Winpar Holdings Ltd v Ransomes Plc [1999] EWCA Civ 1732 (1 July 1999)

BAILII is celebrating 24 years of free online access to the law! Would you consider making a contribution?
No donation is too small. If every visitor before 31 December gives just £1, it will have a significant impact on BAILII's ability to continue providing free access to the law.
Thank you very much for your support!

LORD JUSTICE ROBERT WALKER: This is an appeal with the leave of the Judge from an order of Lloyd J made on 17 December 1998. The order confirmed the cancellation of the share premium account of Ransomes plc (the Company) effected by a special resolution passed at an extraordinary general meeting of the company held on 19 November 1998. The order was made under section 137 of the Companies Act 1985 (the Act), which gives the court power to confirm a reduction of capital if satisfied that the interests of creditors are not prejudiced. Some material events have occurred since the Judge made his order and this court allowed an application by the respondent, not opposed by the appellant, to adduce further evidence as to recent events.

For over 130 years successive Companies Acts have permitted the reduction of a limited company’s capital, but only subject to safeguards including sanction by the court. Since 1948 the legislation has also provided for the formation of a share premium account when a company issues shares at a premium, recognising that sums received as premium, although not strictly part of the company’s capital, have a similar character and should not be regarded as profits distributable by way of dividend.

Section 135(2) specifies three particular types of reduction : extinguishment or reduction of liability in respect of share capital which is not paid up, cancellation of paid-up share capital which is lost and payment-off of paid-up share capital which is in excess of the company’s wants. Subsection (2) does not refer to cancellation of the share premium account but, as the Judge said, there is no doubt that it falls within the general terms of subsection (1).

Section 136 provides for a company which has resolved to reduce its share capital to apply to the court for confirmation of the reduction, and prescribes procedure for the protection of creditors which need not be set out in detail. Section 137(1) provides as follows,

From this the court appears to have an unfettered discretion (so long as creditors are protected) but case law, starting with the decision of the House of Lords in British American Trustee and Finance Corporation v Couper [1894] AC 399, has established the principles on which the court’s discretion should be exercised.

"(1) The registrar of companies, on production to him of an order of the court confirming the reduction of a company’s share capital, and the delivery to him of a copy of the order and of a minute (approved by the court) showing, with respect to the company’s share capital as altered by the order --

The following information about the Company is derived from its audited financial statements for the year to 30 September 1997, which were exhibited (together with an unaudited balance sheet made up to 31 October 1998) to the first affidavit of Mr Paul Hollingworth, the Company’s finance director and company secretary. The 1997 accounts show that the Company was then the holding company of a multinational engineering group, based in Ipswich, and specialising in the design, manufacture and marketing of grass care machinery and specialist industrial vehicles. It had just over 3000 shareholders holding issued and fully paid share capital of the following classes:

There were also ten non-transferable special shares of varying nominal amounts which arose on the conversion of 8.25p convertible preference shares; they are a technical complication with no direct relevance to this matter, and for practical purposes they can be ignored. References in this judgment to preference shares (without qualification) are to the 3.85% (non-convertible) preference shares.

Note 13 to the accounts listed six direct and indirect subsidiaries of the Company, of which Ransomes Investment Corporation (RIC), a direct subsidiary incorporated in one of the states of the United States of America, is the most important for present purposes. RIC acted as holding company for the group’s operations in the United States and the Judge was told that it was the source of about two thirds of the group’s world-wide revenue. The Company’s balance sheet (together with note 21) showed a share premium account in the amount of £17, 122,880. This arose from a rights issue of ordinary shares issued at a premium in 1996.

Note 26 to the accounts recorded an event, occurring after the accounting date, which is an important part of the background to this litigation : the announcement on 10 November 1997 of agreement on the terms of recommended cash offers, made on behalf of Textron Acquisition Ltd (Acquisition) for the entire issued share capital of the Company. Acquisition is an indirect wholly-owned subsidiary of Textron Inc (Textron), the holding company of a large industrial group based in the United States.

