Case No: A2/2002/1029 QBACF
Neutral Citation Number: [2002] EWCA Civ 1999
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM QUEEN’S BENCH DIVISION
OF THE HIGH COURT (Mr Justice Davis)
Royal Courts of Justice
Strand, 
London, WC2A 2LL

Friday 20 December 2002
Before :

LORD JUSTICE WARD
LORD JUSTICE BUXTON
and 
LADY JUSTICE ARDEN

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Between :

	Robert Chaston	Claimant/ Respondent	
	- and -		
	SWP Group plc	Defendant/Appellant	

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(Transcript of the Handed Down Judgment of
Smith Bernal Wordwave Limited, 190 Fleet Street
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Michael Todd QC and David Cavender (instructed by Theodore Goddard) for the Appellant
Mark Cunningham QC (instructed by Lyons Davidson) for the Respondent

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Judgment
As Approved by the Court

Crown Copyright ©

Lady Justice Arden  : 

1.	This is an appeal by the defendant in this action (whom I will call “SWP”) against part of the order of Mr Justice Davis sitting in the Queen’s Bench Division of the High Court dated 26 April 2002.  The part of the order in question is that part of the judge’s order which dismissed SWP’s Part 20 claim against the respondent to this appeal, Mr Robert Chaston (to whom I will refer as “Mr Chaston”), for damages for breach of fiduciary duty for having procured, or connived in, the grant by DRC Polymer Products Ltd (formerly Dunstable Rubber Company Ltd) (referred to below as “DRC”), of which he was a director and also a major shareholder, of financial assistance for the purpose of the acquisition by SWP of the shares in the parent of DRC, Dunstable Rubber Company Holdings Ltd (hereinafter called “DRCH”), contrary to section 151 of the Companies Act 1985.  The alleged financial assistance is the incurring of liability to Deloitte and Touche (hereinafter called “D&T”) to pay certain fees, and/or the payment of those fees.  The consideration for the acquisition was a mixture of cash, loan stock and deferred consideration having a maximum aggregate value of £2.55m.  The acquisition did not in SWP’s view turn out to be a beneficial transaction for reasons which need not concern us on this appeal.
2.	The appeal raises three issues, which are of some importance in practice:-
i)	was the commitment to pay these fees or the payment of these financial assistance at all?
ii)	to which party was the financial assistance given?
iii)	was the assistance “for the purpose of” the acquisition by DRCH of the share capital of DRCH?
3.	The fees in question are the fees represented by the invoices issued by D&T particularised below:-
Invoice No. Date of Invoice Amount of Invoice Amount alleged by To whom invoice Narrative in invoice
			       including VAT     SWP to have been    rendered       paid in breach of s.151
__________________________________________________________________________________________

0100828     01.12.97             £3,525.00                 £3,525.00                DRC                     For professional services  
                                                                                                                                            rendered in respect of the
										         potential sale of the 										         entire share capital of 										          [DRCH].                             

0100781     22.10.97             £8,812.50                 £8,812.50                 DRC                   Payment on account for 										         professional services in 										         respect of assistance 								 		         given on the sale of 										         [DRCH] to [SWP].

0100981     02.10.97             £7,775.00                 £1,468.75                 DRC                   For professional services 										         for the period ended 15 										         September 1997.

0101319     15.02.98            £5,875.00                  £5,875.00                  DRC                  For professional services 										         for the period ended 30 										         November 1997. During 										         this period we performed 										         the tax related work in 										         connection with the sale 										         of [DRCH] to [SWP] [in 										         addition] to the audit 										         work carried out by 									                      David Isherwood.  The 										         work included a meeting 										         and correspondence with 										         Geoffrey Smith with 										         regard to the past and 										         presenttax affairs of the 										         DRC Group together 										         with telephone 											         conversations with 										         [Coopers & Lybrand].
						   ________

                                               Total:                               £19,681.25
                                                                                        ========
4.	
The first and second invoices were rendered by the audit department of D&T’s St Albans office.  The third and fourth invoices were rendered by the tax department of D&T’s St Albans office.  Only part of the third invoice is claimed, namely the sum of £1,250 plus VAT, which D&T later said was for “initial work in respect of the sale of the Dunstable Rubber Group”.
5.	The fourth invoice was originally for the sum of £12,000 and this amount was originally billed to Mr Chaston personally.  D&T agreed to reduce the invoice amount and to attribute part of the work to DRC in replacement of their invoice for £12,000.  The original invoice stated that the fourth invoice “replaces our previous invoice … dated 10 December 1997.”  The judge found that Mr Chaston redacted the invoice for the purposes of disclosure so that this sentence did not appear.  The judge found that Mr Chaston did this with a view to suppressing the reference to the earlier invoice “his motive being to forestall providing SWP with ammunition for a claim that he had wrongly procured DRC to pay his personal bills” (judgment, paragraph 176). 
6.	SWP brought its Part 20 claim as assignee from DRC of all its claims which it might have against Mr Chaston in respect of these invoices.
7.	Section 151(1) and (2) provide as follows:-  
“151	Financial assistance generally prohibited
(1)	Subject to the following provisions of this Chapter, where a person is acquiring or is proposing to acquire shares in a company, it is not lawful for the company or any of its subsidiaries to give financial assistance directly or indirectly for the purpose of that acquisition before or at the same time as the acquisition takes place.
(2)	Subject to those provisions, where a person has acquired shares in a company and any liability has been incurred (by that or any other person), for the purpose of that acquisition, it is not lawful for the company or any of its subsidiaries to give financial assistance directly or indirectly for the purpose of reducing or discharging the liability so incurred.
(3)	If a company acts in contravention of this section, it is liable to a fine, and every officer of it who is in default is liable to imprisonment or a fine, or both.

