Aveling Barford Ltd v Perion Ltd

Aveling Barford Ltd v Perion Ltd
Court High Court
Citation(s) [1989] BCLC 626
Keywords
Reduction of capital

Aveling Barford Ltd v Perion Ltd [1989] BCLC 626 is a UK company law case concerning reduction of capital. It held that a sale at an undervalue of an asset was a dress up (and unlawful) reduction of capital.

The proper procedure for reduction of capital is now found in CA 2006 sections 641-653.

Facts

Mr Lee owned and controlled both Aveling Barford Ltd and Perion Ltd. Aveling Barford had a sports ground and with it, residential planning permission, but it did not have enough money to make a distribution to its shareholders. So the property of Aveling Barford was conveyed to Perion for £350,000, when its actual resale value was £1,520,000. Aveling Barford then went into liquidation. The liquidator sued to have Perion be declared a constructive trustee of the resale proceeds price.

Judgment

Hoffmann J held that it was the director’s duty to obtain the full value of the land for Aveling Barford, so Mr Lee was in breach of fiduciary duty. He was, therefore, accountable as a constructive trustee. Whether or not the act was approved by all shareholders was irrelevant since the company cannot return its capital to shareholders without court leave, or following the special procedure. ‘This was a dressed up distribution’, it was ultra vires and incapable of validation or ratification.

“ The rule that capital may not be returned to shareholders is a rule for the protection of creditors and the evasion of the rule falls within what I think Slade LJ had in mind when he spoke of fraud on creditors. ”

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