The agreed offer (made on 24 November 1997) resulted in Acquisition becoming the owner of all the Company’s ordinary shares and its convertible preference shares, but only just over half of the 200,000 preference shares. 98,597 of those shares remained in other hands, and 50,100 were held by the appellant Winpar Holdings Ltd (Winpar). Winpar is a public company incorporated in New South Wales, Australia. Mr Gordon Elkington, a director and company secretary of Winpar, has deposed that it has about 300 shareholders and shareholders’ funds of about AUS$ 1.8m. Its principal activities are share trading, investment and underwriting. Winpar has since acquired a further 32,084 preference shares.

In order to enable an extraordinary general meeting (EGM) to be called at short notice under section 369 of the Act, Acquisition transferred one ordinary share in the Company to each of thirty individuals (all partners or employees of the Company’s solicitors, Eversheds) and the transfers were registered on 16 November 1998. On the same day notice was given of an EGM of the Company to be held (at Ransome's Way, Ipswich on 19 November 1998 at 3 pm.) at which the following resolutions were to be proposed:

2. That the Directors are hereby authorised to resolve that any interim dividend declared by them pursuant to Article 143 of the Company’s Articles of Association be satisfied (wholly or in part) by the distribution of shares or stock in the capital of its subsidiaries or any of them."

The notes to the notice stated the holders of ordinary shares and preference shares (but not holders of convertible preference shares) were entitled to attend and vote at the meeting. The notes also referred to proxies, and stated that proxies must be deposited at the registered office not later than 48 hours before the meeting.

"I am writing to enclose a notice convening an Extraordinary General Meeting of the Company for 3.00pm on Thursday 19 November 1998. The purpose of the meeting is to pass two resolutions, the first of which is to enable the Company to increase its distributable reserves while the second is to enable interim dividends on the Ordinary shares to be satisfied by the distribution of assets to the Company’s parent company, Textron Acquisition Limited.

The first resolution requires the consent of the Court before it becomes effective. It has proved difficult to obtain a Court appointment for this purpose before Christmas but a cancellation has now made this possible. Because of the short time available before the Court appointment, the meeting convened by the enclosed notice is being called on short notice, the consent of the requisite majority of shareholders entitled to attend and vote at the meeting having been obtained."

“Following the confirmation of the proposed reduction of share premium account, the Company proposes to use the reserve arising, together with certain of the Company’s distributable reserves, to effect a distribution in specie of the shares in [RIC], at present a wholly owned subsidiary of the Company.”

Winpar had not notified the Company (under Article 156 of its articles) of an address within the United Kingdom at which notices could be sent to it, and so was not, strictly speaking, entitled to notice of the EGM. But the notice and circular were sent by airmail to Winpar and four other preference shareholders with addresses overseas. The Judge assumed, no doubt correctly, that none of these notices could have reached an overseas shareholder before the meeting. The exhibited minutes of the EGM on 19 November show that it was attended by Mr Peter Wilson (a director of the Company and chairman of the meeting) and by two other shareholders, and that the two resolutions were proposed and passed as special resolutions.

On 20 November 1998 the Company presented a petition to the Companies Court seeking confirmation of the first resolution for cancellation of the share premium account. On the same day Winpar received notice of the EGM. On 27 November the Registrar heard the summons for directions and (on appropriate undertakings by the Company) dispensed with the settlement of a list of creditors. On 9 December the petition was adjourned into court for hearing. By that stage Winpar had instructed London solicitors to oppose the petition, and on 9 December Mr Stephan Maffey of S J Berwin swore an affidavit exhibiting a copy of an unsworn affidavit of Mr Elkington in opposition to the petition. The unsworn affidavit raised several issues as to the reduction of capital and the associated proposals, saying that they had been put forward with undue haste and no or insufficient explanation.

