Corporate Matters – October 2016
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Court guidance as to the solvency statement on a reduction of capital
A Ltd, a UK company, was a wholly owned subsidiary of S SA. By reason […]
A Ltd, a UK company, was a wholly owned subsidiary of S SA. By reason of a series of corporate acquisitions BAT plc became liable to pay for an environmental clean-up operation in the United States and A Ltd was liable to indemnify it for part of that liability. A provision was included in A Ltd’s accounts to reflect its directors’ best estimate of that liability.
A Ltd’s accounts also showed a large debt owing from its parent company. The directors wished to reduce the company’s share capital, declare a dividend in favour of the parent company and set off that dividend against the inter-company debt.
In support of the capital reduction each of the directors signed a statutory solvency statement confirming that in their opinion (i) there was no ground, as at the date of the declaration, on which A Ltd could be found to be unable to pay or otherwise discharge its debts; and (ii) A Ltd would be able to pay or otherwise discharge its debts as they fell due during the following 12 months. The capital reduction proceeded and A Ltd paid an interim dividend to S SA by way of set off against the intra-group receivable and, subsequently, it paid a second dividend against release of the balance of the intra-group receivable.
A Ltd later brought a claim against its directors and S SA on the following grounds:
- the accounts by reference to which the dividends were paid contravened the requirements of the Companies Act 2006. (A distribution must be justified by reference to “relevant accounts”, the requirements for which are set out in sections 836 to 839 of the Companies Act). In so far as the relevant accounts were A Ltd’s last annual accounts (in respect of the second dividend), they contravened the requirement (in section 837(2)) that they be “properly prepared” or, to the extent that they were interim accounts (in respect of the first dividend), they did not enable a “reasonable judgment” to be made (section 838(1)). This was because:
- the accounts had been drawn up on the basis that the capital reduction had taken place and was effective to create sufficient distributable reserves to pay the dividend, whereas A Ltd argued, the capital reduction was vitiated by a defective solvency statement
- the accounts made inadequate provision for the environmental liability
- the accounts failed to make adequate disclosure of A Ltd’s contingent liabilities
- the decision to pay the dividends was in breach of the directors’ fiduciary duties
BAT plc also brought a claim against S SA and A Ltd on the grounds that the dividends contravened section 423 of the Insolvency Act 1986, as transactions defrauding creditors.
The High Court [1] gave judgment in part in favour of BAT plc on the section 423 claim but dismissed all other claims.
Statement of capital
The statement of capital that the company had filed contained an error, with the figure stated for the reduced paid up share capital being incorrectly stated by a factor of 100 as the statement of capital had conflated the figures for the issued and authorised share capital. This was not, however, sufficient to render the resolution invalid. The Court cited prior authority (in relation to a declaration of solvency) [2] where the judge had stated “I do not think that I ought to impute to Parliament an intention to require perfection in a provision which contains no words to indicate this super-human standard”. The same reasoning, the Court held, applied to a statement of capital made pursuant to a capital reduction.
Requirements of the solvency statement
Much of the Court’s judgment comprised an analysis of the requirements of the solvency statement in support of a capital reduction. The Court made the following points:
- section 643(1) required the directors to have taken certain things into account to demonstrate that they had actually formed the opinions set out in the solvency statement. It was not enough for the directors to say that they had formed those opinions if in fact they had not done so, for example, if they had misunderstood what was the correct test. The Court must be satisfied that the directors had formed the opinions required and therefore applied the correct test in coming to those opinions
- the test for establishing whether the company was unable to pay its debts was not a technical one. The directors needed to consider the contingent and prospective liabilities of the company in coming to their conclusion with consideration being given to the nature of the contingent and prospective liabilities, the assets available to meet them and what provision (in the non-technical sense) had been made to meet them
- a solvency statement was not invalid simply because the directors did not have reasonable grounds for making the statement. The requirement for “reasonable grounds” was a necessary ingredient of the criminal offence in section 643(4) but it did not impact the validity of the solvency statement (and therefore the reduction of capital itself)
- the directors were entitled to take into account the likely receipts under an insurance policy to meet the company’s prospective and contingent liabilities
- the directors had formed the necessary opinion for the purposes of section 643. It followed that the two sets of accounts were not defective by reason of showing that the capital reduction had taken place.
