Case No: 1999 Folio 1-21
 
IN THE HIGH COURT OF JUSTICE
QUEEN’S BENCH DIVISION
COMMERCIAL COURT

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 28th February 2000

B e f o r e :

THE HON MR JUSTICE LANGLEY

	Training for tomorrow (holdings) limited	Claimant	
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	THE CORPORATE SERVICES GROUP Plc	Defendant	

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Mr E. Bannister QC and Mr A. Twigger (instructed by  Messrs.Wright Hassall & Co  for the Claimants)
Mr C. Carr QC and Mr D. Owen  (instructed by  Messrs. Linklaters & Alliance for the Defendants)

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JUDGMENT
With reference to R.S.C. Order 68 Rule 1 and the Practice direction of the Master of The Rolls
dated 9th July 1990 ([1990] 1 W.L.R. 1126)

I certify that the attached text records my judgment and direct that no further note or transcript need be made

				The Hon. Mr Justice Langley
COPIES OF THIS JUDGMENT ARE AVAILABLE  IN WORD 6 for WINDOWS 3.1 ON PROVISION OF A CLEAN DISC. APPLY TO THE CLERK TO THE HONOURABLE MR JUSTICE LANGLEY Telephone 0171-936-6395

 Mr Justice Langley:
There are two applications by the Claimant (TFT) before the Court. TFT seeks to strike out the defence and counterclaim on the grounds that it discloses no reasonable defence or claim, alternatively it seeks summary judgment on the claim under Part 24 of the CPR on the basis that the Defendant (CSG) has no real prospect of successfully defending the claim. 
The claim is for £1.614m. It is brought under the terms of a side letter which formed part of the sale documentation by which CSG sold what was known as its Training Division to TFT, a company formed for the purpose of the acquisition, and controlled  and managed by a Mr Shopland. For the purposes of both applications TFT accepts that the facts pleaded by CSG in the defence and counterclaim must be regarded as true. They are in issue and in referring to the facts in this judgment it should of course be kept in mind that I am assuming what has not been and if there is to be a trial may not be proved.
The sale of the Training Division was the subject of a number of documents dated 28th November 1998. First, there was a Business Sale Agreement whereby TFT agreed to buy the Division in consideration for the issue of 5 loan notes payable over 5 years commencing on 30.09.02. The Loan Notes had a total nominal value of some £32.6m to reflect an agreed price of some £20.95m discounted for the delayed payment over that period. This agreement also contained an agreement by CSG to compensate TFT to the extent that the net asset value of the division was less than £1.2m.
The second Agreement was a Loan Note Instrument. That Agreement spelt out that the amount payable under the Loan Notes was to be dependant on the net profits in fact achieved by TFT for the year ending March 31, 2002. If those profits  were only £500,000 in fact nothing would be paid. If they were £1m a payment of some £1.8m would be made thereafter rising on a stated scale so that only if the profit exceeded £5.5m in that year would the full face value of the Loan Notes in fact be payable. This Agreement also fixed a maximum amount payable under any Loan Note at the amount of net profits for the year ending immediately prior to the date of payment.
There were also three side letter agreements. The claim is brought under the one referred to as "The Turnover letter" which, put shortly, provided that if the turnover of the Division was less than £7.856m in the 12 months ending on March 31, 1999 CSG would pay TFT any shortfall pound for pound. That is the basis of the claim. The same letter also provided that if the operating profit was less than £1.75m for any of the 3 years ending March 31, 2000, 2001 and 2002 again CSG would pay TFT the shortfall pound for pound. The other two side letters were "The Closure Letter" whereby CSG undertook to pay the costs of restructuring the Division, initially set at £2.07m, and "the Services Letter" whereby CSG agreed to provide certain services free of charge to TFT.
The Turnover letter also contained a provision that the amounts of any shortfall in the turnover or profits claimable under it should be invoiced by TFT as "courses" which TFT had provided to CSG. The agreement stated that "under no circumstances" was payment to be dependant upon any such services in fact being provided, and, so it is alleged, it was never intended that in fact they would be.
It is CSG's case that this elaborate structure was intended by those of its executive directors who were involved at the time to enable them to present in the Company's 1998 accounts the sale of what had become a loss-making Division as one which involved no write off of assets or loss to the company. In fact, so it is alleged, it was known that the profits of the Division and so TFT would never reach a level at which the Loan Notes would be payable in full or even remotely so. Paragraphs 41 and 42 of the Defence and Counterclaim pleads that the side letter agreements were executed for the purpose of obscuring the true nature of the sale and concealing the fact that CSG had assumed substantial and unusual ongoing financial obligations to TFT, and that the agreement about the form the invoices were to take under the Turnover Letter was to disguise the true basis for the claims and so further obscure the true nature of the sale. 
On 1st December, two days after the sale agreement, a Press Announcement was made by CSG which stated that the division had been sold for its net asset value of £20.956m on deferred terms repayable by secured loan notes. In the event, and following discovery of the full terms of the agreement, the 1998 Accounts of CSG made full provision against the value of the Loan Notes and a provision of £8m against potential liabilities under the side letters.
The allegations made by CSG against TFT or Mr Shopland and in some cases those advising him include that :