152	Definitions for this Chapter
(1)	In this Chapter—
(a)	“financial assistance” means—
(i)	financial assistance given by way of gift,
(ii)	financial assistance given by way of guarantee, security or indemnity, other than an indemnity in respect of the indemnifier’s own neglect or default, or by way of release or waiver,
(iii)	financial assistance given by way of a loan or any other agreement under which any of the obligations of the person giving the assistance are to be fulfilled at a time when in accordance with the agreement any obligation of another party to the agreement remains unfulfilled, or by way of the novation of, or the assignment of rights arising under, a loan or such other agreement, or
(iv)	any other financial assistance given by a company the net assets of which are thereby reduced to a material extent or which has no net assets;

(b)	“distributable profits”, in relation to the giving of any financial assistance—
(i)	means those profits out of which the company could lawfully make a distribution equal in value to that assistance, and
(ii)	includes, in a case where the financial assistance is or includes a non-cash asset, any profit which, if the company were to make a distribution of that asset, would under section 276 (distributions in kind) be available for that purpose, and

(c)	“distribution” has the meaning given by section 263(2).
(2)	In subsection (1)(a)(iv), “net assets” means the aggregate of the company’s assets, less the aggregate of its liabilities (“liabilities” to include any provision for liabilities or charges within paragraph 89 of Schedule 4).
(3)	In this Chapter—
(a)	a reference to a person incurring a liability includes his changing his financial position by making an agreement or arrangement (whether enforceable or unenforceable, and whether made on his own account or with any other person) or by any other means, and
(b)	a reference to a company giving financial assistance for the purpose of reducing or discharging a liability incurred by a person for the purpose of the acquisition of shares includes its giving such assistance for the purpose of wholly or partly restoring his financial position to what it was before the acquisition took place.

153	Transactions not prohibited by s 151
(1)	Section 151(1) does not prohibit a company from giving financial assistance for the purpose of an acquisition of shares in it or its holding company if—
(a)	the company’s principal purpose in giving that assistance is not to give it for the purpose of any such acquisition, or the giving of the assistance for that purpose is but an incidental part of some larger purpose of the company, and
(b)	the assistance is given in good faith in the interests of the company.
(2)	Section 151(2) does not prohibit a company from giving financial assistance if—
(a)	the company’s principal purpose in giving the assistance is not to reduce or discharge any liability incurred by a person for the purpose of the acquisition of shares in the company or its holding company, or the reduction or discharge of any such liability is but an incidental part of some larger purpose of the company, and
(b)	the assistance is given in good faith in the interests of the company.
(3)	Section 151 does not prohibit—
(a)     a distribution of a company’s assets by way of dividend lawfully made or a distribution made in the course of the company’s winding up,
(b)	the allotment of bonus shares,
(c)	a reduction of capital confirmed by order of the court under section 137,
(d)	a redemption or purchase of shares made in accordance with Chapter VII of this Part,

