[COURT OF APPEAL]

BELMONT FINANCE CORPORATION LTD. v. WILLIAMS FURNITURE LTD. AND OTHERS

[1969 B. No. 5821]

Company - Psyche - Knowledge - Conspiracy for company to give financial aid to purchasers of its shares - Company victim of conspiracy - Directors' knowledge of illegal transaction - Whether knowledge to be imputed to company - Whether company conspirator - Companies Act 1948 (11 & 12 Geo. 6, c. 38), s. 54

Practice - Pleadings - Constructive trust - Conspiracy pleaded between company directors and others - Company claiming damages - Plea that directors in breach of trust - Whether pleadings disclosing allegation that conspirators constructive trustees - Need to plead fraud and relief claimed - R.S.C., Ord. 18, rr. 12, 15 (1) (2) ¹; Ord. 20, r. 5(5)

All the issued shares of the plaintiff company were held by the second defendant, a subsidiary company of the first defendant. The third to sixth defendants held all the issued shares in a company ("M"), and, on October 11, 1967, pursuant to a written agreement of October 3, they sold all their shares in M to the plaintiff company for £500,000 and, on the same day, purchased all the issued shares in the plaintiff company from the second defendant for £489.000.

Subsequently the plaintiff company was in liquidation and through its receiver brought an action against the defendants including two of its three directors, the seventh and eighth defendants, claiming that the value of M's shares was not £500,000 but £60,038 and, therefore, to the extent that the plaintiff company had purchased M's shares for an excessive amount, it had given the third to sixth defendants financial aid to purchase its shares in contravention of section 54 of the Companies Act 1948. The statement of claim alleged that the defendants were "at all material times aware or ought to have been aware of the fact" that the third to sixth defendants could not have purchased the shares without financial assistance from the plaintiff company through the purchase of M's shares at an excessive price and they had conspired together to carry out the sale and purchase of the plaintiff's share capital. It was further alleged that the defendant directors were guilty of misfeasance and breach of trust. Foster J., at the close of the plaintiff company's case, held that on its pleadings, it was a party to the agreement of October 3 and therefore, it was a conspirator to an unlawful act and could not sue its fellow conspirators in relation to that act and since the pleadings did not allege fraud or dishonesty, they did not disclose a claim against the defendants of a breach of constructive trust in that they had assisted a breach of

1 R.S.C., Ord. 18, r. 15 (1) (2): see post, p. 266C-D.

Ord. 20, r. 5 (5): see post, p. 266E-F.

Ord. 18, r. 12: see post, p. 270D-F.

duty by the plaintiff company's directors, as trustees, in misapplying the company's funds and also in a breach of section 54. He refused leave for the plaintiff company to amend its pleadings to specifically allege a breach of constructive trust and dismissed the action.

On appeal by the plaintiff company: -

Held, allowing the appeal in part, (1) that, if the defendant directors knew at the board meeting on October 3, when the agreement was entered into, that the sale of M's shares was at an inflated price, then they had knowledge that the agreement was illegal but, since the company was the victim of the conspiracy, it was not to be treated on the basis that the defendant directors had notionally transmitted their knowledge to the plaintiff company to make it a conspirator; that, even if the company had the knowledge that the agreement was illegal, the conspiracy alleged in the pleadings was a conspiracy to enter into the agreement of October 3 and not the agreement itself and, therefore, since the plaintiff company had not been shown to have had knowledge of the transactions leading to the agreement, it was not a party to the conspiracy (post, pp. 261F - 262A, 263H - 264C, 270C).

Reg. v. Churchill (No. 2) [1967] 2 A.C. 224, H.L.(E.); Oram v. Hutt [1914] 1 Ch. 98, C.A. and Wallersteiner v. Moir [1974] 1 W.L.R. 991, C.A. considered.

(2) That before the defendants could be held to be liable as constructive trustees, they had to assist with knowledge a dishonest and fraudulent design on the part of the company's directors; that "dishonest" and "fraudulent" in that context had the same meaning and, although neither word needed to be specifically pleaded, the pleadings had to disclose with particularity the allegation that the defendants had knowledge of dishonesty; that the only knowledge pleaded was that they were aware or ought to have been aware of the facts that constituted a breach of section 54 of the Companies Act 1948, and, in the absence of an unequivocal plea that the defendants had been dishonest, the plaintiff company could not rely on a breach of a constructive trust without being granted leave to amend the pleadings (post, pp. 265E, 267D-E, 268B - 269A, H - 270A, C-D).

Barnes v. Addy (1874) L.R. 9 Ch.App. 244; Davy v. Garratt (1878) 7 Ch.D. 473, C.A. and Selangor United Rubber Estates Ltd. v. Cradock [1965] Ch. 896 applied.

Per Goff L.J. The statement of claim did disclose all the facts necessary to constitute a fraudulent breach of trust but it was necessary to plead fraud and the absence of a specific pleading of fraud and of the relief claimed for breach of a constructive trust prevented the pleadings from showing the defendants the case that they had to answer (post, p. 274C-F).

Decision of Foster J. reversed in part.

The following cases are referred to in the judgments:

Alabaster v. Harness [1894] 2 Q.B. 897; [1895] 1 Q.B. 339, C.A.

Barnes v. Addy (1874) L.R. 9 Ch.App. 244.

Cargill v. Bower (1878) 10 Ch.D. 502.

Carl Zeiss Stiftung v. Herbert Smith & Co. (No. 2) [1969] 2 Ch. 276; [1969] 2 W.L.R. 427; [1969] 2 All E.R. 367, C.A.

Competitive Insurance Co. Ltd. v. Davies Investments Ltd. [1975] 1 W.L.R. 1240: [1975] 3 All E.R. 254.

Crofter Hand Woven Harris Tweed Co. Ltd. v. Veitch [1942] A.C. 435; [1942] 1 All E.R. 142, H.L.(Sc.).

Davy v. Garrett (1878) 7 Ch.D. 473, C.A.

Karak Rubber Co. v. Burden (No. 2) [1972] 1 W.L.R. 602; [1972] 1 All E.R. 1210.

Lawrance v. Lord Norreys (1890) 15 App.Cas. 210, H.L.(E.).

Oram v. Hutt [1914] 1 Ch. 98, C.A.

Reg. v. Churchill (No. 2) [1967] 2 A.C. 224; [1967] 2 W.L.R. 682; [1967] 1 All E.R. 497, H.L.(E.).

Selangor United Rubber Estates Ltd. v. Cradock [1965] Ch. 896; [1965] 2 W.L.R. 67; [1964] 3 All E.R. 709.

Selangor United Rubber Estates Ltd. v. Cradock (No. 3) [1968] 1 W.L.R. 1555; [1968] 2 All E.R. 1073.

Sterman v. E. W. & W. J. Moore [1970] 1 Q.B. 596; [1970] 2 W.L.R. 386; [1970] 1 All E.R. 581, C.A.

Wallersteiner v. Moir [1974] 1 W.L.R. 991; [1974] 3 All E.R. 217, C.A.

The following additional cases were cited in argument:

Colburn v. Patmore (1834) 1 Cr.M. & R. 73.

Letang v. Cooper [1964] 2 Q.B. 53; [1964] 2 W.L.R. 642; [1964] 1 All E.R. 669; [1965] 1 Q.B. 232; [1964] 3 W.L.R. 573; [1964] 2 All E.R. 929, C.A.

Vandervell's Trusts (No. 2), In re [1974] Ch. 269; [1974] 3 W.L.R. 256; [1974] 3 All E.R. 205, C.A.

Williams v. Williams (1881) 17 Ch.D. 437.

APPEAL from Foster J.

The plaintiff company, Belmont Finance Corporation Ltd. of 1, Fitzroy Square, London, W.1, was incorporated in March 1946 to carry on business as a finance house. On September 2, 1954, it became a public company and in October 1954, its objects were amended to enable it to carry on the business of general bankers. The nominal capital of the plaintiff company was £1,250,000 and the amount of capital paid up or credited as paid up was £1,080,000 consisting of 250,000 5 per cent. cumulative redeemable participating shares of £1 each, 560,000 preferred ordinary shares of £1 each and 540,000 ordinary shares of 10s. each.

