Jersey Unreported Judgments

Companies - application for confirmation of a proposed reduction of capital.

[2013]JRC031

Royal Court

(Samedi)

7 February 2013

Before     :

Sir Michael Birt, Kt., Bailiff, and Jurats Marett-Crosby and Blampied.

IN THE MATTER OF THE REPRESENTATION OF WPP PLC

AND IN THE MATTER OF ARTICLE 62 OF THE COMPANIES (JERSEY) LAW 1991.

Advocate M. H. Temple for the Representor.

judgment

the bailiff:

1.        This is an application by WPP plc ("the Company") pursuant to Article 62 of the Companies (Jersey) Law 1991 ("the Law") for confirmation by the Court of a proposed reduction of capital.  The application itself is straightforward.  The Court gave its approval at the conclusion of the hearing and we deal with that aspect at paragraphs 26 - 39 of this judgment.  

2.        However, Advocate Temple submitted that, in the light of amendments to the Law in 2008, the Court should reconsider the test which it has applied hitherto so far as the interests of creditors are concerned.  We have taken time to consider those submissions and this judgment is aimed primarily at that aspect of the case.  

The present approach

3.        Reductions of share capital are dealt with at Articles 61 - 66 of the Law.  Those Articles are clearly based on equivalent provisions which were contained in the Companies Act 1985 of the United Kingdom at the time when the Law was enacted.  

4.        Article 62 is in the following terms:-

"62     Application to Court for order of confirmation

(1)       Where a company has passed a resolution for reducing a capital account, it may apply to the court for an order confirming the reduction.  

(2)       If the proposed reduction of share capital involves either -

(a)       a diminution of liability in respect of any amount unpaid on a share; or

(b)       the payment to a shareholder of any paid up capital,

and in any other case if the court so directs, paragraphs (3), (4), and (5) have effect, but subject throughout to paragraph (6).

(3)       Every creditor of the company who at the date fixed by the court is entitled to a debt or claim which if that date were the commencement of the winding up of the company, would be admissible in proof against the company is entitled to object to the reduction of capital. 

(4)       The court shall settle a list of creditors entitled to object, and for that purpose -

(a)       shall ascertain, as far as possible, without requiring an application from any creditor, the names of those creditors and the nature and amount of their debts or claims; and

(b)       may publish notices fixing a day or days within which creditors not entered on the list are to claim to be so entered or are to be excluded from the right of objecting to the reduction of capital. 

(5)       If a creditor entered on the list whose debt or claim is not discharged or has not determined does not consent to the reduction, the court may dispense with the consent of that creditor, on the company securing payment of the creditor's debt or claim by appropriating (as the court may direct) the following amount -

(a)       if the company admits the full amount of the debt or claim or, though not admitting it, is willing to provide for it, then the full amount of the debt or claim;

(b)       if the company does not admit, and is not willing to provide for, the full amount of the debt or claim, or if the amount is contingent or not ascertained, then an amount fixed by the court after an enquiry and adjudication. 

(6)       If a proposed reduction of capital involves either the diminution of a liability in respect of unpaid capital or the payment to a shareholder of paid up capital, the court may, if having regard to any special circumstances of the case it thinks proper to do so, direct that paragraphs (3) to (5) shall not apply as regards any class or any classes of creditors."

5.        Article 62 is clearly concerned to safeguard the position of creditors of the company seeking a reduction.  This is because, when the Law was enacted, there were considerable restrictions in both Jersey and the United Kingdom on the ability of a company to return capital accounts to shareholders.  The underlying principle was that the company's capital should be retained in order to protect its creditors.  As Tolley's Company Law Service puts it at S5055, when speaking of the Companies Act 2006:-

"The maintenance of capital in relation to a company remains one of the cardinal principles of company law.  The capital of a company represents a fund available for the protection of a company's creditors; it is not capable of being returned to shareholders except where the strict procedures for reductions of capital, or redemption and purchase of shares, contained in the [Companies Act] 2006 have been complied with ..."

6.        As can be seen paragraphs (3) - (5) of Article 62 contain a provision whereby a list of creditors of the company must be drawn up and such creditors may object to the proposed reduction in capital.  This provision ("the creditor provision") may be applicable in two circumstances:-

(i)        Under paragraph (2), if the proposed reduction involves either a diminution of liability in respect of any amount unpaid on a share or the payment to a shareholder of any paid up capital, the creditor provision must be applied unless the Court exercises its discretion under paragraph (6) to dis-apply it in special circumstances.  

