Belmont Finance Corporation v Williams Furniture Ltd and others (No 2)

[1980] 1 All ER 393

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(Judgment by: BUCKLEY LJ)

Belmont Finance Corporation
v Williams Furniture Ltd and others (No 2)

Court:

Judges:
BUCKLEY LJGOFF LJ
WALLER LJ

Hearing date: 8, 12, 13, 14, 15, 16, 19, 20, 21, 22 MARCH, 25 MAY, 13 JULY 1979
Judgment date: 31 JULY 1979

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Judgment by:
BUCKLEY LJ

31 July 1979. The following judgments were delivered.

This is the plaintiff's appeal against a judgment of Foster J, who on 6 December 1977 dismissed this action. The action is brought by a receiver and manager appointed out of court by the holders of debentures created by the plaintiff company ('Belmont'). The receiver sues in Belmont's name under the direction of the court, but the action is being fought in the interests of depositors with Belmont, the business of which was that of deposit bankers financing mainly hire-purchase transactions. Belmont is now in compulsory liquidation. We are told that under the terms of the debentures the claims of depositors rank in priority to the claims of the debenture holders and that there are no assets to meet the claims of the depositors apart from the fruits of this action.

The action arises out of a sale of the share capital of Belmont which is claimed to have been in breach of the Companies Act 1948, s 54, which makes it illegal for a company to give financial assistance for or in connection with the purchase of its own shares.

Immediately before the transaction out of which the claim arises Belmont was a wholly-owned subsidiary of the second defendant, City Industrial Finance Ltd ('City'). City was and is a wholly owned subsidiary of the first defendant, Williams Furniture Ltd ('Williams') formerly called Easterns Ltd. Williams was then owned or controlled by a Colonel Lipert. He was anxious to sell Belmont because its business was not proving to be profitable and also partly because it did not form a particularly useful adjunct of the business of dealing in furniture in which the rest of his companies were engaged.

The third defendant, James Peter Grosscurth, and associates of his, owned or controlled, amongst other companies, two companies called Rentahome Ltd ('Rentahome') and Maximum Finance Ltd ('Maximum') engaged directly or indirectly in property development. All or substantially all the issued shares of Maximum, which consisted of 50,000 £1 ordinary shares, were beneficially owned by Mr Grosscurth, the fifth defendant Kenneth Maund and the sixth defendant John Sinclair Copeland, although some of these were registered in the name of the fourth defendant Andreas Demetri. Mr Grosscurth controlled both companies. Mr Grosscurth, with the concurrence of Mr Maund and Mr Copeland, was anxious to buy Belmont for use as a means of financing property development projects of other companies in their group. He and Colonel Lipert entered into negotiations. While these negotiations were proceeding there was a change in the control of Williams. A Mr James and a Mr Norman Williams owned the share capital of a company called W & S Williams (Kilburn) Ltd which carried on a furniture business. As a result of what has been termed a reverse takeover, Messrs James and Norman Williams early in September 1963 acquired a controlling interest in Williams (the first defendant) in exchange for their shares in W & S Williams (Kilburn) Ltd, which thus became a subsidiary of Williams. Thereafter the negotiations with Mr Grosscurth were conducted by Mr James and his representatives in the place of Colonel Lipert. They resulted in due course in an agreement dated 3 October 1963 ('the agreement') which gives rise to the present action.

Early in those negotiations in answer to an enquiry by Colonel Lipert as to how Mr Grosscurth proposed to finance the deal, Mr Grosscurth stated in a letter dated 5 June 1963 that his present intention was 'to arrange the consideration for the purchase of Belmont from Belmont's own resources ... by selling to Belmont the whole of the issued share capital of Rentahome Limited'. Later, in a letter dated 2 September 1963 to Mr James, Mr Grosscurth said that for fiscal reasons he was unable to sell shares in Rentahome and suggested as an alternative that Belmont should purchase the whole of the share capital of Maximum for £500,000.

