England and Wales Court of Appeal (Civil Division) Decisions

1. This is an appeal against an order made on 22 January 1999 by Mr Justice Ferris in proceedings brought by the respondents, Mr Iain MacPherson and Miss Susan Torevell, against the appellant company, European Strategic Bureau Limited ("ESB"), for payment of monies said to be due under an agreement dated 28 February 1991.
2. It is not in dispute that, in the events which have happened and if the agreement of 28 February 1991 were to be given effect in accordance with its terms, the sums claimed would be due from ESB to the respondents. But it is said that the relevant provisions of that agreement are not enforceable. In particular, it is said that to cause the company to enter into that agreement was a breach of duty on the part of its directors (of whom Mr McPherson was one); that Miss Torevell had knowledge of that breach; that to enforce the agreement would involve a contravention of section 263 of the Companies Act 1985; and that, in any event, the effect of the agreement was that the company provided financial assistance for the purpose of an acquisition of its shares, contrary to section 151 of that Act.
3. Mr Justice Ferris, whose judgment is now reported at [1999] 2 BCLC 203, rejected those contentions and gave judgment for each of the respondents in the amounts claimed. ESB appeals against that decision with the permission of this Court (Lord Justice Aldous), given on 18 March 1999.

The underlying facts
4. The facts are not in dispute in this Court. They are fully set out by the judge, at pages 205g-210d in the report of his judgment. It is, I think, sufficient to summarise them as follows:
(1) At or about the end of 1989 Mr MacPherson, Miss Torevell and a Mr Richard Lyman decided to carry on together the business of providing investment banking services for European health care companies. The initial vehicle for the business was an informal partnership, under the firm name "European Strategic Bureau", in which the interests of Mr MacPherson, Miss Torevell and Mr Lyman in both capital and profits were in the proportions 25:25:50.
(2) In January 1990 the partners acquired the appellant company "off-the shelf". They changed its name to European Strategic Bureau Limited. The company, ESB, began to carry on the business formerly carried on by the partnership. In July 1990 the partners entered into a written agreement ("the 1990 agreement") by which it was agreed that the shares in ESB should be held in the same proportions, 25:25:50; and that Mr MacPherson and Mr Lyman should be the directors of the company.
(3) During the first year or so of trading, the receipts of the business were insufficient to finance the activities which the three individuals were carrying out on its behalf; they took no remuneration from it; they were not reimbursed expenses; and they (or at least Mr MacPherson on his own behalf and on behalf of Miss Torevell) provided funds for working capital by way of loan.
(4) By September 1990 ESB had reached agreement in principle with another company, Technomark Limited, which was active in the same field, for mutual co-operation on a fee-sharing basis. From about September 1990, Technomark was in negotiation with the shareholders of Guys Drug Development Unit ("GDRU") for a contract under which Technomark would seek a buyer for the shares in GDRU in return for a fee based on the price achieved. It was agreed between ESB and Technomark that, if those negotiations came to fruition, the fee payable by the GDRU shareholders would be shared equally between ESB and Technomark. The GDRU contract was obtained in January 1991; and, immediately thereafter, ESB and Technomark formally confirmed their arrangement for sharing the fee payable. But only a small initial fee was paid by the GDRU shareholders at that stage. The major part of the fee was not payable until the successful completion of the engagement.
(5) By January 1991, as the judge found, the relationship between Mr MacPherson and Miss Torevell, on the one hand, and Mr Lyman, on the other hand, had deteriorated to such an extent that it was agreed between them that Mr MacPherson and Miss Torevell would disengage from ESB once their work on the GDRU contract was completed. That agreement was embodied in the written agreement of 28 February 1991 to which I have already referred.
(6) It will be necessary to set out the terms of the 1991 agreement in some detail later in this judgment; but it is sufficient to note at this stage that clause 8.4 - on which the respondents' claims in this action were based - provided that all payments received by ESB under the contracts specified in an appendix to the agreement (of which the GDRU contract was one) would be applied, after payment off of the liabilities of ESB accrued as at the date of the agreement and the reimbursement of expenses already incurred by the shareholders, by way of distribution to the shareholders "as payment for consultancy services provided by them to ESB" in the proportions 25:25:50.
(7) Mr MacPherson resigned as a director of ESB with immediate effect. Mr MacPherson and Miss Torevell transferred their shares in ESB to Mr Lyman. But they (or, at the least, Mr MacPherson) continued to work for ESB until 20 March 1991 - when the work to be done in relation to the GDRU contract was effectively complete.
(8) In the events which happened the GDRU contract was the only contract (of those specified in the 1991 agreement) under which monies became payable by the client. In November 1991 the GDRU shareholders paid £286,831 to Technomark. Technomark disputed its liability to pay any part of that sum to ESB. That led to litigation between ESB and Technomark. On 20 June 1995 ESB obtained judgment against Technomark in the amount of £143,416 (being equal to one half of the monies paid by the GDRU shareholders) together with interest of £45,963 down to that date and an order for costs. But, as the judge recorded, at page 210b, although Technomark paid the amount of the judgment and interest in full, its ability to pay the costs ordered against it was in doubt and ESB agreed to accept a sum in respect of costs which was substantially less than the amount of the costs which it had incurred. In the result the net recovery by ESB under that judgment (after payment of its own costs) was little more than £24,000.
(9) Before ESB had obtained judgment against Technomark in respect of the GDRU contract (or had recovered any monies thereunder), the accrued liabilities and the unreimbursed expenses payable under clause 8.4 of the 1991 agreement had been paid by ESB out of other funds. Accordingly, when ESB had established its claim to one half of the monies paid by the GDRU shareholders to Technomark, Mr MacPherson and Miss Torevell each claimed from ESB 25% of the amount of the judgment sum (excluding interest) - that is to say, each claimed £35,854.
The issues in the court below
5. The judge set out, at page 210f-j, the five grounds upon which it was contended before him that ESB were not liable to pay any sums to Mr MacPherson and Miss Torevell. He noted, at page 210e, that it was not suggested that, if all those grounds were rejected, any lesser sums than the £35,854 which each claimed were payable under clause 8.4 of the 1991 agreement. In particular, it was not suggested that the sums payable by ESB were 25% of the net recoveries (£24,168) made by ESB from Technomark.
6. The grounds raised by way of defence before the judge were these:
(1) Clause 8.4 provided for an unlawful distribution to the shareholders in ESB, in contravention of section 263 of the Companies Act 1985 ("the 1985 Act").
(2) Clause 8 provided for the distribution to shareholders of all ESB's assets, without making provision for its liabilities. A provision having that effect was not one to which the directors of ESB could properly agree, having regard to the fiduciary duties which they owed to the company. Accordingly the clause could not be enforced by Mr MacPherson, as a director in breach of duty, or by Miss Torevell, as a person with full knowledge of the circumstances.
(3) The obligation to make the payments required by clause 8.4 was unsupported by any consideration; because the consideration given by Mr MacPherson and Miss Torevell was past consideration.
(4) The payments provided for by clause 8.4 would constitute unlawful financial assistance, contrary to section 151 of the Companies Act 1985, in connection with the acquisition by Mr Lyman of the shares formerly held by Mr MacPherson and Miss Torevell, and so could not be enforced.
(5) Clause 8.4 is unenforceable because Mr MacPherson failed to declare his interest under the 1991 agreement at a board meeting of ESB.
7. The judge rejected each of those grounds. The contention that the agreement is unenforceable because Mr MacPherson failed to disclose his interest at a board meeting of ESB has not been pursued on this appeal. It is unnecessary to say any more about it. Nor, as I understand the notice of appeal, even when read in the light of the appellant's skeleton argument, is it now said that the company's obligation to make payments under clause 8.4 was unsupported by any consideration.
The issues on this appeal