(ii)       Conversely, even if the proposed reduction does 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, the Court may, pursuant to the concluding wording of paragraph (2), direct that the creditor provision shall have effect. 

7.        There is therefore a difference in these two situations.  In the first case, the creditor provision will apply unless there are special circumstances enabling the Court to decide that it should not.  In the second case, the creditor provision will only have effect if the Court in its discretion decides that it should. 

8.        The proposed reduction in this case involves cancelling the Company's share premium account and crediting the amount which was in the share premium account to a new reserve of profit so as to be available for the payment of dividends and any other purpose to which such a reserve may be applied.  Reductions of this nature have been applied for previously both in Jersey and elsewhere.  So far as this Court is concerned, there appears to have been some uncertainty as to whether such a reduction falls within (i) or (ii) in paragraph 6 above.  In Re Wolseley Plc [2011] JRC 007 Clyde-Smith, Commissioner treated it as falling within (ii), so that the creditor provision would only apply if the Court were to direct that it should.  Conversely in Re Vodafone Holdings Limited [2011] JRC 030A (Birt, Bailiff) and Re Cape Plc [2011] JRC 127 (William Bailhache, Deputy Bailiff) the Court, although not deciding the issue, seems to have inclined towards (i) because, in each case, it made a direction that the creditor provision should not apply. 

9.        Having had the benefit of full argument in this case (albeit not adversarial), we have come to the clear conclusion that the approach in Re Wolseley Plc is the correct one.  Where an amount standing in the share premium account is simply moved to a new account designated as a reserve of profit, neither of the conditions referred to in Article 62(2)(a) and (b) applies.  There has been no diminution of liability in respect of any amount unpaid on a share; nor has there in fact been payment to a shareholder of any paid up capital.  We accept of course that money transferred to a reserve may subsequently be paid out by way of distribution, but this is not part of the reduction.  The reduction does not, in our judgment, involve payment to a shareholder of any paid up capital.  

10.      It follows that the creditor provision (i.e. paragraphs (3) - (5) of Article 62) does not apply in such a case unless the Court specifically determines that it should.  We note that that interpretation is consistent with the view of the Court of Session in the Scottish case of Re Martin Currie Limited [2006] CSOH 77 at paragraph 4. 

11.      Given the terms of Article 62 and the underlying principle of the maintenance of a company's capital, it is not surprising that this Court has, like those of the United Kingdom, been concerned to ensure, when considering a proposed reduction, that the interests of creditors are safeguarded (see re Henderson Far East Income Limited [2007] JLR N16, [2007] JRC 015).  

12.      A convenient summary of the approach of the courts in the United Kingdom can be found in the judgment of Lord Glennie in Re Royal Scottish Assurance Plc [2011] CSOH 2 at paragraph 8:-

"... What happens in practice is that the court makes an assessment of the nature and amount of debts and claims outstanding at the date of the application for confirmation of the reduction; and forms a view as to the risk, if any, that the reduction in capital might result in prejudice to some or all of those creditors.  In general terms, it has become the practice of the Court of Session in Scotland and, as I understand it, also of the Companies Court in London, to dispense with settlement of a list of creditors if the court can be satisfied that there is no realistic possibility of any creditor being put at risk by the reduction (by a consideration of the value of the company's realisable assets, or a variant of that approach ...) or if one or more of certain accepted methods of creditor protection are adopted.  The principal methods are:

(a)       obtaining the consent of creditors and, where only some of the creditors consent, subordinating the claims of consenting creditors to those of non-consenting creditors;

(b)       setting aside cash in a blocked account in an amount sufficient to discharge the claims of non-consenting creditors;

(c)       the provision by a bank or other third party with a sound credit covenant of a guarantee in an amount sufficient to cover the claims of non-consenting creditors; and

(d)       the giving of an appropriately worded undertaking, the effect of which is to ensure that any distribution consequent upon the reduction being confirmed by the court does not reduce the net assets of the company below a figure sufficient to ensure that the claims of non-consenting creditors will be paid as they fall due.  

No doubt other methods have been used from time to time."

13.      That approach is followed here.  In particular, it is often the case that the company will have obtained the consent of all the creditors to the proposed reduction. 

Changes introduced in Jersey in 2008

14.      Advocate Temple submits that the position in Jersey is now different and that, unlike in the United Kingdom, the principle of the maintenance of capital has been considerably attenuated.  He submits therefore that, for a reduction of the type in this case where there is simply a transfer from the share premium account to a reserve account, the interests of the creditors cannot be prejudiced and there is no need to obtain their consent or for the company to consider any of the other means of protection for creditors envisaged in the passage cited above at paragraph 12.  