The disclosure in the accounts regarding contingent liabilities
Under Accounting Standard FRS 12, where a liability is a contingent liability, no provision needs to be made, although there must be disclosure of the contingent liability. Any defects in the disclosure made in the accounts were not relevant to the question whether the accounts gave a true and fair view or enabled a reasonable judgement to be made for the purpose of paying the dividend. Section 836(1) provided that the lawfulness of a distribution was to be determined “by reference to the following items as stated in the relevant accounts”, namely profits, losses, assets and liabilities; provisions relating to depreciation or diminution in the value of assets or any amount retained as reasonably necessary for the purposes of providing for any liability the nature of which requires provision for accounting purposes. The focus was on amounts rather than narrative, something reinforced by the wording of section 837(2) (in respect of the last annual accounts) which states: “The accounts must have been prepared in accordance with this Act, or have been prepared subject only to matters that are not material for determining (by reference to the items mentioned in section 836(1)) whether the distribution would contravene this Part”. Further, the ability of directors to rely on interim accounts to determine the lawfulness of a distribution was another indication that disclosure notes were not relevant to the exercise. The absence of any disclosure notes in the interim accounts supporting the first dividend did not therefore, render the accounts defective.
Breach of fiduciary duty
So long as a company is solvent, the directors are under a duty to promote the success of the company, having regard to the interests of the members as a whole. This duty is subject to any enactment or rule of law requiring the directors to consider or act in the interests of the company’s creditors. At common law, where a company is insolvent, the directors must consider the interests of the creditors as paramount. The case law indicates that the duty arises at an earlier point than insolvency but precisely when that point is reached is not wholly clear from the authorities.
The Court rejected the suggestion that simply because the company was at risk of becoming insolvent at some indefinite point in the future, the directors were under a duty to consider the interests of creditors as paramount. The authorities suggested that the duty arose where the company’s prospects were much more pessimistic than this, such as on the verge of insolvency, precarious or in a parlous financial state. The Court was not prepared to accept the situation where there was a proper provision for a liability in the company’s accounts but there was a real risk that the provision would turn out to be inadequate.
It followed that the decision to pay the dividend was not a breach of fiduciary duty.
Transactions defrauding creditors
The Court rejected S SA’s argument that a dividend payment was not capable of being a transaction to which section 423 of the Insolvency Act applied.
The test for whether a transaction was a transaction defrauding creditors was a subjective one: what was the intention of the person making the transaction (as opposed to a “reasonable” person)? In this case, there was no evidence that the first transaction was made for the purpose of defrauding creditors, but there was evidence to show that A Ltd, through its directors, had the intention of removing from the S SA group the risk that the indemnity liability to BAT plc for the environmental clean-up might turn out to be much more than the amount available from the insurance policies receipts. The intention was to put the assets beyond the reach of BAT plc if the receipts from policies were not enough to meet the indemnity claim.
WM Comment
There are a number of points to take from this case:
- that a mistake in a statement of capital following a capital reduction does not invalidate the capital reduction
- the absence of reasonable grounds for the opinion set out in the solvency statement will not invalidate the solvency statement – though it may give rise to a criminal liability
- the absence of a provision in respect of a contingent liability – which is noted in the relevant accounts – does not mean a distribution cannot be justified by reference to those accounts
- the point at which directors are under a duty to consider the interests of creditors as paramount requires at the very least for the company to be on the verge of insolvency or in a parlous financial state and the simple existence of a contingent liability which the company may not have the resources to meet is not sufficient to meet this threshold
- that a dividend may be capable of being a transaction at an undervalue within the meaning of section 423 of the Insolvency Act.
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[1] BTI 2014 LLC v Sequana SA and others [2016] EWHC 1686
[2] De Courcy v Clement and another [1970] 1 Ch 693

FCA final notice for breaches by sponsor of Listing Rule 8
The rules underlying the sponsor regime are set out in chapter 8 of the Listing […]
The rules underlying the sponsor regime are set out in chapter 8 of the Listing Rules (LR 8). A sponsor is obliged by LR 8.6.6R, at all times, to comply with the criteria set out in LR 8.6.5.R. LR 8.6.5R(3) stipulates that the FCA will approve a person as a sponsor only if it is satisfied that it “has appropriate systems and controls in place to ensure that it can carry out its role as a sponsor in accordance with this chapter”.
