England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
CARDIFF DISTRICT REGISTRY
Hart. J.
CF120328

		Royal Courts of Justice Strand, London, WC2A 2LL
		26 November 2004

Lord Justice Peter Gibson:

1. This appeal on the applicability of s.151 Companies Act 1985 is brought in most unusual circumstances. Usually when s.151 is claimed to be applicable, it is not so claimed by a person who was a director of the company at the time it is alleged to have given financial assistance for the acquisition of its own shares. Where such company acts in contravention of the section it does so unlawfully and both it and every officer of it who is in default is liable to a penal sanction under s.151(3). However, that is what is claimed by the Applicant, Audrey Dyment, claims that Pathways Residential and Training Centres Ltd. ("the Company") did at a time when she was a director of it and its controlling mind. She has been trying for some time to escape the consequences of the rental obligations of the Company as tenant under a lease of premises of which the Second Respondent, Evan Bishop, and his son, the Third Respondent, Paul Bishop (together "the Bishops") are landlords. Mrs. Dyment's Originating Application, by which she sought various orders and directions under the Insolvency Act 1986 and the Insolvency Rules 1986, challenging proofs of debt lodged by the Bishops in the insolvent liquidation of the Company, was, as her counsel, Mr.Hantusch, frankly acknowledged, her last throw of the dice. But, as he rightly pointed out, if s.151 was contravened she is entitled to relief, and that is so whatever this court may think of the merits.
2. It is an appeal by Mrs. Dyment from the order made by Hart J. on 27 February 2004 after a three-day trial. Thereby the judge dismissed her Originating Application. The judge only considered s.151(1) and (2) and did not consider and expressed no views on a number of other points which would arise if s.151 did apply. On this appeal in the event this court has not had to go beyond what the judge decided in his judgment.

The facts

3. Mrs. Dyment is a State Registered Nurse and a registered nurse for mental handicap. When working as a placement officer in the Social Services department of West Glamorgan County Council ("the Council") she met the Bishops, who were seeking local authority approval for a care home to be operated by them at Brynmill House, Swansea. They decided to go into business together as partners to provide residential care to people with learning difficulties and behavioural problems. A suitable property for the venture, The Mount in Gowerton, which Paul Bishop had purchased in his own name, was available. This was treated by the Bishops and Mrs. Dyment as belonging to the three of them in equal shares.
4. The business was operated through the Company, 34 shares in which were held by each of the Bishops and 33 by Mrs. Dyment. The three of them were the directors of the Company. By March 1989 they had incurred substantial liabilities to Midland Bank in connection with effecting the necessary improvements to The Mount. Those liabilities were secured by charges over the Mount and the houses owned by each of the Bishops and Mrs. Dyment and their respective spouses. No formal arrangements were made for the Company to pay rent, but in practice it paid £3,350 per month into the partnership's account with the Midland Bank.
5. In March 1989 the first client went into residence at The Mount. However, in December 1989 Evan Bishop was charged with assault on one of the residents of Brynmill House. In consequence the Council indicated that it proposed to take steps to cancel the Company's registration under the Registered Homes Act 1984. Later it emerged that the Council was also contemplating de-registration on the ground that each of the Bishops had failed to disclose previous spent convictions. The Council cancelled the registration in April 1990, but Mrs. Dyment and the Bishops appealed and while the appeal was pending the business was able to continue.
6. All the parties appreciated that unless an effective way could be found to separate the Bishops from the business, permanent de-registration was inevitable. The solution at which the parties arrived with the help of their accountant, Rhydian Harris, was that the Bishops would give up their interests as shareholders and directors of the Company, that Mrs. Dyment would give up her interest in The Mount and that the Bishops would grant the Company a 21-year lease. Mr. Harris suggested that a valuation of the current rental value of The Mount be obtained but that was rejected by Evan Bishop by letter dated 11 June 1991 addressed to Mr Harris. Evan Bishop said:

"The rental would have to show not only the valuation of the property but to consider the loss of earnings that would have been enjoyed."

Evan Bishop subsequently indicated that the rent would have to be £5,500 per month with upwards only rent reviews. This was never the subject of negotiation.

