Nature Resorts Ltd v First Citizens Bank Ltd (Trinidad and Tobago)

In my judgment, for the reasons set out below, the grant of the mortgage dated 28 March 2008 which Nature Resorts Ltd (“NRL”) executed over its undeveloped Culloden Estate constituted a contravention of section 56 of the Companies Act of Trinidad and Tobago and that in the events which have happened the Board should declare that the respondent, First Citizens Bank Ltd (“FCB”), cannot enforce the mortgage.

For convenience I will set out sections 56 and 57 again:

“Illicit loans by company

56(1) When circumstances prejudicial to the company exist, the company or any company with which it is affiliated shall not, directly or indirectly, give financial assistance by means of a loan, guarantee or otherwise -

(a)

to a shareholder, director, officer or employee of the company or affiliated company, or to an associate of any such person for any purpose; or

(b)

to any person for the purpose of, or in connection with, a purchase of a share issued or to be issued by the company or a company with which it is affiliated.

(2)

Circumstances prejudicial to the company exist in respect of financial assistance mentioned in subsection (1) when there are reasonable grounds for believing that -

(a)

the company is unable or would, after giving the financial assistance, be unable to pay its liabilities as they become due; or

(b)

the realisable value of the company’s assets, excluding the amount of any financial assistance in the form of a loan and in the form of assets pledged or encumbered to secure a guarantee, would, after giving the financial assistance, be less than the aggregate of the company’s liabilities and stated capital of all classes.

Enforcement of illicit loans

57.

A contract made by a company contrary to section 56 may be enforced by the company or by a lender for value in good faith without notice of the contravention.”

NRL was incorporated on 30 October 2000 under the laws of Trinidad and Tobago. Mr Patrick Dankou was the principal registered holder of shares, and a director. Mr Richard Wheeler, referred to below, was also a director. Mr Dankou wished to sell some of his shares and the second and third defendants (“the Borrowers”) agreed to purchase them. They represented some 75% of his total shareholding. The share purchase agreement dated January 2008 provided that the price would be paid in two instalments, US$275,000 on signing and a further US$2,475,000 before 14 March 2008 (a date which the parties could agree to vary). They required a bank loan to complete the purchase and FCB agreed to lend the Borrowers money to acquire the shares.

One of FCB’s requirements was that NRL would execute a mortgage over the Culloden Estate to secure all moneys which might become due from the Borrowers to FCB. FCB accepts that the moneys to be advanced to the Borrowers were to be used to enable them to purchase shares in NRL (see, for example, para 6 of the witness statement of Mr Derek Ramlal, a senior manager of FCB who was involved in the processing of the Borrowers’ credit application). At the date of the deed of mortgage NRL had no or no significant assets other than the Culloden Estate. Mr Wheeler acted for FCB and he prepared the draft deed of mortgage. There was no covenant for payment in this document but the securing of the amounts due to FCB from the Borrowers on Culloden Estate amounts in law to the grant of a guarantee: See In re Conley, Ex p Trustee v Barclays Bank Ltd; In re Conley, Ex p Trustee v Lloyd’s Bank Ltd [1938] 2 All ER 127; Halsbury’s Laws of England vol 48, 5th ed (2008), para 1152.

The mortgage secured only the liabilities, present and future, of the Borrowers to FCB. FCB made no promise or payment to NRL. The judge made no finding that the “all moneys” charge in the mortgage was in the best interests of NRL as a separate legal entity. She merely found that the transaction enabled Mr Dankou to make payments out of the proceeds of sale to beneficial owners of shares who wished to dispose of their shares and in the payment of certain liabilities of NRL of an aggregate amount which rendered the mortgage over the whole of the Culloden Estate wholly disproportionate. Moreover, the general principle is that a company has no interest in the identity of its shareholders. In addition, the prohibition against giving financial assistance support the rules of company law regarding capital maintenance, which are cardinal in protecting the rights and expectations of creditors in relation to limited liability companies.

As is usual, the facility which FCB extended to the Borrowers was subject to certain conditions. The facility letter from the Bank stated that the following were conditions of the lending:

“Conditions of lending:



First Citizens Bank Ltd reserves the right of first refusal on the villa construction. [H]owever this is not to be construed as a commitment by the bank to finance the project.



The rate of interest on the facility is subject to change without prior notice by the bank based on prevailing market conditions.



The borrowers shall maintain site to a level acceptable to the lender.



Equity of US$825,000 to be injected into acquisition of the property prior to drawing on the banks debt facility.”

These conditions were set out in the facility letter, and when Mr Wheeler was instructed on behalf of FCB to draft the deed of mortgage, he was given a copy of the facility letter.