15.      He points out that, at the time the Law was enacted, the position in the UK was governed by the Companies Act 1985.  Section 263 of that Act provided that distributions could only be made out of profits available for distribution and these were in turn defined as its accumulated realised profits, so far as not previously distributed or capitalised, less its accumulated realised losses, so far as not previously written off in a reduction or reorganisation of capital duly made. 

16.      The position under the Law concerning distribution was substantially similar prior to 2008 (see Article 115 of the Law as originally enacted) although a Jersey company was also permitted in certain circumstances to make distributions out of unrealised profits. 

17.      Accordingly, in both jurisdictions a company could only make distributions out of profits.  It could not do so out of capital accounts such as a share premium account, unless the payment fell within the provisions for redemption and purchase of shares contained in Part 11 of the Law.  

18.      It is our understanding from the information provided to us in this case that, although the position in the United Kingdom is now governed by the Companies Act 2006, and has been relaxed in one or two respects, nevertheless it remains broadly as previously.  In particular Section 830 of the 2006 Act provides that a company may only make a distribution out of profits available for that purpose and the profits available for distribution are still defined in the same way as previously, namely its accumulated realised profits, so far as not previously utilised by distribution or capitalisation, less its accumulated, realised losses, so far as not previously written off in a reduction or reorganisation of capital duly made.  Thus the principle of the maintenance of capital is still retained in the United Kingdom, as described in the passage from Tolley quoted at paragraph 5 above. 

19.      The position in Jersey, however, is now very different.  As a result of the amendments introduced by the Companies (Amendment No.9) (Jersey) Law 2008 and the Companies (Amendment No.2) (Jersey) Regulations 2008 (together the "2008 amendments") the principle of the maintenance of capital is now of very limited application in Jersey.  In particular, Articles 114 and 115 of the Law were repealed and replaced with new provisions.  So far as relevant, Article 115 now provides as follows:-

"115 (1) A company may make a distribution at any time.  

(2) A company shall not make a distribution except in accordance with this Article.  

(3) A company (other than an open-ended investment company) may make a distribution only if the directors who are to authorise the distribution make a statement in accordance with paragraph (4).  

(4) The statement shall state that the directors of the company who are to authorise the distribution have formed the opinion:-

(a) that, immediately following the date on which the distribution is proposed to be made, the company will be able to discharge its liabilities as they fall due; and

(b) that, having regard to:-

(i) the prospects of the company and to the intentions of the directors with respect to the management of the company's business, and

(ii) the amount and character of the financial resources that will in their view be available to the company,

the company will be able to:-

(A) continue to carry on business, and

(B) discharge its liabilities as they fall due,

until the expiry of the period of 12 months immediately following the date on which the distribution is proposed to be made or until the company is dissolved under Article 150, whichever first occurs. 

(5) A director who makes a statement under paragraph (4) without having reasonable grounds for the opinion expressed in the statement is guilty of an offence. 

(6) ...

(7) A distribution made in accordance with this Article shall be debited by the company to:-

(a) a share premium account, or a stated capital account of the company; or

(b) any other account of the company, other than the capital redemption reserve or the nominal capital account.

(8) In paragraph (7), "nominal capital account", in relation to a company, means a share capital account of the company to which are credited funds equivalent to the nominal value of the shares issued by the company. 

(9) A distribution made in accordance with this Article is not for the purposes of Part 12 a reduction of capital."

20.      As can be seen therefore, distributions are no longer restricted to being made out of profits.  They may be made out of a share premium account or any other account except the nominal capital account or a capital redemption reserve account.  No matter what account the distribution is made from, the directors must sign the relevant solvency statement and that is now the key protection for creditors.  

The effect of the 2008 amendments on the Court's approach to the protection of creditors on reductions of capital

21.      It is clear that, following adoption of the 2008 amendments, distributions no longer have to be out of profits and the Law no longer distinguishes between a distribution out of share premium account and a distribution out of profits.  There is no restriction on a distribution out of share premium account except that the directors must be able to make a solvency statement in the terms of Article 115(4).  That is now the protection for creditors and this protection has been substituted for the principle of maintenance of capital, which is now only applied in respect of the nominal capital and the capital redemption reserve (if there is one).  

