UK: England and Wales: Court of Appeal considers ultra vires and directors' liability

Today has seen several Court of Appeal judgments handed down and published on the BAILII website. Two have caught my eye, the first of which is Ceredigion Recycling & Furniture Team v Pope [2022] EWCA Civ 22. Of note is what the court said about the operation of section 39 ("A company's capacity") of the Companies Act 2006. To quote the Chancellor: "The fact that section 39 abolishes the ultra vires doctrine as between the company and third parties does not relieve the directors from liability to the company for their breach of duty or wrongdoing merely because, qua members, they agreed with the course which was taken" (para. [47]). 

UK: Supreme Court considers whether transaction was unlawful distribution of capital

The Supreme Court handed down its judgment today in Progress Property Company Limited v Moorgarth Group Limited [2010] UKSC 55: see here (pdf). A summary is available here (pdf). The court unanimously held that the transaction in question was not an unlawful distribution and set out guidance in this regard. The ICLR, as part of its WLR Daily Service, has published a summary of the judgment here.

UK: Supreme Court judgment due in ultra vires case tomorrow

The Supreme Court will tomorrow hand down its judgment in Progress Property Company Ltd. v Moorgarth Group Ltd.. The Supreme Court's summary of the case (here) identifies the issue before the Court as follows: "Whether the sale at undervalue of a company’s assets to its shareholder is ultra vires, in accordance with the common law rule, in circumstances where the director who procured the sale (acting on behalf of both the company and the shareholder) subjectively believed the sale to be at a proper market value".

UK: before the Supreme Court today

The UK Supreme Court hears argument today in Progress Property Company Limited (Appellant) v Moorgarth Group Limited (Respondent), on appeal from [2009] EWCA Civ 629. The case details page - available here - reports the principal issue to be:

Whether the sale at undervalue of a company’s assets to its shareholder is ultra vires, in accordance with the common law rule, in circumstances where the director who procured the sale (acting on behalf of both the company and the shareholder) subjectively believed the sale to be at a proper market value".

UK: England and Wales: an unlawful distribution in disguise?

The Court of Appeal has given judgment in Progress Property Company Ltd v Moorgarth Group Ltd [2009] EWCA Civ 629. The case concerned what Mummery LJ described as a short and basic point of company law: what are the circumstances in which a sale of assets at an undervalue by a company to, or at the behest of, a shareholder in the company should be held ultra vires on the ground that, in substance, the sale is an unlawful distribution in disguise? Mummery LJ (delivering the only reasoned judgment, with which Touslon and Elias LJJ concurred) observed (paras. [23] and [31]):

The common law rule devised for the protection of the creditors of a company is well settled: a distribution of a company's assets to a shareholder, except in accordance with specific statutory procedures, such as a winding up of the company, is a return of capital, which is unlawful and ultra vires the company.

In my judgment, the deputy judge was right in holding that the sale of the ... shares was not a disguised distribution of assets either in breach of the common law rule or in breach of section 263 [of the Companies Act (1985)] or as being for a collateral purpose. It was an intra vires sale of shares for a proper purpose, even if, as was assumed, it was at an undervalue, and even if Mr Moore [the director negotiating the sale] ought to have appreciated that fact. The authorities demonstrate that the issue is whether, on the facts as they were genuinely perceived by Mr Moore to be, and having regard to the nature and character of the payment, it could properly be characterised as something other than a gratuitous distribution to shareholders. In [Aveling Barford Limited v Perion Limited & Ors [1989] BCLC 626] and [Re Halt Garage (1964) Limited [1982] 3 All ER 1016] the payment (or at least part of it) could not. Here the payment could only properly and objectively be characterised as consideration for the sale of an asset without any element of gratuitous benefit".

Note: for further discussion of the issues in this area, and the Aveling and Re Halt cases, see: Micheler, E., Disguised Returns of Capital - An Arm's Length Approach (December 8, 2008), available at SSRN: http://ssrn.com/abstract=1313144.

Update (30 June 2009): the case has been reported by the ICLR as part of its WLR(D) service: see here.