These conditions show that FCB saw the development of the Culloden Estate as an opportunity for further lending. That lending would be for the development of the Estate. In those circumstances, it is apparent from the conditions that FCB was looking to provide project funding for the Culloden Estate. That may explain why an “all moneys” form of charge was taken. In addition, it would strengthen FCB’s position as potential project lender to NRL if FCB took security over the whole of the Culloden Estate and not simply a part of it. Furthermore, the fact that FCB imposed a condition about the further subscription of shares shows that FCB expected the project to be carried out by NRL and not the Borrowers personally. This condition also shows that FCB had investigated, or had been given information about, the financial position of NRL. Indeed, as Mr Ramlal explained in his witness statement, that was standard practice:

“Commercial due diligence is carried out to determine the defendant’s level of interest and appetite for the particular project having regard to the risk profile of the project. In other words the defendant determines the client’s ability to repay whatever credit facility is granted in respect of the project.”

On the execution of the mortgage, FCB advanced the sum of US$1,925,000 to the Borrowers and they used US$1.5m of the moneys so lent to pay the first instalment of the sale price for the shares that Mr Dankou was then selling to them.

On receipt of those moneys Mr Dankou gave instructions to Mr Wheeler to use part of them to pay liabilities amounting to US$184,279.90. All but some US$34,000 were for amounts due to Mr Dankou. Most of the liabilities were liabilities for taxes, services and directors’ fees for prior years. It is to be inferred that NRL had liabilities of this amount immediately before the mortgage was executed. There is no realistic possibility of showing that the liabilities were materially less than this amount. The balance of US$1,315,720 was paid to three persons, known as the “silent investors”, who had provided 80% of the funds for the acquisition of the Culloden estate and received equitable charges over it from NRL. However, terms of this funding have not been established, and I therefore proceed on the basis that the discharge of this funding did not constitute financial assistance.

On 18 May 2021 the Board invited submissions on the effect of section 56 of the Companies Act which limits the circumstances in which a company may give financial assistance for the purchase of its own shares. The point had been mentioned in the judgment of the Court of Appeal but not pleaded.

There is no suggestion that the law of Trinidad and Tobago in this situation differs from that of England and Wales in any material respect. On this issue, there is a rich seam of case law in England and Wales, and the law is well established.

The court will not act on a contract which is unlawful even if neither party has relied on this point. The court may act on evidence as to illegality even if the point is not pleaded and it simply emerges from the evidence at trial to which no objection is taken.

As regards the evidential basis for a conclusion of illegality, a court in the position of the Board can only conclude that the mortgage was unlawful where the facts, viewed realistically, admit of no other conclusion. Edler v Auerbach [1950] 1 KB 359, (whose complex facts are not material) addresses the law as to the correct approach of the court to questions of fact where there is an unpleaded question as to the unlawfulness of a contract. Devlin J distilled the principles established in earlier cases into four propositions as follows, at pp 371-372:

“I turn now to the objection that I ought not to be considering any illegality except that which is pleaded. I accept the submission of counsel for the defendant that the illegality which I have found depends on the knowledge or intention of the defendant, that this is not pleaded, and that it ought to have been pleaded if it was to be relied on. Counsel then cited North-Western Salt Company Ltd v Electrolytic Alkali Company Ltd [1914] AC 461. That case, I think, authorizes four propositions: first, that, where a contract is ex facie illegal, the court will not enforce it, whether the illegality is pleaded or not; secondly, that, where, as here, the contract is not ex facie illegal, evidence of extraneous circumstances tending to show that it has an illegal object should not be admitted unless the circumstances relied on are pleaded; thirdly, that, where unpleaded facts, which taken by themselves show an illegal object, have been revealed in evidence (because, perhaps, no objection was raised or because they were adduced for some other purpose), the court should not act on them unless it is satisfied that the whole of the relevant circumstances are before it; but, fourthly, that, where the court is satisfied that all the relevant facts are before it and it can see clearly from them that the contract had an illegal object, it may not enforce the contract, whether the facts were pleaded or not.