The parties to the agreement were Mr Grosscurth, Belmont, City (then called Belmont Industrial Finance Ltd) and Williams (then called Easterns Ltd). By cl 2 Mr Grosscurth agreed to sell, or procure the sale of, the whole share capital of Maximum to Belmont for £500,000 in cash and Belmont agreed to buy it at that price. By cl 4, subject to and on completion of the foregoing sale, City agreed to sell and Mr Grosscurth agreed to buy, or procure the purchase of, all the issued share capital of Belmont for £230,000 and a further sum to be ascertained in accordance with cl 5, which turned out to be £259,000, making a total purchase price of £489,000. Both transactions were to be completed on 11 October 1963, the latter sale being completed immediately after the former. By cl 7 on completion of the latter sale City agreed to subscribe for 230,000 £1 5% cumulative redeemable preference shares of Belmont, and Mr Grosscurth agreed to subscribe for 20,000 like shares and 50,000 £1 ordinary shares of Belmont, in every case at par. By cl 9 City and Williams agreed to lend Belmont £200,000 for 12 months from completion at 9 1/4% per annum secured on the capital of maximum. By cl 13(h) Mr Grosscurth undertook and warranted to Belmont that the aggregate profits of Maximum and its subsidiaries for the period from 22 May 1962 to 31 May 1968, net of all expenses but subject to tax, should be not less than £500,000, and that in default Mr Grosscurth should pay to Belmont by way of liquidated damages a sum equal to the deficiency less income tax and profits tax at the rates in force on 31 May 1968. This undertaking or warranty was to be secured on the whole of the issued share capital of Rentahome. The preference shares of Belmont were to be redeemed in accordance with a prescribed programme and Mr Grosscurth covenanted with City that, if they were not so redeemed, he would purchase them at par within 28 days of the several redemption dates.

The outcome of the agreement when completed was (1) that, whereas previously (a) Mr Grosscurth and his associates had owned all the capital of Maximum, of which a company which I shall call Cityfield was a wholly owned subsidiary, and (b) Mr James and his associates had owned a controlling interest in Williams, of which City was a wholly owned subsidiary and Belmont a wholly owned sub-subsidiary, after completion (i) Mr Grosscurth and his associates owned all the capital of Belmont, of which Maximum was a wholly-owned subsidiary and Cityfield a wholly-owned sub-subsidiary, and (ii) City had parted with Belmont, (2) that City received £489,000, out of which it subscribed at par for 230,000 £1 5% cumulative redeemable preference shares of Belmont retaining £259,000 in cash, and Mr Grosscurth and his associates received £11,000 in cash, (3) that the paid-up capital of Belmont was increased by an amount of £300,000 consisting of 230,000 preference shares subscribed by City, 20,000 like shares subscribed by Mr Grosscurth and 50,000 ordinary shares subscribed by Mr Grosscurth, (4) that Belmont had £200,000 on loan from Williams and City for 12 months, which altogether with the proceeds of the new share capital, restored to Belmont for the time being the £500,000 cash employed in buying Maximum, (5) that Belmont had the undertaking of Mr Grosscurth that the profits of Maximum and its subsidiaries for the period 22 May 1962 to 31 May 1968, net of all expenses but subject to tax, should be not less than £500,000 (representing net profits after tax at the rates of tax then in force of £156,250), such undertaking being secured on the share capital of Rentahome, and (6) that the programme for the redemption of the preference shares was such that they would become due for redemption by prescribed instalments in each of the sixth to the twentieth years following allotment.

The sealing of the agreement by Belmont was resolved on at a board meeting of Belmont on 3 October 1963 at which three directors only of that company were present, namely Mr Norman Williams, the seventh defendant Mr Spector, and a Mr Foley. Its completion was carried out at two board meetings of Belmont, one of which was held at noon on 11 October 1963 and the other at 2.30 pm on the same day. The directors present at each of those meetings were the seventh and eighth defendants, Messrs Spector and Smith, a Mr Kellman and Mr Foley. At the earlier meeting it was resolved that Belmont should purchase the issued share capital of Maximum for £500,000. The necessary transfers were approved and sealed by Belmont and the secretary was instructed to arrange for the transfers to be stamped and presented for registration. The minute of the later meeting records:

'It was confirmed that Messrs. Gouldens [who were the solicitors advising Mr Grosscurth and his associates] had obtained Counsel's Opinion, a copy of which was produced at the meeting, stating that the transaction did not in his opinion contravene section 54 of the Companies Act 1948.'

At that meeting, which was also attended by Mr Grosscurth and his associates, all the rest of the formal steps necessary to implement the agreement were carried out. The opinion of counsel there referred to is dated 27 September 1963 and was obtained by Messrs Gouldens on behalf of their clients without any reference to Belmont or anyone on Belmont's behalf, or any suggestion by anyone on Belmont's behalf that such an opinion should be obtained. I must revert to this opinion later.

