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BELMONT FINANCE CORPORATION
WILLIAMS FURNITURE LTD AND OTHERS (NO 2)
COURT OF APPEAL, CIVIL DIVISION
31 JULY 1979
 1 ALL ER 393
BEFORE THEIR LORDSHIPS:
BUCKLEY, GOFF AND WALLER LJJ
Sidney Pearlman & Greene (for Belmont);
Freshfields (for Williams and City);
Gentle Mathias & Co (for the fourth and sixth defendants)
J H Fazan ESQ Barrister
Michael Miller QC and M J Roth for Belmont.
Martin Nourse QC and Brian Parker for Williams and City.
Nicholas Stewart for the fourth and sixth defendants.
The third defendant did not appear.
COMPANY LAW – SHAREHOLDING:- Transactions in shares of company – Arm’s length transaction – Where purchase financed by selling inflated asset to company and using money so obtained to buy company – Legality – Whether parties liable to company in conspiracy or as constructive trustees – Companies Act 1948, s 54.
CAPITAL MARKET LAW:- Shares – Purchase of company shares with financial assistance of company – Arm’s length transaction – Whether bona fide commercial transaction – Parties agreeing sale and purchase of company – Purchase financed by selling inflated asset to company and using money so obtained to buy company – Seller of company obtaining services of property expert in return – Transaction fair and bona fide as regards buyer and seller – Whether company’s shares is deemed purchased with financial assistance from company – Whether transaction illegal
SUMMARY AND HISTORY
The first defendant (a company known as ‘Williams’) owned all the shares in the second defendant (a company known as ‘City’) which in turn owned all the shares in the plaintiff company (‘Belmont’). The chairman of all three companies was J. The third defendant, G, was the controlling shareholder of another company (Maximum’) which was engaged in property development. The fourth to sixth defendants were associates of G and owned the balance of the shares in Maximum. In 1963 G and his associates wished to purchase Belmont in order to use its assets to finance the property development projects of other companies owned by them. At the same time J, who was impressed by G, wanted to obtain the benefit of G’s expertise and flair in property development for the Williams group of companies. Accordingly, on 3 October, G and his associates agreed with Williams and City to sell Maximum to Belmont for £500,000 and to buy the share capital of Belmont from City for £489,000. In addition Williams and City agreed to lend Belmont £200,000 for 12 months secured on the capital of Maximum, G guaranteed to Belmont that the aggregate pre-tax profits of Maximum and its subsidiaries for the six years to 31 May 1968 would be not less than £500,000, and City agreed to subscribe for 230,000 £1 preference shares in Belmont out of the £489,000 it received for the sale of Belmont. Although G and J negotiated at arm’s length, neither J, City nor Belmont sought or received an independent valuation of the worth of Maximum. It was realised by the parties involved that there was a possibility that the transaction might involve a breach of s 54(1)a of the Companies Act 1948 which made it unlawful for a company to give ‘any financial assistance for the purpose of … a purchase … made … by any person of or for any shares in the company’. G’s solicitors obtained counsel’s opinion that the proposed purchase of Maximum by Belmont, being a bona fide purchase at a proper price, would not contravene s 54. A copy of that opinion was given to the directors of City. At board meetings of City and Belmont held on 11 October it was resolved that the agreement of 3 October should be implemented, and the transaction was completed later that day. Belmont subsequently went into liquidation with debts of £176,269. The receiver of Belmont obtained an independent valuation of Maximum on the basis of advising Belmont of a fair price to pay for Maximum as at 3 October 1963. That valuation suggested that Maximum was worth only £60,069 at that date and not £500,000. The receiver accordingly commenced an action on behalf of Belmont against, inter alios, Williams, City and G alleging (i) that the price of £500,000 for Maximum had been arrived at to enable G and his associates to purchase Belmont with the money provided by Belmont in contravention of s 54, (ii) that the defendants had wrongfully conspired together to carry into effect the sale and purchase of Belmont’s share capital in contravention of s 54, and (iii) that the defendants were liable as constructive trustees, both as having received money which was held in trust for Belmont in such circumstances as to render them accountable for it and as having knowingly participated in a dishonest and fraudulent design on the part of those holding money in trust for Belmont. Belmont claimed damages. At the trial, J, on behalf of Williams and City, asserted that he genuinely believed that buying Maximum for £500,000 was a good commercial proposition for Belmont because he and Belmont were buying G’s ability to make money. The judge accepted that and, having decided that the agreement of 3 October was a bona fide commercial transaction, dismissed the claim. Belmont appealed.
The appeal would be allowed for the following reasons—
(i) A breach of s 54 of the 1948 Act occurred if a company, without regard to its own commercial interests, bought something from a third party with the sole purpose of putting the third party in funds to acquire shares in the company, notwithstanding that the price paid was a fair price. Thus, even though the agreement for the purchase of the share capital of Maximum by Belmont was a satisfactory commercial transaction for both Williams and City and for G and his associates, it nevertheless contravened s 54 even if the £500,000 paid by Belmont for Maximum had been a fair price, because it was not a commercial transaction in its own right but merely part of a scheme to enable G and his associates to acquire Belmont at no cash cost to themselves, was not a transaction in the ordinary course of Belmont’s business, and did not enable Belmont to acquire anything which it genuinely needed for its own purposes. It followed that the belief of Williams and City (acting through J) that Maximum’s shares were worth £500,000 was not in any event a good defence to a breach of s 54. The fact that Maximum was, on the evidence, worth only some £60,000 and not £500,000 at the time merely reinforced the fact that the transaction contravened s 54 (see p 402 f g, p 403 c to j, p 406 e, p 407 j, p 408 b to p 409 j, p 410 c, p 413 d and p 414 d to h, post); Re V G M Holdings  1 All ER 224 and Gradwell (Pty) Ltd v Rostra Printers Ltd 1959 (4)SA 419 considered.
(ii) Having regard to the fact that, as a director of both companies, J’s knowledge of the objects of the agreement was to be imputed to Williams and City, the claim of conspiracy had been established against the defendants because (a) they had combined to participate in a common intention to enter into the agreement of 3 October, to procure that Belmont entered into it, and then to ensure that it was implemented, (b) that combination had been to effect an unlawful purpose, namely the provision of financial assistance to G and his associates to acquire Belmont using money provided by Belmont, in contravention of s 54 of the 1948 Act, and that had resulted in damage to Belmont (see p 404 c to h, p 406 e, p 413 d, p 414 j to p 415 a, p 416 b c and p 417 d to f, post); Mulcahy v R (1868) LR 3 HL 306 and dictum of Lord Simon LC in Crofter Hand Woven Harris Tweed Co Ltd v Veitch  1 All ER at 147 applied.
(iii) Having regard to J’s genuine belief that Maximum’s shares were worth £500,000, it could not be said that City had knowingly participated in a dishonest and fraudulent design on the part of Belmont’s directors, and City was not therefore liable as a constructive trustee on that account. However City was liable to Belmont as a constructive trustee of the £489,000 received for the sale of the share capital of Belmont because that money had been misapplied by the directors of Belmont by virtue of the breach of s 54 and City, through its directors, had known of the whole circumstances of the transaction, and had accordingly received trust funds (ie funds belonging to Belmont of which Belmont’s directors were trustees) in such a way as to become accountable for them (see p 405 c to h, p 406 b to f, p 411 a b, p 412 e to p 413 b d and p 417 f, post); dictum of Lord Selbourne LC in Barnes v Addy (1874) LR 9 Ch App at 251–252 applied.
Quaere whether there is a breach of s 54 when company A legitimately enters into a transaction in its own commercial interests and not solely as a means of financially assisting B to buy shares in it, but nevertheless partly with the object of putting B in funds to acquire shares in it or with the knowledge that B so intends to use the proceeds of sale (see p 402 h j, p 406 e, p 407 j to p 408 b, p 413 d and p 414 g h, post).
For the ingredients of the tort of conspiracy see 37 Halsbury’s Laws (3rd Edn) 128, para 222.
For the provision of financial assistance by a company for the purchase of its own shares, see 7 Halsbury’s Laws (4th Edn) para 208, and for cases on the subject, see 9 Digest (Reissue) 403–405, 2378–2379.
For constructive trusts, see 38 Halsbury’s Laws (3rd Edn) 855–856, paras 1440–1441, and for cases on the subject, see 47 Digest (Repl) 101–113, 727–814.
For pleading fraud, see 30 Halsbury’s Laws (3rd Edn) 17, para 36.
For the Companies Act 1948, s 54, see 5 Halsbury’s Statutes (3rd Edn) 163.
The plaintiff, Belmont Finance Corpn Ltd (‘Belmont’), by a receiver appointed out of court under debentures issued by the company, brought an action against the defendants, (i) Williams Furniture Ltd (formerly Easterns Ltd) (‘Williams’), (2) City Industrial Finance Ltd (‘City’), (3) James Peter Grosscurth, (4) Andreas Demetri, (5) Kenneth Maund, (6) John Sinclair Copeland, (7) Archie Spector and (8) Frank Victor Smith, seeking (i) a declaration that a transaction effected by an agreement dated 3 October 1963 made between the first three defendants and Belmont was unlawful and void under s 54 of the Companies Act 1948, (ii) damages and (iii) all necessary accounts and enquiries. Further and in the alternative Belmont claimed against the seventh and eighth defendants a declaration that they were guilty of misfeasance and breach of trust in relation to Belmont, as its directors, in procuring Belmont to enter into an unlawful agreement and/or in procuring the purchase by Belmont of certain shares at a price which to the knowledge of those defendants was greatly in excess of the true value of the shares, and compensation for such misfeasance and breach of trust.
The third defendant was a bankrupt and did not enter an appearance to the action. Shortly before the trial Belmont reached a compromise with the fifth defendant. Early in 1970 the action was discontinued against the eighth defendant on compassionate grounds. At the trial of the action Belmont asserted that on the pleadings in the statement of claim it was entitled to claim additional relief against all defendants, on the basis of constructive trust.
On 30 July 1976, at the close of Belmont’s case, Foster J dismissed the action on the grounds that there was no case to answer on the claim for conspiracy and that it was not open to Belmont, on the case as pleaded, to claim relief on the basis of constructive trust. Belmont appealed to the Court of Appeal ( 1 All ER 118,  Ch 250) (Buckley, Orr and Goff LJJ) which on 18 February 1977 allowed the appeal holding that Belmont was not barred from pursuing the claim for conspiracy. The Court of Appeal also allowed Belmont to amend its statement of claim to allege breach of a constructive trust by the defendants. The case was remitted to Foster J who on 6 December 1977, after the trial of the action, dismissed Belmont’s claim. Belmont appealed. During the course of the hearing of the appeal Belmont reached a compromise with the fourth and sixth defendants. The seventh defendant was not made a respondent to the appeal and therefore as against him the case stood dismissed. The facts are set out in the judgment of Buckley LJ.
