Chaston v SWP Group plc [2002] EWCA Civ 1999

SWP Group acquired shares in DRCH, with DRC (a subsidiary) paying fees to accountants D&T for due diligence work. SWP claimed these payments constituted unlawful financial assistance under s.151 Companies Act 1985. The Court of Appeal allowed the appeal, holding the payments were financial assistance 'for the purpose of' the acquisition.

Facts

SWP Group plc acquired the shares of Dunstable Rubber Company Holdings Ltd (DRCH) for consideration of up to £2.55m. DRC Polymer Products Ltd (DRC), a subsidiary of DRCH, paid fees totalling approximately £19,681 to Deloitte & Touche (D&T) for work done in connection with the due diligence exercise required by SWP as purchaser. Mr Chaston was a director and major shareholder of DRC. SWP, as assignee of DRC’s claims, brought a Part 20 claim against Mr Chaston for breach of fiduciary duty for procuring financial assistance contrary to section 151 of the Companies Act 1985.

Background to the Fees

The fees arose from D&T’s work facilitating SWP’s due diligence exercise and the progress of acquisition negotiations. The judge found the instructions to D&T were given to facilitate negotiations and enable SWP to conclude its due diligence exercise.

Issues

The appeal raised three key issues:

• Whether the commitment to pay or payment of these fees constituted financial assistance
• To which party was the financial assistance given
• Whether the assistance was ‘for the purpose of’ the acquisition

Judgment

The Court of Appeal (Lady Justice Arden, Lord Justice Buxton, and Lord Justice Ward) allowed SWP’s appeal, holding that the payment of D&T’s fees by DRC did constitute unlawful financial assistance under section 151.

Financial Assistance

Lady Justice Arden held that the test for financial assistance is one of commercial substance and reality, citing with approval Hoffmann J’s approach:

“The words have no technical meaning and their frame of reference is in my judgment the language of ordinary commerce. One must examine the commercial realities of the transaction and decide whether it can properly be described as the giving of financial assistance by the company.”

The Court held that looking at the commercial realities, the fees smoothed the path to acquisition and relieved SWP of costs it would otherwise have incurred.

Purpose of the Assistance

The Court rejected the judge’s conclusion that acting in good faith in the company’s best interests was sufficient to avoid breach of section 151. Lady Justice Arden stated:

“Due performance of fiduciary duties is not of itself enough to avoid a breach of section 151. If it were, financial assistance by way of a loan by a target to a bidder on commercial terms might be outside section 151. That result would drive a coach and horses through these provisions.”

Applying Brady v Brady, the Court distinguished between ‘purpose’ and ‘reason’. The directors’ motivation (the company’s best interests) was merely a reason; the purpose was clearly the acquisition of shares.

Lord Justice Ward’s Analysis

Lord Justice Ward emphasised the straightforward application of the section:

“If D & T did not do the spadework for the due diligence exercise, then SWP’s accountants, C & L, would have had to dig for the information… DRC’s incurring those liabilities and discharging part of those debts was, therefore, of financial assistance to SWP.”

Implications

This decision clarifies several important aspects of section 151:

• Financial assistance need not be detrimental to the company providing it
• Good faith by directors does not excuse a breach of section 151
• The prohibition extends beyond direct financing of share purchases to include ancillary costs that facilitate acquisitions
• Pre-transactional assistance is not excluded from the prohibition
• Assistance can be given to vendors, purchasers, or third parties

The case has significant implications for corporate acquisitions, requiring careful consideration of who bears transaction costs to avoid inadvertent breaches of financial assistance rules.

Verdict: Appeal allowed. The payment of D&T’s fees by DRC constituted unlawful financial assistance contrary to section 151 of the Companies Act 1985. SWP was entitled to costs.

Source: Chaston v SWP Group plc [2002] EWCA Civ 1999