In 1426967443gd

MANU/UKCH/0022/1981

Equivalent Citation: [1982]3All ER1057

ENGLAND AND WALES HIGH COURT (CHANCERY DIVISION)

Decided On: 02.12.1981

Appellants: Rolled Steel Products (Holdings) Ltd. Vs.

Respondent: British Steel Corp.

Hon'ble Judges: Vinelott, J.

Counsels: For Appellant/Petitioner/Plaintiff: Andrew Morritt QC and Charles Aldous, Herbert Smith and Co.

For Respondents/Defendant: Allan Heyman QC and Eben Hamilton, Lovell, White and King

JUDGMENT

Vinelott

On 22 January 1969 the Plaintiff in these consolidated actions, Rolled Steel Products (Holdings) Ltd. (RSP), executed or purportedly executed two documents. By the first document (the guarantee) it was recited that another company, Scottish Steel Sheet Ltd. (SSS), owed Colvilles Ltd. (Colvilles) the sum of £383,084 15s 4d and RSP thereby guaranteed to Colvilles the repayment by SSS of all moneys and liabilities then due or becoming due to Colvilles by SSS. By the second document (the agreement) it was recited that RSP was indebted to Colvilles in the sum of £401,448 and that RSP had guaranteed the debt of £383,084 15s 4d due from SSS to Colvilles and RSP thereby agreed that unless it had before 17 February 1969 entered into a binding contract for the sale of the freehold interest in certain land owned by it at Rainham in Essex for a sum, which after discharging any existing charges, would leave the sum of £784,532 15s 4d (the aggregate of the sums owed to Colvilles by RSP and SSS) with interest and unless all the sums due from RSP and SSS to Colvilles had been paid before 1 March 1969 it would issue to Colvilles a debenture in the form of an annexed draft. The agreement and the debenture provided for interest to be paid on the aggregate sum of £784,532 15s 4d at 1% above bank rate for the time being. The land referred to in the agreement was not sold before 17 February 1969 and on that date a debenture in the terms of the agreed draft (which had also been executed on 22 January and delivered to RSP's solicitors as an escrow) was delivered to Colvilles. Colvilles appointed a receiver under powers conferred by the debenture on 2 April 1969. By virtue of the Steel Companies (Vesting) Order 1970, (SI 1970/430), the British Steel Corp (BSC) succeeded on 29 March 1970 to all the assets and obligations of Colvilles. Between the appointment of the receiver and 31 December 1973 the receiver received in respect of property of RSP and paid to BSC in discharge of the moneys secured by the debenture (including interest) sums amounting in the aggregate to £1,005,347. In addition the receiver accounted to the Inland Revenue for the sum of £92,731.15 in respect of tax deducted from interest paid to BSC making, with the £1,005,347 paid to Colvilles, a total of £1,098,078. He retained the sum of £50,000 in respect of his fees and expenses as receiver and manager. The balance of the moneys received by the receiver in respect of property of RSP charged by the debenture (which created a fixed and floating charge over all the assets of RSP) are insufficient to meet other unsecured liabilities of RSP.

Before outlining the claims made in these consolidated actions an explanation of the origin of the debt secured by the debenture and of the relationship between RSP and SSS is necessary. At all material times a Mr. Alexander Ilytch Shenkman (Mr. Shenkman) owned the entire issued share capital of SSS. He also held 51% of the issued share capital of RSP. The remaining 49%

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of the issued share capital of RSP was held by the trustees of a settlement made by Mr. Shenkman for the benefit of his children. In April 1968 SSS owed Colvilles and certain subsidiaries of Colvilles substantial sums which it was believed exceeded £800,000 in the aggregate although the precise amount was in dispute. On 2 May 1968 Mr. Shenkman executed a guarantee whereby he guaranteed the payment to Colvilles and its subsidiaries of all moneys then due or becoming due from SSS. It was provided that payment should be made by Mr. Shenkman within 90 days after notice by Colvilles and that interest would be paid at 1% above bank rate from the expiry of any notice calling for payment of the debt or part thereof, but that the total payable by virtue of any notice or notices given before 1 August 1968 was not to exceed £400,000. By 22 January 1969 notices had been given calling on Mr. Shenkman to pay the whole of the indebtedness of SSS. On 22 January 1969 the total liability of SSS to Colvilles had been agreed to be £784,532 15s 4d. In April 1968 RSP owed SSS a substantial sum then thought to be approximately £360,000 but which was later agreed to be £401,448. The sum owed by RSP to SSS did not carry interest.

On 22 January there was a meeting of the board of directors of RSP attended by its only directors, who were Mr. Shenkman and his father, Mr. Ilya Michael Shenkman (Mr. Ilya Shenkman). Mr. Ilya Shenkman was also the secretary of RSP. The articles of association of RSP provided, by Article 17, that, if a director declared his interest in a proposed contract or arrangement in accordance with Section 199 of the Companies Act 1948, he should be counted in the quorum at any meeting of the directors at which the proposed contract or arrangement was considered and entitled to vote as a director in respect of it. The articles of association also fixed, by Article 18(a), the quorum necessary for the transaction of the business of the directors at two. The minutes of the meeting of the directors of RSP on 22 January 1969 record that it had been reported to the board that RSP had agreed with Colvilles, first, that, 'in consideration of Colvilles not demanding immediate repayment of all sums due to it from' SSS, RSP could guarantee SSS's liability to Colvilles and, second, that Colvilles had agreed to advance £401,448 to SSS. Engrossments of the guarantee, the agreement and the debenture were then put before the directors. The minutes record a resolution that the transactions reported to the board be approved and that the documents put before the board be approved and executed by RSP as to the guarantee of the agreement for delivery to Colvilles on receipt of the advance and as to the debenture to be held in escrow for delivery in the circumstances described in the agreement.

On the same day, an account was opened with Midland Bank Ltd., RSP's bankers, in the name of its solicitors, Messrs Montague Cox and Cardales, entitled 'Re Rolled Steel' and a bankers draft for £401,448 drawn on Colvilles was paid into that account. That sum was immediately transferred to an account also with Midland Bank as bankers to SSS in the name of Messrs Montague Cox and Cardales, the account being entitled 'Re Scottish Steel'. A bankers draft was drawn on that account in favour of Messrs Lovell, White and King, who were Colvilles's solicitors. The guarantee and the agreement were then delivered to them.

It was clearly for Mr. Shenkman's benefit that transactions approved at the meeting of the board should be approved. In particular the advance of £401,448 to RSP, which, under arrangements already made, could only be used to discharge the liability of RSP to SSS and in turn could only be used by SSS towards payment of the sum owed by SSS to Colvilles, would indirectly reduce Mr. Shenkman's liability under the guarantee of 2 May 1968. However, the minutes of the meeting of the board of directors of RSP do not record any declaration or disclosure by Mr. Shenkman of this guarantee.

The first claim in these consolidated actions is that no such declaration or disclosure was in fact made by Mr. Shenkman, that in consequence he was not entitled to vote on the resolutions purportedly passed at that meeting and that accordingly the meeting of the board was inquorate. On that footing no authority was given by the board for the acceptance of the advance by Colvilles or for the execution by RSP of the guarantee, the agreement and the debenture. Thus RSP claim against BSC and Mr. Vivian Rupert Vaughan Cooper, the receiver appointed under the debenture (who is the second Defendant), that RSP is now entitled at its election either to recover from BSC and the receiver all sums received by the receiver in respect of property of RSP with interest as moneys had and received to the use of RSP or to recover


damages from the receiver for trespass and conversion. In his opening counsel for RSP elected to claim on the footing of money had and received.

The second claim is that the guarantee and the debenture, if only authorised by RSP, were ultra vires and void. The ground of this claim set out in the statement of claim is that the guarantee and the debenture were not made for the purposes or for the benefit of RSP but for the purposes and for the benefit of Mr. Shenkman, SSS and Colvilles. In his opening counsel for RSP made it clear that, if the first claim failed, there could be no objection to the advance by Colvilles to RSP of the sum of £401,448 or to the use of that money to discharge the debt owed by RSP to SSS and that on that footing the debenture (and in consequence the appointment of the receiver thereunder) would be valid to the extent of that advance.

In the alternative it is said that, if the guarantee and the debenture was not ultra vires, none the less the giving of the guarantee was and was known by Colvilles and the receiver to have been an act done in bad faith and in breach of the duties of the directors of RSP (being something done to the detriment of RSP and for the purposes and benefit of Mr. Shenkman, SSS and Colvilles) and that the guarantee and (to the extent of the sum guaranteed) the debenture ought to be set aside and the sum of £383,084 15s 4d repaid to RSP with interest.

The Defendants to these claims, in addition to BSC and the receiver, are the trustee in bankruptcy of Mr. Shenkman (who was adjudicated bankrupt on 18 March 1970) and the personal representatives of Mr. Ilya Shenkman (who died in 1976). Neither the trustee in bankruptcy of Mr. Shenkman nor the personal representatives of Mr. Ilya Shenkman have taken any part in these proceedings, though the trustee in bankruptcy of Mr. Shenkman has agreed to be bound by any order which is made. An order for the compulsory winding up of SSS was made on 16 March 1970. The assets of SSS are wholly insufficient to meet its liabilities even if the potential liability to BSC is disregarded. An order for the compulsory winding up of RSP was made on 29 October 1973. Its liabilities, apart from any liability to RSC or SSS, amount to approximately £373,000. Of this sum £250,000 is owed to the Inland Revenue, which is a preferential creditor.

[His Lordship then dealt with the background and the relationship between Mr. Shenkman and Colvilles. He said that RSP had been formed in 1954 by Mr. Shenkman and its business was the importation and sale of steel in the United Kingdom. Its main customers were motor manufacturing companies, in particular the Ford Motor Co. In July 1961 RSP approached Colvilles, a company engaged in the production of steel, with a proposal that SSS, which had been formed by Mr. Shenkman for the purpose, would act as sole distributor in Southern England of coil and cut steel sheet produced by Colvilles. Mr. Shenkman planned to develop a steel service centre, which SSS would operate and Colvilles would supply with coil in standard guages. The centre would supply the customer. RSP acquired a site for the steel centre at Rainham, Essex, but its erection there was not proceeded with because it proved too costly. Instead in 1964 RSP acquired a site at Andover and began to build the new steel service centre there with moneys borrowed from SSS amounting to £401,448. The centre was to be operated by a company formed for the purpose.