Cur adv vult
31 July 1979. The following judgments were delivered.
This is the plaintiff’s appeal against a judgment of Foster J, who on 6 December 1977 dismissed this action. The action is brought by a receiver and manager appointed out of court by the holders of debentures created by the plaintiff company (‘Belmont’). The receiver sues in Belmont’s name under the direction of the court, but the action is being fought in the interests of depositors with Belmont, the business of which was that of deposit bankers financing mainly hire-purchase transactions. Belmont is now in compulsory liquidation. We are told that under the terms of the debentures the claims of depositors rank in priority to the claims of the debenture holders and that there are no assets to meet the claims of the depositors apart from the fruits of this action.
The action arises out of a sale of the share capital of Belmont which is claimed to have been in breach of the Companies Act 1948, s 54, which makes it illegal for a company to give financial assistance for or in connection with the purchase of its own shares.
Immediately before the transaction out of which the claim arises Belmont was a wholly-owned subsidiary of the second defendant, City Industrial Finance Ltd (‘City’). City was and is a wholly owned subsidiary of the first defendant, Williams Furniture Ltd (‘Williams’) formerly called Easterns Ltd. Williams was then owned or controlled by a Colonel Lipert. He was anxious to sell Belmont because its business was not proving to be profitable and also partly because it did not form a particularly useful adjunct of the business of dealing in furniture in which the rest of his companies were engaged.
The third defendant, James Peter Grosscurth, and associates of his, owned or controlled, amongst other companies, two companies called Rentahome Ltd (‘Rentahome’) and Maximum Finance Ltd (‘Maximum’) engaged directly or indirectly in property development. All or substantially all the issued shares of Maximum, which consisted of 50,000 £1 ordinary shares, were beneficially owned by Mr Grosscurth, the fifth defendant Kenneth Maund and the sixth defendant John Sinclair Copeland, although some of these were registered in the name of the fourth defendant Andreas Demetri. Mr Grosscurth controlled both companies. Mr Grosscurth, with the concurrence of Mr Maund and Mr Copeland, was anxious to buy Belmont for use as a means of financing property development projects of other companies in their group. He and Colonel Lipert entered into negotiations. While these negotiations were proceeding there was a change in the control of Williams. A Mr James and a Mr Norman Williams owned the share capital of a company called W & S Williams (Kilburn) Ltd which carried on a furniture business. As a result of what has been termed a reverse takeover, Messrs James and Norman Williams early in September 1963 acquired a controlling interest in Williams (the first defendant) in exchange for their shares in W & S Williams (Kilburn) Ltd, which thus became a subsidiary of Williams. Thereafter the negotiations with Mr Grosscurth were conducted by Mr James and his representatives in the place of Colonel Lipert. They resulted in due course in an agreement dated 3 October 1963 (‘the agreement’) which gives rise to the present action.
Early in those negotiations in answer to an enquiry by Colonel Lipert as to how Mr Grosscurth proposed to finance the deal, Mr Grosscurth stated in a letter dated 5 June 1963 that his present intention was ‘to arrange the consideration for the purchase of Belmont from Belmont’s own resources … by selling to Belmont the whole of the issued share capital of Rentahome Limited’. Later, in a letter dated 2 September 1963 to Mr James, Mr Grosscurth said that for fiscal reasons he was unable to sell shares in Rentahome and suggested as an alternative that Belmont should purchase the whole of the share capital of Maximum for £500,000.
The parties to the agreement were Mr Grosscurth, Belmont, City (then called Belmont Industrial Finance Ltd) and Williams (then called Easterns Ltd). By cl 2 Mr Grosscurth agreed to sell, or procure the sale of, the whole share capital of Maximum to Belmont for £500,000 in cash and Belmont agreed to buy it at that price. By cl 4, subject to and on completion of the foregoing sale, City agreed to sell and Mr Grosscurth agreed to buy, or procure the purchase of, all the issued share capital of Belmont for £230,000 and a further sum to be ascertained in accordance with cl 5, which turned out to be £259,000, making a total purchase price of £489,000. Both transactions were to be completed on 11 October 1963, the latter sale being completed immediately after the former. By cl 7 on completion of the latter sale City agreed to subscribe for 230,000 £1 5% cumulative redeemable preference shares of Belmont, and Mr Grosscurth agreed to subscribe for 20,000 like shares and 50,000 £1 ordinary shares of Belmont, in every case at par. By cl 9 City and Williams agreed to lend Belmont £200,000 for 12 months from completion at 9 1/4% per annum secured on the capital of maximum. By cl 13(h) Mr Grosscurth undertook and warranted to Belmont that the aggregate profits of Maximum and its subsidiaries for the period from 22 May 1962 to 31 May 1968, net of all expenses but subject to tax, should be not less than £500,000, and that in default Mr Grosscurth should pay to Belmont by way of liquidated damages a sum equal to the deficiency less income tax and profits tax at the rates in force on 31 May 1968. This undertaking or warranty was to be secured on the whole of the issued share capital of Rentahome. The preference shares of Belmont were to be redeemed in accordance with a prescribed programme and Mr Grosscurth covenanted with City that, if they were not so redeemed, he would purchase them at par within 28 days of the several redemption dates.
The outcome of the agreement when completed was (1) that, whereas previously (a) Mr Grosscurth and his associates had owned all the capital of Maximum, of which a company which I shall call Cityfield was a wholly owned subsidiary, and (b) Mr James and his associates had owned a controlling interest in Williams, of which City was a wholly owned subsidiary and Belmont a wholly owned sub-subsidiary, after completion (i) Mr Grosscurth and his associates owned all the capital of Belmont, of which Maximum was a wholly-owned subsidiary and Cityfield a wholly-owned sub-subsidiary, and (ii) City had parted with Belmont, (2) that City received £489,000, out of which it subscribed at par for 230,000 £1 5% cumulative redeemable preference shares of Belmont retaining £259,000 in cash, and Mr Grosscurth and his associates received £11,000 in cash, (3) that the paid-up capital of Belmont was increased by an amount of £300,000 consisting of 230,000 preference shares subscribed by City, 20,000 like shares subscribed by Mr Grosscurth and 50,000 ordinary shares subscribed by Mr Grosscurth, (4) that Belmont had £200,000 on loan from Williams and City for 12 months, which altogether with the proceeds of the new share capital, restored to Belmont for the time being the £500,000 cash employed in buying Maximum, (5) that Belmont had the undertaking of Mr Grosscurth that the profits of Maximum and its subsidiaries for the period 22 May 1962 to 31 May 1968, net of all expenses but subject to tax, should be not less than £500,000 (representing net profits after tax at the rates of tax then in force of £156,250), such undertaking being secured on the share capital of Rentahome, and (6) that the programme for the redemption of the preference shares was such that they would become due for redemption by prescribed instalments in each of the sixth to the twentieth years following allotment.
The sealing of the agreement by Belmont was resolved on at a board meeting of Belmont on 3 October 1963 at which three directors only of that company were present, namely Mr Norman Williams, the seventh defendant Mr Spector, and a Mr Foley. Its completion was carried out at two board meetings of Belmont, one of which was held at noon on 11 October 1963 and the other at 2.30 pm on the same day. The directors present at each of those meetings were the seventh and eighth defendants, Messrs Spector and Smith, a Mr Kellman and Mr Foley. At the earlier meeting it was resolved that Belmont should purchase the issued share capital of Maximum for £500,000. The necessary transfers were approved and sealed by Belmont and the secretary was instructed to arrange for the transfers to be stamped and presented for registration. The minute of the later meeting records:
‘It was confirmed that Messrs. Gouldens [who were the solicitors advising Mr Grosscurth and his associates] had obtained Counsel’s Opinion, a copy of which was produced at the meeting, stating that the transaction did not in his opinion contravene section 54 of the Companies Act 1948.’
At that meeting, which was also attended by Mr Grosscurth and his associates, all the rest of the formal steps necessary to implement the agreement were carried out. The opinion of counsel there referred to is dated 27 September 1963 and was obtained by Messrs Gouldens on behalf of their clients without any reference to Belmont or anyone on Belmont’s behalf, or any suggestion by anyone on Belmont’s behalf that such an opinion should be obtained. I must revert to this opinion later.
For the sake of completeness I should say that the execution of the agreement by Williams was resolved on at a board meeting of Williams on 3 October 1963 at which the directors present were Mr Norman Williams and a Mr Burke. The execution of the agreement by Ciry was resolved on at a board meeting of City on the same date at which the directors present were Mr Norman Williams, a Mr Harries and Mr Spector. At a board meeting of City at 1.30 pm on 11 October 1963, at which the directors present were Mr Harries, Mr Smith and Mr Spector, it was, according to the minute, confirmed that Messrs Gouldens had obtained counsel’s opinion, a copy of which was produced at the meeting, stating that the agreement did not in counsel’s opinion contravene s 54 of the 1948 Act. Share transfers of all the shares of Belmont were then approved and sealed as follows: 116,668 ordinary £1 shares in favour of Mr Grosscurth, 41,666 like shares in favour of Mr Maund, 41,666 like shares in favour of Mr Demetri, making a total of 200,000 shares.
It was further resolved that City should subscribe for 230,000 preference shares of Belmont and the secretary was authorised to draw and present a cheque in favour of Belmont for £230,000 accordingly. A letter from Messrs Binder Hamlyn & Co, chartered accountants, was produced to the meeting confirming that that firm held a memorandum of deposit of all the issued share capital of Rentahome together with the relevant certificates and blank transfers executed by the registered holders, and that the same would not be removed from Messrs Binder Hamlyn & Co until the liability of Mr Grosscurth to Belmont had been determined. The shares transferred to Mr Demetri were to be held by him as nominee for Mr Grosscurth and Mr Copeland.
At 3 and 11 October 1963 the boards of directors of City and Belmont respectively consisted of the following persons: City—James, Norman Williams, Harries, Voss, Spector and Smith; Belmont—James, Norman Williams, Spector, Smith, Kellman and Foley. Foley was also the secretary of Williams, City and Belmont. Of these gentlemen, Harries and Foley were members of what I shall refer to hereafter as Mr James’s team. None of the rest, apart from Mr James himself, appears to have taken any effective part in the affair, save in so far as they appeared at the board meetings of 3 and 11 October, but no explanation of the transactions was given to them at either of those board meetings or apparently at any other time. They did what they were told to do. Mr Norman Williams, Mr Harries and Mr Foley all died before the action came to trial. Harries and Foley, who both died in 1972, had made written statements, but no use was attempted to be made of these under the Civil Evidence Act 1968 at the trial. Mr Spector was alive at the time of the trial, but his health was said to be such that he was unfit to be cross-examined. He was then legally aided and represented by counsel, who asked that Mr Spector should be permitted to give evidence by way of answers to interrogatories; but in the face of opposition by counsel for Williams and City to this proposal the judge refused to allow that course to be taken. Consequently the judge heard no evidence from Mr Spector. Mr Spector is not a respondent to this appeal. So far as he is concerned the judgment stands.
