Zavarco Plc v Ranjeet Singh Sidhu

A subscriber to the memorandum of a public company formed under Companies Act 2006 agrees to take the shares identified for that subscriber in the statement of capital and initial shareholdings. The words “at least one share” do not confine that undertaking to one share. Section 584 requires the subscriber to discharge that contractual obligation in cash.

Subscriber shares are acquired automatically on formation. They are not shares allotted by the company for the purposes of section 593. The non-cash consideration provisions, including the share-for-share exception in section 594, therefore do not apply. Nor does section 606 empower the court to relieve a subscriber from the cash-payment obligation imposed by section 584.

Zavarco plc was incorporated as an English public company with 1.2 billion shares of €0.10 each. Mr Sidhu was shown in the statement of capital and initial shareholdings as taking 840 million shares. No cash was paid for them. The company subsequently acquired shares in a Malaysian holding company as part of a proposed share-for-share transaction.

The High Court gave judgment for Zavarco for €84 million plus interest under sections 593 and 594 of the Companies Act 2006, and refused relief under section 606: [2021] EWHC 1526 (Ch). Mr Sidhu appealed, relying on the section 594 exception and, alternatively, on section 606. By a respondent’s notice, Zavarco contended that he was liable under section 584 as a subscriber.

The central issue was the legal basis and consequences of shares taken by a subscriber on the formation of a public company.

1. Appeal dismissed. Snowden LJ, with whom Males and Lewison LJJ agreed, held that the High Court’s monetary judgment was correct, but had been reached by the wrong statutory route.

2. Under sections 8, 10 and 16(5) of the Companies Act 2006, a subscriber becomes, on registration, the holder of the shares specified for that subscriber in the statement of capital and initial shareholdings. The undertaking in the memorandum to take “at least one share” necessarily extends to those shares. It is a contractual undertaking. Its meaning must be ascertained when made, using the admissible background available from the public documents, rather than later private dealings.

3. Section 584 prescribes the means by which that contractual obligation must be discharged: the subscriber shares must be paid up in cash. It does not need separately to impose a statutory civil liability, because it operates directly upon the existing contractual obligation. Mr Sidhu was therefore obliged to pay €84 million in cash for the 840 million shares he took on incorporation.

4. Subscriber shares are not allotted by the company. They are held automatically under section 16(5). Section 559 confirms that the allotment provisions do not apply to shares taken on formation. Section 546(2) has only an interpretative function; it does not deem subscriber shares to have been allotted for every statutory purpose. Section 593 therefore did not apply, and it was unnecessary to decide whether the proposed transaction was an arrangement within section 594.

5. Section 606 gave no power to exempt Mr Sidhu from his section 584 obligation. The liability was neither one under Chapter 6 for section 606(1)(a), nor an undertaking-based liability within section 606(1)(b). The absence of equivalent relief in section 589 supported that construction.

6. In any event, the judge was entitled to reject audited accounts as sufficient proof that the acquired shares were worth €84 million. They did not establish the value of the shares, expert valuation evidence was absent, and reliance on the accounts at trial would have been procedurally unfair to the company.

• Court of Appeal (Civil Division): Appeal dismissed. The court upheld the judgment for €84 million plus interest, but held that liability arose under section 584 rather than section 593: [2022] EWCA Civ 1040.
• High Court (Chancery Division): Jonathan Richards UTJ, sitting as a High Court judge, held that the section 594 exception did not apply, found liability under section 593, and refused relief under section 606: [2021] EWHC 1526 (Ch).