Administration order - Powers

Re TXU Group plc: Chancery Division (Mr Justice Newey): 12 July 2011

TEG was the parent company of TXUEG and other subsidiaries. TXUEG went into administration on 19 November 2002 as did some of its subsidiaries. TXUEG and its subsidiaries entered into Company Voluntary Arrangements (CVAs) which were approved by the majority of creditors. TXUEG paid 100p in the pound in the principle amount under the CVA to its creditors and, having regard to the CVAs, there was no prospect of further payments to creditors.

TXUEG held £186m which fell to be paid to TEG. In the circumstances, concern arose amongst the supervisors and administrators of TXUEG, the applicants, that any payment to TEG might be considered illegal as breaching the common law rule on restrictions of distribution of a company's assets to a shareholder pursuant to Pt 23 of the Companies Act 2006 (the Act) and related case law.

Payments under the CVAs were calculated according to a model and that model referred to the amounts payable to TEG as 'equity payments'. Under the CVAs money fell to be paid to TEG in respect of 'shareholding' in TXUEG. The applicants sought confirmation that it was proper and lawful that the money be paid to TEG. The application was unopposed, although TEG appeared and was represented.

The main issue was whether the payment to TEG was an unlawful return of capital or distribution. The applicant submitted that making payments to TEG did not offend against the restrictions on distribution as the payments were not properly characterised as 'distributions' and, in any event, the rule was devised for the protection of creditor of which there were none in the instant case. Consideration was given to the definition of distribution in s 829 of the 2006 Act. The application would be refused.

Part 23 of the Act applied regardless of whether on the facts of a particular case creditors' interests would be prejudiced.

The common law rule devised for the protection of the creditors of a company was well established. The distribution of a company's assets to a shareholder, except in accordance with specific statutory procedures such as a winding up, was a return of capital which was unlawful and ultra vires the company.

In the instant case, the money fell to be paid to TEG in respect of its shareholding in TXUEG as described in the CVAs and the model described it as 'equity payments'. There was no reason to doubt those descriptions or to go behind them. Although the payment to TEG was not called a 'distribution', the labels that parties attached were not important.

The mere fact that a contract provided for payment did not mean that it was not a distribution. In that regard s 829 of the Act was relevant. The fact that no creditors would be prejudiced did not make the payment legal.

The proposed payment was a distribution and if paid, the applicants would fall foul of Pt 23 of the Act. The CVA and the model regarded TEG's holding as an 'equity payment. There was no basis to recategorise the payment. Aveling Barford Ltd v Perion Ltd [1989] BCLC 626 considered; Progress Property Co Ltd v Moorgarth Group Ltd [2009] All ER (D) 294 (Jun) considered.

William Trower QC and Daniel Bayfield (instructed by Herbert Smith) for the applicants. David Allison (instructed by Herbert Smith) for TEG.