8. The first - and, to my mind, the principal - issue raised by the notice of appeal is whether the judge was right in refusing to hold that the directors of ESB (Mr MacPherson and Mr Lyman) were in breach of duty in causing the company to enter into an agreement - the 1991 agreement - the effect of which was that the gross proceeds of all current contracts (after paying certain liabilities accrued at the date of the 1991 agreement) would be paid to Mr MacPherson, Miss Torevell and Mr Lyman, when received, to the exclusion of current and future creditors. Two other issues are raised: (i) whether the payments for which the 1991 agreement provided would, if made, contravene the requirement, in section 263(1) of the Companies Act 1985, that a company shall not make a distribution of its assets to its members except out of profits available for the purpose; and (ii) whether the assumption by the company of an obligation to make those payments in the future constituted the giving of financial assistance directly or indirectly for the purpose of the acquisition by Mr Lyman of the shares in the company then held by Mr MacPherson and Miss Torevell.
9. Although considerable argument was directed to those other issues, they become irrelevant if ESB succeeds on the first issue. If the obligation to make the payments is unenforceable because the agreement was one into which, consistently with the performance of their duties towards the company as its directors, Mr MacPherson and Mr Lyman could not properly have caused or allowed the company to enter, then (no payments having been made in fact) the section 263 issue does not arise. Similarly, if the obligation is unenforceable - and has not, in fact, been performed - it is difficult to see how any financial assistance, within the meaning of section 152(1)(a) of the 1985 Act, can have been given by the company.
10. Before addressing the issues raised by the notice of appeal it is convenient to set out the provisions of the 1991 agreement - and certain of the provisions in the 1990 agreement - and to examine the financial position of the company at the relevant time.
The 1990 agreement
11. The 1990 agreement, made on 30 July 1990, is of importance as part of the background to an understanding of the circumstances in which the 1991 agreement was made. The parties to the 1990 agreement were Mr Lyman, Mr MacPherson and Miss Torevell. The company, ESB, was not a party to that agreement. The agreement was described as "Shareholders Agreement". Its purpose, as stated in the recitals, was to regulate the rights and obligations of the three individual shareholders in the company. Clause 1 provided for the shares to be held by the parties in the proportions 50:25:25. Clause 2 provided that Mr Lyman and Mr MacPherson were to be the directors of the company. Clause 3 described the business of the company as "identifying health care companies for seed capital investment" and "investment banking business" including mergers and acquisitions, development of existing companies and their technology by attracting investment to them, and the joining of companies seeking manufacturing and/or marketing in Europe with suitable partners.
12. Clause 4, as originally drawn, was in these terms (so far as material):

"4.1 The parties agree to provide loans to the Company as required to meet its working capital requirement, the loans to be of such amounts and on such such terms as are agreed between the parties from time to time.

4.2 All fees generated by contracts for services entered into by the Company will be paid to the Company.

4.3 Cash received by the Company will be applied in the following order:

4.3.1. reimbursing the parties for any loans made by them to the Company or expenses advanced on behalf of the Company, initially in proportion to their their shareholdings in the Company;
4.3.2. paying fees to the Company's associates with whom it has a contract of association;
4.3.3. maintaining a positive cash balance of £10,000;
4.3.4. making payments to the parties in proportion to their shareholdings, initially as payments for services rendered and thereafter as dividends; ..."

But the clause was amended by deletions made on the face of the document at the time that the agreement was signed. Sub-clause 4.1 was deleted. The words "initially in proportion to their shareholdings in the Company", which had appeared in sub-clause 4.3.1 as drawn, were deleted. And, significantly in the present context, the words "initially as payments for services rendered and thereafter as dividends", which had appeared in sub-clause 4.3.4 as drawn, were deleted. Each of the deletions was initialled by the parties.
13. The significance of clause 4.3 - and, in particular, sub-clause 4.3.4 in the amended form in which it was signed - as it seems to me, is that it shows that the parties addressed their minds to the question whether they should receive remuneration for their services to the company; and decided that they should not. Surplus cash was to be paid to them "in proportion to their shareholdings". Properly understood, I think, sub-clause 4.3.4 must be taken to have effect as an agreement to a dividend policy - that is to say, as an agreement to a policy under which no distributions would be made to shareholders until loans had been repaid, expenses had been reimbursed and fees due to associates had been paid, and unless cash reserves of £10,000 could be maintained. But that policy had to be operated, of course, within the confines imposed by the Companies Act 1985; and, in particular, with proper regard to section 263(1) of that Act. Distributions under clause 4.3 could only be made out of profits available for the purpose. So understood, there is no vice in sub-clause 4.3.4 in the amended form in which it appeared in the 1990 agreement as signed.
The 1991 agreement
14. The 1991 agreement, made on 28 February 1991, was described as "Revised Shareholders Agreement". It was made between Mr Lyman, Mr MacPherson, Miss Torevell and the company, ESB. As appears from the recitals, the 1991 agreement "regulates the rights and obligations of all parties to each other and replaces the shareholders' agreement dated 30th July 1990 between the parties ("the Original Shareholders Agreement")". It was to take effect on the date on which it was signed, which was defined as "the Effective Date".
15. Clauses 1 and 2 were in these terms:

"1. [Mr MacPherson] hereby resigns as a director of the Company and of European High Technology Seed Fund Limited with effect from the Effective Date. He waives all rights to compensation or other payment in connection with his directorship or resignation except for the payments expressly provided for in this Agreement.

