LAW REPORT: Company's liability was for breach of covenant

LAW REPORT 25 August 1995

Barclays Bank plc and others v British and Commonwealth Holdings plc; Court of Appeal (Lord Justice Kennedy, Lord Justice Aldous and Sir Roger Parker) 28 July 1995

To decide whether, by virtue of section 178(2) of the Companies Act 1985, a company was excused liability to pay damages for failing to redeem its own shares, the court should ask itself whether the damages were claimed because of the failure to redeem. Where, in fact, the damages were claimed in respect of the breach of a covenant in an option agreement, the section did not preclude liability.

The Court of Appeal dismissed an appeal by the defendants, British and Common- wealth Holdings plc (B & C), against a ruling by Mr Justice Harman, sitting in the Chancery Division on 14 November 1994, in favour of the plaintiffs, Barclays Bank plc, Banque Paribas, Hongkong and Shanghai Banking Corporation Ltd, Royal Bank of Scotland plc, Standard Chartered Bank, Creditanstalt-Bankverein, and Tindalk Ltd.

The proceedings arose out of the collapse of B & C in 1990. In 1987 it had entered into a scheme, sanctioned by the court, to enable Caledonia Investments Ltd to divest itself of 90 million ordinary stock units which Caledonia held in B & C. Under the scheme, B & C would buy back some of the stock units at once and would cancel the remainder in exchange for the issue to Caledonia of new redeemable preference shares in B & C. These were to be redeemed at a preset price in four tranches on 31 December of each of the years 1988 to 1991 at the wish of either Caledonia or B & C. If B & C failed to redeem any tranche of shares, Caledonia had the right to sell them at the same price to Tindalk Ltd, a company formed for this purpose and financed by the six plaintiff banks.

B & C covenanted with the six banks that it would conduct its affairs so as to maintain certain asset rates. Any breach of covenant would give rise to a claim in damages by the banks against B & C. In 1988 and 1989 B & C duly redeemed the first two tranches of Caledonia's preference shares.

But in 1990 B & C was placed in administration and the last two tranches of preference shares were not redeemed. Caledonia therefore exercised its right to require Tindalk to purchase them. Tindalk was provided with finance to do so by the six banks. Since the shares were unlikely to be of any value, the banks were unlikely to recover their loans. They therefore sued B & C for damages for breach of covenant. B & C relied on section 178(2) of the 1985 Act: "The company is not liable in damages in respect of any failure on its part to redeem or purchase any of [its] shares."

William Stubbs QC and Sir Thomas Stockdale (Wilde Sapte) for the defendants; Robin Potts QC and Christopher Butcher (Clifford Chance) for the plaintiffs.

Lord Justice Aldous said thatto decide whether a company was excused liability to pay damages, the court should ask itself whether there had been a failure to redeem and, if so, whether the damages were claimed in respect of that failure, in the sense of being damages recoverable because of the failure to redeem. The loose connection or relationship for which B & C contended was insufficient. The damages claimed by the plaintiffs in this case were in respect of breaches of covenants in the option agreement and not in respect of the failure to redeem. Section 178(2) therefore did not exclude the claim.

B & C also relied on section 151 of the 1985 Act, under which it was unlawful for a company to give a person direct or indirect financial assistance to enable that person to acquire shares in the company. The option agreement and in particular the covenants were said by B & C to constitute "financial assistance" for the purpose of either Caledonia's or Tindalk's acquisition of the preference shares.

In his Lordship's judgment the purpose of the covenants in the option agreement was to reassure Caledonia. The fact that breach of the covenants might render B & C liable in damages did not mean that it gave financial assistance thereby. Section 151 also, therefore, did not preclude the plaintiffs' claims.

Lord Justice Kennedy and Sir Roger Parker agreed.

Paul Magrath, Barrister