(1) they were aware of the executive directors' intention to present the sale in the 1998 accounts as one not involving a write-off or a loss (paragraphs 32 and 46.1);
(2) they appreciated that the profit level required for payment in full of the Loan Notes was "wholly unrealistic" or "deliberately refrained from investigating the likelihood " of it being achieved (Para. 46.2);
(3) they were or should have been alerted to the wish of the executive directors to disguise the true nature of the sale and CSG's obligations arising from it, (Para. 46.8);
(4) they knew or should have appreciated that the provision relating to invoices afforded a mechanism to disguise the true basis of any claims made under the side letter and the nature of CSG's obligations (Para. 46.9);
(5) Mr Shopland appreciated that the structure and accounting treatment adopted by the executive directors was misleading and likely to be used to create a false or misleading impression as to the value of CSG's shares (Para. 49);
(6) it was intended "by the parties to the letter" to perform the provisions of the Turnover letter "in an illegal and dishonest manner involving (a) the deception of CSG's auditors and ultimately its shareholders and (b) the commission of the offence of false accounting" (para 51).
These allegations are not suggested by Mr Bannister to be unrealistic or fanciful of themselves and, as I have said, are to be treated for the purposes of these applications as true. I will therefore turn to the defences and counterclaim to which they are said (and pleaded) to give rise.
First, it is alleged that the executive directors of CSG acted without authority in concluding the sale and so that it is not binding on CSG. Mr Carr submits that the directors had no actual authority to enter into an agreement which was so structured as to enable them to deceive third parties, such as auditors and investors, as to its true terms and financial consequences. Mr Carr accepts that normally in such circumstances a third party, such as Mr Shopland and TFT, would not be affected because they could rely on the apparent or ostensible authority of the directors to dispose of the company's property. But that, he submits, is not available to TFT if the allegations pleaded concerning Mr Shopland's knowledge of the directors' purpose are established. 
Second, it is alleged that the sale agreement is illegal and unenforceable because either the executive directors were guilty of an offence under section 47(2) of the Financial Services Act 1986 (creating a false impression as to the value of CSG's shares) and Mr Shopland aided and abetted the commission of that offence, or the parties intended to perform the contract in an illegal and dishonest manner by the use of false invoices.
Thirdly, and lastly, the counterclaim pleads a claim for an account or damages on the basis of a "constructive trust" arising from the transfer of property and funds from CSG to TFT under the sale "as a result of the executive directors' breaches of fiduciary duty, in circumstances in which Mr Shopland on behalf of TFT had actual knowledge of such breaches, or wilfully shut his eyes to them, or wilfully and recklessly failed to make such enquiries as an honest man would make" or "knowingly and dishonestly assisted in the breaches of fiduciary duty".
There is no pleaded claim that the assets of the Training Division were sold at an undervalue. The loss and damage alleged is the exposure to the obligations (if binding) under the Turnover Letter, the disposal of assets when it was "highly unlikely" that CSG would receive any payment for them and the costs of investigating the matter.
AUTHORITY
Mr Bannister's submission is that as there is no allegation that the sale was made at an undervalue and the directors plainly had capacity to sell the Training Division on terms that the buyer would only pay for it if it could make a profit from it, actual authority to sell was clear and it was nothing to the point that the directors intended, after the sale, to present a false picture of it. There was therefore no need for TFT to rely on ostensible or apparent authority as to which, without conceding as much, Mr Bannister did not (rightly in my judgment) contend that the pleading failed to advance a sufficient case of knowledge on the part of Mr Shopland to defeat such a case if TFT had sought to make it.
Mr Carr submitted that the question of actual authority did not depend solely on the question of value but rather on the purpose of the directors and whether that purpose was one for which authority existed. Thus, he submitted, the directors' power of sale and actual authority to sell was subject to the limit that it had to be exercised in the best interests of CSG and not for some other purpose such as deceiving third parties as to the terms of sale.
Both counsel referred me to the decision of the Court of Appeal in Rolled Steel Corporation [1986] 1 Ch 246. In my judgment the decision supports Mr Carr's submission. I refer in particular to the summary of the authorities in Slade LJ's judgment at page 295. Point (4) of that summary reads:
At least in default of the unanimous consent of all the shareholders ... the directors of a company will not have actual authority from the company to exercise any express or implied power other than for the purposes of the company as set out in its memorandum of association.

Much the same concept in the context of the exercise of fiduciary powers over a company's share capital is to be found in Howard Smith Ltd v Ampol Ltd [1974] AC 821. Lord Wilberforce said at page 834:
Thus ... the issue [of new shares] was clearly intra vires the directors. But ... the directors' power under the article is a fiduciary power: and it remains the case that an exercise of such a power though formally valid, may be attacked on the ground that it was not exercised for the purpose for which it was granted.