"The preference shares confer on the holders thereof the right to a fixed cumulative preferential dividend at the rate of 3.85% per cent per annum on the capital for the time being paid up thereon and in a winding up to rank both as regards capital and dividend in priority to the other shares of the Company, but do not confer any further right to participate in profits or surplus assets."

Article 17 is headed ‘Method of varying rights’ and in substance (apart from a reference to abrogation) it reproduces the effect of section 125(2) and (6) of the Act (which would apply in the absence of any special provision). Class rights can be varied only with the consent of the holders of three-quarters (in nominal value) of the issued shares of the class in question, given either in writing or by an extraordinary resolution passed at a separate meeting of the holders of that class of shares.

"Unless otherwise expressly provided by the rights attached to any shares or class of shares, those rights shall be deemed to be varied by the reduction of the capital paid up on those shares otherwise than by a purchase or redemption by the Company of its own shares and by the allotment of other shares ranking in priority for payment of a dividend or in respect of capital or which confer on the holders voting rights more favourable than those conferred by such first mentioned shares, but shall not be deemed to be varied by the creation or issue of other shares ranking pari passu with, or subsequent to, such first mentioned shares or by the purchase or redemption by the Company of any of its own shares or by the Company permitting in accordance with the Regulations, the holding and transfer of shares of that or any class in uncertificated form by means of a relevant system or by shares of that class or any other class being held as uncertificated shares."

Article 51 contains a power for the Company to reduce its share capital, any capital redemption reserve and any share premium account (that power is a prerequisite for the application of ss. 135ff. of the Act). Article 74 deals with voting rights. Holders of ordinary shares have full voting rights. Holders of preference shares do not have a general right to attend or vote at general meetings. They have such rights only in specified circumstances, including a meeting to consider a reduction of capital. The voting rights of the convertible preference shares (set out in article 5(D)) are similar but even more limited; in particular, they are not exercisable on a resolution for a reduction of capital.

In his judgment the Judge referred to the three objections to the reduction of capital raised by Winpar : that it amounted to a return of capital to the ordinary shareholders in priority to the preference shareholders, who ought to be accorded priority; that it put at risk the preference shareholders’ future dividends; and that the procedure adopted had been unacceptable. The Judge then considered the submissions made on behalf of the Company in answer to the first of these objections: that the preference shareholders’ non-receipt of any distribution representing a return of capital was in line with their “reasonable expectations” (an expression used by Asquith LJ in Re Chatterley-Whitfield Collieries [1948] 2 AER 593, 601) and did not by itself make the proposals unfair; that the cancellation of the share premium account and the distribution of funds representing it was not technically a return of capital ; and that the Companies Court was asked to approve only the reduction of capital, which was only the first stage of the plan. As to the last of these points, the Judge rightly observed that he could not ignore the Company’s stated objective. But in the event, as will be mentioned shortly, the Company did not carry out the whole of its plan.

The Judge’s conclusion about the preference shareholders’ reasonable expectations seems to be based on a reading of article 18 of the Company’s articles which I find surprising. Whether preference shareholders would regard the prospect of payment-off of their shares at par (otherwise than in the course of a liquidation) as a risk or as something to be welcomed depends on their company’s fortunes and on prevailing interest rates. Structural changes in the system of company taxation may also be material. These points are illustrated by the fact that in some of the cases referred to in the skeleton arguments ( notably Chatterley-Whitfield, one of several reported cases concerned with the nationalisation of the coal industry at a period of very low interest rates, Re Saltdean Estates [1968] 1 WLR 583, Re Holders Investment Trust [1971] 1 WLR 583 and House of Fraser v ACGE [1987] AC 387) preference shareholders were objecting to the compulsory payment-off of their shares at par, whereas in cases like Re Fowlers Vacola [1966] VR 97, a decision of the Supreme Court of Victoria, the preference shareholders were objecting that they (unlike the ordinary shareholders) did not receive a partial payment-off of their shares. However the Judge’s reading of article 18 is not challenged in this court.