The “systems and controls” are then given some colour by LR 8.6.12R. For example, LR 8.6.12R(1) requires “clear and effective reporting lines” (including “clear and effective management responsibilities”) while LR 8.6.12R(2) requires “effective systems and controls for the appropriate supervision of employees engaged in the provision of sponsor services”. LR8.6.12R(6) requires the sponsor to maintain “effective systems and controls to ensure that it has appropriate staffing arrangements for the performance of the sponsor services with due care and skill”.
In a recent case, the Financial Conduct Authority (FCA) found a number of failings by a sponsor:
- the sponsor had failed to have appropriate systems and controls in place across its sponsor activities. This was a breach of LR 8.6.6.R. For the majority of the relevant period, the sponsor had had no overarching structure in place for its sponsor services, with no single person, group or committee having been designated with overall responsibility for oversight of sponsor services. As a consequence, deficiencies in the sponsor’s systems and controls were not addressed, increasing the risk that a serious issue could arise on client mandates
- there was no obligation on deal teams to report at key milestones, nor were specific procedures in place regarding the escalation of key issues during client mandates. The use of regulatory checklists was not mandatory within the company
- on one particular transaction, involving the attempted transfer of a particular client from AIM to a premium listing, the sponsor had failed to act as sponsor with the level of diligence and professional care expected by the FCA from sponsors. This was a breach of LR 8.3.3R, which states that “A sponsor must in relation to a sponsor service act with due care and skill”. In particular, the sponsor had failed to identify that the client in question, being a highly acquisitive and fast-growing company, created a potential risk with regard to satisfying the eligibility requirements for a premium listing. Additionally, the sponsor had failed to carry out the necessary due diligence to support its submissions to the FCA regarding the client’s eligibility. Further, it had failed to address the considerable comments that the FCA had made regarding the client’s eligibility for a premium listing
- the sponsor had failed to keep the timetable for the premium listing under review, and therefore failed to consider whether it continued to be realistic and had also failed to consider the impact of negative claims contained in a research report and to conduct further enquiries into the issues raised on the back of that report.
The size of the fine reflected:
- that the sponsor had represented to the FCA that the client was eligible for a premium listing without having done the due diligence necessary to support this assertion. The premium listing did not go ahead but, had it done so, there could have been a situation in which an ineligible company had obtained a premium listing, creating a potential risk to investors
- the serious and systemic weaknesses in the sponsor’s systems and controls in respect of its sponsor services
- that the sponsor had not acted deliberately and recklessly in respect of its sponsor service. (It should also be noted that two of its business areas that provided sponsor services had practices that were more appropriate to meet the risks entailed by the provision of sponsor services.)
- that the sponsor had dedicated significant resource to improving its systems and controls since the end of the transaction in question
- that the sponsor agreed to settle at an early stage of the investigation.
WM comment
The case is a reminder of the importance of sponsors regularly reviewing the effectiveness of their internal systems and controls to ensure continued compliance with their obligations under the Listing Rules.

October 2016 – Can a warranty also be a representation?
In Idemitsu Kosan Ltd v Sumitomo Co Corp [1], the claimant had purchased shares from […]
In Idemitsu Kosan Ltd v Sumitomo Co Corp [1], the claimant had purchased shares from the defendant seller. The parties had entered into a share purchase agreement (the SPA) which contained a series of warranties by the seller. The purchaser accepted that its claim for breach of warranty was time barred and, instead, brought a claim in misrepresentation on the basis that a claim for misrepresentation was not time barred.
The statements in the agreement on which the purchaser was founding its case were described as “warranties” with nothing in the SPA stating that they were also “representations”. The SPA, as is usual, also contained an “entire agreement” clause pursuant to which the purchaser agreed and acknowledged that it had not relied upon nor been induced to enter into the SPA by any representation or warranty other than as set out in the SPA as a contractual warranty.
Unsurprisingly, the High Court gave judgment for the seller. The Court held that where a contractual provision states only that a party is giving a warranty, that party does not (absent wording to the contrary), by concluding the contract, make any statement that it is actionable as a misrepresentation. The Court said that it would be wrong in principle to read the warranty schedule in the SPA as though it had an existence independent of its function which was to provide content to the seller’s warranties. The presentation of an execution copy of the SPA, complete with warranty schedule, by the seller to the purchaser, did not amount to a representation. Even if this were not the case the purchaser’s claim would have been defeated by the entire agreement clause.
