Eylewood Ltd & Ors v Companies Acts

Factual and Procedural Background

The Petitioner is a holding company wholly owning two subsidiaries, Company A and Company B, each operating licensed premises in The City. The Petitioner’s directors include two siblings who each hold 50% of its share capital, with their father also a director of Company B. The Petitioner petitioned for the appointment of an Examiner for both subsidiaries under the Companies (Amendment) Act 1990. The Examiner was appointed and subsequently filed reports proposing schemes of arrangement for both companies, recommending their confirmation by the Court.

The confirmation hearing was initially scheduled but postponed, ultimately commencing before Judge [Last Name] and lasting three days. Various parties, including a proposed investor, a major secured creditor, and other creditors, participated with differing stances on the proposals. During the examinership, concerns arose regarding undisclosed payments made by Company B, leading the Examiner to lose trust in the management and consider receivership as the only option.

Subsequently, the Examiner obtained Court orders transferring director powers to himself for negotiating an investment agreement with the proposed investor. The Examiner entered into the investment agreement on behalf of both companies. Meetings of creditors and members were held, and the Examiner filed reports recommending confirmation of the schemes. The Petitioner moved to remove the Examiner, but the Court directed that the confirmation hearing proceed first, incorporating affidavits filed in the removal application as evidence.

The confirmation hearing was complex due to the dual examinerships and shifting proposals, including modifications addressing directors’ removal and creditor dividend adjustments. The Court reserved certain issues for future consideration and noted the unusual procedural context of having two separate examinerships joined in one proceeding.

Legal Issues Presented

1. Whether a scheme of arrangement may include an enforceable obligation on the sole member of a company to transfer all its shares to a third party.
2. Whether section 25A(1)(d) of the Companies (Amendment) Act 1990 limits the indemnity and/or subrogation rights of existing guarantors of debts of the companies upon payment pursuant to the guarantees after confirmation of the proposals.

Arguments of the Parties

Petitioner's Arguments

• The Petitioner contended that the Act does not expressly permit compulsory transfer of shares and that their property right in shares is constitutionally protected.
• They argued that any interference with constitutional rights must be express and unambiguous.
• The Petitioner opposed the proposed investment agreement with the proposed investor and contended that other investment proposals had not been properly considered.
• They asserted that the guarantors retain full rights of indemnity and subrogation and that the schemes failed to address their contingent liabilities adequately.

Examiner and Proposed Investor's Arguments

• The Examiner and proposed investor submitted that the Act permits compulsory transfer of shares as part of a scheme of arrangement, relying notably on section 22(6)(e).
• They argued that the shares, despite having no monetary value, remain property rights subject to impairment under the Act.
• The Examiner submitted that section 25A(1)(d) limits the guarantors' indemnity and subrogation rights to the payments specified therein.
• They maintained that the investment agreement was the only viable basis for the schemes and that transferring director powers to the Examiner was necessary to finalize the investment.

Table of Precedents Cited

Court's Reasoning and Analysis

The Court began by outlining the factual and procedural background, emphasizing the complexity of handling two separate examinerships joined in one proceeding. It noted the Examiner’s loss of trust in management following undisclosed payments and the subsequent transfer of director powers to the Examiner to conclude an investment agreement.

Regarding the compulsory transfer of shares, the Court recognized that shares constitute constitutionally protected property rights. However, it found that the Companies (Amendment) Act 1990 permits impairment of such rights within a scheme of arrangement, including deprivation of shareholding as specified in section 22(6)(e). The Court applied principles of statutory interpretation requiring express and unambiguous language to infringe constitutional rights and concluded that the Act’s provisions, including binding effect of confirmed schemes on members and amendments to articles, support the inclusion of compulsory share transfer provisions. The Court distinguished this from share cancellation, which is unlawful without statutory authority.

On the issue of guarantors’ rights, the Court examined the guarantees given by directors and their status as contingent creditors. It considered established principles of surety law, including the right to indemnity and subrogation, and analyzed section 25A of the Act, which governs guarantor liabilities in examinership contexts. While the section protects creditor rights and imposes notice requirements, the Court found no express limitation in section 25A(1)(d) on guarantors’ indemnity or subrogation rights. It rejected the Examiner and investor’s submission that such limitation should be implied, emphasizing constitutional protections and the need for clear legislative language to restrict such rights.

The Court noted the practical implications of these findings, particularly regarding the investment agreement’s conditionality on waiver of guarantors’ rights. Since the guarantors’ rights cannot be so limited, the Court found no binding commitment to invest remained, undermining the schemes' viability.

Consequently, the Court refused to confirm the schemes, deeming it unnecessary to address other objections. The Court expressed regret at this outcome but underscored the directors’ obligations to cooperate with the Examiner and the strict time limits governing examinerships.

Holding and Implications

The Court’s final decision was to REFUSE TO CONFIRM the proposed schemes of arrangement for both Company A and Company B.

The direct effect is that no binding investment agreement exists to fund the schemes, and the companies will cease to be under the protection of the Court. No new precedent was established beyond the interpretation of the Act’s provisions as applied to the facts. The ruling emphasizes the necessity for clear statutory authority to limit constitutional property rights and the importance of addressing guarantors’ contingent liabilities within schemes of arrangement. It also highlights the critical role of cooperation by company directors in examinership proceedings and adherence to procedural timelines.