The Judge considered the evidence as to the Company’s finances, noting that during the mid 90’s it had passed one half-yearly dividend on the convertible preference shares (and no dividends were paid on the ordinary shares from 1991 to 1996, although dividends have always been paid on the 200,000 preference shares). He referred to the financial information in Mr Hollingworth’s second and third affidavits and their exhibits and concluded that there was no real risk of the holders of preference shares failing to receive future dividends, or a return of capital in the event of liquidation. He said,

"Of course there will be a reduction in the company’s assets and in the company’s likely profit but a reduction of assets to a position in which the shareholders’ funds are something of the order of 280 times the amount of the preference shares’ nominal capital, and the profit is likely to be in a similar ratio to the annual dividend due on the preference shares, cannot be said to be one that increases the risk of non-payment to the preference shareholders materially or in any meaningful sense."

The Judge was, rightly, very critical of the procedure which the Company had adopted. He said that the information supplied by the Company to its shareholders had been “parsimonious” and (while positively not misleading) was “far from forthcoming as to the true nature and background of the proposed course of action as a whole”. He saw much force in the submission (made by counsel who then appeared for Winpar) that the procedure, although legally effective, failed to take account of the interests of the minority preference shareholders. He said,

"I take the point that it was all done in a hurry but it seems to me that it would not have been impossible to say a little bit more to explain what was going on and the reasons in particular for the haste, rather than have that information dragged out piece by piece in the course of the proceedings on the petition."

On 21 December 1998 the order was registered under section 138(1) of the Act and the registration was certified by the Registrar under section 138(4). On 14 January 1999 the Judge gave Winpar permission to appeal. The notice of appeal relied principally on the grounds that the reduction approved by the Judge was not fair and equitable, and that the proposals were not properly explained to the shareholders. Those are the first two of the requirements stated by Harman J in Re Ratners Group [1988] BCLC 685, 687 - 8 (see also Harman J in Re Thorn EMI [1989] BCLC 612, 616). The Company put in a respondent’s notice dated 9 February 1999 relying on the conclusive effect of a certificate under section 138(4)(b) of the Act. The notice also disclosed that the Company had decided not to proceed with its plan (deposed to in affidavit evidence before the Judge) to make a distribution in specie of its shares in RIC. Accordingly, the notice stated, the Company retained the reserve of about £17m resulting from the cancellation of its share premium account, and that reserve was available for distribution by the Company. It also stated that the members of the Company would as soon as practicable be invited to confirm in general meeting the approval of the cancellation.

Instead, Mr Wilson’s affidavit stated, the Company on 20 January 1999 transferred the shares in RIC to Acquisition in consideration of the assignment by Acquisition to the Company of a debt of £91.2m, bearing interest at a commercial rate, owed by another subsidiary of Acquisition, Textron Fluid & Power Systems Holdings Ltd (TFPSH). This debt was secured by a first equitable charge on the entire issued share capital of David Brown Group plc, which is apparently a wholly-owned subsidiary of TFPSH. The directors of the Company are satisfied that the debt is worth not less than its face value. The affidavit continued,

"I add that the final decision to take this route was made on 13 January 1999. If it had not been viable, the Company would have proceeded with the distribution in specie of the shares in RIC, albeit in 1999 and so with adverse consequences for the immediate holding company of [Acquisition] Textron Atlantic Inc., and for its holding company [Textron]."

Mr Wilson’s affidavit stated that the Company wished the share premium account to remain cancelled, and to maintain the reserve of about £17m “notwithstanding the fact that the original objective of cancellation [that is, the distribution in specie of the shares of RIC] no longer existed.” The Company sent out an explanatory letter dated 17 May 1999 and a notice calling an EGM for 11 June 1999 in order to consider a special resolution confirming the cancellation of the share premium account. The circular ran to five pages and contained a good deal of detailed information. The EGM was held on 11 June and the special resolution was passed, despite opposition by Winpar.