On October 3, 1963, the second defendant, City Industrial Finance Ltd., which was the registered holder of the plaintiff company's entire issued share capital consisting of 200,000 fully paid ordinary shares of £1 each, entered into an agreement with the third defendant. James Peter Grosscurth, of Maiden Hatch House, Pangbourne, Berkshire, the plaintiff company, the first defendant Williams Furniture Ltd., which held a majority of the issued share capital in the second defendant. The agreement provided for the purchase by the third defendant of the entire issued share capital of the plaintiff company. On October 11, 1963, the third defendant, the fourth defendant, Andreas Demetri, of 17, Surrey Street, London, W.C.2, the fifth defendant, Kenneth Maund, of Maximum Finance Ltd., 65, Castle Street, Reading, Berkshire, and the sixth defendant John Sinclair Copeland, of Russell Tillet & Co., 18, St. Swithin's Lane London, E.C.4, sold all their shares in Maximum to the plaintiff

company for £500,000 and bought all the issued shares of the plaintiff company for £489,000.

The value of the share capital of Maximum Finance Ltd. was not worth more than £60,038 as shown by the balance sheets and profit and loss accounts for 1963 and 1964. The plaintiff company was ordered to be compulsorily wound up on April 8, 1966, and by a further order of the court dated May 10, 1966, John Peter Landau was appointed liquidator. The statement of affairs as at December 1966 disclosed a deficiency as regards creditors in the sum of £176,269.

By an amended statement of claim the plaintiff company alleged that the shares of Maximum were not worth more than £60,038, and that to the extent that the plaintiff company did not get value for money it gave the third, fourth, fifth and sixth defendants financial aid for the purchase of its own shares in contravention of section 54 of the Companies Act 1948.

The plaintiff company claimed (1) a declaration that the transaction effected by the agreement of October 3, 1963, and made between the plaintiff company and the first three defendants was unlawful and void under section 54 of the Companies Act 1948, (2) damages with interest thereon from October 11, 1963, to payment or judgment under the Law Reform (Miscellaneous Provisions) Act 1934; (3) all necessary accounts and inquiries; (4) as against the seventh defendant, Archie Spector, and the eighth defendant, Frank Victor Smith, a declaration that they were guilty of misfeasance and breach of trust in relation to the plaintiff company as its directors in procuring the plaintiff company to enter into the unlawful agreement of October 3, 1963; (5) alternatively a declaration that the seventh and eighth defendants and each of them were guilty of misfeasance and breach of trust in relation to the plaintiff company as directors in procuring the purchase by the plaintiff company of the entire share capital in Maximum Finance Ltd. at a price of £500,000 which was to the knowledge of the defendants greatly in excess of the true value of such shares; (6) an order that all necessary accounts and inquiries be taken for ascertaining what sums the two defendants were liable to contribute to the assets of the plaintiff company by way of compensation for such misfeasance and breach of trust in procuring the plaintiff company to enter into the agreement of October 3, 1968, and/or for the purchase of the shares in Maximum Finance Ltd.; (7) an order that the seventh and eighth defendants should jointly and severally contribute to the assets of the plaintiff company and to pay all such sums as they might be found liable to contribute to such assets on taking and making such accounts and inquiries with interest on such sums as from October 11, 1963, to payment or judgment under the Law Reform (Miscellaneous Provisions) Act 1934; as against all eight defendants for (8) costs (9) further and other relief.

Before the trial of the action and counterclaim before Foster J. the plaintiff company reached a compromise with the fifth defendant, Mr. Kenneth Maund, and at the trial, the third defendant, who was adjudged bankrupt, was in default of appearance. In 1970, the action was discontinued against the eighth defendant, Frank Victor Smith, a man of little substance on compassionate grounds but during the trial a claim in constructive trust was asserted against all the remaining defendants.

At the completion of the plaintiff company's case on October 4, 1976, Foster J. upheld the defendants' submission that there was no case to answer, and held that, as against the first, second, fourth, sixth and seventh defendants, the action should be dismissed on the ground that the plaintiff company was a party to the agreement forming part of the alleged conspiracy and the claim in conspiracy failed in limine because a party to a conspiracy to do an unlawful act could not sue a co-conspirator in relation to that act. He held further that on the statement of claim as it stood it was not open to the plaintiff company to claim relief against the defendants on a basis of constructive trust without amendment of the pleadings and he refused leave to amend.

By a notice of appeal dated October 15, 1976, the plaintiff company appealed on the grounds that the judge misdirected himself on the facts and was wrong in law and in so far as he had discretion exercised the same upon the wrong principles in holding (1) that the plaintiff company as a party to the agreement of October 3, 1963, was ipso facto a party to the conspiracy alleged in the statement of claim; (2) that the plaintiff company could not succeed in its claim for damages for conspiracy against any of the defendants; (3) that the plaintiff company could not on the pleadings as they stood succeed in its claim for damages for conspiracy against any of the defendants; (4) that the plaintiff company could not on the pleadings as they stood at the date of such order obtain any relief against any of the defendants other than the eighth defendant on the footing that they were liable as constructive trustees for the plaintiff company; (5) refusing the plaintiff company leave to amend its statement of claim in accordance with the proposed amendments.

The facts are stated in the judgment of Buckley L.J.

Michael Miller Q.C. and Martin Roth for the plaintiff company.

N. C. H. Browne-Wilkinson Q.C. and Brian Parker for the first and second defendants.

Nicholas Stewart for the fourth and sixth defendants.

Gerald Godfrey Q.C. and Ian McCulloch for the seventh defendant.

The main submissions of counsel are dealt with in the judgments of Buckley and Goff L.JJ. at pp. 260C - 261C, 263B-D, 264H - 266A, G - 267D, 273C - 274B, C-D, E-G, 275A. Additionally, the plaintiff company relied on In re Vandervell's Trusts (No. 2) [1974] Ch. 269 as authority for the contention that if, on the proved facts, the legal result was that the defendants ought to be held liable to account as constructive trustees, then in the present case it should apply to the first and second defendants. Legal results do not have to be pleaded: see per Lord Denning M.R. at pp. 321, 322; per Lawton L.J. at p. 324. Williams v. Williams (1881) 17 Ch.D. 437 was cited by the first and second defendants for the principle that a notice to raise a constructive trust was different from notice to an actual trustee. Letang v. Cooper [1964] 2 Q.B. 53 was cited on the question of delay.

It was argued for the seventh defendant, on the conspiracy point, that it would be contrary to principle for the plaintiff company, which was a party with the first and second defendants to the

alleged conspiracy, to be permitted to recover damages in those circumstances: see Colburn v. Patmore (1834) 1 Cr.M. & R. 73, 83, per Lord Lyndhurst C.B.

BUCKLEY L.J. On July 30, 1976, Foster J. dismissed this action at the close of the plaintiff company's case upon the submission of the defendants that there was no case to answer in relation to an alleged conspiracy and that it was not open to the plaintiff company upon the statement of claim to seek relief on the basis of constructive trust.

The facts are these: before the transaction out of which the action arose took place, the second defendant, a wholly owned subsidiary of the first defendant, owned all the issued shares of the plaintiff company; the third, fourth, fifth and sixth defendants owned between them all the shares in a company called Maximum Finance Ltd. (to which I shall refer as "Maximum"); another company called Cityfields Properties Ltd., was a wholly owned subsidiary of Maximum; the seventh and eighth defendants were at all relevant times directors of the plaintiff company.

The third, fourth, fifth and sixth defendants wished to acquire the share capital of the plaintiff company; for this purpose they required finance. The form which the transaction took was in essence this, that under a written agreement of October 3, 1963, the third, fourth, fifth and sixth defendants sold all their shares in Maximum to the plaintiff company at the price of £500,000 and bought all the issued shares of the plaintiff company from the second defendant for £489,000. If the share capital of Maximum was worth £500,000, there would have been nothing wrong with this, but the plaintiff company asserts that the shares of Maximum were not worth more than about £60,000, and that to the extent that the plaintiff company did not get value for money it was giving the third, fourth, fifth and sixth defendants financial aid for the purchase of its own shares, in contravention of the Companies Act 1948, section 54.

The action is brought in the name of the plaintiff company by a receiver appointed out of court under debentures issued by the plaintiff company. The plaintiff company is now in compulsory liquidation and the receiver has prosecuted the action under the direction of the Companies Court.

