SATYAM ENTERPRISES LIMITED v JOHN VINCENT BURTON & Anor.

An asset transfer by a company to a company under common control is not an unlawful return of capital merely because the consideration is retrospectively shown to be below market value. The court must investigate the true purpose and substance of the transaction and all relevant circumstances.

The claimant must establish both an undervalue and that the transaction was not a genuine arm’s-length sale, but an improper attempt knowingly to extract value from the company. A proper margin of appreciation may be allowed where valuation involves a range. There is no automatic rule giving the benefit of doubt to the party seeking to uphold the transaction.

The claimant, formerly JVB Five Limited, transferred 12 flats to JVB Seven Properties Limited in October 2012. The companies had the same registered director and shareholder, who held the shares beneficially for a third party. The transfer recorded an inflated headline price, with an allowance producing a net price of £1,096,000.

At the first trial, the claim against the director was dismissed on findings concerning beneficial ownership and authorisation under the Duomatic principle. The Court of Appeal set aside that decision because the beneficial-ownership point had not been pleaded or argued, and remitted the issues concerning unlawful return of capital and damages for determination after a further trial.

The central questions were whether the transfer was at an undervalue, whether it was an improper extraction of value rather than a genuine arm’s-length transaction, and, if so, the claimant’s loss.

1. Applicable principles. The Duomatic principle permits unanimous informal shareholder assent to matters capable of approval by formal resolution. It cannot relieve a director from liability for a transaction which the company had no power to carry out, including an unlawful return of capital.
2. Under [2010] UKSC 55, the court must examine the true purpose and substance of the transaction and all relevant facts, rather than conduct a retrospective valuation exercise alone. A genuine arm’s-length transaction stands even if later shown to have been a bad bargain. An improper attempt to extract value by pretending to make an arm’s-length sale is unlawful.
3. The claimant bore the burden of proving that the transfer was at an undervalue and that the director knew it was an improper attempt to extract value. Linked transactions may be considered together. The court has latitude where there is a range of possible values, but there is no principle that the person seeking to uphold the transaction automatically receives the benefit of the doubt.
4. The properties were valued at approximately £1,335,000 and the consideration at approximately £1,258,190, producing an undervalue of about 5.75%. The director genuinely believed that the assumption of the company’s property-related liabilities was reasonable consideration. The transaction was intended to refinance expensive borrowing and was not shown to be an attempt to transfer value from the claimant.
5. The transfer was therefore a genuine sale, not a disguised distribution. There was no unlawful return of capital, and it was unnecessary to decide breach of duty or damages. The claim against the director was dismissed.

1. Court of Appeal: set aside the dismissal of the claim because the first-instance decision had relied on an unpleaded and unargued beneficial-ownership point. The Court of Appeal remitted the issues of unlawful return of capital and damages for a further trial.
2. High Court (Business List): after the remitted trial, held that the transfer was at an undervalue but was not an unlawful return of capital, and dismissed the claim.