Section 303
REGISTER
OF DIRECTORS
[1957] 27 COMP. CAS. 388 (AJMER)
v.
State.
SHARMA J.C.
MAY 21, 1956
The Krishna Mills Ltd., Beawar, is a company incorporated under the Indian Companies Act. Shri Man Mal Bakliwal is the manager of the said Mills. Sarva Shri Goverdhan Das Kabra and Achaldas were two of the directors. They were due to retire by rotation, but were rejected at the annual general meeting of the company held on 22, September, 1954. Their names were not notified to the Registrar under section 87(2) of the Indian Companies Act, 1913.
The
case for the prosecution in brief was
that by reason of not notifying the change in the directors, the
provisions of section 87(2) of the Indian Companies Act were contravened.
The
applicants pleaded not guilty. The contention was that there was no change in
the, directors as the same two directors were re-elected.
The
learned Magistrate held there was a change and it was necessary to notify it
under section 87(2) of the Indian Companies Act.
The
learned Sessions judge has made the references on two grounds:
(i)
as the same directors were re‑elected,
There was no change and (ii) the default, if any, was not wilful.
Under section 87(2) a company is required to Keep at its registered office a register of its directors, managers and managing agents containing with respect to each of them his present name in full, any former name or surname in full, his usual residential address, his nationality and if he holds any other directorship or directorships, section 87(2) says that the company shall within the periods respectively mentioned in this sub-section send to the Registrar a return in the prescribed form containing the particulars specified in the said register and a notification in the prescribed form of any change among its directors, managers or managing agents or in any of the particulars contained in the register. The question is if the re-election of the same directors is, any change among the directors. It is a cardinal principle of interpretation that the words in a statute should ordinarily be given their plain and dictionary meaning.
The
dictionary meaning of the word "change" is "to alter" or
"make different." If the, same directors are re-elected, there is no
change in the plain and dictionary meaning of the word, as obviously the
directors are neither changed nor made different. A stress on behalf of the State
was laid on Form No. XIII Column No. 7 of which is "date of appointment of
a director which is the date of his re-election if any should be
mentioned." But the date of appointment has reference to the first
appointment of a director as is clearly borne out by the second apart of
section 87(2) which says that the period within which the said return is to be
sent shall be a period of fourteen days from the appointment of the first
directors of the company and the period within which the said notification of a
change is to be sent shall be fourteen days from the happening thereof. A form
although prescribed by statute cannot control the specific language of a
particular section of the Act.
I agree with the learned Sessions Judge that by re-election of the same directors there has been no change in the directorship and it was not necessary to send to the Registrar a notification under section 87(2).
The
second ground in support of the reference has no force. Where a statute
requires a certain thing to be done and provides for penalties in case there is
a default, the default itself entails the penalties and its is immaterial
whether it was wilful or otherwise.
The references are accepted and the conviction and the sentences of the applicants are set aside.
[1943] 13 COMP. CAS. 50 (MAD.)
v.
Coimbatore National Bank Ltd.
HORWILL, J.
NOVEMBER 26, 1941
Appellant in person.
N. Somasundaram, for the Respondent.
The Assistant Registrar of Joint Stock Companies, Coimbatore, preferred a
complaint against the Coimbatore National Bank, Limited, of that town for not
complying with a requirement of Section 87(2) of the Indian Companies Act that
particulars of any change in the directorships held by any of its directors
should be reported to the Registrar within fourteen days of the change. The
sub-Divisional Magistrate of Coimbatore who tried the case, found that a
director by name Ponniah Goundar had ceased to be the director of another company
and that this fact had not been reported. He nevertheless acquitted the Bank,
saying that he was unable to understand how a company is to know of such a
change unless the director concerned intimates the change to the company. He
held that as there was no evidence to show that the company was aware of the
change, the company was not guilty of the offence with which it was charged.
The Crown has appealed.
I pointed out in The Public Prosecutor v. B. V. A. Lury and Company' in
connection with the interpretation of Section 32(5) of the Act, that one cannot
impute intention and knowledge to an entity such as a company, that it is only
a human being who can be said to have knowledge and intention, and that on a
grammatical construction of Section 32(5) this knowledge, wilful intention, has
only to be proved where the charge is against an officer of the company, and
that the company is liable for failing to comply with the requirements of the
section even though none of its officers may be. Section 87(4) says that if
default is made in complying with sub-section (1) or sub-section (2) of this
section (Section 87), the company and every officer of the company who is
knowingly and wilfully in default shall be liable to a fine of fifty rupees.
"Who" can refer only to an officer of the company and not to the
company; and as I pointed out in The Public Prosecutor v. B. V. A. Lury and
Company
"knowingly and wilfully" can only relate to a person and not to a
company. So it is unnecessary for the prosecution to prove that anybody
connected with the company had knowledge of the change.
Mr. Somasundaram seeks to make a distinction between facts which are
available from the records of the company and facts which are not. For example,
where certain annual returns have to be submitted to the Registrar and there is
some error in those returns, such an error may be and generally is clear from
the records of the company. On the other hand, if we assume that Ponniah
Goundar did not officially inform the accused company that he had resigned from
one of his directorships, the company would not have been in a position to send
the information to the Registrar. A clear distinction between the two sets of
cases can no doubt be made; but Section 87 does not make that distinction
Sub-section (2) of Section 87 says:
"The company shall within the periods respectively mentioned in this
sub-section send to the Registrar a return in the prescribed form……………and a
notification in the prescribed form of any change among its directors,
managers, or managing agents or in any of the particulars contained in the
register."
In the following paragraph the periods are laid down, and it is stated
that the period within which such notification of a change is to be sent shall
be fourteen days from the happening thereof. It is argued from the wording of
the first paragraph in sub-section (2) that all that the company is expected to
do is to notify a change in the register. The section however says that the
company has to notify a change in any of the particulars contained in the
register; and the particular in question is that of other directorships held by
the directors. If Mr. Somasundaram's contention were correct, then there would
be a premium upon negligence by companies. Even though a notice had been sent
to the company of a change in directorships or in other particulars, the
company would be free of any penalty as long as it did not make a change in the
register; so that it would obviously be to the great advantage of the company
if it did not take the trouble to keep its registers up to date. Where a
statutory duty is cast upon a company to do something, it must take steps to
see that it is aware of all the changes that it has to notify to the Registrar,
and if it fails to do so, then the company becomes liable for the default. The
scheme of penalties in the Act makes the company liable for every default
without proof of negligence. If it were otherwise, the enforcement of the
provisions of the Act would be impossible.