2. [Mr MacPherson] will provide consultancy services to the Company for a period of six months from the Effective Date or until he has gained permanent employment with another company whichever is sooner. He will receive no payment for such services except as expressly provided."

16. Clause 3 provided for Mr MacPherson to be reimbursed expenses incurred in providing consultancy services under clause 2. Clauses 4, 5, 6 and 7 were in these terms:

"4. The amount of expenses paid by [Mr MacPherson] and [Miss Torevell] on the one hand and [Mr Lyman] on the other before the Effective Date in promoting and supporting the Company's business, both prior to and after its incorporation, will be identified, audited and documented by the Company's accountants [naming them] ("the Accountants")and shown in a document to be initialled by the parties and attached as Appendix A.The amount of expenses incurred by each party and shown on Appendix A shall be treated as loans to the Company by [Mr MacPherson] and [Miss Torevell] ("the IFDM Loan") and [Mr Lyman] ("the RPL Loan") and shall be repayable as provided herein.

5. The parties will instruct the Accountants to identify, audit and list in a document which will be initialled by the parties and attached as Appendix C:
5.1 all liabilities incurred by the Company which are accrued and unpaid as at the Effective Date; and
5.2 the liability of the Company to Lombard plc under the lease of a Mercedes 420SE [identifying it] on the basis that the Company terminates such lease at the Effective Date;

(the liabilities listed in Appendix C being referred to as "Accrued Liabilities").

6. The parties agree that at the Effective Date the Company will have monies in its bank account [identifying the accounts] totalling the amounts shown in Appendix D ("Cash in Hand").

7. The parties agree that Appendix B contains a complete list of the contracts of the Company obtained as a result of the efforts of [Mr MacPherson] and [Mr Lyman] before the Effective Date ("the Contracts"). The parties agree that such contracts are the property of the Company and, for so long as this Agreement remains in force, none of the parties shall do anything which might in any way interfere with the performance of such contracts by the Company or deprive the Company of the full benefit of such contracts. Further, for so long as [Mr MacPherson] continues to receive payments under clause 8, [Mr MacPherson] will not provide or attempt to provide services to any actual or potential client of ESB in competition with ESB unless ESB agrees."
17. Those clauses identify four appendices, to be prepared and agreed between the parties: Appendix A - expenses incurred by the individual parties before the Effective Date (described as "the IFDM loan" and "the RPL loan"); Appendix B - contracts obtained before the Effective Date ("the Contracts"); Appendix C - unpaid liabilities incurred by ESB before the Effective Date ("the Accrued Liabilities"); and Appendix D - bank balances as at the Effective Date ("Cash in Hand"). Those appendices were prepared, and were signed by Mr MacPherson and Mr Lyman (but not, it seems, Miss Torevell or by anyone purporting to sign on behalf of ESB) on 28 February 1991. Their contents may be summarised as follows: Appendix A shows the IFDM loan at a figure of £20,180 and the RPL loan at £1,319; Appendix B shows six contracts, of which the GDRU contract is one; Appendix C shows Accrued Liabilities at £9,933 (net of VAT) but makes no provision for liability under the vehicle finance lease; and Appendix D shows "Cash at Bank at 20th March 1991" at the projected figure of £7,195 (after deducting a finance lease payment and a payment for vehicle insurance to be made on 18 March 1991).

18. Clauses 8, 9 and 10 are in these terms:
"8. The parties agree that subject to clauses 13 and 14 and subject to the Company's other cash flow requirements as disclosed to [Mr MacPherson] the Cash in Hand and all payments received by the Company under the Contracts after the Effective Date will be applied in the following order:

8.1 first in payment of the Accrued Liabilities;
8.2 second in repayment of the IFDM Loan;
8.3 third in repayment of the RPL Loan; and
8.4 thereafter will be distributed to [Mr MacPherson], [Miss Torevell] and [Mr Lyman] in the proportions 25:25:50 as payment for consultancy services provided by them to ESB.
9. It is agreed by all parties that the liabilities incurred by the Company after the Effective Date and not forming part of the Accrued Liabilities will be the responsibility and liability of the Company, which will pay them out of income or other cash resources other than the Cash in Hand and income arising under the Contracts.

10. Fees generated by contracts entered into by the Company after the Effective Date will not be subject to distribution as provided in clause 8."

19. Ignoring, for the moment, the qualification that clause 8 is to take effect subject to clauses 13 and 14, and "subject to the Company's other cash flow requirements as disclosed to [Mr MacPherson]", the scheme of clauses 8, 9 and 10, read in conjunction with clauses 4, 5, 6 and 7 and the appendices, is clear enough. The intention was to effect an informal winding up of the business as at the Effective Date - that is to say, as at the date of the agreement. The monies at the bank and the monies to come in from business already generated (the Contracts) were to be used in paying the existing debts and in reimbursing Mr MacPherson, Miss Torevell and Mr Lyman the expenses they had incurred in promoting and supporting the business thus far; any surplus remaining out of those monies was to be divided between the shareholders in the proportions in which they held the shares, as recompense for their efforts in generating the business and seeing it through to fruition. The business was to carry on; but on the basis that future debts would be paid out of income generated by future contracts. Income generated by existing contracts, although it might be received in the future, was not to be used to discharge future debts; and income generated by future contracts was not to be used to discharge debts accrued at the date of the agreement (save, perhaps, to the extent that the proceeds of existing contracts was insufficient to do so).
20. Clauses 13 and 14, to which the obligation in clause 8 had been made subject, provided for advance payments to be made in respect of the obligations under clause 8 and on account of those obligations. The circumstances in which those advance payments were to be made are not material in the present context. Clause 8 was subject, also, to "the Company's other cash flow requirements"; but that, as it seems to me, means no more than that the timing of the payments to be made under clause 8 might be determined by the liquidity of the company from time to time. "Subject to the Company's other cash flow requirements" does not mean "subject to the payment of the company's other creditors".
21. Clause 11 provided for the eventuality that, before repayment in full of the IFDM Loan, ESB were to go into voluntary liquidation or were to be unable to meet its debts. In that event, Mr Lyman was to be under a personal obligation to pay the balance of the IFDM Loan then outstanding, but after deducting the amount of the monies due to him (the RPL Loan), within eighteen months of the Effective Date. Clause 12 provided that, if ESB were put into liquidation for the purposes of amalgamation or reconstruction, the new company formed in the course of such amalgamation or reconstruction would assume the liabilities of ESB under clause 8. But the obligations under clauses 11 and 12 were conditional upon Mr MacPherson and Miss Torevell transferring their shares in ESB. That condition was imposed by clause 18:
"18. The obligations of [Mr Lyman] under clause 11 are conditional upon [Mr MacPherson] and [Miss Torevell] both transferring their shares in the Company to [Mr Lyman] or his nominee for £1 per share not later than the Effective Date. If this condition is not satisfied by the Effective Date, clause 12 shall be null and void. In exchange for such transfer, [Mr Lyman] will execute and deliver to [Mr MacPherson] a pledge of the shares held by him in ESB to secure [Mr Lyman's] obligations under clause 11, in the form attached to this agreement."
22. At the date of the 1991 agreement Mr MacPherson and Miss Torevell each held one share out of the four issued shares of £1 each in the capital of ESB. The other two shares were held by Mr Lyman. It is pertinent to note that the 1991 agreement does not impose any obligation upon Mr MacPherson or Miss Torevell to transfer their shares to Mr Lyman. But, unless they do transfer their shares to Mr Lyman or his nominee on or before the Effective Date - and for a nominal consideration - they cannot take the benefit of the provisions in clause 11 (Mr Lyman's personal obligation to pay the balance of the IFDM Loan if ESB goes into liquidation) or clause 12 (the assumption of the clause 8 obligations by a new company formed on amalgamation or reconstruction). The judge found, at page 209g, that Mr MacPherson and Miss Torevell did transfer their shares to Mr Lyman on the Effective Date. This finding appears inconsistent with the evidence, in paragraph 116 of Mr MacPherson's witness statement signed on 6 June 1998 - where it is said that the shares were not transferred until 2 September 1991 - but it has not been suggested that anything turns on the date upon which the shares were transferred. It is common ground that they were transferred.
23. Clause 16 provided for the 1990 agreement to determine with effect from the signing of the 1991 agreement. Clause 17 provided for the termination of the 1991 agreement if additional finance could not be obtained. It is in these terms:

"17. The parties acknowledge that ESB will only be able to continue its business if it can obtain additional finance. [Mr Lyman] is currently seeking additional finance and will continue for a reasonable period to do so. If such finance has not, for any reason, been obtained by 30 April 1991, this Agreement will terminate and each of the parties shall be released from all obligations hereunder except that [Mr Lyman] will continue to be bound by clause 11 and clause 19 [a confidentiality clause] will continue in force."

It has not been suggested that that condition was not satisfied. The financial statements to 31 January 1992 show that two new directors were appointed on 21 March 1991; and that, at some stage during the year to 31 January 1992, a further 101 shares of £1 each were issued; 96 at par and five at a premium of £4,172.54 per share.
The financial position of the company
24. There can be no real doubt that, at the date of the 1991 agreement, ESB was insolvent, in the sense that its liabilities exceeded it assets. The position as at 31 January 1991 - some four weeks before the date of the 1991 agreement - appears from audited financial statements signed by Mr Lyman on 20 March 1991. The balance sheet shows net current liabilities of £18,409, fixed assets of £20,250 and creditors for amounts falling due after one year of £8,415 - that is to say, an excess of liabilities over assets of £6,574. But the notes make it clear that the fixed assets represent the written down value of a motor vehicle which is being acquired under a finance lease; and that the obligations under the finance lease are £20,159 - of which £11,744 would fall due within the year to 31 January 1992 and the balance (£8,415) would fall due within years two to five. If the motor vehicle, and the associated liabilities under the finance lease, were taken out of the accounts, the position would be that the excess of liabilities over assets (representing both net liabilities and net current liabilities) would be £6,675.
25. The balance sheet as at 31 January 1991 shows Mr Lyman as a debtor in the sum of £1,605. There is no entry which reflects the monies owed to Mr MacPherson and Miss Torevell, or to Mr Lyman, which were subsequently to be identified in Appendix A to the 1991 agreement as the IFDM Loan (£20,180) or the RPL Loan (£1,319); notwithstanding that, under the terms of clause 4.3.1 of the 1990 agreement, they were entitled to reimbursement in respect of loans made by them to the company or expenses incurred on its behalf. If those amounts, which were recognised as due from the company in clause 4 and Appendix A of the 1991 agreement, are treated as liabilities as at 31 January 1991, the excess of liabilities over assets as at that date was £28,000 or thereabouts.
26. It is impossible, on the material available, to achieve an exact reconciliation of the figures for Accrued Liabilities (£9,933) and Cash in Hand (£7,195), shown in Appendices C and D to the 1991 agreement, to the position shown in the balance sheet as at 31 January 1991; but, ignoring for the moment (i) the motor vehicle and its associated liabilities under the finance lease and (ii) the IFDM Loan and the RPL Loan, there appears to have been a reduction in net current liabilities - from £6,675 to £2,738 or thereabouts. That must reflect the receipt of some income by the company during the month of February. But the overall position is much the same. If the motor vehicle with its associated liabilities, and the IFDM Loan and the RPL Loan, are taken into account, the excess of liabilities over assets as at the date of the 1991 agreement would be £24,000 or thereabouts.
27. Clause 5.2 of the 1991 agreement provided for the Accrued Liabilities to be ascertained on the basis that the liability of ESB under the finance lease would be included as if the company had terminated the lease at the date of the agreement. The accountants gave effect to that instruction, not by including any liability under the finance lease in Appendix C, but by reducing Cash in Hand (Appendix D) by the amount of a lease payment due on 18 March 1991. That is to say, they treated the finance lease as determined upon payment of one month's rental. But the finance lease was not, in fact, determined. That appears from the financial statements of the company as at 31 January 1992 - which show the same motor vehicle and its associated liabilities under the finance lease in the balance sheet.
28. The balance sheet as at 31 January 1992 shows net current liabilities of £207,306, and an excess of liabilities over assets in the sum of £192,253. Those figures reflect an amount for "other creditors" of £204,752. A letter of 23 March 1994 from the company's accountants (Stoy Hayward) to the Inspector of Taxes - itself based on information supplied by Mr Lyman in letters dated 25 November 1992 and 6 August 1993 - discloses that included amongst "other creditors" are debts owed by ESB to Mr Lyman (£39,075) and to Mr MacPherson (£76,430). It is reasonably clear from the letter of 23 March 1994 - when read in conjunction with the 1992 financial statements - that the debt said to be owed to Mr MacPherson includes an amount in respect of commission (£71,250) payable to him "for services in connection with gaining business from Technomark" - that is to say, in substance, the aggregate of the sums claimed by Mr MacPherson and Miss Torevell in this action. It is unlikely to be a coincidence that the amount said to be payable to Mr MacPherson in respect of commission (£71,250) is exactly one half of the amount (£142,500) shown as due to the company under "trade debtors" in the 1992 balance sheet. Plainly, that amount (£142,500) represents the monies due to ESB from Technomark under the fee-sharing arrangement in respect of the GDRU contract.
The first issue: breach of duty
29. I turn, therefore, to first issue raised by the notice of appeal: whether the judge was right in refusing to hold that the directors of ESB were in breach of duty in causing the company to enter into the 1991 agreement at a time when it was insolvent and in circumstances that the effect of clause 8.4 was that the gross proceeds of all current contracts (after paying some, but not all, of the company's liabilities at the date of the 1991 agreement) would be paid to Mr MacPherson, Miss Torevell and Mr Lyman, when received, to the exclusion of creditors. In order to address that issue it is necessary to identify and resolve two preliminary questions: (i) was the distribution to be made under clause 8.4 of the agreement intended to be a contractual payment for services, and (ii), if so, was there consideration to support the company's contractual promise to pay.
Was the distribution to be made under clause 8.4 of the 1991 agreement intended to be a contractual payment for services?
30. The judge approached the issues before him on the basis that, as a matter of construction, clause 8.4 of the 1991 agreement was intended to give rise to a contractual obligation on ESB to make payments to the three individuals - Mr MacPherson, Miss Torevell and Mr Lyman - for consultancy services provided by them to ESB. He described the payments as, in part, deferred remuneration for services already provided in gaining the contracts from which the company could hope to obtain the fruits in due course and, in part, as a reward for future services to be provided in bringing those contracts to fruition - see [1999] 2 BCLC 203, 212c-d, 213c-d.
31. In my view, the judge was correct to hold that that was the intended purpose of the provision in clause 8.4. The words used must be given the meaning which, having regard to the circumstances in which the agreement was signed, they were plainly and obviously intended to bear. It is, to my mind, of some significance, that the words which had been deliberately omitted from the comparable clause in the 1990 agreement (clause 4.3.4) - "as payment for services rendered" - are included, in substance, in the agreement made in 1991. I reject the submission, advanced on behalf of ESB on this appeal for the first time, that the words "payment for consultancy services to be provided" in clause 8.4 of the 1991 agreement are to be disregarded, on the basis that they are an attempt to disguise the real intention of the parties. It is true that, if clause 8.4 were given effect, there would be payments out of the assets of the company to shareholders or former shareholders in proportion to their shareholdings; but that is not enough, in my view, to justify the conclusion that those payments were not intended as a reward for past and future services. There is no reason, in principle, why a company should not agree that the amounts of the payments to be made to persons who have provided, or who are to provide, services for its benefit are to be apportioned amongst those person in the proportions in which they hold shares in the company; provided, of course, that the agreement to pay for those services, and in those amounts, is otherwise a proper one for the company to make.