Lord Wilberforce continued to make clear that self interest was not the only "improper motive" which could invalidate the exercise of such a power but it was necesary to examine "the substantial purpose for which it was exercised and to reach a conclusion whether that purpose was proper or not".
Whilst it is of course possible to envisage arguments where there may be competing or multiple purposes in the exercise of a power, I do not think this is a case in which such arguments could properly or sensibly be addressed other than in a context of appropriate findings of fact made at a trial.
In my judgment CSG has pleaded a sufficient and realistic case to entitle it to argue that this sale was not one which the directors had actual authority to agree on behalf of CSG. In particular I think it is open to reasonable argument both that the issue is not so narrowly to be defined as to be restricted to whether the sale was at an undervalue or not and also that it is artificial to separate the commercial terms of the agreement from the alleged purpose of the directors as to how they would be presented to third parties; or, as Mr Carr put it, that the latter infected the terms and structure of the former. One further possible illustration of that is the allegation that the value of the loan notes was itself increased in the course of negotiations for no reason other than it was necessary if the deception were to succeed.
ILLEGALITY
As to section 47(2) of the 1986 Act Mr Bannister's submissions, founded on the decision in National Coal Board v Gamble [1959] 1 QB 11 and in particular the judgment of Devlin J at page 20, was that the defence did not allege that TFT or Mr Shopland intended to aid the commission of an offence by the executive directors (if such it was) and so failed to allege an essential ingredient of "aiding and abetting" and further that there was no allegation that TFT or Mr Shopland acted with the knowledge that it was intended to make use of the sale agreement for an unlawful purpose: see Alexander v Rayson [1936] 1 KB 169 at page 182, and Chitty on Contracts 28th Ed para 17-010. 
However these submissions in my judgment ignore the terms of Paragraph 51 of the Defence and Counterclaim which I have summarised above. That is, I think, a sufficient allegation of intention. Moreover, as in Alexander v Rayson (see at page 189) I think it is reasonably arguable that the form which the sale documents took here, as was held there, was itself "dangerous in the sense that they could be and were intended to be used" for an illegal purpose. The fact that side letters were used and false invoices agreed to is, I think, a basis on which such a case can realistically be put forward.
Mr Bannister submitted the invoices were "mechanics" and the term referring to them was no part of the substantive consideration for the agreements. That submission was made in support of a further argument that the term could "easily be severed". Again I think it open to argument by CSG that the term in fact reflected an important part of the consideration for the agreement, namely that the invoices should not refer to their true basis because to do so would reveal the existence of the Turnover Letter which itself was an essential part of the agreement but one which it was equally essential should not be revealed. Mr Carr referred me to the decision of the Court of Appeal in Taylor v Bhail [1996] CLC 377 as an illustration of circumstances in which a contract which involved an entirely legitimate obligation but which also involved both parties to it in defrauding a third party, was not enforceable even as to the legitimate part. 
CONSTRUCTIVE TRUST
Mr Bannister's submission was that no true allegation of a breach of fiduciary duty was alleged because, again, the commercial terms of the sale were not impugned as a sale at an undervalue. The duties alleged were in reality duties not to deceive investors and auditors, not breaches of loyalty or good faith. He cited Bristol and West Building Society v Mothew [1998] Ch 1 and in particular the analysis of a fiduciary obligation by Millett LJ at page 18 as one of loyalty and fidelity.
The major difficulty Mr Bannister faces in this submission is that paragraph 45 of the defence and counterclaim expressly pleads that in acting as alleged the executive directors of CSG were acting in breach of their fiduciary obligations "(a) to ensure that they acted honsetly and in good faith in what they considered to be the best interests of CSG and (b) to ensure that they exercised their powers to deal with the property of CSG and its subsidiaries for proper purposes". As Mr Carr submitted, and I agree, there could hardly be a plainer allegation of a breach of fiduciary duty in the strict and proper sense; nor in my judgment can it be said that the allegation is misconceived or fanciful in circumstances in which it is alleged that the power of sale was exercised at least in part for the purpose of presenting a false public picture of the terms and effect of the sale. It was Mr Bannister's submission that even if directors would only agree to a sale to a buyer who would agree to the sale being structured and implemented so that it could be presented in a deceitful way, provided the price was justified, such a sale would be valid and authorised and so binding on the company. As he put it, there might be liability in tort to third parties but there was no basis on which the contract of sale itself could be avoided. In my judgment there is a sufficient basis in authority to justify CSG contending to the contrary at a trial. The point is in reality no different from the issue on authority. Mr Carr cited a short passage from the judgment of Browne-Wilkinson LJ in Rolled Steel at page 303G-H as follows:
If a third party has received the company's property with notice of the excess or abuse of powers, such third party will be personally liable as a constructive trustee and the company will be able to recover the property....

Again, in my judgment, there is insufficient basis on which to justify an order which would preclude CSG from advancing its constructive trust case at a trial.
CONCLUSION
It follows that in my judgment and as I stated at the conclusion of the hearing, the Claimants' applications must be dismissed.