CR-2024-000675 - [2025] EWHC 2069 (Ch)

In support of their primary case that, when the Respondents’ conduct is viewed as a whole, the Diversions were ultra vires, unlawful and therefore unratifiable, I was referred to the following extract from the opinion of Lord Walker in Progress Property v Moore [2011] 1 WLR 1 (SC) (a case dealing with only one transaction but analysing the authorities and principles exhaustively – emphasis added):

"1.

A limited company not in liquidation cannot lawfully return capital to its shareholders except by way of a reduction of capital approved by the court. Profits may be distributed to shareholders (normally by way of dividend) but only out of distributable profits computed in accordance with the….Companies Act 2006

Whether a transaction amounts to an unlawful distribution of capital is not simply a matter of form. As Hoffmann J said in Aveling Barford Ltd v Perion Ltd [1989] BCLC 626, 631: "Whether or not the transaction is a distribution to shareholders does not depend exclusively on what the parties choose to call it. The court looks at the substance rather than the outward appearance. Similarly, Pennycuick J observed in Ridge Securities Ltd v Inland Revenue [1964] 1 WLR 479, 495:

"A company can only lawfully deal with its assets in furtherance of its objects. The corporators may take assets out of the company by way of dividend, or, with the leave of the court, by way of reduction of capital, or in a winding up. They may, of course, acquire them for full consideration. They cannot take assets out of the company by way of voluntary distribution, however described, and, if they attempt to do so, the distribution is ultra vires the company"….

15….The rule is essentially a judge-made rule, almost as old as company law itself, derived from the fundamental principles embodied in the statutes by which Parliament has permitted companies to be incorporated with limited liability…..

16 Whether a transaction infringes the common law rule is a matter of substance, not form. The label attached to the transaction by the parties is not decisive. That is a theme running through the authorities, including Ridge and Aveling….

……

27 …. But in cases of this sort the court's real task is to inquire into the true purpose and substance of the impugned transaction. That calls for an investigation of all the relevant facts, which sometimes include the state of mind of the human beings who are orchestrating the corporate activity.

28 Sometimes their states of mind are totally irrelevant. A distribution described as a dividend but actually paid out of capital is unlawful, however technical the error and however well-meaning the directors who paid it. The same is true of a payment which is on analysis the equivalent of a dividend. Where there is a challenge to the propriety of a director's remuneration the test is objective….but probably subject in practice to what has been called a 'margin of appreciation'. If a controlling shareholder simply treats a company as his own property….his state of mind (and fellow directors) is irrelevant. It does not matter whether they were consciously in breach of duty, or just woefully ignorant of their duties. What they do is enough by itself to establish the unlawful character of the transaction.”