The last proposition is the most important for the purpose of this case, and I think that it fairly synthesizes the relevant dicta. The court must pronounce on the transaction if, in the words of Viscount Haldane L-C, the ‘case has been completely presented’, or, in Lord Moulton’s words ‘the contract and its setting be fully before the court’. What I have expressed as the third proposition is not so much an exception to the principle as an exemplification of it: the court must be satisfied of the illegality of the transaction; that means that it must be satisfied that it knows all the relevant facts. On any issue which is raised on the pleadings the court may safely assume that the relevant facts will be brought before it by one side or the other; where notice or the issue is not given on the pleadings, there is a danger that that assumption may break down, and the decision in North-Western Salt Company Ltd v Electrolytic Alkali Company Ltd is a warning against overlooking that danger. In Rawlings v General Trading Company [1921] 1 KB 635, 645, Scrutton LJ treated the decision as making it clear ‘that where all the facts are before the court, and it can see clearly that it is contrary to public policy to enforce the agreement, the court should act, though the pleadings do not raise the point’. This dictum is in a dissenting judgment; but the point of dissent was whether the agreement in that case was in restraint of trade or not.”

By “all the facts”, Scrutton LJ clearly meant all the relevant facts. The Board is not prevented from reaching a conclusion as to unlawfulness by the fact that that issue is not pleaded. The Board can examine all the evidence that emerged at trial. But, under Devlin J’s third proposition, the Board must ask itself, before reaching any conclusion as to whether the transaction (here the mortgage) was unlawful, whether there is any realistic possibility of showing that the facts were not as they seem to the Board to be. I would treat this as a matter going to the fairness of the procedure.

This appeal requires the Board to consider both points of evidence and points of law. Nothing in the authorities holds that the court is prevented from deciding points of law in the usual way. The Board does not have to ask whether there is any possibility that another court could have decided the point of law in some other way.

In this case, Mendonça JA gave the judgment of the Court of Appeal (Mendonça, Mohammed and des Vignes JJA). In his judgment, he dealt with the financial point very briefly as follows:

“lt is perfectly lawful for a company to provide financial assistance for the purchase of shares Issued by it. No one has suggested that the transaction was anything but lawful or usual.” (para 63)

Clearly the question of unlawful financial assistance was a cause of concern to the Court of Appeal. I can deal briefly with the Court of Appeal’s reasoning here. Not all financial assistance is lawful. There is a prohibition: see section 56(1). However, the prohibition applies only if section 56(2) applies. So the possibility that section 56(2) applies has to be considered.

The Board does not have a transcript of the proceedings in the Court of Appeal. Counsel who appeared in the Court of Appeal and now appear before us have not indicated that there was any discussion of financial assistance in the hearing before the Court of Appeal.

NRL contends that on the findings of the courts below the mortgage is unlawful and unenforceable by virtue of section 56 even if the undue influence appeal fails, and that this appeal ought to be allowed on this ground as well. It submits that the deed of mortgage falls within the mischief to which section 56 is directed, that section 56(2) which sets out the circumstances in which the prohibition is satisfied applies and that FCB is not a “lender” within section 57 and, even if it was, it was not a lender for value and without notice of the contravention.

FCB contends that the prejudicial circumstances required by section 56 had not arisen, that it was not aware that they had arisen and that in any event it would be unfair for these matters to be raised now when it has not had an opportunity to lead evidence on, or to plead to, them.

Section 56 was based on section 44 of the Canada Business Corporations Act (“CBCA”) which has since been repealed in Canada and which I need not set out. The prohibitions, however, on companies giving financial assistance in connection with the purchase of their shares (to which I will simply refer as “financial assistance”) have a common root even if they have evolved differently. The common root is the recommendation of the Company Law Amendment Committee, known as the Greene Committee. Paragraphs 30 to 31 of the Greene Report (Cmd 2657) (1926) said:

“Company Providing Money for the Purchase of its own Shares

30.

A practice has made its appearance in recent years which we consider to be highly improper. A syndicate agrees to purchase from the existing shareholders sufficient shares to control the company, the purchase money is provided by a temporary loan from a bank for a day or two, the syndicate’s nominees are appointed directors in place of the old board and immediately proceed to lend to the syndicate out of the company’s funds (often without security) the money required to pay off the bank. Thus in effect the company provides money for the purchase of its own shares. This is a typical example although there are, of course, many variations. Such an arrangement appears to us to offend against the spirit if not the letter of the law which prohibits a company from trafficking in its own shares and the practice is open to the gravest abuses.

RECOMMENDATION

31.

We recommend that companies should be prohibited from directly or indirectly providing any financial assistance in connection with a purchase (made or to be made) of their own shares by third persons, whether such assistance takes the form of loan, guarantee, provision of security, or otherwise. This should not apply in the case of companies whose ordinary business includes the lending of money, to money lent in the ordinary course of such business, or to schemes by which a company puts up money in the hands of trustees for purchasing shares of the company to be held for the benefit of employees or to loans direct to employees for the same purpose.”