22.      It seems to us therefore that, where a reduction takes the form of that proposed in the present case, namely a reduction in share premium account with a corresponding increase in a reserve of profit account, the position of creditors of the company is completely unaltered.  Prior to the reduction, the company could have made a distribution out of the share premium account of any amount, subject only to satisfying the solvency requirement.  Once the reduction has taken place, so that the share premium account has been substituted by a reserve of profit, the company may again make a distribution of any amount out of that account, subject only to the same solvency requirement.  

23.      It follows, in our judgment, that, although in relation to any reduction of capital, the Court must consider the position of creditors, where such a reduction takes the form of transferring monies from a share premium account to a reserve of profit account, it is hard to envisage that any creditor could be prejudiced by such a transfer.  

24.      In those circumstances, we do not think that the company need in future come to Court armed with the consent of all the creditors or with one of the other measures referred to at paragraph 12 above.  The Company should of course still produce details of its financial position and the level of creditors simply so that the Court is aware of the situation.  We reiterate that the 2008 amendments do not remove the duty of the Court to have regard to the interests of creditors in relation to any reduction of capital.  The sole effect of the 2008 amendments is that, where the reduction effectively transfers funds from a capital account such as a share premium account (from which distributions may be freely made under Article 115 subject only to the solvency requirement) to a non-capital account (from which distributions may be made on exactly the same basis), it is hard to envisage the Court concluding that creditors may be prejudiced or that any other measure to protect creditors is required. 

25.      We emphasise however that these observations apply only to a reduction of this nature.  Where any other form of reduction is proposed, the Court may still require measures to be taken to satisfy it that creditors will not be prejudiced by the reduction.  

Application to this case

26.      The background to this application can be shortly stated.  The proposed reduction is the last stage following a Scheme of Arrangement under Article 125 of the Law, which was approved by the Court on 18th December, 2012.  

27.      The WPP Group is one of the world's largest communications services groups (the "WPP Group").  Until the Scheme of Arrangement, the parent company of the WPP Group was a Jersey company then called WPP plc ("Old WPP").  It has since changed its name to WPP 2012 Limited.  The Company was incorporated in Jersey on 25th October, 2012, with an authorised share capital of £175,000,000 divided into 1,750,000,000 shares of £0.10 each. 

28.      Old WPP's ordinary shares were listed on the London Stock Exchange and on NASDAQ.  On 30th August, 2012, Old WPP announced proposals relating to the corporate restructuring and reorganisation of the WPP Group, under which (among other things) the Company would be put in place as the new parent for the WPP Group pursuant to a Scheme of Arrangement.  

29.      Under the Scheme between Old WPP and the holders of the Scheme Shares (the "Scheme Share Owners"):-

(i)        Old WPP cancelled all of the Scheme Shares held by the Scheme Share Owners and issued to the Company 1,265,407,107 ordinary shares credited as fully paid. 

(ii)       The Company then issued ordinary shares credited as fully paid to the Scheme Share Owners on the basis of one ordinary share in the capital of the Company for each Scheme Share previously held by the Scheme Share Owners. 

(iii)      Consequently, the Company became the new parent company of the WPP Group and Old WPP became a wholly-owned subsidiary of the Company. 

(iv)      The ordinary shares issued by the Company to the Scheme Share Owners pursuant to the Scheme were issued at a price of 888p each (representing par value of £0.10 plus a premium of 878p).  The ordinary shares issued by the Company to the Scheme Share Owners were issued in consideration for the cancellation of the Old WPP ordinary shares held by the Scheme Share Owners and the issue to the Company by Old WPP of the ordinary shares referred to above.  Accordingly, the issue price for the ordinary shares issued by the Company to the Scheme Share Owners was set as the final market price for the Old WPP ordinary shares on the London Stock Exchange at the close of trading on 31st December, 2012.  

30.      The aggregate share premium arising upon the issue of the ordinary shares by the Company pursuant to the Scheme amounted to £11,110,274,399 and that amount was credited to the Company's share premium account on 2nd January, 2013, when the Scheme became effective.  On that date the Company also issued a further 17,006 ordinary shares in satisfaction of the rights of a particular holder of convertible bonds and accordingly the total amount standing to the credit of the Company's share premium account is £11,110,423,712. 