It is perhaps convenient to mention also at this point (i) that the action was discontinued against Mr Smith in 1970 on compassionate grounds and (ii) that all claims by Belmont against Mr Maund were compromised shortly before the first trial on payment of a certain sum by Mr Maund to Belmont, when the proceedings were discontinued against him. Neither of these two gentlemen has given evidence. Late in the course of this appeal the plaintiff came to terms with Mr Copeland and Mr Demetri and all proceedings against them have been stayed. Mr Grosscurth himself has gone bankrupt and was not available at the trial to give evidence, being abroad.
This action was commenced by Belmont’s receiver on 30 September 1969 against Williams, City, Grosscurth, Demetri, Maund, Copeland, Spector and Smith. The fourth, fifth and sixth defendants were, as I have already indicated, associates of Mr Grosscurth. The seventh and eighth defendants were directors of Belmont until the board of that company was reconstituted at the board meeting held at 2.30 pm on 11 October 1963 after the completion of the agreement. In the statement of claim Belmont alleged that the agreement was in contravention of s 54 of the 1948 Act and that the defendants conspired to carry it into effect whereby Belmont had suffered damage. Belmont claimed as against all the defendants a declaration that the agreement was unlawful and void under s 54 and damages with ancillary relief, and as against the defendants Spector and Smith that they were guilty of misfeasance and breach of trust in procuring Belmont to enter into the agreement or alternatively in procuring Belmont to buy the share capital of Maximum at £500,000, which was to their knowledge greatly in excess of its true value, with consequential relief.
The earlier history of the action appears from the report of an earlier appeal to this court ( 1 All ER 118,  Ch 250). I shall not repeat now what is there recorded. Under the leave to amend which was then obtained, Belmont amended its statement of claim to introduce an allegation that, as all the defendants well knew, the price paid for the capital of Maximum was an inflated price, or alternatively that the defendants shut their eyes to the fact that such price was an inflated one or wilfully refrained from enquiring into the question whether such price was a proper or an inflated one. They further alleged that the price of £500,000 was arrived at by all the defendants dishonestly to facilitate the purchase of Belmont’s capital in contravention of s 54. They also alleged that the banker’s draft for £489,000 by which the purchase price for the capital of Belmont was satisfied, as City knew or ought to have known, was or represented moneys of Belmont misapplied by the defendants Spector and Smith in breach of trust in giving financial assistance to the purchasers of the capital of Belmont for their purchase thereof from City. They also alleged that £122,500, part of the £489,000, was the purchase price of 41,666 Belmont shares bought by Grosscurth and Copeland and that as Copeland well knew the £122,500 was or represented moneys of Belmont misapplied by the defendants Spector and Smith in breach of trust in giving financial assistance as aforesaid. Based on these new allegations Belmont by amendment to the prayer of its statement of claim raised new claims against City and Copeland as constructive trustees in respect of the sums of £489,000 and £122,500 respectively.
The first question for consideration is whether the agreement did contravene s 54 of the 1948 Act. Only if the answer to that question is affirmative does the question whether the defendants or any of them are guilty of conspiracy arise, for it is the illegality of the agreement, if it be illegal, which constitutes the common intention of the parties to enter into the agreement a conspiracy at law.
There is little judicial authority on the section. In Re V G M Holdings this court had to consider whether under the section in the form in which it stood in the Companies Act 1929, which did not contain the word ‘subscription’, the section covered a case where money which a company had provided had been used to assist a subscription for the company’s own shares. Lord Greene MR said ( Ch 235 at 240; cf  1 All ER 224 at 226):
‘There could, I think, be no doubt that, if that question were answered in favour of the liquidator, the 15,98ol was provided by the company by way of financial assistance, because whether a company provides the money by way of gift or by way of loan or by buying assets from the person who is purchasing the shares at a fraudulent overvalue, all those transactions, it seems to me, would fall within the phrase “financial assistance.”’
The transaction there in question was a fraudulent one. V G M Holdings Ltd bought all the share capital of Century, which was worthless, from Vanbergen for £8,301 and Vanbergen used the money to pay a call on shares which he held in V G M. The court, however, held that the transaction did not involve a purchase of V G M shares and so was not within the section. In reliance on the reference by Lord Greene MR to a purchase at a fraudulent overvalue, it was suggested to us that the section does not apply to any case in which the company which is alleged to have given financial assistance got fair value for its money. I think that Lord Greene MR must be understood to have been speaking in the context of the facts of the case before him and not to have intended to attempt to put any limit on the scope of the section.
Our attention was also drawn to a South African case of Gradwell (Pty) Ltd v Rostra Printers Ltd. The contract in that case was a little complicated, but the facts can be summarised as follows. Company A sold to company B all the shares in company C and a debt of £40,258 due from company C to company A. The price was £32,245. The contract was conditional on company B being able to borrow £30,000 on the security of company C’s assets. That sum was to be applied in discharging an existing mortgage of company C’s assets and in reducing company C’s debt to company A. To the extent that the debt to company A was reduced, the cash so received by company A was to be treated as paid on account of the purchase price, that is to say, the price payable by company B was to be reduced by the amount that the debt to company A, which formed part of the subject-matter of the sale, was reduced. The statutory provision there under consideration was for present purposes identical with s 54(1) of the 1948 Act.
The case eventually came before the Appellate Division of the Supreme Court of South Africa. In the following passage Rostra is company A, Crowden is company B and ‘the company’ is company C. Schreiner JA, who delivered what was effectively the judgment of the court, said (1959 (4)SA 419 at 425–426):
‘We were pressed by counsel for Crowden with the importance of the purpose of the whole transaction. The purpose of Crowden and Rostra was inevitably that of the company, the actions of which were entirely controllable by Rostra. The purpose must be taken to have been to help Crowden to buy and Rostra to sell the company’s shares. But this does not carry Crowden to success. Unless what was to be done would amount to giving of financial assistance within the meaning of the sub-section the purpose and the connection would not be important. Having money available the company could part with it in various ways that would enable the recipient to purchase the company’s shares with the money. It could for instance buy an asset, not required for the purposes of its business, in order to provide the seller of the asset with money with which to buy the shares. It was contended on behalf of Crowden that this would be giving financial assistance. If the purchase of the asset were effected at a price known to be inflated, this would no doubt be the giving of financial assistance. It would indeed be equivalent to a gift and would clearly involve a reduction of the company’s capital. It was one of the illustrations given by LORD GREENE in In re V.G.M. Holdings Ltd. [ 1 All ER 224 at 226,  Ch 235 at 240]. It is, I think, significant that the MASTER OF THE ROLLS did not mention the case of the purchase of an asset at a fair price with the object of enabling the seller of the asset to buy the shares. But whatever may be the position in such a case the paying off of an existing debt seems to be decidedly more difficult to bring within the notion of giving financial assistance. The payer’s assets and liabilities are put into a different form but the balance is unchanged. And the same applies to the financial position of the payee. Here the company would have no more and no less after the completion of the transaction than before. And the same would apply to Rostra. The company would owe more to its mortgagee and correspondingly less to Rostra. The price to be paid by Crowden would be less by the difference in the value of the assets to be acquired. Its financial position would be unchanged—only its investment would be smaller. Where there is an anticipation of the date when a debt becomes due and payable the position may possibly be different, but where the debt is presently due and payable and the debtor can have no answer to the creditor’s demand for payment, it would be straining the language to hold that by paying his debt the debtor gives the creditor financial assistance.’
In that passage the learned judge reserves the question of what the effect would be if company B were to purchase from company A an asset not required for the purposes of its business but at a fair price.
Foster J treated as a proposition of law, accepted by counsel for Belmont, that a company does not give financial assistance in connection with a purchase of its own shares within the meaning of s 54 by reason only of its simultaneous entry into a bona fide commercial transaction as a result of which it parts with money or money’s worth, which in turn is used to finance the purchase of its own shares. He went on to find that the negotiations in the present case were at arm’s length and that on the one side Mr James genuinely believed that to buy the capital of Maximum for £500,000 was a good commercial proposition for Belmont and on the other side Mr Copeland honestly believed that in October 1963 the value of the capital of Maximum with Mr Grosscurth’s guarantee of Maximum’s profits under cl 13(h) of the agreement secured on Rentahomes’s share capital was not less than £500,000. On these findings he reached the conclusion that the agreement was a bona fide commercial transaction, on which ground he dismissed the action.
This reasoning assumes, as I understand it, that if the transaction under consideration is genuinely regarded by the parties as a sound commercial transaction negotiated at arm’s length and capable of justification on purely commercial grounds, it cannot offend against s 54. This is, I think, a broader proposition than the proposition which the judge treated as having been accepted by counsel for Belmont. If A Ltd buys from B a chattel or a commodity, like a ship or merchandise, which A Ltd genuinely wants to acquire for its own purposes, and does so having no other purpose in view, the fact that B thereafter employs the proceeds of the sale in buying shares in A Ltd should not, I would suppose, be held to offend against the section; but the position may be different if A Ltd makes the purchase in order to put B in funds to buy shares in A Ltd. If A Ltd buys something from B without regard to its own commercial interests, the sole purpose of the transaction being to put B in funds to acquire shares in A Ltd, this would, in my opinion, clearly contravene the section, even if the price paid was a fair price for what is bought, and a fortiori that would be so if the sale to A Ltd was at an inflated price. The sole purpose would be to enable (ie to assist) B to pay for the shares. If A Ltd buys something from B at a fair price, which A Ltd could readily realise on a resale if it wished to do so, but the purpose, or one of the purposes, of the transaction is to put B in funds to acquire shares of A Ltd, the fact that the price was fair might not, I think, prevent the transaction from contravening the section, if it would otherwise do so, though A Ltd could very probably recover no damages in civil proceedings, for it would have suffered no damage. If the transaction is of a kind which A Ltd could in its own commercial interests legitimately enter into, and the transaction is genuinely entered into by A Ltd in its own commercial interests and not merely as a means of assisting B financially to buy shares of A Ltd, the circumstance that A Ltd enters into the transaction with B, partly with the object of putting B in funds to acquire its own shares or with the knowledge of B’s intended use of the proceeds of sale, might, I think, involve no contravention of the section, but I do not wish to express a concluded opinion on that point.
The reasoning of the judge’s judgment appears to me, with deference to him, to overlook the word ‘only’ in the suggested proposition of law.
[His Lordship then considered the judge’s favourable assessment of Mr James as a witness and the failure of Mr James or any of his associates to obtain a valuation of Maximum and went on to consider an independent valuation made in July 1974 by Mr Howard Williams, a partner in Messrs Mann Judd & Co, a London firm of chartered accountants, who were instructed by Belmont’s receiver as if to advise Belmont of a fair price to pay for the share capital of Maximum as at 3 October 1963. The valuation report of Messrs Mann Judd & Co valued the total issued share capital of Maximum as at 3 October 1963 at not more than the ‘value of the underlying consolidated “tangible” assets of the company, that is, £60,069’. His Lordship then pointed out that Mr James had genuinely believed that the transaction was a good commercial proposition for Belmont without having any good grounds for that belief, and then continued:]
After careful consideration I do not feel that we should be justified in disturbing the judge’s finding that Mr James genuinely believed that the agreement was a good commercial proposition for Belmont. It was a belief which, on his view of the commercial aspects of the case, Mr James could have sincerely held.