The acquittal is therefore set aside and the company convicted of the
offence with which it was charged and sentenced to pay a fine of Rs. 25.
[1936] 6 COMP.
CAS. 90 (BOM.)
v.
E.D. Sassoon & Co. Ltd
BEAUMONT, C.J.
AND WADIA, J.
SEPTEMBER 18,
1935
JUDGMENT
Kania, J.—The first question which arises is as to the power of the
company and its directors to borrow the money from M.T. Ltd. From the
memorandum of association of the company it is clear that there is no limit to
the borrowing power of the company as such for its business. The terms of
Clause 3 (f) further authorize the company to mortgage any property or to
secure the re-payment of any money borrowed by it in any manner as the company
should think fit. As to the power of the directors to borrow money the matter
has become complicated because certain articles of association were drawn up
when the company was formed and under which the directors were given very wide
and general powers, but these articles were not filed with the Registrar, with
the result that the articles of association contained in the schedule to the
Indian Companies Act govern the company. Article 73 is the relevant article to
be considered on this point. That article runs as follows :
"The amount for the time being remaining undischarged of moneys
borrowed or raised by the directors for the purposes of the company (otherwise
than by the issue of share capital) shall not at any time exceed the issued
share capital of the company without the sanction of the company in general
meeting."
The question for consideration is what is the proper construction of this
article. It is contended on behalf of Sassoons that the words "for the
time being" mean "when the claim is made." It is contended that
whatever be the initial borrowing by the directors that is not a matter to be
inquired into by the Court. I do not think the terms of the article justify
such a narrow construction. The article in terms fixes the limit at any time
and although the validity of the claim may have to be considered in respect of
the amount claimed on the date of liquidation I am unable to consider that the
article in terms refers only to that point of time and no other.
On behalf of the claimants it is contended that the article authorizes
the directors to borrow money and the company as such has unlimited power of
borrowing. Therefore, when the directors borrow money in excess of the amount
of the issued capital the lender is entitled to presume that the necessary
formalities authorizing the directors to borrow money have been gone through,
and the question of going through such formalities is a matter of internal
management of the company. In this connection strong reliance is placed on the
decision of Royal British Bank v. Turquand. In that case the plaintiff claimed
against the defendants, a joint stock company, on a bond signed by two directors
under the seal of the company whereby the company acknowledged themselves to be
bound to the plaintiff, in £ 2,000. The plea set out the condition which
appeared to be for securing to the plaintiff, who was a banker, such sum as the
company should to the amount of £1,000 owe to the plaintiff on the balance of
the account current, from time to time and for indemnifying plaintiff to that
amount from losses incurred by reason of the account between plaintiff and
defendants. The plea further set out clauses of the registered deed of
settlement, by which it appeared that the directors were authorized, under
certain circumstances, to give bills, notes, bonds or mortgages; and one clause
provided that the directors might borrow on bonds such sums as should, from
time to time, by a general resolution of the company, be authorized to be
borrowed. The plea averred that there had been no such resolution authorizing
the making of the bond, and that it was given without the authority of the
share-holders. The replication set out the deed of settlement further, by which
it appeared that the company was formed for the purpose of carrying on mining
operations and forming a railway. On demurrers to the plea and replication the
plaintiff was held entitled to judgment, the oblige having, on the facts
alleged, a right to presume that there had been a resolution at a general
meeting, authorizing the borrowing of the money on bond. The facts set out in
the judgment show that at a general meeting of the company it was resolved that
the directors of the company should be and they were thereby authorized to
borrow on bond such sums for such periods and at such rates of interest as they
might deem expedient, in accordance with the deed of settlement and the Act of
Parliament; and the said resolution had remained unrescinded. In the judgment
Jervis, C. J., observed as follows (p. 331):
"My impression is………….that the resolution set forth in the
replication goes far enough to satisfy the requisites of the deed of
settlement. The deed allows the directors to borrow on bond such sum or sums of
money as shall from time to time, by a resolution passed at a general meeting
of the company, be authorized to be borrowed: and the replication shows a
resolution, passed at a general meeting, authorizing the directors to borrow on
bond such sums for such periods and at such rates of interest as they might
deem expedient, in accordance with the deed of settlement and the Act of
Parliament; but the resolution does not otherwise define the amount to be
borrowed. That seems to me enough. If that be so, the other question does not
arise. But whether it be so or not we need not decide; for it seems to us that
the plea, whether we consider it as a confession and avoidance or a special non
est factum, does not raise any objection to this advance as against the
company. We may now take for granted that the dealings with these companies are
not like dealings with other partnerships, and that the parties dealing with
them are bound to read the statute and the deed of settlement. But they are not
bound to do more. And the party here, on reading the deed of settlement, would
find not a prohibition from borrowing, but a permission to do so on certain
conditions. Finding that the authority might be made complete, by a resolution,
he would have a right to infer the fact of a resolution authorizing that which
on the face of the document appeared to be legitimately done."
The facts thus show that the directors could borrow on bonds such sums,
as from time to time by a general resolution of the company they may be
authorized, and a resolution having been passed, the lender was not called upon
to make any other inquiry, but would be entitled to rely on what appeared to be
done on the face of the document as legitimately done. The judgment, however,
makes clear the distinction between a case where the directors are permitted to
borrow on certain conditions as contrasted with the case of a prohibition from
borrowing contained in the article. In other words, if the article authorizing
the directors to borrow is so worded as to give them authority or permission to
borrow on certain conditions, and ostensibly those conditions were fulfilled,
the lender would be entitled to act on the footing that the necessary steps
were taken, and the way in which the authority is given is a matter of the
internal management of the company. On the other hand, as the judgment points
out, when there is an express prohibition to borrow beyond a certain limit
contained in the article itself, the lender cannot rely on the principle of
this ease but has to satisfy himself that in accordance with the terms of the
article the prohibition does not stand in the way of the directors borrowing
the money.
This distinction is made clear and accepted by the decision in Irvine v.
Union Bank of Australia. In that case by Article 50 of the articles of
association it was provided that the directors' power of borrowing sums on the
credit of the company "should not exceed in the aggregate, as an existing
debt, at the same time, one-half of the then actually paid up capital."
