[2011]JRC161
Before : |
J. A. Clyde-Smith, Commissioner, and Jurats Clapham and Milner. |
IN THE MATTER OF E D & F MANAGEMENT INVESTMENTS LIMITED
AND IN THE MATTER OF PART 12 OF THE COMPANIES (JERSEY) LAW 1991
Advocate A. D. Robinson for the Representor.
judgment
the commissioner:
1. On 1st July, 2011, the Court gave the Representor confirmation, pursuant to Article 63 of the Companies (Jersey) Law 1991 ("the Companies Law"), that it may reduce the balance standing to the credit of its share premium account from US$1,824,254,607.54 to nil and credit the company's profit and loss account with the amount of capital so reduced.
2. The Representor is part of the Man Group of which Man Group plc is the holding company. The group operates in the alternative investment management sector with a geographically diverse investor base with offices in 16 countries.
3. The Representor wished to effect the proposed capital reduction so that it could have the ability to make future dividend payments to its shareholders out of the profits of the Representor. A secondary effect of the capital reduction was the elimination of the negative profit and loss reserve in the Representor's balance sheet.
4. The Representor can fund dividends to shareholders from the share premium account, subject to compliance with the procedure set out in Article 115 of the Companies Law which includes the need for a solvency statement to be made by the directors. By following this procedure, the Representor may distribute all monies in the share premium account to its shareholders without seeking the approval of the Court to the reduction. However, the directors of the Representor considered that it would be in the best interests of the Representor to instead fund payment of dividends from a reserve of profit because:-
(i) the normal expectation of an English shareholder would be to receive dividends out of profit; and
(ii) the company considered that paying dividends from a reserve of profits may have tax benefits for its shareholders.
5. The entire issued share capital of the Representor is held by a company incorporated in England, Man Group UK Limited, and it was submitted that an English shareholder would expect an English company to pay dividends out of profits of the company available for that purpose, rather than from the share premium account of the company. We were referred to section 830 of the Companies Act 2006 which states that an English company may "only make a distribution out of profits available for the purpose."
6. Man Group UK Limited will potentially be assessed for UK tax on dividend payments it receives from the Representor. The Representor believes that a dividend which is funded from the share premium account may be classed as a repayment of capital which may give rise to chargeable gains, whereas a dividend payment made out of the profit and loss reserve account is likely to be exempt from tax. It is therefore more tax efficient for the dividends to be funded out of the Representor's profit reserve rather than from the share premium account. The circumstances of this case are similar to the recently unreported case of In the matter of the Representation of Wolseley Plc [2011] JRC 007.
7. The Representor's balance sheet established a negative profit and loss reserve in the amount of US$495,627,835.78 attributable primarily to an impairment of the Representor's investments in subsidiaries, losses which the directors regard as permanent. By crediting the profit and loss account with the amount standing to the share premium account, the negative profit reserve will be eliminated. This will result in a new actual positive profit and loss reserve in the amount of US$1,328,626,771.76.
8. In the case of In the matter of Rangold Resources Limited [2004] JRC 070 the Court approved an application to reduce share capital for the purpose of cancelling accumulated losses on the balance sheet of the company, drawing assistance from the English case of In re Jupiter House Investments (Cambridge) Limited [1985] 1 WLR 975 which held that the loss had to be of a permanent nature to warrant such a reduction. The rationale behind In re Jupiter, being the need to guard against capital being used to pay dividends, now falls away in the light of the changes introduced by the 2008 revisions to the Companies Law which include the Article 115 procedure referred to above. The Court therefore considers that it may approve an application to reduce share capital where such reduction will reduce accumulated losses on the balance sheet of a company in circumstances where such losses are not of a permanent nature. In any event, the Representor applied for a reduction of capital for the reasons set out above with the elimination of the losses on the balance sheet being a secondary factor.
9. In considering its decision, the Court had to consider the interests of both its shareholders and the creditors of the Representor. In the case of the former, the Court needed to satisfy itself that (a) the shareholders, particularly if there are different classes, had been treated equitably (b) the proposals for reduction had been properly explained to them and (c) the reduction had a discernible purpose (see In re Henderson Far East Income Limited [2007] JRC O15). In this case, there is but a single shareholder and the Court was satisfied in respect of all three requirements.
10. The capital reduction did not involve a diminution of liability in respect of any amount unpaid on a share or the payment to a shareholder of any paid up capital. It was submitted and the Court accepted that Article 62(3), 62(4) and 62(5) of the Companies Law did not apply to the reduction and the Court had no reason to direct them to apply.
11. The Representor has no creditors save for amounts due to Bedell Cristin (who consented to the reduction), for operating expenses which are met as and when incurred and in respect of tax losses surrendered to the Representor by Man Group UK Limited, which has also consented to the capital reduction.
12. In the premises, the Court confirmed the reduction and approved the minute for registration.
Authorities
Companies (Jersey) Law 1991.
Companies Act 2006.
In the matter of the Representation of Wolseley Plc [2011] JRC 007.
In the matter of Rangold Resources Limited [2004] JRC 070.
In re Jupiter House Investments (Cambridge) Limited [1985] 1 WLR 975.