In practice the resultant prohibitions against financial assistance, section 45 of the Companies Act 1929 and its successor, section 54 of the Companies Act 1948, were found in metaphorical terms to be a patch much larger than the hole they were intended to cover. So much so that the Report of the Company Law Committee (known as the Jenkins Committee) (Cmnd 1749) (1962) famously remarked:

“From the evidence we have received, we are satisfied that section 54, as it is now framed, has proved to be an occasional embarrassment to the honest without being a serious inconvenience to the unscrupulous.” (para 176)

The Jenkins Committee recommended that section 54 be recast. That in due course followed and the current position in the UK is that the prohibition on financial assistance no longer applies to the acquisition of shares in private companies except in the case of private companies which are holding companies of public companies (see further sections 677 to 683 of UK Companies Act 2006, which is the current Companies Act in the UK).

Section 56, in line with section 44 of the CBCA, limits the prohibition to situations where there are prejudicial circumstances, which are then defined. Where there are no prejudicial circumstances, shareholders and creditors are protected appropriately by the director’s duty to act in the company’s best interests. The question whether the directors of NRL fulfilled their fiduciary duty does not arise on the present appeal.

It follows from the above that while the company will be the body which contravenes the prohibition, it is generally the victim of the wrong, not the real culprit (see Belmont Finance Corpn Ltd v Williams Furniture Ltd [1979] Ch 250, 261-262 per Buckley LJ with whom Orr and Goff LJJ agreed).

The concept of “financial assistance” plays a crucial role in the application of section 56(1). Yet, while the forms of proscribed financial assistance are described in section 56(1), there is no definition of financial assistance itself. Moreover, the forms specified conclude (as did section 44 of the CBCA and section 54 of the UK Companies Act 1948) with the words “or otherwise”. Those two words make it clear that there are no limits on what can constitute financial assistance, provided it is assistance which is financial. In this case the financial assistance consisted of the charging of the company’s property in favour of the bank to secure the liabilities (as widely defined) of the Borrowers.

When section 54 of the UK Companies Act 1948 was enacted, it may be that it was thought that everybody knew what financial assistance was but in practice the term has been hotly contested because for instance, under a complex share acquisition, a company may be involved for any number of reasons. Moreover, while the company may be so involved for commercial reasons, it may also be the case that it would not have been involved at all were it not for the share acquisition. On the face of it, even a transaction on commercial terms or the paying of a dividend can constitute financial assistance. Hence there was an active debate about what the words “financial assistance” occurring “in connection with” the share acquisition meant.

In the UK, Parliament has made substantial changes to resolve doubts about what is financial assistance (for example, dividends and de minimis transactions are now excluded). The matter has also been clarified by the seminal decision of Hoffmann J (as he then was) on section 54 of the UK Companies Act 1948 in Charterhouse Investment Trust Ltd v Tempest Diesels Ltd [1986] BCLC 1. The company there had sold tax losses to put itself into a suitable state for its shares to be sold, and the issue was whether this was unlawful financial assistance. In the decision of the Court of Appeal of England and Wales in Chaston v SWP Group plc [2002] EWCA Civ 1999; [2003] 1 BCLC 675, placed before the Board on this appeal, I adopted the approach of Hoffmann J, and placed it in the context of amendments made by the UK Companies Act 1985. The passage (paras 23 to 32) reads:

“For a company to ‘give’ financial assistance, the financial assistance must be given to the purchaser … In order that assistance may be ‘financial’, a net transfer of value is required. In support of this submission, Mr Cunningham relies on a passage from the decision of Hoffmann J in the Charterhouse case (at 10–11):

‘The need to look at the commercial realities means that one cannot consider the surrender letter in isolation. Although it constituted a collateral contract, it was in truth part of a composite transaction under which Tempest both received benefits and assumed burdens. It is necessary to look at this transaction as a whole and decide whether it constituted the giving of financial assistance by Tempest. This must involve the determination of where the net balance of financial advantage lay. …’

In the present case … the assistance was not for the purpose of the acquisition. Assistance which only persuades a purchaser to buy shares is not enough. The authorities draw a distinction between assistance which occurs before a transaction and assistance in the course of a transaction. Mr Cunningham relies in support of this submission on another passage from the Charterhouse case (at 14):

‘… I am not satisfied that [even if the transaction had involved a net transfer of value from Tempest to the Charterhouse group] Tempest could be said to have given financial assistance. The object of the transaction was to put the assets and liabilities of Tempest into a state in which it was acceptable to both parties for them to be sold to Mr Allam for £1. If this process involved the prior extraction by the shareholders of assets from Tempest by means which were intra vires and not a fraud upon creditors, I doubt whether it could be described in any acceptable commercial sense as a giving of financial assistance by the company. It is no more than a change in the character of the assets being sold.’

