Re Ransomes Plc  2 BCLC 591 CA
Introduction to the topic area and issue of the case
The Ransomes case is concerned with the fairness of cancellation of the share premium account during the reduction of capital process as regulated by the Companies Act 1985.
The share premium account is formed when a company 'issues shares at a premium.'1 It balances the difference between the amount that a company received for the newly issued shares and the shares' face value. The share premium account does not belong to the category of distributable reserves and therefore cannot be used for paying out dividends2 and therefore serves a 'tier of protection'3 for preference share holders. However, if the reduction of share capital occurs, the share premium account can be treated 'as a realised profit.'4
As the companies enjoy the benefits of limited liability, there is a need for counter-balance to protect the creditors' interests.5 One of the ways to do it is to regulate the reduction of capital so as to limit the freedom of a company to reduce its share capital to avoid unfair losses for creditors and shareholders. The reduction of capital occurs when a company reduces its share capital by the way of passing a special resolution and/or obtaining a relevant court order.6 This procedure could be used, for example, to eliminate a deficit on the profit and loss account or to 'sell off certain divisions of the company's business in order to concentrate on its core activities.'7 Whereas nowadays the private companies can reduce their capital by providing a statement of solvency, 8 prior to 1 October 2008 the reduction of capital in both public and private companies has required a court order.9 The Companies Act 2006 is, however, consistent with its earlier 1985 edition in that it allows the creditors to object the capital reduction.10
The core issues of the Ransomes case were whether the cancellation of a share premium account during the reduction of share capital was fair; whether it was holding risk for preference share holders' future dividends; and whether the adequacy of the procedure affects the court's decision on the capital reduction.
Facts of the case
Ransomes plc was a holding company of a multinational engineering group with a subsidiary in the US, RIC. It was agreed that Textron would take over RIC. Textron's subsidiary, Acquisition, agreed to acquire all the ordinary shares in the company, over half of its preference shares and all its convertible preference shares.
Winpar, an Australian company, was the holder of preference shares. The proposal was to distribute shares to Acquisition and to cancel the share premium account. Ransomes plc called for an extraordinary general meeting on a short notice. During the meeting, a cancellation of the share premium account and the distribution of RIC shares were approved. Winpar, however, did not receive the notice for the meeting before it commenced because it did not provide a UK address and the notice could not have reached Winpar on such short notice in Australia.
Ransomes plc then presented a petition to the Companies Court applying for a confirmation of the cancellation of the share premium account as a reduction of capital under s 137 of the Companies Act 1985. Winpar then exercised its rights under s 137 and objected to the petition on three grounds. The first was that the capital reduction proposal involved the 'return of capital to ordinary shareholders in priority to the preference shareholders.' 11 The second was that is involved a 'risk for the dividend payable to the preference shareholders.'12 Finally, the third was a complaint related to the inadequacy of the procedure.
The case was heard in a Chancery Division Court, where Justice Lloyd held that the capital reduction proposal was 'indeed fair and equitable to the shareholders as a whole'13 in that it gave 'proper account to the interests of the ordinary-shareholders in the company's distributable profits and reserves while leaving the company in possession of assets and sources of income which are more than adequate cover for the foreseeable future for the preference shareholders' rights.'14 With regards to the procedure he held that the 'in the interests of speed'15 the it was the 'bare legal minimum rather than the fuller and more leisurely procedure that one would normally expect to be followed in a reduction of capital case.'16 However, since the capital reduction proposal was 'fair to the preference shareholders'17 he sanctioned it.
Winpar appealed to the Court of Appeal against sanction of the reduction and asked the court to 'impose a condition on cancellation of the share premium account unders 137of the Companies Act requiring the company to establish a special reserve account (equal to the cancelled share premium account) from which the company could not make any distribution without permission of the court.'18
Decision of the case
Justice Robert Walker confirmed the decision of the lower court and dismissed the appeal. He ruled that the judge was 'right to sanction the cancellation'19 of the share premium account. He claimed that the application for a share capital reduction is distinguished from an 'ordinary adversarial litigation'20 in the event that there is just one party to the case, the court needs to 'be satisfied'21 in order to sanction the reduction.
It was stressed that 'in every case the court needs to know at least the general purpose of what is proposed.'22 In the present case, the judge argued, this requirement was fulfilled since there was a 'genuine intention to make a distribution in specie of the shares of RIC.'23 The decision also established that there was a duty on the part of the applicant of a 'full and frank disclosure to the court.'24
With regards to the procedure, the Court of Appeal agreed with the lower court judge that the 'procedure, although legally effective, failed to take account of the interests of the minority preference shareholders.'25 However, since 'the proposal was substantively fair'26 the sanctioning of the reduction proposal remained unopposed.
Impact of the outcome
The Ransomes decision is now often cited as a source of the requirement of the understanding by the Court of a general purpose of the share capital reduction and the duty of a full and frank disclosure on part of the applicant.27 It is also cited as confirmation that the inadequacy of the procedure can be justified 'if the reduction is otherwise fair and equitable.'28
The Ransomes ruling has been cited by the Grand Court of the Cayman Islands, which was concerned with a matter of reduction. The ruling was cited as the one that established the requirement of the Court to have a 'proper understanding of commercial rationale for the overall transaction of which the capital reduction forms part.'29
1 Companies Act 2006 s 610.
2 Companies Act 2006 s 830.
3 Re Ransomes Plc 1999 2 BCLC 591 CA.
4 The Companies (Reduction of Share Capital) Order 2008, SI 2008/1915 s 3(1)b.
5 Eilís Ferran and Look Chan Ho, Principles of Corporate Finance Law (2nd ed, OUP 2014) 155.
6 Companies Act 2006 s 626(1), (2).
7 Eilís Ferran and Look Chan Ho (n 4) 165.
8 Companies Act 2006 s 641(1)a.
9 Companies Act 1985.
10 Companies Act 2006 s 646; Companies Act 1985 s 137.
11 Re Ransomes Plc 1999 1 B.C.L.C 775.
18 Re Ransomes Plc 1999 2 BCLC 591 CA.
24 Re Ransomes Plc 1999 2 BCLC 591 CA.
27 Eilís Ferran and Look Chan Ho (n 4) 168; Palmer's Company Law vol 1 4.342.
28 Derek French, Stephen Mayson and Christopher Ryan, Company Law (30th ed, OUP 2014) 304.
29 Santiago Pipelines Company FSD 153 and FSD 154 2012 12 (Grand Court of the Cayman Islands).