7. By 12 June 1991 the Council had indicated to Mrs. Dyment's solicitors that it approved the registration of Mrs. Dyment in her sole name to operate the business at The Mount. There appears to have been no necessity that the Company continue to be involved in operating the business. It had no lease or licence and Mr. Harris gave evidence to the judge that its shares were effectively worthless. However, the parties proceeded on the footing that the Company would continue to operate the business as it had been doing.
8. Heads of Agreement, referring to an annexed lease, were agreed and signed on or about 25 October 1991 by Mrs. Dyment and the Bishops. The Company was not a party. By cl.1 and cl.2 the Bishops gave up their interests in the business conducted at The Mount. By cl. 3 Mrs. Dyment surrendered and released her interest in The Mount. Cl.4 provided that the Bishops would forthwith grant a lease of The Mount for 21 years to the Company in accordance with the annexed lease. The lease whereunder the Bishops were the landlords and the Company the tenant provided for a term of 21 years from 25 June 1997 at the rent of £66,000 per annum with upwards only rent reviews. Cl.7 of the Heads of Agreement contained an acknowledgement by each of the Bishops and Mrs. Dyment that "the said agreement is conditional upon approval and acceptance by [the Council] and that such agreement is null and void if such approval is not granted PROVIDED THAT Mrs. Dyment shall have used her best endeavours to appeal against any refusal of approval." By cl.8 and cl.9 the Bishops were forthwith to sign forms of resignation as directors of the Company and irrevocable stock transfer forms in respect of their shareholdings. By cl.10 the Bishops were forthwith to secure the unconditional release of Mr. and Mrs. Dyment's home from the Midland Bank charge.
9. The Bishops executed the lease in escrow and it was delivered to Mrs. Dyment's solicitors, accompanied by a letter dated 25 October 1991 from the Bishops' solicitors, against an undertaking by Mrs. Dyment's solicitors to hold the Heads of Agreement and the lease until they received the written consent of the Bishops' solicitors that those documents might be released. The Bishops' solicitors also sent with that letter the Counterpart lease for sealing by the Company. Thus at 25 October 1991 the Company had not yet sealed the Counterpart lease and there had been no exchange of it and the lease with the Bishops. Mr. Dyment became the company secretary at some point after 5 November 1991. On that day there was a Board meeting of the Company at which the Bishops resigned and executed transfers of their shares. The minutes of the meeting make no reference to the lease. The judge found that Mrs. Dyment acquired the Bishops' shares in the Company on 5 November 1991 and that the Company had not at that time executed the lease. At some time after 5 November and before 19 November 1991 the Counterpart lease was executed by the Company. That is not challenged on this appeal.
10. On 21 November 1991 the Council approved Mrs. Dyment's application for registration with the result that her appeal against de-registration was allowed the next day. However, the Bishops were unable to secure the release of Mr. and Mrs. Dyment's home from the Midland Bank charge because of the refusal by Paul Bishop's wife to cooperate. Mrs. Dyment took the view that rent under the lease consequently continued to be payable only at the rate at which it had previously been paid of £3,350 per month and the Company did not pay the full rent provided for in the lease.
11. On 17 February 1995 the Bishops issued proceedings ("the Rent Action") for recovery of the arrears of rent. In December 1995 the residents of The Mount were transferred to another property which Mr. and Mrs. Dyment had acquired. Mr. and Mrs. Dyment formed a new company, Pathways (Trebanos) Ltd. ("NewCo"), which took over the Company's business for no consideration. Four days before the hearing of an application by the Bishops for summary judgment in the Rent Action Mrs. Dyment placed the Company into creditors' voluntary winding up. On 12 January 1996 the Bishops obtained judgment against the Company in the Rent Action for £140,017.63. Although represented by Counsel, the Company did not suggest that s. 151 applied to defeat the Bishops' claim. There was no appeal.
12. The liquidator of the Company recovered from NewCo £100,000 to compensate the Company for the wrongful transfer of the business.
13. The Bishops on 4 March 1996 lodged a proof of debt for £140,017.63 in the liquidation of the Company. The liquidator accepted this.
14. On 5 January 1998 the Bishops sold The Mount. The Midland Bank charge on Mr. and Mrs. Dyment's home was released. The lease came to an end. On 3 April 2000 the Bishops lodged a further proof in respect of the rent due under the lease from the commencement of the liquidation of the Company to the date of The Mount's sale.
15. In January 2001 the liquidator commenced proceedings against Mrs. Dyment for misfeasance and fraudulent breach of duty in extracting £398,000 by way of dividends from the Company between March 1994 and November 1995. Mrs. Dyment initially disputed the claims but later admitted liability for misfeasance and on 7 December 2001 was ordered to contribute to the assets of the Company an amount sufficient with the other assets of the Company to discharge all the debts of the Company.