Meanwhile SSS's business with Fords increased, with the result that the amount outstanding by SSS to Colvilles on credit terms also increased. By the middle of 1966 the sums owed by SSS to Colvilles had increased to about £500,000. Between 1961 and 1966 SSS incurred losses on a merchanting and stockholding business of over £200,000. The account of SSS with Colvilles fell into arrears and in October 1966 Mr. Shenkman agreed that the amount owed by SSS would be reduced to and kept below £400,000 overdue, that is as additional to any sums in respect of which SSS was entitled to credit. In July 1967 Colvilles was renationalised and its shares vested in BSC. In November 1967 it became clear that the new steel centre would not be completed until July 1968 at the earliest. Colvilles became increasingly concerned at the delay and the continuing indebtedness of SSS, which in November amounted to £820,000, £420,000 of which was overdue. Colvilles began to press SSS to reduce its indebtedness. In December 1967 Mr. Shenkman was told that the arrangements by which the sheet steel was sold through SSS would be terminated and in future Colvilles would sell to Fords direct and he must take immediate steps to reduce the indebtedness of SSS to £400,000 and to produce a programme


for the elimination of the balance after 60 days' credit had expired. Once the Ford arrangements came to an end SSS would have no income until the new steel service centre became operative. Mr. Shenkman made proposals for the repayment of the debt of SSS but they were not acceptable to Colvilles. He also promised to reduce the indebtedness to £400,000 by 10 April, but the promised reduction did not materialise. Colvilles reported the position to the legal services department of BSC. Mr. Edwards, the head of the department, decided that the best solution for Colvilles and BSC would be to persuade Mr. Shenkman to execute an immediate and binding guarantee of the whole indebtedness of SSS, which at that time was of the order of £860,000. Mr. Shenkman calculated that the realisation of the assets held by RSP and of his personal assets would raise some £810,000. On 2 May 1968 he signed the guarantee. When he executed the guarantee he mistakenly believed that Colvilles and BSC, though not prepared to enter into a legally binding commitment, had agreed that if SSS's debt could be reduced to £400,000 within the near future they would not press for the balance of £400,000 until the steel service centre was in full operation, and he was confident that he could reduce the debt to £400,000.

On 17 May 1968 Colvilles served on SSS a statutory demand for payment of the sum of £868,875 is 2d then claimed to be due from SSS, the purpose of which was to enable Colvilles to take advantage of Section 222 of the Companies Act 1948 should it be deemed necessary. Meanwhile, it became apparent to BSC that Mr. Shenkman's 51% interest in RSP, together with other assets, was insufficient to meet the debt due from SSS. It was decided to seek a compulsory winding-up order unless Mr. Shenkman would come to some arrangement for the voluntary winding up of SSS and the payment off of Colvilles's debt. A meeting was arranged for 11 September 1968 to reappraise the whole approach to the problem of the repayment of the debt owing to Colvilles. Shortly before the meeting it occurred to Mr. Hands (the assistant to Mr. Edwards in the legal services department of BSC) that the solution was to persuade Mr. Shenkman to procure RSP to guarantee the debt due from SSS and on 4 September he wrote to Mr. Shenton, a partner in Messrs Lovell White and King, BSC's solicitors, and explained that BSC had it in mind to propose to Mr. Shenkman's advisors that BSC would agree to the liquidator not pursuing his claim against RSP on terms that RSP would guarantee SSS's debt, the debt if necessary to be phased over an agreed period. The only significant asset of SSS was the debt due to it from RSP and RSP had assets sufficient to meet that debt. After consulting counsel, Mr. Arthur Figgis, Mr. Shenton pointed out that, if SSS was put into liquidation, the liquidator could not enter into an arrangement with RSP under which RSP guaranteed the debt to Colvilles unless Colvilles was prepared to ensure that all other creditors of SSS were paid in full. He put forward an alternative proposal, namely, that Colvilles should offer to defer the presentation of a petition for the winding up of SSS in consideration of a guarantee by RSP of an amount in excess of the £360,000 then thought to be owed by RSP to SSS, the excess over the amount of the debt being justified as the price of BSC's forbearance in relation to SSS, which would benefit RSP inasmuch as it would gain time in which to realise its assets without pressure from a liquidator of SSS. At the meeting of 11 September this proposal was put to Mr. Dyson of Messrs Montague Cox and Cardales, Mr. Shenkman's solicitors, and it was explained to him that the consideration for the giving of the guarantee was the forbearance of Colvilles from taking steps to place SSS in liquidation during the period of the repayment programme. Mr. Shenton again consulted Mr. Figgis, who confirmed Mr. Shenton's advice that if SSS were put into liquidation it would not be open to the liquidator to obtain a guarantee of the kind contemplated. With respect to the validity of the guarantee, Mr. Figgis advised that it would be within the powers conferred by RSP's memorandum of association to give a guarantee even for a sum larger than the debt owed by RSP to SSS on the ground that it was in RSP's interests that Colvilles should hold its hand against SSS provided that the sum guaranteed should not be so large as to make plain that RSP could not meet its obligations under the guarantee and pay its other creditors 20s in the pound. Mr. Figgis added that he did not think that the directors of RSP would be advised by their legal advisers to grant a guarantee considerably in excess of the debt due to SSS and suggested that the guarantee should be limited to £400,000, i.e. £40,000 more than the debt then thought to be owed by RSP to SSS. The reason he recommended a limit of £400,000 being placed on the guarantee was that appeared to be the limit of RSP's excess of assets over liabilities on the basis of the information he had been given as to the value of the Rainham land. He was concerned about inducing RSP to give a guarantee of such an amount as would clearly have the effect of making its liabilities exceed its assets. He added that what he was concerned with was that BSC should not be a party to inducing RSP's


directors to do that which on the figures known to BSC it would be a breach of RSP's directors duty to do.

On 9 October 1968 Mr. Edwards wrote to Mr. Dyson stating that he could only advise Colvilles to refrain from taking immediate action if the following three conditions were complied with:

(1) prompt payment was to be made on the due dates (17 October and 17 November) of the two sums of £100,000 which had been claimed from Mr. Shenkman under his guarantee;

(2) the giving by RSP before 17 November of a guarantee by RSP of the full amount owing by SSS with a limit to liability of £400,000, payments to be made at a minimum rate of £50,000 per month starting on 17 December but on the footing that claims for the same amounts would also be made against Mr. Shenkman under his guarantee and that, if he paid, RSP would not be expected to pay as well; and

(3) a nominee of Colvilles should be appointed to the board of RSP within one week after, but not before, the giving of the guarantee by the company. Various meetings took place and Mr. Dyson in the mean time sought the advice of Mr. A.J. Balcombe QC whether RSP could properly enter into the guarantee. Mr. Dyson reported to Mr. Hands the advice he had been given by Mr. Balcombe, namely that for RSP to give a guarantee of a debt in an amount in excess of the amount owed by RSP to SSS would be an act of gross misfeasance on the part of the directors of RSP and that RSP could properly give a guarantee not in excess of the amount it owed to SSS provided that RSP was given some consideration which could only be the imposition of a timetable for payment under the guarantee. Mr. Dyson also reported that Mr. Balcombe had expressed surprise at the suggestion that the appointment of a director nominated by BSC to the board of RSP should be deferred until after the guarantee had been given.

On 13 November 1968 Colvilles obtained summary judgment under RSC Order 14 against Mr. Shenkman for £100,000 which was then due on 17 October. On 21 November it gave Mr. Shenkman notice to pay the balance of approximately £485,000 due from SSS, after taking into account the three sums of £100,000 called for under the earlier demands. A further writ was issued against Mr. Shenkman for the payment of the £100,000 then due on 18 November and Colvilles also issued a bankruptcy notice against him. On 28 November Messrs Foster and Cranfield valued the Rainham land and advised that it would not be unreasonable to anticipate obtaining a price in the region of £850,000 for the freehold interest. If that sum could be obtained by sale before the end of January 1969 RSP would be in a position to pay off the debt it owed to SSS before any effective steps could be taken by a liquidator of SSS to launch a petition for the winding up of RSP and would be left with ample money to finance the completion of the steel service centre at Andover. A scheme was considered whereby Mr. Shenkman would sell his shares in SSS to RSP at par, RSP would repay its debt to SSS and guarantee the balance of the debt due from SSS to Colvilles, RSP would sell its lease of the Andover factory for full value and RSP would then be put into liquidation, and in that liquidation the assets would be so distributed that the trustees of the settlement to the scheme would get the proceeds of sale of the Andover lease and the shares of SSS, while Mr. Shenkman received the benefit of the debt of £400,000 due from SSS to RSP against which would be set off his debt of £200,000 to SSS.

The scheme could not be put into operation in the time available but the trustees decided to give their consent to the execution of the guarantee in exchange for an indemnity by Mr. Shenkman secured by a charge on his shares of RSP. On 22 January 1979 there was a board meeting of RSP at which its two directors (Mr. Shenkman and Mr. Ilya Shenkman) passed a resolution approving the execution of the guarantee and debenture. The Rainham land had not been sold when on 14 February 1969 a debenture creating a floating charge over all the assets of RSP was delivered to Colvilles under which Colvilles was entitled to give notice demanding immediate payment of the moneys thereby secured on or after 1 April and if the moneys were not paid to appoint a receiver.


A demand was made on 12 March for a payment on 1 April of the full amount secured by the debenture and on the same day a writ was issued by Colvilles against Mr. Shenkman claiming the balance of the sum due under his guarantee which was followed by an application for summary judgment under RSC Order 14 on 25 March. On 2 April Mr. Cooper the second Defendant was appointed receiver and manager of RSP. Shortly after 14 November a bankruptcy notice was served on Mr. Shenkman, who was adjudicated bankrupt on 8 March 1970. After protracted efforts the receiver sold the Rainham land in October 1972 for £1,025,000. His accounts showed receipts totalling £1,281,660 (including £122,500 for the lease of the Andover factory) out of which he paid Colvilles £858,772 capital and £239,306 interest and after other payments including his remuneration of £50,000 he accounted to the liquidator of RSP for the surplus of £47,778.

