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	Scottish Court of Session Decisions
You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Micro Leisure Ltd v County Properties & Developments Ltd & Anor [1999] ScotCS 240 (15 October 1999) URL: http://www.bailii.org/scot/cases/ScotCS/1999/240.html Cite as: [1999] ScotCS 240

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In January of this year after hearing debate I issued an Opinion expressing certain views on legal issues arising in this case. Those views included a discussion of sections 320(1) and 739 of the Companies Act 1985. I expressed the view that in certain circumstances section 320 might apply in respect of the rights acquired by the first defenders under clauses 2 and 4 of the Minute of Agreement dated 26 February 1996. However, I observed that there were in the then existing pleadings no averments apt to satisfy the statutory provisions. After sundry procedure a Minute of Amendment was lodged by the pursuers which, by paragraph 2 thereof, seeks to address that matter. I heard argument as to whether amendment should be allowed in terms of that paragraph as well as of paragraph 1 (the latter being uncontroversial).

The averments sought to be introduced may be summarised as follows. At the date of the Minute of Agreement the pursuers were the proprietors of an area of ground ("A") at East Kilbride. The first defenders were proprietors of two adjacent areas ("B" and "C"). Areas A and C had development potential. Clause 2 of the Minute of Agreement conferred on the defenders certain rights in respect of the development and marketing of land, including areas A and C. While A and C in isolation each had at that date certain values, when taken together as one large site available for development their cumulative value was significantly greater than the sum of their values as separate sites. The difference (the "marriage value") if allocated pro rata between the sites resulted in a significant enhancement in the value of site C, calculated by the pursuers at £88,532. The proposed averments continue - "The value of the development and marketing rights acquired by the first defenders under Clause 2 is therefore £88,532". The pursuers then set out averments to the effect that the threshold for calculation of "requisite value" under section 320 was, having regard to the company's asset value, £53,532. On that basis they seek to contend that the first defenders (being then a person connected with a director of the pursuers) acquired from the pursuers a non-cash asset of the requisite value for the purposes of section 320.

As appears from the above summary the pursuers, having stated the enhanced value of site C in a particular figure, continue that the value of the development and marketing rights acquired by the first defenders under clause 2 is "therefore" in the same figure. I am not to be taken as accepting that the inference there sought to be drawn is warranted. However, Mr Sellar for the first defenders, while recognising that the ultimate question would be the value of the development and marketing rights, presented his argument for refusal of amendment on the prior question, namely, whether the proposed averments in respect of the alleged enhanced value of site C were relevant.

Section 320(1) provides -

Section 320(2) provides -

Mr Sellar submitted that on a correct interpretation of section 320(2) the "value" of a non-cash asset was its "objective market value" and not its value to the director (or to the person connected with the director) who acquired it. By "objective market value" I understood him to mean its value without account being taken of any factor special to the acquirer. Section 320(1) was concerned, he observed, both with acquisition from the company and acquisition by the company. That required the value of the non-cash asset to be the same whether the company was disposing of it or acquiring it. The contrary view would make section 320 difficult in practical terms to operate. The company and its advisers would be placed in serious difficulty in identifying whether a particular non-cash asset had a special value to an acquirer from it (such as might arise from the acquirer's possession of some other asset). The market value of the asset in isolation could, however, be ascertained - although section 320 did not lay down a statutory requirement for a valuation. The reference in section 320(2) to the company's net asset value, determined by reference to accounts prepared on specific objective criteria, again pointed to the exclusion of any special value to the acquiring director (or the connected person). It would be anomalous in the extreme, he argued, if the threshold value was to be identified by objective criteria but the value of the non-cash asset itself took into account subjective matters in relation to the acquirer. The position under section 320 was usefully to be contrasted with that under sections 103 and 104, where "consideration" rather than "value" was used and where the statute required reports as to value arrived at independently (sections 108 and 109). The purpose of section 320 was to increase the control of the members of the company over specific transactions between the company and its directors (British Racing Drivers' Club v Hextall Erskine [1997] 1 BCLC 182; Re Duckwari plc (No. 2) [1998] 2 BCLC 315). The use of an objective concept of value was consistent with that purpose. The exception from section 320(1) effected by section 321(4) (a transaction on a recognised investment exchange) also pointed to an objective basis. There was no express authority on the interpretation of "its value" in section 320(2); but no text book writer had suggested that it meant value to the acquiring director. There was implicit support for the first defenders' contention in Niltan Carson Limited v Hawthorne [1988] BCLC 298, per Hodgson J. at page 321. Reference was also made to Re Duckwari plc (No. 2). It would be inappropriate to construe section 320 simply to meet unusual circumstances. The members of a company had other remedies, including remedies based on the fiduciary obligations of directors. Although the definitions of "value" given in section 340 were not applied to section 320(2), section 340(6) again pointed to an objective approach. The pursuers' proposed amendments in relation to site C were, at best, directed only to the benefit to the first defenders, as owners of that site, of the development and marketing rights conferred by clause 2. They did not address the value of those rights on an objective basis. They were accordingly fundamentally irrelevant. Amendment as proposed should be refused.