The articles contained no restriction upon the company's power of borrowing and
the directors' power to borrow was capable of being extended under Article 31,
by one half of the votes of all the share-holders given at a general meeting.
In construing the terms of this article their Lordships of the Privy Council
held that it was very clearly beyond the authority of the directors to borrow,
upon the credit of the company, and sum exceeding one-half of the actually paid up capital of the company. There is no
doubt that the authority of the directors, limited as it was by the article,
was capable of being extended under the provisions of Article 31. But by that
article one-half of the votes of the shareholders given at a general meeting
called for the purpose was necessary. It was not contended that the authority
of the directors to borrow was ever extended at a general meeting of the
share-holders held for the purpose and therefore the lender was not entitled to
presume that the directors had any authority to borrow beyond the prescribed
limits. In the course of the judgment their Lordships considered the
applicability of Royal British Bank v. Turquand and observed as follows:
"The case of Royal British
Bank v. Turquand was decided with reference to a company registered under 7 and
8 Viet., C. 110, and Jervis, C. J., remarked that the lender, finding that the
authority might have been made complete by a resolution would have had a right
to infer the fact of a resolution authorizing that which on the face of the
document appeared to be legitimately done. In the present case, however, the
bank would have found that, by the articles of association the directors were
expressly restricted from borrowing beyond a certain amount, and they must have
known that if the general powers vested in the directors by Article 50 had been
extended or enlarged by a resolution of a general meeting of the share-holders
under the provisions of Section 31, a copy of that resolution ought, in regular
course, to have been forwarded to the Registrar of Joint Stock Companies, in
pursuance of Section 53 of the Companies Act, and would have been found amongst
his records. Their Lordships are of opinion that the learned Recorder was correct
in holding that this case is different from that of Royal British Bank v.
Turquand:
Article 73 of the articles of
association contained in Table A is similar in terms to the article in Irvine
v. Union Bank of Australia and supports the contention that when there is a
prohibition against borrowing contained in the article, it is not a case of
internal management as decided in Royal British Bank v. Turquand. Under the
circumstances, and it being common ground that no resolution at any general
meeting of the company was passed, the directors were not authorized to borrow money
beyond the amount of the issued share capital of the company. As the original
dealings giving rise to the debt were between M.T. Ltd. and the company, it
would be convenient to consider the claim of M.T. Ltd. first. Their claim is a
money claim. Relying on Irvine v. Union Batik of Australia, the liquidator
contends that if the borrowing is ultra vires the directors, no debt binding on
the company is created except when the company ratifies it. It is urged that
there is no valid ratification of the borrowing because the attention of the
shareholders was never expressly drawn to the fact that the directors having no
authority to borrow in excess, had so borrowed and at the meeting they were
called upon to confirm that unauthorized borrowing of the directors. In this
connection also the liquidator relies on the observations in Irvine v. Union
Bank of Australia to the effect that Royal British Bank v. Turquand does not
apply. The liquidator further relies on the decision in Sinclair v. Brougham in
which it was held that if a company is not authorized to borrow any money and
if money in fact is borrowed, no claim can be maintained by the lender against
the company on the footing either of debt or of money had and received. In that
case, Viscount Haldane, L.C., while considering an unauthorized borrowing by a
company which was a statutory society and had no power to borrow, observed as
follows:
"If it be outside the power of a statutory society to enter into the
relation of debtor and creditor in a particular transaction, the only possible
remedy for the person who has paid the money would, on principle, appear to be
one in rent and not in personam, a claim to follow and recover specifically any
money which could be earmarked as never having ceased to be his property. To
hold that a remedy will lie in personam against a statutory society, which by
hypothesis cannot in the case in question have become a debtor or entered into
a contract for repayment, is to strike at the root of the doctrine of ultra
vires as established in the jurisprudence of this country. That doctrine
belongs to substantive law and is the outcome of statute, and cannot be made
different by any choice of form in procedure.''
The Lord Chancellor, after examining in detail how actions for money had
and received came into existence, held that none of the underlying principles
could be invoked as an authority for the
proposition that an action for money had and received would have lain in a case
of borrowing ultra vires the company. The other Law Lords expressed concurrent
opinions on this point. On behalf of M.T. Ltd., on the other hand, it is
contended that the whole argument of the liquidator was fallacious and was
based on a misconception of the situation. The principles laid down and the
opinions pronounced in Sinclair v. Brougham are all based on the central fact
that the borrowing by the society itself was ultra vires. In my opinion the
contention of the liquidator in this connection is wrong. According to the
general principles of law when an agent borrows money for a principal, without
the authority of the principal, but if the principal takes the benefit of the
money so borrowed or when the money so borrowed has gone into the coffers of
the principal, the law implies a promise to repay. The lender has not advanced
the money as a gift but has given them as a loan, and the principal having
received the benefit of the money, the law implies a promise to re-pay. This
view is supported by the decisions in Reid v. Rigby & Co. and Bannatyne v.
MacIver. There appears to be nothing in law which makes this principle
inapplicable to the case of a joint stock company when the borrowing power of
the company itself is unlimited. The position, in my opinion, would be that the
principal (the company) through its agents (the directors or the managing
agents) had borrowed money which the principal had not authorized the agents to
borrow. However, the money having been borrowed and used for the benefit of the
principal, either in paying its debts or for its legitimate business, I do not
think the company can repudiate its liability to repay on the ground that the
agents had no authority from the company to borrow. In my opinion, when these
facts are established, a claim on the footing of money had and received would
be maintainable. The decision in Sinclair v. Brougham is clearly based on the
fundamental fact that the society was prohibited by statute from borrowing any
money and therefore any borrowing by the company, i.e,, the principal itself
would be ultra vires. The observations of Lord Haldane, L.C., apply, in my
opinion, to that set of facts alone.