The proceedings

16. On 2 December 2001 Mrs. Dyment commenced the proceedings with which this appeal is concerned. She seeks an order expunging the Bishops' first proof of debt, alternatively an order reversing the admission by the liquidator (who is the First Respondent) of that proof, although she is long out of time for this. She also seeks an order that the liquidator should reject the further proof of debt of the Bishops. Although these orders are sought on behalf of the creditors of the Company, in reality she seeks to reduce her liability under the order of 7 December 2001.
17. Before I set out the basis of Mrs. Dyment's claim, it is convenient to refer to the relevant statutory provisions on which she relies. S. 151 provides, so far as material:

"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."

S. 152(1)(a)(iv) defines "financial assistance" as meaning:

"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."

18. The basis of Mrs. Dyment's claim was pleaded as follows:

"11. The rent payable under the lease was in substantially excess [sic] of what would have been an open market commercial rent for the Mount. By entering into the lease and agreeing to pay the rent thereunder the net assets of the Company were reduced to a material extent.

12. The excessive rent payable under the lease was at all times intended by both the [Bishops] and by [Mrs. Dyment] to provide payment to the [Bishops] for the value of their shareholding in the Company.

13. In the premises the Heads of Agreement and the lease contravened section 151 …. and all the obligations assumed by the Company under the lease and the rent payable thereunder constituted unlawful financial assistance. The lease was accordingly at all times wholly void and unenforceable and no rent was or is ever properly payable or recoverable thereunder."

19. In answer to a request for further information on Mrs. Dyment's pleading as to the intention averred in para. 12 of her Particulars of Claim, it was stated that Mrs. Dyment recognised that the increased rental to be paid under the lease was to compensate the Bishops for giving up their shareholdings in the Company in return for her share in The Mount, but felt that she had no option but to accept such terms, as any failure to agree would have led to the cessation of the business. The answer to a request for information insofar as reliance was placed on s. 151(2) was "Not applicable".
20. At the trial the judge had written and oral evidence from Mrs. Dyment, Mr. Harris and the Bishops and a joint report from the expert on each side. The experts agreed that the open market rental value of The Mount was £37,000, that is £29,000 per annum less than the rent reserved under the lease. It was accepted before the judge by the Bishops that the consequence of that was to reduce the net assets of the Company to a material extent. For Mrs. Dyment it was argued that the Company had given financial assistance in relation to a transaction which involved the acquisition by her of the Bishops' shares in the Company and that the assistance was given "directly or indirectly for the purposes of that acquisition".
21. The judge held that at the date of Mrs. Dyment's acquisition of the Bishops' shares, viz. 5 November 1991, the Company had not become liable, conditionally or otherwise, under the lease and was not bound by any legal obligation to enter into it. It followed, he said, that Mrs. Dyment's case under s.151(1) must fail.
22. The judge then turned to s.151(2) on which he allowed Mr. Hantusch to advance an alternative argument. That was generous to Mrs. Dyment in view of the expressly pleaded disavowal of any reliance on that sub-section; nor, it appears, was there any attempt to explore any factual matters relevant to s.151(2) in the oral evidence. Mr. Hantusch pointed out that in the skeleton argument of Mr. Bamford, then appearing alone for the Bishops at the trial, there is a single sentence that, because the lease was entered into after 5 November 1991, "presumably Mrs. Dyment's case in fact relies upon s.151(2) …." and that may have been the reason why the judge allowed the alternative argument. That argument proceeded on the footing that it was an implied term of the Heads of Agreement that Mrs. Dyment should procure that the Company entered the lease, that that liability had been incurred for the purpose of Mrs. Dyment's acquisition of the shares, and that the Company, by subsequently entering into the lease, had discharged her liability. The judge said that if it could be shown that Mrs. Dyment undertook that obligation for the purpose of acquiring the shares, the claim that there was an infringement of s.151(2) was in principle a good one.
23. However, the judge said that he had not been persuaded that as a matter of commercial reality it could properly be said that the obligation to procure the Company's acceptance of the lease was undertaken for that purpose, as it was contradicted both by the history of the parties' negotiations, by the form which the legal documentation took and by their accounts of their subjective intentions. The judge then went through those matters, including the evidence that Evan Bishop's demand for a rent of £5,500 per month was presented to Mrs. Dyment on a take-it-or-leave-it basis, that she perceived herself as having no commercial alternative but to agree and that entry into the lease was for the purpose of obtaining The Mount for the Company and was not linked to her acquisition of the shares.
24. The judge expressed his conclusion in this way:

"34. The fact that Evan Bishop's letter of 11th June 1991 had referred to the rent as being compensation for loss of earnings he would otherwise have enjoyed was, naturally, relied on by Mr. Hantusch as showing a link between the amount of the rent and the fact that the Bishops were giving up their shares. However, in my judgment, this overlooks the fact that the Bishops giving up their shares was a premise of the negotiation and not one of the elements over which there was, or could be, any negotiation. This was simply the effect of the requirements of the [Council] if the company was to continue to operate the business. To put the point in a different way, if the Bishops had at the outset transferred their shares at par, their ability to drive the hard bargain which they eventually did over the lease would not have been one whit impaired. It was their ownership of a 2/3 interest in the Mount, the company's need to take a 21-year lease if it was to continue in business, and the Dyments' desire to keep that business going which gave the Bishops the negotiating position which they exploited. Accordingly I have come to the conclusion that, while the company's entering into the lease can be said to have been "in connection with" (in the words of the old section 54 [of the Companies Act 1948]) the acquisition of the shares, it cannot fairly be said to have been "for the purpose" of that acquisition. It entered into the lease in order to obtain the premises, and agreed to pay what is now known to be an excessive rent because the owners of the freehold were in a position to exact that ransom."

The appeal

s. 151(1)

25. Before this court Mr. Hantusch submits that the judge erred in dismissing the claim under s.151(1) because, at the date of Mrs. Dyment's acquisition of the Bishops' shares, the Company was to be treated as having become liable under the lease. He argued that as the lease had been executed by the Bishops and delivered by them in escrow, when the condition of the escrow was fulfilled and the lease ceased to be in escrow the doctrine of relation back caused the title as between the Bishops as landlords and the Company as tenant to have passed as at the date of the original delivery of the lease in escrow.
26. That is a bold submission, particularly in the context of the applicability of a penal provision in a statute. If Mr. Hantusch is right, where a lease and a counterpart are prepared for execution and exchange by the landlord and the tenant respectively and the landlord executes the lease and delivers it in escrow but the tenant does not execute the counterpart until later, and the condition of the escrow is then fulfilled and the lease and counterpart exchanged, the tenant is treated as bound as and from the time of the landlord's delivery in escrow, even though the tenant has done nothing to commit himself at that time. If Mr. Hantusch is right and the entry by a corporate tenant into the lease by subsequent execution of the counterpart and its exchange constitutes the contravention of s.152(1), the tenant will be treated as having committed an unlawful act even before it has done anything to become bound; that is said to be because of the unilateral action of the landlord in delivering the lease in escrow followed by the fulfillment of the escrow condition.
27. At the hearing of the appeal Mr. Hantusch took us to no authority on the point, but in his skeleton argument he referred us to Halsbury's Laws, 4^th ed. Vol.14, (2000 Reissue) para.38 and Alan Estates v W G Stores [1982] Ch.511. Neither assists on the question whether the doctrine of relation back applies to a party other than the party who delivers the deed in escrow. In Alan Estates an undated lease and counterpart were executed and exchanged in escrow and when the conditions of the escrow were fulfilled, this court held that the date of the lease was the date of the delivery in escrow.
28. In my judgment it is in principle wrong that an intended party to a lease should be treated as bound at a time before he has committed himself to the lease merely because the other party has delivered the lease in escrow and the escrow conditions are subsequently satisfied. That is all the clearer in a case such as the present where the other party has prepared a counterpart lease for execution and exchange and where penal consequences would otherwise follow. Mrs Dyment has failed to show that any financial assistance was given by the Company before or at the same time as the acquisition of the Bishops' shares. I would therefore reject this ground of appeal.

s.151(2)