… The prohibition [against giving financial assistance in connection with a share purchase] was amended in 1948 and reformulated in 1981. The Report of the Company Law Committee (the Jenkins Committee) (Cmnd 1749, 1962) para 180, p 66 expressed the view that it was ‘unwise’ to attempt a precise definition of financial assistance. It is clear from the way in which section 151 and section 152 [of the Companies Act 1985] are drafted that it covers financial assistance in many forms apart from loans (see for example the wide wording of section 152(3)). The general mischief, however, remains the same, namely that the resources of the target company and its subsidiaries should not be used directly or indirectly to assist the purchaser financially to make the acquisition. This may prejudice the interests of the creditors of the target or its group, and the interests of any shareholders who do not accept the offer to acquire their shares or to whom the offer is not made.

… Thus although section 152 proscribes a number of forms of financial assistance, it does not define the words ‘financial assistance’. It is clear from the authorities that what matters is the commercial substance of the transaction: ‘The words [“financial assistance”] have no technical meaning and their frame of reference is the language of ordinary commerce’ (per Hoffmann J in Charterhouse v Tempest Diesels [1986] BCLC 1 at 10, approved by the Court of Appeal in Barclays Bank plc v British & Commonwealth Holdings plc [1996] 1 BCLC 1 at 40). This approach was confirmed by Lord Hoffmann (with whom the other members of the House of Lords agreed) in a recent revenue case: MacNiven (Inspector of Taxes) v Westmoreland Investments Ltd [2001] STC 237 at 254. In the relevant passage, Lord Hoffmann usefully draws a distinction between the expression ‘financial assistance’, which conveys a commercial concept, and other words used in this group of sections which by contrast have a recognised legal meaning …”

The UK Parliament has accepted the approach to financial assistance enunciated by Hoffmann J since “financial assistance” remains undefined in the Companies Acts 1985 to 2006.

It is therefore clear that the concept of financial assistance has substance and impact, and that the question whether a transaction constituted financial assistance cannot be ignored. The concept, as refined by the case law, directs attention to the commercial realities. So, it is unlikely to have included a guarantee which NRL entered into in the ordinary course of its property development business even if it had done that in preparation for a share acquisition. But that was not the case with the mortgage. The mortgage was primarily if not exclusively executed to secure the acquisition borrowing of the Borrowers. The clear “balance of advantage” lay with FCB and the Borrowers, not NRL. There was a net transfer of value from NRL to FCB at the request of the Borrowers.

Two tests for establishing existence of “circumstances prejudicial to the company” (section 56(1))

There are two tests for the prejudicial circumstances which make the prohibition against giving financial assistance in section 56(1) applicable. The first is in section 56(2)(a) and this requires an assessment of commercial insolvency and the second is in section 56(2)(b) and this requires a calculation to ensure that there is no deficiency of “free assets” (which I will call “the free asset deficiency”), ie a deficiency in those assets which did not represent, and were therefore “free” of, the financial assistance for the share acquisition. I will refer to the assets which represented the financial assistance as “the financial assistance-based assets”.

In my judgment, the Board need only consider section 56(2)(b) of the Companies Act because, if that is satisfied, there is no need to consider further section 56(2)(a). It simply would not matter whether NSL passed the commercial insolvency test.

Section 56(2) requires an objective approach to the satisfaction of the tests

For the tests to be satisfied, the Parliament of Trinidad and Tobago has provided that there must be reasonable grounds for believing that the tests in section 56(2) of commercial insolvency and free asset deficiency are satisfied. Unreasonable grounds will not suffice, nor is it sufficient for the calculation to be done by the directors according to their business judgement. So, NRL rightly submits that the calculation is an objective question dependent on whether there are reasonable grounds to believe that the states of affairs in section 56(2) existed (see also XDG Ltd v 1099606 Ont Ltd [2002] OTC 1062, Superior Court of Justice of Ontario (Canada)).

Asset values generally for the purposes of section 56(2)(b)

The valuation of assets is to be of “realisable value” and by implication the date for valuation is immediately before the financial assistance is given.

Section 56(2) directs assets to be taken at their “realisable” value. Company accounts are generally drawn up on a going concern basis so the realisable value is unlikely to be the value appearing in the balance sheet or book value. In any event, even if the accounts are drawn to the date immediately prior to the date on which financial assistance is given, balance sheet values will be historic (unless exceptionally current cost accounting is adopted). There must be a real-world valuation of the sum for which the company could then sell the assets. This figure may be less or more than book value. To ascertain the realisable value, it may be necessary to carry out a special valuation. In this case, the development of the Culloden Estate had scarcely been commenced and so potentially this is a case where realisable value may have been less than the value shown in the balance sheet.

