Trevor v Whitworth
A company cannot buy its own shares, because this would reduce its capital and harm its creditors, a rule now subject to statutory exceptions.
Facts
A company's articles allowed it to buy its own shares. It bought shares from a shareholder, Mr Whitworth, paying part of the price, but went into liquidation before the balance was paid. The executors of Mr Whitworth claimed the balance of the price from the liquidator, Mr Trevor.
Legal principle
The House of Lords held that the purchase was unlawful, so the executors could not claim the balance. Lord Watson said that paid up capital may be diminished or lost in the course of the company's trading, but that the creditors are entitled to assume that no part of the capital which has been paid into the coffers of the company has been subsequently paid out, except in the legitimate course of its business. A company buying its own shares would return capital to the shareholders, to the prejudice of creditors. The rule is now in section 658 of the Companies Act 2006, subject to the detailed exceptions in Part 18, which allow companies to buy back their shares out of distributable profits and, for private companies, out of capital in some cases.
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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