As a general principle, a company may make “distributions” to shareholders out of profits available for the purpose, but not out of capital. The circumstances in which a company may properly make distributions to its shareholders are governed by two sets of rules: those in Part 23 of the Companies Act 2006, and at common law.

In a judgment handed down on 17 June 2021, following a six-day trial in the High Court, Patents Court in London, Meade J considered whether the assignment of a potentially valuable patent and its associated rights for no consideration between two companies controlled by the same individual constituted an unlawful distribution by the assignor at common law.

Richard Fowler was led by Guy Burkill QC and appeared with Charles Brabin, both of Three New Square; they were instructed by Innovate Legal on behalf of the claimant.

The claimant was the registered legal proprietor of a patent relating to electronic interface circuits for use in particular within simulation techniques in the automotive industry, while the defendants were major players in that field. The claimant claimed damages for patent infringement. It had taken an assignment of the patent and associated rights from another company, Add2 Ltd (“A2L”), for no consideration; both the claimant and A2L were controlled by the same individual, D. A2L was a trading company with a small turnover; it subsequently entered insolvent liquidation some 20 months after the assignment and for reasons unconnected with it.

A few months before trial, the defendants sought to amend their defence to assert that the assignment was in substance an unlawful distribution of A2L’s assets to a shareholder (in practice to the claimant, an entity controlled by A2L’s majority shareholder), and hence ultra vires A2L and void at common law. Shortly before permission was granted for the amendment, the liquidator of A2L executed a “confirmatory assignment”, once more assigning the patent and associated rights to the claimant.

Much of the trial was concerned with the questions of whether the patent was valid and had been infringed. Nevertheless, Meade J’s judgment is also a significant contribution to the jurisprudence on unlawful distributions by companies. The court considered in detail the leading cases of Progress Property Co Ltd v Moorgarth Group Ltd [2010] UKSC, [2011] 1 WLR 1 and Aveling Barford Ltd v Perion Ltd (1989) BCC 677.

The claimant argued that, at the time of the first assignment, it was unclear whether the patent was valid or had been infringed, and thus its value was nil, negligible or wholly speculative; the assignment should be viewed not as a distribution but as a form of simple corporate restructuring intended to separate out the patent from A2L’s trading business.

In Progress Property, Lord Walker had made it clear that the question of whether a transaction was an unlawful distribution could not be answered merely on the basis of an ex post facto valuation of the asset transferred by the company to see whether, with the benefit of hindsight, the transfer had been at an undervalue; rather, it was necessary to consider all the relevant facts. Lord Walker had identified two kinds of case: the first where, considered objectively, the impugned transaction was in substance a distribution; the second where the subjective intentions of the company’s controlling minds were relevant to its characterisation.

Meade J emphasised that he considered that D had acted honestly throughout, and that at the time of the assignment the patent was “a sort of Schrödinger’s cat”: if invalid and/or not infringed, it would be worthless; if both valid and infringed, potentially highly valuable. (D had hoped it might conceivably be worth about £20 million, though the judge stated that this was “probably a pipe dream”.) On balance, the judge concluded that assigning a valuable opportunity for no consideration was an unlawful distribution on an objective basis; but he would also have reached the same conclusion if he had considered that D’s intentions were relevant. The assignment was thus ultra vires A2L and void.

However, different considerations applied to the liquidator’s confirmatory assignment. The defendants argued that, since this was for no consideration too, it was void for the same reasons as the original assignment; the judge disagreed, holding that the confirmatory assignment was valid and effective to transfer both the patent and the right to bring the claim to the claimant.

Meade J ultimately concluded that the patent itself was invalid for obviousness. Nevertheless, the judgment addresses several issues of importance and interest to company lawyers: how the distinction drawn by Lord Walker between the objective and subjective tests for whether a transaction is a “distribution” is to be applied in practice; how the tests are to be applied where the asset transferred is a patent and a cause of action, which have a speculative and possibly nil value; and whether the common-law principles apply to transactions by liquidators on the company’s behalf (it appears they do not, perhaps unsurprisingly).

Most importantly, the case highlights a potential risk for practitioners. The assignment of the patent from A2L to the claimant was apparently a neat and efficient way to separate out a speculative and potentially risky claim for infringement from A2L’s trading business. Even so, the fact that both companies were controlled by D left the assignment open to attack as an unlawful distribution, an attack that in this case would have succeeded but for the confirmatory assignment.

The full judgment on Bailii can be found here.