The free asset deficiency calculation involves applying the statutory formula

Under section 56(2)(b), if satisfaction of the statutory test is taken as “S”, the statutory formula for satisfying that test may be expressed as follows:

S may be nil or a negative figure. If it is, the test will inevitably be satisfied. Prejudicial circumstances within the statutory definition exist and the formula does not produce the necessary positive figure. The company cannot lawfully give financial assistance (but enforcement may be possible under section 57).

Taking the components of the formula in turn:

In conclusion on this issue, it was common ground that NRL’s only asset was the Culloden Estate (see para 6 of the witness statement of Mr Ramlal). On the facts of this case, the first component of the formula is thus necessarily nil whatever the value of the Estate. The second component is US$184,479.90. There were bound to be some liabilities and their precise amount, if not that figure, is not material. Therefore, there existed a free asset deficiency and the prohibition in section 56(1) applied. Therefore, the mortgage is unlawful. Under the Companies Act of Trinidad and Tobago, the mortgage can only be enforced in accordance with section 57.

Under the general law, if an agreement to give financial assistance may be performed without breaking the law, it may be enforced unless the object was to break the law: see, in the context of financial assistance, Brady v Brady [1989] AC 755. But in this case, there was no way in which the mortgage could be lawfully given unless the guarantee was limited to specific assets leaving a margin equal to the second element of the formula. But there was no suggestion of this and the court cannot rewrite the parties’ agreement.

The issues here are (1) whether FCB is a “lender” for the purpose of section 57, and, if it is, (2) whether it was a lender for value, and (3) whether it had notice of the contravention.

In my judgment, FCB is plainly not a lender for the purposes of section 57. The ordinary meaning of “lend” is to provide something to someone on the basis or expectation that it will be returned. So, to be a lender for this purpose, it must have lent money to the company or an affiliated company (see the opening words of section 56(1)). There is no company which could fall within the definition in section 5 of the Companies Act of Trinidad and Tobago of affiliate relationship.

The argument that “lender” includes FCB because it lends money to the Borrowers leads to absurdity. Section 57 would serve no purpose if the lender is to some other company since in the case of such a loan, there would be no question of that loan being rendered unenforceable because of section 56 in any event. Further, if “lender” incudes lender to a third party, and the company which has breached section 56(1) has given financial assistance involving a transfer of value, the mischief to which section 56 is directed could be evaded as there would be no test applicable to ensure the propriety of the transaction carried out by the company. Indeed, that result would render the law incoherent.

Furthermore, the word “lender” cannot be interpreted to include the obligee of a guarantee because section 56 plainly makes a distinction between loans and guarantees.

If the word “lender” means in a particular case the lender to a third party, the steps to enforcement must on the ordinary meaning of the statute be taken in the same capacity, ie qua lender to the third party not in some other capacity. So, it does not help FCB to hold that the expression “lender” includes “lender to a third party” in any event. It would still not be able to rely on section 57. It needs to be able to enforce the provisions of the charge given by NRL. We are concerned with a guarantee which takes the form of provision of security only but the same would be true if there was a personal covenant of guarantee. In many cases there will be a personal covenant to guarantee, and the guarantor will also often agree to be liable as a principal and not as surety only. Where that happens, the company is a principal obligor and it would not in that case be an ordinary use of the word “lender” as including the beneficiary of the guarantee (see para 88 above).

I conclude that for these reasons FCB is not in any event a “lender” within the meaning of section 57. In those circumstances it is unnecessary to consider issues (2) or (3) above.

There is no room for permitting enforcement of a transaction which contravenes section 56(1) in any circumstances other than those specifically permitted by section 57. To hold that other parties could take steps would usurp the decision of the Parliament of Trinidad and Tobago, which was to deny enforcement save in the limited circumstances expressly set out. In other words, it is not open to the court, as the Board suggests, to enforce transactions in breach of section 56 under the common law doctrine of Patel v Mirza in ways that go beyond what is permitted by section 57. For the same reason, section 517 could not confer any right on the beneficiary of a guarantee to enforce a transaction which went beyond section 57. The specific provisions of section 57 must override the general provisions of section 517, if they go that far: generalia specialibus non derogant.

