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2 Held, allowing the appeal:

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6 Legislation referred to

7 Companies Act (Cap 50, 1985 ed) s 76, 157

8 1 Belmont Finance Corporation v Williams Furniture Ltd and ors (No 2) < 1980 > 1

All ER 393 (folld)

9 2 Charterhouse Investment Trust Ltd and ors v Tempest Diesels Ltd < 1986 > BCLC 1

(folld)

10 3 Charterbridge Corporation Ltd v Lloyds Bank Ltd and anor < 1970 > Ch 62 (folld)

11 4 Howard Smith Ltd v Ampol Petroleum Ltd and ors < 1974 > AC 821 (refd)

12 Judgment:

13 Coram: Karthigesu JA L P Thean JA Goh Joon Seng J

14 < Delivered by L P Thean JA >

15 GROUNDS OF JUDGMENT

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17 (i) that the appellants were constructive trustees of the sum for the respondents;

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20 The facts

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29 Decision below

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31 Appeal

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41 (i) one for $2m in payment for the shares and

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44 (i) subscription by the appellants of the 20,000 shares in the respondents, and

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50 The respondents relied on the case of Belmont Finance Corporation v Williams Furniture

Ltd and ors (No 2) < 1980 > 1 All ER 393 and contended that the transactions

contravened s 76. There, the third defendant, Grosscurth, wanted to acquire the entire

share capital of Belmont Finance Corpn Ltd (`Belmont'), which was wholly-owned by the

second defendant, City Industrial Finance Ltd (`City'), which in turn was wholly-owned by

the first defendant, Williams Furniture Ltd (`Williams'). Grosscurth was the controlling

shareholder of Maximum Finance Ltd (`Maximum'). Grosscurth and his associates agreed with

Williams and City to sell all their shares in Maximum to Belmont for 500,000 and to buy

the entire share capital of Belmont from City for 489,000. At the same time, Williams and

City agreed to lend Belmont 200,000 for 12 months secured on the share capital of Maximum.

Grosscurth guaranteed to Belmont that the aggregate pre-tax profits of Maximum and its

subsidiaries for a certain period of time would be not less than 500,000 and City agreed

to subscribe for 230,000 1 preference shares in Belmont out of the 489,000 it received for

the sale of Belmont. The end result was that Grosscurth and his associates became the

owners of all the shares of Belmont and through it, Maximum. Belmont subsequently went

into liquidation. It was then found on valuation that Maximum was worth only about 60,069

and not 500,000. An action was later commenced against, inter alios, Grosscurth, Williams

and City. At the trial, it was established that at the material time of the transaction,

the respective parties genuinely believed that Maximum's shares were worth 500,000 and

that buying Maximum was a good commercial transaction, and on that ground the High Court

dismissed the claim. On appeal, the Court of Appeal held that the purchase of Maximum was

not a bona fide commercial transaction in its own right but was merely part of a scheme to

enable Grosscurth and his associates to acquire Belmont using Belmont's own funds and that

it was not a transaction in the ordinary course of Belmont's business to acquire Maximum

and did not enable Belmont to acquire anything which it genuinely needed for its own

purpose. Accordingly, it was held that there was a breach of s 54 of the Companies Act

1948 (which was in pari materia with s 76 of our Companies Act). Buckley LJ in his

judgment said, at p 403:

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55 Waller LJ said, at p 414:

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59 In Charterhouse Investment Trust Ltd and ors v Tempest Diesels Ltd < 1986 > BCLC

1, Hoffmann J provided a helpful guide in applying s 54. He said, at p 10:

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67 We were referred to the decision of Pennycuick J in Charterbridge Corporation Ltd v

Lloyds Bank Ltd and anor < 1970 > Ch 62. There, the plaintiffs sought a declaration

that a legal charge and a guarantee given by a company known as Castleford to secure the

debts of another company, Pomeroy, were ultra vires as being outside the powers of

Castleford. The two companies were part of the same group of companies and had common

directors. The basis of the claim was twofold, first, that it was ultra vires Castleford,

i.e. outside the corporate powers, to give the guarantee and legal charge, and, secondly,

that the charge and guarantee were created for purposes not for the benefit of Castleford.

The learned judge decided that Castleford was carrying out the purposes authorised by its

memorandum and that the transactions were effected pusuant to the express power conferred

by the memorandum and were not ultra vires. He then proceeded further and said, at p 74:

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70 We have dealt with the commercial purpose and reasons of the transactions and it is

unnecessary for us to repeat them here. Suffice it here to say that the decision to

purchase the debts in return for the appellants subscribing for the shares and advancing

the loan was a management decision taken by the directors which turned out, in retrospect,

to be a poor decision. It did not appear to us that this decision was not arrived at bona

fide. In this respect, we found most apposite the following passage from the speech of

Lord Wilberforce in Howard Smith Ltd v Ampol Petroleum Ltd and ors < 1974 > AC 821

at p 832:

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