (Miscellaneous Provisions) Act 1989 were relevant.

Court's reasoning and outcome.

• The trial judge made adverse credibility findings about principal witnesses, preferred some corroborative witnesses, and expressed a provisional preference for one expert valuer's comparables and methodology. The judge concluded (a) on a primary basis that Mr V Sharma was the ultimate beneficial owner of both the shareholdings and the Croydon Properties and therefore JVB5 only held bare legal title so that no loss was suffered by JVB5, and (b) alternatively that the Duomatic principle would apply because the transfer was authorised by the beneficial owner. The judge also described the TR1 as a vehicle for a sham or fraud to inflate price for future lenders.
• The Court of Appeal held that the primary basis for dismissal was a finding that had not been pleaded or argued and that deciding the case on that unpleaded theory was impermissible; this required allowing the appeal. The Court further found that the judge had not adequately addressed whether the transfer was an unlawful return of capital such that Duomatic could not operate; there were insufficient findings on valuation and on whether the transaction was a bona fide sale or an attempt to extract value in the guise of a sale. The Court therefore remitted the matter for further hearing before a different judge to resolve valuation, the nature and value of consideration, whether the transfer was an unlawful return of capital, and if so the assessment of loss.
• The Court declined to uphold alternative lines advanced by the respondent which sought to import other unpleaded findings. The appeal was allowed and the matter remitted for further directions and hearing.

Appeal allowed. The High Court judge erred by deciding the case on an unpleaded and unargued factual basis (that the properties were beneficially owned throughout by Mr V Sharma), which was impermissible in the adversarial system; the alternative reliance on the Duomatic principle was insufficiently reasoned because the judge did not make necessary findings on valuation and whether the transfer constituted an unlawful return of capital, so the matter must be remitted to the High Court for further hearing before a different judge to determine valuation, the true consideration, whether Duomatic applies, and, if necessary, loss.

Appeal from the High Court of Justice, Business and Property Courts (Chancery Division) (Deputy Judge James Pickering) [2019] EWHC 2584 (Ch). Permission to appeal given by Males LJ on 23 June 2020. Appeal heard in the Court of Appeal (Civil Division) on 3 February 2021; judgment delivered 8 March 2021 [2021] EWCA Civ 287.