I am further supported in this
view by the decision in Troup's case, where it was held that when the directors
of a company have no power to borrow, a person lending money to the
company cannot enforce payment of it against the company unless it had been
bona fide applied to the purposes of the company. In that case the directors
having no borrowing powers, being pressed for money by their contractor,
obtained for him, on credit, £2,000 at a banker's upon their guarantee. The
contractor afterwards agreed to abandon the plant, etc., to the company, on
receiving £600 and being indemnified against the banker's claim. Subsequently
to this, the secretary of the company, with the sanction of the directors,
borrowed £500 in his own name for the company, which was applied in paying the
bankers and a judgment debt of the company. The company had the benefit of the
plant, etc. It was held that the secretary could recover the amount from the
company with interest. The principle of that case was accepted and followed in
Hoare's Case. There a sum of money had been borrowed from the lender by H, the
secretary of a company, and for which three of its directors had become
sureties. The directors had no borrowing powers, but it was admitted that the
money had been applied for the benefit of the company. Judgment had been signed
against H for the debt, and he applied to prove the amount against the company
which was being wound up. It was held that money borrowed for the company and
bona fide applied for its benefit could be recovered from the company although
the directors had no borrowing powers.
In British and American Telegraph Co. v. Albion Bank, the plaintiffs, a
telegraph company, invited applications for shares, received some in the
ordinary way and allotted some on which deposits were paid. The number allotted
was, however, insufficient to procure a settling day on the stock exchange, and
some of the directors of the company, S the promoter, and C the defendants'
manager, agreed, in order that the defendants might certify to the committee of
the stock exchange the requisite amount of shares to have been subscribed, that
an account should be opened in S's name with the defendants, and another
account in the plaintiff's name; that the plaintiffs should guarantee to the
defendants the payment of any money drawn by S, and charge with such repayment
any balance in their favour; that the defendants should have a bonus of £ 600,
and C, £ 1,000; that S should get persons to apply for shares, which would be
duly allotted, and should draw on his account for, and pay into the plaintiffs'
account the requisite deposits, taking blank transfers for the pretended
allottees. This plan was carried out. Accounts were opened, that in the
plaintiff's name with £ 1,500 really paid in ; that in 5's name with a loan of
£ 1,500 from the defendants. Same applications were obtained by S and shares
allotted to them. S thereupon drew on his account, and with the proceeds paid
the requisite deposits into the plaintiffs' account. The pretended allottees,
immediately after the shares were allotted, handed blank transfers to S.
Finally the plaintiffs' account with the defendant stood with a credit of £
24,505 and odd, made up of £1,500 really paid in and the pretended deposits.
5's account stood with a debit of £24,506 and odd made up of the sums he had
drawn and the £1,500 loan. No settling day was ever granted and the plaintiffs'
company afterwards went into liquidation under a winding-up order. A suit was
filed to recover the whole amount to the credit of the plaintiffs. The
defendants paid the bonus of £ 600 into Court, and denied liability as to the
residue. It is apparent on the facts that the directors and parties were not
authorized to do the acts for the company and the same were not therefore
binding on the company. It was, however, held that the plaintiffs were entitled
to the re-payment of £ 1,500 actually paid by them to the defendants but to no
more. This case, in my opinion, is a clear authority for the proposition that
money actually received by the company and used for its business can be
recovered by the claimants. In Halsbury's Laws of England (Edn. 2,) Vol. 5, at
p. 314, this case is relied upon for the following proposition:
"Apart from ratification, the company will be answerable for any
property which has come into its possession through the unauthorized acts of
the directors."
It is argued on behalf of the liquidator that Irvine v. Union Bank of
Australia decides to the contrary. On a closer examination of the judgment in
that case, however, I am unable to agree with this contention. There, on
December 23, 1867, the directors of the O.R. Company obtained from the bank a
letter of credit, No. 150, for £ 10,000, and on September 11, 1868, a letter
No, 141 for £ 5,000, and stated those facts in their report of October 29,
1868, which was ratified at the half yearly meeting of that date. Letter No.
150 expired on March 29,1869, but was renewed. On September 9, 1869, the
directors obtained another letter of credit, No. 153, for £ 5,000, but this act
was never assented to or ratified by the shareholders. In a suit by the
respondent bank to enforce against the appellant, as the assignee of the right,
title and interest of the O.R. Company, an equitable mortgage which had been
granted by the company to secure advances made by the bank, which, with
interest, amounted to £15,296 it appeared that half of the actually paid up
capital was never more than £8,550; that at the end of 1870 the balance due to
the bank was £8; and that the sums claimed in this suit had been advanced in
February, 1871, viz., £10,000 under letter No. 150, and £ 5,000 under letter
No. 153. The trial Court passed a decree declaring a charge for £14,984-16-8,
in favour of the bank and directed a sale in default. The property; which
originally belonged to O.R. Company, was purchased by the appellant on May 31,
1872, at a sale by auction in execution of three decrees obtained by the Bank
of Bengal and others against O.R. Company. At the date of the auction sale the
title deeds of the property were held by the respondent bank as equitable
mortgagees by deposit. The question raised in the appeal was : " What is
the sum for which the respondent bank is entitled to a charge upon the
property? " The bank contended that it was entitled to a charge for the
whole amount owing to it by the O.R. Company. It was contended by the appellant
that the charge was limited to half the amount of the actually paid-up capital
of the company, because Article 50 of the articles of association prohibited
the directors from borrowing more than half the amount of paid-up capital of
the company. The whole judgment shows that the question of the liability of
O.R. Company, for the balance of the debt, which was disallowed as a charge
against the property, was not the point in issue before the Privy Council.
Towards the end of the judgment it is specifically pointed out that—
"for the above
reasons their Lordships are of the opinion that the plaintiffs are not
entitled, as against the defendant, to a charge on the property beyond the
amount of one half of £17,100 the paid-up capital of the company."
The form of the order finally made also makes this clear. It was as
allows
"Their Lordships will, therefore, further advise Her Majesty that it
be ordered that the costs of the suit in the lower Court, both of the
plaintiffs and of the defendant respectively, as taxed by the lower Court, be
paid to the said parties respectively out of the proceeds of the sale of the
property which are now in Court, and that out of the balance of such proceeds
there be paid to the plaintiffs a sum of rupees equivalent, at the rate of exchange
current between Rangoon and England at the time of filing of the suit, to the
principal sum of £8,550, with interest thereon, at the rate of 8 per cent, from
October 5, 1872 to the date of the sale of the property, together with a
proportionate part of the accumulations, if any, of the proceeds of the sale
and that the residue of the proceeds and of the accumulations thereon, if any,
be paid to the defendant appellant."