For the sake of completeness I should say that the execution of the agreement by Williams was resolved on at a board meeting of Williams on 3 October 1963 at which the directors present were Mr Norman Williams and a Mr Burke. The execution of the agreement by Ciry was resolved on at a board meeting of City on the same date at which the directors present were Mr Norman Williams, a Mr Harries and Mr Spector. At a board meeting of City at 1.30 pm on 11 October 1963, at which the directors present were Mr Harries, Mr Smith and Mr Spector, it was, according to the minute, confirmed that Messrs Gouldens had obtained counsel's opinion, a copy of which was produced at the meeting, stating that the agreement did not in counsel's opinion contravene s 54 of the 1948 Act. Share transfers of all the shares of Belmont were then approved and sealed as follows: 116,668 ordinary £1 shares in favour of Mr Grosscurth, 41,666 like shares in favour of Mr Maund, 41,666 like shares in favour of Mr Demetri, making a total of 200,000 shares.

It was further resolved that City should subscribe for 230,000 preference shares of Belmont and the secretary was authorised to draw and present a cheque in favour of Belmont for £230,000 accordingly. A letter from Messrs Binder Hamlyn & Co, chartered accountants, was produced to the meeting confirming that that firm held a memorandum of deposit of all the issued share capital of Rentahome together with the relevant certificates and blank transfers executed by the registered holders, and that the same would not be removed from Messrs Binder Hamlyn & Co until the liability of Mr Grosscurth to Belmont had been determined. The shares transferred to Mr Demetri were to be held by him as nominee for Mr Grosscurth and Mr Copeland.

At 3 and 11 October 1963 the boards of directors of City and Belmont respectively consisted of the following persons: City--James, Norman Williams, Harries, Voss, Spector and Smith; Belmont--James, Norman Williams, Spector, Smith, Kellman and Foley. Foley was also the secretary of Williams, City and Belmont. Of these gentlemen, Harries and Foley were members of what I shall refer to hereafter as Mr James's team. None of the rest, apart from Mr James himself, appears to have taken any effective part in the affair, save in so far as they appeared at the board meetings of 3 and 11 October, but no explanation of the transactions was given to them at either of those board meetings or apparently at any other time. They did what they were told to do. Mr Norman Williams, Mr Harries and Mr Foley all died before the action came to trial. Harries and Foley, who both died in 1972, had made written statements, but no use was attempted to be made of these under the Civil Evidence Act 1968 at the trial. Mr Spector was alive at the time of the trial, but his health was said to be such that he was unfit to be cross-examined. He was then legally aided and represented by counsel, who asked that Mr Spector should be permitted to give evidence by way of answers to interrogatories; but in the face of opposition by counsel for Williams and City to this proposal the judge refused to allow that course to be taken. Consequently the judge heard no evidence from Mr Spector. Mr Spector is not a respondent to this appeal. So far as he is concerned the judgment stands.

It is perhaps convenient to mention also at this point (i) that the action was discontinued against Mr Smith in 1970 on compassionate grounds and (ii) that all claims by Belmont against Mr Maund were compromised shortly before the first trial on payment of a certain sum by Mr Maund to Belmont, when the proceedings were discontinued against him. Neither of these two gentlemen has given evidence. Late in the course of this appeal the plaintiff came to terms with Mr Copeland and Mr Demetri and all proceedings against them have been stayed. Mr Grosscurth himself has gone bankrupt and was not available at the trial to give evidence, being abroad.

This action was commenced by Belmont's receiver on 30 September 1969 against Williams, City, Grosscurth, Demetri, Maund, Copeland, Spector and Smith. The fourth, fifth and sixth defendants were, as I have already indicated, associates of Mr Grosscurth. The seventh and eighth defendants were directors of Belmont until the board of that company was reconstituted at the board meeting held at 2.30 pm on 11 October 1963 after the completion of the agreement. In the statement of claim Belmont alleged that the agreement was in contravention of s 54 of the 1948 Act and that the defendants conspired to carry it into effect whereby Belmont had suffered damage. Belmont claimed as against all the defendants a declaration that the agreement was unlawful and void under s 54 and damages with ancillary relief, and as against the defendants Spector and Smith that they were guilty of misfeasance and breach of trust in procuring Belmont to enter into the agreement or alternatively in procuring Belmont to buy the share capital of Maximum at £500,000, which was to their knowledge greatly in excess of its true value, with consequential relief.

