Rolled Steel Products (Holdings) Ltd v British Steel Corporation

This is an appeal by British Steel Corporation ("B.S.C.") and Mr. Vivian Rupert Vaughan Cooper, who were two of the defendants in two consolidated actions, from an order of Vinelott J. made on 23rd March 1983. There is also a cross-appeal from the order by Rolled Steel Products (Holdings) Limited, which was the plaintiff in the action.

The appeal and cross-appeal raise important questions of principle concerning (inter alia) the capacity and powers of companies incorporated under the Companies' Acts and the powers and authority of their directors. Section 9(1) of the European Communities Act 1972, which may be important when such questions nowadays fall to be considered as between a company and persons dealing with it in good faith, had not become law when the transactions in issue in the present case were effected. For the purposes of this present judgment this subsection therefore requires no further attention.

The trial of these consolidated actions lasted for about nineteen days and ended on or about 7th April 1981. Judgment was given by Vinelott J. on 2nd December 1981. There then followed a number of disputes concerning the detailed terms required to give effect to this judgment. The matter having been brought back to the judge for the resolution of these disputes, he delivered a further judgment for this purpose on 23rd March 1983, following which the order now under appeal was drawn up.

The judgment of 2nd December 1981 (some parts of which are now reported— (1982) 1 Ch. 478) occupies nearly one hundred pages of transcript, and sets out very carefully and comprehensively the long and involved history of this case. Since various important findings of fact are challenged, I cannot avoid a similar, if briefer, recital of this history.

The plaintiff, Rolled Steel Products (Holdings) Limited ("R.S.P."), which is now in liquidation, was a company which had been incorporated in 1954 under the Companies' Act 1948 and had carried on the business of importing and selling steel in the United Kingdom. Its main customers were motor manufacturers. At all material times Mr. Alexander Ilytch Shenkman ("Mr. Shenkman") held 51 per cent of the issued share capital, the remaining 49 per cent being held by the trustees of a settlement made by Mr. Shenkman for the benefit of his children ("the trustee-shareholders"). Its directors were Mr. Shenkman and his father, Mr. Ilya Michael Shenkman. The trustee-shareholders were Mr. Wills, who was a former business associate of Mr. Shenkman, and the senior trustee, Mr. Hibbert, a senior employee of British Petroleum, and Mr. Perkins, a retired solicitor.

Clause 3 of the Memorandum of Association of R.S.P. listed a number of objects, including the following:

"(A) To carry on business as exporters and importers of, and manufacturers of, and dealers in, and buying and selling agents for, iron, steel, copper, bronze, aluminium, lead, tin, zinc, antimony and other metal goods of all descriptions and home and foreign and dominion and colonial goods, merchandise and produce of all descriptions.

"(K) To lend and advance money or give credit to such persons, firms, or companies and on such terms as may seem expedient, and in particular to customers of and others having dealings with the Company, and to give guarantees or become security for any such persons, firms, or companies.

"(L) To borrow or raise money in such manner as the Company shall think fit, and in particular by the Issue of Debentures or Debenture Stock (perpetual or otherwise), and to secure the repayment of any money borrowed, raised, or owing, by mortgage, charge, or lien upon the whole or any part of the Company's property or assets (whether present or future), including its uncalled Capital, and also by a similar mortgage, charge, or lien to secure and guarantee the performance by the Company of any obligation or liability it may undertake."

The objects clause ended with the following words:-

"It is hereby expressly declared that each Sub-Clause of this Clause shall be construed independently of the other Sub-Clauses hereof, and that none of the objects mentioned in any Sub-Clause shall be deemed to be merely subsidiary to the objects mentioned in any other Sub-Clause."

The Articles of Association of R.S.P. contained (inter alia) the following provisions:

"17. Provided that a Director declares his interest in a contract or arrangement or proposed contract or arrangement with the Company in manner provided by Section 199 of the Act he shall be counted in the quorum at any meeting of Directors at which the same is considered and shall be entitled to vote as a Director in respect thereof.