His Lordship then examined the claims made in the proceedings and dealt with the argument addressed to him on the validity of the resolution passed at the board meeting of 22 January 1969, which was challenged on the ground that Mr. Shenkman had not declared the nature of his interest in the proposed transaction in compliance with Section 199 of the 1948 Act, and accordingly, by Article 17, was not entitled to be counted in the quorum at the meeting. His Lordship having considered Imperial Mercantile Credit Association (liquidators) v. Coleman held that there was no sufficient evidence that Mr. Shenkman had made a declaration of his interest as required by Article 17, that he was accordingly not entitled to vote on the resolution put to the meeting of the directors of RSP on 22 January 1969, and that the resolution was accordingly not validly passed, there being no quorum. His Lordship also gave leave for an amendment to raise the defence that Colvilles was entitled to assume that the resolution had been passed at a properly constituted meeting of the directors of RSP at which a proper disclosure of Mr. Shenkman's interest had been made and that RSC was entitled (under the Rule in Royal British Bank v. Turquand to rely on that defence, and continued:]

Ultra vires

In para 11 of the statement of claim it is alleged that the arrangements constituted by the transactions and documents specified in paras 6 and 7 [i.e. the loan by Colvilles to RSP of £401,448 and the authorisation of the guarantee and debenture by the directors of RSP] 'were made not for the purposes or benefit of RSP but for the purposes and benefit of Mr. Shenkman and Colvilles and were not and could not have seemed to be expedient in the interests of RSP'. It is claimed that the guarantee and, to the extent of the sum guaranteed, the debenture were accordingly ultra vires. It is claimed in the alternative that the borrowing of £401,448 and the execution of the guarantee and the debenture were acts done in bad faith and in breach of Mr. Shenkman's and Mr. Ilya Shenkman's respective duties as directors and that Colvilles and that the receiver knew or ought to have known that the borrowing and the execution of the guarantee and the debenture were acts done otherwise than for the benefit of RSP and in bad faith and in breach of the directors' duties. As I have said, the claim that the borrowing of £401,448 and its subsequent application in paying off RSP's indebtedness to SSS was ultra vires or an act done in bad faith and in breach of the directors' duties was not pursued at the hearing and it is accepted that the debenture was a valid security to the extent of this sum.

In support of the first claim, counsel for RSP relied mainly on the decision of the Court of Appeal in Re Introductions Ltd., Introductions Ltd. v. National Provincial Bank Ltd. confirming the decision of Buckley J. Counsel for the Defendants relied mainly on the decision of Pennycuick J in Charterbridge Corp v. Lloyds Bank Ltd. The decision of Buckley J in Ke Introductions Ltd. had been reported when Pennycuick J decided Charterbridge. The decision of Pennycuick J in Charterbridge was given on 5 November 1968 and had not been reported when the decision of the Court of Appeal in Re Introductions Ltd. was given on 28 January 1969.

In Re Introductions Ltd. the company's principal object was the provision of entertainments services and facilities for foreign visitors. It had an express power in its memorandum of association to borrow or raise money in such manner as it should think fit and the objects clause in the memorandum of association included a common form declaration that each sub-clause of the clause setting out the objects of the company should be construed independently of and be in no way limited by reference to any other sub-clause and that the objects set out in


each sub-clause were independent objects of the company. The company's business came to an end in 1958. Thereafter there was a change of control and in 1960 the company embarked on a new business, that of pig breeding which was not a business it was authorised to carry on. The company's bank account became overdrawn in 1961 and it gave the bank debentures on its assets to secure the overdraft. The bank was fully aware that the only business of the company was that of pig breeding. Buckley J held that the debentures were ultra vires and void. He said:

"Where a company incorporated under the Companies Act, 1948, has the power to borrow, that fact must be discovered from its memorandum of association. The power may be one which has to be inferred from the objects of the company, or it may be one that is expressly conferred on the company by the terms of its memorandum. If the power to borrow is one which is inferred, it naturally follows that the borrowing is only within the power of the company in relation to those matters in respect of which the inference arises. Where the memorandum is one in which those sub-clauses of the objects clause, which confer what are truly powers rather than objects, are to be read as subsidiary to the main and real objects of the company, in such a case also the borrowing power must be read as confined to borrowing for the purposes for which the company is formed. Moreover, borrowing for any purpose other than the legitimate activities of the company will be ultra vires, and if the lender is aware of the circumstances which render the borrowing ultra vires he will be unable to recover the moneys as moneys lent."

He went on to observe that the separate objects clause was incapable of elevating what was in truth a power ancillary to the purposes which the company was authorised to pursue into an independent object which the company could carry on as its sole activity. As I have said, that decision was confirmed in the Court of Appeal. I do not propose to recite extensively from the judgments of the Court of Appeal. Harman LJ said:

"It was argued that the only obligation of the Defendant bank was to satisfy itself that there was an express power to borrow money and that this power was converted into an object by the concluding words [of the objects clause] which I have read. It was said that if this was so not only need the Defendant bank enquire no further but they were unaffected by the knowledge that they had that the activity on which the money was to be spent was one beyond the company's powers. The judge rejected this view, and I agree with him. He based his judgment I think, on the view that a power or an object conferred on a company to borrow cannot mean something in the air: borrowing is not an end in itself and must be for some purpose of the company; and as this borrowing was for an ultra vires purpose that is an end of the matter."

Russell LJ said:

"If the borrowing clause had expressly stated that it did not include borrowing for use in an undertaking ultra vires the company, it would have been plainly unarguable that the Defendant bank's security was valid, the bank being fully aware that the borrowing was only for use in the pig-breeding business and being at least deemed to be aware that such business was wholly ultra vires the company. But in every borrowing clause that which I have stated as having been expressly stated is implicit, whether or not the objects clause contains the proviso that is contained here. Putting the matter round the other way, supposing the borrowing clause had purported expressly to include borrowing for use in a business ultra vires the company, no lender could conceivably rely upon such a provision, which would have to be ignored as mere nonsense."

Charterbridge Corporation v. Lloyds Bank Ltd. concerned a legal charge granted by a company referred to in the judgment as 'Castleford'. The main object of Castleford was to acquire land for investment. It had power under its memorandum of association -

"To secure or guarantee by mortgages, charges or otherwise the performance and


discharge of any contract, obligation or liability of [Castleford] or of any other person or corporation with whom or which [Castleford] has dealings or having a business or undertaking in which [Castleford] is concerned or interested whether directly or indirectly."

The objects clause in the memorandum of association also included a common form separate objects clause.

In 1961 Castleford guaranteed the overdraft of another company referred to in the judgment as 'Pomeroy'. Castleford and Pomeroy were members of the same group, Pomeroy standing at the head of the group, in that, in conjunction with a number of other companies, they had a common shareholding, directorate and office. But Castleford was not a subsidiary of Pomeroy. In March 1962 Castleford gave a legal charge over leasehold property which it owned, subject to a mortgage in favour of another company in the group, to secure its indebtedness to its bank including any indebtedness arising under the guarantee it had given in favour of Pomeroy. The evidence of a Mr. Pomeroy, accepted by Pennycuick J, was that in causing Castleford to enter into the guarantee and the legal charge he and the officer at the bank concerned -

"looked to the group as a whole. They believed the transactions to be proper ones. They likewise did not at the time of the transactions take into consideration the interest of Castleford separately from that of the group."

The claim by the Plaintiff company which had purchased Castleford's leasehold property was that the guarantee and the charges were ultra vires. The claim was formulated under two heads. The first was that the guarantee and charge were created for purposes outside the scope of Castleford's business; the second was that the guarantee and charge were created for purposes which were not for the benefit of Castleford. As regards the first head, Pennycuick J said at:

"But where as here a company is carrying on the purposes authorised by its memorandum and a transaction is effected pursuant to an express power conferred by the memorandum, counsel for the Plaintiff company found difficulty in attaching any significant meaning to the expression "purposes outside the scope of Castleford's business" in the first head. He suggested as alternatives:

(i) not for the purpose of carrying on Castleford's business;

(ii) not reasonably connected with Castleford's business; and

(iii) not done for the benefit of and to promote prosperity of Castleford. But (i) is tautology; (ii) could not be asserted on the facts of the present case; and (iii) is a paraphrase of the second head. I think I need to say no more about the first head."

He went on to consider the second head, which was founded on the decision of Eve J in the well-known case of Re Lee, Behrens and Co. Ltd. In that case the memorandum of association of the company authorised the directors to provide for the welfare of employees and their widows and children. Pursuant to a resolution of the directors, the company entered into a deed of covenant granting a pension to the widow of a former director payable for five years after his death. In the liquidation of the company the liquidator rejected a proof of the value of the annuity first on the grounds that the grant of the annuity was ultra vires the company and, alternatively, on the ground that it could only be authorised by the company in general meeting. The widow, of course, was not an object of the power to provide for the welfare of employees and their widows.

Eve J said:

"It is not contended, nor in the face of a number of the authorities to the contrary


effect could it be, that an arrangement of this nature for rewarding long and faithful service on the part of the persons employed by the company is not within the power of an ordinary trading company such as this company was, and indeed, in the company's memorandum of association is contained (Clause 3) an express power to provide for the welfare of persons in the employment of the company or formerly in its employment, and the widows and children of such persons and others dependent upon them by granting money or pensions, providing schools, reading rooms or places of recreation, subscribing to sick or benefit clubs or societies or otherwise as the company may think fit. But whether they be made under an express or implied power, all such grants involve an expenditure of the company's money, and that money can only be spent for purposes reasonably incidental to the carrying on of the company's business, and the validity of such grants is to be tested, as is shown in all the authorities, by the answers to three pertinent questions:

(i) Is the transaction reasonably incidental to the carrying on of the company's business?

(ii) Is it a bona fide transaction?

(iii) Is it done for the benefit and to promote the prosperity of the company? Authority for each of the foregoing propositions is to be found in the following cases: Hampson v. Price's Patent Candle Co.; Hutton v. West Cork Ry. Co.; and Henderson v. Bank of Australasia:

Eve J concluded that the evidence pointed irresistibly to the conclusion that -

"the predominant, if not the only, considerations operating in the minds of the directors was a desire to provide for the Applicant, and that the question what, if any, benefit would accrue to the company never presented itself to their minds."

He accordingly upheld the liquidator's rejection of the proof. But he added:

"The alternative of getting authority from the shareholders at a meeting duly convened for the purpose was never thought of, or, if thought of, was dismissed as superfluous, inasmuch as the shares were in the hands of so few, and so far as was known nobody was likely to object."

In Charterbridge Pennycuick J, having referred to the first passage from the judgment of Eve J which I have cited, said:

"It seems to me, on the best consideration I can give to this passage, that the learned judge must have been directing his mind to both the issues raised by the liquidator, without differentiating them. In truth (i), the first of the three pertinent questions which he raises, is probably appropriate to the scope of the implied powers of a company where there is no express power. Question (ii) is appropriate in part again to the scope of implied powers, and in part, and perhaps principally, to the duty of directors. Question (iii) is, I think, quite inappropriate to the scope of express powers, and notwithstanding the words "whether they be made under an express or implied power" at the beginning of the paragraph, I doubt very much whether the judge really intended to apply this last question to express powers. None of the cases cited by him supports such an application. If he did so intend, his statement is obiter and with great diffidence I do not feel bound to follow it. Finally, I would observe that the whole passage proceeds on the footing that the transaction might have been ratified, which would not be possible if it had been ultra vires the company."

