Plaintiffs selling shares in hotel business and adjacent property – Agreement subject to purchaser giving security of second charge on hotel and acquiring properties after transaction to be charged to plaintiff – Solicitor and accountants instructed to act for plaintiff – Agreement completed – Purchaser becoming insolvent – Assets insufficient to cover first charge – Whether defendants failing in duty to advise – Whether transfer unlawful under Companies Act 1985, section 151
The plaintiffs owned all the issued share capital of a company, HEL Ltd, which had purchased the Manor Hotel, Newlands, Guildford, in July 1986. The plaintiffs also owned the adjacent property, Tewkesbury House. In 1988 protracted negotiations took place between the plaintiffs and a potential purchaser of the company, Mr Hancock. The first defendant was engaged to deal with the legal aspects of the sale. A share sale agreement was entered into on October 21 and both the shares and the house were bought by HLM Developments Ltd, a company set up by Mr Hancock. The share sale agreement included at clause 2(iii)(e) an undertaking to procure the acquisition by HLM of properties with an equity value of £400,000 by February 29 1989 and to charge those properties in favour of the plaintiffs. The purchase was financed by two loans, one from the bank, secured by a first charge on the hotel and the house, and the second for £950,000 by the loan from the plaintiffs.
A number of transactions resulted, including charges on the shares of both HEL and HLM, which assumed the continuing prosperity of the hotel. The essential security for the second loan was the second mortgage on the property, which ranked after the bank’s charge and the personal guarantees of Mr and Mrs Hancock. The purchasers of the hotel failed to make interest payments to the bank and failed to acquire properties and charge them to the plaintiffs under clause 2(iii)(e). HLM went into administrative receivership and its assets were insufficient to cover the bank’s first charge. The plaintiffs issued proceedings against both the first defendant and their financial advisers alleging negligence and breach of contract, inter alia, in failing to advise the plaintiffs that the proposed arrangements were unlawful under the Companies Act 1985 section 151. The judge dismissed the claim (see [1996] EGCS 79) and the plaintiffs appealed contending, inter alia, that the judge should have found that it was obvious that HLM would be unable to meet its obligations within the time specified in clause 2(iii)(e), and that the obligation to repay HEL was derived from the fact that the statutory declaration signed by the new directors of HEL described the balance of purchase money, as payable “over the ensuing twelve months by inter-company transfers”. The plaintiffs’ financial advisers were not involved in the appeal.
Held The appeal was dismissed.
1. Section 155(2) of the 1985 Act was concerned with the valuation of the assets at the time of the transaction. What had to be valued was the net realisable value of the debt; time of payment was not equated to this. The terms of the statutory declaration had no bearing on the value of the asset, and the judge had been entitled to accept the evidence of the defendant’s accountants and neither he nor the accountants made any error of law.
2. The judge had been perfectly entitled to hold on the basis of the accountancy evidence which he preferred, that the transaction satisfied section 155(2) of the Act. The accountancy witnesses had given reasons why, based on the fact that the business was a going concern, the business was expected to make profits and, in a bouyant market, it was reasonable not to make any provision for the debt and certainly not to value it at less than £211,939. The plaintiffs had therefore failed to establish that it was wrong advice and the appeal failed.
Timothy Charlton QC and Michael Patchett-Joyce (instructed by Wedlake Bell) appeared for the appellants; Richard Seymour QC (instructed by Mills & Reeve, of Norwich) appeared for the first respondent; the second respondent did not appear and was not represented.
