Chalcot Training Ltd v Ralph & Anor

The Court of Appeal dismissed the company's appeal. The central legal questions were whether payments made under a commercially marketed tax-avoidance "E Shares" scheme amounted to (i) the allotment of shares at a discount contrary to section 580 of the Companies Act 2006, or (ii) the application of the company's shares or capital money in consideration of an agreement to subscribe for shares contrary to section 552 of the Act. The court accepted the judge's factual findings that the payments were a genuine exercise of the directors' power to award remuneration, recorded and treated in the accounts as directors' emoluments, and that the allottees remained contractually liable for the unpaid 99p per £1 share (callable on specified events).

On those findings the payments were not an allotment at a discount under section 580 because the unpaid nominal amounts remained payable by the allottees and the company had not lost the protection of capital maintenance. Nor did the payments constitute an application of the company's shares or capital money in consideration of subscribing for shares under section 552 because the sums were paid from trading profits as remuneration rather than from the company's capital and were not earmarked as capital applied to discharge the allottees' liability. Because those statutory arguments failed, there was no need to decide the company's alternative claim of fundamental mistake.

Background and parties: Chalcot Training Ltd (the company) appealed against the decision of Mr Michael Green QC (sitting as Deputy High Court Judge) ([2020] EWHC 1054 (Ch); [2020] STC 1537) rejecting the company's claim that payments made under a marketed E Shares tax scheme contravened the Companies Act 2006. The scheme operated by paying directors/employees substantial sums but requiring them to subscribe for newly created "E" shares of £1 nominal value with only 1p paid and 99p uncalled, the balance being credited to loan accounts. HM Revenue & Customs had issued tax determinations which were the subject of separate FTT proceedings; those tax issues were not part of this appeal.

Nature of claim / relief sought (i): The company sought declaratory and consequential relief that the E Shares transactions should be set aside on the basis that they contravened (a) section 580 (prohibition on allotment at a discount) and/or (b) section 552 (application of shares or capital money in payment of commission/discount) of the Companies Act 2006, and alternatively that the agreements were vitiated by fundamental mistake.

Issues framed by the Court (ii): (1) Whether the allotments were at a discount contrary to section 580 given the payments from the company to the proposed allottees; (2) whether the payments amounted to an application of the company's shares or capital money in consideration of an agreement to subscribe for shares contrary to section 552; and (3) whether, if those statutory grounds failed, the company could nevertheless set aside the transactions for fundamental common mistake.

Facts and findings: The court accepted the first instance findings that the payments were made as a form of remuneration, recorded as directors' emoluments, and that the E shares were allotted 1p paid, 99p uncalled with express contractual events (including cessation of employment and liquidation) rendering the uncalled amount payable. The director/allottees remained liable for calls and could use the sums paid by the company as they pleased.

Court's reasoning and disposal (iii): Applying the capital-maintenance principle and the authorities on allotment at a discount and the prohibited application of capital, the court held that the statutory mischief in s.580 and s.552 is the depletion or improper application of capital. Because the payments were made out of distributable trading profits as remuneration and the allottees remained liable for the unpaid nominal amounts, the allotments were not at a discount and the payments were not an application of capital money in contravention of s.552. The court therefore dismissed the appeal and did not need to determine the claim in mistake. The judgment emphasised the distinction between payments made from trading income (which may be remuneratory and deductible for corporation tax) and payments which have the effect of diminishing a company's nominal share capital.

Appeal dismissed. The Court of Appeal agreed with the judge below that the payments under the E Shares scheme were in substance genuine remuneration paid by the directors/shareholders and recorded as directors' emoluments; the allottees remained contractually liable for the uncalled nominal amounts so the allotments were not at a discount within section 580, and the payments were not an application of the company's shares or capital money within section 552. Given those conclusions the alternative ground of fundamental mistake did not need to be decided.

Appeal from the High Court (Chancery Division), Mr Michael Green QC (Deputy High Court Judge) who gave judgment at [2020] EWHC 1054 (Ch), [2020] STC 1537. Permission to appeal was granted and the Court of Appeal (Lewison LJ, Arnold LJ, Edis LJ) heard the appeal and dismissed it on 27 May 2021 ([2021] EWCA Civ 795).