(e)	anything done in pursuance of an order of the court under section 425 (compromises and arrangements with creditors and members),
(f)	anything done under an arrangement made in pursuance of [section 110 of the Insolvency Act] (acceptance of shares by liquidator in winding up as consideration for sale of property), or
(g)   anything done under an arrangement made between company and its creditors which is binding on the creditors by virtue of [Part I of the Insolvency Act].
(4)	Section 151 does not prohibit (a) where the lending of money is part of the ordinary business of the company, the lending of money by the company in the ordinary course of its business …”
8.	It is common ground that the fees represented by the invoices arose out of the acquisition by SWP of DRCH.  SWP is a listed company.  It needed the consent of its shareholders for the purposes of the acquisition, and in addition, since the funding for the acquisition was to be raised by a placing of further shares in SWP in the market, a prospectus had to be issued by SWP.  The listing rules of the London Stock Exchange contained a requirement for a report by reporting accountants, known as a short form report, providing certain prescribed information and details to be set out in the prospectus.  In addition, SWP decided (as is common) to obtain a detailed report on the DRC Group, known as a long form report.  The two reports were to be prepared by Mr Geoffrey Smith of Cinderhall Ltd and the reports were to be reviewed by Coopers & Lybrand.  Mr Chaston was largely responsible for the negotiations from the DRCH side.  He signed letters of representation based on the long form report, which gave rise to other claims in the action with which we are not concerned.
9.	The work represented by the fees in the four invoices was work done by D&T in connection with the preparation by SWP of the long form report.  The judge considered that none of this particular work would have to have been done were the shareholders of DRCH  were not negotiating a sale of their shares to SWP.  It was not entirely clear whether DRC committed itself to pay those fees before the invoices were rendered and hence the case was put alternatively under section 151(1) and section 151(2), which deals with post-acquisition financial assistance.  Nor is it clear when the fees were paid.
10.	Mr Chaston’s case at trial was that no financial assistance had been unlawfully given contrary to section 151(1) or section 151(2), alternatively, that the provisions of section 153(1) and (2) were satisfied.  The latter issue has not featured on this appeal.
11.	The judge made detailed findings on the facts.  He approached the issues by asking first whether the incurring of the fees was in breach of the directors’ fiduciary duties under the general law.  He answered this question in the negative.  He held that the directors could properly consider that the advancement of the negotiations with SWP and co-operation in the due diligence exercise were for the benefit of the companies.  Accordingly, he concluded that it was not contrary to the duties of the directors of DRC to incur the liability to pay, or pay the invoices in question.  In so far as the fees were properly attributable to other companies in the group, the judge held that that matter could have been resolved by DRC raising the necessary debits on inter-company account to its fellow members of the group.  Accordingly, the judge acquitted Mr Chaston of any breach of his fiduciary duty under the general law.  There is no appeal against the judge’s judgment on any of these points.
12.	The judge then turned to sections 151 and 153 of the Companies Act 1985.  The judge appears to have accepted that the incurring of the obligation to pay, or payment of, D&T’s fees was capable of being financial assistance for the purposes of these sections.  Counsel for Mr Chaston conceded that, if the payment of the fees constituted financial assistance, the financial assistance fell within section 152(1)(e), having regard to their size and the fact that DRC’s actual net assets were probably less than £100,000.  Counsel also conceded (whilst reserving his right to argue to the contrary in a higher court) that section 151 was capable of including within its ambit financial assistance given to a vendor of shares.  The judge accepted this concession as a matter of law.
13.	The judge’s conclusion was that the incurring by DRC of an obligation to pay D&T’s fees in respect of the due diligence exercise did not constitute the giving of financial assistance for the purpose of the acquisition by SWP of the share capital of DRC contrary to section 151(1) and likewise the payment of those fees did not constitute the giving of financial assistance directly or indirectly for the purpose of reducing or discharging a liability incurred for the purpose of that acquisition contrary to section 151(2).  His reasons were in essence as follows.  First, since the liability to D&T was incurred bona fide in what the directors believed was the best interests of DRC there had not been financial assistance “directly or indirectly” for the purpose of the acquisition of its shares” (judgment, paragraph 187).  He said:
“I can see that if such liability was incurred other than in good faith or for the proper interests or purposes of DRC then a breach of section 151 might thereby also be established (although there would in any event ipso facto be a breach of fiduciary duty on the part of the directors involved).  But in the present case this was work done by D&T for and on behalf of the company itself:  D&T (properly) regarded DRC as its client for this purpose and the work was undertaken (and instructed by the directors to be undertaken) in good faith for the corporate purposes of the DRC Group.  I take the view, on the evidence, that the instructions to D&T (giving rise to the obligation to pay D&T) were given on behalf of and in the interests of DRC (and DRCH), to facilitate the progress of the negotiations and to enable SWP to conclude its due diligence exercise: and, having done so, then to enable it to make up its mind as to whether or not to acquire the shares in DRCH.  In such circumstances I do not think that there has been given financial assistance directly or ‘indirectly for the purpose of’ the acquisition of its shares.”
14.	Second, the judge held that his view was supported by the words “(by that or any other person)” in s.151(2).  He held that those words, taken with the remaining words of that subsection, connoted “that the draftsman contemplated that some person other than the company itself will have incurred the liability for the purpose of the acquisition before the subsequent provisions of that subsection can apply” (judgment, paragraph 188).  On this appeal, neither counsel has relied heavily or at all on this reason given by the judge.  It is difficult to be certain the judge’s line of reasoning here but it appears to be that the words in parenthesis refer to a person other than the company and thus support his first reason.  But, even on this analysis, the words in parenthesis went further than his first reason since, if his construction was correct, even liabilities incurred by the directors in the name of the company in breach of duty to it would be outside the reach of section 151(2).
15.	Third, the judge relied on Brady v Brady [1989] 1 AC 755.  He held that the payment of fees by DRC in connection with the acquisition by SWP was not “the obvious mischief at which [section 151] is aimed” (quoting from Brady v Brady).  The purpose of incurring the liability to pay the fees was to co-operate in the due diligence exercise.  Such costs were occasioned by reason of SWP having made a bid was a reason for D&T being instructed by DRC to assist in the due diligence process, but as Lord Oliver held in Brady v Brady, the word “reason” is not the same as “purpose”.
16.	The judge, therefore, ruled that there was no breach of section 151.  He further expressed the view that if he had considered that there was otherwise a prima facie infringement of section 151 he would have had difficulty in accepting the alternative submission by reference to section 153 in the light of Brady v Brady.  He also held that if he had thought Mr Chaston had acted in breach of his fiduciary duty of good faith he would not have granted relief under section 727 of the Companies Act 1985.  There is no cross-appeal on these points.
17.	Mr Michael Todd QC, for the appellant, submits that the commitment to pay the fees, alternatively the payment of the fees constituted financial assistance with section 152(1)(a)(iv).  He relied upon the approach set out by Hoffmann J in Charterhouse Investment Trust Ltd v Tempest Diesels Ltd 1986 BCLC 1 at 10:-
“There are two elements in the commission of offence under s.54 [the section that preceded s.151]. The first is the giving of financial assistance and the second is that it should have been given ‘for the purpose of or in connection with’ in this case, a purchase of shares …  There is no definition of giving financial assistance in the section, although some examples are given.  The words have no technical meaning and their frame of reference is in my judgment the language of ordinary commerce.  One must examine the commercial realities of the transaction and decide whether it can properly be described as the giving of financial assistance by the company, bearing in mind that the section is a penal one and should not be strained to cover transactions which are not fairly within it.”
That passage was cited with approval by Aldous LJ in Barclays Bank plc v British Commonwealth Holdings plc [1996] 1 BCLC 1, 39, with whom Kennedy LJ and Sir Roger Parker agreed.  Aldous LJ went on to hold that what section 151 requires is “that there should be assistance or help for the purpose of acquiring the shares and that that assistance should be financial.” (page 40).  In the present case, as a matter of commercial reality, the payments provided assistance because, as the judge found, the instructions to D&T were given “to facilitate the progress of the negotiations, and to enable SWP to conclude its due diligence exercise:  and, having done so, then to enable it to make up its mind as to whether or not to acquire the shares in DRCH.”  The assistance was financial as it involved the payment of money.