Was there consideration to support the company's contractual promise?
32. The judge held that the company's obligation to make payments for consultancy services under clause 8.4 of the 1991 agreement was supported by consideration. In my view, he was correct to do so. It is not, I think, contended otherwise on this appeal. It is important to keep in mind that, in this context, the question is not whether the consideration is adequate. It is trite law that a contractual promise may be enforceable notwithstanding that the consideration for it is inadequate, or even nominal, provided that the consideration is real and not illusory; that is to say, that it is capable of estimation in terms of value - see Chitty on Contracts (28 Edition 1999) at paragraph 3-021.
33. By clause 1 of the 1991 agreement Mr MacPherson waived all rights to compensation or other payment in connection with his directorship or resignation; by clause 2 he agreed to provide consultancy services in the future, albeit for a limited period; and by clause 7 he agreed that he would not provide or attempt to provide services to any actual or potential client of ESB, save with the agreement of ESB. To my mind it is plain that the waiver, the promise to provide future services and the promise not to compete are consideration enough, as a matter of law, to support a promise by the company not only to pay for future services but also to pay for past services. The performance of the past services cannot, of itself, be consideration for the promise to pay for those services; but there is no reason why a person should not agree to provide future services on terms that he is paid both for those future services and for his past services.
34. There was no waiver of rights by Miss Torevell or Mr Lyman, comparable to that on the part of Mr MacPherson in clause 1. Miss Torevell was not a director of the company; and Mr Lyman, who was a director, was not resigning his office. No express obligation was assumed by Miss Torevell or by Mr Lyman, comparable to that assumed by Mr MacPherson under clause 2 of the 1991 agreement, in relation to the provision of future services. But the judge held that it was implicit that Miss Torevell would provide consultancy services to the extent needed to achieve the fulfilment of the existing contracts. As he said, at page 215f-g:
"It was clearly implicit in the agreement that Miss Torevell, as well as Mr MacPherson, would leave the service of ESB on the effective date, but would provide consultancy services to the extent needed to achieve the fulfilment of the existing contracts of ESB, so far as this was achievable. It was the uncontradicted evidence of both Mr MacPherson and Miss Torevell that this is what happened. In my judgment it happened because it was in accordance with the express and implied terms of the 1991 agreement."
35. There is, as I understand the notice of appeal, no challenge to that finding. But, in any event, Miss Torevell plainly did provide some consideration for the company's obligations: (i) by her promise, in clause 7 of the 1991 agreement, not to interfere in any way with the performance of the existing contracts; (ii) by her agreement, in clause 10, that fees generated by future contracts would not be applied in payment of the IFDM Loan, in which she had an interest - see clause 4; and (iii) by her agreement to the confidentiality clause (clause 19).
36. Nor, as it seems to me, could it said that Mr Lyman provided no consideration for the company's obligations under clause 8.4. He, too, promised not to interfere with the performance of the existing contracts. He, too, agreed that fees generated by future contracts would not be applied in payment of his loan (the RPL Loan). He, too, agreed to the confidentiality clause. He agreed, in clause 17, to continue his efforts to seek additional finance for a reasonable period; in clause 11, to assume a personal obligation to discharge the IFDM Loan - which, for the reasons which I have already explained, was an existing liability of ESB; and, in clause 12, to cause any new company, formed on amalgamation or reconstruction, to assume ESB's liabilities in respect of the IFDM Loan, the RPL Loan and the Accrued Liabilities.
Could directors, acting properly, cause or allow ESB to enter into the 1991 agreement?
37. The fact that, as a matter of law, there was consideration to support the company's contractual promise to make payments, under clause 8.4, in respect of past and future services does not, of course, lead to the conclusion that that was an obligation which its directors, consistently with the obligations which they owed to the company, could cause or allow the company to assume. The powers of management conferred on directors by the articles of association of a company are to be exercised for the benefit of the company; not for their own benefit without regard to the interests of the company. The observations of Mr Justice Eve in In re Lee, Behrens and Co Ltd [1932] 2 Ch 46, at pages 51-2, are relevant in this context:
". . . all such grants involve an expenditure of the company's money, and that money can only be spent for purposes reasonably incidental to the carrying on of the company's business, and the validity of such grants is to be tested, as is shown in all the authorities, by the answers to three pertinent questions: (i) Is the transaction reasonably incidental to the carrying on of the company's business? (ii) Is it a bona fide transaction? and (iii) Is it done for the benefit and to promote the prosperity of the company?"
38. In addressing those questions it is necessary to have in mind: (i) that, subject to whatever recoveries might be made under the existing contracts (listed in Appendix B to the agreement) the company was insolvent at the time when the agreement was made; (ii) that the effect of the agreement was to hypothecate whatever recoveries might be made under the existing contracts to the payment of certain liabilities - the Accrued Liabilities, the IFDM Loan and the RPL Loan, and the liability (assumed under the agreement itself) to pay for consultancy services - to the exclusion of other creditors; (iii) that the nature of the liability (assumed under the agreement) to pay for consultancy services was such that no part of whatever recoveries might be made under the existing contracts could become available for the payment of other creditors - because the whole of any surplus after discharge of the Accrued Liabilities, the IFDM Loan and the RPL Loan was payable for consultancy services - and (iv) that the persons to benefit under the agreement - both in respect of the repayment of the IFDM Loan and the RPL Loan and in respect of the payments for consultancy services - included the two directors of the company.
39. It is necessary, also, to have in mind that the Accrued Liabilities did not include all the liabilities of the company (other than the IFDM Loan and the RPL Loan) immediately before the 1991 agreement was made - although the parties may, perhaps, have thought otherwise. The reason lies in the definition of Accrued Liabilities contained clause 5 of the agreement. Accrued Liabilities means (i) all liabilities incurred by the company which are accrued and unpaid as at the date of the agreement and (ii) the liability of the company under the finance lease on the basis that the lease was terminated at that date. That definition does not include future or contingent liabilities; that is to say, liabilities which the company will, or may, have to meet, but which have not accrued as at the date of the agreement. In particular, the definition does not include future liabilities under the finance lease in the event (which happened) that the finance lease was not terminated at the date of the agreement. Further, in defining the Accrued Liabilities by reference to the list in Appendix C, the parties made no provision at all for future liabilities under the finance lease - because Appendix C contains no reference to that lease. The point is not met by including in Appendix D - "Cash at Bank at 20 March 1991" - a single finance lease payment made or to be made on 18 March 1991.

