Clash of values
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1 July 2013
The Supreme Court has passed judgment on a lengthy legal battle over a property portfolio, at the heart of which was a sensitive issue with major financial ramifications for companies and their directors. By James Batham and Damian Hyndman
In November 2010 the Supreme Court delivered its judgment in the case of Progress Property Co Ltd v Moorgarth Group Ltd. Depending on the outcome, there could have been disastrous consequences for companies, opening them up to suggestions that historic deals should be regarded as void and put back to zero.
The case also has implications for company directors. Its progress through the courts has attracted academic interest, such as the article by Dr Eva Micheler of the London School of Economics entitled ’Disguised returns of capital - an arm’s length approach’ in the Cambridge Law Journal (March 2010).
The case concerned an allegedly ’dressed-up’ distribution of a company’s property assets. The allegation was that an inter-group distribution of assets had been made at an undervalue, and that this amounted to an unlawful distribution of capital to shareholders. Applying the principle in Aveling Barford Ltd v Perion Ltd (1989), this is a question of the substance of the transaction rather than how it may have been dressed up by the parties.
The legal question before the court was: if a director believes the sale of an asset of a company to a shareholder (in this case the entire retail property portfolio) is at market value, and intends that it should be, is that sufficient to protect the transaction from challenge if the sale was in fact at an undervalue and the director knew or ought to have known this, and so was in breach of their duty of care in failing to appreciate this? Alternatively, even if the director did their best but objectively the sale was at the wrong value, is the transaction void and can it be reversed, producing a windfall for the claimant?
Values peaked in the boom and have subsequently fallen, particularly in property, so this is of relevance to company directors.
The claimant in this case was Progress Property (PPC), now called BLN Property. The company is wholly owned by well-known property professional Charles Price. Price is a partner at PIP Asset Management and was recently noted for his proposal for a seven-star hotel in Glasgow.
Price was employed by Dr Cristo Wiese, a well-known South African businessman and investor, to manage the Moorgarth property portfolio. Wiese indirectly controlled all the companies involved at the time of the sale, including PPC.
The pair parted company in 2003. Under subsequent arrangements between them, PPC sold the portfolio to Moorgarth, a company in the same group, and Price then acquired the remainder of the share capital in PPC. However, soon after the sale, Price denied knowledge of certain key aspects of the agreement. He claimed the portfolio had been grossly undervalued and that Moorgarth had, as a consequence, made millions.
A four-year legal battle was resolved at the Supreme Court in November. The court concluded that the transaction in question was in fact a genuine commercial sale. The Supreme Court focused on the characterisation of the sale and whether it was, in truth, an unlawful, dressed-up distribution of capital.
This turned largely on the state of mind of Cornus Moore, who was director of both PPC and Moorgarth at the time, and critically it had been accepted by Price that Moore genuinely believed the sale to have been at full market value. Determining what was the substance of the transaction, in accordance with the Aveling Barford principle, might - and in this case did - involve a consideration of the subjective intentions of those involved.
In the High Court the judge slammed Price’s account as, on occasion, “hard to credit” and lacking the “ring of truth”. The scale of the alleged undervaluation was remarkable, running to tens of millions of pounds, including the entire value of the retail portfolio, set against a sale price of around £60,000.
The decision is, crucially, a vote of confidence in directors and their ability to deal sensibly with assets when they proceed on the basis of what they honestly believe to be their value, even if in hindsight that is wrong or they ought to have known that it was wrong.
If Price had won it would have opened up a significant number of transactions in these fluctuating markets, and many directors could be accused of disposing of assets at the wrong value. By virtue of this judgment, if directors proceed with an honest and genuine subjective belief in the accuracy of the valuations, they are protected.
James Batham and Damian Hyndman are partners in Eversheds’ real estate litigation team