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1. The well-known Belton group of companies which owned and managed nine public houses in Dublin, comprised ten separate companies, a holding company, Motels Ltd, and nine subsidiaries. This appeal is concerned with that company and with three of its subsidiaries, namely, Frederick Inns Ltd, The Rendezvous Ltd and The Graduate Ltd.

2. Since the late 1970s the group was in a position of constant indebtedness to the Revenue in respect of VAT, PAYE/PRSI and corporation profits tax. In April 1984 the group’s liabilities stood at approximately £1.6 million and by June 1986 this had risen to £2.8 million. On 12 June 1986 the Collector General sent to each of the ten companies a separate letter demanding the amount due from such company and giving notice that in the event of its failure to pay, the letter would be used for the purposes of s. 214 of the Companies Act 1963 as evidence that the company was unable to pay its debts, and a petition for winding-up would be issued.

3. Subsequent to the receipt of that letter, negotiations took place between a representative of the Revenue Commissioners and some of the directors of the Belton group and their accountants, as a result of which an arrangement was reached whereby the licensed premises in which Frederick Inns Ltd, The Rendezvous Ltd and The Graduate Ltd carried on business (two of which were leased from Motels Ltd) would be sold, and £1.4 million would be paid to the Revenue Commissioners out of the proceeds. The precise terms of the arrangement were set out in a letter from the group’s solicitor to the Revenue Commissioners dated 22 August 1986:-

4. Motels Ltd, The Graduate Ltd, Frederick Inns Ltd and The Rendezvous Ltd.

5. With reference to our interview of 21st inst we confirm that we act for the above companies. We further confirm that Motels Ltd and The Graduate Ltd have agreed to sell The Graduate public house at Rochestown Avenue to Terence E. Dickson, solicitor, in trust for the sum of £650,000. We have received the contract duly signed and a cheque for the deposit. Motels Ltd, The Rendezvous Ltd have agreed to sell The Rendezvous at Shantalla Road, Beaumont to Dermot Carew for the sum of £550,000. We sent out the contracts for signature on 15th inst and anticipate receiving same back in the next day or so. We have to-day received instructions that Frederick Inns Ltd have agreed to sell the premises The Hunters, South Frederick Street, for the sum of £400,000. We are awaiting particulars of the purchaser’s solicitors and will be sending you out contracts for the sale immediately we receive such particulars.

6. We are instructed by our clients and hereby undertake to pay to the Revenue Commissioners the sum of £1,400,000 out of the sale of the above three premises. We anticipate that all sales will be closed by 30th approx. and it is hoped that The Rendezvous sale will close in or about 5th approx. and The Graduate sale in the middle of September.

7. Yours faithfully.

8. The arrangement outlined in that letter was duly carried out, with one variation, £1.2 million being paid instead of £1.4 million. It was paid in three instalments as follows:-

9. £600,000 on 24 October 1986, and

10. The £1.2 million was made up of the following contributions made by the four companies:-

11. Frederick Inns Ltd: £ 200,000

12. The Rendezvous Ltd: £ 100,506

13. The Graduate Ltd: £ 122,517

14. All four companies were insolvent when each of the instalments was paid and the Revenue Commissioners were aware that they were insolvent. Mr. Ray Jackson was appointed official liquidator of Motels Ltd on 15 December 1986, the petition having been presented on the 3 December 1986, and he was appointed official liquidator of the other three companies on 30 March 1987 on foot of petitions presented on 13 March 1987.

15. The Revenue Commissioners appropriated the £1.2 million to reducing the amounts owing by all ten companies in the group, the division being made rateably according to the amount of tax owed by each. It is not disputed that such appropriation was what both sides intended.

16. The issue in the High Court was whether the payments made in reduction of the amounts owing by the other six companies were ultra vires and, if so, if they could be recovered by the official liquidator. The learned trial judge held that they were. He held that each of the companies in the group was a separate company and that the Revenue Commissioners were not entitled to treat the group as a single entity. He further held that none of the four companies had power in its memorandum of association to pay the debts of any associated company in the group and that accordingly the payment made in reduction of the amounts owing by the other six companies was ultra vires. He held also that as the four companies were insolvent at the time the payments were made, the payments were in breach of the duty owed by the companies and their directors to the general creditors of the companies and accordingly were misapplications of the respective companies’ assets.

