England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		12 July 2011

MR JUSTICE NEWEY:

1. I have before me an application for a direction sanctioning a payment by the Supervisors of a Company Voluntary Arrangement ("CVA") entered into between TXU Europe Group plc ("TXUEG") and its creditors to TXUEG's parent company, The Energy Group Limited ("TEG").PRIVATE 
2. The matter arises in this way. TXUEG went into administration on 19 November 2002. Various of its subsidiaries have also been placed in administration and/or liquidation. TEG too is in administration.
3. With a view to resolving a number of complex and substantial disputes between Group companies in a timely and cost effective way, TXUEG and a number of its subsidiaries entered into CVAs. The CVAs were all approved on 28 January 2005 with more than 99 per cent of creditors by value voting in favour. Some £2 billion has since been distributed to creditors.
4. The position now is that TXUEG has paid 100p in the pound on the principal amounts of the claims made against it under its CVA and allowed by the Supervisors. Having regard to the terms of the CVA there is no prospect of TXUEG being obliged to make any further payments to its creditors.
5. The present application concerns the very large sums amounting to approximately £186m, which will remain held for TXUEG. Under the terms of the TXUEG CVA that money falls to be paid to TEG. TXUEG's Administrators and Supervisors seek confirmation that it is proper for the money to be paid to TEG. The reason for seeking such confirmation is a concern that such a payment could represent an unlawful return of capital or distribution.
6. The various CVAs, including that relating to TXUEG, provided for money to be distributed in accordance with a Model contained I gather on a CD. Mr Alan Bloom, a partner in Ernst & Young who is one of TXUEG's Administrators and Supervisors, has said the following about the Model in a witness statement:

"Although the settlement is simple to describe, the actual calculations required to be made on each Distribution Date in order to calculate the amounts due to each individual creditor are incredibly complicated. To overcome this, the Model was created. Pursuant to the terms of CVAs, the Model is used to calculate the distribution amounts payable to all CVA Creditors of all CVA Companies."

7. It was recognised that under the Model, money could potentially fall to be paid to TEG. Clause 21.7 of the CVA stated in terms that:

"TXUEG may, in certain circumstances determined by reference to the Model, be obliged to make a payment to TEG in respect of its shareholding in TXUEG."

8. The clause further provided for certain payments to "include the amount payable to TEG in respect of its shareholding in TXUEG". Further, clause 21.1.7 stated that "the amount if any to be paid to TEG as described in clause 21.7" was to be "determined by reference to the Model". It is also noteworthy that the Model referred to the amount, if any, payable to TEG as an "equity payment".
9. TEG was not only TXUEG's parent, but a creditor. Under clause 32.2 of the CVA creditors described as the "conduit companies" (which included TEG) agreed that their claims should be treated as allowed to the extent set out in Part D of Annexe 4 to the CVA. Part D of Annexe 4 specified the amount due to TEG from TXUEG as £82,383,456. That sum has already been paid in full.
10. Mr William Trower QC who appears with Mr Daniel Buyfield for the applicants and Mr David Allison, who appears for TEG's Administrators and Supervisors, were each concerned to stress that the CVAs created complex and interdependent bundles of rights and obligations. It was pointed out to me, for example, that it was a condition of each CVA that every other CVA was approved and became unconditional. The CVAs also depended on certain deeds, to two of which TEG was a party, becoming effective.
11. As I have already indicated, the question raised by the present application is whether payments to TEG would represent unlawful returns of capital or distributions. Mr Bloom explained the position as follows in his witness statement:

"In light of the fact that the unsecured creditors have been paid in full and that clause 21.7 of the CVA provides (with reference to the Model) for payments to be made to TEG, the Supervisors have considered whether the payment might be characterised as an unlawful return to TXUEG's shareholder in circumstances where it appears that there are obstacles which prevent the payment being made other than pursuant to clause 21.7. The Administrators of TEG are themselves keen to ensure that any receipt by TEG cannot subsequently be challenged."

