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

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs People

Recruitment Genius: HR Manager

£25000 - £30000 per annum: Recruitment Genius: They are in need of a HR Manage...

h2 Recruit Ltd: Business Development Manager - HR Consultancy - £65,000 OTE

£35000 - £40000 per annum + £65,000 OTE: h2 Recruit Ltd: London, Birmingham, M...

Day In a Page

The week Hollywood got scared and had to grow up a bit

The week Hollywood got scared and had to grow up a bit

Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

Panto dames: before and after

From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
Thirties murder mystery novel is surprise runaway Christmas hit

Thirties murder mystery novel is surprise runaway Christmas hit

Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

Anne-Marie Huby: 'Charities deserve the best'

Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
The botanist who hunts for giant trees at Kew Gardens

The man who hunts giants

A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there
The 12 ways of Christmas: Spare a thought for those who will be working to keep others safe during the festive season

The 12 ways of Christmas

We speak to a dozen people who will be working to keep others safe, happy and healthy over the holidays
Birdwatching men have a lot in common with their feathered friends, new study shows

The male exhibits strange behaviour

A new study shows that birdwatching men have a lot in common with their feathered friends...
Diaries of Evelyn Waugh, Virginia Woolf and Noël Coward reveal how they coped with the December blues

Famous diaries: Christmas week in history

Noël Coward parties into the night, Alan Clark bemoans the cost of servants, Evelyn Waugh ponders his drinking…
From noble to narky, the fall of the open letter

From noble to narky, the fall of the open letter

The great tradition of St Paul and Zola reached its nadir with a hungry worker's rant to Russell Brand, says DJ Taylor
A Christmas ghost story by Alison Moore: A prodigal daughter has a breakthrough

A Christmas ghost story by Alison Moore

The story was published earlier this month in 'Poor Souls' Light: Seven Curious Tales'
Marian Keyes: The author on her pre-approved Christmas, true love's parking implications and living in the moment

Marian Keyes

The author on her pre-approved Christmas, true love's parking implications and living in the moment
Bill Granger recipes: Our chef creates an Italian-inspired fish feast for Christmas Eve

Bill Granger's Christmas Eve fish feast

Bill's Italian friends introduced him to the Roman Catholic custom of a lavish fish supper on Christmas Eve. Here, he gives the tradition his own spin…
Liverpool vs Arsenal: Brendan Rodgers is fighting for his reputation

Rodgers fights for his reputation

Liverpool manager tries to stay on his feet despite waves of criticism
Amir Khan: 'The Taliban can threaten me but I must speak out... innocent kids, killed over nothing. It’s sick in the mind'

Amir Khan attacks the Taliban

'They can threaten me but I must speak out... innocent kids, killed over nothing. It’s sick in the mind'
Michael Calvin: Sepp Blatter is my man of the year in sport. Bring on 2015, quick

Michael Calvin's Last Word

Sepp Blatter is my man of the year in sport. Bring on 2015, quick