In truth the purchase of the share capital of Maximum was not a commercial transaction in its own right so far as Mr James and his group of companies were concerned: it was part of the machinery by which City obtained £489,000 for the share capital of Belmont, £259,000 in cash and £230,000 by redemption of the redeemable preference shares subscribed in Belmont. It was not a transaction whereby Belmont acquired anything which Belmont genuinely needed or wanted for its own purposes: it was one which facilitated Mr Grosscurth’s acquiring Belmont for his own purposes without effectively parting with Maximum. That the purpose of the sale of Maximum to Belmont was to enable Mr Grosscurth to pay £489,000 for Belmont was at all relevant times known to and recognised by Mr James and the members of his team as well as by Mr Copeland. There is no good reason disclosed by the evidence to suppose either that Mr Grosscurth and his associates could have sold Maximum to anyone else for £500,000 or that Belmont could have disposed of Maximum for £500,000 to anyone else at any time. The purchase of the share capital of Maximum may have been intra vires of Belmont (a matter which we have not been invited to consider), but it was certainly not a transaction in the ordinary course of Belmont’s business or for the purposes of that business as it subsisted at the date of the agreement. It was an exceptional and artificial transaction and not in any sense an ordinary commercial transaction entered into for its own sake in the commercial interests of Belmont. It was part of a comparatively complex scheme for enabling Mr Grosscurth and his associates to acquire Belmont at no cash cost to themselves, the purchase price being found not from their own funds or by the realisation of any asset of theirs (for Maximum continued to be part of their group of companies) but out of Belmont’s own resources. In these circumstances, in my judgment, the agreement would have contravened s 54 of the 1948 Act even if £500,000 was a fair price for Maximum. I think, however, that Mr Howard Williams’s report and evidence clearly establish that £500,000 was in truth an inflated price. To the extent that it exceeded £60,000 or thereabouts it was speculative and depended on the continued availability of Mr Grosscurth to direct Maximum’s affairs and his willingness to do so. The view that Belmont was buying Mr Grosscurth’s services for a period of some five years or until Maximum had earned £500,000 gross profits is, in my view, untenable. As I remarked in the course of the argument, Belmont was not buying Grosscurth; Grosscurth was buying Belmont. The business of Cityfield, which was Maximum’s main source of profit, was admittedly speculative and was financed by borrowing. Moreover, its profits as stated in its annual accounts were ascertained on a basis which Mr Copeland agreed was imprudent, though not improper, profits being brought into account before they were received. A considerable part of such profits had to be written off because the contracts on which they depended fell through. It is, in my judgment, manifest on the evidence, particularly that of Mr Howard Williams, that the existence of the warranty could not have added an amount anywhere near £440,000 to the saleable value of Maximum, if indeed it added anything.
It follows that in my judgment the agreement was unlawful, for it was a contract by Belmont to do an unlawful act, viz to provide financial assistance to Mr Grosscurth and his associates for the purpose of, or in connection with, the purchase of Belmont’s own share capital.
The next question is whether in these circumstances the alleged conspiracy is established in respect of those defendants against whom the action is still on foot, ie the first three defendants. To obtain in civil proceedings a remedy for conspiracy, the plaintiff must establish (a) a combination of the defendants, (b) to effect an unlawful purpose, resulting in damage to the plaintiff (Crofter Hand Woven Harris Tweed Co Ltd v Veitch ( 1 All ER 142 at 147,  AC 435 at 440) per Lord Simon LC). The classic definition of conspiracy is that in Mulcahy v R ((1868) LR 3 HL 306 at 317):
‘A conspiracy consists not merely of the intention of two or more, but in the agreement of two or more to do an unlawful act, or to do a lawful act by unlawful means.’
I have used the word ‘combination’ rather than the word ‘agreement’ used in that definition and by Lord Simon LC, because the word ‘agreement’ in this context does not mean an agreement in any contractual sense but a combination and common intention to do the act which is the object of the alleged conspiracy. That Lord Simon LC was so using the word is, in my opinion, clear from later passages in his speech: see also the other speeches in the Crofter Hand Woven case.
The unlawful purpose in this case was the provision of financial assistance in contravention of s 54 of the 1948 Act. That the purpose of the sale of Maximum to Belmont was to enable Mr Grosscurth to pay £489,000 to City for the share capital of Belmont was known to all concerned. For reasons which I gave in my judgment on the earlier appeal in this action ( 1 All ER 118 at 127,  Ch 250 at 263), the alleged conspiracy sued on must, in my view, have preceded the signing of the agreement, but its object is made clear by the agreement, namely that Belmont should give the financial assistance to Mr Grosscurth which the carrying out of the agreement would afford him. Williams and City were parties to the agreement and so, in my opinion, are fixed with the character of parties to the conspiracy. Moreover, Mr James knew perfectly well what the objects of the agreement were. He was a director of both Williams and City. Mr Harries and Mr Foley, who also knew the objects of the agreement, were a director and the secretary respectively of City. Mr Foley was also the secretary of Williams. Their knowledge must, in my opinion, be imputed to the companies of which they were directors and secretary, for an officer of a company must surely be under a duty, if he is aware that a transaction into which his company or a wholly-owned subsidiary is about to enter is illegal or tainted with illegality, to inform the board of that company of the fact. Where an officer is under a duty to make such a disclosure to his company, his knowledge is imputed to the company (Re David Payne & Co Ltd, Re Fenwick, Stobart & Co Ltd). In these circumstances, in my opinion, Williams and City must be regarded as having participated with Mr Grosscurth in a common intention to enter into the agreement and to procure that Belmont should enter into the agreement and that the agreement should be implemented. That Mr Grosscurth was a party to that common intention is, in my opinion, indisputable.
In my judgment, the alleged conspiracy is established in respect of these three defendants, and they are not exempt from liability on account of counsel’s opinion or because they may have believed in good faith that the transaction did not transgress s 54. If all the facts which make the transaction unlawful were known to the parties, as I think they were, ignorance of the law will not excuse them: see Churchill v Walton ( 1 All ER 497 at 503,  2 AC 224 at 237). That case was one of criminal conspiracy, but it seems to me that precisely similar principles must apply to a conspiracy for which a civil remedy is sought. Nor, in my opinion, can the fact that their ignorance of, or failure to appreciate, the unlawful nature of the transaction was due to the unfortunate fact that they were, as I think, erroneously advised excuse them (Cooper v Simmons, and see Shaw v Director of Public Prosecutions, where the appellant had taken professional legal advice).
If they had sincerely believed in a factual state of affairs which, if true, would have made their actions legal, this would have afforded a defence (Kamara v Director of Public Prosecutions ( 2 All ER 1242 at 1252,  AC 104 at 119)); but on my view of the effect of s 54 in the present case, even if £500,000 had been a fair price for the share capital of Maximum and all other benefits under the agreement, this would not have made the agreement legal. So a belief in the fairness of the price could not excuse them.
I now come to the constructive trust point. If a stranger to a trust (a) receives and becomes chargeable with some part of the trust fund or (b) assists the trustees of a trust with knowledge of the facts in a dishonest design on the part of the trustees to misapply some part of a trust fund, he is liable as a constructive trustee (Barnes v Addy ((1874) LR 9 Ch App 244 at 251–252) per Lord Selborne LC).
A limited company is of course not a trustee of its own funds: it is their beneficial owner; but in consequence of the fiduciary character of their duties the directors of a limited company are treated as if they were trustees of those funds of the company which are in their hands or under their control, and if they misapply them they commit a breach of trust (Re Lands Allotment Co ( 1 Ch 616 at 631, 638, [1891–94] All ER Rep 1032 at 1034, 1038), per Lindley and Kay LJJ). So, if the directors of a company in breach of their fiduciary duties misapply the funds of their company so that they come into the hands of some stranger to the trust who receives them with knowledge (actual or constructive) of the breach, he cannot conscientiously retain those funds against the company unless he has some better equity. He becomes a constructive trustee for the company of the misapplied funds. This is stated very clearly by Jessel MR in Russell v Wakefield Waterworks Co ((1875) LR 20 Eq 474 at 479), where he said:
‘In this Court the money of the company is a trust fund, because it is applicable only to the special purposes of the company in the hands of the agents of the company, and it is in that sense a trust fund applicable by them to those special purposes; and a person taking it from them with notice that it is being applied to other purposes cannot in this Court say that he is not a constructive trustee.’
In the present case, the payment of the £500,000 by Belmont to Mr Grosscurth, being an unlawful contravention of s 54, was a misapplication of Belmont’s money and was in breach of the duties of the directors of Belmont. £489,000 of the £500,000 so misapplied found their way into the hands of City with City’s knowledge of the whole circumstances of the transaction. It must follow, in my opinion, that City is accountable to Belmont as a constructive trustee of the £489,000 under the first of Lord Selborne LC’s two heads.
There remains the question whether City is chargeable as a constructive trustee under Lord Selborne LC’s second head on the ground that Belmont’s directors were guilty of dishonesty in buying the shares of Maximum and that City with knowledge of the facts assisted them in that dishonest design. As I understand Lord Selborne LC’s second head, a stranger to a trust notwithstanding that he may not have received any of the trust fund which has been misapplied will be treated as accountable as a constructive trustee if he has knowingly participated in a dishonest design on the part of the trustees to misapply the fund; he must himself have been in some way a party to the dishonesty of the trustees. It follows from what I have already held that the directors of Belmont were guilty of misfeasance but not that they acted dishonestly. No attack appears to have been made at the trial on the honesty of either Mr Norman Williams or Mr Spector, who were two of the three directors of Belmont present at the board meeting of 3 October 1963, or on the honesty of Mr Smith and Mr Kellman, who with Mr Spector were three of the four directors present at the Belmont board meetings of 11 October 1963. The other director present at those three meetings was Mr Foley. The evidence establishes that the scheme was not explained to Mr Spector, Mr Smith or Mr Kellman. They did what they were told to do. In this respect they clearly failed to discharge their duties as directors, but it has not been shown that they were dishonest. The position of Mr Norman Williams was not investigated. Mr Foley, as one of Mr James’s team, was presumably aware of all the relevant facts. There was, so far as I am aware, no evidence directed to establishing dishonesty on his part. Any finding of dishonesty by Mr Foley would have had to be reached by inference. The judge made no finding that any of these gentlemen acted dishonestly. His judgment clearly implies that in his view they did not. Mr James was not present at either of the board meetings. It was not suggested that it was on his personal instructions that Messrs Spector, Smith and Kellman acted as they did at the board meetings. It would seem probable that it was Mr Foley who ran the meetings. Even if the instructions should be regarded as given by Mr James and relayed through Mr Foley, the judge’s finding that Mr James honestly believed that the transaction was in Belmont’s interests, which as I have said I would not feel justified in disturbing, makes it impossible, in my view, to hold that there was any dishonesty about the proceedings of the Belmont board. So Lord Selborne LC’s second head of liability as a constructive trustee cannot, in my judgment, apply in this case.