The O.R. Company, who were parties to the original suit had not appeared
before the Privy Council at all. The question of directing an inquiry as to
what portion was bona fide used for the benefit of the company is not
considered, nor is the question of a tracting order discussed. I am, therefore,
unable to consider this decision as overriding the general principle of law
under which a principal is liable for what he actually receives, when his own
powers of borrowing or receiving are not limited. In the present case the
balance sheets and the accounts put in show that the amount borrowed by the
company from M.T. Ltd. was utilized for the business of company and the results
of the dealings were submitted every year to the share holders. It is not
suggested on behalf of the liquidator that any business done by his company was
ultra vires the company. Therefore the money received by the company from M.T.
Ltd., through the directors and managing agents was bona fide utilized for the
business of the company and the company has received the benefit thereof. I,
therefore, hold that for the reasons mentioned above M.T. Ltd. are entitled to
claim from the company the balance of the amount advanced by them. It is
further urged on behalf of M.T. Ltd., that in any event the company is liable
because, however unauthorized the directors' borrowings be, the share holders
of the company were aware of this and have ratified the same by their
acquiescence. In this connection M.T. Ltd., rely on the balance-sheets prepared
by the directors and passed by the share-holders, year after year, at their
annual general meetings from 1921 onwards. As I have pointed out, these balance
sheets clearly show the amount due by the company to M.T. Ltd., from year to
year, and it is not disputed that those balance-sheets were duly passed by the
share-holders.
In In re The Magdalena Steam Navigation Co. by the deed of settlement of
a joint stock company power was given to a meeting of two-thirds in number and
value of the share-holders, to authorize the directors to borrow money upon
debentures; and at a meeting of shareholding less than two-thirds of the shares
it was resolved that the directors should be authorized to borrow money on
debentures. The directors accordingly borrowed on debentures diverse sums of
money, which were applied in discharging the debts and liabilities of the
company. The debenture debts regularly appeared in the reports of the directors
which were confirmed at the annual general meeting of the share-holders, and
interest was regularly paid, with the consent of share-holders, until the
winding up of the company, a period of 2 years. It was held that though the
debentures were clearly improperly issued, yet as the money had been raised and
applied for the benefit of the company, and the share-holders had acquiesced
for two years, it was too late to dispute their validity. The report shows that
the holders of the debentures themselves were present at the meeting of the
shareholders, which passed the resolution, and were therefore, conscious of the
irregularity of the meeting. It is" urged that this case distinctly
supports the contention of M.T. Ltd., because the balance-sheets showed the
amount from time to time due by the company to M.T. Ltd., and also showed the
amounts from time to time paid by way of interest to M.T. Ltd. in respect of
these borrowings. It is pointed out that at no time before the liquidation any
shareholder had contended that the borrowings were not binding on the company.
On behalf of the liquidator reliance is placed on the decision in Houghton
& Co. v. Nolhard, Lowe and Wills where it was held that although a person
who contracts with an individual director or servant of a company, knowing that
the board of directors had powers to delegate its authority to such an
individual, may under certain circumstances assume that that power of delegation
had been exercised and that he may safely deal with the individual in question
as representing the company, he cannot rely on the supposed exercise of such
power if he did not know of the existence of the power at the time he made the
contract. It was also held that the doctrine of constructive notice operates
adversely to a person who neglects to inquire; it does not entitle such a
person to claim for his own advantage to be treated as having knowledge of the
facts which an inquiry would have disclosed. In my opinion the contention of
M.T. Ltd. in this connection is unsound. In order to establish a case of
ratification it appears to be essential that the party ratifying should be
conscious that an act beyond the authority of the agent had been done, and
further after notice of that fact the party consciously by an overt act agreed
to be bound by it or by acquiescence in the situation arising thereafter
allowed the business to continue. It either event it appears that consciousness
of the act done by the agent without authority must be proved, and, secondly,
it should be proved that, after notice of such unauthorized act, the principal
adopted the transaction.
The question of adopting the transaction by the shareholders passing the
balance-sheets has been considered in some English cases. In Houldsworth v.
Evans the question indirectly came to be considered and Lord Cairns, L. C, in
considering this point held that the share-holders who had agreed to the scheme
had no knowledge that the scheme which they were adopting was the scheme
originally put forward. In other words that case shows that in order to
establish a case of ratification it was essential to prove in the first
instance that the alleged assent was given on proof of consciousness of the act
having been done without authority or after full knowledge of the transaction
which was being assented to. Even in the dissenting judgment of Lord Cranworih,
who held that when the directors bad exceeded their legal powers and the
share-holders took no steps in the matter but allowed the things done to remain
unimpeached for years they must be taken to have retrospectively sanctioned
what had been done, the fact that the share-holders were aware that the
directors had been exceeding their legal powers was emphasized. In In re
Railway and General Light Improvement Co., Matzetti's Case the question again
came to be considered. In that case a certain item of expenditure was included
in a larger item in the balance-sheet and that balance-sheet was passed by the share-holders
at their meeting. The item included was shown to be unauthorized expenditure.
Brett, L. J., in considering the question of ratification observed as follows:
"But it cannot be said that the company ratified the payment by
passing it unquestioned on the balance-sheet, unless it appeared there in such
a way as to attract the attention of persons of ordinary care. There must have
been direct notice, or notice sufficient to put a person of ordinary care upon
inquiry as to the item. The mere statements on the balance-sheet in this case
would not have put such a person upon inquiry so as to lead him to the facts.
Therefore, I think there is no evidence of ratification."
In In re Republic of Bolivia Exploration Syndicate, Ltd. the question of
waiver in respect of an ultra vires payment, by receiving and adopting the
balance-sheet, came to be considered and it was observed as follows :
"After they learned at the share-holders' meeting of December 14,
1908, that the legality of these payments was questioned, the meeting was
adjourned for the purpose inter alia of inquiries being made into the matter,
and the balance-sheet and accounts were subsequently approved by the
share-holders at the adjourned meeting….."