He distinguished the decision of Buckley J in Re Introductions Ltd. on the ground that the observations of Buckley J to which I have referred were -


"directed to the particular case before him, where the company was not carrying on any authorised business, and he held that the power to borrow was not a power which could subsist in isolation from the business. That case, I think, throws no light on the position where, as here, the company concerned is carrying on a business authorised by its memorandum'.

He also distinguished his own decision in Ridge Securities Ltd. v. IRC on the footing that the transaction which he held ultra vires in that case amounted to no more than a 'dressed-up gift of a large sum by certain companies to another company which had acquired their shares'. He accordingly rejected the claim under the second head and concluded that the state of mind of the directors of Castleford and of the bank's officers was irrelevant on the issue of ultra vires. He added, though it was unnecessary in view of his conclusion as to the law, that a director of Castleford taking an objective view in the exclusive interest of Castleford at the date of the guarantee could reasonably have concluded that the transaction was for the benefit of Castleford. The ground of that conclusion was that the collapse of Pomeroy which was threatened by demands from the bank would have been a disaster for Castleford since although it would have remained solvent and could have realised the value of its land it would have been deprived of the opportunity of developing and realising the land at the most favourable price in conjunction with the group.

The decisions in Re Introductions Ltd. and Charterbridge have been considered in two subsequent cases. They are, first, the decision of Oliver J in Re Halt Garage (1964) Ltd. (1978) and, second, the decision of the Court of Appeal, affirming a decision of Oliver J, in Re Horsley and Weight Ltd. (1980),

Re Halt Garage (1964) Ltd. concerned a claim made by the liquidator of a company, which was being compulsorily wound up, to recover remuneration paid to the directors of the company, a Mr. and Mrs. Charlesworth, in the accounting years (which ended on 30 May) 1967/68, 1968/69, 1969/70 and 1970/71. The application was made Under Section 333 of the Companies Act 1948. Mr. and Mrs. Charlesworth were the only shareholders of the company. The remuneration paid to them as directors for the years 1967/68 and 1968/69 had been approved by the company in general meeting and it was conceded by the liquidator that, in the light of Re Duomatic Ltd. the remuneration paid in the last two years also fell to be treated as if it had been sanctioned by the company in general meeting. In the year 1967/68 the company traded at a loss but it had a reserve on profit and loss account distributable as dividend greater than the remuneration paid in that year. In the year 1968/69 and subsequent years there was a deficit on profit and loss account even after taking into account the reserve on profit and loss account for the earlier years and, accordingly, the sums paid to the directors by way of remuneration in those years could not be treated as paid out of moneys which, if the remuneration had not been paid, could have been distributed to Mr. and Mrs. Charlesworth by way of dividend. It was conceded by counsel who appeared for the liquidator that while a company 'has divisible profits remuneration may be paid on any scale which the shareholders are prepared to sanction within the limits of available profits'. The question was whether the remuneration paid in the last three years, when there were no distributable profits, to the extent that it exceeded reasonable remuneration, could be recovered by the liquidator. The proposition contended for by the liquidator was that any disposition of a company's assets made otherwise than for full consideration was invalid unless the disposition satisfied the test set out in the judgment of Eve J in Re Lee, Behrens and Co. Ltd. and that, to the extent that the disposition was made otherwise than out of the profits available for distribution by way of dividend, the invalidity could not be cured by the sanction of the company in general meeting. I should mention that the company's articles incorporated Regulation 76 of Part 1 of Table A in Schedule 1 to the Companies Act 1948.

The judgment of Oliver J contains an exhaustive review of the decisions cited by Eve J in the Lee, Behrens and Co. case, of the cases in which the decision in the Lee, Behrens and Co. case has been followed, in particular Parke v. Daily News Ltd. Re W and M Roith Ltd. and Ridge Securities Ltd. v. IRC and of Re Introductions Ltd. and Charterbridge. He summarised his conclusions in these terms:


"I must therefore attempt, although I do so with some unease, some analysis of what I conceive to be the principles which underlie the cases. Part of the difficulty, I think, arises from the fact that Eve J in Re Lee, Behrens and Co. combined together, in the context of an inquiry as to the effective exercise of directors' powers, two different concepts which have since been regarded as a single composite test of the corporate entity's capacity. In fact, however, as it seems to me at any rate, only one of the three tests postulated in Lee, Behrens and Co. is truly applicable to that question. The court will clearly not imply a power, even if potentially beneficial to the company , if it is not reasonably incidental to the company's business (see Tomkinson v. South-Eastern Rly Co) and express powers are to be construed as if they were subject to that limitation (see Re Introductions Ltd., particularly the judgment of Russell LJ. But the test of bona fides and benefit to the company seems to me to be appropriate, and really only appropriate, to the question of the propriety of an exercise of a power rather than the capacity to exercise it. The cases really divide into two groups: those such as Hampson v. Price's Patent Candle Co., Hutton's case, Henderson v. Bank of Australasia and Parke v. Daily News Ltd., where the question was not so much that of the company's capacity to do a particular act as that of the extent to which a majority in general meeting could force a particular measure on a dissentient minority; and those such as Lee, Behrens and Co. itself, Re W and M Roith Ltd., Ridge Securities v. IRC and the Charterbridge case, where the question was as to the validity of an exercise of the powers, express or implied, by directors. Although the test of benefit to the company was applied in both groups of cases, I am not at all sure that the phrase "the benefit of the company" was being employed in quite the same sense in each. In the latter group, where what was in question was whether an exercise of powers by directors was effective, the benefit regarded seems to have been that of the company as a corporate entity (see the phrase "to promote the prosperity of the company") whereas in the former it was, I think, used in the same sense as that in which it was used in the line of cases dealing with, for instance, the power of the majority to alter the articles of association."

Then after citing from Allen v. Gold Reefs of West Africa Ltd. and Greenhalgh v. Arderne Cinemas Ltd., he continued:

"In my judgment the true rationale of this group of cases is not that what was proposed was ultra vires in the sense that it could not be confirmed by a general meeting where there was no dissentient minority, but that they were concerned with a very different question, namely the circumstances in which the court will interfere to prevent a majority from overriding the rights of a dissentient minority to have the company's property administered in accordance with its constitution. I think that, in truth, neither group properly falls to be regarded as exemplifying applications of the ultra vires doctrine. Both, as it seems to me, more properly belong to the sphere of abuse of power, and part of the confusion has, I think, arisen from the fact that in Hutton's case, which contains the classical judgment of Bowen LJ always cited in this context, the determination of the question of the majority's power to bind the minority did, because the affairs of the company were being conducted under, and only under, the provisions of a special Act conferring very limited powers, necessarily also involve a consideration of the extent of those powers, which was, indeed, a true ultra vires question."

Later, having pointed out that there is no Rule that directors' remuneration is payable only out of divisible profits, he stated his conclusion as to the application of the principles he had explained to the payment of remuneration in the following terms:

"I do not think that in circumstances such as those in the instant case the authorities compel the application to the express power of a test of benefit to the company which, certainly construed as Plowman J held that it should be construed, would be largely meaningless. The real test must, I think, be whether the transaction in question was a genuine exercise of the power. The motive is more


important than the label. Those who deal with a limited company do so on the basis that its affairs will be conducted in accordance with its constitution, one of the express incidents of which is that the directors may be paid remuneration. Subject to that, they are entitled to have the capital kept intact. They have to accept the shareholders' assessment of the scale of that remuneration, but they are entitled to assume that, whether liberal or illiberal, what is paid is genuinely remuneration and that the power is not used as a cloak for making payments out of capital to the shareholders as such. It may well be that one way of ascertaining the true nature of the payment made in purported exercise of such an express power is by subjecting it to the three tests postulated in the Lee, Behrens and Co. case, but it cannot, I think, be conclusive that the court, looking at the matter with hindsight, concludes that a particular application was not beneficial to the company as a corporate entity or that the shareholders in considering it did not have that in mind. If benefit in that sense were the conclusive test, it is difficult to see how the directors in Hutton v. West Cork Rly Co. could have been paid for their past services in connection with the winding up. Such a payment, as I have pointed out, could not have been of any possible benefit to the company which was in the course of winding up. Yet both Cotton and Bowen LJJ clearly contemplated that this could quite properly be paid."

This last sentence is a reference to the last paragraph of the judgment of Bowen LJ in the Hutton case as to which Oliver J had earlier observed that it showed that Bowen LJ -

"clearly contemplated that there was nothing necessarily improper or wrong with paying reasonable remuneration, albeit it could not be said to be for the benefit of the company, since the business at that time was defunct and the services which the directors had rendered were past."

Turning to the facts of that case Oliver J held that the payments to Mr. Charlesworth were not so blatantly excessive or unreasonable as to compel the conclusion that the payments were not really remuneration but gratuitous distributions to a shareholder out of capital dressed up as remuneration. As regards the payments to Mrs. Charlesworth (who in the last three years was so seriously ill that 'she was able to contribute nothing to the company's prosperity beyond, perhaps, the occasional discussion with her husband and the formal signature of documents') he held that payments in excess of a modest weekly sum could not be regarded 'as being anything more than disguised gifts out of capital'. He therefore held that the liquidator succeeded to that extent.

In Re Horsley and Weight Ltd. the liquidator of a company which was in compulsory liquidation claimed Under Section 333 that the Respondent held a retirement pension policy, which had been effected by the company with Hambro Life Assurance Ltd., on trust for the company. The Respondent had been a director of the company although at the material time a director in name only, his position being substantially that of an employee. At the material time there were four other directors, a Mr. Campbell-Dick, a Mr. Frank Horsley, and their respective wives; Mr. Campbell-Dick and Mr. Frank Horsley were the only shareholders. Shortly before the Respondent attained 65 he was introduced to a representative of the insurance company. Mr. Campbell-Dick told the Respondent that, having regard to his intending retirement and his long service, the directors had decided to purchase a retirement pension policy for him. The representative of the insurance company produced a form which the Respondent and Mr. Campbell-Dick signed. The company gave the representative of the insurance company a cheque for £10,000, being a single premium of £9,000 and a single annual premium of £1,000. The objects of the company set out in its memorandum of association included a paragraph in the following terms:

"(c) To grant pensions to employees and ex-employees and directors and ex-directors or other officers or ex-officers of the company, their widows, children and dependants, and to subscribe to benevolent and other funds for the benefit of any such persons and to subscribe to or assist in the promotion of any charitable benevolent or public purpose or object."


The objects clause also contained a common form of separate objects clause.