12. The restrictions on distributions to shareholders were developed at common law in Progress Property Co Ltd v Moorgarth [2009] EWCA Civ 629 [2010] 1 Butterworths Company Law Cases 1. Mummery LJ said this about the common law rule in paragraph 23:

"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 an ultra vires the Company. "

13. Part 23 of the Companies Act 2006 also imposes restrictions on distributions. In that context section 829(1) provides that "distribution" means "every description of distribution of a company's assets to its members whether in cash or otherwise" subject to the exceptions specified in subsection (2). One such exception is "a distribution of assets to members of the company on its winding up" - see section 829(2)(d).
14. Mr Trower and Mr Allison both submitted that making the proposed payments to TEG would not offend either the common law rule or Part 23 of the Companies Act. They argued that the payments were not properly characterised as distributions to members or a return of capital. A payment by a company to its shareholders need not, they pointed out, involve a distribution and here the payments to TEG would be derived from the complex rights and obligations created by the TXUEG CVA. Further, the restrictions on distributions exist for the benefit of creditors and here there are now none. There should accordingly be no bar on the payments being made.
15. Despite Mr Trower's and Mr Allison's attractive submissions, I have concluded that the Supervisors would offend the restrictions on distributions if they made the proposed payments to TEG. It is quite true that a payment by a company to a shareholder need not constitute a distribution. Proper remuneration for services, for example, will not do so - in re Halt Garage (1964)] Ltd [1982] 3 AER 1016. Nor without more will payment of the purchase price for an asset - see Progress Property Co Ltd v Moorgarth [2010] UKSC 55; [2011] 1 WLR 1.
16. However, the money at issue in the present case is not being paid to TEG for services or an asset. According to the CVA, the money falls to be paid to TEG "in respect of its shareholding in TXUEG" and the Model describes it as an "equity payment".
17. The payments are thus to be made to TEG because it is TXUEG's shareholder and in that capacity. I appreciate that, as was pointed out to me, the label which the parties attach to a transaction is not decisive - see Lord Walker in the Progress Property case at paragraph 16.
18. In the present case, however, I can see no reason at all to doubt the way in which the payments were described in the CVA and the Model. It is fair, as it seems to me, to regard the payments as "in respect of [TEG's] shareholding" and an "equity payment". The CVA itself distinguishes between payments to TEG "in respect of its shareholding" and as one of the "conduit companies" and there is to my mind no basis for going behind the CVA's treatment of the payments.
19. It is true that on the facts of this case there is no danger of creditors' interests being prejudiced by the proposed payments. However, whatever may be the position as regards the common law rule, the restrictions on distributions laid down by Part 23 of the Companies Act must apply regardless of whether on the particular facts of an individual case creditors' interests could be prejudiced. If, say, a company had ceased trading and paid all its debts, it would not be open to its directors to pass the remaining assets to the shareholders unless the requirements of Part 23 were satisfied.
20. Further, the mere fact that a contract provides for a payment to be made does not preclude it being a distribution. That is implicit in such cases as Aveling Barford Ltd v Perion Ltd [1989] BCLC 626 and Progress Property. Section 829(2)(d) of the Companies Act is of relevance in this context. This provision will presumably have been inserted because it was felt that without it "a distribution of assets to members of the company on its winding up" could constitute a distribution within the meaning of Part 23. There is no comparable exception for Administrators or Supervisors.
21. On the facts of the present case, as I have already indicated, it seems to me that the proposed payments are to be made to TEG as shareholder and are properly to be characterised as distributions. The CVA and the Model treat the payments as "in respect of [TEG's] shareholding" and "equity payments" and there is no basis for recategorising the payments. It follows that as things stand the Supervisors would fall foul of Part 23 of the Companies Act if they made the proposed payments.
22. This conclusion may mean that for the payments to be made TXUEG will need to go into liquidation. I appreciate that for the reasons explained by Mr Bloom there are disadvantages to placing TXUEG in liquidation. As I have said, however, Part 23 of the Companies Act seems to me to mean that as things stand the Supervisors cannot lawfully make the payments.
23. In the circumstances, I shall not grant the relief sought.
24. I should not wish it to be thought, however, that I am in any way critical of the applicants or those advising them for making the application. I can entirely see that it made sense to see if the payments could be made by the Supervisors of the CVA without TXUEG going into liquidation.