18.	Mr Todd submits that the parties assisted were both the vendor and the purchaser of the shares of DRCH.  There was no obligation on the DRC Group to provide this information.  This transaction was not subject to the City Code on Takeovers and Mergers which imposes certain obligations on a target company to provide information.  The present problem arises because of the size of the fees in relation to DRC’s actual net assets:  this would not have been a problem in a more substantial company.  Moreover, there was nothing to prevent the company providing the information or authorising its auditors to provide the information on the basis that the purchaser or vendor paid the costs of its doing so.  Financial assistance need not be detrimental and could even be beneficial to the company, as where the target makes a loan on good terms.
19.	 Mr Todd further submits that the judge was incorrect in proceeding on the basis that it was sufficient that assistance was given in the best interests of DRC.  The judge’s conclusion amounts to a new free-standing defence whereas section 153(1) is much more restrictively drawn.  Moreover, the judge was wrong to hold that his conclusions were supported by Brady v Brady.  Lord Oliver drew a distinction between “reason” and “purpose”.  The former word provides an explanation why an act is done.  The word “purpose” describes what transaction is designed to achieve.  The interests of DRC were here only a reason.  The object of the transaction was the acquisition of shares.
20.	Mr Todd distinguishes the decision of Laddie J in MT Realisations Ltd v Digital Equipment Co Ltd [2002] EWHC 1628 (Ch.)  I can take the summary of facts in this case from Buckley on the Companies Acts, 15 ed., para. [151.21A] where I wrote:
“In MT Realisations Ltd (in liquidation) v Digital Equipment Co Ltd  a purchaser, MTI, acquired the shares of a company, M, for £1.  At the same time MTI agreed to pay £6.5m for an assignment of sums totalling £8m due from M to the vendor, D.  Although not stated in the judgment, it appears that these sums were due on demand.  Subsequently MTI could not meet its obligations in respect of the assignment and the terms were varied so that sums due from D or any member of its group to MTI or its subsidiaries, including M, would be directed to be paid to D.  M was compensated by the creation by MTI of a credit in its favour.  M subsequently went into liquidation and its liquidator claimed that the rescheduling of MTI’s obligations in this way constituted a breach of s,151 by M.  It appears that M had negative net assets.  It was not contended that M’s assets were actually reduced as a result of the rescheduling.  Laddie J held that there was no breach of s.151(2).  The first issue was whether MTI’s agreement to pay £6.5m under the assignment was a liability incurred ‘for the purpose of’ the acquisition of M’s shares within the CA 1985, s.151(2).  Laddie J found for the defendant on this issue.  There was no evidence that MTI could not pay the price of £1 for the shares or that M’s shares were worth more than £1.  It seems that Laddie J would have reached a different conclusion if the attribution of £1 to the price of M’s shares had not fairly reflected the value of those shares or if there had been an artificial apportionment of the total consideration for the intercompany loans and the shares.”
(I need not read the rest of this commentary as it proffers an alternative analysis to that given by the judge or Mr Todd and this court is not concerned with the second issue in the MT Realisations case).  Laddie J held:-
“ ‘For the purpose’ …
30 … a distinction must be drawn between incentives to enter an agreement or concurrent benefits and the acquisition of the shares in the target company …  Even though the Loan Assignment was connected with the sale of [M’s] shares, that does not mean that it is necessarily for the purpose of that sale.”
Mr Todd submits that, to the extent that Laddie J held that section 151 was concerned only with financial assistance as regards the acquisition of shares, his reasoning should not be followed in this court.  Otherwise, where, for example, an acquisition proceeded by share exchange there would be nothing to prevent the target from paying all the expenses which the bidder incurred to facilitate the share exchange, irrespective of their amount.
21.	Mr Mark Cunningham QC, for the respondent, relies on the judge’s findings of fact and in particular that D&T regarded DRC as their client.  He emphasises that section 151 is a penal statute and that the court should not strain the language “to cover transactions which are not fairly within it.” (per Hoffmann J in the Charterhouse case at page 10).
22.	In a carefully crafted argument Mr Cunningham submits that there are three relevant requirements of section 151.  First, the company must “give” financial assistance.  Second, the assistance must be “financial”.  Third, the assistance must be “for the purpose of” the acquisition.
23.	For a company to “give” financial assistance, the financial assistance must be given to the purchaser.  Armour Hick Northern Ltd v Whitehouse [1980] 1 WLR 1520 is the only reported case where a vendor was assisted (by financial assistance given by a subsidiary).  However, Mr Cunningham did not actually ask the court to overrule this decision.  It was unnecessary in his submission for him to go that far.  In this case, the assistance was given by the company to itself because the incurring of the fees was in the best interests of the company.
24.	In order that assistance may be “financial”, a net transfer of value is required.  In support of this submission, Mr Cunningham relies on a passage from the decision of Hoffmann J in the Charterhouse case:
“The need to look at the commercial realities means that one cannot consider the surrender letter in isolation.  Although it constituted a collateral contract, it was in truth part of a composite transaction under which Tempest both received benefits and assumed burdens.  It is necessary to look at this transaction as a whole and decide whether it constituted the giving of financial assistance by Tempest.  This must involve the determination of where the net balance of financial advantage lay. I see no contradiction between this view and anything which was said in the Belmont case.  In Belmont the company made cash available to the purchaser.  This amounted to giving financial assistance and no less because it was done without any net transfer of value by the company.  On the facts of this case there is no question of cash being provided and the only way in which it can even plausibly be suggested that Tempest gave financial assistance is if it made a net transfer of value which reduced the price Mr Allam would have to pay for the shares if the transaction as a whole had not taken place.”
25.	In the present case, the assistance did not sound in money so far as SWP was concerned.  The fees were paid by DRC and the fees had no impact on the purchase price.
26.	Third, the assistance was not for the purpose of the acquisition.  Assistance which only persuades a purchaser to buy shares is not enough.  The authorities draw a distinction between assistance which occurs before a transaction and assistance in the course of a transaction.  Mr Cunningham relies in support of this submission on another passage from the Charterhouse case:
“… I am not satisfied that [even if the transaction had involved a net transfer of value from Tempest to the Charterhouse Group] Tempest could be said to have given financial assistance.  The object of the transaction was to put the assets and liabilities of Tempest into a state in which it was acceptable to both parties for them to be sold to Mr Allum for £1.  If this process involved the prior extraction by the shareholders of assets from Tempest by means which were intra vires and not a fraud upon creditors, I doubt whether it could be described in any acceptable commercial sense as a giving of financial assistance by the company.  It is no more than a change in the character of the assets being sold.”
27.	Mr Cunningham accepts that this passage is obiter but submits on the basis of it that there is a distinction between transactions which occur before a company is acquired and the transaction of acquisition itself.  In the former case, there is no financial assistance even if the transaction involves a net transfer of value provided of course that creditors are not prejudiced and that the transaction is intra vires.
28.	Mr Cunningham also relies on Brady v Brady, in which Lord Oliver held that the obvious mischief to which section 151 is directed is the case of a bidder financing his bid from the funds of the company acquired.  Lord Oliver said:  “the purpose and the only purpose of the financial assistance is and remains that of enabling the shares to be acquired …” (see pages 779 – 780).  In this part of his argument Mr Cunningham was taking sentences from the speech of Lord Oliver out of their immediate context.
29.	Next Mr Cunningham relied (as his best authority) on the decision of this court in the British & Commonwealth case.  At page 40-41, Aldous LJ addressed the argument that the giving by the company of covenants as to the future conduct of its business “may have induced [the bidder] to enter into the commitments that [it] did, but … did not financially assist anybody to buy shares.”  In support of this submission counsel relied on two Australian authorities, Industrial Equity Ltd v Tocpar Pty Ltd [1972] 2 NSWLR 505 and Burton v Palmer [1980] 2 NSWLR 878.  Aldous LJ held that the statement in the latter case of the way to approach section 67 in the Australian Companies Act 1961 was applicable to section 151 of the 1985 Act.  Mr Cunningham submits that those cases draw a distinction between (1) commitments into which the company enters into to induce either the bidder to make his offer or the vendor shareholders to part with their shares and (2) commitments into which it enters as part of the transaction of share acquisition.  In addition, the decision in Burton v Palmer is authority for the proposition that not every obligation which a company undertakes in connection with an offer for its shares constitutes the giving of “financial assistance”.
30.	Lastly, Mr Cunningham relies on the decision of Laddie J in the MT Realisations case, and in particular on the passage which Mr Todd cited.
Conclusions