These recent events have led Winpar and its advisers to reappraise their position on this appeal. Winpar’s case before the Judge was based on its opposition to a composite transaction including a distribution in specie. Winpar has not in this court asked for the cancellation of the share premium account to be reversed, but has asked the court to exercise its power under section 137(1) of the Act to impose a condition which would in practice have a similar effect, that is requiring the Company to establish a designated special reserve account (equal to the cancelled share premium account) from which the Company might not make any distribution without the permission of the court. That has rendered academic the point (on the conclusiveness of a certificate under section 138(4)(b) of the Act) raised in the respondent’s notice, and it is probably better to express no view on it. But at first sight I would not describe it as a formidable argument (which is how it was put by Mr Simon Mortimore QC, who appeared with Mr Nicholas Cherryman for Winpar; neither appeared below).

In this court the submissions made to the Judge on behalf of Winpar have been partly abandoned, partly maintained, and partly reinforced. Winpar can no longer attack the proposed composite transaction as amounting to a distribution of capital in defiance of priorities established by the Company’s articles, since the composite transaction has not taken place and will not now take place. Moreover the Company’s recent circular has belatedly made good the parsimoniousness of the information originally furnished to its shareholders. But Winpar does still maintain that the cancellation of the share premium account puts at risk the interests of the preference shareholders, by removal of the tier of protection provided by that undistributable reserve. Winpar submits that the removal of the protection becomes still more unjustifiable since the cancellation can now be seen to have been proposed and sanctioned (in Harman J’s words in Ratners at page 688) “not for any discernible purpose at all but simply [as] an act in a vacuum.”

Before considering the issues in the appeal as now reformulated I would record that in my judgment the Judge’s decision, on the evidence and submissions before him, was (in his rejection of the main attacks based on unfair disregard of priorities and on significant risk of future prejudice) correct and (in his decision on the procedural deficiencies) well within the ambit of his discretion. So was the Judge’s order as to costs. Both of the Australian cases relied on below by Winpar, and referred to by the Judge in his judgment, were concerned with very different factual situations. In Re Fowlers Vacola [1966] VR 97 the unfairness was not simply that holders of preference shares were not receiving a return of capital, but that ordinary shareholders were receiving a return of capital in contravention of established priorities. In Re Campaign Holdings (1989) 15 ACLR 762 the lack of proper explanation was of crucial importance because of the remarkable fact that the holders of fully-paid shares had voted unanimously in general meeting for a reduction and associated transactions which when properly explained and understood were (as the Supreme Court of Victoria held) unfair to holders of fully-paid 20c shares and unduly advantageous to holders of 1c-paid 20c shares (most of whom were directors).

Counsel on both sides made written and oral submissions as to the burden of proof in cases of this sort. It is doubtful whether the burden of proof will be decisive in many applications under s. 137 of the Act. An application under section 137 does not amount to ordinary adversarial litigation, since the court has to be satisfied that it should sanction the reduction even if the application is unopposed. In many cases the question will be whether, on the evidence as a whole, the court is satisfied that it is right to give its approval. In this case the Judge came to the conclusion that the Company’s evidence had established that the cancellation was fair, and that there was not in any meaningful sense any increased risk of holders of preference shares being prejudiced by non-payment of future dividends.

The evidence before the Judge on this last point could in my judgment lead to no other conclusion. Textron’s change of plan had the effect of powerfully confirming that conclusion, since instead of the Company’s distributable reserves being depleted by £38m (after an initial increase of £17m) they were increased by the disposal of RIC for a consideration about £53m in excess of its original book value. The facts and figures appear from Mr Wilson’s latest affidavit and its exhibits, the contents of which are not challenged.

Mr David Mabb (who appeared for the Company and greatly assisted the court with his submissions) was right in describing Textron’s change of plan as essentially involving one similarity and one difference. The similarity is that RIC has, as originally planned, ceased to be an asset of the Company. The difference is that its disposal has produced a credit item of about £91m reflected in the unaudited balance sheet (from management accounts as at 30 January 1999) exhibited by Mr Wilson. Mr Mabb was also right, in my view, in suggesting that Winpar’s submissions as to the risk of future prejudice can survive only as an adjunct to its submissions on lack of ‘discernible purpose’, to which I now turn.