On account of the way in which the case went, the judge has heard the evidence of the plaintiff company's side only; he has heard no evidence of, or on behalf of, any defendant. He made no findings of fact; in view of his judgment it was unnecessary for him to do so. He dealt with the case upon the plaintiff company's pleading, and on that alone he held that since the agreement is alleged to have formed part of the alleged conspiracy, and since the plaintiff company was a party to the agreement, the plaintiff company was a conspirator. So he held that the claim in conspiracy failed in limine on the ground that one party to a conspiracy to do an unlawful act cannot sue a co-conspirator in relation to that act. He also held that on the statement of claim it was not open to the plaintiff company to claim relief against the defendants on a basis of constructive trust.

It is common ground that for the purposes of this appeal we must

assume that the plaintiff company will be able to establish all the allegations in its statement of claim. When considering the statement of claim, two questions have to be kept in mind. First, on the allegations contained in it, was the judge right in holding that the plaintiff company could not maintain its claim to relief on the basis that the defendants had conspired to the damage of the plaintiff company? Secondly, on those same allegations and having regard to the form of the endorsement on the writ and the prayer for relief in the statement of claim, is the plaintiff company entitled to any relief on the basis of constructive trust? The plaintiff company asks us to hold that the judge was wrong in holding that the plaintiff company could not succeed on the conspiracy point and that the constructive trust point was not open to the plaintiff company on the statement of claim. If he was right on the latter point, the plaintiff company says that the judge should have allowed an amendment of the statement of claim, which in fact he refused.

The endorsement on the writ is in precisely the same form as the claim to relief in the statement of claim, to which I shall come in due course. The statement of claim pleads the agreement which I have mentioned, the effect of which was as follows: by the agreement (a) the third defendant agreed to sell and the plaintiff agreed to buy all the issued share capital of Maximum for £500,000; that is clause 2. (b) Such sale to be completed on October 11, 1963; that is clause 3. (c) Subject to and upon the completion of that sale, the second defendant agreed to sell and the third defendant to buy all the share capital of the plaintiff company for £489,000 (clause 4) subject to adjustment as provided by clause 5. (d) The last mentioned sale to be completed immediately after the completion of the sale of the share capital of Maximum; that is clause 6.

I pause there to say that it is important to notice the close relationship between the two transactions, the purchase of the plaintiff's share capital being conditional upon the sale of the Maximum shares having been completed, and itself to follow immediately after the completion of the sale of the Maximum shares.

(e) Upon completion of the sale of the share capital to the plaintiff company the second defendant agreed to subscribe at par for 230,000 5 per cent. redeemable preference shares of £1 each in the plaintiff company, and to reconstitute the board of the plaintiff company in accordance with nominations by the third defendant; and the third defendant agreed to subscribe at par for 20,000 5 per cent. redeemable preference shares and 50,000 ordinary shares, all of £1 each, of the plaintiff company; that is clause 2.

There then follow some provisions of a subsidiary character, which I need not read; then (f) by clause 13 the third defendant warranted the correctness of the balance sheets of Maximum and Cityfield Properties Ltd., and certain anciliary matters designed to ensure that those balance sheets should substantially represent the state of those two companies at the completion of the sale of the share capital to Maximum. (g) The third defendant further warranted that the aggregate net profits before tax of Maximum and its subsidiaries, for the period May 22, 1962, to

May 31, 1968, should not be less than £500,000; that is clause 13 (h) (i); (h) such last-mentioned warranty being secured by a deposit of the whole listed share capital of a company called Rentahome Ltd.: clause 13 (h) (ii). (i) The first and second defendants gave the third defendants certain warranties relating to the plaintiff company and certain indemnities: clause 14. (j) The first defendant guaranteed to the third defendant the second defendant's due performance of the agreement. That agreement is incorporated by reference into the statement of claim.

The statement of claim proceeds to contain the following allegations: I do not read them in the language of the pleader, but in an abbreviated form, with the exception of certain paragraphs towards the end. It is alleged (a) that the fourth, fifth and sixth defendants were associates of the first defendant and active participants in negotiating and procuring the agreement: paragraph 5. (b) That the seventh and eighth defendants and another were at all material times until October 11, 1963, directors of the plaintiff company: paragraph 6. (c) That the terms of the agreement were approved at a board meeting of the plaintiff company on October 3, 1963, which was attended by the seventh defendant and one other director of the plaintiff; paragraph 8. (d) That at a board meeting of the plaintiff company held at noon on October 11, 1963, at which the seventh and eighth defendants and another director of the plaintiff company were present as directors, it was resolved that the plaintiff company should purchase from the third, fourth and fifth defendants the issued share capital of Maximum for £500,000: paragraph 9. (e) That the purchase was completed at that board meeting: paragraph 9 (A). (f) That the board meeting was attended by the third, fourth, fifth and sixth defendants, by an accountant employed by the first defendant and its secretary and by the third defendant's solicitor; paragraph 9 (B). (g) That on or about October 11, 1963, the second defendant resolved to sell the issued share capital of the plaintiff company to the third defendant or as he should direct and that that transaction was completed on October 11, 1963, the 200,000 issued shares in the plaintiff company being transferred as to 116,668 to the third defendant, as to 41,666 to the fourth defendant and as to 41,666 to the fifth defendant; that is paragraph 9 (A). (h) That at a further board meeting of the plaintiff company held in the afternoon of October 11, 1963, at which the same persons were present as were present at the board meeting held at noon on that day, the rest of the terms of the agreement were completed: paragraphs 10 and 10A. (i) That the initial negotiations for the third defendant's purchase of the shares of the plaintiff were conducted between the third defendant and one Lipert, then chairman of the second defendant, in the course of which the third defendant wrote to Mr. Lipert the letter which is set out in paragraph 12 of the statement of claim, from which I read this passage:

"... my present intention is to arrange the consideration for the purchase of Belmont from Belmont's own resources and this I propose to accomplish by selling to Belmont the whole of the issued share capital of Rentahome Ltd."

(j) That later, in the course of negotiations the third defendant wrote to one James, who was by then the chairman of the first and second defendants, a letter set out in paragraph 15 of the statement of claim, from which I read this passage:

"I am sorry that it has taken me so long to write to you with firm proposals for the mechanics for the purchase of Belmont, following the news that I am unable to sell shares in Rentahome Ltd. because of the consequences of the Finance Act 1962. Following our recent meeting, I have given considerable thought to your very helpful suggestions, but I have come to the conclusion that it would be more convenient for the transaction to proceed as follows: (1) That you or your associates should lend me by way of bridging finance, the amount required for completion say £480,000. (2) That I personally should purchase from [the second defendant], the share capital of [the plaintiff company] for say £480,000. (3) That [the second defendant] should subscribe at par for £230,000 of redeemable preference shares in [the plaintiff company]. (4) That [the plaintiff company] should purchase from me the whole of the share capital of Maximum Finance Ltd. for £500,000 (this will avoid me showing a large loan in [the plaintiff company's] accounts and deal with the section 54 difficulty). (5) That I will repay the bridging loan of £480,000 and my costs out of the proceeds of sale of Maximum Finance."

I have of course described the various companies by their character in this action and not by the names by which they are described in the letter. (k) That in the event the transaction proceeded on the basis of the agreement without any bridging finance: paragraph 16. There then come four very important paragraphs, which I shall read in their entirety:

"(17) The value of the entire share capital of Maximum Finance Ltd. was considerably less than the said sum of £500,000 as is borne out by its balance sheets and profit and loss accounts as at May 31, 1963, August 31, 1963 and August 31, 1964. The said sum of £500,000 had been arrived at in order to enable the [third, fourth and fifth defendants] to purchase the plaintiff company's shares with money provided by it in contravention of section 54 of the Companies Act 1948. A receiver and manager of Maximum Finance Ltd. was appointed on December 1, 1966. The statement of affairs as at December 2, 1966, discloses a deficiency as regards creditors in the sum of £176,269. (18) The defendants and each of them were at all material times aware or ought to have been aware of the fact that the [third, fourth and fifth defendants] were unable to purchase the share capital of the plaintiff company unless they obtained financial assistance from the plaintiff company through the purchase by it of their shares in Maximum Finance Ltd, at an inflated price."

Then there is a reference to not being able to give particulars until after discovery:

"(19) The defendants wrongfully conspired together to carry into effect the said sale and purchase of the entire share capital of the plaintiff company in contravention of the provisions of section 54 of the Companies Act 1948"

and then it states what is to be found in that section. Paragraph (20):

"Further and in the alternative the [seventh and eighth defendants] are guilty of misfeasance and breach of trust in their capacities as directors of the plaintiff company in procuring it to enter into the agreement in contravention of section 54 of the said Act."