"18. (a) The quorum necessary for the transaction of the business of the Directors may be fixed by the Directors, and unless so fixed, shall, be two."

At all material times Mr. Shenkman owned the entire issued capital of another company, Scottish Steel Sheet Ltd. ("S.S.S."). In July 1961 R.S.P. approached Colvilles Ltd. ("Colvilles"), a company engaged in the production of steel, with a proposal that S.S.S., which Mr. Shenkman had formed for the purpose, would act as sole distributor in Southern England of coil and cut steel sheet produced by Colvilles. Mr. Shenkman further planned to develop a steel service centre which S.S.S. would operate and Colvilles would supply with coil. The centre itself would supply the customers.

R.S.P. acquired a leasehold site for the steel service centre at Rainham, Essex, but its erection at that site was not proceeded with. Instead, in 1964, R.S.P. acquired a leasehold site at Andover and began to build a new steel service centre there with moneys amounting to about £400,000 borrowed from S.S.S. Though the judge said that the sum owed by R.S.P. to S.S.S. did not carry interest, it appears that it may have carried interest at 5 per cent per annum: (see Vol. 1 page 236). Meantime, R.S.P. retained the Rainham site.

S.S.S. began to purchase coil and cut steel on credit from Colvilles. Its principal customer was Fords. The account of S.S.S. with Colvilles fell more and more into arrears. In October 1966, Mr. Shenkman agreed to reduce and keep the sum owed by S.S.S. to below £400,000. In July 1967, Colvilles was re-nationalised and its shares were vested in B.S.C. By November 1967, the indebtedness of S.S.S. to Colvilles amounted to £820,000, of which £420,000 was overdue. In December 1967, Mr. Shenkman was told that the arrangement by which the sheet steel was sold through S.S.S. would be ended and that Colvilles would in the future sell to Fords direct. Once S.S.S. lost the arrangement with Fords, it would have no income until the new steel service centre became operative; completion of the steel service centre was scheduled for July 1968 at the earliest. Mr. Shenkman was also told in December 1967 that he must take immediate steps to reduce the indebtedness of S.S.S. to Colvilles to £400,000, and produce a programme for the elimination of the balance after a sixty day's credit period had expired.

By April 1968 Mr. Shenkman had still failed to reduce the debt. Colvilles accordingly reported the matter to the legal services department. Mr. Edwards, the head of that department, decided that the best solution for Colvilles and B.S.C. would be for Mr. Shenkman to execute an immediate and binding guarantee of the whole indebtedness of S.S.S., which by then amounted to about £860,000. On 2nd May 1968, Mr. Shenkman entered into a guarantee of this nature. Fifteen days later, on 17th May 1968, Colvilles served on S.S.S. a statutory demand pursuant to section 222 of the Companies' Act 1948 for payment of the sum of £868,000, then claimed to be due from S.S.S.

The judge's findings as to the events between June and November 1968 are, I think, accurately and well summarised in the Law Report (1982) Ch. at pages 482B to 483A, which summary I gratefully adopt:

"By June 1968 British Steel Corporation doubted whether Mr. Shenkman's 51 per cent interest in the plaintiff and his other assets were sufficient to meet the debt due from S.S.S. It was decided to offer Mr. Shenkman 14 days to agree to the voluntary liquidation of S.S.S. or failing that a petition would be presented to wind up the company. A meeting was arranged for that purpose on September 11 but, between September 3 and 11, it occurred to Mr. Hands, assistant to Mr. Edwards in the legal services department, that a solution would be to persuade Mr. Shenkman to procure the plaintiff to guarantee the debt due from S.S.S. The only significant asset of S.S.S. was the debt owed to it by the plaintiff and the plaintiff had sufficient assets to meet that debt. He wrote to Mr. Shenton of Lovell White & King, solicitors to the corporation, stating that he had it in mind...