40. The effect, therefore, of the bargain which the parties made on 28 February 1991 was that the assets to which the company was then entitled - including the off-balance sheet assets represented by the existing contracts (for whatever they might prove to be worth) - were to be applied in making payments to certain creditors - including the directors and including payments for past services under a liability assumed under the agreement itself - to the exclusion of other creditors and without making any provision (other than for consultancy services to be provided by the parties themselves) for the cost of bringing the existing contracts to fruition or of recovering any monies due thereunder. An obvious illustration of the latter point - based on the construction which the respondents themselves put on the 1991 agreement - is that the litigation costs incurred in making recovery from Technomark fall under clause 9 of the agreement and cannot be met out of the gross amount received, or payable, in respect of the GDRU contract.

41 The judge recorded the submissions in relation to breach of duty which were advanced before him in the following passage of his judgment, at page 213e-f:
"In support of the argument that no reasonable board of directors could have caused ESB to enter into the 1991 agreement, Mr Wright [leading counsel then appearing for ESB] contended that: (a) cl 8.4 is objectionable because it was designed to enable Mr MacPherson and Miss Torevell to recover the value of `what they had put into ESB' and the amount of such recovery was not related to any proper assessment of remuneration for services rendered assessed against the resources of ESB; (b) the prospective receipts which were to be dealt with in accordance with cl 8 represented all, or substantially all, of ESB's assets; (c) no proper provision was made for the discharge of ESB's liabilities; (d) the effect of cl 8 was to give Mr Lyman, Mr MacPherson and Miss Torevell priority over the other creditors of ESB; and (e) cl 8 purported to create a charge over future book debts of ESB for the benefit of Mr Lyman, Mr MacPherson and Miss Torevell."
42. The judge rejected the first of those points for the reasons which he gave at pages 213g- 214a:
"What Mr MacPherson and Miss Torevell (and for the matter Mr Lyman too) had `put into ESB' was not a capital contribution except to the extent of the loans which they had made to cover expenses and which the directors of ESB were fully justified in agreeing that ESB should repay. For the most part it was their expertise, skill and personal effort, which they had provided, as I see it, on the basis that they would be remunerated when the contracts which they had obtained for ESB came to fruition. The directors of ESB, who at the outset were themselves, were, it seems to me, fully entitled to accept their services on this basis and they should be regarded as having impliedly done so. Subsequently when Mr MacPherson and Miss Torevell desired to sever their relationships with ESB, the directors of ESB were, in my view, entitled to negotiate and agree the terms on which severance should take place. It does not appear to me to be unreasonable that it should be agreed on terms that all of those who had built up the potential of ESB down to the time of severance, including Mr Lyman himself, should in due course receive the benefits which they had worked to obtain."
43. The judge accepted that the payments to be made under clause 8 of the 1991 agreement would exhaust the whole, or substantially the whole, of ESB's assets at the date of the agreement. But he rejected the submission - which he had recorded as point (c) - that the agreement had made no proper provision for the discharge of ESB's liabilities. He said this, at page 214b-e:
"Clause 8 itself starts by saying that the prescribed payments are to be made `subject to [ESB's] other cash flow requirements as disclosed to [Mr MacPherson]'. First priority was to be given to the payment of the accrued liabilities, which included all ESB's unsatisfied liabilities as at the effective date. Next payments were to be made in satisfaction of the IFDM loan and the RPL loan, which was equivalent to saying that ESB's loan capital was to be repaid. Only when these payments had been made in full were the individuals to be paid pursuant to cl 8.4. In the absence of evidence that ESB had, at the effective date, liabilities not falling into the categories of accrued liabilities, the IFDM loan or the RPL loan, the only other liabilities which might have been provided for were in the nature of costs which might be incurred by ESB in bringing to fruition the contracts listed in Appendix B, or in obtaining and bringing to fruition other contracts yet to be negotiated. These would be future, not present, liabilities of ESB. They were provided for by cl 9 of the 1991 agreement, under which ESB agreed that it would pay them out of other moneys, such as fresh capital raised by ESB or the receipts from future contracts. I do not see why the directors of ESB could not properly agree that this should be done especially when, as I see it, ESB was negotiating a severance deal with two of its executives who had rendered valuable services without hitherto being rewarded."
44. It is, perhaps, not wholly clear whether the judge intended, in the first of those passages, to accept that, immediately before the 1991 agreement was signed, any of Mr MacPherson, Miss Torevell or Mr Lyman had a right to payment for their past services. If that was the basis on which he held that "the directors of ESB were entitled to negotiate and agree the terms on which severance should take place", then, in my view, he had failed to appreciate the importance and effect of the amendment made to clause 4.3.4 of the 1990 agreement - to which I have referred earlier in this judgment. To my mind it is clear that the parties had decided, at the time of the 1990 agreement, that they would provide their services on the basis that they would not be entitled to remuneration as such, but would take the reward for their efforts as shareholders, either by way of a distribution or dividend out of profits or by way of distribution out of surplus assets on a winding up. Whatever the contractual basis for the company's agreement to clause 8.4 of the 1991 agreement, it was not the compromise of an existing claim to payment for past services.