The earlier history of the action appears from the report of an earlier appeal to this court ( [1979] 1 All ER 118 , [1979] Ch 250). I shall not repeat now what is there recorded. Under the leave to amend which was then obtained, Belmont amended its statement of claim to introduce an allegation that, as all the defendants well knew, the price paid for the capital of Maximum was an inflated price, or alternatively that the defendants shut their eyes to the fact that such price was an inflated one or wilfully refrained from enquiring into the question whether such price was a proper or an inflated one. They further alleged that the price of £500,000 was arrived at by all the defendants dishonestly to facilitate the purchase of Belmont's capital in contravention of s 54. They also alleged that the banker's draft for £489,000 by which the purchase price for the capital of Belmont was satisfied, as City knew or ought to have known, was or represented moneys of Belmont misapplied by the defendants Spector and Smith in breach of trust in giving financial assistance to the purchasers of the capital of Belmont for their purchase thereof from City. They also alleged that £122,500, part of the £489,000, was the purchase price of 41,666 Belmont shares bought by Grosscurth and Copeland and that as Copeland well knew the £122,500 was or represented moneys of Belmont misapplied by the defendants Spector and Smith in breach of trust in giving financial assistance as aforesaid. Based on these new allegations Belmont by amendment to the prayer of its statement of claim raised new claims against City and Copeland as constructive trustees in respect of the sums of £489,000 and £122,500 respectively.

The first question for consideration is whether the agreement did contravene s 54 of the 1948 Act. Only if the answer to that question is affirmative does the question whether the defendants or any of them are guilty of conspiracy arise, for it is the illegality of the agreement, if it be illegal, which constitutes the common intention of the parties to enter into the agreement a conspiracy at law.

There is little judicial authority on the section. In Re V G M Holdings this court had to consider whether under the section in the form in which it stood in the Companies Act 1929, which did not contain the word 'subscription', the section covered a case where money which a company had provided had been used to assist a subscription for the company's own shares. Lord Greene MR said ([1942] Ch 235 at 240; cf [1942] 1 All ER 224 at 226):

'There could, I think, be no doubt that, if that question were answered in favour of the liquidator, the 15,98 ol was provided by the company by way of financial assistance, because whether a company provides the money by way of gift or by way of loan or by buying assets from the person who is purchasing the shares at a fraudulent overvalue, all those transactions, it seems to me, would fall within the phrase "financial assistance."'

The transaction there in question was a fraudulent one. V G M Holdings Ltd bought all the share capital of Century, which was worthless, from Vanbergen for £8,301 and Vanbergen used the money to pay a call on shares which he held in V G M. The court, however, held that the transaction did not involve a purchase of V G M shares and so was not within the section. In reliance on the reference by Lord Greene MR to a purchase at a fraudulent overvalue, it was suggested to us that the section does not apply to any case in which the company which is alleged to have given financial assistance got fair value for its money. I think that Lord Greene MR must be understood to have been speaking in the context of the facts of the case before him and not to have intended to attempt to put any limit on the scope of the section.

Our attention was also drawn to a South African case of Gradwell (Pty) Ltd v Rostra Printers Ltd. The contract in that case was a little complicated, but the facts can be summarised as follows. Company A sold to company B all the shares in company C and a debt of £40,258 due from company C to company A. The price was £32,245. The contract was conditional on company B being able to borrow £30,000 on the security of company C's assets. That sum was to be applied in discharging an existing mortgage of company C's assets and in reducing company C's debt to company A. To the extent that the debt to company A was reduced, the cash so received by company A was to be treated as paid on account of the purchase price, that is to say, the price payable by company B was to be reduced by the amount that the debt to company A, which formed part of the subject-matter of the sale, was reduced. The statutory provision there under consideration was for present purposes identical with s 54(1) of the 1948 Act.

