Corporate finance update - March 2011

Deal News

Taylor&Emmet’s corporate team recently advised on a management buyout of Sheffield Electric Co (Contractors) Limited.

The legal work was led by Peter Crawford.  Corporate finance advice was provided by Chris Sellars and Matt Milnes from Hart Shaw.

Sheffield Electric Co was established in 1960 and provides high quality electrical installations to a host of local and national customers, including the Sheffield Teaching Hospitals and npower.

Derek Milner, the director of Sheffield Electric Co said: “the advice I received from Taylor & Emmet and Hart Shaw was timely, pragmatic and key to getting the deal done”.

Peter Crawford added: “Sheffield Electric Co is a very well established Sheffield business with a strong reputation.  Under Derek’s guidance, I am certain that its success will continue long into the future”.

Briefcase News

Can a guarantee be enforced if it is not in writing?

In Fairstate Limited v General Enterprise the court considered whether a guarantee could be enforceable even though it did not comply with the requirements of the Statute of Frauds 1677.

Section 4 of the Statute of Frauds 1677 essentially states that to be enforceable a guarantee must be a promise to answer for the debt default of another person, and must be in writing.

Fairstate owned a block of flats and entered into an agreement with GEML to manage those flats.  It was the intention of the parties that Sarian (who owned GEML) would guarantee GEML’s liabilities.  In this case the guarantee document was very badly drafted.  It appeared that Sarian was guaranteeing himself and the debtor was incorrectly named as Fairstate rather than GEML. 

When GEML defaulted Fairstate sued Sarian as the guarantor.  As the written ‘guarantee’ was entirely defective Sarian argued that under the Statute of Frauds 1677 the suggested guarantee could not be enforceable as it was not in writing.  Fairstate responded by asserting that the ‘guarantee’ could be rectified to correctly reflect the parties’ intention, or alternatively, that Sarian was estopped from denying he had entered into a guarantee.            

For an estoppel to take place case law suggests that Sarian would have had to tell GEML that he would honour the guarantee despite it not being in writing, have made a payment under the guarantee which affirmed the agreement, or specifically assured Fairstate he would not plead the Statute of Frauds.  The judge held that in this case there was no estoppel.   

If the guarantee could be properly rectified to form a ‘promise to answer for the debt default of another person’ then that rectified written form of guarantee can be enforced under the Statute of Frauds.  In this case the judge held that the parties’ intention was not sufficiently clear to allow a rectification and therefore the guarantee was not enforceable. 

This case demonstrates that even where a guarantee is not in writing, it could be enforceable against the proposed guarantor if:

• that guarantor’s behaviour prevents them from raising the Statute of Frauds as a defence (estoppel as set out above); or
• an existing written agreement can be rectified to form a guarantee on the basis that sufficient intention between the parties can be shown

De Facto Directors

In Holland v Revenue & Customs & Anorthe Supreme Court considered whether a director of a company which was the corporate director of another company, was a de facto director of that other company, and therefore personally liable for the actions of the other company. 

A de facto director is a person who assumes to act as a director, and undertakes functions which could only be properly carried out by a director. 

In this case the other company paid unlawful dividends to its shareholders, and the question was whether Mr Holland was personally liable for the payment of the dividends (i.e. if he had been acting as a de facto director), or whether the liability was limited to the company which was the corporate director (i.e. if he had not).

It was held that Mr Holland had not been doing anything other than discharging his duties as the director for the corporate director.  Although he was the ‘guiding mind’ behind the corporate director, if this was sufficient to make him a de facto director, then the same could be held true for every company with a sole corporate director.  As long as the acts he carried out were entirely within the scope of discharging his duties as a director of the corporate director, his acts will be taken in that capacity, and he will not be held to be a de facto director.

The court noted that legislation requires companies to have at least one director who is a natural person, but did not require that all directors be natural persons, allowing individuals to limit their personal liability by using corporate directors. 

This case makes clear that directors of corporate directors will be able to limit their liability as long as they can show that all their actions were carried out discharging their duties as a director of the corporate director. 

Intra-group transfers at an undervalue

In Progress Property Company Ltd v Moorgarth Group Ltdthe Supreme Court considered whether a sale by a company of an asset to a shareholder constituted an unlawful distribution of capital. 

Company Y was sold by Company P to Company M at a greatly reduced price.  The reduction was approximately £4 million in respect of an undertaking to carry out property repairs given by Company P.  The purchase price was reduced on the basis that Company P would then be released from this liability.  At the time all three companies were owned by the same holding company, with Company M being the ultimate shareholder.

Company P was later sold to a third party buyer who discovered there had been no formally binding undertaking.  As there was no liability to be released from, the purchase price should not have been reduced and accordingly the sale had been at a significant undervalue.

As Company M was the ultimate shareholder, the sale at an undervalue was in effect a distribution of Company P’s assets to its shareholder, which is not allowed, except in accordance with the statutory rules governing winding up or the reduction of share capital.                

In deciding whether there had been a transfer at an undervalue, the court had to decide whether it was sufficient that it was objectively true (i.e. that there was no liability to be released from) or whether there had to be subjective knowledge of the undervalue (i.e. that the defendant knew there was no actual liability to justify a reduction in the purchase price).

The court found that an entirely objective view would be oppressive and unworkable, and cast doubt on any transaction between a company and a shareholder.  The court would not simply consider an isolated factual valuation.

All the relevant facts would be investigated, including the subjective intentions of the parties, and if on conclusion the transaction was genuinely at arm’s length, then the transaction would stand even if with hindsight it was a bad bargain for the company.  However, if it was an attempt to extract value from the company under the pretence of an arm’s length transaction it would be unlawful.   

In this case it was held to be a genuine arm’s length transaction, and Company P’s appeal was dismissed.