45. The judge referred, in the second of those passages, to "the absence of evidence that ESB had, at the effective date, liabilities not falling into the categories of accrued liabilities, the IFDM loan or the RPL loan". He drew the conclusion that "the only other liabilities which might have been provided for were in the nature of costs which might be incurred by ESB in bringing to fruition the contracts listed in Appendix B . . ." But, as I have sought to explain, there were other liabilities not provided for. There were future liabilities under the finance lease. And, in any event, the costs of bringing the existing contracts to fruition were, as it seems to me, costs which needed to be provided for before any distribution of the whole of the fruits of those contracts could be made, or any obligation to make a payment by way of remuneration which would absorb the whole of the fruits of those contracts could be entered into.
46. In my view there can be no doubt that the arrangement made under the 1991 agreement fails to satisfy the third of the questions posed by Mr Justice Eve in In re Lee, Behrens and Co Ltd [1932] 2 Ch 46: "is [the transaction] . . for the benefit and to promote the prosperity of the company?" What the parties have sought to achieve, by an arrangement for the payment of remuneration, is the distribution of assets as if on a winding up. As I have said, in an earlier passage in this judgment, the scheme of clauses 8, 9 and 10 of the agreement, read in conjunction with clauses 4, 5, 6 and 7 and the appendices, is clear enough. The intention was to effect an informal winding up of the business. That is an understandable objective. Two of the partners, or corporators as they had become, were leaving the business. They wished to take out what, as they saw it, was due to them in respect of the value which they had contributed by their efforts. But it is not an objective which can be said to have anything to do with the promotion of the prosperity of the company. It is no answer to say that the provision in clause 8.4 was for the payment of remuneration. It is inconceivable that that provision would have taken the form that it does but for the fact that the parties wished to achieve the objective which I have identified - namely, a distribution of assets as if on a winding up.
47. The parties could have achieved that objective by the sale of the business by ESB to a new company, leaving existing assets (including the benefit of the existing contracts) and existing liabilities to be realised and discharged in a winding up of ESB. Or, perhaps more conveniently in the circumstances that further work was needed in order to bring the existing contracts to fruition, they could have caused ESB to sell the business, with the benefit of the existing contracts and subject to an indemnity against existing liabilities, to a new company on terms as to deferred payment of an amount equal to the fruits of the existing contracts. Or, they could have sought the sanction of the court to a reconstruction under Part XIII (Arrangements and Reconstructions) of the Companies Act 1985. But, in each case, it would have been necessary to make provision for all the creditors of the company before there could be a distribution to the corporators.
48. In my view, to enter into an arrangement which seeks to achieve a distribution of assets, as if on a winding up, without making proper provision for creditors is, itself, a breach of the duties which directors owe to the company; alternatively, it is ultra vires the company. It is an attempt to circumvent the protection which the Companies Act 1985 aims to provide for those who give credit to a business carried on, with the benefit of limited liability, through the vehicle of a company incorporated under that Act. As such, it fails to satisfy the first of the questions posed by Mr Justice Eve in In re Lee, Behrens and Co Ltd [1932] 2 Ch 46: "is the transaction reasonably incidental to the carrying on of the company's business?" As Mr Justice Pennycuick pointed out in Ridge Securities Ltd v Inland Revenue Commissioners [1961] 1 WLR 479, at page 495:
"A company can only lawfully deal with its assets in furtherance of its objects. The corporators may take assets out of the company by way of dividend or, with leave of the court, by way of reduction of capital, or in a winding up. They may, of course, acquire them for full consideration. They cannot take assets out of the company by way of voluntary disposition, however described, and if they attempt to do so, the disposition is ultra vires the company."
It is important to note the epithet by which Mr Justice Pennycuick qualifies the word "consideration" in that passage. The question is not whether the assets are acquired under some arrangement which contains the elements which the law requires for recognition as a contract. What is needed is "full consideration"; that is to say, the arrangement must be entered into for the benefit and to promote the prosperity of the company. The provisions in the 1991 agreement do not meet that test.

49. In reaching the conclusion which I have expressed, it is not necessary to categorise the provision, in clause 8.4 of the 1991 agreement, for payment "for consultancy services" as "a sham" - in the sense described by Lord Justice Diplock in Snook v London and West Riding Investments Ltd [1967] 2 QB 786, at page 802C-F; and I do not do so. It is enough to hold, as I do, that the provision can have no place in an arrangement entered into for the benefit and to promote the prosperity of the company. The parties have sought to achieve their objective without making proper provision for creditors; and their attempt must fail.
The second issue: section 263 of the Companies Act 1985

50. Section 263(1) of the Companies Act 1985 requires that a company shall not make a distribution except out of profits available for the purpose. In that context "distribution" means every description of distribution of a company's assets to its members, except distribution by way of (a) an issue of shares as fully or partly paid bonus shares, (b) the redemption or purchase of any of the company's own shares out of capital or out of unrealised profits, (c) the reduction of share capital or (d) a distribution of assets to members of the company on its winding up.