17. The learned trial judge made a separate order in respect of each of the four companies. The orders made in respect of Frederick Inns Ltd, The Rendezvous Ltd and The Graduate Ltd were all in the same form. Each of these companies owed the Revenue more than the amounts they respectively contributed to the £1.2 million. The learned trial judge found that the payment of the parts of their contributions which had been appropriated to other companies was ultra vires and directed that such parts should be credited to the companies themselves in reduction of the amounts owing respectively by them. Accordingly there was no order for the repayment of any part of the amounts contributed by them to the £1.2 million.

18. The position of Motels Ltd was different. Its contribution to the £1.2 million was much greater than the amount it owed to the Revenue. It contributed £776,977 whereas it only owed £125,058. The Revenue had appropriated £30,000 of the £776,977 in reduction of its debt and the balance in reduction of what was owing by the other nine companies. The learned trial judge found that the payment of so much of the amount contributed by Motels Ltd as exceeded what it owed, (which came to a sum of £65l,919) was ultra vires the company and he directed the Revenue Commissioners to repay this sum to the official liquidator together with interest thereon at the statutory rate from time to time payable on judgment debts from 26 November 1986 down to the date of payment.

19. In this appeal the Revenue Commissioners dispute the finding that the payment of part of the £1.2 million was ultra vires and seek an order setting aside the judgment of the High Court. By a notice to vary, the official liquidator seeks an order that the Revenue Commissioners should be directed to repay to each of the four companies the amount which each respectively had contributed to the £1.2 million.

20. In dividing the £1.2 million between the ten companies in the group, the Revenue Commissioners appropriated the following sums in reduction of the amounts owing by each of the four companies:-

21. Frederick Inns Ltd: £ 28,000

22. The Rendezvous Ltd: £ 24,000

23. The Graduate Ltd: £ 54,000

24. It had originally been contended by the official liquidator that these payments were fraudulent preferences but that contention was withdrawn in the High Court. As this was the only ground on which these payments could be disputed, and as it is no longer being relied upon, and in my opinion quite properly since the payments were made as a result of pressure brought by the Revenue Commissioners, it is clear that the Revenue Commissioners are entitled to retain these sums which amounted together to £136,000, and this is conceded by counsel for the official liquidator. So this appeal is concerned with the balance of £1,064,000 which was appropriated by the Revenue Commissioners to the other six companies.

25. While the appropriation of the £1.2 million had been made independently by the Revenue Commissioners, it was accepted by both sides that it constituted a payment by the four companies in reduction of the amounts owing by all ten companies in the group, so the first issue to be resolved is whether the learned trial judge was correct in holding that the payments made in reduction of the amounts owing by the other six companies amounting, as I have just indicated, to £1,064,000 were ultra vires. If he was correct in so deciding, the second issue is whether he was correct in holding that the contribution made by each of the four companies to the £1.2 million over and above the amount originally appropriated to each in reduction of their respective liabilities should now be credited to the company which made it in reduction of the amount owing by such company to the Revenue. The effect of this finding was that the official liquidator did not recover any part of the sums contributed by Frederick Inns Ltd, The Rendezvous Ltd or The Graduate Ltd as each of these companies owed more than the amount of their respective contributions, and he recovered less of the contribution made by Motels Ltd than would otherwise have been the case. The final issue is as to what order the official liquidator is entitled to if it is held that the Revenue Commissioners are not entitled at this stage to make a new appropriation of the amounts originally credited to the other six companies.

26. The first submission made on behalf of the Revenue Commissioners was that the memorandum of association of each of the four companies contained a power to make the relevant payments. A number of different clauses in the respective memoranda of association were relied upon, but most reliance was placed on the following two clauses which are to be found in the memorandum of association of each of the companies:-

27. In my opinion neither of these clauses gives the power to pay the debts of an associate company, which is what happened here. What the first clause gives is a power ‘to establish or promote or concur in establishing or promoting’ another company in certain circumstances. That could not be construed as a power to pay the debts of another company. And the second clause gives the power ‘to purchase or otherwise acquire and undertake all or any part of the. . . liabilities of any company etc.’ The companies here were neither ‘purchasing’ nor ‘acquiring and undertaking’ the liabilities of the other companies. They were paying part of their debts. This clause did not give any power to do this.

