Progress Property Co Ltd v Moorgarth Group Ltd
Whether a transaction between a company and its shareholder is an unlawful distribution depends on its substance, and a genuine arm's length sale at a price the directors believed to be fair is not a distribution.
Facts
Progress Property sold its shares in a subsidiary, YMS, to Moorgarth, which was a subsidiary of Progress's own parent company. The price was calculated on the basis that YMS had a large liability, which the directors believed to have been released, but in fact it had already been released, so the price was too low. Progress later claimed that the sale was an unlawful distribution of capital to its shareholder, because it was at an undervalue.
Legal principle
The Supreme Court held that the sale was not an unlawful distribution. Lord Walker said that whether a transaction is a distribution to shareholders does not depend exclusively on its label, and the court must have regard to its substance. A relevant factor is the motive and purpose of the directors, but a transaction will not be a distribution merely because the price turns out to be inadequate, if it was a genuine commercial transaction made in good faith at a price that the directors honestly believed to be fair. Here, the sale was a genuine arm's length commercial transaction, and the mistake as to the liability was made in good faith.
Related cases on share capital and distributions
- Aveling Barford Ltd v Perion Ltd [1989] BCLC 626
- Bairstow v Queens Moat Houses plc [2001] EWCA Civ 712, [2002] BCC 91
- Belmont Finance Corp Ltd v Williams Furniture Ltd (No 2) [1980] 1 All ER 393
- Brady v Brady [1989] AC 755
- Re Exchange Banking Co (Flitcroft's Case) (1882) 21 Ch D 519
- Re Halt Garage (1964) Ltd [1982] 3 All ER 1016
- It's a Wrap (UK) Ltd v Gula [2006] EWCA Civ 544, [2006] BCC 626
- MacPherson v European Strategic Bureau Ltd [2000] 2 BCLC 683
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