51. The judge held that the payments which were to be made to Mr MacPherson and Miss Torevell (and, by implication, the payment to be made to Mr Lyman) did not fall within the prohibition in section 263(1) of the 1985 Act because those payments were not to be made to them in their capacity as members of the company. At page 213c-d he said this:
"I find, therefore, that cl 8.4 of the 1991 agreement does not provide for a distribution of assets of ESB to its shareholders. Rather it provides for the receipt of retrospective remuneration for the individuals who had previously worked for ESB without pay in the expectation they would be rewarded when their efforts bore fruit in the form of the receipt of fees or commission by ESB. The fact that these individuals were also shareholders and that they were to be remunerated in proportions commensurate with their shareholdings does not point to the opposite conclusion."
52. If I were persuaded that clause 8.4 of the 1991 agreement could have any place in a bona fide transaction entered into for the benefit and to promote the prosperity of the company, I would recognise the force of the judge's view that the fact that the payments were to be made to individuals who happened to be shareholders, and the fact that the amount of the payments were to be in proportion to the amount of their shareholdings, did not lead to the conclusion that payments for remuneration had to be regarded as distributions within section 263(1) of the 1985 Act. But, for the reasons which I have sought to explain, those facts compel the conclusion (in the present case) that the purpose of the parties in agreeing remuneration in the form for which clause 8.4 provides was to achieve a distribution of assets as if on a winding up, but without making proper provision for creditors. The vice, as it seems to me, is not that the agreement, as made, contravenes section 263(1). Rather, it is that the agreement seeks, by a route other than formal winding up, to achieve the distribution of assets on a winding up which section 263(1), read in conjunction with section 263(2)(d), permits; and, in so doing, involves the directors - and, I think, the company - in acts which are outside their respective powers.

The third issue: section 151 of the Companies Act 1985
53. Section 151(1) of the Companies Act 1985 makes it unlawful (save in circumstances which are not material in the present context) for a company to give financial assistance, directly or indirectly, for the purpose of an acquisition by a person of shares in the company, before or at the same time as the acquisition takes place. Financial assistance is defined in section 152(1). It includes any financial assistance given by a company the net assets of which are thereby reduced to a material extent or which has no net assets. In the present case, as I have sought to explain, the position immediately before the 1991 agreement was that (if the benefit of the existing contracts was left out of account) ESB had no net assets. The effect of the 1991 agreement was to absorb the whole benefit of the existing contracts. So, the effect of the 1991 agreement was to reduce to a material extent - indeed, to extinguish - whatever net assets the company had. It follows, in my view, that if, on a proper understanding of the arrangement, the provisions of clause 8 of the 1991 agreement assisted the acquisition by Mr Lyman of the shares transferred to him by Mr MacPherson and Miss Torevell, that assistance was financial assistance given for the purpose of that acquisition contrary to section 151(1) of the 1985 Act.

54. If the provisions of clause 8 were otherwise enforceable, I would have little doubt that those provisions do assist the acquisition of the shares which, as the 1991 agreement contemplated, were to be transferred to Mr Lyman. I appreciate, of course, that the agreement imposed no obligation on Mr MacPherson or on Miss Torevell to transfer their shares; but it provided a strong incentive for them to do so - see clauses 11 and 18. Further, the nominal consideration for which the shares were to be transferred can be explained only on the basis that Mr MacPherson and Miss Torevell were to share in the latent value in the company - that is to say, the value (such as it might turn out to be) in the existing contracts - through the machinery provided by clause 8. It is, to my mind, inconceivable that Mr MacPherson or Miss Torevell would have contemplated transferring their shares in ESB for a nominal consideration but for the fact that they expected to take their share of the latent value through the provision for remuneration in clause 8.4. But, in the circumstances that, for the reasons which I have set out, I would hold that the provisions of clause 8 of the 1991 agreement are not enforceable, it is unnecessary to reach a concluded view on the third issue.

Conclusion
55. I would allow this appeal and set aside the order of 22 January 1999.

Buxton LJ::

56. I gratefully adopt the statement of facts and issues set out in the judgment of Chadwick LJ. Like him, I would allow this appeal. I venture to add some short words of my own because I am minded to think that the 1991 agreement on its true construction did provide for a distribution of the assets of ESB to its members, contrary to section 263(1) of the 1985 Act.

57. The central feature of the 1991 agreement is clause 8.4, which provides in terms for the "distribution" of the company's assets to the shareholders in proportion to their holding. True it is that that distribution is said to be as payment for consultancy services provided by them to the company. The judge was, however, in my respectful view correct when he said, in the passage cited by my Lord in paragraph 51 of his judgment, that that was retrospective remuneration for persons who had previously worked for the company without pay. I do not agree that the phrase can easily be read as extending also to payment for future services, as the judge saw it in another passage, at page 212c of his judgment, and as my Lord suggests that the phrase can be read. That payment for future services is envisaged is not consistent with the use of the single word "provided". Nor is it consistent with the specific provision as to future consultancy services on the part of Mr Macpherson in clause 2 of the agreement, which states that those services are to be without payment "except as expressly provided". That most obviously means, as provided elsewhere, and not as expressly provided by this agreement. If Mr Macpherson had indeed been paid for future services under clause 8.4, clause 2 envisages the possibility of the company remunerating him for those services a second time.

58. It is true, as my Lord points out, that there are other obligations placed on the three corporators that can be construed as the provision on their part of consideration for whatever payment they receive under the agreement. In my view, however, the immediate question is not whether consideration was given for the company's promise to distribute its assets, since if there were no consideration that promise would not be enforceable in any event; but rather whether the reason stated for the distribution suffice to take it out of section 263.

59. The reason stated in clause 8.4 is, and in my view as set out above is only, past services provided by the corporators. But those were services that had originally been agreed to be provided gratuitously; and which could not support a contractual obligation on the part of the company to make the payments. I therefore consider that the claim that the distribution is payment for past consultancy services is insufficient to prevent the arrangement from being what otherwise it on its face plainly is, a distribution of the company's assets. So to hold does not entail a holding that the agreement was a sham, in the sense that the parties did not genuinely think that they were rewarding each other for past services and were entitled so to do. Rather, the method of reward that they chose was in danger of being characterised as distribution of assets unless the basis on which it was explained and justified was capable of some other construction in law. In this case I am not satisfied that it was so capable.

60. I do not however need to reach a final conclusion on that issue, because I am quite clear that the appeal must succeed on the second of the grounds set out by my Lord, that the arrangements in the 1991 agreement were ultra vires the company. It would need a considerable degree of cynicism to think that an arrangement whereunder the corporators depart with the future income leaving the creditors with the debts is for the benefit of the company, even if the beneficiaries hold the whole of the interest in the company; and for the reasons set out by my Lord such an arrangement is without question ultra vires the company.
61. The original partners no doubt saw advantage in deciding to conduct their business through a corporate vehicle. The use of a corporate structure however entails obligations as well as benefits, because the company and its affairs must be conducted as company law requires. The 1991 agreement on any view fails that requirement. I would allow the appeal.
Peter Gibson LJ:
62. Although we are differing from the conclusion of the judge in a full and careful judgment on the issue whether the directors could properly have caused ESB to enter into the 1991 agreement, there is nothing which I would wish to add to the judgment of Chadwick LJ, as I am in entire agreement with it.
Order: Appeal allowed and the order of the judge below set aside. Appellant to have their costs of the appeal and costs below.
(Order does not form part of approved judgment.)