31.	I start with the mischief to which section 151 is directed.  Section 151 is derived from section 45 of the Companies Act 1929 which was enacted as a result of the previously common practice of purchasing the shares of a company having a substantial cash balance or easily realisable assets and so arranging matters that the purchase money was lent by the company to the purchaser (see Re VGM Holdings Ltd [1942] Ch. 235 at 239).  The prohibition was amended in 1948 and reformulated in 1981.  The Report of the Company Law Committee (the Jenkins Committee) expressed the view that it was “unwise” to attempt a precise definition of financial assistance (Report, para.180, page 66, Cmnd 1749 (1962)).  It is clear from the way in which section 151 and section 152 are drafted that it covers financial assistance in many forms apart from loans (see for example the wide wording of section 152(3)).  The general mischief, however, remains the same, namely that the resources of the target company and its subsidiaries should not be used directly or indirectly to assist the purchaser financially to make the acquisition.  This may prejudice the interests of the creditors of the target or its group, and the interests of any shareholders who do not accept the offer to acquire their shares or to whom the offer is not made.
32.	Thus although section 152 proscribes a number of forms of financial assistance, it does not define the words “financial assistance”.  It is clear from the authorities that what matters is the commercial substance of the transaction: “The words ‘financial assistance’ have no technical meaning and their frame of reference is the language of ordinary commerce” (see per Hoffmann J in Charterhouse v Tempest Diesels [1986] BCLC 1, approved by the Court of Appeal in Barclays Bank plc v British & Commonwealth Holdings plc [1996] 1 BCLC 1 at 40).  This approach was confirmed by Lord Hoffmann (with whom the other members of the House of Lords agreed) in a recent revenue case:  MacNiven (Inspector of Taxes) v Westmoreland Investments Ltd [2001] STC 237 at 254.  In the relevant passage, Lord Hoffmann usefully draws a distinction between the expression “financial assistance”, which conveys a commercial concept, and other words used in this group of sections which by contrast have a recognised legal meaning:-
“The distinction between commercial and legal concepts has also been drawn in other areas of legislation.  So, for example, the term ‘financial assistance’ in s.151 of the Companies Act 1985 has been construed as a commercial concept, involving an inquiry into the commercial realities of the transaction (see Burton v Palmer [1980] 2 NSWLR 878 at 889-890 and Charterhouse Investment Trust Ltd v Tempest Diesels Ltd  [1986] BCLC 1).  But the same is not necessarily true of other terms used in the same section, such as ‘indemnity’.  As Aldous LJ said in British and Commonwealth Holdings plc v Barclays Bank plc [1996] 1 WLR 1 at 14:
‘It was submitted that as the words ‘financial assistance’ had no technical meaning and their frame of reference was the language of ordinary commerce, the word ‘indemnity’ should be similarly construed.  The fallacy in that submission is clear.  The words ‘financial assistance’ are not words which have any recognised legal significance whereas the word ‘indemnity’ does.  It is used in the section as one of a number of words having a recognised legal meaning.’
I would only add by way of caution that although a word may have a ‘recognised legal meaning’, the legislative context may show that it is in fact being used to refer to a broader commercial concept.”
33.	It is worthy of note that Lord Hoffmann refers in this passage to Burton v Palmer but not to the Industrial Equity case cited by counsel in the British & Commonwealth case.
34.	 Charterhouse v Tempest Diesels was a decision on section 54 of the Companies Act 1948, which was in somewhat a different form from section 151.  Doubts arose as to whether section 54 applied to a transaction where only one of the purposes was to assist in the acquisition of shares and in addition as to whether financial assistance which did not diminish the company’s net assets constituted “financial assistance” for the purposes of this section.  These doubts were reinforced by the decision of this court in Belmont Finance Corporation Ltd v Williams Furniture Ltd (No.2) [1980] 1 ALL ER 393:  see the passage from the judgment of Buckley LJ cited in Buckley on the Companies Acts at para. [153.5].  The Belmont case decided that a transaction for full value could contravene the section and left open the position if the giving of financial assistance was an incidental purpose or effect of the transaction.  As Lord Oliver recognised in Brady v Brady [1989] AC 755 at 778, it seems likely that the changes to section 54 which were made in the Companies Act 1981 (including the addition of what are now sections 152 and 153(1) and (2)) were introduced for the purpose of dispelling doubts arising from the Belmont case.
35.	The Companies Act 1981 was consolidated with other companies legislation in the Companies Act 1985.  In short, two changes were made by the 1981 Act (so far as relevant).  First, Parliament limited the prohibition to certain forms of financial assistance.  These include a residual category:  see section 152(1)(a)(iv).  This provision incorporates, for companies with positive net assets, a “de minimis” exception.  The giving of any form of financial assistance not previously mentioned in section 152(1)(a) is outside the categories of financial assistance for the purposes of section 151 if it does not reduce actual net assets to a material extent.  We have not been required to consider the position of companies with no net assets.
36.	The further major change introduced by the Companies Act 1981 was to introduce a ‘principal purpose’ defence in section 153.  This was construed by the House of Lords in Brady v Brady.  The House held that the larger purpose had to be something other than the acquisition of shares, however beneficial the acquisition was felt to be in the interests of the company.  
37.	It is thus apparent that sections 151 to 153 distinguish between various categories of transactions.  First, there are the categories of financial assistance listed in section 152(1)(a)(i) to (iii) which are prohibited whether or not there is any diminution in net assets, unless section 153 applies.  Second, there is financial assistance of a kind not specifically mentioned in s.152(1)(a)(i) to (iii).  This does not contravene s.151 provided the company has positive net assets and the reduction in actual net assets is immaterial.  (Again, I leave to one side the case of companies with no net assets.)  Third, there are those which although carried out for the purpose of an acquisition of shares and have financial implications do not constitute financial assistance for the purposes of section 151.  This category includes lawful dividends:  see section 153(3).  Fourth, there are transactions which although they constitute financial assistance within section 152(1)(a) are taken outside the prohibition in section 151 by the principal purpose defences in section 153(1) and (2).   Fifth, there are the transactions exempted by section 153(4), such as the lending of money by a money-lending company in the ordinary course of its business.
38.	The first issue on this appeal is whether the incurring of liability to pay the fees to D&T or the payment of those fees constituted “financial assistance” for the purpose of section 151.  Although it does not clearly so appear, it would seem that the judge concluded that there was financial assistance in the circumstances of this case.  It is clear from the Charterhouse case as approved by this court in the British & Commonwealth case that the test is one of commercial substance and reality.  Looking simply at the facts, the judge found that the payments were “to facilitate the progress of the negotiations and to enable SWP to conclude its due diligence exercise:  and having done so, then to make up its mind whether or not to acquire the shares in DRCH.” (judgment, paragraph 187). As a matter of commercial reality, the fees in question smoothed the path to the acquisition of shares.  There was no provision in the agreement for any benefit to be given to the DRC Group.  What the DRC Group was looking for was the spin-off benefits of the acquisition.  The DRC Group had financial difficulties and it would be joining a larger group which saw a future for it.  However, the negotiations appear to have been solely concerned with the actual terms of the acquisition, for example, as to the giving of warranties by the selling shareholders.
39.	Mr Cunningham argues persuasively that we should take into account that section 151 imposes criminal liability.  That is so, but the effect is as Hoffmann J said in the Charterhouse case only that the language must not be strained as to include transactions not fairly within it.  Moreover, the term “financial assistance” is clearly established to be a commercial concept.  Accordingly the question whether financial assistance exists in any given case may be fact-sensitive and not one which can be answered simply by applying a legal definition.  The question is whether from a commercial point of view the transaction impugned amounts to financial assistance.  If the company’s participation in the transaction meets that test, no straining of the statutory language occurs.
40.	Here as a commercial matter assistance was clearly given.  D&T received payment for their services and both the purchaser and the vendors were relieved of any obligation to pay for this service themselves.  Mr Cunningham submits that section 151 should be restricted to assistance given to purchasers, alternatively to assistance given to vendors and purchasers.  However, in so far as that point matters in this case there is no mandate in my judgment for reading any such limitation in that section.  There is no reason why assistance which is paid to a subsidiary or associated company or other person nominated by one of the parties to the transaction should not be assistance contrary to the section.  This again does not involve straining the language of the section to include transactions not fairly within it.