Paragraph 22 pleads damage and gives particulars from which it appears that the value which is put by the pleader upon the entire share capital of Maximum is £60,038; the damages claimed is the difference between £500,000 and that sum of £60,038. The relief claimed was in these terms:

"The plaintiff company's claim is against all the defendants for (1) a declaration that the transaction effected by the agreement dated October 3, 1963, and made between the [third defendant] of the first part, the plaintiff company of the second part, the [second defendant] of the third part and the [first defendant] of the fourth part was unlawful and void under the provisions of section 54 of the Companies Act 1948. (2) Damages with interest thereon from October 11, 1963, to payment or judgment under the Law Reform (Miscellaneous Provisions) Act 1934. (3) All necessary accounts and inquiries.... Further and in the alternative against the [seventh and eighth defendants] for (4) A declaration that the said defendants and each of them were guilty of misfeasance and breach of trust in relation to the plaintiff company as directors in procuring the plaintiff company to enter into the said unlawful agreement dated October 3, 1963. (5) Alternatively a declaration that the said defendants and each of them were guilty of misfeasance and breach of trust in relation to the plaintiff company as directors in procuring the purchase by the plaintiff company of the entire share capital in Maximum Finance Ltd. at a price of £500,000 which was to the knowledge of the defendants greatly in excess of the true value of such shares. (6) An order that all necessary accounts and inquiries may be taken and made for ascertaining what sums the said [seventh and eighth defendants] are liable to contribute to the assets of the plaintiff company by way of compensation for such misfeasance and breach of trust in procuring the plaintiff company to enter into the said agreement dated October 3, 1963, and/or for the purchase of the said shares in Maximum Finance Ltd. (7) An order of the said [seventh and eighth defendants] do jointly and severally contribute to the assets of the plaintiff company and do pay to the plaintiff all such sums as they may be found liable to contribute to such assets on taking and making such accounts and inquiries as aforesaid with interest on such sums from October 11, 1963, to payment or judgment under the Law Reform

(Miscellaneous Provisions) Act 1934.... Against all the defendants for: (8) Costs; (9) Further or other relief."

I shall deal first with the conspiracy claim. The plaintiff company's argument is to the following effect: on the allegations in the statement of claim, the agreement was illegal, and they say that an agreement between two or more persons to effect any unlawful purpose, with knowledge of all the facts which are necessary ingredients of illegality, is a conspiracy; and we were referred to Crofter Hand Woven Harris Tweed Co. Ltd. v. Veitch [1942] 435 and Reg. v. Churchill (No. 2) [1967] 2 A.C. 224. The agreement was carried out, and damaged the plaintiff company.

In the course of the argument in this court counsel for the first and second defendants conceded that the plaintiff company is entitled in this appeal to succeed on the conspiracy point, unless it is debarred from doing so on the ground that it was a party to the conspiracy, which was the ground that was relied upon by the judge.

The plaintiff company points out that the agreement was resolved on by a board of which the seventh and eighth defendants constituted the majority, and that they were the two directors who countersigned the plaintiff company's seal on the agreement, and that they are sued as two of the conspirators. It is conceded by Mr. Miller for the plaintiff company that a company may be held to be a participant in a criminal conspiracy, and that the illegality attending a conspiracy cannot relieve the company on the ground that such an agreement may be ultra vires; but he says that to establish a conspiracy to which the company was a party, having as its object the doing of an illegal act, it must be shown that the company must be treated as knowing all the facts relevant to the illegality; he relies on Reg. v. Churchill.

The plaintiff company in its reply denies being a party to the conspiracy and, says Mr. Miller, it would be for the defendants to allege the necessary knowledge on the part of the plaintiff company. But he further submits that even if the plaintiff company should be regarded as a party to the conspiracy, this would not debar it from relief, and he relies upon Oram v. Hutt [1914] 1 Ch. 98.

The defendants' argument on this part of the case was to the following effect: that no party to an illegal contract can sue any other party to it upon the contract. Here, Mr. Browne-Wilkinson, for the first and second defendants, says that the company relies on the agreement to establish the conspiracy; that the conspiracy involved the agreement, and he refers to paragraph 19 of the statement of claim, which I have read, and to the particulars given under it. These were particulars given in response to a request for particulars of the allegation that the defendants wrongfully conspired together, specifying all facts and matters relied on in support of this allegation, and the answer to that request is in the following terms:

"The best particulars which the plaintiff can give of overt acts of the parties to the said conspiracy are the negotiations which took place between the defendants and/or their respective solicitors and/or their duly appointed agents both at meetings between two

or more of them and through the correspondence disclosed in this action, and the entry by the parties into the agreement on October 3, 1963, the completion thereof on October 11, 1963, as alleged in the re-reamended statement of claim and the concurrence in the agreement by" the fourth, fifth and sixth defendants "as evidenced in the correspondence."

So, submits Mr. Browne-Wilkinson, the plaintiff company cannot seek relief in respect of the transactions there agreed upon - that is to say, agreed upon in the agreement; one joint tortfeasor cannot sue another for damages suffered by the plaintiff tortfeasor in consequence of the tort. But I feel impelled to ask: can the plaintiff company sensibly be regarded as a party to the conspiracy, and in law ought it to be regarded as a party to the conspiracy?

Section 54 of the Companies Act 1948 is designed for the protection of the relevant company whose shares are dealt with in breach of the section; that was so held in Wallersteiner v. Moir [1974] 1 W.L.R. 991.

In the present case the object of the alleged conspiracy was to deprive the plaintiff company of over £400,000-worth of its assets, assuming always, of course, that it succeeds in establishing that allegation. The plaintiff company was the party at which the conspiracy was aimed. It seems to me that it would be very strange that it should also be one of the conspirators. The majority of the board which committed the company to carry out the project consisted of two of the alleged conspirators.

The judge said that the plaintiff company was a vital party to the agreement, and it could not be said that the other parties were conspirators but not the plaintiff company. With deference to the judge, who I think probably had very much less reference to authority in the course of the argument before him than we have had in this court, that view seems to me to be too simplistic a view, and not to probe far enough into the true circumstances of the case.

On the footing that the directors of the plaintiff company who were present at the board meeting on October 11, 1963, knew that the sale of the Maximum shares was at an inflated value, and that such value was inflated for the purpose of enabling the third, fourth, fifth and sixth defendants to buy the share capital of the plaintiff company, those directors must be taken to have known that the transaction was illegal under section 54.

It may emerge at a trial that the facts are not as alleged in the statement of claim, but if the allegations in the statement of claim are made good, the directors of the plaintiff company must then have known that the transaction was an illegal transaction.

But in my view such knowledge should not be imputed to the company, for the essence of the arrangement was to deprive the company improperly of a large part of its assets. As I have said, the company was a victim of the conspiracy. I think it would be irrational to treat the directors, who were allegedly parties to the conspiracy, notionally as having transmitted this knowledge to the company; and indeed it is a well-recognised exception from the general rule that a principal is

affected by notice received by his agent that, if the agent is acting in fraud of his principal and the matter of which he has notice is relevant to the fraud, that knowledge is not to be imputed to the principal.

So in my opinion the plaintiff company should not be regarded as a party to the conspiracy, on the ground of lack of the necessary guilty knowledge.

Even though the plaintiff company were to be supposed to be aware of the illegality, would this disentitle it to relief against co-conspirators? In Oram v. Hutt [1914] 1 Ch. 98, which I have already mentioned, the plaintiff was a member of a trade union and he sued, as a member of the trade union, to obtain relief for the union itself, which was an unincorporated body. The union had passed a resolution that it would indemnify any official of the union who took legal proceedings against one of the members of the union, called McNicholas, for defamation, and in reliance upon that indemnity Mr. Johnson, who was the general secretary of the union, sued Mr. McNicholas for damages for defamation. He was successful and recovered damages. The union paid the solicitor who acted for Mr. Johnson £775, I think it was, but the exact figure does not matter. Mr. Oram, the plaintiff, sued for a declaration that the payment was ultra vires and asked for an order for repayment of the money to the union.

The matter came before Swinfen Eady J. at first instance, who held that the union had no power to authorise its officers to take proceedings for slander at the expense of the union and that the payment made in respect of the costs of Mr. Johnson's action were invalid on the ground that they offended against the law of maintenance. He took the further subsidiary view that the acts of the union were ultra vires, inasmuch as the rules of the union did not specifically provide for the step that was taken; and he made a declaration and an order for the repayment of the £775 paid to Mr. Johnson's solicitors.

