Reduction in Capital
Cases
Permanent TSB Group Holdings Plc -v- McManus & ors
[2015] IEHC 500 Barrett J. wrote
38. Where a reduction of capital requires to be confirmed by the court, the court enjoys a discretion to approve or not to approve the reduction of capital. That this is so is clear from long-ago cases such as British American Trustee and Finance Corporation v. Couper [1894] A.C. 399 and Thomas de la Rue & Co. [1911] 2 Ch. 361. So, for example, Lord Macnaghten notes as follows, at p.411 of his speech in Couper.
“The Companies Act 1867 declares that any company limited by shares may by special resolution so far modify the conditions contained in its memorandum, if authorized so to do by its regulations as originally framed or as altered by special resolution, as to reduce its capital. The power is general. The exercise of the power is fenced round by safeguards which are calculated to protect the interests of the public. Creditors are protected by express provisions. Their consent must be procured or their claims must be satisfied. The public, the shareholders, and every class of shareholders individually and collectively, are protected by the necessary publicity of the proceedings and by the discretion which is entrusted to the Court. Until confirmed by the Court the proposed reduction is not to take effect, though all creditors have been satisfied.”
39. Likewise in the de La Rue case, Eve J. refers, at p.365 of his judgment, to the power conferred on the court to confirm a scheme for the reduction of share capital as a “discretion with which it [the court] is charged”. Obviously, both Couper and de la Rue were decided in the context of earlier legislation. Even so, there is no reason to doubt that the discretion which they recognised as arising under such legislation does not continue to subsist under the now-pertaining legislation.
ii. Proper exercise of discretion.
40. The principles that arise when it comes to exercising the discretion whether or not to sanction a reduction of share capital/share premium account are apparent in the decision of the High Court of England and Wales in Re Ratners Group plc [1988] BCLC 685, in which Harman J. notes as follows at p.687:
“The principles on which the court will sanction a reduction of share premium account, in my judgment, are similar in all respects to those on which the court will sanction the reduction of share capital. The Companies Act 1985 provides in s135(1) that share capital can be reduced ‘in any way’. Those words are extremely wide and general. There are then given three particular instances of ways, but they are expressly given without prejudice to the generality of the foregoing in any way.
The court has over the years established…three principles on which the court will require to be satisfied. Those principles are, first, that all shareholders are treated equitably in any reduction. That usually means that they are treated equally, but may mean that they are treated equally save as to some who have consented to their being treated unequally, so that counsel’s word ‘equitably’ is the correct word, which I adopt and accept. The second principle to be applied is that the shareholders at the general meeting had the proposals properly explained to them so that they could exercise an informed judgment on them. And the third principle is that creditors of the company are safeguarded so that money cannot be applied in any way which would be detrimental to creditors.
Those are, in my judgment, the relevant principles which the court has always applied and does apply in these matters and they can be seen clearly set out in the judgment of Nourse J. in Re Grosvenor Press plc [1985] BCLC 286 at 289-292….The judge was then good enough to express his agreement with my own decision in Re Jupiter House Investments (Cambridge) Ltd [1985] BCLC 222…”.
41. A useful summary of factors that the courts of England and Wales appear to consider relevant when reaching a decision as to whether to approve a reduction in share capital is identified by the editors of Palmer’s Company Law (25th ed., 2011), Vol.1, at para.4.335, which states as follows:
“Factors that the court will consider in reaching its decision whether to approve a reduction of capital include the following:
whether the shareholders have been treated equitably;
whether the reduction proposals have been properly explained;
whether creditors or third party interests have been prejudiced; and
whether the reduction has a discernible purpose.”
42. Based upon the foregoing it appears to the court that the following six factors require to be satisfied when a party comes to court, as happened here, seeking a confirmation of a proposed capital reduction:
That:
(1) in a case to which the Act of 1963 applies, the company is authorised by its articles of association to resolve to reduce its capital.
(2) the company duly resolved by special resolution to reduce its share capital.