The liquidator's case was that the policy was procured to be taken out in circumstances of misfeasance and breach of trust by the directors and that the Respondent had at the time or at the date of the proceedings knowledge of such misfeasance and breach of trust and held the policy in trust for the company. Buckley LJ said:

"It has now long been a common practice to set out in memoranda of association a great number and variety of "objects" so called, some of which (for example, to borrow money, to promote the company's interests by advertising its products or services, or to do acts or things conducive or incidental to the company's objects) are by their very nature incapable of standing as independent objects which can be pursued in isolation as the sole activity of the company. Such "objects" must, by reason of their very nature, be interpreted merely as powers incidental to the true objects of the company and must be so treated notwithstanding the presence of a separate objects clause: see Re Introductions Ltd., Introductions Ltd. v. National Provincial Bank Ltd. Where there is no separate objects clause, some of the express "objects" may on construction fall to be treated as no more than powers which are ancillary to the dominant or main objects of the company: see, for example, Re German Date Coffee Co. Ex hypothesi an implied power can only legitimately be used in a way which is ancillary or incidental to the pursuit of an authorised object of the company, for it is the practical need to imply the power in order to enable the company effectively to pursue its authorised objects which justifies the implication of the power. So an exercise of an implied power can only be intra vires the company if it is ancillary or incidental to the pursuit of an authorised object. So also, in the case of express "objects" which, on construction of the memorandum or by their very nature, are ancillary to the dominant or main objects of the company, an exercise of any such power can only be intra vires if it is in fact ancillary or incidental to the pursuit of some such dominant or main object. On the other hand, the doing of an act which is expressed to be, and is capable of being, an independent object of the company cannot be ultra vires, for it is by definition something which the company is formed to do and so must be intra vires. I shall use the term "substantive object" to describe such an object of a company."

Then, having referred to the passage in the judgment of Eve J in Re Lee, Behrens and Co. Ltd. which I have cited, he said:

"Clause 3(o) must be read as a whole. It includes not only pensions and other disbursements which will benefit directors, employees and their dependants, but also making grants for charitable, benevolent or public purposes or objects. The objects of a company do not need to be commercial; they can be charitable or philanthropic; indeed, they can be whatever the original incorporators wish, provided that they are legal. Nor is there any reason why a company should not part with its funds gratuitously or for non-commercial reasons if to do so is within its declared objects. Counsel for the liquidator relies on the finding of Oliver J that there is no evidence that the company did or could derive any benefit or that the question was considered by anyone connected with the transaction. He says that the provision of the pension must accordingly be accepted as having been purely gratuitous, that is to say, a gift which could and did confer no consequent benefit on the company. Accepting this to have been the case, the transaction none the less falls, in my view, precisely within the scope of Clause 3(0) and, in my judgment, the purposes referred to in that clause are such as to be capable of subsisting as substantive objects of the company and, having regard to the separate objects clause, must be so construed. For these reasons the liquidator fail, in my view, on the ultra vires point."

As regards the decision of Plowman J in Re W and M Roith Ltd. Buckley LJ said:

"It appears from the judgment that there was no evidence of lack of good faith on


the part of anyone concerned, but the judge evidently took the view that the service agreement was a facade. If the judge was justified in taking that view, and if the paragraph in the company's memorandum of association relating to the grant of pensions ought to have been construed merely as an ancillary power, Plowman J may have been justified in his conclusion, but not, in my view, otherwise."

Buckley LJ then went on to cite without disapproval the decision of Pennycuick J in Charterbridge Corp Ltd. v. Lloyds Bank Ltd. and expressly affirmed the view expressed by Pennycuick J that Eve J's third test was inappropriate to the scope of express powers. He continued:

"Of course, if the memorandum of association expressly or by implication provides that an express object only extends to acts which benefit or promote the prosperity of the company, regard must be paid to the limitation; but, where there is no such express or implied limitation, the question whether an act done within the terms of an express object of the company will benefit or promote the prosperity of the company or of its business is, in my view, irrelevant. In the present case Clause. 3(0) contains no such express limitation, and I see no grounds for implying such a limitation; the provision of the pension was within the terms of the clause, and consequently it was, in my judgment, intra vires the company."

He then turned to the liquidator's alternative argument that the purchase of the pension was effected by Mr. Campbell-Dick and Mr. Frank Horsley without the authority of the board or of the company in general meeting. He pointed out that the transaction, having been carried out without the sanction of a board resolution, could not stand unless ratified; he turned to consider the further submission by the liquidator -

"that there is a general duty incumbent on directors of a company, whether properly described as owed to creditors or not, to preserve the company's capital fund (which he identifies as those assets which are not distributable by way of dividend) and not to dispose of it otherwise than for the benefit or intended benefit of the company."

Buckley LJ held:

"There was nothing in the statute or in the general law which prevents a company or its directors expending contributed capital in doing anything which is an authorised object of the company."

He accordingly held that as Mr. Campbell-Dick and Mr. Frank Horsley were the only shareholders their assent made the transaction binding on the company and unassailable by the liquidator. Cumming-Bruce LJ agreed with the judgment of Buckley LJ, as did Templeman LJ. I need only mention one point in those judgments. Templeman LJ questioned whether:

"If the company had been doubtfully solvent at the date of the grant to the knowledge of the directors, the grant would have been both a misfeasance and a fraud on the creditors for which the directors would remain liable... If the company could not afford to pay out £10,000 and was doubtfully solvent so that the expenditure threatened the continued existence of the company, the directors ought to have known the fact and ought at any rate to have postponed the grant of the pension until the financial position of the company was assured."

He concluded on the evidence that it was impossible to convict the directors of 'gross negligence amounting to misfeasance' but concluded:

"If, however, there had been evidence and a finding of misfeasance and it appeared that the payment of £10,000 in the event reduced the fund available for creditors by that sum, or by a substantial proportion of that sum, I am not satisfied that the


directors convicted of such misfeasance, albeit with no fraudulent intent or action, could excuse themselves because two of them held all the issued shares in the company and as shareholders ratified their own gross negligence as directors which inflicted loss on creditors."

Before turning to the detailed arguments which have been addressed to me, I should make three observations on these authorities. First, in Re Horsley and Weight Ltd., Buckley LJ stressed the distinction (which he had drawn in Re Introductions Ltd.) between 'objects' properly so called which state the purposes which a company is authorised to pursue and provisions which though described as 'objects' can be seen on construction of the memorandum of association as a whole and notwithstanding a 'separate objects clause' to be powers to be exercised in the furtherance of those purposes and which add to, or may in some circumstances, limit the powers that would otherwise be implied as reasonably incidental to them. The question whether a stated 'object' is truly an independent object or purpose is always a question of construction. Even borrowing and lending moneys are activities capable of being pursued as independent objects, for instance, in the case of a bank or finance company; but commonly, where a sub-clause of the memorandum of association of a company states that one of the objects of the company is 'to lend or advance' or 'to borrow and raise' money it is artificial to construe the sub-clause as anything other than a power conferred for the furtherance of what are in truth its 'substantive objects' or purposes. That may be so notwithstanding that the memorandum of association includes a separate objects clause.

The second observation is that the phrase 'ultra vires' is used, even in cases where what is in question is the capacity of a company to enter into a given transaction and not the extent of the powers of the directors or of the power of a majority of the shareholders to bind the minority, in a narrow and in a wider sense. It is used in a narrow sense to describe a transaction which is outside the scope of the powers expressed in the memorandum of association of a company or which can be implied as reasonably incidental to the furtherance of the objects thereby authorised. For instance, an express power to borrow may, on construction of a memorandum of association or of the Act of Parliament governing the purposes and powers of a company, be found to restrict and not enlarge the power of borrowing that would otherwise be implied. A borrowing in excess of the stated limit will then be ultra vires the company in this narrow sense (see Baroness Wenlock v. River Dee Co). The phrase 'ultra vires' is also used to describe a transaction which, although it falls within the scope of the powers of a company, express or implied, is entered into in furtherance of some purpose which is not an authorised purpose. Buckley J, in the passage I have cited from his judgment in Re Introductions Ltd., described a borrowing which prima facie fell within the scope of the express powers conferred by the memorandum of association of the company but which was made for an unauthorised purpose as ultra vires. Oliver J, in Re Halt Garage (1964) Ltd. expressed doubt whether such a transaction should not properly be classified as an abuse of power rather than as an ultra vires transaction and commented that it does not follow that 'because a power must not be abused, therefore, beyond the limits of propriety it does not exist'. This approach is, I think, consistent with a decision of the Court of Appeal in Re Introductions Ltd. where Harman and Russell LJJ refer to the borrowing as 'made for the purposes of an ultra vires business' but do not describe the borrowing itself as ultra vires. It is also supported by the decision of the Court of Appeal in Re David Payne and Co. Ltd., Young v. David Payne and Co. Ltd. In that case a company borrowed money from another company for a purpose outside the scope of its authorised business but the lender company did not know the purpose for which the moneys were borrowed. Buckley J said: 'A corporation cannot do anything except for the purposes of its business, borrowing or anything else; everything else is beyond its power, and is ultra vires'. This observation taken in isolation suggests that a borrowing, even under an express power, otherwise than for the purposes of the company's authorised business is ultra vires. But Buckley J continued:

"If this borrowing was made, as it appears to me at present it was made, for a purpose illegitimate so far as the borrowing company was concerned, that may very well be a matter on which rights may arise as between the shareholders and directors of that company. It may have been a wrongful act on the part of the directors. But I do not think that a person who lends to the company is by any


words such as these required to investigate whether the money borrowed is borrowed for a proper purpose or an improper purpose. The borrowing being affected, and the money passing to the company, the subsequent application of the money is a matter in which the directors may have acted wrongly; but that does not affect the principal act, which is the borrowing of the money... I think here the power to borrow was a power resting in the directors."

Pennycuick J in Charterbridge found it difficult to reconcile these two passages. He pointed out that in the Court of Appeal Vaughan Williams LJ distinguished the transaction in that case from a transaction that 'was ultra vires altogether', such as a borrowing in excess of the amount authorised by an express power and disapproved the decision in Re Durham County Permanent Investment, Land and Building Society, Davis's in so far as that case suggested that a borrowing within the powers of a company is invalid and the security a nullity if there is an intention on the part of the borrowing company to apply the moneys for an improper purpose, although the lending company has no knowledge of that intention. The Court of Appeal affirmed the decision of Buckley J that a lender lending money to a company which has a general power to borrow is not bound to inquire into the purpose for which the money is intended to be applied and that the misapplication of the money does not avoid the loan in the absence of knowledge on the part of the lender that the money was intended to be misapplied. The explanation of the apparent inconsistency in the judgment of Buckley J in Re David Payne and Co. Ltd. is, I think, that in the first of the passages I have cited he was using the words 'ultra vires' in this wider sense. That is, I think, also the sense in which Roxburgh J described the transaction in question in Re Jon Beauforte (London) Ltd. as 'ultra vires'. For he specifically left open the question what the position would have been if the third party dealing with the company had not had clear notice that goods supplied to the company were not required for any authorised purpose of the company.