For these reasons, in my opinion, Belmont is entitled to judgment against the first three defendants for conspiracy and against City as a constructive trustee. I would allow this appeal accordingly. What precise form the relief flowing from this should take may require further argument.
GOFF LJ. I agree with all that Buckley LJ has said. As, however, we are differing from the learned judge I feel that I ought to add my reasons in my own words.
In my view, with every respect to Foster J, he misdirected himself in two fundamental respects. In the first place he took the view at the outset that the matter was remitted to him to try an allegation of dishonesty and nothing else, saying ‘… and the case was remitted to me to finish the trial but now on the basis of an allegation of dishonesty’. This may, I think, have been occasioned by the way in which the defendants put their argument, although Belmont’s counsel certainly made it clear that he was submitting that he did not have to prove fraud, unless in the end he was forced to rely on one particular claim, and in that, in my judgment, Belmont’s counsel was correct.
Belmont presented its case originally as one of conspiracy and nothing else, and it has never resiled from that claim, or placed less reliance on it, but the first trial came to an abrupt end because the judge accepted a submission on behalf of the defendants that they had no case to answer on the ground that Belmont was itself a party to the agreement of 3 October 1963, and therefore a party to the alleged conspiracy and thus precluded from maintaining any claim based on it.
We rejected that ruling, and so on the remission the judge had to try that issue, which had so far never been tried. That case, however, does not depend on any allegation of fraud, and so with all respect, taking the view he did that all he had to consider was an allegation of fraud, he could not, and did not, properly consider the issue of conspiracy. Secondly, when the judge gave his ruling at the conclusion of Belmont’s case at the first trial, its counsel applied for leave to amend so as to add, not substitute, a claim for relief on the basis of constructive truat. The judge refused to allow any amendment, but we also overruled him on that point. It is true that we held that for this purpose Belmont must allege and prove fraud, which it did in the final version of its statement of claim. However, the constructive trustee claim was formulated, both in the finally amended statement of claim and in argument before us, in the two alternative ways stated by Lord Selborne LC in Barnes v Addy ((1874) LR 9 Ch App 244 at 251–252), namely, receiving trust funds in such a way as to become accountable for them and knowing participation in a dishonest and fraudulent design on the part of the trustees. The second of those ways does depend on fraud or dishonesty, but the first does not, and in saying that fraud was essential, we were dealing only with the second class of case, and with the argument of Belmont’s counsel, which we rejected, that even there fraud is not a necessary part of the cause of action.
In my judgment, therefore, in addition to the conspiracy case the judge had at the second trial to decide, quite apart from any question of fraud, whether any, and if so which, of the defendants had received money, being or representing money held in trust for Belmont, in such circumstances as to render them accountable as constructive trustees. Again, however, with all respect he failed to direct his mind to this, because no doubt of the mistaken view he had on the question that it was fraud or nothing. This is highlighted, I think, when one sees that in his recital of the significant paragraphs in the statement of claim, the judge stopped short at para 20 and did not read or mention para 20A at all, that being the paragraph alleging receipt of trust money and constructive trusteeship on that footing.
The second fundamental misdirection, in my judgment, was that the judge placed too wide a construction on the proposition advanced by counsel in his opinion on the effect of s 54 of the Companies Act 1948, and accepted by counsel for Belmont as an accurate statement of the law. With all respect, the judge failed to give due, or any, weight to the words ‘by reason only’ in that opinion, which words in my view are highly important. That being so, the judge directed himself that—
‘there remains for me to decide a question of fact, namely: was the purchase by Belmont of all the shares in Maximum a bona fide [the judge’s emphasis] commercial transaction [and] was the purchase price of £500,000 a commercial one?’
That, however, was in my judgment plainly too narrow, for the judge had also to consider as a matter of the utmost importance what was the purpose of the purchase by the plaintiff company.
With these preliminary observations I shall proceed to consider the case in conspiracy. To succeed on this issue Belmont must establish that the agreement of 3 October 1963 was a breach of s 54 of the 1948 Act and, therefore, illegal and that the value of the Maximum shares was significantly less than £500,000, since otherwise Belmont suffered no damage which is not too remote.
For reasons which I shall give presently, the shares were not in my view worth anything like that amount, and if that be so I do not understand it to be seriously disputed but that there was a breach of the section. In any case in my judgment, for reasons which will appear later, on that basis there most plainly was.
Even so, in my view it is necessary to consider further whether there would have been a breach even if the shares had been of that value because the defendants raise the defence that, as the judge found, Mr James genuinely believed that they were. If there would be a breach of trust even if that were true, this cannot help them because there would still be an offence even if the facts had been as he believed, and they knew all other relevant facts, namely the purpose of the transaction and the existence and general effect of s 54. If, however, there would be no breach unless the value of the Maximum shares did not amount to £500,000, then unless one can go behind the judge’s finding, as we are asked to do, this belief would in my judgment afford a complete defence to the charge of conspiracy.
Then was the agreement a breach of s 54, and was it so even if the shares in Maximum were worth £500,000? I have already said that I agree with everything in Buckley LJ’s judgment and I repeat this in particular with regard to the construction of s 54. I too would wish to leave open the question whether, when the transaction is of a kind which A Ltd could in its own commercial interests legitimately enter into and the transaction is genuinely entered into by A Ltd in its own commercial interests and not merely as a means of assisting B financially to buy shares of A Ltd, the circumstance that A Ltd enters into the transaction with B partly with the object of putting B in funds to acquire its own shares, or with the knowledge of B’s intended use of the proceeds of sale, would involve a contravention of s 54. It is not necessary to decide that problem for the purposes of this case. In my view the section was breached even if the Maximum shares were worth £500,000 because the only, or main, purpose was to put Grosscurth and his associates in possession of funds to buy Belmont’s shares from City.
In my judgment this conclusion is established by the following considerations.
‘My present intention is to arrange the consideration for the purchase of Belmont from Belmont’s own resources, and this I propose to accomplish by selling to Belmont the whole of the issued share capital of Rentahome Limited.’
‘Q. Were you aware during this transaction that Mr Grosscurth’s intention was to sell assets to Belmont and use the proceeds to acquire the share capital of Belmont?
and in cross-examination:
‘Q. Mr Copeland, is it a fair statement that Mr Grosscurth’s object in selling Maximum Finance Ltd shares to Belmont in 1963, that his object was by that sale to obtain the money with which he was purchasing the shares of Belmont?
‘Q. And that is reflected, is it not, in a letter which I think you have seen … ?
‘Q. And you remember in para 4 of that it is proposed that Belmont should purchase from Mr Grosscurth the whole of the share capital of Maximum for £500,000: “This will enable me to avoid showing a large loan in Belmont’s accounts and deal with the section 54 difficulty”?
‘Q. He proposed to buy the shares of Belmont with bridging finance originally, and now he is proposing in para 5 to repay the bridging loan out of the proceeds of sale of Maximum?
‘Q. So does that confirm what you have just told my Lord as to Mr Grosscurth’s contemporary object?
‘Q. You yourself signed this letter on Mr Grosscurth’s behalf?
‘Q. So I can take it that you knew at the time that that was Mr Grosscurth’s intention?
Moreover, this was Mr Copeland’s own intention also:
‘Q. In selling your shares of Maximum to Belmont, therefore, I understand that it was your purpose to obtain the money to buy the Belmont shares with?
‘Q. Third, that you knew at the time that Mr Grosscurth’s intention in selling Maximum to Belmont for £500,000 was to obtain finance for his acquisition of the
share capital of Belmont.
‘Q. Please answer my question, Mr James.
‘Q. My question was did you know that Mr Grosscurth’s purposes in selling Maximum for £500,000 to Belmont was to obtain finance for the purchase by him of the shares of Belmont?
I confess, however, that I have felt very grave doubt about the judge’s finding in this respect. What Mr James wanted to do was to buy a controlling interest in all Grosscurth’s ventures. He stressed in his evidence that it must be all, and that control was essential.
The evidence leaves a strong impression in my mind that when he could not get this, he simply fell back on the arrangement to sell Belmont’s shares, for City wanted to be rid of them, and adopted the price of £500,000 negotiated for Rentahome, which had valuable assets, although the substitution of Maximum made it a very different proposition, and that he did shut his eyes to the value of Maximum. However, the judge said: ‘Mr James was an impressive and truthful witness’, and he found as a fact that he (Mr James) genuinely believed that the agreement was a good commercial proposition for Belmont to purchase Maximum’s shares for £500,000, and seeing that he was charged with fraud, and all the events took place some 13 or 14 years previously and seeing the very favourable impression that Mr James made on the learned judge, I have come to the conclusion that it would not be right for this court to disturb that finding.
Accordingly, in my judgment this defence would have succeeded had I taken the view that if this belief had been true in fact there would have been no breach of the section; but, as I have said, I do not. A company, of course has no mind of its own, only the mind of its directors, and this was its mind through Mr James. It is true that he left the details to Foley, Harries and Duck (who had been associated with Mr Jones for a number of years and has been described as his right-hand man), that the statement of the first two were not put in evidence and that Mr Duck was not called. However, on the basis on which Mr James proceeded, that the bulk of the value lay not in the assets but in the judgment and expertise of Mr Grosscurth, and that he was sufficiently bound to Belmont by the guarantee, there was nothing left for them to investigate or do. Commercial assessment would obviously be a matter on which Mr James’s views would prevail.
The measure of damages on this claim is, in my judgment, the difference between the true value of the Maximum shares, including therein such allowance (if any) as may be proper over and above the value of the net tangible assets in respect of future profitability on the one hand, and £500,000 on the other.
Before I develop that further, I shall consider which of the defendants are liable on this claim. Grosscurth plainly must be, and Williams and City also, in my judgment, because they were both parties to the agreement of 3 October 1963, and Mr James, who was chairman of both, knew the offending purpose. Having regard to the various settlements and arrangements which have been made, this is not now a live issue against anyone else.
[His Lordship then considered the evidence relating to the true value of Maximum at the time of the sale to Belmont. His Lordship continued:]
Having carefully weighed all these matters, I would accept Messrs Mann Judd & Co’s valuation in principle, that is, the net tangible assets only, without any addition for goodwill, save that I think something should be added for the guarantee. This should, in my view, be substantially less than the actuarially discounted value of £156,250, since whilst Rentahome had substantial assets there was no telling what its position and that of Grosscurth might be at the end of the five or six years before the guarantee could become enforceable. Moreover, Belmont, Grosscurth and Rentahome would all be engaged in or about the same kind of business and, as in fact actually happened, could all fail together. I would hear argument from counsel before deciding on a precise figure.
I turn next to the first limb of Belmont’s case on constructive trust, that is to say, ‘knowing receipt’. This is now relevant as against City only. As I have said, this does not depend on proof of fraud, nor in my judgment is Mr James’s belief that ‘the agreement was a good commercial proposition for Belmont to purchase Maximum’s shares for £500,000’ any answer.