Mr Wallace for the pursuers moved that the amendment be allowed. He submitted that within the scheme of sections 320 and 322 "value" must mean value to the director (or person connected with the director) who acquired the asset; otherwise those sections were unworkable. It would be inconsistent with the scheme if the value of the non-cash asset under section 320 and the gain for which the acquirer was liable to account under section 322(3)(a) were different. Reference was also made to Re Duckwari plc (No. 2), per Nourse L.J. at page 324. Special value was applicable both to acquisitions from and to the company. Parliament had deliberately left "value" undefined for the purposes of section 320. If it had intended to restrict its scope, it could readily have done so. Sections 103 and 104 were of no real assistance in construing section 320. Nor was section 340, which provided definitions for other purposes. In any event, section 340(6) was apt to include value to a special purchaser. The pursuers' interpretation was not unworkable as had been claimed. There would be no difficulty in the company and its advisers valuing the asset having regard to its value to a director (or connected person) proposing to acquire it. A prudent prospective acquirer would, in case of doubt, obtain the sanction of the members in general meeting. The pursuers' proposed averments were relevant for inquiry.

In Re Duckwari plc (No. 2) Nourse L.J. at p.324 identified the evident purpose of sections 320 and 322 as being "to give shareholders specific protection in respect of arrangements and transactions which will or may benefit directors to the detriment of the company". He declined (in the context of the availability of remedies) "to give a narrow effect to provisions plainly intended to afford a protection and equally amenable to being given some wider effect". That general approach is, in my view, applicable to the present circumstances, notwithstanding that a different issue falls to be determined. Parliament has not defined the criteria by which "its value" in section 320(2), i.e. the value of the non-cash asset, is to be determined. That state of affairs is to be contrasted with definitions of "value" given for other statutory purposes. It is also to be contrasted with the prescribed criteria for determining whether the relevant threshold of value has been reached. The absence of definition suggests, in my view, that Parliament intended the value of the non-cash asset to be determined, having regard to the statutory purposes, in the context of the particular circumstances of the transaction or arrangement. I figured in the course of argument a situation in which a company owned a strip of land which a director of it sought to acquire, the director already being the proprietor of adjacent land. In circumstances in which it was quite evident both to the company (i.e. its board) and to the director that the land proposed to be acquired was a ransom strip, the acquisition of which would markedly enhance the development value of the director's existing property, it is difficult to see why the "value" of the strip should, for the purposes of section 320(2), be assessed without reference to that circumstance. Otherwise, not only would the director be acquiring the strip at an advantageous price but the company would be failing to take advantage of the known circumstance that its property could on sale to a particular purchaser realise a significantly higher price than its value treated in isolation. That enhanced price would in such circumstances, in my view, represent the true market value or worth of the property. Such an example is not, in my view, so fanciful or unusual that taking account of it would distort the true purpose and intent of the statutory provisions. A more difficult question might arise where the special value was not in fact known but ought to have been known to the board. It is unnecessary to address that question at this stage. The close involvement of the pursuers and the first defenders (and their material directors) in development arrangements for the areas in question is sufficient to justify inquiry in this case into their states of knowledge at the time of the transaction.

In my view the wider construction of "value" which I favour would not render compliance with section 320 unworkable for companies or their advisers, at least in the circumstances which potentially arise here. None of the authorities referred to compels or persuades me that a narrower construction is appropriate. Nor do the other statutory provisions referred to satisfy me that a wider construction is inappropriate. For those reasons I shall allow amendment as proposed. The case will then be put out By Order for discussion of further procedure.