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Belmont Finance Corporation v. Williams Furniture Ltd. and Others (NO 2) (1979) – SC

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➥ CASE SUMMARY OF:
Belmont Finance Corporation v. Williams Furniture Ltd. and Others (NO 2) (1979) – SC

by Branham Chima (SAL).

➥ COURT:
Supreme Court

➥ JUDGEMENT DELIVERED ON:
31 July 1979
[1980] 1 ALL ER 393

➥ AREA(S) OF LAW
Constructive trustee.

➥ PRINCIPLES OF LAW
⦿ ILLEGAL TO BUY CHATTEL/COMMODITY SIMPLY TO PUT THE OTHER JUST IN FUNDS ONLY
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 [Companies Act 1948]. 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. — Buckley LJ.

⦿ REMEDY FOR CONSPIRACY IN CIVIL PROCEEDINGS
To obtain in civil proceedings a remedy for conspiracy, the plaintiff must establish (a) a combination of the defendants, (b) to effect an unlawful purpose, resulting in damage to the plaintiff (Crofter Hand Woven Harris Tweed Co Ltd v Veitch ([1942] 1 All ER 142 at 147, [1942] AC 435 at 440) per Lord Simon LC). The classic definition of conspiracy is that in Mulcahy v R ((1868) LR 3 HL 306 at 317): ‘A conspiracy consists not merely of the intention of two or more, but in the agreement of two or more to do an unlawful act, or to do a lawful act by unlawful means.’ — Buckley LJ.

Available:  Josiah Danjuma v Royal Salt Ltd. & Anor. (2020) - NICN

⦿ IGNORANCE OF LAW NOT EXCUSE – IGNORANCE TO APPRECIATE UNLAWFUL NATURE OF A TRANSACTION
If all the facts which make the transaction unlawful were known to the parties, as I think they were, ignorance of the law will not excuse them: see Churchill v Walton ([1967] 1 All ER 497 at 503, [1967] 2 AC 224 at 237). That case was one of criminal conspiracy, but it seems to me that precisely similar principles must apply to a conspiracy for which a civil remedy is sought. Nor, in my opinion, can the fact that their ignorance of, or failure to appreciate, the unlawful nature of the transaction was due to the unfortunate fact that they were, as I think, erroneously advised excuse them (Cooper v Simmons, and see Shaw v Director of Public Prosecutions, where the appellant had taken professional legal advice). — Buckley LJ.

⦿ STRANGER LIABLE AS CONSTRUCTIVE TRUSTEE
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). — Buckley LJ.

⦿ COMPANY’S MIND IS THAT OF ITS DIRECTORS
A company, of course has no mind of its own, only the mind of its directors, and this was its mind through Mr James. — Goff LJ.

➥ LEAD JUDGEMENT DELIVERED BY:
Buckley LJ.

➥ APPEARANCES
⦿ FOR THE APPELLANT
⦿ FOR THE RESPONDENT

➥ CASE FACT/HISTORY
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 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.

➥ ISSUE(S) & RESOLUTION(S)
[SUIT SUCCEEDED]

Available:  Ewerami v. African Continental Bank Limited (1978) 4 SC 99

I. Whether the agreement did contravene s.54 of the 1948 Act?

RULING: IN CLAIMANT’S FAVOUR
A. THE PURCHASE OF THE SHARE CAPITAL WAS NOT A COMMERCIAL TRANSACTION
“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.”

B. ALTHOUGH THE £500,000 WAS AN INFLATED PRICE; PURCHASE DOES NOT EXCEED £60,000
“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.”

Available:  Etim Moses Essien v. The Gambia (2007) - ECOWAS

C. THE PURCHASE WAS TO DO AN UNLAWFUL ACT
“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.”
.
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II. Whether in these circumstances the alleged conspiracy is established in respect of those defendants against whom the action is still on foot?

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

➥ MISCELLANEOUS POINTS

➥ REFERENCED (LEGISLATION)

➥ REFERENCED (CASE)

➥ REFERENCED (OTHERS)

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