What Belmont has to show is that the payment of the £500,000 was a misfeasance, which for this purpose is equivalent to breach of trust, that City received all or part of this money, and that it did so knowing, or in circumstances in which it ought to know, that it was a breach of trust. In fact City received £489,000 and that is the basic measure of any liability under this head. It is true that City received this through Grosscurth as a payment for the shares in Belmont, but this was intended by all parties and made pursuant to the agreement of 3 October 1963. In my judgment, therefore, the money received by City was clearly part of the original £500,000 of Belmont’s money.
Then was the payment of the £500,000 a breach of trust? In my judgment it was, on two counts. First, and obviously, because, as I have held, the agreement was unlawful and the payment was made by Belmont for an illegal purpose, namely to facilitate the purchase by Grosscurth and his associates of Belmont shares.
Secondly, it was a misfeasance in my judgment for the following reasons. Belmont parted with sound assets in return for which it received shares which, making full allowance for prospective profits and the benefit of the guarantee, were not worth anything like the sum paid for them and it committed itself to a speculative venture. However much store Mr James set by Mr Grosscurth’s ability, everything depended on that, and Belmont had no sufficient control over him. It is highly significant that Mr James wanted 51% if he put in his own or City’s money, and Belmont did not get that. This stands out when one sees that both Mr James and Mr Copeland attributed the failure which ensued to Grosscurth, both saying he got too much money too soon and had no proper financial control.
All this was done without an independent board capable of considering the transaction from Belmont’s point of view, since Mr James de facto controlled the board of Belmont, and he, or his team, simply told the other directors what to do. Mr James himself said so, and Mr Kellman, who was the only independent director and who was called by Belmont, made his own position quite clear. He said he regarded himself as an executive director in a subordinate position. Further, the board did not even have any independent advice of any kind, whether from accountants, merchant bankers, lawyers or anyone else.
The opinion on s 54 of the 1948 Act was obtained by the solicitors acting for the Grosscurth side; Mr Mesquita (the partner in Messrs Gouldens concerned with the matter) made this quite clear in his letter to Mr Duck of 14 October 1963, in which he said:
‘I confirm having handed you at your request copy of the Opinion of counsel dated 27th September 1963, and I have noted that you have incorporated a reference to this Opinion in the minutes of Belmont Industrial Finance Limited. To this of course I make no objection, but I think that it should be put on record that this Opinion was obtained by my clients without any reference to your clients, or any suggestion from your clients that an Opinion on this point should be obtained.’
As was to be expected, Mr Mesquita provided his clients, Mr Grosscurth, Mr Maund and Mr Copeland, with copies of the opinion, but there is nothing to show or suggest that he sent it to any of the directors of Belmont, or informed them of its existence before the board meeting at 2.30 pm on 11 October, at which it is recorded as having been produced. It was also produced earlier on that same day at the board meeting of City, which took place at 1.30 pm, but there is no documentary evidence to suggest that it was shown, even to that board, any earlier. As Buckley LJ has pointed out, Mr James’s evidence shows clearly that he personally never saw the opinion at any time. His evidence was that he left all the details to his team, Messrs Harries, Foley and Duck, and legal matters in particular to Mr Duck. He was sure Messrs Harries and Foley would not have proceeded unless they had been satisfied on the particular aspect of s 54. In spite of this evidence, the defendants did not put in the statements that they had from Messrs Harries and Foley, nor did they call Mr Duck, who was available to give evidence and was actually in court part of the time. In these circumstances I see no reason to infer that Mr Spector, Mr Smith or Mr Kellman saw the opinion at any time before the agreement was entered into on 3 October.
The only valuation obtained was that of Mr Cass, which Mr Copeland directed to be sent to himself, and he could not recall having sent it to the board of Belmont, and Mr Demetri, his bookkeeper and right-hand man, was not called. So there is at least no evidence that this was produced to the board of Belmont, and in my view the evidence really leads positively to the inference that it was not. Further, it is clear on the evidence that no enquiries were made about the assets or Maximum’s prospects on behalf of the board of Belmont.
Yet there was an obvious and inescapable conflict of duty and interest between the position of Mr James as chairman of the board of Belmont, and his position as chairman of the board of City. Counsel for Williams and City argued that this was not altogether so, because City subscribed for 230,000 preference shares in Belmont and also lent it a large sum of money, £200,000, and thus was concerned for the success of Belmont. This is true as far as it goes, but it does not go anywhere nearly far enough. As chairman of City it was his interest and duty to see that the shares in Belmont were disposed of, because it was not making sufficient profits for the group’s liking, and to get as high a price as possible, and in particular one which would include £230,000 for goodwill. As chairman of Belmont, it was his duty to consider, with a single eye to the future welfare of that company and the safety of its assets and the protection of the depositors, whether to purchase the Maximum shares at all and, if so, to keep the price as low as possible and in particular to take the opportunity of reopening negotiations with a view to a reduction of the price when Grosscurth sought to substitute the Maximum shares for those of Rentahome. This very important aspect of the matter seems to me, with very great respect, to have been overlooked by the judge, who said:
‘It must be remembered that there were two factions in this deal. On the one hand was Mr John James who had recently taken over Williams and City and on the other hand Mr Grosscurth and his two associates. I cannot find any evidence of collaboration between the two groups. They were very much at arm’s length.’
In my view there were not two, but three, since on the James side was Belmont as well as City and their interests were clearly not the same as those of City.
Then did City know, or ought it to have known, of the misfeasance or breach of trust? In my judgment the answer to that question must plainly be Yes, for they are fixed with all the knowledge that Mr James had. Now, he had actual knowledge of all the facts which made the agreement illegal and his belief that the agreement was a good commercial proposition for Belmont can be no more a defence to City’s liability as constructive trustees than in conspiracy.
Apart from this, clearly, in my judgment, Mr James knew or ought to have known all the facts that I have rehearsed, showing that there was in any event a misfeasance apart from illegality. He knew of the conflict of interest, and indeed, said in his evidence that he sought (though he failed) to obtain a further term in the guarantee for the protection of Belmont’s depositors that a sum of £60,000 should actually be set aside each year. Yet neither he nor his team took any steps whatever to see that Belmont was separately advised.
In my judgment, therefore, City are liable in damages as constructive trustees. ‘The long arm of equity’ is long enough to catch this sort of transaction.
What then is the measure of damages? Belmont did in fact receive dividends on the Maximum shares, amounting to approximately £60,000 before the collapse, and its counsel rightly concedes that it must give credit for that amount. But must it bring into account, either in addition or substitution, the full value to it of the transaction as a whole at 3 October 1973, notwithstanding that in the end all was lost? In my judgment the answer is No, because the loss was inherent in and, though not expected, could be foreseen from the start. True, there was a sharp deterioration in the economic situation, but that was one of the risks inherent in the speculation, and Mr Copeland himself said in his evidence that he thought that as things turned out Mr Grosscurth would have failed apart from that because, as I have said, he got too much money too soon and did not have, or exercise, the necessary financial control.
This leaves only the second head of constructive trusteeship, and in my judgment that cannot be supported without going behind the judge’s finding as to Mr James’s genuine belief, which I have already said I am not prepared to do. He may have been carried away by his enthusiasm over Mr Grosscurth, but if he genuinely believed that the agreement was a good commercial proposition for Belmont, he cannot be held to have been fraudulent. If he had been wilfully shutting his eyes to the truth, his belief would not have been genuine.
The judge also acquitted Mr Copeland of fraud, and it is not suggested that anyone else was guilty of fraud. The junior directors committed breaches of duty, but they were not fraudulent.
On the judge’s findings, therefore, in my judgment this part of Belmont’s case has not been made out.
Apart from this, however, it has succeeded and I would therefore allow the appeal, discharge the judge’s order and give judgment for Belmont: (i) in conspiracy against Williams, City and Grosscurth, for the sum of £500,000, less the value of the Maximum shares on 3 October 1963, on the basis set out in this judgment; the actual figure will have to be decided after further argument, if necessary, when the parties have had an opportunity of considering this judgment, (ii) against City as constructive trustees for £489,000, less the precise amount of the dividends to be brought into account. I would hear counsel on the question of interest on these sums.
Belmont is entitled to pursue this judgment as it thinks fit, but cannot, of course, recover in the aggregate more than £500,000 less the value of the Maximum shares as valued in accordance with this judgment, or £489,000 less the dividends, whichever be the greater.
WALLER LJ. I agree with the judgment of Buckley LJ, and were it not that we are differing from the final conclusion of the learned judge I would be content to say no more. However, as we are differing, and as the matter is one of considerable importance, I will on the substance of the case briefly set out my own reasons.
The judge came to the conclusion and I quote: ‘There can be no doubt that Mr Grosscurth used the £500,000 which he received from Belmont to purchase its shares for £489,000.’ He also came to the conclusion that Mr James was a truthful witness who genuinely believed that the agreement was a good commercial proposition. Similarly he accepted that Mr Copeland honestly believed that the value of Maximum was not less than £500,000. We have been referred to a number of passages in the evidence of both Mr James and Mr Copeland which are not easy to reconcile with such a conclusion. There were passages in Mr James’s evidence on four different topics which, were it not for the judge’s findings to the contrary, would appear to show that his evidence was unreliable. But the judge had the advantage of seeing Mr James in the witness box for four days and we have not had that advantage. Furthermore he was giving evidence about events which had taken place 14 years before the hearing. I will return to this subject again but I am of the opinion that the passages to which we have been referred are insufficient to justify disturbing the judge’s assessment.
It was however part of counsel’s case for Belmont, both before the judge and before this court, that although he suggested there was dishonesty it was not necessary for him to prove dishonesty in order to succeed. In other words there could be a breach of s 54 of the Companies Act 1948 without dishonesty on the part of either members of the James group or of the Grosscurth group, which included of course Mr Copeland.
The details of the transactions between the two groups have already been set out in the judgment of Buckley LJ. I propose however to set out briefly the effect of what happened on 11 October 1963. At the beginning of the day the Grosscurth group owned, among other things, Maximum. At the same time the James group owned City and also Belmont, again among others. They proposed to sell Belmont for £500,000 which would enable them to show a book value for the goodwill as the same as the group had paid for Belmont. The first transaction that took place was that Belmont purchased Maximum for £500,000. The next stage was, with the £500,000 they had received from Belmont, the Grosscurth group paid City £489,000 for Belmont, which included of course Maximum. At the end of the day therefore the Grosscurth group owned everything that they owned at the beginning of the day, that is including Maximum, plus Belmont which had paid out £500,000 for Maximum. The James group owned everything that they owned at the beginning of the day except Belmont, but they had received £489,000 for the sale of Belmont. They also had an obligation to subscribe to preference shares in Belmont which by now was in the Grosscurth group. From the point of view of the two groups it was easy to see that the situation was satisfactory. The Grosscurth group had acquired Belmont at no cost to themselves and the James group had sold Belmont for £489,000, which would mean that the goodwill price was that which they had paid for it years before. But the question with which we are concerned is Belmont. Had Belmont benefited from a transaction in which the company had paid £500,000 for Maximum even if Maximum was worth £500,000?
