Progress Property Co Ltd vs. Moorgarth Group Ltd

Progress Property Co Ltd vs. Moorgarth Group Ltd.

This case was Before Lord Phillips, President, Lord Walker, Lord Mance, Lord Collins, Lord Clarke and the judgement  was given on 8 December 2010, referring to the common law prohibition on the unlawful distribution of capital by a company through, inter alia, the sale of its assets to shareholders at an undervalue.

The principle, sometimes called the rule on maintenance of capital, was authoritatively stated by the House of Lords in Trevor v Whitworth,[1] and has been subsequently applied both by the courts and in statutory provisions. The objective of the rule has always been thought to be the protection of creditors, who are entitled to assume that the risk of a loss of the company’s capital is confined to ordinary commercial activity. The rule is firmly entrenched in both English and Indian law, although its scope varies considerably.

Over time, various devices have been employed to circumvent the rule, of which the most prominent is perhaps the sale of corporate assets at an undervalue to (typically) the controlling shareholders. In Aveling Barford v Perion Ltd[2], Hoffman J. had held that “it is the fact that it was known and intended to be a sale at an undervalue which made it an unlawful distribution.”


The issue in this case was whether in the case there might have been an unlawful distribution of capital when the appellant company, Progress Property Company Ltd., now onwards, (“PPC”), sold the whole issued share capital of a wholly-owned subsidiary, YMS Properties (No. 1) Ltd, now onwards(“YMS1”) to another company, Moorgarth Group Ltd (“Moorgarth”).[3]


All these companies were indirectly controlled by Dr Cristo Wiese, a South African investor. The transaction between PPC and Moorgarth was attacked by the appellant PPC on the ground that it was at an undervalue[4]. YMS1, a company worth as much as £4m, was sold for little more than £60,000. PPC alleged that there was a huge undervaluation which was done mistakenly. The deputy dismissed the action on the basis that it could not succeed even if there had been an unintentional sale at an undervalue[5], and even if Mr Moore was in breach of duty in failing to recognize it.

The Court of Appeal upheld the deputy judge’s dismissal of the action. In doing so it held that there was no dispute before the deputy judge that Mr Moore genuinely believed that the price of the shares in YMS1 sold by PPC to Moorgarth was their market value.[6] He acted in the honest belief that the sale of the shares in YMS1 was a commercial transaction.

PPC’s case, as finally developed earlier, relied not on section 263 of the Companies Act 1985 (now replaced by sections 829 and 830 of the Companies Act 2006) but on the common law rule which was devised for the protection of the creditors of a company. As per the rule, 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, was a return of capital, which was unlawful and ultra vires the company[7]. The essential issue was how the sale by PPC of its shareholding in YMS was to be characterised. The deputy judge roundly rejected the submission made on behalf of PPC that there was an unlawful return of capital whenever the company has entered into a transaction with a shareholder which results in a transfer of value not covered by distributable profits, and regardless of the purpose of the transaction.[8]

In the Court of Appeal Mummery LJ developed the deputy judge’s line of thought into a more rounded conclusion and held that in this case the deputy judge noted that it had been accepted by PPC that the sale was entered into in the belief on the part of the director, Mr Moore, that the agreed price was at market value[9]. In those circumstances there was no knowledge or intention that the shares should be disposed of at an undervalue. There was no reason to doubt the genuineness of the transaction as a commercial sale of the YMS1 shares[10].


The honourable high court On 15 October 2008, rejected the proposition advanced by the Appellant that “a transaction is not only illegal but ultra vires whenever the company has entered into a transaction with a shareholder which results in a transfer of value not covered by distributable profits, and regardless of the purpose of the transaction”.


Lords Justice Mummery, Toulson and Elias on 26 June 2009,  rejected an appeal by the Appellant against the decision of High court[11], holding that the common law rule against the distribution of capital[12] to shareholders did not apply in this case simply because of the link between Mr Moore and Tradegro, nor because Mr Moore ought to have appreciated the fact that the sale was at an undervalue.

Both Aveling Barford and Re Halt Garage (1964) Limited [1982] 3 All ER 1016 show that the relevant test is whether the transaction in question can be characterised as something other than a gratuitous distribution to shareholders.[13]  In those two cases, the payment in question could not.[14]  In this case, by contrast, the transaction was not intended by Mr Moore to be at an undervalue, and the Deputy Judge had found that there was no reason to doubt the genuineness of the sale to Moorgarth as a commercial sale of PPC’s subsidiary even though it appeared that the sale price was calculated on a basis that was misunderstood by all concerned.[15]  Accordingly, the Court of Appeal concluded that “the payment could only properly and objectively be characterised as consideration for the sale of an asset without any element of gratuitous benefit”[16].


The Supreme Court held that if a company sell to a shareholder at a low value assets which were difficult to value precisely, but which were potentially very valuable, the transaction may call for close scrutiny, and the company’s financial position, and the actual motives and intentions of the directors[17], would be highly relevant. If after considering all relevant circumstances the conclusion was that it was a genuine arm’s length transaction then it will stand, even if it may, with hindsight, appear to have been a bad bargain. But if it was an improper attempt to extract value by the pretence of an arm’s length sale, then it will be held unlawful.[18] But either conclusion would depend on a realistic assessment of all the relevant facts, not simply a retrospective valuation exercise in isolation from all other inquiries.[19]

The Supreme Court finally held that in this case as there were concurrent findings that the sale of YMS1 to Moorgarth was a genuine commercial sale, it dismissed the appeal

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