In his submissions on this point Mr Mabb accepted that the statements of principle by Harman J in Ratners and Thorn EMI are correct, and are regularly cited in the Companies Court as a succinct statement of the requirements which have to be satisfied. But those principles must, he submitted, be understood in the context of the more general principle that the court will not interfere more than necessary in the affairs of a company. He referred to a passage in Buckley on the Companies Acts (14th Ed, Vol 1, p. 180),

"Subject, however, to the confirmation by the court, which is required, and which is the safeguard of the minority, the question of reducing capital is a domestic one for the decision of the majority, and the Act leaves the company to determine the extent, the mode, and the incidence of the reduction and the application of any capital moneys which the reduction may set free."

Mr Mabb ingeniously suggested that the need for a discernible purpose was imposed, not for the protection of creditors or shareholders (who are protected by the first three principles) but in effect for the protection of the court, and to stop the resources of the Companies Court being devoted to pointless applications. The notion (mentioned by Harman J in Ratners at p. 688) that “the Court will not do anything in vain” is no doubt part of the basis of the fourth principle, but I am not persuaded that there is no more to it than that. Nor is it necessary to accept Mr Mabb’s submission in its entirety in order to dispose of this appeal.

Most proposals for the reduction of a company’s capital fall into recognisable categories more or less familiar to the Companies Court and those who practise in it (although the familiar categories change with economic and fiscal changes, such as the Coal Industry Nationalisation Act 1946 or the changes in the structure of corporation tax made by the Finance Act 1972). Some reductions of capital take effect at once in an entirely predictable manner. Others (such as reductions of share premium account in order to facilitate the writing-off of goodwill on future acquisitions, as in Ratners and Thorn EMI ) are looking to future possibilities and their eventual results are necessarily less predictable. But in every case the court needs to know at least the general purpose of what is proposed. Since many applications are unopposed and the Companies Court hears only from the applicant company, it would be undesirable to dilute in any way the applicant’s duty of full and frank disclosure to the court.

This is on any view an unusual case. It is not in dispute that at the hearing before the Judge on 17 December 1998 the Company and its advisers had a genuine intention to make a distribution in specie of the shares of RIC (although the apparent lack of forward planning for the production of interim accounts must have made it at least doubtful, on 17 December, whether that could be accomplished before the end of the year). Mr Wilson’s evidence as to the timing of, and reasons for, the change of plan is not challenged. It is not suggested that there has at any stage been any deliberate lack of frankness with the court (although the Judge did refer to information being “dragged out piece by piece”), still less any deliberate deception of the court. The cancellation of the share premium account has already, it seems, been of practical utility in connection with a management buy-out of a subsidiary named Mountfield-Westwood Ltd.

In brief the position as I see it is that the Judge was right to sanction the cancellation on the material before him. Subsequent events have led the Company and those who ultimately control it to alter their plans radically, but not in a way which deprives the cancellation of any utility, nor so as to increase the vestigial risk of prejudice to holders of preference shares. On the contrary, the risk (such as it is) is further diminished. In these circumstances there is no warrant for this court to impose on the Company an unusual condition, of potentially unlimited duration, which the Judge did not think necessary.

	[Home] [Databases] [World Law] [Multidatabase Search] [Help] [Feedback]
	England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Winpar Holdings Ltd v Ransomes Plc [1999] EWCA Civ 1732 (1 July 1999) URL: http://www.bailii.org/ew/cases/EWCA/Civ/1999/1732.html Cite as: [1999] EWCA Civ 1732, [2000] BCC 455, [1999] 2 BCLC 591

	£m
revaluation reserve	53
reduction of share premium account	17
distributable reserves	21 ----
total	91

England and Wales Court of Appeal (Civil Division) Decisions