The case eventually came before the Appellate Division of the Supreme Court of South Africa. In the following passage Rostra is company A, Crowden is company B and 'the company' is company C. Schreiner JA, who delivered what was effectively the judgment of the court, said (1959 (4) (SA) 419 at 425-426):

'We were pressed by counsel for Crowden with the importance of the purpose of the whole transaction. The purpose of Crowden and Rostra was inevitably that of the company, the actions of which were entirely controllable by Rostra. The purpose must be taken to have been to help Crowden to buy and Rostra to sell the company's shares. But this does not carry Crowden to success. Unless what was to be done would amount to giving of financial assistance within the meaning of the sub-section the purpose and the connection would not be important. Having money available the company could part with it in various ways that would enable the recipient to purchase the company's shares with the money. It could for instance buy an asset, not required for the purposes of its business, in order to provide the seller of the asset with money with which to buy the shares. It was contended on behalf of Crowden that this would be giving financial assistance. If the purchase of the asset were effected at a price known to be inflated, this would no doubt be the giving of financial assistance. It would indeed be equivalent to a gift and would clearly involve a reduction of the company's capital. It was one of the illustrations given by LORD GREENE in In re V.G.M. Holdings Ltd. [ [1942] 1 All ER 224 at 226, [1942] Ch 235 at 240]. It is, I think, significant that the MASTER OF THE ROLLS did not mention the case of the purchase of an asset at a fair price with the object of enabling the seller of the asset to buy the shares. But whatever may be the position in such a case the paying off of an existing debt seems to be decidedly more difficult to bring within the notion of giving financial assistance. The payer's assets and liabilities are put into a different form but the balance is unchanged. And the same applies to the financial position of the payee. Here the company would have no more and no less after the completion of the transaction than before. And the same would apply to Rostra. The company would owe more to its mortgagee and correspondingly less to Rostra. The price to be paid by Crowden would be less by the difference in the value of the assets to be acquired. Its financial position would be unchanged--only its investment would be smaller. Where there is an anticipation of the date when a debt becomes due and payable the position may possibly be different, but where the debt is presently due and payable and the debtor can have no answer to the ceditor's demand for payment, it would be straining the language to hold that by paying his debt the debtor gives the creditor financial assistance.'

In that passage the learned judge reserves the question of what the effect would be if company B were to purchase from company A an asset not required for the purposes of its business but at a fair price.

Foster J treated as a proposition of law, accepted by counsel for Belmont, that a company does not give financial assistance in connection with a purchase of its own shares within the meaning of s 54 by reason only of its simultaneous entry into a bona fide commercial transaction as a result of which it parts with money or money's worth, which in turn is used to finance the purchase of its own shares. He went on to find that the negotiations in the present case were at arm's length and that on the one side Mr James genuinely believed that to buy the capital of Maximum for £500,000 was a good commercial proposition for Belmont and on the other side Mr Copeland honestly believed that in October 1963 the value of the capital of Maximum with Mr Grosscurth's guarantee of Maximum's profits under cl 13(h) of the agreement secured on Rentahomes's share capital was not less than £500,000. On these findings he reached the conclusion that the agreement was a bona fide commercial transaction, on which ground he dismissed the action.

This reasoning assumes, as I understand it, that if the transaction under consideration is genuinely regarded by the parties as a sound commercial transaction negotiated at arm's length and capable of justification on purely commercial grounds, it cannot offend against s 54. This is, I think, a broader proposition than the proposition which the judge treated as having been accepted by counsel for Belmont. If A Ltd buys from B a chattel or a commodity, like a ship or merchandise, which A Ltd genuinely wants to acquire for its own purposes, and does so having no other purpose in view, the fact that B thereafter employs the proceeds of the sale in buying shares in A Ltd should not, I would suppose, be held to offend against the section; but the position may be different if A Ltd makes the purchase in order to put B in funds to buy shares in A Ltd. If A Ltd buys something from B without regard to its own commercial interests, the sole purpose of the transaction being to put B in funds to acquire shares in A Ltd, this would, in my opinion, clearly contravene the section, even if the price paid was a fair price for what is bought, and a fortiori that would be so if the sale to A Ltd was at an inflated price. The sole purpose would be to enable (ie to assist) B to pay for the shares. If A Ltd buys something from B at a fair price, which A Ltd could readily realise on a resale if it wished to do so, but the purpose, or one of the purposes, of the transaction is to put B in funds to acquire shares of A Ltd, the fact that the price was fair might not, I think, prevent the transaction from contravening the section, if it would otherwise do so, though A Ltd could very probably recover no damages in civil proceedings, for it would have suffered no damage. If the transaction is of a kind which A Ltd could in its own commercial interests legitimately enter into, and the transaction is genuinely entered into by A Ltd in its own commercial interests and not merely as a means of assisting B financially to buy shares of A Ltd, the circumstance that A Ltd enters into the transaction with B, partly with the object of putting B in funds to acquire its own shares or with the knowledge of B's intended use of the proceeds of sale, might, I think, involve no contravention of the section, but I do not wish to express a concluded opinion on that point.