In this court Lord Parker of Waddington dealt with the matter in this way, at p. 104:

"The first question for decision, therefore, is whether the agreement by the association to indemnify any of its officers who took proceedings against McNicholas for libel was void on the ground of maintenance. In my opinion Swinfen Eady J. was bound and this court is bound to hold this agreement void unless this case can be distinguished from the case of Alabaster v. Harness [1894] 2 Q.B. 897."

He then discussed Alabaster v. Harness and came to the conclusion that the case then before the court could not be distinguished from that case, and he went on to say at p. 105: "The question remains whether the payments in question were justified on any other ground." He discussed that and he came to the conclusion that they were not, and in the result he said: "I have come to the conclusion, therefore, that the appeal must be dismissed."

Lord Sumner, who was also sitting in this court on that case, held that the law of maintenance affected the case and that the transactions were illegal on that ground, and he also agreed with Swinfen Eady J.

Warrington J., who was the third member of the court, said, at p. 109:

"If the transaction amounted to maintenance on the part of the association, then the payment in question was made in pursuance of an illegal contract, and, in my opinion, it is impossible to hold that to make such a payment can be within the implied powers of the association. I think, therefore, that the judgment of the learned judge was right and this appeal fails."

Mr. Miller put that case forward as authority for the proposition that the illegality of the agreement did not debar the union from relief, and he asked rhetorically: "Why should having been a party to the agreement here debar the plaintiff from relief?"

Mr. Browne-Wilkinson has emphasised that in Oram v. Hutt the court came to the conclusion that the payments by the union were ultra vires payments; consequently no title to the property in the sum of £775 passed when the payment was made, all parties to the agreement being aware of the circumstances, the solicitor being also the solicitor to the union and Mr. Johnson being its general secretary, and that accordingly the union did not have to rely upon the illegal contract in any way for the purpose of making a case for recovery of the money; it relied upon its own legal ownership of the money, which had never been determined as a result of the payment to Mr. Johnson or his solicitors. He said that that case is unlike the present one because as he contends, the claim in conspiracy in the instant case before us, is founded upon the illegal agreement and the plaintiff was a party to that agreement and to its being carried into effect.

I think one must look with some care at what is alleged to have been the conspiracy. I have read paragraph 19 of the statement of claim, which asserts that the defendants wrongfully conspired to carry into effect the sale and purchase of the share capital of the plaintiff company. The sale and purchase of the share capital of the plaintiff company is to be found in the agreement - that is, the agreement for the sale and the agreement for the purchase - and as I read this paragraph, the allegation is that antecedent to the agreement being entered into, the conspirators conspired, the effect of the conspiracy being that they would enter into the agreement; and when one comes to look at the particulars delivered under paragraph 19, one finds that there are relied upon as overt acts of the parties to the conspiracy the negotiations and the correspondence which took place before the agreement was entered into, the entry into the agreement and its completion. I cannot understand how the negotiations could be overt acts of the conspiracy unless the conspiracy existed before those negotiations took place, because as I understand it, an overt act establishing the existence of a conspiracy is an overt act which shows that the agreement which is alleged to be conspiratorial has already been made. The entering into of the agreement of October 3, 1963, is referred to in these particulars, as I read them, as part of the implementation of the conspiracy, not as itself constituting the conspiracy, and in the same way the completion of that agreement is part of the implementation.

So for my part I do not feel able to accept Mr. Browne-Wilkinson's

contention that the conspiracy here is founded on the illegal agreement. It is quite true that the illegal agreement was part and parcel of the implementation, but it seems to me that the allegation of a conspiracy relates to something different. The plaintiff company, not being shown to have knowledge of the facts relevant to the illegality of the agreement, is not in my judgment debarred from suing the defendants for damages for the conspiracy, because the plaintiff company is not shown to have been a party to the conspiracy or to guilty knowledge about the illegality of the transaction which was to be carried out under the agreement. On these grounds it seems to me that it is mistaken to regard the plaintiff company as being in law party to the conspiracy. I feel glad to be able to reach that decision because, for reasons that I indicated at the beginning of this section of my judgment, it seems to me to be completely unreal to regard the plaintiff company as party to the conspiracy. Accordingly, in my judgment, the judge was wrong in dismissing the action on that ground.

I come now to the subject of constructive trust. It should be realised that the claim in constructive trust came into the case only during the hearing before the judge. That arose in this way: the pleadings were framed in the way I have indicated and the case came before the judge with the statement of claim in that form. Shortly before the trial opened, the plaintiff had reached a compromise with the fifth defendant, Mr. Kenneth Maund, and the action was settled as far as he was concerned. The other defendants became aware of this when the trial opened and they asked to be allowed to know the terms of the settlement with Mr. Maund, which ultimately they received, I think on about the second or third day of the trial. There was then a request by all the defendants before the court for an adjournment so that they could amend their pleadings to plead that the settlement with Mr. Maund operated as a release of all the other alleged conspirators from any liability upon the alleged conspiracy. Those amendments will be found now incorporated in the pleadings.

We have not been concerned with that question at all; it has not yet been judicially considered in any way. The reason for that is that during the adjournment the plaintiff's advisers gave notice of the fact that they would raise a claim not only for damages for conspiracy, but also a claim asserting that the defendants are liable as constructive trustees. The settlement with Mr. Maund would not affect the viability of that claim in any way; so if the plaintiff company is allowed to bring in, or to pursue, the claim of constructive trust, there was no immediate purpose in pursuing the question of whether the settlement with Mr. Maund had released the other defendants from their liability under the alleged conspiracy, because the facts relied upon by the plaintiff company in support of the constructive trust claim are the same, or substantially the same, as the facts relied upon on the conspiracy claim.

But it is of some importance to realise that when the parties were preparing for trial, and indeed when the case came before the trial judge and for the first few days of the trial, the only claim before him was the claim in damages for conspiracy. Mr. Miller, for the plaintiff company, asserts that on the facts pleaded in the statement of claim, although

there is no reference in it to constructive trusteeship, the plaintiff is entitled to relief on that footing against all the defendants before the court. I should perhaps have said that not all the original defendants were before the court; the third defendant is a bankrupt and is in default of appearance; Mr. Maund, as I say, has been disposed of by compromise; and early in 1970 the action was discontinued against the eighth defendant, who I understand was a man of little substance and we were told that the proceedings were discontinued against him on compassionate grounds. But the claim in constructive trust is asserted against all the other defendants.

Mr. Miller contends that the statement of claim does not need any amendment, accountability on the footing of a constructive trust flowing as a legal result from the pleaded facts. He says that on those facts, particularly paragraphs 17, 18 and 19 of the statement of claim, if proved, the court ought to find the plaintiff company entitled to damages for conspiracy, and grant to the plaintiff company any other relief to which, on those facts, it can show that it is entitled, particularly by way of account against all the participants in the conspiracy, because, he says, the legal consequences of the facts are to bring home to the participants in the conspiracy participation in a transaction which involved misapplying the company's assets in breach of trust - that is to say, in breach of the duties of the directors of the plaintiff company and in breach of section 54, and he emphasises that that section creates a criminal liability; he does that to emphasise the undesirable nature of the transaction.

Distinguishing the decision of Pennycuick J. in Selangor United Rubber Estates Ltd. v. Cradock [1965] 1 Ch. 896, Mr. Miller says that the plaintiff company does not in this case rely on any duty owed to him by the first and second defendants in his claim against those defendants as constructive trustees; but on the fact that in consequence of their conduct those two defendants are accountable on the basis of constructive trusteeship and therefore, he says, an allegation of the particular relationship giving rise to accountability is not necessary.

The plaintiff company founds this part of its case on the statement of principle of Lord Selborne L.C. in Barnes v. Addy (1874) L.R. 9 Ch.App. 244, 251-252, to the effect that anyone who assists with knowledge a dishonest or fraudulent design on the part of trustees is liable to be treated as a constructive trustee. Mr. Miller says that there is no need to plead fraud, and that knowing participation in a misfeasance or breach of trust ought to be held as a sufficient basis to claim liability on the footing of constructive trusteeship particularly if, as in the present case, the action complained of is of a criminal character directed to depriving the plaintiff company of assets, he says that such an act must be sufficiently dishonest for the purposes of the doctrine. He admits that this is an extension of the rule as formulated by Lord Selborne L.C.; but he says that it is an extension which this court ought to make. He says moreover that there are here in fact sufficient facts pleaded to demonstrate that the transaction here in question was truly a dishonest transaction. Moreover, he says that the statement of claim shows that the second defendant and the third defendant received moneys of the

plaintiff, or money which for the present purpose sufficiently represents the plaintiff's money, in circumstances which would support a claim of constructive trusteeship under the other head mentioned by Lord Selborne L.C., which relates to cases in which the defendant has received and has become accountable for some part of the trust property. That, shortly, and I hope not too inadequately, describes the nature of the plaintiff company's argument.