(3) the reduction proposals were properly explained to the shareholders so that they could exercise an informed judgment;
(4) the reduction of share capital is for a discernible purpose;
(5) all shareholders are treated equitably; and
(6) the creditors of the company are safeguarded.
43. The first factor identified derives from s.72 of the Act of 1963. The second to fifth factors derive from the above-quoted synthesis of principle in Palmer’s Company Law. The sixth arises from a consideration of s.73 of the Act of 1963 and/or s.85 of the Act of 2014. The court proceeds hereafter to address each of these factors in turn, having due regard to the arguments advanced by the Notice Parties.
Cases
Mc Enaney Construction Ltd -v- Companies Acts
[2008] IEHC 43 (25 February 2008)
Judgment of Ms. Justice Finlay Geoghegan delivered the 25th day of February, 2008.
On 11th January, 2008, by order of the High Court, Mr. Michael McAteer was appointed Examiner of McEnaney Construction Limited (“the Company”) for the purpose of examining the state of the Company’s affairs and performing such duties in relation to the Company as are imposed by or under the Companies (Amendment) Act, 1990 (“the Act”).
The Examiner, as required by s. 18 of the Act, formulated proposals for a scheme of arrangement in relation to the Company, held the necessary meetings of members and creditors and made a report thereon to the Court on 5th February, 2008, recommending confirmation of the proposals.
The report of the Examiner, with the proposal for a scheme of arrangement, was set down for consideration by the Court pursuant to s. 24 of the Act on 12th February, 2008.
At the hearing before me on 12th February, no person appeared to object to the confirmation of the proposals for the scheme of arrangement and I was not precluded from confirming the proposals by reason of any of the matters specified in s. 24(4) of the Act.
However, there were two distinct reasons for which I was unwilling to confirm the proposals for the scheme of arrangement. Having raised the issues with counsel for the Examiner, in the course of the hearing, and considered his submissions thereon, I indicated that I could not confirm the proposals for the scheme of arrangement as proposed and adjourned the hearing to allow the Examiner, with his counsel and solicitor, to consider whether the difficulties could be overcome by modifications to the scheme of arrangement.
On 14th February, 2008, at the adjourned hearing, the Examiner presented modified proposals for a scheme of arrangement which addressed the issues raised by the Court and I confirmed the scheme of arrangement. The modified proposals did not alter the substance of the scheme.
As the difficulties presented by the original proposals for the scheme of arrangement are matters which have previously occurred and may re-occur, I indicated that I would set out in writing the reasons for which I considered I could not confirm the original proposals. This judgment is for that purpose.
The first issue was the proposed cancellation of all 100 issued ordinary shares in the Company at paragraph 3.1.2 of the scheme of arrangement and, in substance, repeated in paragraph 5.1. The Company was a single-member company. Mr. Sean McEnaney held all 100 ordinary shares of €1.26973 each credited as fully paid up. The scheme of arrangement was predicated on “the Investor” making available €67,500,000 to the Company, secured on the Company’s assets. The Examiner had entered into an agreement with the Investor, Paragraph 3.1.2 of the scheme of arrangement provided:
“The Company’s Issued Share Capital of 100 ordinary shares will be cancelled and 100 ordinary shares will be issued to the Investor (75 ordinary shares) and Sean McEnaney (25 ordinary shares) at the Effective Date.”
This provision was, in substance, repeated in Clause 5.1, though with the slight variation that the existing issued share capital of 100 ordinary shares “will be deemed to be cancelled”. I propose ignoring this variation as clearly it is not possible to “deem” shares to be cancelled.
The proposal, therefore, was that the Company would, as part of the scheme of arrangement, cancel its existing 100 issued ordinary shares. There was no indication, in the proposals, of the steps intended to be taken by the Company to effect the cancellation of its shares. Upon inquiry by the Court, counsel for the Examiner indicated that if the Court confirmed the proposals, he would seek an order from the Court pursuant to s. 24(8) of the Act that the existing 100 issued ordinary shares in the Company be cancelled.