The reasoning of the judge's judgment appears to me, with deference to him, to overlook the word 'only' in the suggested proposition of law.

[His Lordship then considered the judge's favourable assessment of Mr James as a witness and the failure of Mr James or any of his associates to obtain a valuation of Maximum and went on to consider an independent valuation made in July 1974 by Mr Howard Williams, a partner in Messrs Mann Judd & Co, a London firm of chartered accountants, who were instructed by Belmont's receiver as if to advise Belmont of a fair price to pay for the share capital of Maximum as at 3 October 1963. The valuation report of Messrs Mann Judd & Co valued the total issued share capital of Maximum as at 3 October 1963 at not more than the 'value of the underlying consolidated "tangible" assets of the company, that is, £60,069'. His Lordship then pointed out that Mr James had genuinely believed that the transaction was a good commercial proposition for Belmont without having any good grounds for that belief, and then continued:] After careful consideration I do not feel that we should be justified in disturbing the judge's finding that Mr James genuinely believed that the agreement was a good commercial proposition for Belmont. It was a belief which, on his view of the commercial aspects of the case, Mr James could have sincerely held.

In truth the purchase of the share capital of Maximum was not a commercial transaction in its own right so far as Mr James and his group of companies were concerned: it was part of the machinery by which City obtained £489,000 for the share capital of Belmont, £259,000 in cash and £230,000 by redemption of the redeemable preference shares subscribed in Belmont. It was not a transaction whereby Belmont acquired anything which Belmont genuinely needed or wanted for its own purposes: it was one which facilitated Mr Grosscurth's acquiring Belmont for his own purposes without effectively parting with Maximum. That the purpose of the sale of Maximum to Belmont was to enable Mr Grosscurth to pay £489,000 for Belmont was at all relevant times known to and recognised by Mr James and the members of his team as well as by Mr Copeland. There is no good reason disclosed by the evidence to suppose either that Mr Grosscurth and his associates could have sold Maximum to anyone else for £500,000 or that Belmont could have disposed of Maximum for £500,000 to anyone else at any time. The purchase of the share capital of Maximum may have been intra vires of Belmont (a matter which we have not been invited to consider), but it was certainly not a transaction in the ordinary course of Belmont's business or for the purposes of that business as it subsisted at the date of the agreement. It was an exceptional and artificial transaction and not in any sense an ordinary commercial transaction entered into for its own sake in the commercial interests of Belmont. It was part of a comparatively complex scheme for enabling Mr Grosscurth and his associates to acquire Belmont at no cash cost to themselves, the purchase price being found not from their own funds or by the realisation of any asset of theirs (for Maximum continued to be part of their group of companies) but out of Belmont's own resources. In these circumstances, in my judgment, the agreement would have contravened s 54 of the 1948 Act even if £500,000 was a fair price for Maximum. I think, however, that Mr Howard Williams's report and evidence clearly establish that £500,000 was in truth an inflated price. To the extent that it exceeded £60,000 or thereabouts it was speculative and depended on the continued availability of Mr Grosscurth to direct Maximum's affairs and his willingness to do so. The view that Belmont was buying Mr Grosscurth's services for a period of some five years or until Maximum had earned £500,000 gross profits is, in my view, untenable. As I remarked in the course of the argument, Belmont was not buying Grosscurth; Grosscurth was buying Belmont. The business of Cityfield, which was Maximum's main source of profit, was admittedly speculative and was financed by borrowing. Moreover, its profits as stated in its annual accounts were ascertained on a basis which Mr Copeland agreed was imprudent, though not improper, profits being brought into account before they were received. A considerable part of such profits had to be written off because the contracts on which they depended fell through. It is, in my judgment, manifest on the evidence, particularly that of Mr Howard Williams, that the existence of the warranty could not have added an amount anywhere near £440,000 to the saleable value of Maximum, if indeed it added anything.