The defendants have relied to a great extent upon the Rules of the Supreme Court relating to pleadings. They have referred us to R.S.C., Ord. 6, r. 2, which relates to the indorsement of the claim on the writ and statement of claim, which is required to contain a concise statement of the nature of the claim made or the relief or remedy required.

Mr. Browne-Wilkinson also referred us to R.S.C., Ord. 18, r. 15 (1) and (2), which are in these terms:

"(1) A statement of claim must state specifically the relief or remedy which the plaintiff claims; but costs need not be specifically claimed. (2) A statement of claim must not contain any allegation or claim in respect of a cause of action unless that cause of action is mentioned in the writ or arises from facts which are the same as, or include or form part of, facts giving rise to the cause of action so mentioned; but, subject to that, a plaintiff may in his statement of claim alter, modify or extend any claim made by him in the indorsement of the writ without amending the indorsement."

Sub-rule (2) contemplates that, where two kinds of relief are sought arising out of common facts or facts which are to some extent common, those claims to relief may be combined in the statement of claim.

We were referred by Mr. Godfrey to R.S.C., Ord. 20, r. 5 (5), which provides:

"An amendment may be allowed under paragraph (2) notwith-standing that the effect of the amendment will be to add or substitute a new cause of action if the new cause of action arises out of the same facts or substantially the same facts as a cause of action in respect of which relief has already been claimed in the action by the party applying for leave to make the amendment."

It appears to me that in that sub-rule the Rules Committee must have been using the expression "cause of action" as referring to a type of relief claimed rather than to pleaded facts.

The defendants argue that an account cannot be claimed, as the plaintiff company seeks to claim an account, on the basis of constructive trusteeship, without pleading the circumstances which give rise to the accountability; and they say that if the plaintiff company relies upon alternative causes of action, or intends to claim alternative relief based upon facts which are to some extent, or even entirely, the same, each must be stated in the pleadings; and they say that the facts alleged in the present case in the statement of claim are insufficient to support a claim to constructive trusteeship, because an agreement to do an illegal act may be entered into in circumstances which involve no dishonesty;

the parties may not have recognised the illegality of the act, even though they may have known all the facts which in truth make the act illegal. For example the transaction may have been embarked upon and carried out under mistaken advice given in good faith by properly instructed advisers. Counsel drew our attention to the requirements of R.S.C., Ord. 18, r. 12 relating to the particularity with which misrepresentations, fraud, breach of trust, wilful default or undue influence should be pleaded, and to the notes in The Supreme Court Practice (1976) which relate to that subject; and also to note 18/12/2, which explains the functions of particulars in pleadings, and they have contended that if any fraud is intended to be pleaded by the statement of claim, this is only done by way of inference. They referred us to two authorities, Davy v. Garrett (1878) 7 Ch.D. 473, where Baggallay L.J. said at p. 489 that fraud should not be inferred; and to Lawrance v. Lord Norreys (1890) 15 App.Cas. 210, where Lord Watson made a rather similar observation at p. 221. They raised the question whether constructive knowledge that trust moneys were being wrongly applied was sufficient to render a defendant liable as a constructive trustee where he had not in fact received any of the trust moneys or any moneys sufficiently representing the trust moneys. I hope that gives a sufficient indication of the nature of the defendants' argument on this part of the case.

I think two questions need to be considered: first, is it necessary when a person is sought to be charged as a constructive trustee that the design of which he is alleged to have had knowledge should be a fraudulent and dishonest design? For this purpose I do not myself see that any distinction is to be drawn between the words "fraudulent" and "dishonest"; I think they mean the same thing, and to use the two of them together does not add to the extent of dishonesty required.

The second question is: if this is necessary, does the statement of claim here allege dishonesty with sufficient particularity? The plaintiff company has contended that in every case the court should consider whether the conduct in question was so unsatisfactory - whether it can be strictly described as fraudulent or dishonest in law - as to make accountability on the footing of constructive trust equitably just. This, as I have said, is admitted to constitute an extension of the rule as formulated by Lord Selborne L.C. That formulation has stood for more than 100 years. To depart from it now would, I think, introduce an undesirable degree of uncertainty to the law, because if dishonesty is not to be the criterion, what degree of unethical conduct is to be sufficient? I think we should adhere to the formula used by Lord Selborne L.C. So in my judgment the design must be shown to be a dishonest one - that is to say, a fraudulent one.

The knowledge of that design on the part of the parties sought to be made liable may be actual knowledge. If he wilfully shuts his eyes to dishonesty, or wilfully or recklessly fails to make such inquiries as an honest and reasonable man would make, he may be found to have involved himself in the fraudulent character of the design, or at any rate to be disentitled to rely on lack of actual knowledge of the design as a defence. But otherwise, as it seems to me, he should not be held to be affected by constructive notice. It is not strictly necessary, I

think, for us to decide that point on this appeal; I express that opinion merely as my view at the present stage without intending to lay it down as a final decision.

In the present case, do the facts alleged in the statement of claim suffice to bring home to the defendants or any of them a charge that (a) the object of the alleged conspiracy was a dishonest one; and (b) that they actually knew, or must be taken to have known, that it was so?

An allegation of dishonesty must be pleaded clearly and with particularity. That is laid down by the rules and it is a well-recognised rule of practice. This does not import that the word "fraud" or the word "dishonesty" must necessarily be used: see Davy v. Garrett, 7 Ch.D. 473, 489, per Thesiger L.J. The facts alleged may sufficiently demonstrate that dishonesty is allegedly involved, but where the facts are complicated this may not be so clear, and in such a case it is incumbent upon the pleader to make it clear when dishonesty is alleged. If he uses language which is equivocal, rendering it doubtful whether he is in fact relying on the alleged dishonesty of the transaction, this will be fatal; the allegation of its dishonest nature will not have been pleaded with sufficient clarity.

The facts that are asserted here are that the defendants and each of them were at all material times aware, or ought to have been aware, of the fact that the third, fourth and fifth defendants were unable to purchase the share capital of the plaintiff company unless they obtained financial assistance from the plaintiff company through the purchase by it of their shares in Maximum at an inflated price. That must be read in conjunction with the allegation in paragraph 17, that the said sum of £500,000 had been arrived at in order to enable the third, fourth and fifth defendants to purchase the plaintiff's shares with money provided by it in contravention of section 54. The allegation of the conspiracy is an allegation that the parties conspired to carry into effect the sale and purchase of the share capital of the plaintiff company in contravention of section 54, and all the defendants were, in one capacity or another, parties to the agreement of October 3. They were well aware of everything to be found in that agreement, and I drew attention earlier to the very intimate connection in that agreement between the sale of the shares of Maximum and the sale of the plaintiff's shares.

The alleged design, namely, to procure that the plaintiff company should pay £500,000 for property worth about £60,000 in order to enable the third, fourth, fifth and sixth defendants to buy the share capital of the plaintiff company, which they could not otherwise do, was in my judgment clearly dishonest if the alleged inflation of the price was actually known, but not otherwise. Paragraph 18 does not allege exclusively actual knowledge; it says that the defendants were aware, or ought to have been aware. It seems to me therefore that the plaintiff company does not unequivocally assert that the fact that the price was an inflated one was known to the defendants or any of them, although it is open to the plaintiff company on the pleadings to prove that this was so. The pleading does not demonstrate that the plaintiff relies on dishonesty as an essential element of its cause of action. So in my

opinion this statement of claim does not unequivocally and clearly indicate that the plaintiff is proposing to assert that the transaction was a dishonest one.

R.S.C., Ord. 18, r. 15 (1) requires that the statement of claim must state specifically the relief or remedy which the plaintiff claims. A statement of claim must therefore specify at least one form of relief which the plaintiff claims, but on proof of the necessary facts the court is not I think confined to granting that particular or precise form of relief. We were referred to the Supreme Court of Judicature (Consolidation) Act 1925, sections 40 and 43, the first of which has the marginal note "Equities appearing incidentally." Section 40 says:

"The court or judge shall take notice of all equitable estates, titles and rights, and all equitable duties and liabilities appearing incidentally in the course of any cause or matter, in the same manner in which the Court of Chancery would formerly have taken notice of those matters in any suit or proceeding duly instituted therein."

