Progress Property Company Ltd v Moorgarth Group Limited
Unlawful distribution of capital and Aveling Barford revisited/ clarified.
PPC and MG were undercommon ownership. PPC sold a subsidiary to MG. Subsequently PPC attacked the transaction as being at a gross undervalue and thus the transaction to the extent of the undervalue, argued PPC,represented a distribution of some kind. The element of alleged undervalue was not covered by distributable reserves so couldn't be a dividend so instead had to be a distribution of capital. As this had not been sanctioned by the court in a reduction of capital or winding up it had to be an unlawful distribution of capital and as it was unlawful the distribution was void and incapable of ratification by directors or shareholders.
The parties inplementing the transaction believed it was taking place at market value. PPC argued that what the actors genuinely believed should make no difference - the transaction should still be an unlawful distribution of capital. The Supreme Cpurt did not accept this. It would be too easy to attack genuine transactions honestly implemented by company directors by deplyment of hindsight. The objective formula was rejected. Aveling Barford was a case of a sham transaction, one dressed up as a sale but in reality a means of extracting value from the company. The court said the correct approach was a subjective one - to look at ht epurpose and intent of the parties. If done with dishonesty the undervalue element would be an unlawful distribution of capital, at least if not covered by distributable reserves; if done honestly there would be no unlawful distribution of capital.