FCB contends that it is not fair at this stage of these proceedings for it to be called on to address the question of whether section 56 is contravened and if so whether it had notice of any contravention, since it had no opportunity to plead to these issues or to lead evidence specific to them at trial. But in my judgment, it is protected from any unfairness by the principles that have been developed in the authorities: see Edler v Auerbach, above. Applying those principles, I consider that there is no material factual issue raised by this judgment which depends on an issue on which there was no evidence at trial which was agreed or admitted without challenge. Moreover, fairness only goes to the evidence, and not to questions of law as to which FCB has had sufficient opportunity to prepare submissions.

If I am right on statutory interpretation, it might be said with some force that not to decide on the grounds put forward by the Board the issues that have been raised on sections 56 and 57 does not deal fairly with NRL’s case, it having adopted the position before the Board that section 56 is breached.

I note that before the Board FCB has failed both in writing and orally (even in response to enquiries from the Board) to deal with the question whether it was on notice of the contravention by answering that it was not aware of the contravention. All section 57 requires is lack of notice and notice is different from knowledge. FCB has had a full opportunity to identify evidence which could have been called and has failed to identify any such evidence on any of the issues discussed in this judgment. This supports my conclusion that FCB cannot complain that the process before the Board was unfair because it had not been able to plead to any relevant issue or call any relevant evidence at trial.

The essence of the difference in view between the Board and myself is that the Board concludes that it can dispose of the sections 56 and 57 points in issue on this appeal without deciding them because “it does not appear with sufficient clarity that there is disclosed a contravention of section 56” (para 34 above). I do not agree that the Board can avoid deciding points of law in this case: as explained above and will be amplified below, there is no relevant question of fact which has not been determined or on which unchallenged evidence has not been led without deciding the points of interpretation in a manner contrary to my interpretation. To put it another way, the point cannot be sustained that there are issues of fact to be decided in the courts of Trinidad and Tobago unless the Board also reaches a positive decision that I am wrong on the interpretation I have placed on sections 56 and 57.

The points of statutory interpretation which the Board identifies are principally set out in paras 35 to 38 above, which, as explained, the Board does not decide. The first concerns the “amount” to be deducted under section 56(2)(b). I will not repeat my interpretation of this requirement in the present case (paras 78-81 above). I have explained why I consider that section 56(2)(b) is drafted as it is in relation to guarantees and that what must be deducted is the amount of all the assets which have been subjected to the mortgage, not the amount secured (which may not be ascertainable). The relevant deduction applies only to guarantees. The Board’s interpretation suggested as an alternative is that the “amount” is the amount secured, but neither the legislature nor the Board provides any guidance how or when that amount will be ascertained before the principal debtor defaults and a demand is made under the guarantee.

On my interpretation, contrary to para 36 above, no factual issue is raised by para 24 of the Board’s judgment. I have also explained that, contrary to the Board’s approach, the “amount” of assets is not under section 56(2)(b) limited to the aggregate of balance sheet values.

The Board’s second point relates to the interpretation of the following words in section 57, namely “lender for value in good faith without notice of the contravention”. The Board sets out two possible interpretations and makes no assessment of their merits and it does not decide between them. The Board does not address the points which I have made, including the point that the word “lender” cannot in this context include a lender to a third party (paras 85-91 above and paras 99-101 below).

If “lender” includes a lender to a third party, it would leave the guarantor’s position fundamentally unprotected contrary to the evident intention of the legislature. The court would have to enforce a charge given to secure a guarantee by the company whose shares were being acquired where the guarantee was given by the company whose shares are purchased even though there was no semblance of benefit to the company. The Board hypothesizes that the words “for value in good faith” provide protection to the company whose shares are being purchased because the lenders’ enquiries would have to extend to the financial position of the company. That seems unlikely because it is trite law that “good faith” means only honesty so there is no requirement for the lender to display diligence in making enquiries into the position of the company. It may also be more difficult for the company to be compensated for the consequences of the unlawful transactions if it has to rely on breach for breach of duty and constructive trust. There would therefore under this interpretation be less protection for the company. That raises a real doubt as to whether section 57 could have been intended to have that effect.

Moreover, there is no good reason why the legislature should concern itself here with “value” if the lender is a lender to a third party. If it provided no value to the third party, nothing will be due under any guarantee from the company whose shares are being purchased.

As indicated in para 95 above, the Board makes the point (expressed as its second point in para 34) that “there are factual questions which it would not be just to resolve without the Bank having been given the opportunity to address them in the appropriate tribunal of fact in Trinidad and Tobago”. This is in my respectful judgment not the case unless the Board has first decided the issues of interpretation to ascertain whether any factual issue arises. To take the “amount” point, the issue of law comes first. The question of fact simply does not arise unless my interpretation of the relevant words “the amount of any financial assistance … in the form of assets pledged or encumbered to secure a guarantee” is held to be wrong. If the point were decided in agreement with me, no factual question could arise as to the amount. The same is true with necessary modification in relation to the interpretation of the words “lender for value in good faith without notice of the contravention”.