41.	Mr Cunningham also argues that financial assistance cannot be given without a detriment to the company being acquired.  This argument was considered by the Court of Appeal in the Belmont case and there rejected (see above).  That decision was later distinguished in the Charterhouse case. In my judgment, detriment is not necessarily required.  The forms of financial assistance which contravene section 151 are spelt out in section 152(1)(a) (which was new in 1981).  As Mr Todd demonstrated, there is no reason why for instance financial assistance given by way of loan should not be given on terms which are highly beneficial to the target company.  The only situation in which detriment is essential is in section 152(1)(a)(iv) where financial assistance of a kind not previously specified is prohibited if (in the case of a company having positive net assets) it reduces the company’s assets to a material extent.  As I have said above, we are not dealing with the case of a company with no or negative actual net assets.  In so far as in the MT Realisations case (which concerned a company (M) with no net assets), Laddie J came to a different conclusion (judgment, paragraph 50), I respectfully disagree with him but say no more as this court has yet to consider the appeal in that case.  I should add that neither counsel in this case has relied on that passage from the judgment of Laddie J.
42.	Mr Cunningham made a further submission that there was a distinction to be drawn between financial assistance given in advance of a transaction and financial assistance given in the course of a transaction.  As to the former, this was not prohibited.  On this, he relied on the four cases referred to above.  In my judgment, this distinction is not justified by section 151.  It prohibits financial assistance given “directly or indirectly” and those words are sufficiently wide to cover “pre-transactional” financial assistance.  Moreover section 151(1) provides that a transaction can offend the section even though a person is only “proposing” to acquire shares.  In my judgment, the distinction which Mr Cunningham seeks to draw is not borne out by the authorities which he cites in support.  The obiter passage from the Charterhouse case is concerned with the meaning of financial assistance; it was dealing with a composite transaction and is an application of the commercial concept of financial assistance.  It thus must be read against the particular facts of the case.  It is not based on the bright line distinction which Mr Cunningham draws.  
43.	In the British & Commonwealth case, the submission of counsel which the Court of Appeal accepted was that the covenants given by the target company as to the future conduct of its business could not “financially assist” anyone to buy shares.  This is the ratio as I read it of the decision of the Court of Appeal on this point.  Aldous LJ said:-
“The purpose of the covenants in the option agreement was to reassure Caledonia.  The covenants were bona fide covenants, the performance of which did not involve giving of any financial assistance.  The fact that breach of the covenants might render B&C liable to damages did not mean that B&C gave financial assistance thereby.”  
44.	It is therefore essential to the reasoning of Aldous LJ that it was not anticipated at the time of giving the covenants that there would be any liability thereunder.  I do not consider that Aldous LJ accepted a wider submission based on the Industrial Equity case that assistance which merely acted as an inducement to a transaction could never be financial assistance (if indeed that was the submission made).  In the circumstances I need not deal specifically with Mr Todd’s analysis of the decision of Laddie J on the first issue arising in the MT Realisations case, but in so far as Laddie J took the opposite view (judgment, paragraph 30), I respectfully disagree with him.
45.	In my judgment the financial assistance in the present case was clearly “financial”.  It makes no difference that the payment of the fees had no impact on the share price.  As I see it the policy of section 151 extends beyond assistance given to enable the price for shares to be paid.  There must be a link, and the link which the section requires is that the financial assistance must be “for the purpose of” the acquisition.  That is the issue which particularly concerned the judge and to which I now turn.
46.	I now turn to the judge’s reasons for concluding that this transaction did not breach section 151(1) or (2).  His first reason was that it was sufficient that the directors had acted bona fide in the best interests of DRC.  Mr Todd has not contended that the financial assistance is within section 151(2)(i), (ii) or (iii).  I therefore turn to section 152(1)(a)(iv) as the only provision applicable.  This does not contain any exception for acts done by directors in good faith.  Due performance of fiduciary duties is not of itself enough to avoid a breach of section 151.  If it were, financial assistance by way of a loan by a target to a bidder on commercial terms might be outside section 151.  That result would drive a coach and horses through these provisions.  The only defence relevant to this case is that provided by section 153 but that applies only where there is some other “larger purpose”.  In my view the judge was right to reject section 153 because there was no corporate purpose other than the acquisition of shares in DRCH.
47.	The judge’s second reason was based on section 151(2).  I agree that it would be an unusual case where a company provides assistance to itself.  On the other hand, it is possible that an acquisition of shares may be an acquisition of shares by the company itself (compare the use of the word “acquire” in sections 143 to 148 of the Companies Act 1985, which clearly includes the redemption or purchase by a company of its own shares).  In those circumstances, the liability referred to in the opening clause of section 151(2) may be a liability incurred by the company itself in order to purchase shares in itself, for example, the grant of security by an unlimited company to secure a borrowing raised to purchase its own shares.  Accordingly, I disagree with the judge that there is any necessary implication to be drawn from section 151(2).  In fact it is not necessary in this case to go so far as to say that the company was financially assisted.  Clearly the parties to the transaction were assisted and that is enough.
48.	As regards the judge’s third reason based on Brady, The issue in Brady was whether a ‘larger purpose’ within section 153 could include removal of deadlock between two controlling shareholders.  Lord Oliver (in a passage cited in part by the judge) said:-
“The matter can perhaps, most easily be tested by reference to section 153(1)(a) where the same formula is used.  Here the words are ‘or the giving of the assistance for that purpose’ (i.e. the acquisition of shares) ‘is but an incidental part of some larger purpose of the company’.  The words ‘larger purpose’ must here have the same meaning as the same words in subsection (2)(a).  In applying subsection (1)(a) one has, therefore, to look for some larger purpose in the giving of financial assistance than the mere purpose of the acquisition of the shares and to ask whether the giving of assistance is a mere incident of that purpose.  My Lords, ‘purpose’ is, in some contexts, a word of wide content but in construing it in the context of the fasciculus of sections regulating the provision of finance by a company in connection with the purchase of its own shares there has always to be borne in mind the mischief against which section 151 is aimed.  In particular, if the section is not, effectively, to be deprived of any useful application, it is important to distinguish between a purpose and the reason why a purpose is formed.  The ultimate reason for forming the purpose of financing an acquisition may, and in most cases probably will, be more important to those making the decision than the immediate transaction itself.  But ‘larger’ is not the same thing as ‘more important’ nor is ‘reason’ the same as ‘purpose’.  If one postulates the case of a bidder for control of a public company financing his bid from the company’s own funds – the obvious mischief at which the section is aimed – the immediate purpose which it is sought to achieve is that of completing the purchase and vesting control of the company in the bidder.  The reasons why that course is considered desirable may be many and varied.  The company may have fallen on hard times so that a change of management is considered necessary to avert disaster.  It may merely be thought, and no doubt would be thought by the purchaser and the directors whom he nominates once he has control, that the business of the company will be more profitable under his management than it was heretofore.  These may be excellent reasons but they cannot, in my judgment, constitute a ‘larger purpose’ of which the provision of assistance is merely an incident.  The purpose and the only purpose of the financial assistance is and remains that of enabling the shares to be acquired and the financial or commercial advantages flowing from the acquisition, whilst they may form the reason for forming the purpose of providing assistance, are a by-product of it rather than an independent purpose of which the assistance can properly be considered to be an incident.”
49.	 In my judgment, the judge overlooked the significance of Brady v Brady at this point in his judgment.  The point with which the House of Lords was dealing was whether the desire to remove deadlock could be a larger purpose for the purpose of section 153(1).  The House of Lords was not saying that the acquisition of shares could not be a “purpose” for the purposes of the prohibition and indeed that would make no sense.  Lord Oliver was concerned to distinguish between reason and purpose for the immediate question at issue, but to use that as a reason for saying that the acquisition of shares is only a reason and can never be a “purpose” for the purpose of the expression “for the purpose of “ seems to me, with respect to the judge, to turn Brady v Brady and section 151 on its head.
50.	Section 153 makes it clear that a transaction can fall within section 151 even if only one of the purposes for which it was carried out was to assist the acquisition of shares.  Here the liability to pay the fees of D&T was clearly incurred for the purpose of the acquisition by SWP of DRCH’s shares. Brady v Brady also makes it clear that an unlawful purpose is not removed by the fact that, as the judge found here, the directors were motivated by the best interests of the company.  Their motivation was only a reason for their acts, not a purpose in itself (see Brady v Brady, above).
51.	Accordingly in my judgment the judge was in error in his conclusion on section 151 and the appeal must be allowed.
Lord Justice Buxton : 