28. It was also submitted that the power to lend money could be relied upon, such as the following power in the memorandum of association of Frederick Inns

29. To advance and lend money from time to time either with or without mortgage or other security at such rates of interest and generally upon such terms and conditions and in such manner as may be thought expedient.

30. I reject this submission also. The four companies did not lend any monies to the other six. What they did was to pay part of their debts which was something very different.

31. I have read the other clauses in the four memoranda of association on which reliance was also placed and I am satisfied that none of them gave power to make the relevant payments. I find accordingly that the payments were ultra vires.

32. It was then submitted that even if the payments were ultra vires, they were nonetheless validated in favour of the Revenue Commissioners by either s. 8 of the Companies Act 1963 or article 6 of the European Communities (Companies) Regulations 1973. In my opinion neither of these provisions had this effect. I start with article 6 which is as follows:-

33. I think it is clear that none of the companies had any person registered under the regulations as a person authorised to bind the company, so if the Revenue Commissioners are to get the benefit of the article they would need to show that the payment to them was a transaction entered into by the board of directors of each of the companies. There is no evidence of this in any of the affidavits filed by either side. The payment appears to have been agreed to be made as a result of informal meetings between accountants acting on behalf of the companies and Mr. Patrick Burke acting on behalf of the Revenue Commissioners. In these circumstances it seems to me that the Revenue Commissioners cannot rely on article 6 as validating the payment.

34. They are confined then to relying on s. 8 of the Companies Act 1963. This section is as follows:-

35. It seems clear that the Revenue Commissioners cannot be shown to have been actually aware that the payment was not within the powers of the four companies. Mr. Burke seems generally to have been of the belief that he was dealing with a group of companies and that the payment was being made by some of the companies within the group on behalf of the entire group. I consider, accordingly, that the Revenue Commissioners would be entitled to rely on the section if they could show that the payment by the four companies, if they had been empowered to make it, ‘would have been lawfully and effectively done.’ The view I take is that the facts here are such that the Revenue Commissioners could not establish this.

36. At the time the payments were made, all four companies were insolvent and were known by the Revenue Commissioners to be insolvent. Frederick Inns Ltd, The Rendezvous Ltd and The Graduate Ltd had each sold their licensed premises and had ceased to trade. In addition, a s. 214 demand had been served on each of the companies and had not been complied with. The position of each of the companies was, accordingly, that all that was required to wind it up was that a petition should be presented. And the moment that had been done, it is clear that the relevant payments could not have been made as the company would have ceased to be the beneficial owner of its assets. In Ayerst v. C. & K. (Construction) Ltd [1974] 1 All ER 676 Templeman J cited in his judgment at p. 684 the following passage from the judgment of James LJ in In re Oriental Inland Steam Co. (1874) 9 Ch App 557 at p. 559 setting out the effect of a winding-up order:-

37. The English Act of Parliament has enacted that in the case of a winding-up the assets of the company so wound up are to be collected and applied in discharge of its liabilities [there is a similar provision in s. 235 of the Companies Act 1963]. That makes the property of the company clearly trust property. It is property affected by the Act of Parliament with an obligation to be dealt with by the proper officer in a particular way. Then it has ceased to be beneficially the property of the company; and, being so, it has ceased to be liable to be seized by the execution creditors of the company.

38. It is clear from this that as soon as a winding-up order has been made the

39. This conclusion is supported by the decision of the Court of Appeal in New South Wales in Kinsela v. Russell Kinsela Properly Ltd (in liquidation) [1986] 4 NSWLR 722. The essential facts of the case were summarised as follows by Street CJ in his judgment at p. 727:-

40. This insolvent company, in a state of imminent and foreseen collapse, entered into a transaction which plainly had the effect, and was intended to have the effect, of placing its assets beyond the immediate reach of its creditors; it did this by means of a lease of its business premises entered into with the intention that two of its directors, as lessees, would use those premises for the purpose of continuing to conduct a business of the nature of that which the family of the directors and all of the shareholders had carried on for many years; the lease was executed on behalf of the company by the two directors who were to be lessees with the unanimous approval of all the shareholders of the company; it may be added, for what it is worth, that the terms of the lease were, to say the least, commercially questionable.

