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Share buybacks and payments

14 January 2020 #Corporate #Commercial


The concept of share buybacks is a useful one.  The ability for a company to buy back its own shares is seen as a useful tool for capital re-organisations and a tax efficient way in which to remove a shareholder or class of shareholders.

Of course, whilst the Companies Act 2006 simplified the procedure as set out in the previous Companies Acts, it does impose a number of safeguards to protect the interests of creditors.  Notably, S691 of the Companies Act 2006 which states:

“ S691 Payment for purchase of own shares

(1) A limited company may not purchase its own shares unless they are fully paid.

(2) Where a limited company purchases its own shares, the shares must be paid for on purchase….”

What constitutes “paid” and what constitutes “paid for on purchase” has been the subject of a great deal of discussion and case law.

The Court of Appeal recently reaffirmed in Dickinson v NAL Realisations (Staffordshire) Ltd [2019] EWCA CIV 2146 (‘Dickinson’) that a share buyback was void on the basis that S691 was not complied with.  In this particular case, the Court held that the consideration for the transfer of shares was the Company entering into a loan agreement for the future payment of the shares.  No monies had moved in consideration of the loan and the loan agreement had been entered into after the buyback agreement had completed.  This did not constitute a “payment” under the Act and neither could it be said that the entry into a loan agreement after the buyback had completed constituted “paid for on purchase”.

In that case, the Court did analyse the meaning of “paid” and “paid for on purchase” and whilst Lord Justice Newey’s analysis were not necessarily directly related to the facts of Dickinson, they do give useful guidance on the interpretation of these provisions in S691 of the Act.

At first instance, HHJ David Cooke explained that a lack of payment made at the time of transaction results into an automatic debt and that setting it off merely represents an acknowledgement of the consequences of that debt, which does not equate to “payment” under the Act. HHJ Cooke explained that it would be “wholly artificial to regard such a loan agreement as creating one obligation to pay money to the company which was then “set off” against the company’s obligation to pay the purchase price.” 

In his judgment, HHJ Cooke did explain that  if a loan agreement was entered into on completion and “money was actually paid by the company at completion”, or the company borrowed money from a “third party and use the funds to pay for the shares” and it could be said that the loan agreement was “genuinely separate, such that the arrangement was not a sham…” then this “would satisfy the requirements of [S691(1])”.

The Court of Appeal did not disagree with the Judgment of Mr Justice Park in BDG Roof-Bond Limited v Douglas [2000] 1 BCLC 401 (‘BDG’) that payment need not in and of itself constitute the payment of money and in that specific case, the transfer of a car and real property could constitute payment.  Park J also re-affirmed the position that “…a bona fide set-off of one debt against another constitutes payment…” 

Summary

The recent Court of Appeal decision makes it clear that great care needs to be given to the structuring of share buy backs.  Failure to comply with the rules will result in the transaction being set aside which can have significant practical and tax implications and also render the board and its advisers committing a criminal offence.

Whilst the Court of Appeal did not disagree with the broader views of Park J, attempting to satisfy payment of a buy back with off setting of a loan or entering into a loan should be considered very carefully and regarded as high risk.

Wherever possible, a buy back should be structured to ensure that payment is made and a funds flow exists to identify this and that this can be said, unquestionably, to have taken place contemporaneously on completion of the buyback documentation to ensure compliance with S691.

In the event that a buyback is to be structured around the off setting of a shareholder loan, specialist  advice needs to be taken as being able to show that the loan has been off set and payment made in accordance with S691 will be vital in showing that the debt has repaid to HMRC for the Company to seek repayment of any Corporation Tax lodged with HMRC in respect of that loan.

Clarkslegal, specialist Corporate lawyers in London, Reading and throughout the Thames Valley.
For further information about this or any other Corporate matter please contact Clarkslegal's corporate team by email at contact@clarkslegal.com by telephone 020 7539 8000 (London office), 0118 958 5321 (Reading office) or by completing the form on this page.
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Stuart Mullins

Stuart Mullins
Partner

E: SMullins@clarkslegal.com
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