Civil Actions by Shareholders against an Insolvent Issuer: Soden v British & Commonwealth Plc Available to Purchase

X acquires securities of a company, Y plc. It transpires that Y plc has induced X to acquire the securities by a misrepresentation as to the underlying asset worth of Y plc. Y plc subsequently goes into insolvent liquidation. Should X's claim against Y plc for damages arising from the misrepresentation be subordinated to the claims of Y plc's creditors? This question fell to be determined by the House of Lords in the recent English case of Soden v British & Commonwealth Plc. The facts and key issue of the case can be summarised briefly. British & Commonwealth Plc (B&C) acquired the entire issued share capital of Atlantic Computers plc (Atlantic), the holding company of a large corporate group, by means of a successful takeover offer having first built a stake in Atlantic through market purchases. The acquisition proved ruinous and both B&C and Atlantic were placed in administration under the provisions of UK insolvency legislation. B&C subsequently issued proceedings claiming damages from Atlantic (and its directors) on the footing that B&C had been induced to acquire the shares by a misrepresentation as to the value of Atlantic's assets and business. The proceedings were somewhat unusual in that they involved a parent company seeking to recover damages directly from its subsidiary which were designed to reflect the loss suffered by the parent arising from the acquisition of the subsidiary. The question for their Lordships was whether any damages ordered to be paid by Atlantic in these proceedings constituted ‘a sum due to any member of the company (in his character of a member) by way of dividends, profits or otherwise’ within the meaning of s. 74(2)(f) of the Insolvency Act 1986. If B&C was claiming in the character of a member of Atlantic then its claim, once determined, would rank for payment below the general creditors in any distribution of Atlantic's assets. The administrators of Atlantic sought to persuade the court that B&C's claim fell within s. 74(2)(f) as otherwise B&C would rank pari passu with Atlantic's creditors whose potential return would be diminished as a result.