The marginal note to section 43 reads: "Determination of matter completely and finally." Section 43 says:

"The High Court and the Court of Appeal respectively, in the exercise of the jurisdiction vested in them by this Act, shall, in any cause or matter pending before the court, grant, either absolutely or on such terms and conditions as the court thinks just, all such remedies whatsoever as any of the parties thereto may appear to be entitled to in respect of any legal or equitable claim properly brought forward by them in the cause or matter, so that, as far as possible, all matters in controversy between the parties may be completely and finally determined, and all multiplicity of legal proceedings concerning any of those matters avoided."

It is clear that a plaintiff cannot claim relief which is inconsistent with the relief that he has explicitly claimed; the authority for that is Cargill v. Bower (1878) 10 Ch.D. 502. But it appears to me that the court must have jurisdiction to grant any relief that it thinks appropriate to the facts as proved; but if a party seeks to raise a new claim, which has not been adumbrated in his pleading, in the course of the trial, in my opinion the court should not give relief of that kind, at any rate without offering the opposing party an opportunity for an adjournment, and giving them an opportunity to say whether they have been taken by surprise, or have been prejudiced by the fact that that particular form of relief had not been explicitly claimed earlier.

In the present case the absence of any claim in constructive trust, which was introduced, as I have said, at a late stage, has greatly added, it seems to me, to the likelihood of confusion about whether the statement of claim contains any sufficiently clear allegation of fraud and dishonesty; and indeed whether the plaintiff company was intending to rely on any allegations of fraud and dishonesty at all. Dishonesty was not a necessary ingredient of the claim of conspiracy; all that would be necessary to support that claim would be actual, or possibly imputed,

knowledge of the facts which rendered the transaction an illegal one. "Crime" and "fraud" are not synonymous; a criminal act may well be committed without any fraud or dishonesty.

In the present case, as it seems to me, there is no sufficiently clear allegation of dishonesty to be found in this statement of claim; and if it is to be raised it must be raised by amendment, and I understand that an application for amendment is to be made later.

For these reasons I think the judge was justified in saying that a claim in constructive trust was not one which was open to the plaintiff company on the pleading as it stands. As I say, the judge refused leave to amend; I have said nothing about that because we have to hear argument about it later. For my part I think the judge was wrong on the conspiracy point, but right, to the extent that I have indicated, on the constructive trust point.

ORR L.J. I entirely agree with the judgment that has just been delivered by Buckley L.J. and only wish to add a few words. As to the circumstances in which a person may be held liable as a constructive trustee, the statement of Lord Selborne L.C. in Barnes v. Addy, L.R. 9 Ch.App. 244, has, as Buckley L.J. has pointed out, stood for over 100 years. I agree with his view that it would be wrong to extend the principle there stated and it might be productive of uncertainty in the law to do so.

As to the obligation to plead fraud, the notes, in The Supreme Court Practice (1976) to Ord. 18, r. 12, state: "Fraudulent conduct must be distinctly alleged and as distinctly proved, and it is not allowable to leave fraud to be inferred from the facts." That statement is fully justified by the passage to which Buckley L.J. has referred in the judgment of Thesiger L.J. in Davy v. Garratt, 7 Ch.D. 473, and in my judgment these requirements were plainly not satisfied in the present case.

I would only add that where fraud has not been sufficiently pleaded, it is in my judgment no answer to say that if it had been sufficiently pleaded no further evidence would have been called for the defence. The presence or absence of a charge of fraud may, as it seems to me, affect the whole manner in which a defence is conducted.

I agree with the order proposed by Buckley L.J.

GOFF L.J. I would like to preface this judgment by pointing out that so far as the conspiracy question is concerned, we are dealing with a point of law on a particular pleading, and so far as the question of constructive trust is concerned we are dealing with a pleading point. It is, therefore, necessary that we should proceed on the footing that all the facts alleged in the statement of claim have been, or will be, proved; but in fairness to the defendants I should state that they deny that they joined in any conspiracy and they deny that they were dishonest or party to any dishonesty. Whether that denial is well-founded or not is a matter which will have to be investigated at the trial.

On the question whether the plea that the plaintiff company cannot proceed on conspiracy because it became a party to the unlawful act, or

to the conspiracy, by becoming a party to the agreement of October 3, 1963, I entirely agree with the conclusion reached by Buckley L.J. and with his reasons. I would add only a few points of my own in amplification.

First, the agreement of October 3, 1963, was not per se unlawful. It was the other facts alleged concerning it, the fact that the purchase by the plaintiff company was at an inflated price and that that price was arrived at, not for any purpose of the company, which indeed it injured, but to assist the third defendant, and to put him in a position to buy the shares in the plaintiff company which made the agreement illegal. In my judgment, therefore, the plaintiff company cannot on any showing be a party to that conspiracy and debarred from maintaining its action unless it knew those facts.

This is shown by Reg. v. Churchill [1967] 2 A.C. 224 to which Buckley L.J. has referred, and I would read just two passages from the speech of Viscount Dilhorne in that case. He said, at p. 237:

"In answer to the question posed by the Court of Criminal Appeal in this case, I would say that mens rea is only an essential ingredient in conspiracy in so far as there must be an intention to be a party to an agreement to do an unlawful act; that knowledge of the law on the part of the accused is immaterial and that knowledge of the facts is only material in so far as such knowledge throws a light on what was agreed."

Then Viscount Dilhorne said, at p. 237:

"The question is, 'What did they agree to do?' If what they agreed to do was, on the facts known to them, an unlawful act, they are guilty of conspiracy and cannot excuse themselves by saying that, owing to their ignorance of the law, they did not realise that such an act was a crime. If, on the facts known to them, what they agreed to do was lawful, they are not rendered artificially guilty by the existence of other facts, not known to them, giving a different and criminal quality to the act agreed upon."

I agree with Buckley L.J. that it is not possible to impute to the company the knowledge of the sixth and seventh defendants. It was suggested in reply that Mr. James was somehow in a different position, but I cannot see myself how that affects the matter. If he was innocent, it carries it no further; if he had knowledge of the improper purpose of the conspirators, I do not see how his knowledge either could be imputed to the plaintiff company, seeing that he was the chairman of the second defendant, who was one of the conspirators.

Finally in support of what Buckley L.J. has said, I would wish to cite two short passages from Wallersteiner v. Moir [1974] 1 W.L.R. 991; the first passage is in the judgment of Lord Denning M.R. where he said, at p. 1014:

"In Essex Aero Ltd. v. Cross, November 17, 1961; Bar Library Transcript No. 388 of 1961, Harman L.J. said: 'the section was not enacted for the company's protection, but for that of its creditors;... the company,... cannot enforce it.' I do not agree. I think the section was passed so as to protect the company

from having its assets misused. If it is broken, there is a civil remedy by way of an action for damages."

Scarman L.J. spoke to the same effect and said, at pp. 1032-1033:

"There was, on these facts, a breach of duty by Dr. Wallersteiner as a director. The companies were, also, in breach of the section. But the maxim 'potior est conditio defendentis' is of no avail to Dr. Wallersteiner, for the section must have been enacted to protect company funds and the interests of shareholders as well as creditors. I do not agree with the dictum of Harman L.J. in Essex Aero Ltd. v. Cross... to the effect that the section was enacted not for the company's protection but for that of its creditors."

Turning to the other point, the question as to constructive trust, the judge took many objections. We have heard argument upon them, though in the end the matter came to be focused, rightly, on the question of fraudulent breach of trust. I think I ought to refer to them and to say a few words about them. Foster J. said:

"There is not one word in the statement of claim that the second defendant is a trustee, that it was in breach of trust, that it received the moneys knowing the moneys belonged to Belmont, or even that the moneys which it did receive did in fact belong to Belmont."

Foster J. cited a passage from Ungoed-Thomas J.'s judgment in Selangor United Rubber Estates Ltd. v. Cradock (No. 3) [1968] 1 W.L.R. 1555, 1580, which includes these words:

"There are thus three elements: (1), assistance by the stranger, (2) with knowledge, (3) in a dishonest and fraudulent design on the part of the trustees."