It follows that in my judgment the agreement was unlawful, for it was a contract by Belmont to do an unlawful act, viz to provide financial assistance to Mr Grosscurth and his associates for the purpose of, or in connection with, the purchase of Belmont's own share capital. The next question is whether in these circumstances the alleged conspiracy is established in respect of those defendants against whom the action is still on foot, ie the first three defendants. To obtain in civil proceedings a remedy for conspiracy, the plaintiff must establish (a) a combination of the defendants, (b) to effect an unlawful purpose, resulting in damage to the plaintiff (Crofter Hand Woven Harris Tweed Co Ltd v Veitch ( [1942] 1 All ER 142 at 147, [1942] AC 435 at 440) per Lord Simon LC). The classic definition of conspiracy is that in Mulcahy v R ((1868) LR 3 HL 306 at 317):

'A conspiracy consists not merely of the intention of two or more, but in the agreement of two or more to do an unlawful act, or to do a lawful act by unlawful means.'

I have used the word 'combination' rather than the word 'agreement' used in that definition and by Lord Simon LC, because the word 'agreement' in this context does not mean an agreement in any contractual sense but a combination and common intention to do the act which is the object of the alleged conspiracy. That Lord Simon LC was so using the word is, in my opinion, clear from later passages in his speech: see also the other speeches in the Crofter Hand Woven case.

The unlawful purpose in this case was the provision of financial assistance in contravention of s 54 of the 1948 Act. That the purpose of the sale of Maximum to Belmont was to enable Mr Grosscurth to pay £489,000 to City for the share capital of Belmont was known to all concerned. For reasons which I gave in my judgment on the earlier appeal in this action ( [1979] 1 All ER 118 at 127, [1979] Ch 250 at 263), the alleged conspiracy sued on must, in my view, have preceded the signing of the agreement, but its object is made clear by the agreement, namely that Belmont should give the financial assistance to Mr Grosscurth which the carrying out of the agreement would afford him. Williams and City were parties to the agreement and so, in my opinion, are fixed with the character of parties to the conspiracy. Moreover, Mr James knew perfectly well what the objects of the agreement were. He was a director of both Williams and City. Mr Harries and Mr Foley, who also knew the objects of the agreement, were a director and the secretary respectively of City. Mr Foley was also the secretary of Williams. Their knowledge must, in my opinion, be imputed to the companies of which they were directors and secretary, for an officer of a company must surely be under a duty, if he is aware that a transaction into which his company or a wholly-owned subsidiary is about to enter is illegal or tainted with illegality, to inform the board of that company of the fact. Where an officer is under a duty to make such a disclosure to his company, his knowledge is imputed to the company (Re David Payne & Co Ltd, Re Fenwick, Stobart & Co Ltd). In these circumstances, in my opinion, Williams and City must be regarded as having participated with Mr Grosscurth in a common intention to enter into the agreement and to procure that Belmont should enter into the agreement and that the agreement should be implemented. That Mr Grosscurth was a party to that common intention is, in my opinion, indisputable.

In my judgment, the alleged conspiracy is established in respect of these three defendants, and they are not exempt from liability on account of counsel's opinion or because they may have believed in good faith that the transaction did not transgress s 54. If all the facts which make the transaction unlawful were known to the parties, as I think they were, ignorance of the law will not excuse them: see Churchill v Walton ( [1967] 1 All ER 497 at 503, [1967] 2 AC 224 at 237). That case was one of criminal conspiracy, but it seems to me that precisely similar principles must apply to a conspiracy for which a civil remedy is sought. Nor, in my opinion, can the fact that their ignorance of, or failure to appreciate, the unlawful nature of the transaction was due to the unfortunate fact that they were, as I think, erroneously advised excuse them (Cooper v Simmons, and see Shaw v Director of Public Prosecutions, where the appellant had taken professional legal advice).

If they had sincerely believed in a factual state of affairs which, if true, would have made their actions legal, this would have afforded a defence (Kamara v Director of Public Prosecutions ( [1973] 2 All ER 1242 at 1252, [1974] AC 104 at 119)); but on my view of the effect of s 54 in the present case, even if £500,000 had been a fair price for the share capital of Maximum and all other benefits under the agreement, this would not have made the agreement legal. So a belief in the fairness of the price could not excuse them.