29. Mr Hantusch submitted that the judge was wrong to confirm that he was not satisfied that the implied obligation to procure the Company's acceptance of the lease was undertaken for the purpose of acquiring the Bishops' shares, because the judge had found that the giving up by the Bishops of their shares was a premise of the negotiation. He contended that there was a preordained scheme which included the transfer by the Bishops of their shares. His principal submission was that the purpose of the Bishops, as indicated in Evan Bishop's letter of 11 June 1991, was to obtain compensation via the rent from the lease for the loss of earnings they would otherwise have obtained from the business and that the Bishops' purpose must be deemed to be the purpose of Mrs. Dyment and the Company because they had no choice other than to accept the lease with its provisions for an excessive rent.
30. Mr. Chivers Q.C. for the Bishops accepted before us that an obligation on the part of Mrs. Dyment to procure the entry by the Company into the lease was to be implied in the Heads of Agreement. He pointed out that s.151(2) requires the court to focus on two purposes. One is the purpose of the acquisition of shares, a relevant liability having to be incurred for that purpose. In this case he says, and Mr. Hantusch agrees, that the liability is the obligation to procure the Company's entry into the lease, and that it must be shown that Mrs. Dyment incurred that liability for the purpose of acquiring the Bishops' shares. The other, he says and Mr Hantusch agrees, is the purpose of reducing or discharging that liability, and it must be shown that the Company gave financial assistance directly or indirectly for that purpose.
31. Mr. Chivers submitted that there was no inconsistency between the judge's finding on the premise of the negotiation and his conclusion that the obligation undertaken by Mrs. Dyment was not for the purpose of acquiring the Bishops' shares. I agree. The judge was rejecting Mr. Hantusch's suggestion that the letter of 11 June 1991 showed a relevant link between the rent payable under the lease and the Bishops giving up their shares. The judge was pointing out in para. 34 of his judgment that the transfer of shares by the Bishops so that they no longer had an interest in the Company, if it was to continue to operate the business, was a requirement of the Council which everyone accepted had to be met. For the reasons given by the judge, the rent insisted on by the Bishops was not linked to the acquisition of the shares.
32. Further, the evidence given by Mrs. Dyment in cross-examination amply supported the judge's findings that she felt she had no commercial alternative to Evan Bishop's hard-nosed proposal as to rent, and that her purpose in incurring the obligation to procure the Company's entry into the lease was to obtain The Mount so that the Company could continue in business. Her oral evidence was wholly inconsistent with the pleaded intention that the rent payable under the lease was to provide payment to the Bishops for the value of their shares. She accepted that there was no link between the rent and the shares, as is apparent from these exchanges:

"Q. But you weren't linking rent and the figure that was being put forward for rent with anything to do with shares. Your simple concern was, "from the Company's point of view and your point of view, can we afford to pay this rent?"

A. That's right.

Q. So there was no link, so far as you could see, between that and the shares.

A. No."

33. Mrs. Dyment's intention was the Company's intention: it could not have acted for a purpose which she did not intend.
34. Mr. Hantusch is right to accept that Mrs. Dyment cannot succeed unless he is correct in saying that the purpose of Mr. Bishop, as taken from the letter of 11 June 1991, is to be deemed to be Mrs. Dyment's and the Company's purpose because they had no alternative other than to accede to Evan Bishop's rental demands. However, I do not understand how as a matter of law or fact the Bishops' purpose should be taken to be the purpose of Mrs. Dyment or the Company. When she undertook the obligation of procuring the Company's entry into the lease and when the Company discharged that obligation by entering into the lease, she and it had the obvious purpose of acquiring The Mount to keep the business going. The particular reasons why Evan Bishop wanted the amount of the rent demanded by him cannot be translated into the purpose of Mrs. Dyment and the Company. There is no evidence that Mrs. Dyment ever saw the letter of 11 June 1991 which was addressed to Mr. Harris. Mr. Hantusch accepted that his submissions would be the same whether or not she knew of the thinking of Evan Bishop. In the light of her evidence as to her purpose, it is impossible to infer that the Bishops' purpose was her or the Company's purpose.
35. The judge in my view was entirely justified in saying in para. 34 of the judgment that the Company's entry into the lease was "in connection with" the acquisition by Mrs. Dyment of the Bishops' shares but was not "for the purpose of " that acquisition. In my judgment his conclusion that the entry into the lease was for the purpose of obtaining the premises and not for the purpose of the share acquisition is a finding of fact with which this court cannot interfere. I would therefore reject the appeal based on section 151(2).

Conclusion

36. This appeal must be dismissed.

Lord Justice Clarke:

37. I agree.

Lord Justice Keene:

38. I also agree.