52.	I agree that this appeal should be allowed, for the reasons given by my Lady.   The case is in my view concluded by the judge’s finding, at paragraph 187 of his judgment, that the instructions were given to D&T at least in part to enable SWP to conclude its due diligence exercise.  That exercise was the responsibility of, and in the interests of, SWP; would not have been entered upon except in the context of the purchase; and was accordingly to SWP’s charge.  By paying for part of that exercise, DRC therefore plainly gave financial assistance to SWP.  That assistance was “for the purpose of” the acquisition, because it was given to further the acquisition.  As the judge stressed, in paragraph 190 of his judgment, it was indeed the object and desire of the DRC Group, or at least of those who owned the Group, that the acquisition should go forward.  But even if the latter objective can be said to have been the purpose, and not merely the motive, of the DRC Group in meeting D&T’s bill, that cannot alter the fact that the objective sought to be forwarded by the payment was the purchase: which is more than enough, on the facts of this case, to satisfy the statutory formula in section 151.
Lord Justice Ward:

53.	I agree with Arden L.J. and would go on to say that there is nothing I can usefully add, but, having joined in the argument so enthusiastically, I should in fairness to the parties explain why I have reached the same conclusion.

54.	Coming to s.151 of the Companies Act 1985 for the first time, it seemed to me that its application was relatively straightforward.  Loosely to paraphrase s.151(1) and (2), they provide that it is not lawful for the company or its subsidiaries, here DRC, to give financial assistance, directly or indirectly (or to reduce or discharge a liability incurred) for the purpose of the acquisition of shares in the company.  The judge took the view, and there has been no challenge to it:-
“that the instructions to D & T (giving rise to the obligation to pay D & T) were given on behalf of [and in the interests of] DRC (and DRCH) to facilitate the progress of the negotiations and to enable SWP to conclude its due diligence exercise:  and, having done so, then to enable it to make up its mind as to whether or not to acquire the shares in DRCH.”

