Residential care home — Conditional agreement to enter into lease in connection with purchase of shares — Lease in escrow — Counterpart lease prepared for execution — Whether company rendering unlawful financial assistance for acquisition of shares — Appeal dismissed
The appellant set up a residential care home business with the second and third respondents (the respondents) for the purpose of providing residential care. They purchased a suitable property, which was treated as belonging to each of them in equal shares. The business was operated through a company, 34 shares in which were held by each of the respondents and 33 by the appellant. All three were directors of the company. No formal arrangements were made for the company to pay rent, but, in practice, it paid £3,350 per month into the partnership’s bank account.
The respondents were subsequently obliged to withdraw from the business in order to avoid the permanent deregistration of the company. It was decided that the respondents would relinquish their interests as shareholders and directors in the company, and, in return the appellant would give up her interest in the property, following which the respondents would grant the company a 21-year lease of the property. The respondents demanded a rent of £5,500 per month with three-yearly upwards’ only reviews.
The heads of agreement provided that the lease was conditional upon the approval and acceptance of the council, failing which it would be null and void. In October 1991, the respondents executed the lease in escrow. In November of the same year, the appellant acquired the respondents’ shares in the company before the company had executed the counterpart lease.
The respondents subsequently sought to recover arrears of rent. However, while the action was pending, the company went into voluntary liquidation. The respondents obtained judgment against the company in the rent action and submitted a proof in the liquidation for that sum, which was accepted. They also submitted a further proof in respect of the rent that was due under the lease from the beginning of the liquidation to the date upon which the property was sold. The appellant, as a creditor and shareholder in the company, applied for an order that the first proof of debt should be expunged and the second rejected on the ground that the obligations assumed by the company and the rent payable under the lease amounted to unlawful financial assistance contrary to section 151 of the Companies Act 1985. The High Court dismissed her claim: [2004] EWHC 350 (Ch). The appellant appealed.
Held: The appeal was dismissed.
The judge had been justified in concluding that the company’s entry into the lease was “in connection with” the appellant’s acquisition of the respondents’ shares, but was not “for the purpose of” that acquisition within section 151. His conclusion that the entry into the lease was for the purpose of obtaining the premises, and not for the purpose of the share acquisition, constituted a finding of fact with which the appeal court could not interfere.
It was, in principle, wrong that an intended party to a lease should be treated as being bound before it had committed itself to the lease merely because the other party had delivered the lease in escrow and the escrow conditions were subsequently satisfied. That was all the clearer in a case such as this, where the other party had prepared a counterpart lease for execution and exchange and where penal consequences would otherwise have followed. The appellant had failed to show that any financial assistance had been given by the company before or at the same time as the acquisition of the respondents’ shares.
Robert Hantusch (instructed by Hunt & Morgan, of Cardiff) appeared for the appellant; David Chivers QC and Jeremy Bamford (instructed by Roy Thomas, Begley & Co, of Swansea) appeared for the respondents.
Eileen O’Grady, barrister