These observations also show that in order to establish a case of
ratification it is essential to prove knowledge of the fact that the act was
unauthorized in the first instance and that after clear notice either by
acquiescence or an overt act the shareholders of the company adopted the
transaction. Irvine v. Union Bank of Australia makes the point still more
clear. Their Lordships observed as follows:
''Their Lordships think that it would be competent for a majority of the
share-holders present (though not a majority of the share-holders of the
company), at an extra-ordinary meeting convened for that object, and of which
object due notice had been given, to ratify an act previously done by the
directors in excess of their authority; and they are not prepared to say that
if a report had been circulated before a half-yearly meeting distinctly giving
notice that the directors had done an act in excess of their authority, and
that the meeting would be asked by confirming the report to ratify the act,
this might not be sufficient notice to bring the ratification within the
competency of the majority of the share-holders present at the half yearly
meeting.
The case of In re The Magdalena Steam Navigation Co. decided nothing to
the contrary. In that case also the shareholders who passed the resolution with
insufficient majority are shown to be conscious of the deed of settlement which
provided the requisite majority of two-thirds in numbers and value of the
share-holders present at the meeting. It is not a case of the directors
exceeding their authority, but a case where a company by an irregular
resolution authorized the directors to do a thing. Having regard to these
considerations, in my opinion, the contention of M.T. Ltd., that the company by
adopting the balance-sheets had ratified the borrowings, cannot be accepted.
It is next contended on behalf of the liquidator, that the claim now made
by M.T. Ltd., wholly represents the balance of unauthorized borrowings. This
contention is based on the argument that in considering the account of
borrowings and repayments the rule in Clayton's case does not apply. In this
connection reliance is placed on the decisions in Blackburn and District
Benefit Building Society v. Cunliffe, Brooks & Co. Cunliffe Brooks &
Co. v. Blackburn and District Benefit Building Society, Blackburn and District
Benefit Building Society v. Cunliffe Brooks & Co. and Sinclair v. Brougham.
Having regard to the view I have taken, it is not necessary to decide this. As,
however, an elaborate argument was addressed to me, I think I should shortly
express my opinion on the point. I do not think the liquidator's contention in
this connection is correct. The first three authorities relied upon by the
liquidator do not help him. In those cases an attempt was made by the claimant
to show that the money advanced had been applied towards the payment of debts
and liabilities of the society properly payable by it and it was held that in
making the inquiry as to what amount had been properly applied in paying the
debts of the company the claimant could not rely on the rule in Clayton's case.
In my opinion when out of the total sum advanced by the party if a portion is
authorized and the rest unauthorized according to the principles discussed in
Sinclair v. Brougham, the excess, if it is ultra vires the company, would never
cease to be the property of the lender, and, if traced, must be returned by the
borrower. The rule of law would, therefore, be that when the directors have
borrowed without any authority and then repaid money, they should be deemed to
have done the right thing, viz., return what never belonged to the company.
Viscount Haldane, L.C. has put the proposition very succinctly in the following
words: "The Society ought in my opinion, to have been regarded, in the
absence of evidence to this effect, as having simply returned to the bankers
the latter's own money."
According to the Lord Chancellor, therefore, in the absence of evidence
to the contrary, when repayments are made by the company, they should be
treated simply as returning to the lender his own money, and which in law,
having regard to the incapacity of the company to borrow had never become the
property of the company. These observations, therefore, instead of supporting
the contention of the liquidator, support the contention of M.T. Ltd. Applying
that principle to the account it should be held that the first five lacs of
rupees, borrowed by the company from M.T. Ltd., were the authorized borrowing
and the excess was unauthorized so far as the directors are concerned.
Thereafter when in the subsequent years or the same year there are repayments,
the same should be treated as repayments of the unauthorized borrowings, i.e.,
return to M.T. Ltd., of their own money. Looking at the account in that way and
having regard to the fact that the balance now claimed is only Es.
4,91,284-0-8, it is evident that, according to the principles laid down by
Viscount Haldane, L.C, the whole of the balance now claimed by M.T. Ltd.,
represents the authorized borrowing, the unauthorized borrowing having been
repaid during the interval by the directors. This contention of the liquidator,
therefore, if necessary to be considered, must also fail.
The observations and principles contained in Sinclair v. Brougham, with
regard to making a tracing order, were fully argued. Having regard to my
finding the question does not arise, and, therefore, I do not propose to
examine the cases cited on the point. It was lastly contended on behalf of the
liquidator that no further call on the shareholders should be made. That
contention is based on Sinclair v. Brougham. I do not think that case stands in
the way of M.T. Ltd. The principles there discussed were for finding how the
assets which were the outcome of a wholly ultra vires business were to be
divided between the creditors of the ultra vires business and the share-holders
of the same ultra vires business. In the present case, M.T. Ltd., claim a sum
of money payable from the company in liquidation, and if the claim is allowed,
all the liabilities of the shareholders to satisfy the claim of a person who is
entitled to the payment of a specified sum of money must follow. I shall
consider next the claim of Sassoons. It is contended on behalf of the
liquidator that the agreement of February 28, 1928, is not valid and binding on
the company because it is a suretyship transaction. It is pointed out that in
the deed itself the company is called surety. It is common ground that at the
time of the execution of the deed no money was paid and the company had
borrowed no money from Sassoons.
It is further pointed out that in spite of the deed, and all the recitals
contained therein, M.T. Ltd. continued to be the creditors of the company, and
Sassoons to be the creditors of M.T. Ltd., for the whole amount, as before. In
the books of Sassoons the company is not shown to be their debtor nor in the
books of the company are Sassoons shown to be their creditor. The result is
that the legal relations subsisting between the parties till then were not
altered and the company and Sassoons do not assume the relationship of debtor
and creditor. The right of Sassoons is only under the deed of mortgage and
there are no other relations on which the claim put forward by Sassoons could
be sustained. As regards the clause by which the company and M.T. Ltd. jointly
and severally promised to pay the Sassoons Rs. 4,50,000, it is contended that
this provision cannot override the legal relations established by the
description given to the company in the deed itself. In any event it is pointed
out that, as the liability of the surety is co-extensive, the two clauses can
be reconciled and the deed is only a deed of suretyship. It is further
contended that if the two clauses cannot be reconciled, the first must prevail
on the general principle that in construing a deed the first clause prevails.
The liquidator contends that such a transaction of suretyship is ultra vires
the directors and also the company.