(I am not sure that I see the purpose of or need for the words I have highlighted and placed in parenthesis, but this may not much matter).

55.	Taking the facts as found I would have drawn conclusions exactly opposite to those of the judge who did not think “that there has been given financial assistance directly or “indirectly for the purpose of” the acquisition of its shares”.  On first impression, and to my untutored eye, the first obvious conclusion was that if D & T did not do the spadework for the due diligence exercise, then SWP’s accountants, C & L, would have had to dig for the information clearly thought to be material to the exercise and C & L would then charge SWP for doing that work.  DCR’s incurring those liabilities and discharging part of those debts was, therefore, of financial assistance to SWP.  SWP was helped by not having to put its hand in its pocket for part of the fees that would otherwise be incurred in the due diligence exercise.  Without the benefit of any authority to clarify the meaning of “financial assistance”, ordinary enough words, I would have had no trouble in concluding this was indeed financial assistance.

56.	The next question would be to decide what the purpose of that exercise was.  The judge’s findings of fact answer the question.  The instructions were given by the DCR Group to, i.e. in order that they might, facilitate the progress of the negotiations and, secondly, to enable SWP to conclude the due diligence exercise, and thirdly to enable it to make up its mind as to whether or not to acquire the shares.  It seemed to me inescapable that the financial assistance was given for the purpose of the acquisition of the shares.

57.	When, however, Mr Todd Q.C. took me to s.152 and the singularly unhelpful definition of financial assistance, I began to worry whether it was as simple as it had appeared.  I say s.152 is unhelpful because ss.(1) purports to be a definition of “financial assistance”.  It says so.  It says it in these terms:-
“152(1)	In this chapter –

(a)	“Financial assistance” means –

(i)	financial assistance given by way of gift.
(ii)	financial assistance given by way of guarantee …
(iii)	financial assistance given by way of loan …
(iv)	any other financial assistance given by the company the net assets of which are thereby reduced to a material extent or which has no net assets.”

58.	I can understand (i) to (iii) and they seem all to be related to direct or indirect assistance given for the actual acquisition of the shares, that is to say help in meeting the consideration for the transaction.  But (iv) tells one nothing about what comprises financial assistance.  The words are as wide as can be – “any other financial assistance”.  Rather it tells you when financial assistance is not financial assistance, namely when it is de minimis.  That, submitted Mr Todd, is where the line has to be drawn. 

59.	That struck me as an unsatisfactory answer because this is a section imposing serious penalties, the contravention of which attracts imprisonment or a fine or both.  On elementary canons of constructions it has to be strictly construed.  Can one clearly know what is legal and what is illegal?

60.	Those seeds of doubt were watered by Mr Cunningham Q.C.’s very persuasive submissions which have been summarised by Arden L.J.  Central to his case, as I understood it, was the submission that the mischief at which this prohibition is aimed is making the target company’s funds directly or indirectly available for the acquisition of the shares.  Lord Oliver of Alymerton said as much in Brady v Brady [1989] 1 A.C. 755, 779:-
“If one postulates the case of a bidder for control of a public company financing his bid from the company’s own funds – the obvious mischief at which the section is aimed – the immediate purpose which it is sought to achieve is that of completing the purpose and vesting control of the company in the bidder.”  (Emphasis added by me).

Arden L.J. has explained the historical development of s.151 and I accept that is the obvious mischief.  Chapter IV concerns “financial assistance by a company for the acquisition of its own shares”, which would also lead me to think that the financial help is indeed directed to the financing of the acquisition, including financial help of the kind defined in s.152(1)(a)(i)–(iii).

61.	That may be how Laddie J. understood it in MT Realisations Ltd. (In Liquidation) v Digital Equipment Co. Ltd. [2002] EWHC 1628 (Ch) when he said in paragraph 31:-
“Whatever the categorisation of the loan swap under the Rescheduling Agreement it was not financial assistance for the purpose of reducing or discharging the liability incurred by MTI “for the purpose of” acquiring shares in MTR-Digital”.

62.	That led me to question whether a purposive construction has to be given to s.151 to limit its application to financial assistance which directly or indirectly helps pay the price, if I can loosely so put it.  If so, I can see the importance of the distinction Mr Cunningham makes between the transaction as a transaction itself and pre-transactional assistance.

63.	I have concluded that that purposive construction is wrong.  Helping to finance the bid may be, or rather undoubtedly is, “the obvious mischief” at which the section is aimed, but I do not now read Lord Oliver’s speech as confining that to an identification of the only mischief.  Section 152(1)(a)(iv) must serve its own purpose.  It is that financial assistance which is de minimis is not prohibited but, necessarily, all financial assistance, direct or indirect, is.  Arden L.J. in the course of the argument supplied the answer as to why that should be.  The bid may be for only a part of the shareholding of the company and there may be a body of shareholders, probably in the minority, who have no part in the bid and who may not have identical interests with the proposed vendor and purchaser.  Company funds should not, therefore, be used to reduce the value of their shareholding.  Nor should creditors have company assets reduced by giving financial assistance to the bid.

64.	My concerns have evaporated.  The section ceases to be so wide as to make it impossible for someone to know whether or not they are likely to be offending.  Those advising directors would be able to give fairly simply advice, “Don’t do it unless vendor and/or purchaser agree to foot the bill”.  If this causes commercial havoc, and I do not see that it should, then Parliament must make a better attempt at defining what the words mean.

65.	I am now back to the happy position I was in when the appeal was opened.  This is a criminal statute.  It raises a jury question.  A jury would not need an over-elaborate direction of any further meaning to be given to “financial assistance” than the words literally bear though they would surely be helped by Hoffmann’s helpful explanation in Charterhouse Investment Trust Ltd. v Tempest Diesels Ltd. [1986] BCLC 1 that:-
“The words have no technical meaning and their frame of reference is … the language of ordinary commerce.”

Speaking for myself, I probably would not direct the jury to the subtleties of distinction between “purpose” and “reason”, helpful though Lord Oliver’s words always are.  If the jury found the facts as the judge did, then I am satisfied, with respect to the judge whose experience is so much greater than mine, that the jury would return a verdict of guilty and would not, as the judge did, acquit Mr Chaston.

66.	For the further reasons so persuasively set out by Arden L.J. and so much more rooted in the jurisprudence than my simplistic approach, and for the succinct reasons given by Buxton LJ, I agree that the appeal must be allowed.
Order: Appeal allowed with costs to be assessed by the costs judge if not agreed; appellant to have costs below relating to this issue but exact form of order reserved to the trial judge; application for payment on account of costs refused; application for set-off refused; application for permission to appeal to the House of Lords refused; counsel to agree and lodge a minute of order.
(Order does not form part of the approved judgment)