31.      The directors of the Company wish to continue Old WPP's existing dividend policy and share repurchase programme in a financially and operationally efficient way.  Although Article 115 of the Law permits the Company to make a distribution from its share premium account without court sanction (as described earlier), since a share premium account is a capital account it is apparently not clear whether a distribution made from a share premium account would constitute an income payment or a capital payment in the hands of the recipient shareholders.  The proposed reduction involves the cancellation of the entire amount outstanding to the credit of the Company's share premium account on the date on which the Scheme became effective and its re-characterisation as a reserve of profit.  The Company has been advised that this reserve will be treated as realised profit, with the result that dividends paid out of it will be treated as income in the hands of the recipient, which is the desired end result.  We should add that one of the underlying purposes of the Scheme was to move the tax residence of the parent company of the WPP Group from Ireland to the United Kingdom.  Thus, although the Company is incorporated in Jersey, it will be resident for tax purposes in the United Kingdom. 

32.      The special resolution for the reduction of capital was passed by the only two shareholders of the Company on 5th November, 2012, in the following terms:-

"THAT subject to and conditional upon:-

(a)       the passing of the special resolutions approving the Scheme and the New WPP Reduction of Capital (as defined in the circular) as set out in the notice convening the general meeting of Old WPP to be held on or around 11 December 2012;

(b)       the ordinary shares of the Company (the New WPP Shares) required to be allotted and issued by the Company pursuant to the Scheme having been allotted and issued and registered in the names of the persons entitled to such New WPP Shares in the Company's register of members; and

(c)       the Scheme becoming effective,

the amount standing to the credit of the Company's share premium account (including the amount arising upon the allotment and issue of the New WPP Shares pursuant to the Scheme) on the date on which the Scheme becomes effective be cancelled and such amount be credited to a reserve of profit to be available to the Company to be:

(i)        distributed by the Company from time to time as dividends in accordance with the Law and the Articles: or

(ii)       applied by the Company from time to time toward any other lawful purpose to which such a reserve may be applied."

33.      Although that special resolution was not passed by the current shareholders of the Company, such shareholders (in their capacity as shareholders of Old WPP) were notified in the Scheme circular of the intention that the capital of the Company should be reduced in this way at the conclusion of the Scheme and indeed on 11th December, 2012, passed a resolution (as shareholders of Old WPP)  which specifically approved the reduction of the Company's capital in the same terms as the resolution described above. 

34.      As mentioned earlier, the test to be applied by the Court when considering a reduction of capital was described in Re Henderson Far East Income Limited at paragraph 11:-

"The court has a discretion as to whether to approve a reduction of capital approved by the shareholders by special resolution.  In considering its decision the Court must consider the interests of both the shareholders and the creditors of the Company.  In relation to the former the Court will need to satisfy itself that (a) the shareholders, particularly if there are different classes, have been treated equitably, (b) that the proposals for reduction have been properly explained to the shareholders and (c) that the reduction has a discernible purpose ... ."

35.      Nothing we have said earlier in this judgment is intended to alter the consideration which the Court must give to the position of shareholders.  Taking these three points in turn, there is only one class of shareholder and we are satisfied that the shareholders have been equitably treated.  

36.      As to the second issue, we are satisfied that the proposals for reduction were properly explained to the shareholders of Old WPP (who are now the shareholders of the Company) as part of the Scheme and indeed they passed a resolution approving of the reduction.  

37.      Finally we are satisfied the reduction has a discernible purpose, namely that described at paragraph 31 above. 

38.      We turn therefore to consider the position of creditors.  For the reasons set out earlier in this judgment, we are satisfied that no creditor will be prejudiced because there is no distinction in the ability of the Company to make distributions out of the new reserve account as compared with its ability to make distributions out of the share premium account.  That is sufficient to approve the reduction.  But, in any event, the overall financial position of the Company satisfies us that no creditor is likely to be prejudiced.  If the Court approves the reduction, the Company will have a reserve of profit of approximately £11.1 billion and paid up share capital of £126.5 million.  We are satisfied that there are ample assets to cover the creditors, who are in any event protected by the solvency test for future distributions. 

39.      For these reasons we approved the reduction and the minute showing the revised share capital. 

Authorities

Companies (Jersey) Law 1991.

Companies Act 1985.

Tolley's Company Law Service.

Re Wolseley Plc [2011] JRC 007.

Re Vodafone Holdings Limited [2011] JRC 030A.

Re Cape Plc [2011] JRC 127.

Re Martin Currie Limited [2006] CSOH 77.

Henderson Far East Income Limited [2007] JLR N16.

Henderson Far East Income Limited [2007] JRC 015.

Re Royal Scottish Assurance Plc [2011] CSOH 2.

Companies Act 2006.

Companies (Amendment No.9) (Jersey) Law 2008.

Companies (Amendment No.2) (Jersey) Regulations 2008.