Another way of looking at the transaction is to isolate the transaction in which Belmont purchased the shares of Maximum for £500,000. At that time Belmont was in the James group and had been concerned with the hire-purchase of furniture. Maximum on the other hand had been in the Grosscurth group (it had been formed just six months before) and was concerned with the financing of house building. After Belmont had purchased Maximum, Belmont remained in the James group. Even assuming Maximum was worth £500,000 can it possibly be said that this was a genuine commercial transaction? Can it be said it was in the interests of Belmont to purchase Maximum? After the purchase Belmont had virtually no assets except Maximum and, as I have already said, was still in the James group. If it be said that the surrounding circumstances have to be taken into account and must include the sale of Belmont then it becomes clear, in my view, that the whole purpose of the sale was to provide funds for this purchase. There could be no other object in the transaction except to provide finance. It had no independent commercial purpose. In my opinion the above facts alone compel this conclusion. But this conclusion is underlined because it had been Grosscurth’s plan, at least since 5 June 1963, when he wrote saying: ‘… My present intention is to arrange the consideration for the purchase of Belmont from Belmont’s own resources … ‘ In my judgment, having eliminated any other purpose from this transaction, it is impossible to avoid the conclusion that Belmont was giving financial assistance for the purpose of the purchase of its shares and that therefore there was a breach of s 54 of the 1948 Act whether or not Maximum was worth £500,000.
So far as the evidence shows there was no discussion of this purchase at any board meeting of Belmont. If there had been such a meeting and the question had been posed, ‘Why are we purchasing Maximum?’, the only answer which could have been given would be: ‘In order to enable the Grosscurth group to purchase shares in Belmont’, or to use the words of the section, in order to give financial assistance to Grosscurth and his associates for the purpose of the purchase of shares in the company, namely Belmont. To avoid a contravention of s 54 it is not sufficient, in my view, to show that the company is purchasing an asset which is worth the price being paid. The company must also show that the decision to purchase is made in the commercial interests of the company. If this were so, then the fact that the proceeds are used by the seller for the purchase of shares in the company would not necessarily infringe s 54. That would only happen if the decision was made partly with the intention on the part of the board that the proceeds should be used for the purchase of shares in the company.
The next question is whether or not the defendants were guilty of conspiracy. A conspiracy is an agreement between two or more persons to effect an unlawful purpose which results in damage to somebody (see Crofter Hand Woven Harris Tweed Co Ltd v Veitch ( 1 All ER 142 at 147,  AC 435 at 440) per Viscount Simon LC). A person is a party to a conspiracy if he knows the essential facts to constitute that conspiracy even though he does not know that they constitute an offence (see Churchill v Walton). Since there was a breach of s 54 and the defendants through their directors made all the arrangements and knew all the facts constituting the breach, it would follow that they conspired together to contravene s 54, the object of their conspiracy being Belmont, and if Belmont suffered damage they are liable.
I next consider whether Belmont in fact suffered damage. This could only arise if Maximum was not worth £500,000 when it was bought by Belmont. Belmont relied on the independent evidence of Mr Williams, who was presented with the same information as had been given to Mr Cass by Mr Copeland. Mr Cass was not called but he valued Maximum at £500,000 having seen the accounts and made enquiries about them. The accounts gave an unduly optimistic picture because they showed profits which had not been received and Mr Williams regarded this as an imprudent basis; Mr Copeland agreed. Furthermore they included two contracts which by the time of the valuation had been cancelled. Finally Mr Cass relied on a warranty different from, and better than, that which in fact had been given by Mr Grosscurth. Maximum was a company that had only been functioning for some six months and Mr Copeland said: ‘I have to agree that the business of Cityfield, indeed of Maximum, were largely speculative ventures.’ There was no independent evidence to set against that of Mr Williams. Instead there was the evidence of Mr James and of Mr Copeland about the value of Grosscurth’s guarantee. It was common ground between counsel that if a company had a history of profits of £100,000 per year over five years it would be properly valued at £500,000, that is to say, it would be appropriate to apply a multiplier of five in these circumstances. Mr James, who said he would have paid £250,000 for a 51% share of Grosscurth’s empire, emphasising the importance of having financial control, nevertheless urged the value of the warranty by Grosscurth and valued the business of Maximum at £276,000 applying a multiplier of five to the profits after tax. This figure was based on the actual profits of Maximum and Cityfields. This took into account the profitability due to Grosscurth. The warranty, which could not be enforced for five years, could not add very much to this valuation.
In my judgment the failure of the defendants to call Mr Cass, and the failure to call independent witness when they had a representative of Messrs Peat Marwick & Mitchell in court, throws grave doubt on the reliability of the estimates made by Mr James and Mr Copeland, both of whom were interested parties. Mr James was valuing a speculative business as if it were a reliable business with a five year history of profits. To back his own judgment with his own money would be one thing, but to use it as support for a purchase by a company of which he was a director was a very different matter. Mr Copeland also was an interested party and apparently in the negotiations had not observed the important error in Mr Cass’s description of the warranty and chose to take no notice of the contrast between Mr Cass’s view of the warranty and counsel’s view that the warranty should be ignored. Furthermore, Mr Copeland did not appear to be aware of the part of the profits which had in fact been cancelled. When one adds to this the fact that £500,000 had been agreed as a proper valuation for Rentahome, whose assets were considerable, and the same figure was used when Maximum was substituted with assets which were very much smaller, the absence of an independent valuation which could be tested in the witness box is a fatal weakness in the case for the defendants. In my opinion a proper approach would be to accept Mr Williams’s figure and to add to it some modest figure to represent the value of the warranty. In Mr Williams’s view (and there is no independent evidence to the contrary) the shares of Maximum were not worth more than £60,000. In addition I would add something more for the prospect of future profits backed by the warranty. Both Mr James and Mr Copeland thought that this business, although Copeland regarded it as speculative, had good prospects of profits and thought that the guarantees which Grosscurth had given would ensure those profits. The value of a warranty which cannot be called on for five years is itself speculative and must be very severely discounted. I have no doubt that Maximum was not worth £500,000 or anything approaching such a figure. If I am asked to make my own assessment on the evidence I would add something like £75,000, or at the most £100,000, to the £60,000 assessed by Mr Williams.
If I am wrong in the conclusion that a breach of s 54 can be established even though the price paid for the asset is a fair price, and if it is necessary to prove that the price was an inflated one, then I must consider the state of mind of City and Williams about the price being paid: see the words of Lord Hailsham LC in Kamara v Director of Public Prosecutions ( 2 All ER 1242 at 1252,  AC 104 at 119):
‘It seems fairly clear that while a mistake of law is not a good defence, a sincere belief in a state of facts which if true would render the illegal conduct legal would be a good answer to any charge of conspiracy.’
A company acts through its officers and can be a party to a conspiracy (see R v ICR Haulage Ltd). If there were responsible officers of City who were shutting their eyes to the value of Maximum, it would not avail City that there was another officer who honestly believed that Maximum was worth £500,000. As I have already mentioned, counsel for Belmont has submitted that this court should reverse the assessment of the judge that Mr James was a truthful and honest witness. He has drawn attention to a number of matters in the course of the evidence which are not consistent with the view expressed by the judge. Nevertheless, as I have already said, I am of opinion that the view of the judge is a view that cannot be disturbed. But Mr James in his evidence repeated again and again that he left the decisions and arrangements for this transaction to Mr Foley, Mr Harries and Mr Duck. The history of it is as follows: the original proposal was that Grosscurth was going to sell Rentahome to Belmont for £500,000. This was a transaction which was under discussion for some time, a fact which appears from the correspondence. Mr James came into the City group in late August and took over the negotiations with Mr Grosscurth. Some time before 2 September the plan to sell Rentahome was dropped and Maximum was put in its place. Maximum was a company which had only been in existence for six months. There is no evidence that any enquiry was made by anybody from the James group about Maximum and Mr Copeland did not remember any enquiry being made of him apart from Mr Cass. There is no document of any kind showing that enquiries were made. Mr James knew of no enquiry; he left it to his subordinates and relied on their judgment.
Both Mr James and Messrs Smith, Harries and Foley had the same interests and indeed had the same conflicting interests. As directors of Williams and of City (in Mr Foley’s case as secretary) they were concerned to see that they received a price for Belmont which included a price for goodwill which was no less than that which was paid on its acquisition. As directors of Belmont they should have been concerned to see that the integrity of the company was preserved. The James group lost nothing by this transaction. The Grosscurth group were only concerned to provide enough finance to cover the purchase of Belmont. With such a conflict of interest it was in my opinion essential that those representing Belmont should have had an independent valuation of Maximum. Mr James, when discussing Rentahome, said he would want to check the books and have an independent valuation before offering to purchase. Furthermore one would expect that there would be independent advice as to the legality of the transaction. Mr Copeland in the Grosscurth group did both.
We are no longer concerned with the case against Mr Copeland or with the merits of the valuation of Mr Cass or the details of the legal advice which Mr Copeland received. There is, however, no evidence that the valuation was ever seen by any director of Belmont or anybody in the James group and there is no evidence that the opinion of counsel was communicated to anybody within the James group until the transaction was being completed. The state of the evidence was such as to produce a prima facie case that when Maximum was substituted for Rentahome those responsible in the James group were ignoring any question of valuation. When so much reliance was placed by Mr James on Mr Foley and Mr Harries and on Mr Duck being his right-hand man it was unfortunate that both Mr Foley and Mr Harries had died before the hearing of this case. But each of them had made a statement and this could have been put in under the provisions of the Civil Evidence Act 1968. It is difficult to believe that such statements would ignore this question if in fact there had been a valuation. Mr Duck was alive at the time of the hearing and did attend on at least one day, but he was not called as a witness. I find the complete absence of evidence from these three as significant. In my opinion evidence was required from City, or City’s officers, to show a sincere belief that Maximum was worth £500,000. City only called Mr James. City did not put in the statement of Mr Harries or Mr Foley whom James said he had told to get on with it. Nor did City call Mr Duck, who was Mr James’s right-hand man. Mr James was obviously a strong personality and only the judge’s finding of truthfulness prevents me from saying he must have deliberately decided not to have a valuation. But since he left all the negotiations to be done by others, the court is not concerned with his belief. It is not necessary to decide who made, or was a party to making, the decision not to obtain independent advice. Williams and City have, in my opinion, failed to show that those who were entrusted with the arranging of the purchase by Belmont of the shares in Maximum had a sincere belief that they were worth £500,000. In the absence of such evidence the inference to be drawn is that a decision was deliberately taken not to obtain a valuation. Having regard to the matters I have already mentioned, this would indicate, in my opinion, a lack of belief that Maximum was worth the price being paid.