WM comment
This decision is a welcome restatement of the law. The case does highlight the importance, from a seller’s perspective of using clear language to avoid a statement being construed as a representation. A representation is a statement upon which the counterparty has relied inducing it to enter into the contract. Sellers should therefore avoid wording that suggests the purchaser has entered into the contract in reliance upon any statements in the agreement. A successful claim for misrepresentation may entitle the purchaser to “rescind” the contract, restoring the parties to the position they would have been in had the contract never been entered into. This could be disastrous for the seller. By contrast, the remedy of rescission is not available for breach of warranty.
Additionally, the basis upon which damages are assessed is different for misrepresentation and breach of warranty and there may be cases in which an aggrieved purchaser would recover more through an action in misrepresentation than for breach of contract.
Although not decisive in this case, the judgment also provides a reminder of the importance of including a well drafted “entire agreement” clause in sale and purchase agreements.
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[1] 2016] EWHC 1909 (Comm)

How flexible is the procedure for schemes of arrangement?
SABMiller plc was the subject of a takeover by Anheuser-Busch InBev SA/NV. The structure of […]
SABMiller plc was the subject of a takeover by Anheuser-Busch InBev SA/NV. The structure of the scheme included a partial share alternative, which was primarily for the benefit of two of SABMiller’s largest shareholders, Altria Group Inc and BEVCO Ltd, who held respectively 26.48 per cent and 13.85 per cent of SABMiller’s issued share capital and each of whom had entered into a relationship agreement with SABMiller entitling them to appoint directors.
Each of Altria and BEVCO had given irrevocable undertakings to the bidder either to vote in favour of resolutions to approve the transactions including the scheme at any general or class meeting or court-convened meeting to be held in connection with the scheme or, if for the purposes of the scheme court meeting they did not form part of a class within the general body of SABMiller shareholders, to provide their individual written consent to the terms and implementation of the scheme.
Some of the other shareholders expressed concern about the terms of the deal and maintained that Altria and BEVCO could not vote in the same class as the other shareholders. The terms of the offer were revised and SABMiller announced that it would be proposing to the court that Altria and BEVCO be treated as a different class of shareholder from the other shareholders.
One of the shareholders, Soroban, – which in fact supported the scheme – argued that the Court had no jurisdiction to do what SABMiller was proposing. It submitted that there should only be one class meeting to which all scheme shareholders were summoned and at which they should be entitled to vote, as the rights of the persons to be bound by the scheme were not sufficiently dissimilar that they could not consult together as to their common interest.
The applicable legislation is set out in Part 26 of the Companies Act 2006 (the Act). Under section 896, the court may, upon an application, order a meeting of the creditors, or class of creditors, or of the members, or class of members, of the company, to be summoned in such manner as the court thinks fit. Section 899 provides that if a majority in number representing 75 per cent in value of the creditors or class of creditors or members or class of members (as the case may be), present and voting either in person or by proxy, agree the scheme, the court may, on application, sanction the scheme.
The issue for determination by the Court, in essence, was whether the relevant provisions of the Act permitted the court to make an order summoning a meeting of some of the shareholders with whom a scheme was proposed, on the basis that the other shareholders were prepared to give undertakings to the court to be bound by the scheme.
The Court answered that question in the affirmative. It reasoned as follows:
- it was not for Soroban to enforce the irrevocable undertakings to be bound by the scheme. Soroban’s rights related only to its own participation in the scheme and its right not to be placed into a class with persons with whom it could not discuss the scheme with a view to their common interest
- there was nothing in the literal wording of section 896 to suggest that a member or creditor could not voluntarily agree to waive or forgo their right to participate in the meeting, in the same way that they could decide simply not to attend and vote
- the purpose of the scheme jurisdiction is to facilitate compromises or arrangements, by supplying a statutory alternative to an agreement between the company and its relevant creditors and members, in cases where it is not possible to obtain the consent of all the creditors and members
- the legislation should be interpreted flexibly and purposively to reflect the legislative intention of promoting compromise and arrangements, so as to permit the court, where appropriate, to accept undertakings from creditors or members to be bound by the scheme
- where a creditor or member was not acting under compulsion, and was willing to consent voluntarily by agreeing to give an undertaking to be bound by a proposal, there was no confiscation of his property or rights, and no injustice if he was not summoned to the scheme meeting
- the crucial factor was not SABMiller’s decision to exclude certain shareholders from the scheme meeting, but the agreement of Altria and BEVCO to be bound by it while agreeing to forgo their right to participate in the process for approving the scheme.