The reason why a transaction which is within the powers, express or implied, of a company but which is entered into for a purpose which is not authorised by its memorandum of association is equated with one which is ultra vires in the narrow sense is, I think, that such a transaction like a transaction which is ultra vires in the narrow sense is incapable of being made binding on the company even by the assent of all the members. The members cannot authorise the use of the company's property for a purpose other than the purposes which the company is authorised to pursue by its memorandum of association. The difference between a transaction which is ultra vires in the narrow sense and one which is ultra vires in the wider sense is, of course, that a transaction which is ultra vires in the narrow sense is altogether void and cannot confer rights on third parties whereas a transaction which is ultra vires in the wider sense may confer rights on a third party who can show that he dealt with the company in good faith and for valuable consideration and did not have notice of the fact that the transaction, while ostensibly within the powers, express or implied, of the company, was entered into in furtherance of a purpose which was not an authorised purpose. But in the past the distinction has only been of practical importance in those cases where a third party dealing with a company in good faith and for value has been able to show that he did not have notice of the purpose for which the transaction was entered into by the company and the distinction is of even less practical importance now that, Under Section 9(1) of the European Communities Act 1972, a transaction decided on by the directors of a company is to be treated in favour of a third party dealing with the company in good faith as within the capacity of the company.

Thirdly, it is now clear in the light of Charterbridge, Re Halt Garage Ltd. and Re Horsley and Weight Ltd. that the answer to the question whether a disposition of the property of a company was made for the benefit and to promote the prosperity of the company, though directly relevant to the question whether that disposition if made by the directors without the sanction of the company in general meeting was either an excess or abuse of their powers, is not conclusive nor always even relevant to the question whether the disposition was ultra vires the company whether in the narrow or the wider sense. In particular it may be within the power of a company to make a gratuitous disposition of its property which is not calculated to confer any indirect benefit on the company. Thus, if a company has power in general meeting to 'vote' remuneration to its directors in respect of a past period it can validly resolve to pay remuneration even if at the time of the resolution the company's business has come to an end


(as in Hutton v. West Cork Rly Co) so that the payment cannot be said to have been made to promote the prosperity of the company; and a gratuitous payment may also be authorised by a specific provision in the memorandum of association if, on construction, the provision falls to be construed otherwise than as a power conferred for the furtherance of its commercial purposes (as in Re Horsley and Weight Ltd.). On the other hand, if a transaction is entered into in purported reliance on a provision in the memorandum of association of a company which on construction can be seen to be a power conferred for the furtherance of the company's commercial objects, the question whether the transaction was ultra vires in the wider sense as being an abuse of the power, and the question whether the transaction was entered into for the benefit and to promote the prosperity of the company in large measure overlap if they do not coincide. It is difficult to see how a transaction apparently within the scope of such a power but which was clearly detrimental to the company's commercial interests could be said to be one entered into in pursuance of its commercial purposes.

Turning to the present case I have already referred to Clause 3(k) of the memorandum of association of RSP. Counsel for RSP submitted that the effect of the words 'as may seem expedient', like the limit on the power of borrowing in Baroness Wenlock v. River Dee Co., limits the scope of the power and that a transaction apparently within the scope of the power but which could not be considered expedient in the interests of the company is ultra vires in the narrow sense. It is not, to my mind, clear that the words 'as may seem expedient' do govern the last part of sub-cl (k) 'to give guarantees or become a security for any such persons, firms or companies'. But I think that counsel's submission is open to the more fundamental objection that if the words 'as may seem expedient' are construed as governing and qualifying the power conferred by sub-cl (k) they do not limit the scope of the power, but make clear what might otherwise be open to doubt that, notwithstanding the separate objects provision at the end of Clause. 3, sub-clause (k) is a power ancillary to and to be exercised when expedient in furtherance of the objects of the company and is not to be construed as an independent object.

The main question, therefore, which I have to consider is whether the guarantee and, to the extent of the sum guaranteed, the debenture were given by RSP in furtherance of the objects of RSP, in the sense of its substantive objects or purposes, or for some purpose not authorised by the memorandum of association of RSP; and, if the latter is the case, whether Colvilles and BSC had notice of that fact.

The first submission of counsel for the Defendants was that RSP entered into the arrangements and executed the documents resolved on at the meeting of the directors on 22 January in order to obtain time for RSP to sell the land at Rainham in an orderly way and to avoid the risk that Colvilles would present a petition for the winding up of SSS, that in due course the liquidator of SSS would present a petition for the winding up of RSP and that RSP would be unable to realise sufficient moneys to pay its debt to SSS in time to avoid a compulsory winding up. On the facts of this case, that submission seems to me quite unreal. Even if the validity of the transactions is judged by reference to the situation on 19 December 1968 (when Mr. Dyson in a telephone conversation with Mr. Hoare of Messrs Lovell, White Si King told him that the proposals in Mr. Shenton's letter of 17 December were acceptable) rather than on 22 January, the position then was that RSP had been advised by no less than four experienced estate agents that the land at Rainham was worth more than double the debt owed by RSP to SSS and although, at an earlier stage, the agents then concerned had advised that the realisation of the full value of the Rainham land might take some time, by the end of November Mr. Dyson had had the advice of Messrs Foster and Cranfield that the land might be expected to realise £850,000 if sold by tender with a closing date at 30 January (later extended to 12 February). Instructions to sell the land by tender had been given to Fosters and their associate firm Alsop and Co. Everyone concerned expected that the sale by tender would produce a figure if not of £850,000 only a little less and on any view far in excess of the £400,000 or thereabouts owed by RSP to SSS. At that date, therefore, RSP were not confronted with any real risk that a liquidator of SSS would present a winding-up petition. Even if Colvilles could have obtained an order for the compulsory winding up of SSS and the appointment of a liquidator before the end of January (which I doubt), it is inconceivable that the liquidator could or would have presented a petition for the winding up of RSP before the end of January knowing that the sale of the Rainham land was under way and would most probably produce sufficient for the payment of the debt due to SSS


within a matter of a few weeks at the most. Of course, looking at the matter on 19 December, a cautious adviser or director of RSP might have taken the view that it would be in the interests of RSP to enter into an arrangement with Colvilles under which, if the sale at Rainham did not go as planned, RSP would give a guarantee of a sum in excess of the debt owed by it to SSS in consideration of an agreement by Colvilles to defer the payment of the debt owed by SSS for a period which would enable RSP to explore other means of realising the value of the Rainham land (and possibly the Andover site), in particular, as regards the Rainham land over the five-year period contemplated in a valuation obtained by Mr. Shenkman in August 1968 from Glenny and Son, a firm with local experience who had acted for Fords in acquiring land. But that was not done. Counsel for RSP commented that under the arrangements agreed on 19 December in so far as RSP got time it did not need it, and in so far as it might need time it did not get it.

The alternative submission of counsel for the Defendants was that on 19 December the directors of RSP were faced with a business decision. On the one hand, they could refuse to give any guarantee in excess of the sum owed to SSS in the expectation that the Rainham land would be sold and that the debt due to SSS could be paid off in the near future; RSP would still own the Andover factory and it would have sufficient moneys to complete it and finance its operation; on the other hand, Colvilles would then present a petition for the winding up of SSS and would take immediate steps to make Mr. Shenkman bankrupt; further, if Colvilles were not paid, RSP might not be allowed to purchase steel from Colvilles or possibly BSC on normal credit terms and might be compelled to resort to the import of steel from abroad; thus the venture in which Mr. Shenkman had so much confidence would be hamstrung. The alternative was to use the expected proceeds of the sale of the Rainham land to pay off Colvilles; normal trading would be resumed with Colvilles; Mr. Shenkman was confident that he would then be able to 'make a go' of the Andover project; Mr. Shenkman would be of greater value to RSP if he was not made bankrupt; furthermore, if the trustees developed and ran the Andover factory with the assistance of Mr. Shenkman and after normal trading had been resumed with Colvilles, the profits to be expected from the Andover venture would (it was thought) more than outweigh the cost to RSP of meeting the debt due from SSS to Colvilles in excess of its liability to SSS.

This is a more formidable argument. But it is, I think, remote from the facts and the events as they unfolded. It is quite clear that the directors of RSP did not, in fact, decide that it would be in the interests of RSP to enter into the proposed transaction in order to obtain the benefits I have outlined. Moreover, if an independent board had been faced with the suggested choice it could not, as I see it, have decided that it was in the interests of RSP to enter into the proposed transaction without any commitment on the part of Mr. Shenkman to develop the Andover project for the benefit of RSP or of any commitment on the part of Colvilles to supply Andover (which started one shift production in January 1969) with steel on normal credit terms if the debt due to them was paid in full. Colvilles had, it is true, indicated that it would give favourable consideration to the resumption of normal trading terms with RSP or the Andover company if SSS's debt were paid in full; but Colvilles had been careful to make it clear that it was not entering into any commitment.