In this connection reliance is placed on the decision in Crenver etc.,
Mining Co., Ltd. v. Willyams. In that case a company, which was a mining
company, after its incorporation entered into a written contract with G, an
engineer, for the construction of certain work and erection of plants,
machinery, etc., and agreed to pay £8,500 to him. The payments under the
contract to G were to be made every month on a certificate of the engineer of
the company less twenty per cent. Considerable sums of money were advanced by
bankers to G to go on with the erection, and in January 1865, he owed to the
bankers upwards of £14,000 for moneys advanced to him. The company also owed
the bankers £1,272 and was liable for £5,000 on bills discounted by the bankers
and which formed part of the £14,000 due from the contractor. In this state of
things an indenture of mortgage was executed by G of the first part, the
company of the second part and the bankers of the third part, which recited the
contract with G and that he had since erected diverse building and machinery in
pursuance of the contract. It further recited that G had received £19,578 from
the company in part-payment and that a large sum still remained due to him from
the company under the contract; that G was possessed of machinery and that he
was indebted to the bankers for money advanced for the purposes of the
contract; that the company was indebted to the bankers in £l,272 and that G had
applied to the bankers to make him further advances to enable him to carry out
the work which the bankers had agreed to do on having the re-payment of the sum
of £14,289, the balance which was due by G to the bankers, and £1,272 which was
due by the company to the bankers, and any other sum advanced by them to G
secured as mentioned in the deed.
By the indenture, G and the company covenanted to pay to the bankers £14,239
and £1,272 with all further sums advanced to G with interest and G assigned to
the bankers all moneys due or to become due under the contract and all engines,
etc., and the company assigned to the bankers all tin, copper, etc., to be
raised out of the mines. In a suit by the bankers to enforce the mortgage, the
trial Court refused to recognise the validity of the mortgage and dismissed the
suit with costs. The matter went in appeal and the decision is reported in
Crewer & Wheal Abraham United Mining Co., Ltd. v. Willyams. The Court
upheld the contention of the company in part and gave a declaration that the
mortgage was invalid so far as it made the property of the company a security
for the debts due by G to the bankers. So far it secured the moneys due by the
company, and so far it was a mortgage by the contractor of his property to the
bankers, it was not interfered with. It is contended by the liquidator that the
position in the present case is the same. It is further urged by the liquidator
that the question of acquiescence and ratification does not come in because in
the balance-sheets of the company it is nowhere mentioned that Sassoons were
given the security. On the other hand the balance-sheets of the company after
1927 show that M.T. Ltd. were secured creditors. On this ground it is contended
that as the transaction is ultra vires the company and the directors, the deed
is a nullity and no claim could be created thereunder. In the alternative it is
contended that if the transaction is put forth as a new contract made between
the parties on February 28, 1928, it must fail because there was no fresh
consideration.
It is therefore necessary to look to the provisions of the deed itself.
After describing M.T. Ltd., as the mortgagors, the company as sureties and
Sassoons as the mortgagees, the deed recites as follows:
" And whereas the surety required money for the purpose of and in
connection with its business and requested the mortgagor to lend and advance to
it the money so required, and whereas the mortgagor requested the mortgagee to
lend and advance to it a sum of Rs. 9,00,000 (nine lacs) in order to enable it
to lend and advance to the surety the amount required by the surety and to use
the remaining portions for its own business, and whereas the mortgagee agreed
to lend and advance to the mortgagor the said sum of Rs. 9,00,000 (nine lacs)
on the mortgagor agreeing to repay the said sum with interest thereon, and to
secure re-payment of the moiety thereof by the mortgagor depositing the
title-deeds relating to………belonging to the mortgagor and to secure re payment
of the other moiety by the surety depositing with the mortgagee by way of
equitable security the title deeds relating to the said properties………..particularly
described in the first and second schedules hereunder written, and whereas the
mortgagee hath already paid ' to the mortgagor the said sum of Rs. 9,00,000
(nine lacs) as the mortgagor doth hereby admit and acknowledge out of which the
mortgagor hath paid to the surety a sum of over Rs. 4,50,000 (four lacs and
fifty thousand) as the surety doth hereby admit and acknowledge………And whereas
the surety also hath deposited with the mortgagee the title-deeds of the said
lands……………belonging to it and whereas the mortgagee hath called upon the
mortgagor and the surety to execute these presents evidencing the said deposit
of title deeds as such security now this indenture witnesseth that in
consideration of the amount lent and advanced to it by the mortgagor out of the
said sum of Rs. 9,00,000 (nine lacs) lent and advanced to the mortgagor by the
mortgagee (the receipt of which the surety and the mortgagor do hereby
respectively admit and acknowledge) the surety hath already deposited with the
mortgagee the title-deeds mentioned in the schedule hereunder written relating
to lands belonging to the surety to the intent that the said lands may be
equitably charged with the re-payment to the mortgagee of the sum of Rs.
4,50,000 out of the said sum of Rs. 9,00,000 lent and advanced to the mortgagor
by the mortgagee with interest on the same from July 1, 1926, at the rate of 6
per cent……..and the mortgagor and the surety do hereby jointly and severally
agree to re-pay to the mortgagee on October 31, 1931, the said sum of Rs.
4,50,000 with interest thereon at the rate aforesaid and do hereby undertake
that the surety shall execute at its own costs, when called upon a proper legal
mortgage of the said lands...to secure the said sum of Rs. 4,50,000 with
interest."
I am unable to accept the first argument urged on behalf of the
liquidator that because in the deed the company is described as a surety they
must be treated as sureties. While taking into consideration that description
used in the deed to arrive at a correct conclusion, it is necessary to look to
the whole deed and consider the nature of the transaction between the parties.
In my opinion the principle that the first statement in the deed should prevail
is not relevant to be considered in this connection, because what the Court is
called upon in this case is not to determine the question of grant of property,
in which case that principle is held to be applicable, but to determine the
true effect of the document. The liquidator does not dispute the correctness of
the recitals in the deed and no evidence is led to challenge the truthfulness
of the statements contained therein. There is, of course, no proof of the
statements being wrong. Looking to the whole deed, the following facts appear
to be established :— (1) that on July 1, 1926, a sum of Rs. 9,00,000 had been
advanced by Sassoons to M.T. Ltd.; (2) that out of that Rs. 4,50,000 were
admitted to be advanced by M.T. Ltd. to the Company; (3) that M.T. Ltd., had
requested Sassoons to lend the said sum of Rs. 9,00,000, to them in order to
enable them to lend and advance to the company the amount required by the
company; (4) that at the time the said sum of Rs. 9,00,000 was advanced, M.T.
