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%
2015-03-21 (Page 1 of 24 )
www.manupatra.com
National Law University and Judicial Academy
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
2015-03-21 (Page 2 of 24 )
www.manupatra.com
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
2015-03-21 (Page 3 of 24 )
www.manupatra.com
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
2015-03-21 (Page 4 of 24 )
www.manupatra.com
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.
2015-03-21 (Page 5 of 24 )
www.manupatra.com
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 subclause 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
2015-03-21 (Page 6 of 24 )
www.manupatra.com
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
2015-03-21 (Page 7 of 24 )
www.manupatra.com
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
2015-03-21 (Page 8 of 24 )
www.manupatra.com
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 -
2015-03-21 (Page 9 of 24 )
www.manupatra.com
"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:
2015-03-21 (Page 10 of 24 )
www.manupatra.com
"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
2015-03-21 (Page 11 of 24 )
www.manupatra.com
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 exdirectors 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."
2015-03-21 (Page 12 of 24 )
www.manupatra.com
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
2015-03-21 (Page 13 of 24 )
www.manupatra.com
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
2015-03-21 (Page 14 of 24 )
www.manupatra.com
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
2015-03-21 (Page 15 of 24 )
www.manupatra.com
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
2015-03-21 (Page 16 of 24 )
www.manupatra.com
(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
2015-03-21 (Page 17 of 24 )
www.manupatra.com
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 fiveyear 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
2015-03-21 (Page 18 of 24 )
www.manupatra.com
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
2015-03-21 (Page 19 of 24 )
www.manupatra.com
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.
2015-03-21 (Page 20 of 24 )
www.manupatra.com
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
2015-03-21 (Page 21 of 24 )
www.manupatra.com
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
2015-03-21 (Page 22 of 24 )
www.manupatra.com
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
2015-03-21 (Page 23 of 24 )
www.manupatra.com
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'.
Manupatra Information Solutions Pvt. Ltd.
2015-03-21 (Page 24 of 24 )
www.manupatra.com

In 1426967443gd

Hochgeladen von

Dokumentinformationen

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

In 1426967443gd

Hochgeladen von

Copyright:

Verfügbare Formate

MANU/UKCH/0022/1981

Equivalent Citation: [1982]3All ER1057

discharge of any contract, obligation or liability of [Castleford] or of any other

directors convicted of such misfeasance, albeit with no fraudulent intent or action,

words such as these required to investigate whether the money borrowed is

executed by RSP) a further sentence:

Das könnte Ihnen auch gefallen