41. He went on to say at p. 728 of his judgment:-

42. Where, as here, a question arises regarding the extent to which a company is bound by a transaction entered into by it there are two separate questions, namely, is the transaction within the power or capacity of the company and, secondly, if it is, has that power been validly exercised so as to bind the company?

43. He held that the transaction was within the power of the company but that it had not been validly exercised:-

44. The lease was not ultra vires and void as exceeding the capacity of the company. It was, however, entered into by the directors (albeit with unanimous approval of all of the shareholders) in breach of their duty to the company in that it directly prejudiced the creditors of the company. It was accordingly a voidable transaction and, no third party rights having intervened, the company on the initiation of the liquidator is entitled to the aid of the court to void it.

45. At p. 730 of his judgment he outlined as follows the principle on the basis of which he came to this conclusion:-

46. In a solvent company the proprietary interests of the shareholders entitle them as a general body to be regarded as the company when questions of the duty of directors arise. If, as a general body, they authorise or ratify a particular action of the directors, there can be no challenge to the validity of what the directors have done. But where a company is insolvent the interests of the creditors intrude. They become prospectively entitled, through the mechanism of liquidation, to displace the power of the shareholders and directors to deal with the company’s assets. It is in a practical sense their assets and not the shareholders’ assets that, through the medium of the company, are under the management of the directors pending either liquidation, return to solvency, or the imposition of some alternative administration.

47. I would respectfully adopt and follow this statement of the law and when it is applied to the facts here I think it is clear that it could not be held that the payments by the four companies were ‘lawfully and effectively done’. At the time the payments were made, the four companies were under the management of their directors pending imminent liquidation. Because of the insolvency of the companies the shareholders no longer had any interest. The only parties with an interest were the creditors. The payments made could not have been lawful because they were made in total disregard of their interests. And since the payments were not lawfully made, the Revenue Commissioners cannot rely on s. 8 of the Companies Act 1963 to remedy the fact that the payments were ultra vires. So this submission also fails.

48. I would accordingly uphold the finding of the learned trial judge that the payments made by the four companies in reduction of the amounts owing by the other six companies were ultra vires and therefore void.

49. That brings me to the second issue to which I referred earlier and which is whether the learned trial judge was correct in the order he made in regard to how the ultra vires payments should be dealt with. He directed the Revenue Commissioners to credit to each of the four companies the difference between the amount of its contribution to the £1.2 million and the amount originally appropriated to it in reduction of what it owed to the Revenue Commissioners. This resulted in the entire of the contributions made by Frederick Inns Ltd, The Rendezvous Ltd and The Graduate Ltd being credited to those companies respectively and to £95,058 being credited to Motels Ltd, this amount being sufficient to discharge the entire of that company’s liability. The only sum which the learned trial judge directed to be repaid was the balance of Motels Ltd’s contribution which came to £651,919.

50. In my opinion the learned trial judge was not correct in directing that the ultra vires payments should be dealt with in this way. I am satisfied that the entire of these payments are held by the Revenue Commissioners on a constructive trust for the four companies and accordingly that they must be repaid to the companies without any deduction being made from them. I would respectfully adopt and apply the principle set out in the judgment of Buckley LJ (with whom Goff and Waller LJJ agreed) in Belmont Finance Corporation Ltd v. Williams Furniture Ltd (No. 2) [1980] 1 All ER 393 at p. 405:-

