MT Realisations Ltd v Digital Equipment Co Ltd [2003] EWCA Civ 494

A liquidator claimed that set-off arrangements between companies constituted unlawful financial assistance under s151 Companies Act 1985 for acquiring shares. The Court of Appeal held no financial assistance was given as the purchaser, being an assignee of secured loans, was merely enforcing its existing security rights rather than receiving assistance from the target company.

Facts

MT Realisations Limited (MTR) was an insolvent subsidiary in the Digital group, owing approximately £8m in inter-company loans to Digital Equipment Co Limited (Digital UK), secured by debentures. In December 1994, MTI Holdings acquired MTR’s shares for £1, whilst separately agreeing to pay £6.5m for an assignment of the inter-company loans from Digital UK under a Loan Assignment.

When MTI could not meet payment instalments, a Re-scheduling Agreement dated 29 August 1995 was made whereby debts owed by Digital UK group companies to MTR would be paid directly to Digital UK instead, reducing MTI’s liability under the Loan Assignment. MTR subsequently went into liquidation and its liquidator claimed this arrangement constituted unlawful financial assistance under section 151 of the Companies Act 1985.

Issues

Principal Issue

Whether the set-off arrangements under the Re-scheduling Agreement constituted unlawful financial assistance by MTR for the purpose of reducing or discharging a liability incurred for the acquisition of shares in MTR, contrary to section 151(2) of the Companies Act 1985.

Secondary Issues

Whether claims for knowing receipt, breach of fiduciary duty, unlawful interference with contractual relations, and absence of consideration could succeed.

Judgment

The Court of Appeal dismissed the appeal, upholding Laddie J’s decision to strike out the claims.

Lord Justice Mummery, delivering the leading judgment, applied the ‘commercial realities of the transaction’ approach:

“On the ‘commercial realities of the transaction’ approach to s 151, as expounded by Hoffmann J in Charterhouse Investment Trust Ltd v. Tempest Diesels Ltd [1986] BCLC 1 at p.10f-11c… no ‘financial assistance’ was, in my judgment, given by MTR to MTI ‘for the purpose of’ reducing or discharging a liability incurred for the purpose of the acquisition of shares in MTR.”

The court held that MTI, as assignee of the secured loans under the debentures, was entitled to enforce its security rights over debts due to MTR. Mummery LJ stated:

“As MTI was in the position of a secured creditor of MTR, it was entitled to help itself by exercising its security rights over the book debts due to MTR from Digital UK and other companies in its group.”

Quoting from the Australian case Sterileair Pty Ltd v Papallo, the court noted:

“‘Assistance’ involves something in the nature of aid or help. It cannot exist in a vacuum; it must be given to someone.”

The court concluded that nothing was given by MTR to MTI which MTI had not already acquired as its own resource through the assignment securing repayment of the inter-company loans.

Implications

This decision clarifies that where a purchaser of shares simultaneously acquires security over the target company’s assets, subsequent enforcement of that security does not constitute financial assistance under section 151. The commercial substance must be examined: where the purchaser is merely exercising pre-existing security rights rather than receiving assistance from the target company’s free assets, no unlawful financial assistance occurs.

The judgment affirms the importance of the ‘commercial realities’ approach when assessing alleged breaches of section 151, whilst distinguishing the Court of Appeal’s contemporaneous decision in Chaston v SWP Group plc on the facts.

Verdict: Appeal dismissed. The Court of Appeal upheld Laddie J’s order striking out the Particulars of Claim and dismissing all claims, finding no breach of section 151 of the Companies Act 1985 as no financial assistance was given by MTR to MTI.

Source: MT Realisations Ltd v Digital Equipment Co Ltd [2003] EWCA Civ 494