The true position, as I see it, is as follows. Even before Fosters' advice had been received, the directors of RSP had been advised by Mr. Balcombe that a guarantee which in effect cast on RSP, by whatever means, a liability to pay to Colvilles a sum in excess of the debt due to SSS would be an act of gross misfeasance on their part. I have already summarised the instructions given to Mr. Balcombe [his Lordship's summary of the instructions occurs in a portion of his judgment not reproduced in this report]. Mr. Edwards in his evidence criticised those instructions. He said that Mr. Balcombe should have been given the statement of affairs and accounts of SSS and should have been told of Mr. Shenkman's personal position, of the demands made on him and of his possible bankruptcy; he said that he should have been told that without the then proposed guarantee the Andover project would founder, and he should have been told that if SSS went into liquidation there was a strong possibility that RSP would also go into liquidation. I do not think that there is any substance in those criticisms. Mr. Balcombe was given instructions which, in my view, were quite adequate for the general questions on which he was asked to advise. He was given the draft balance sheet of RSP with notes bringing its position up to date; he was told that it was solvent, that it owed SSS


£400,000 and that SSS owed Colvilles £750,000; he was told that arrangements had been made under which RSP might be able to realise £250,000 in the near future; he was told the relationship of Mr. Shenkman to both companies. Mr. Dyson originally intended to ask Mr. Balcombe for a written opinion. In his evidence he said, and I accept, that he did not ask Mr. Balcombe for a written opinion because events moved so quickly that there was not time to obtain one and, more importantly, because a subsequent development made it even more plain that the transaction envisaged would involve a disposition of assets of RSP for no consideration, which could not be justified as being for the purposes or in the interests of RSP. The subsequent development is, of course, that when Fosters' advice was received at the end of November, RSP had for the first time a reasonable assurance that it would be able to meet any demand that might be made on it to meet its debt to SSS. Thereafter, everybody on the RSP side proceeded on the footing that the transactions proposed would not only not be for the purposes or in the interests of RSP but would be positively injurious to it. When Mr. Dyson proposed at the meeting on 29 November that he would consult counsel 'as to the best method of implementing the proposals', his proposal was not that he should go back to Mr. Balcombe for further advice whether the implementation of the proposals would be a misfeasance on the part of the directors of RSP; he proposed to put a scheme before the trustees and before counsel instructed on behalf of the trustees, designed to compensate the trustees for the injury which the trust holding would suffer indirectly if RSP entered into the proposed transaction. In his letter to Mr. Shenkman, cited in the letter to a trustee of the settlement, Mr. Perkins, of 3 January, he stressed that it would be necessary that the trustees 'somehow be properly compensated for an otherwise unwarrantable depreciation in the value of one of the trust assets'. The reason for proposing a scheme which would give the trustees compensation in one of the ways suggested in the letter of 3 January was, of course, that the transaction was not one which could be justified as carried out for the purposes or in the interests of RSP but would, on the contrary, be detrimental to it.

In my judgment the conclusion is inescapable that of the directors of RSP Mr. Shenkman at least knew that the proposals accepted on behalf of RSP on 19 December and implemented on 22 January involved, to the extent of the guarantee of the liability of SSS in excess of the debt due from RSP to SSS and to that extent the debenture, a gratuitous disposition on the part of RSP which could not be justified as something done for the purposes or in the interests of RSP.

Colvilles's knowledge

The further question is whether Colvilles knew or must be taken as having known that the transaction was not one carried out for the purposes or in the interests of RSP. To answer this question it is, I think, necessary to go back to 2 May when Mr. Shenkman first gave his personal guarantee. At that time Mr. Shenkman had made it clear to Colvilles that he 'did not have an orthodox view of limited liability companies' and that he regarded all assets held by all companies of which he had control as available to meet the debt due to Colvilles. When he was induced to enter into a personal guarantee, it was with the knowledge on the part of Colvilles and BSC that his personal assets including his shares of RSP would be wholly insufficient to meet the liability. The purpose of obtaining a guarantee from Mr. Shenkman was, in my judgment, to put Colvilles in the position where it could exert pressure on Mr. Shenkman personally to honour his professed intention of making available for payment of the debt, amongst other things, the assets of RSP. Throughout the summer of 1968 Colvilles expected that assets of RSP would be sold and the proceeds made available to meet the debt. The proposal that RSP should give a guarantee emerged towards the end of September. Mr. Figgis's advice was sought. Mr. Figgis advised that it would be intra vires RSP to give a guarantee in an amount equal to or greater than its debt to SSS but it is important to observe that he also expressed the view that it was doubtful whether the directors could be advised by their legal advisers to grant a guarantee considerably in excess of the debt due to SSS and that, if a guarantee were given of a figure £40,000 in excess of that debt, it would have to be tied with a timetable for repayment which would give some compensating advantage to RSP. He also advised that the guarantee would have to be limited to a sum such that if RSP was called on it would remain solvent. When Mr. Figgis later elaborated his advice by suggesting that the guarantee could be in a form which would leave RSP liable to pay Colvilles £400,000, even after RSP had paid SSS and SSS in turn had paid Colvilles £360,000, his advice must, I think, have


been based on the assumption that, while it would be a breach of duty by the directors to give the guarantee, the only risk would be a risk of attack by a liquidator of RSP in a compulsory winding up of RSP. He must have assumed that Mr. Shenkman would be able to persuade the trustees to consent to the giving of a guarantee (as had been suggested in Mr. Hands's original letter of instruction to Mr. Shenton) and that the transaction could be made invulnerable (except in the event of insolvency) either because the shareholders acting unanimously could ratify it or because RSP would be wound up voluntarily and its reduced assets distributed to its shareholders. Mr. Dyson of course, learning of this proposal, took alarm and consulted Mr. Balcombe. In my view Mr. Bakombe's advice when reported to Mr. Edwards in Mr. Dyson's letter of 6 November came as no surprise to Mr. Edwards. I think the view he took at that time was that Colvilles and BSC were not concerned with whether the giving of a guarantee in the form proposed would be a breach of duty by the directors and that it was up to Mr. Shenkman to persuade the trustees to assent to it. That is, I think, why BSC suggested that the director nominated by BSC, who Mr. Dyson and Mr. Shenkman had agreed to appoint to the board of RSP, should be appointed after the proposed guarantee had been given, a suggestion which, not surprisingly, was adversely commented on by Mr. Balcombe. The reason for delaying the appointment of the nominated director can only have been to ensure that he was not a party to a breach of duty by the board. Mr. Edwards thought that the only risk which need concern Colvilles and BSC was the risk that, if RSP was called on to pay what it owed SSS and in addition to pay £400,000 to Colvilles, the guarantee might be attacked by a liquidator if, as a result, RSP became insolvent. There is direct confirmation that that was the attitude of Mr. Edwards in BSC's notes of the meeting on 29 November. I have already summarised those notes but I should, I think, at this stage refer again to one passage. Mr. Dyson having expressed the view that part only of the proceeds of the sale of the Rainham land should be paid over, a reserve being kept for tax, said that he had in mind 'the possible risk of a subsequent claim by a liquidator that such a payment was a fraudulent preference or perhaps even misfeasance'. Mr. Edwards is recorded as having said that he would 'prefer that the debt to Colvilles were wholly discharged notwithstanding these possibilities, on the assumption that everything possible would be done to reduce the risk'. The risk of attack by a liquidator in an insolvent winding up of RSP was the only one which, he thought, concerned Colvilles and BSC.

Mr. Edwards in his evidence said that he was throughout anxious that there should be no impropriety on the part of the directors of RSP and that he made this clear to Mr. Dyson and pressed him to provide him with his instructions to Mr. Balcombe and for a written opinion. I regret to say that after the most anxious consideration I have come to the conclusion that I cannot accept that that was Mr. Edwards's attitude at the time. It is, I fear, a reconstruction of events which, after all, took place very many years ago. There is no reference in the voluminous correspondence and notes of telephone conversations to any request to Mr. Dyson to provide a copy of Mr. Balcombe's instructions and Mr. Dyson was not pressed to obtain a written opinion. On and after 29 November Mr. Dyson made it clear that he proposed to go to counsel not to advise whether the transaction was a proper transaction in the interests of RSP, but to advise on a scheme which he proposed to work out in detail which would provide compensation to the trustees if they assented to, or, at least, did not take any steps to prevent the implementation of, a transaction which would involve the use of RSP's assets for purposes other than any legitimate purposes of RSP. It is significant that there is no reference in the correspondence between BSC and Mr. Dyson or in notes of telephone conversations to the fact that BSC had obtained advice from Mr. Figgis. Mr. Edwards in his evidence said that he though he must have mentioned this to Mr. Dyson in a telephone conversation at the time when Mr. Dyson obtained advice from Mr. Balcombe. Again I regret that I cannot accept that Mr. Dyson was told at any time that BSC had obtained advice from counsel. The suggestion that he was so told was not put to Mr. Dyson when he gave evidence. The initial claim for privilege was maintained until after Mr. Dyson had given evidence and was only waived in the course of Mr. Edwards's evidence. I have no doubt that if Mr. Dyson had been told that BSC had obtained advice from counsel he would have pressed vigorously for a sight of the instructions to counsel and of any opinion or note of conference that had been obtained. He had, of course, earlier suggested that he and BSC should both consult counsel and should agree the instructions to be sent to their respective counsel in advance. I find myself compelled to the conclusion that the fact that BSC had obtained advice from counsel was not only not disclosed to Mr. Dyson but was quite deliberately not revealed. If Mr. Dyson had known that Colvilles had instructed counsel, he would have asked to see a note of the advice given by counsel and his instructions.


If he had seen Mr. Figgis's original note he would have seen that Mr. Figgis had expressed doubt whether the directors of RSP would be advised to grant a guarantee considerably in excess of the debt due to SSS and had suggested that the consideration for the assumption by RSP of a liability in excess of the debt due to SSS should be the acceptance by Colvilles of a timetable for repayment over a period (advice which was not inconsistent with though not as categorical as the advice given by Mr. Balcombe) and he might have relied on it in the negotiations. Indeed, I think the explanation of Mr. Edwards's failure to ask Mr. Dyson for a copy of the instructions given to Mr. Balcombe and for a written opinion to be obtained is that he knew that, if he asked Mr. Dyson for them, Mr. Dyson in turn might well ask whether Colvilles had sought advice. That would have been an embarrassing question for him to answer.

Counsel for the Defendants also relied on the fact that it appears from the instructions given to Mr. Figgis on 19 March 1969 that he had advised BSC in conference 'on 15th January 1969, and subsequently'. He invited me to infer that Mr. Figgis must have given the same advice as he gave in his written opinion on 27 March 1969 and submitted that in the light of that advice Colvilles was entitled to assume that the guarantee was something which RSP was entitled to give as being for the benefit of RSP in that in Mr. Figgis's words 'it was in RSP's interest that time might be given by Colvilles and time was obtained'. He stressed that I should not draw any adverse inference from the fact that BSC had maintained its claim for privilege in respect of the instructions given to Mr. Figgis before the conference on 15 January and of the note of the advice he gave at that and possibly at a subsequent conference. I accept that it would be wrong to draw any adverse inference from the fact that a claim to legal professional privilege is made even where, as here, counsel is asked to advise in respect of a transaction on more than one occasion and privilege is waived in respect of some but not all the instructions, opinions and notes of conference. The privilege afforded to communications between a citizen and his legal advisers is of fundamental constitutional importance and it is not to be whittled down. But equally it would be wrong for me to draw any inference favourable to Colvilles and BSC. I think I must disregard altogether the fact that Mr. Figgis gave further advice in conference on 15 January. Moreover, if Colvilles had been advised that the transaction was a proper one and not (in the wider sense) ultra vires or an abuse of the directors' powers, that advice would not have exempted them from liability if, as I think, they knew the facts which made the transaction improper (see Belmont Finance Corp v. Williams Furniture Ltd. (No. 2) per Buckley LJ).