Section 24(8) of the Act provides:
“Where the court confirms proposals under this section it may make such orders for the implementation of its decision as it deems fit.”
I formed the view that:
1. The Court should not confirm proposals which include a provision that the Company cancel issued paid-up shares unless the consequent reduction of capital is expressly authorised by the Companies Acts, 1963 – 2006; and
2. Section 24(8) of the Act does not give the Court jurisdiction to make an order that the issued shares in the capital of the Company be cancelled .
My reasons for so concluding are as follows. The effect of the cancellation of issued paid-up shares in the capital of a company limited by shares is to reduce the capital of the company. Section 72(1) of the Companies Act, 1963 (as amended by s. 231(1)(c) of the Companies Act, 1990) provides:
“Except in so far as this Act expressly permits, it shall not be lawful for a company limited by shares or a company limited by guarantee and having a share capital to reduce its share capital in any way.”
The Companies (Amendment) Act, 1990 contains no express provision enabling a company to whom an examiner is appointed under that Act to reduce its share capital as part of a scheme of arrangement.
The absence of such express provision is to be contrasted with certain other provisions of the Companies (Amendment) Act, 1990 which expressly permit a company to which an examiner is appointed to do matters which it would not otherwise be authorised to do. One such provision is s. 20, which enables a company repudiate a contract under certain conditions with the approval of the Court. Also, s. 24(7) (set out below) expressly provides for the taking effect of alterations in the memorandum and articles of association of a company specified in the proposals “notwithstanding any other provisions of the Companies Acts”. No analogous provision exists in relation to alterations in the share capital of a company proposed as part of a scheme of arrangement. .
Accordingly, if a company wishes as part of a scheme of arrangement, to reduce its share capital, then it must do so in accordance with s. 72(1) of the Act of 1963, pursuant to a provision of the Companies Act which expressly so permits. Section 72(2)(b) of the Act of 1963 is one such provision which might apply to a company in a financial situation which required the appointment of an examiner. This was not sought to be operated in the scheme of arrangement herein.
On the facts herein, the provision in the scheme of arrangement that the Company cancel its issued shares on the Effective Date, in effect, requires the Company to do something which appears to be unlawful having regard to s. 72(1) of the Act of 1963.
Section 24(5) of the Act provides that where the Court confirms proposals for a scheme of arrangement, such proposals are binding inter alia on all the members affected by the proposal and also on the company. If the Court were to confirm proposals containing a provision that the Company cancel its issued shares (and thereby reduce its share capital), it would be purporting to impose an obligation on the Company to do something which is unlawful having regard to s. 72(1). The Court cannot make an order which has such an effect. Even if the proposals for the scheme of arrangement were drafted in such a way that the obligation to cancel the shares was not expressly imposed on the Company, it does not appear to me that the Court has jurisdiction under s. 24(8) of the Act to make an order that issued shares credited as fully paid up in the capital of a company limited by shares be cancelled. If it did so, the Court would be assuming a jurisdiction to order that a step be taken, i.e. the shares be cancelled, which the Company itself has no power to do and is expressly prohibited by s. 72(1). Notwithstanding the apparently wide discretion given to the Court under s. 24(8), it does not appear to me to include the doing of an act which, if done by the Company, would be unlawful. Further, any such order of the Court would have to direct that some person or body cancel the shares. The obvious person to do this is the Company, which, again, comes back to the situation of the Court imposing on the Company an obligation to do something which is unlawful pursuant to s. 72(1) of the Act of 1963.
Happily, on the facts of this scheme of arrangement, the issued share capital was very small, i.e. €126.9738. The intention of the scheme of arrangement was that, subsequent to the Effective Date, the Investor would hold 75% of the issued share capital and Mr. McEnaney, 25%. It was possible to achieve this by modifying the scheme of arrangement so as to delete all references to cancellation of the existing 100 ordinary shares and to provide for the issue to the Investor of 300 ordinary shares at par, credited and fully paid up, in consideration of €380.92.