51. A limited company is of course not a trustee of its own funds: it is their beneficial owner; but in consequence of the fiduciary character of their duties the directors of a limited company are treated as if they were trustees of those funds of the company which are in their hands or under their control, and if they misapply them they commit a breach of trust (In re Lands Allotment Co. [1894] 1 Ch 616 at p. 638, per Lindley and Kay LJJ). So, if the directors of a company in breach of their fiduciary duties misapply the funds of their company so that they come into the hands of some stranger to the trust who receives them with knowledge (actual or constructive) of the breach, he cannot conscientiously retain those funds against the company unless he has some better equity. He becomes a constructive trustee for the company of the misapplied funds. This is stated very clearly by Jessel MR in Russell v. Wakefield Waterworks Co. (1875) LR 20 Eq 474 at p. 479 where he said:-

52. In this Court the money of the company is a trust fund, because it is applicable only to the special purposes of the company in the hands of the agents of the company, and it is in that sense a trust fund applicable by them to those special purposes; and a person taking it from them with notice that it is being applied to other purposes cannot in this Court say that he is not a constructive trustee.

53. This passage was cited with approval by Slade LJ in Rolled Steel Products (Holdings) Ltd v. British Steel Corporation [1986] Ch 246 at p. 298, and he added this comment which is particularly relevant to the present appeal:-

54. Frederick Inns Ltd £ 172,000

55. The Rendezvous Ltd £ 76,506

56. The Graduate Ltd £ 68,517

57. I would therefore allow this appeal and direct that these sums be repaid by the Revenue Commissioners to the respective companies together with interest thereon at the statutory rate from time to time payable on judgment debts from 8 December 1986, being the date of the payment of the final instalment making up the £1.2 million, to the date of repayment.

58. There are two further submissions made on behalf of the Revenue Commissioners which I should deal with before concluding. It was submitted that as the form of the proceedings before the High Court was an application for directions by the official liquidator, it was not appropriate to make an order for the payment of monies and it was submitted as an additional ground why such an order should not be made that it would prevent the Revenue Commissioners from raising the question of set-off.

59. I am satisfied that there is no substance in either of these submissions. As to the first, in the points of claim that were served on behalf of the official liquidator there was a clear claim to the repayment of the £1.2 million and the points of defence did not contain any plea that the court would not have power to direct repayment. In addition the point is not raised in any of the four notices of appeal served on behalf of the Revenue Commissioners. In the circumstances I have no hesitation in rejecting it.

60. As to the submission that the Revenue Commissioners should not be prevented from raising the question of set-off, I am satisfied that this submission must be rejected also. The sums which I have found to be due to be repaid by the Revenue Commissioners to the four companies are due by them in their capacity as constructive trustees for the companies, whereas the sums due to the Revenue Commissioners by the companies are due to them in their personal capacity, and where such is the case there is a want of mutuality and so no set-off is possible. This is clear from the following passage in Robb on Bankruptcy at pp. 133-134:-

61. Set-off existed in bankruptcy long before any such right was given at common law by the statutes of set-off (a); and was allowed with a different object. Set-off at law aimed at preventing cross-actions; but in bankruptcy the object aimed at was to do substantial justice between a debtor to the bankrupt’s estate and that estate, where the debtor was at the same time a creditor upon the estate: for it seemed unjust that in respect of what he owed to the estate the man who was also a creditor should have to pay 20s. in £1, while in respect of what was due to him he would receive no more than a dividend (b). This distinction led to this difference: at law a debt owing by a trustee could be set-off against a debt owing to him, even though the former was a purely personal matter, while the latter was due to him purely in his capacity as a trustee, and was a debt in which he had no beneficial interest. These were legal debts between the same parties which could be enforced by cross-actions, and that was sufficient. But in bankruptcy it was different: there was no reason in justice why a trustee who was a debtor to a bankrupt’s estate should not pay that debt, merely because it so happened that the bankrupt was a debtor to the trust estate in which the trustee had no beneficial interest. . . . So, the rule was evolved that a trustee cannot set-off a debt owed by him to the bankrupt’s estate against a debt owing by that estate to him in his capacity as trustee; because, as was said, ‘there was no mutuality’.

62. Since the bankruptcy rules are applicable in the winding-up of an insolvent company by virtue of s. 284(1) of the Companies Act 1963, this passage is applicable to the situation existing in the present case and rules out any possibility of the Revenue Commissioners being entitled to claim a set-off.