I now come to the constructive trust point. If a stranger to a trust (a) receives and becomes chargeable with some part of the trust fund or (b) assists the trustees of a trust with knowledge of the facts in a dishonest design on the part of the trustees to misapply some part of a trust fund, he is liable as a constructive trustee (Barnes v Addy ((1874) LR 9 Ch App 244 at 251-252) per Lord Selborne LC).

A limited company is of course not a trustee of its own funds: it is their beneficial owner; but in consequence of the fiduciary character of their duties the directors of a limited company are treated as if they were trustees of those funds of the company which are in their hands or under their control, and if they misapply them they commit a breach of trust (Re Lands Allotment Co ([1894] 1 Ch 616 at 631, 638, [1891-94] All ER Rep 1032 at 1034, 1038), per Lindley and Kay LJJ). So, if the directors of a company in breach of their fiduciary duties misapply the funds of their company so that they come into the hands of some stranger to the trust who receives them with knowledge (actual or constructive) of the breach, he cannot conscientiously retain those funds against the company unless he has some better equity. He becomes a constructive trustee for the company of the misapplied funds. This is stated very clearly by Jessel MR in Russell v Wakefield Waterworks Co ((1875) LR 20 Eq 474 at 479), where he said:

'In this Court the money of the company is a trust fund, because it is applicable only to the special purposes of the company in the hands of the agents of the company, and it is in that sense a trust fund applicable by them to those special purposes; and a person taking it from them with notice that it is being applied to other purposes cannot in this Court say that he is not a constructive trustee.'

In the present case, the payment of the £500,000 by Belmont to Mr Grosscurth, being an unlawful contravention of s 54, was a misapplication of Belmont's money and was in breach of the duties of the directors of Belmont. £489,000 of the £500,000 so misapplied found their way into the hands of City with City's knowledge of the whole circumstances of the transaction. It must follow, in my opinion, that City is accountable to Belmont as a constructive trustee of the £489,000 under the first of Lord Selborne LC's two heads.

There remains the question whether City is chargeable as a constructive trustee under Lord Selborne LC's second head on the ground that Belmont's directors were guilty of dishonesty in buying the shares of Maximum and that City with knowledge of the facts assisted them in that dishonest design. As I understand Lord Selborne LC's second head, a stranger to a trust notwithstanding that he may not have received any of the trust fund which has been misapplied will be treated as accountable as a constructive trustee if he has knowingly participated in a dishonest design on the part of the trustees to misapply the fund; he must himself have been in some way a party to the dishonesty of the trustees. It follows from what I have already held that the directors of Belmont were guilty of misfeasance but not that they acted dishonestly. No attack appears to have been made at the trial on the honesty of either Mr Norman Williams or Mr Spector, who were two of the three directors of Belmont present at the board meeting of 3 October 1963, or on the honesty of Mr Smith and Mr Kellman, who with Mr Spector were three of the four directors present at the Belmont board meetings of 11 October 1963. The other director present at those three meetings was Mr Foley. The evidence establishes that the scheme was not explained to Mr Spector, Mr Smith or Mr Kellman. They did what they were told to do. In this respect they clearly failed to discharge their duties as directors, but it has not been shown that they were dishonest. The position of Mr Norman Williams was not investigated. Mr Foley, as one of Mr James's team, was presumably aware of all the relevant facts. There was, so far as I am aware, no evidence directed to establishing dishonesty on his part. Any finding of dishonesty by Mr Foley would have had to be reached by inference. The judge made no finding that any of these gentlemen acted dishonestly. His judgment clearly implies that in his view they did not. Mr James was not present at either of the board meetings. It was not suggested that it was on his personal instructions that Messrs Spector, Smith and Kellman acted as they did at the board meetings. It would seem probable that it was Mr Foley who ran the meetings. Even if the instructions should be regarded as given by Mr James and relayed through Mr Foley, the judge's finding that Mr James honestly believed that the transaction was in Belmont's interests, which as I have said I would not feel justified in disturbing, makes it impossible, in my view, to hold that there was any dishonesty about the proceedings of the Belmont board. So Lord Selborne LC's second head of liability as a constructive trustee cannot, in my judgment, apply in this case.

For these reasons, in my opinion, Belmont is entitled to judgment against the first three defendants for conspiracy and against City as a constructive trustee. I would allow this appeal accordingly. What precise form the relief flowing from this should take may require further argument.