A similar issue arose in December, 2007, in the matter of Euro Iompu Teoranta (in examination) [2007] 372 COS In that instance, the examiner had proposed the cancellation of redeemable preference shares. For the same reasons as expressed herein, I reached a conclusion that I could not confirm the scheme of arrangement as originally proposed. In that instance, the examiner was able to modify the proposals so as to provide for the redemption of the issued redeemable preference shares for a total consideration of €20 out of the proceeds of a fresh issue of shares. The purpose of the cancellation in the scheme of arrangement, in that instance, was to remove the holder of the redeemable preference shares as a member of the company. The redemption provided for in the modified proposals achieved this. The redemption proposed was in accordance with Part XI of the Companies Act, 1990 and the shares could have been cancelled if required, pursuant to s. 208 of the Companies Act, 1990.
The confirmation of the scheme of arrangement by the Court does not, of itself, effect any change in the shareholding of the Company. As already stated, confirmation of the scheme of arrangement makes binding, inter alia, on the members and the company. The requisite resolutions of the company and/or the board of directors still have to be passed to issue and allot the new shares to the Investor.
The second issue which arose related to the amendment of the articles of association of the Company. Paragraph 5.1 of the scheme of arrangement, insofar as relevant, originally provided:
“The Articles of Association of the company shall be deemed, with effect from the Effective Date, to be amended to the extent necessary to allow these proposals to be implemented. Without prejudice to the generality of the foregoing, the period during which the directors are empowered to allot shares contained in article 2 of the Company’s Articles of Association shall be extended to the extent necessary to enable the shares to be allotted to the Investor.”
The intention was that the articles of association of the Company would then be amended pursuant to s. 24(7) of the Act. This provides:
“Any alterations in, additions to or deletions from the memorandum and articles of the company which are specified in the proposals shall, after confirmation of the proposals by the court and notwithstanding any other provisions of the Companies Acts, take effect from a date fixed by the court.”
It is to be noted that, if s. 24(7) is to apply, such alterations must be “specified in the proposals”. The original proposals of the Examiner did not specify the intended alterations to the articles of association. The modified proposals confirmed by the Court on 14th February, 2008, expressly specified the amendments to be made in articles 1 and 2 of the articles of association.
The requirement in s. 24(7) that the proposed amendments be specified is consistent with the need for certainty at any time as to the relevant provisions of the memorandum and articles of association of a company. If the Company had amended its articles by special resolution, the resolution would have had to be filed in the Companies Registration Office. Hence, on 14th February, I made an order pursuant to s. 24(8) of the Act that the articles of association, amended as specified in the modified proposals, be filed in the Companies Registration Office within 21 days.
I wish to add one comment in relation to the order made herein which is of practical importance. In the course of the hearing for the purpose of consideration of the report of the examiner in Euro Iompu Teoranta (in examination) [2007] 372 COS in December, 2007, counsel for the examiner therein, as part of his submissions on the question as to whether the Court could confirm proposals for a scheme of arrangement which included provision for the cancellation of shares and/or make an order pursuant to s. 24(8) of the Act that issued shares in the company be cancelled, wished to refer to earlier proposals for schemes of arrangement which, he submitted, had included similar provisions and which had been confirmed by the Court.
It then transpired that the relevant proposals for schemes of arrangement confirmed by the Court had not been retained on the Court file. This was so because such proposals were an exhibit to an affidavit sworn by the examiner and, as such, would not normally be retained on the Court file. It appears desirable that proposals for a scheme of arrangement which are confirmed by the Court should form part of the Court order as a schedule thereto and should be retained on the Court file. I so directed, in the proceedings herein, in the order of 14th February, 2008. The proposals as modified are included as a schedule to the order. This was facilitated by the solicitors for the Examiner making same directly available to the Registrar in electronic format.