In my judgment, Colvilles and BSC knew that the guarantee and, to the extent of the sum guaranteed, the debenture were not entered into by RSP for any purpose of RSP but were a gratuitous disposition of the property of RSP and were entered into by RSP for the benefit of SSS and Mr. Shenkman personally. I do not propose to refer again to all the occasions when Colvilles or BSC or their solicitors were told that a scheme to compensate the trustees for the damage to their shareholding consequent in the implementation of the proposed guarantee and debenture was being worked out. It is sufficient to refer to the note of Messrs Lovell, White and King of the telephone conversation with Mr. Dyson on 6 January when he recorded that Mr. Dyson said that 'he was being asked to do an act which was probably ultra vires and would constitute a misfeasance by its directors' and which could only be carried into effect with the consent of all the shareholders.

Ratification

The defence as originally pleaded contains no trace of any claim that the transactions and documents entered into or executed on 22 January were entered into or executed with the authority and approval of all the shareholders in RSP. Counsel for RSP drew attention to this fact in his opening. No application was then made for leave to amend the defence. After the evidence had been called, counsel for the Defendants in his address submitted that, if the guarantee and the debenture were executed without the authority of the board (the board being inquorate) or if the execution of those documents was an abuse by the directors of their powers, the debenture and the guarantee were none the less binding on RSP because the execution of those documents had been approved by the trustees before 22 January, Counsel for RSP objected that argument was not open to counsel for the Defendants on the pleadings. At the hearing I upheld that objection. Counsel for the Defendants then applied to amend the defence by adding to para 11 (where it is averred that the guarantee and debenture were duly


executed by RSP) a further sentence:

"In support of such averment these Defendants will rely on the fact that the granting of the guarantee and the debenture had been approved by all the shareholders in RSP prior to the execution thereof."

I do not think that it would be right to allow this amendment. There are many matters which RSP might have wished to investigate and on which counsel for RSP might have wished to call evidence if this claim had been pleaded before the evidence was heard. Mr. Dyson in his evidence said that he thought that all the trustees were present at the meeting with him on 21 January. But it appears from the correspondence that shortly before then one of the trustees, Mr. Hibbert, was away in Switzerland. Mr. Dyson's recollection of events in 1968 was, not surprisingly, far from clear. Inquiries might have shown that Mr. Hibbert was not there. Further, Mr. Dyson, reporting to Mr. Maunsell of Messrs Lovell, White and King on 22 January, told him that the trustee had 'agreed to the arrangements provided that Mr. Shenkman gave him certain personal obligations secured on his shares'. That, of course, was not what Mr. Dyson had proposed in his letter of 3 January. There had been no time in which to formulate in detail and carry into effect the elaborate scheme for the protection of the trustees which Mr. Dyson proposed. It is not clear from the brief note of Mr. Dyson's conversation with Mr. Maunsell whether the trustees agreed to the arrangements conditionally on Mr. Shenkman first giving an indemnity secured on his shares, nor is it clear what the terms of the indemnity were to be. In fact, no indemnity was ever given. Lastly, but I think most important of all, it is vital that directors who seek the approval of shareholders to a transaction in which the directors are personally interested should make proper disclosure of all relevant facts. While I have no doubt that Mr. Dyson when he wrote to the trustees on 3 January (when he was acting as Mr. Shenkman's solicitor) did his best to give a fair account of the situation which had arisen, there are some matters which are not referred to, in particular the trustees were not told that the sale of the Rainham land would give rise to a substantial tax liability and that after allowing for that liability the payment by RSP of the whole debt due from SSS might result in RSP's insolvency (which would effectively destroy any prospect of its benefiting from the Andover project). Further, the statement at the end of that letter that refusal by the trustees to give their consent to his scheme would 'result in the certain collapse of the Companies, in a very short space of time' was not justified as regards RSP in the light of the expectation at the time that the sale of the Rainham land would produce ample funds to pay off its debt to SSS and leave a substantial surplus. It is conceivable that if the matter had been properly pleaded the question whether there was a full disclosure to the trustees and whether this last paragraph in Mr. Dyson's letter was misleading would have been put in issue.

However, as the point has been fully argued I should say that it is in my judgment clear that, even if BSC had alleged in its defence and proved that the transactions entered into and the documents executed on 22 January had been entered into or executed with the assent of all the shareholders, then (subject to one possible qualification) the assent of the shareholders would not have founded any defence to RSP's claim. Shareholders, even acting unanimously, cannot authorise a transaction which is ultra vires in the wider sense of being an application of the company's assets for purposes other than those which the company is authorised to pursue and cannot ratify or excuse such a transaction if entered into by the directors in the purported exercise of their powers as directors. Of course, shareholders exercising their votes in general meeting do not owe any fiduciary duty to a company (see North-West Transportation Co. Ltd. v. Beatty). It does not follow that shareholders can exercise their votes without regard to the purposes for which the powers conferred on the company by its memorandum of association were conferred. Thus, in exercising their power to vote remuneration to directors, shareholders are not bound to consider whether it is for the benefit of the company that the proposed remuneration be paid; but what is voted and paid must be something which can genuinely be considered a remuneration and if the proposed payments exceed what can fairly be considered remuneration 'even the sanction of the shareholders in general meeting could not, simply by calling the payments remuneration, validate the acts of the directors in making them' (see Re Halt Garage (1964) Ltd.) per Oliver J). Similarly, if a power, like the power conferred by Clause. 3(k) of the memorandum of association of RSP, is conferred for the furtherance of the company's commercial purposes, the shareholders cannot sanction and make binding on the


company a purported exercise of that power which they know to be detrimental to the company's commercial interests. In the present case, the fact that the trustees gave their consent conditionally on Mr. Shenkman giving an indemnity and in the expectation that in a subsequent liquidation of RSP the trustees would take the whole assets available for distribution or, if RSP was not liquidated, would be compensated in some other way for the 'watering down of their assets by 49% of approximately £400,000' (see the letter of 24 January 1969 from Mr. Wills, a trustee) is to my mind fatal to the submission that the guarantee and debenture could have been made binding on the company by the assent of all the shareholders.

The principle that shareholders, even acting unanimously, cannot ratify or make binding on a company a transaction which is ultra vires whether in the narrow or in the wider sense is subject to one exception. In Re Halt Garage Ltd. Oliver J accepted that a concession by counsel for the liquidator that he could not attack payments of remuneration to the extent that when they were made the company had a reserve on profit and loss account capable of being distributed by way of dividend was rightly made. Having referred to the decision of the Court of Appeal in Re George Newman and Co. Ltd. he said that the observations of Lindley LJ indicate that -

"when it comes to paying gratuities out of profits, there is no necessary requirement of a consideration of the interests of the company's business. The shareholders may do as they please."

Earlier in his judgment he observed that it is -

"a commonplace in private family companies, where there are substantial profits available for distribution by way of dividend, for the shareholder directors to distribute those profits by way of directors' remuneration rather than by way of dividend, because the latter course has certain fiscal disadvantages. But such a distribution may, and frequently does, bear very little relation to the true market value of the services rendered by the directors and if one is to look at it from the point of view of the benefit of the company as a corporate entity, then it is wholly unjustifiable, because it deprives the company of funds which might otherwise be used for expansion or investment or contingency reserves."

The extent of this exception, whether it applies to any disposition of a company's assets which could have been accomplished by a distribution to shareholders and a disposition by them of the moneys or assets distributed by the company, and the fiscal consequences of a disposition of a company's assets which is ultra vires either in the narrow or in the wider sense and which is justified on this ground are matters which I do not think it necessary or desirable to explore. A defence to an action to set aside a transaction if founded on this ground would require to be very specifically pleaded. In particular the defence would have to state what assets could have been distributed to the shareholders and at what time and by reference to what accounts of the company. However, I should say that on the evidence before me it appears that RSP did not have profits available for distribution to its shareholders equal to the amount of the guarantee given of the indebtedness of SSS. The latest balance sheet of RSP is not in evidence but it is common ground that the draft statement of affairs was based on it. In that statement of affairs the value of the Rainham land is taken in at cost plus expenditure on it and, attributing that value to the Rainham land, RSP's available reserves fell far short of £400,000. In the light of Glenny and Sons' valuation it might have been open to the directors to have resolved to substitute a higher figure for the value of the Rainham land and (as the law then stood) RSP could then have distributed by way of dividend the larger surplus that would have been thrown up. But they did not do so, and if the directors had resolved to substitute a higher value for the Rainham land they would clearly have been advised by the auditors that a proper reserve would have to be made for the development gains tax or corporation tax that would be payable on the disposal of the Rainham land. Of course, Mr. Shenkman believed that RSP would be entitled to roll-over relief. But there was no foundation for that belief, which would, I think, have been easily dispelled by the auditors. Equally, the proposal that RSP should repay the whole debt due from SSS and look to future profits to meet the liability to development gains tax or corporation tax on the Rainham land would not have been accepted by them as a basis on which accounts


could properly be drawn. Whether Colvilles or BSC can maintain a claim against Mr. Shenkman or the trustees to the extent of any surplus assets which may come into their hands as a result of the repayment of the sum guaranteed by RSP with interest is a question which cannot be decided in these proceedings.

Conclusion

In my judgment, therefore, the guarantee and, to the extent of the sum guaranteed, the debenture were executed by RSP to the knowledge of Colvilles for a purpose other than the purposes authorised by the memorandum of association of RSP and RSP is entitled to have the guarantee set aside and to require BSC to repay the sum guaranteed with interest. In the statement of claim RSP alleges that the receiver when he took up his appointment had actual or constructive knowledge that the guarantee and, to the extent of the sum guaranteed, the debenture were invalid. It is accepted by counsel for RSP that, if Colvilles was entitled to rely on the resolutions at the meeting of the board of RSP on 22 January as resolutions of a board validly constituted, the debenture was a valid debenture to the extent of the sum paid to RSP by Colvilles to enable RSP to repay its debt to SSS. No criticism is made of the conduct of the receivership or of the remuneration charged by the receiver. In these circumstances the question whether the receiver had notice that the guarantee and, to the extent of the sum guaranteed, the debenture were invalid is devoid of any practical consequence. But in case the point does become material I should say that in my judgment Mr. Cooper, when he took possession of the assets of RSP as receiver, had knowledge of facts from which it should have been apparent to him that the giving of the guarantee was ultra vires RSP in the wider sense and also a breach of duty by the directors of RSP. My Dyson told him on 22 May that he had entered into arrangements with the trustees, the effect of which was that 'in exchange for not complaining about the giving of the Guarantee, they would, in due course, be "cut into" the Andover Group' and that a reorganisation then under consideration would have to be carried out in such a way that the trustees were compensated for what they had 'permitted to be given away from the value of their Holdings Shares'.

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