WM comment
The decision is a welcome one reflecting the flexibility that the legislator intended to afford to schemes of arrangement. In cases of uncertainty whether a particular shareholder forms part of a class, or is in a separate class of shareholder, it will be possible to exclude those shareholders from the scheme, in order to reduce the risk of a subsequent legal challenge, if they enter into irrevocable undertakings to abide by the terms of the scheme.

Closed periods under MAR
The Market Abuse Regulation (MAR) came into effect on 3 July 2016. Getting ready for […]
The Market Abuse Regulation (MAR) came into effect on 3 July 2016. Getting ready for MAR by that deadline was something of a scramble for many of those impacted by the new regime – for companies certainly, but also for the government and regulators. The date passed with some questions still not satisfactorily resolved. One of these concerned the relationship between MAR “closed periods” and the publication of preliminary results.
Article 19(11) of MAR states that, subject to limited exceptions (as defined in Article 19(12)), a person discharging managerial responsibilities within an issuer shall not conduct any transactions on their own account or for the account of a third party, directly or indirectly, relating to the issuer’s financial instruments during a “closed period” of 30 calendar days before the announcement of the issuer’s interim financial report or year-end report. This obligation applies equally to AIM and Main Market companies. What was not clear from the text of MAR and its accompanying technical standards was whether Article 19(11) meant that issuers announcing preliminary results needed to impose closed periods before the announcement of preliminary results, before publication of the year-end report or both.
AIM Regulation has published a statement to clarify the issue for AIM companies. AIM Regulation’s statement mirrors the approach of the Financial Conduct Authority (FCA), namely that where an issuer announces preliminary results, the 30-day closed period is immediately before the preliminary results are announced. This only applies where the preliminary announcement contains all inside information expected to be included in the year-end report.
AIM Regulation has also stated:
- AIM companies must comply with both the AIM Rules and MAR. Where the two overlap, AIM Regulation will work closely with the FCA (as the competent authority for MAR) but will not itself opine on compliance with MAR
- compliance with MAR does not automatically mean compliance with the AIM Rules and vice versa
- AIM companies must have a dealing code even though this is not a MAR requirement (and therefore Main Market companies do not, strictly speaking, need one). The requirement under AIM Rule 21 is for AIM companies to have a “reasonable and effective dealing policy” and AIM Regulation considers this to be consistent with the AIM Rule 31 requirement for AIM companies to have “sufficient procedures, resources and controls” to enable it to comply with their AIM Rule obligations.
WM comment
The clarification of the relationship between closed periods and preliminary results for AIM companies is welcome, particularly in that it follows the guidance previously published by the FCA.
It will be apparent by now that compliance with MAR is a substantial undertaking, both for companies and Nomads/sponsors. If you would like to discuss any aspect of MAR compliance, please do not hesitate to contact the writer.

The duty to report on payment practices
We have reported previously on government proposals to oblige large companies (or LLPs) to publish […]
We have reported previously on government proposals to oblige large companies (or LLPs) to publish a report on their payment practices, policies and performance. A “large” company for these purposes is one that satisfies two of the following criteria:
- an annual turnover over £36 million
- a balance sheet total over £18 million
- on average, more than 250 employees
The new rules were originally intended to come into force in April this year but have been delayed. The new Department for Business, Energy and Industrial Strategy has said that it expects the regulations to be laid before Parliament in the new year and to enter into force on 6 April 2017, applying to financial years starting on or after that date.
From that date, qualifying large companies (and LLPs) will have to publish and update every six months information relating to their payment practices and policies for business-to-business contracts under which they are supplied with goods, services or intangible assets and explain how they have performed in relation to those practices and policies.
WM comment
We will provide an update when the regulations are published.