Likewise, if the Board were to hold in agreement with me that “lender” means “lender to the company” it would be obvious without any further evidence that FCB could not take advantage of section 57 in any event.

Logically, therefore, the points of statutory interpretation must be considered first before it can be said that any factual issue arises.

Of course, the Board would be in a better position if the matter had been raised below and the Court of Appeal of Trinidad and Tobago had given more reasons for its conclusions. But the point has been fully argued with the assistance of local attorneys and no reference has been made to cases decided in Trinidad and Tobago. It is correct as the Board states, that the two expressions - “amount” (in connection with guarantees) and “lender for value in good faith without notice of the contravention” - do not appear in the UK financial assistance provisions. However, sections 56 and 57 share the same roots as current UK law. The primary concept is “financial assistance”, which the UK courts have considered in some detail. In addition, in this judgment, I have made points by reference to the UK provisions. There are other parallels. For instance, under the UK provisions some forms of financial assistance are lawful where there is no material net asset reduction. In addition, there are some parallel aims in the legislative policy between both jurisdictions.

The Board’s further point in para 34 is that to decide the illegality issue would be unfair to FCB because it is raised so late. But it can hardly be unfair to FCB to decide the issue if there is no additional factual issue. Even if there were, FCB has not identified any point on which it would wish to adduce relevant evidence. If it had done so, then different considerations would be likely to apply.

The Board expresses the view that “the issue of illegality is one that the company can choose to raise, or not raise, at its option.” (para 34 above, passage beginning “Thirdly”). That is not in my judgment a correct reading of section 57. It is a narrow provision which cannot be generalised into a proposition that a company can always take steps to enforce a transaction which is unlawful financial assistance. All that section 57 does is to allow the company to enforce contracts made in breach of section 56(1). As a small example, the company could not seek an order of the court compelling a person to accept a gift of tax losses or other assets which it had gratuitously made, and which constituted financial assistance, or take proceedings in tort against the other party to the transaction in respect of unlawful financial assistance.

I agree with the Board (para 34 above) that it does not follow that, just because under section 57 the company is permitted to enforce contractual rights in consequence of a breach of section 56(1), there is no illegality if the company fails to take the point that the transaction is unlawful when financial assistance is sought to be enforced against it. The reason for that is that the enforcement of a right of the company by the company is completely different from allowing the beneficiary of a guarantee to enforce its rights against the company. Enforcing a right conveys some element of benefit to the company whereas succumbing to the enforcement by someone else does not.

In any event the illegality is not cured when section 57 is used: the transaction remains contrary to section 56 and the court’s powers are limited to those in section 57. The attitude of the company is therefore nothing to the point under these provisions. The reason for this is obvious: the company may by then be under the control of those in whose personal interests it is that the guarantee or other financial assistance should be enforced against it. To hold otherwise on the company’s failure to act would fundamentally undermine the protection given to companies and their creditors through section 56.

Therefore, I respectfully do not find persuasive the point made by the Board that, as NRL did not take the illegality point in the courts below and has only taken this point before the Board, that “not least where the claim is one against the company, it may be thought to indicate that, to avoid procedural unfairness to the other party, caution should be exercised before a court does so [ie raises a point of illegality]”. But the point has now been raised, and when the point is raised that a transaction is illegal, courts must ensure that they are not aiding the enforcement of an illegal transaction. It must also be remembered that in breaches of section 56 the victim is the company and not the lender to a third party. The order which I would make does not involve procedural unfairness for the reasons that I have already given.

The fact that the points of law are not “straightforward” (above, para 42) also does not mean that the Board cannot or should not decide them.

I would allow this appeal. It clearly appears from the evidence that the transaction constituted by the deed of mortgage amounted to unlawful financial assistance within the meaning of section 56. The prohibition against giving such financial assistance was triggered by the deficiency of assets which resulted from applying the statutory formula in section 56(2)(b). FCB cannot rely on section 57 because so far as NRL was concerned it was not a lender at all for the purposes of that provision. It is unnecessary to consider any further question as to whether FCB could have brought itself within the category of a lender for value and without notice.

The Board should not lend its assistance to FCB to enforce the mortgage. It is important that the Court should see that the law is observed. It follows that it is not necessary to decide any other issue arising on this appeal. The appeal should be allowed.