It follows that even if it were necessary to prove knowledge of an inflated price to establish conspiracy on the part of City I would hold that inasmuch as those on whom Mr James relied deliberately refrained from obtaining a valuation they must be taken as knowing the price was too high. Indeed, to use the words of Lord Hailsham LCb, City completely failed to show that there was a sincere belief, on the part of those negotiating, in the value of Maximum at £500,000.
I conclude therefore on this aspect of the case that Williams and City were a party to a conspiracy to commit a breach of s 54 of the Companies Act 1948 and that as a result of that conspiracy Belmont suffered damage, and that accordingly Williams and City are liable to Belmont for the damage suffered. I have not sought to identify the other conspirators. Suffice it to say that Grosscurth was clearly one, and that is sufficient to establish the conspiracy.
On the question of constructive trust, I do not wish to add anything to that which has been said by Buckley and Goff LJJ.
Having given judgment on the merits of the appeal, the court heard argument from counsel with respect to the remedies available to Belmont.
Michael Miller QC and M J Roth for Belmont.
Martin Nourse QC and Brian Parker for Williams and City.
The third, fourth and sixth defendants did not appear.
Cur adv vult
BUCKLEY LJ. The judgment I am about to read is the judgment of the court.
Having already decided the merits of this appeal, we now have to determine what remedies Belmont is entitled to. We have found that Belmont is entitled to judgment against the first three defendants for conspiracy and against City as a constructive trustee.
We will deal first with the claim in conspiracy. Counsel for Belmont submits that as in the event Maximum was a total loss, having been wound up in a state of complete insolvency, the whole of the £500,000 invested in Maximum by Belmont has been lost as a result of the conspiracy. The wrong suffered by Belmont was, counsel submits, that the conspirators caused Belmont to buy Maximum. The purchase was a speculative venture and the loss was foreseeable as at least a possible consequence. The measure of damages should consequently, according to counsel, be £500,000 less any sums proper to be brought into credit against that amount. Having regard to the ways in which Belmont’s case has been pleaded and presented here and below, Belmont is willing to give credit for the fair value of Maximum at the time of the transaction, although it does not concede that it is legally bound to do so. This would result in a net figure (which is now agreed) of £439,941.
Counsel for Williams and City, on the other hand, says that the wrong suffered by Belmont was that it was induced to pay too much for Maximum, and that in assessing the damages account must be taken not only of the fair value of Maximum at the date of the purchase but of any other advantage obtained by Belmont under the agreement. In this connection he submits that the value of Mr Grosscurth’s guarantee must be taken into account as well as any benefits consequent on City’s subscription of new capital in Belmont. He further submits that an enquiry is necessary to ascertain to what extent the collapse of Maximum was foreseeable at the date of the agreement because, as he submits, any damage which was not then reasonably foreseeable cannot be recovered.
In our principal judgments delivered earlier in this appeal certain provisional views were expressed which touched on the question of the measure of damages in this case and the elements to be taken into account in measuring them. Having now heard argument on the subject we have reached the following conclusions.
The loss of the entire investment by Belmont of £500,000 in Maximum was, in our view, a reasonably foreseeable possible consequence of that investment. The fact that Mr Grosscurth’s guarantee of the profits of Maximum might prove to be of no value, as was the case in the event, was also in our view a reasonably foreseeable possible event. It is for the defendants to establish either that the damage resulting to Belmont from the conspiracy was less than £500,000 and by how much, or that there are matters which were not gone into at the trial but which require further investigation before the damages can be assessed. Before the learned trial judge this did not arise because he held in favour of the defendants on liability; but we have not been satisfied that there are any such matters apart from two dividends declared by Maximum and received by Belmont before Maximum was liquidated. These dividends were of a substantially less amount than the amount for which Belmont is prepared to give credit in respect of the fair value of Maximum at the date of the purchase. We think that Belmont was under no obligation to allow this credit and, since it exceeds the amount of the dividends, no further sum needs to be credited in reduction of the loss in respect of the dividends.
Counsel for Williams and City submits that some allowance should be made in respect of benefits received by Belmont from the subscription by City of £230,000 new capital of Belmont. We feel unable to accept this for three reasons. First, the subscription was made in pursuance of the agreement of 3 October 1963 which, as we have held, was an illegal agreement. Secondly, the £230,000 made a circular journey from Belmont to Mr Grosscurth and his associates, from Mr Grosscurth and his associates to City and from City to Belmont. This enabled Belmont to the extent of £230,000 to provide the £500,000 for the purchase of Maximum without recourse to any of Belmont’s other assets. The sums invested in the purchase of Maximum have been wholly lost. Accordingly Belmont obtained no advantage from the subscription apart from the dividends declared by Maximum. Thirdly, the use by City of £230,000 thus received indirectly from Belmont in subscribing for shares in Belmont was itself a breach of s 54 of the Companies Act 1948. In these circumstances it is, in our judgment, not open to City to rely on the subscription in abatement of Belmont’s claim against City as a constructive trustee.
Counsel for Williams and City also submitted that there should be an enquiry as to damages, but this could only increase the amount of the loss suffered by Belmont by reason of the further costs involved, and in any case we see no reason for directing an enquiry.
Accordingly we quantify the damages in conspiracy at £439,941.
These being damages at common law for a tort, we think that there is no reason in the circumstances of this case to import the equitable rule under which compound interest is sometimes ordered where a defendant in a fiduciary position has wrongly employed funds in his hands or under his control in his fiduciary capacity for his own personal gain (see Wallersteiner v Moir (No 2)). We award Belmont simple interest on the £439,941 from 11 October 1963 to the date of judgment at 1% per annum above bank rate or the minimum lending rate for the time being in force from time to time.
Belmont must give credit against the £439,941 and interest for the amounts received from Mr Maund (£5,000) and Mr Copeland (£20,000) on the settlement of the claims against them, with interest thereon at the rate already mentioned from the date of receipt of such sums respectively down to the date of judgment.
We now turn to the remedy in constructive trust. By an order of this court in this matter dated 18 February 1977 Belmont was given leave to amend its statement of claim in certain respects on terms that in taking an account of what sums were due to Belmont by (inter alios) City credit should be given for whatever right of contribution City might have against the defendants Maund and Smith or either of them. It is common ground that an enquiry must be directed to ascertain what amounts are proper to be brought into credit in this respect. Counsel for Williams and City has submitted that City should also be given credit in this respect for any benefits received by Belmont under the agreement. Belmont is willing to give credit for the dividends declared by Maximum amounting to £23,525 and to account to City for any further sums received hereafter from the liquidator of Maximum or otherwise in respect of Belmont’s holding of shares in Maximum. Apart from these matters we do not think that City is entitled to any further credit against its liability as constructive trustee.
In our view, City is accountable for the whole of the £489,000, subject only to the deduction of such credits as we have mentioned. There is no evidence that any part of the £489,000 was employed by City for its own commercial advantage in earning profits for City, and consequently we do not consider that whatever net sum is due from City to Belmont under the claim in constructive trust should carry compound interest. In this case also we award simple interest at the rate already mentioned from 11 October 1963 down to the date of judgment.
Belmont cannot recover more from City than whichever is the greater of the damages recoverable from City in conspiracy and the sum recoverable from City as a constructive trustee.
Appeal allowed. Leave to appeal to House of Lords.
Cases referred to in judgments
Barnes v Addy (1874) LR 9 Ch App 244, 43 LJ Ch 513, 30 LT 4, LC and LJJ, 47 Digest (Repl) 191, 1593.
Belmont Finance Corpn Ltd v Williams Furniture Ltd  1 All ER 118,  Ch 250,  3 WLR 712, CA.
Churchill v Walton  1 All ER 497,  2 AC 224,  2 WLR 682, 131 JP 277, 51 Cr App R 212, HL, 14(1) Digest (Reissue) 126, 842.
Cooper v Simmons (1862) 7 H & N 707, 31 LJMC 138, 5 LT 712, 26 JP 486, 8 Jur NS 81, 158 ER 654, 12 Digest (Reissue) 731, 5283.
Crofter Hand Woven Harris Tweed Co Ltd v Veitch  1 All ER 142,  AC 435, 111 LJPC 17, 166 LT 172, HL, 45 Digest (Repl) 534, 1175.
Fenwick, Stobart & Co Ltd, Re, Deep Sea Fishery Co’s (Ltd) Claim  1 Ch 507, 71 LJ Ch 321, 86 LT 193, 9 Mans 205, 9 Digest (Reissue) 585, 3492.
Gradwell (Pty) Ltd v Rostra Printers Ltd 1959(4) SA 419.
Kamara v Director of Public Prosecutions  2 All ER 1242,  AC 104,  3 WLR 198, 137 JP 714, 57 Cr App R 880, HL; affg sub nom R v Kamara  3 All ER 999,  QB 660,  2 WLR 126, 57 Cr App R 144, CA, Digest (Cont Vol D) 151, 863a.
Lands Allotment Co, Re  1 Ch 616, [1891–94] All ER Rep 1032, 63 LJCh 291, 70 LT 286, 1 Mans 107, 7 R 115, CA, 9 Digest (Reissue) 560, 3351.
Mulcahy v R (1868) LR 3 HL 306, 14(1) Digest (Reissue) 119, 800.
Payne (David) & Co Ltd, Re, Young v David Payne & Co Ltd  2 Ch 608, 73 LJCh 849, 91 LT 777, 11 Mans 437, CA, 9 Digest (Reissue) 511, 3058.
R v I C R Haulage Ltd  1 All ER 691,  KB 551, 113 LJKB 492, 171 LT 180, 108 JP 181, 42 LGR 226, 30 Cr App R 31, CCA, 13 Digest (Reissue) 351, 2981.
Russell v Wakefield Waterworks Co (1875) LR 20 Eq 474, 44 LJ Ch 496, 32 LT 685, 10 Digest (Reissue) 1363, 8755.
Shaw v Director of Public Prosecutions  2 All ER 446,  AC 220,  2 WLR 897, 125 JP 437, 45 Cr App R 113, HL; affg sub nom R v Shaw  1 All ER 330, CCA, 14(1) Digest (Reissue) 139, 965.
V G M Holdings Ltd, Re  1 All ER 224,  Ch 235, 111 LJ Ch 145, CA, 9 Digest (Reissue) 677, 4043.
Wallersteiner v Moir (No 2)  1 All ER 849,  QB 373, 508n,  2 WLR 389, CA, Digest (Cont Vol D) 570, 518a.
Cases also cited
Carl-Zeiss-Stiftung v Herbert Smith & Co (a firm) (No 2)  2 All ER 367,  2 Ch 276, CA.
Competitive Insurance Co Ltd v Davies Investments Ltd  3 All ER 254,  1 WLR 1240.
Heron II, The, Koufos v C Czarnikow Ltd  3 All ER 686,  1 AC 350, HL.
Jefford v Gee  1 All ER 1202,  2 QB 130, CA.
Selangor United Rubber Estates Ltd v Cradock (No 3)  2 All ER 1073,  1 WLR 1555.
Wallersteiner v Moir  3 All ER 217,  1 WLR 991, CA.
Yuill v Yuill  1 All ER 183,  P 15, CA.