And then Foster J. said:

"These passages show the various allegations which have to be made and proved. In the statement of claim none of these things are even alleged, let alone proved."

I am not able to agree with any of those objections, except the last, "(3) in a dishonest and fraudulent design on the part of the trustees." In my judgment it was neither necessary nor proper to plead that the second defendants were trustees or that they had committed a breach of trust; that is not the basis on which it is sought to make them liable. Further, this is not a tracing action, and therefore in my judgment it is enough to show that the moneys received by the second defendant sufficiently represented the plaintiff's money: see the Selangor case at p. 1614E.

As a matter of pleading, paragraphs 9A and 9B of the statement of claim, and the agreement of October 3, 1963, showing, as Buckley L.J. has pointed out, the direct and immediate connection between the purchase by the plaintiff company of the shares in the Maximum company and the purchase by the third defendant of the shares in the plaintiff company do, so far as the question is one of fact, in my judgment sufficiently allege that the moneys represented the moneys of the plaintiff company in the case of the second defendant; whilst so far as

concerns the third defendant, he received payment direct from the plaintiff company. It is not now alleged that actual receipt of moneys can be advanced on the pleadings as they stand, without amendment against any other of the defendants.

In my view the allegations in the statement of claim as a whole clearly plead participation in any breach of trust committed by the directors; and in my judgment paragraph 18 is a sufficient pleading of knowledge on the part of all the defendants, whether the true standard be actual knowledge or constructive notice.

It seems to me, therefore, that there are three questions which we have to decide: first, is it necessary to prove that the alleged breaches of trust by the directors were fraudulent or dishonest - and I agree with Buckley L.J. that the two things really mean one and the same; secondly, if so, is that sufficiently pleaded; and thirdly, was it necessary to specify, either in the body of the statement of claim or in the prayer, the claim for relief on the footing of constructive trusteeship?

On the first point Mr. Miller in support of his argument that it is permissible to extend the principle of Barnes v. Addy, L.R. 9 Ch.App. 244, relied on two passages in the Selangor case. The first is where Ungoed-Thomas J. said, at p. 1582:

"It seems to me imperative to grasp and keep constantly in mind that the second category of constructive trusteeship (which is the only category with which we are concerned) is nothing more than a formula for equitable relief. The court of equity says that the defendant shall be liable in equity, as though he were a trustee. He is made liable in equity as trustee by the imposition or construction of the court of equity. This is done because in accordance with equitable principles applied by the court of equity it is equitable that he should be held liable as though he were a trustee. Trusteeship and constructive trusteeship are equitable conceptions."

The second passage was introduced by the judge saying, at p. 1590: "I come to the third element, 'dishonest and fraudulent design on the part of the trustees'...," and he said, at p. 1591:

"It seems to me unnecessary and, indeed, undesirable to attempt to define 'dishonest and fraudulent design,' since a definition in vacuo, without the advantage of all the circumstances that might occur in cases that might come before the court, might be to restrict their scope by definition without regard to, and in ignorance of, circumstances which would patently come within them. The words themselves are not terms of art and not taken from a statute or other document demanding construction. They are used in a judgment as the expression and indication of an equitable principle and not in a document as constituting or demanding verbal application and, therefore, definition. They are to be understood 'according to the plain principles of a court of equity' to which Kindersley V.-C. referred in Bodenham v. Hoskins (1852) 21 L.J.Ch. 864, 873, and these principles, in this context at any rate, are just plain, ordinary common sense. I accept that 'dishonest and fraudulent,' so understood, is certainly conduct which is morally reprehensible.

But what is morally reprehensible is best left open to identification and not to be confined by definition."

If and so far as Ungoed-Thomas J. intended, as I think he did, to say that it is not necessary that the breach of trust in respect of which it is sought to make the defendant liable as a constructive trustee should be fraudulent or dishonest, I respectfully cannot accept that view. I agree that it would be dangerous and wrong to depart from the safe path of the principle as stated by Lord Selborne L.C. to the uncharted sea of something not innocent (and Mr. Miller conceded that mere innocence would not do) but still short of dishonesty. In my judgment, therefore, it was necessary in this case to plead, and of course in due course to prove, that the breach of trust by the directors was dishonest.

I turn then to the second question, which is whether fraud or dishonesty has been sufficiently pleaded. I accept Mr. Miller's submission that the statement of claim, when carefully analysed, does plead all the facts necessary to constitute a fraudulent breach of trust, namely, a deliberate design to misapply the plaintiff company's money in buying shares at an inflated price to place a third party in funds to buy the shares in the plaintiff company, a design known to the directors and to all the participants in it.

However, in my judgment this pleading is defective so far as fraud is concerned, because it does not make it clear that the pleader means to charge fraud, because he says in paragraph 18 that the defendants and each of them were at all material times aware, or ought to have been aware; and the latter part is, as Mr. Miller was constrained to admit, consistent with innocence.

I am unable to accept the submission that this should be construed as a charge of fraud, with an alternative claim to relief in the event of his failing to prove it; on the contrary, it seems to me to reflect what has been his attitude throughout, namely, "I do not have to charge fraud." This passage and the general tenor of the statement of claim as a whole, taken in conjunction with the absence of any claim to relief specifically on the basis of a constructive trust, even if that be not a breach of the rules itself, in my judgment makes the pleading embarrassing and prevents it from showing the defendants what case they have to answer.

So far as the point on the relief claimed is concerned, it is said that the writ itself was defective under R.S.C., Ord. 6, r. 2, because it did not state the nature of the claim or the relief or remedy required, and reliance was placed on Sterman v. E. W. & W. J. Moore [1970] 1 Q.B. 596 as showing that a mere general claim for damages, accounts and inquiries is insufficient. However, in my judgment the writ was valid and regular, since it claimed a declaration that the transaction effected by the agreement of October 3, 1963, was unlawful and void. In my judgment that being so, it was competent under R.S.C., Ord. 18, r. 15 (2), for the plaintiff company to serve a statement of claim pending a case of conspiracy or constructive trust or both, because such cases depend upon, or include, the same facts as are required to support the cause of action for the declaration claimed in the writ. Indeed, apart from the special

point that the plaintiff company, it was said, could not sue for conspiracy because it was itself a party, of which we have already disposed, it was not suggested that the statement of claim was bad so far as it alleged conspiracy.

Nevertheless, in my judgment the pleading failed to comply with R.S.C., Ord. 18, r. 15 (1), in that it did not specify the remedy or relief claimed, so far as based on constructive trust.

Finally, whilst wilfully shutting one's eyes to the obvious, or wilfully refraining from inquiry because it may be embarrassing is, I have no doubt, sufficient to make a person who participates in a fraudulent breach of trust without actually receiving the trust moneys, or moneys representing the same, liable as a constructive trustee, there remains the question whether constructive notice in what has been conveniently described as the "section 199" sense, will suffice.

Ungoed-Thomas J. in the Selangor case held that it would, and Brightman J. in Karak Rubber Co. Ltd. v. Burden (No. 2) [1972] 2 Ch. W.L.R. 602, 639, followed that decision.

But in Carl Zeiss Stiftung v. Herbert Smith & Co. (No. 2) [1969] 2 Ch. 276, Sachs L.J. at pp. 298 and 299, and Edmund Davies L.J., at p. 301, threw great doubt upon this. In Competitive Insurance Co. Ltd . v. Davies Investment Ltd. [1975] 1 W.L.R. 1240, which was in many respects a different case, but touched on similar ground, I took the view that constructive notice of the section 199 type would not be sufficient, and I adhere to that view. It is, however, as Buckley L.J. has said, unnecessary for us to decide that particular matter; it can be left to the trial judge, who may not in the end have to decide it, either because it may turn out that the defendants had actual knowledge, or because there may be insufficient proof to establish constructive notice.

For the reasons that both Buckley L.J. and Orr L.J. have given, which I entirely accept, and for those which I have sought to express myself, I agree that the judge was wrong in ruling that the plaintiff company could not maintain its claim in conspiracy, but that he was right in holding that they could not proceed on a claim based on constructive trust without amendment.

February 18. The Court of Appeal (Buckley, Orr and Goff L.JJ.) gave leave to the plaintiff company to further amend the statement of claim, on certain terms in order to formulate a plea of fraud, notwithstanding the delay and the late stage at which the application was made, on the ground of the exceptional facts of the case.

Solicitors: Sidney Pearlman & Greene; Freshfields; Gentle Mathias & Co.; Arram, Fairfield & Co.

L. G. S.