Ltd., had agreed to give by way of security its own property and the company's property;
(5) that the company had already deposited with Sassoons the title-deeds of
their property; (6) that Sassoons had called upon M.T. Ltd., and the company to
execute the document evidencing the deposit of the said title-deeds as
security; (7) that in consideration of the amount lent and advanced M.T. Ltd.,
had already deposited the title-deeds of their property by way of equitable
mortgage for the repayment to Sassoons of the sum of Rs. 4,50,000 out of the
said sum of Rs. 9,00,000; (8) that by the document M.T. Ltd., and the company
did jointly and severally agree to repay to Sassoons on October 31,1931, the
said sum of Rs. 4,50,000 with interest; and (9) that the company agreed to
execute at its own costs, when called upon, a proper legal mortgage in favour
of Sassoons of the said lands and building to secure the said sum of Rs.
4,50,000, acknowledged to be received by the company out of the said Rs.
9,00,000.
In order to decide whether the transaction is ultra vires the company or
not, it is necessary to have regard to these facts read along with Cl. 3 (f) of
the memorandum of association of the company. Under that clause the company
could give a promissory note to M.T. Ltd., for the amount borrowed by the
company from M.T. Ltd., It is similarly permissible for M. T. Ltd., to ask the
company to join them in passing a promissory note to borrow money, and for the
company to join accordingly. Therefore, a promissory note signed by M.T. Ltd.,
and the company, making them jointly and severally liable thereunder, is not
void under Class 3(f) of the memorandum of association. As the company is
empowered to secure the repayment in such manner as it may deem expedient, it
appears to be equally clear that to secure repayment of the amount covered by
the promissory note the company could have given an equitable mortgage on its
property. It is not disputed that the company, as such, apart from the question
of directors' authority, could have secured the repayment of the money borrowed
by it by the deposit of title deeds with M.T. Ltd., or entered into an
agreement of equitable mortgage in favour of M.T. Ltd. It is further not
disputed that if such mortgage was given, M.T. Ltd. could either assign the
equitable mortgage in favour of the Sassoons or could in their turn enter into
another agreement of equitable mortgage in respect of the same property in
favour of the Sassoons. If so, is the transaction as contained in the deed of
February 28, 1928, ultra vires? . In my opinion, having regard to the terms of
the deed of mortgage, it is not a document of suretyship. A contract of
guarantee, which is the same as a contract of suretyship, is defined in Section
126, Contract Act, as "a contract to perform the promise, or discharge the
liability, of a third person in case of his default." The person who gives
the guarantee is called the "surety," the person in respect of whose
default the guarantee is given is called the "principal debtor," and
the person to whom the guarantee is given is called the "creditor."
Section 128 provides that the liability of the surety is co-extensive with that
of the principal debtor. In the present case the terms of the deed of mortgage
do not provide that in default of the payment of money by M.T. Ltd., to
Sassoons the company would make good the amount. It is also not a case of
admitting or becoming liable when no money is received, but a case where the
liability is admitted and security given for that portion which has admittedly
gone into the possession and coffers of the company. It is a case where both
M.T. Ltd., and the company jointly promise to pay the Sassoons the sum of Rs.
4,50,000 because at the initial stage M.T. Ltd. borrowed Rs. 9,00,000 from
Sassoons and the company admitted that out of that sum a sum of Rs. 4,50,000
was actually received by them and which they were liable to make good to M.T.
Ltd. when called upon.
The difference between the position of a surety and a joint debtor is
made clear and recognized so far back as 1866 in Buck v. Hurst and Bailey. In
that case the plaintiff lent money to A upon B's promise to become surety for
its repayment, and after the money was advanced A and B signed and delivered to
the plaintiff the following memorandum: "We jointly and severally owe you
£60." It was held that this was evidence for the jury of "an account
stated by A and B jointly." In Guild & Co. v. Conrad, the defendant
orally promised the plaintiff that if he (the plaintiff) would accept certain
bills for a firm in which the defendant's son was a partner, he (the defendant)
would provide the plaintiff with funds to meet the bills. It was held that this
was not a contract of guarantee but a case where the defendant promised to be
liable on the ground of indemnity. In other words the liability of the
defendant did not arise in the event of the firm failing to pay the bills, but,
apart from that consideration, the defendant had promised to discharge the
bills if the plaintiff for the time being accommodated the party. In the same
way in the present case, as in the event of Sassoons demanding from M.T. Ltd.
payment of Rs. 4,50,000 the company could have been called upon to pay the
amount forthwith by M.T. Ltd., the company agreed to indemnity Sassoons for the
amount and gave the security mentioned in the deed of mortgage. In my opinion, therefore,
the transaction contained in the deed of mortgage is not a suretyship
transaction as argued on behalf of the liquidator. If the joint liability is
admitted, no question of reduction of debt of M.T. Ltd. arises. Similarly no
question of making entries in the books of any of the three companies arises.
The legal effect of the deed of mortgage cannot be controlled in any event by
the presence or absence of entries the parties may make or omit to make in
their books.
The case of Crenver etc. Mining Co. Ltd. v. Willyams, is quite distinct.
In that case the company had purported to mortgage its own property for the
debt due by the contractor to the banker. It was not shown that any portion of
the money borrowed by the contractor from the banker was admitted to be paid by
the contractor to the company. Merely because in respect of the work done and
materials supplied by the contractor to the company, the contractor had an
independent claim against the company, the company cannot mortgage to the
banker its property for the payment of the whole debt of the contractor and
also further moneys to be borrowed by the contractor for his contract.
Therefore, that decision does not help the liquidator.
In my opinion it is not open to the liquidator to contend that Sassoons'
money had not gone to pay the creditors of the company because Sassoons paid
the money to M.T. Ltd. and that money was advanced by M.T. Ltd. to the company,
as admitted in the deed of mortgage, and bona fide utilized for the business of
the company as shown by its books and balance sheets. Under the circumstances,
even in the absence of any extension of the directors powers and in the absence
of acquiescence or ratification, having regard to the terms of Article 73 of
the articles of association in Table A read with Clause 3(f) of the memorandum
of association, the directors had power to give security in respect of a sum
not exceeding Rs. 5,00,000. As under the deed of mortgage Rs. 4,50,000 are
shown on the face of the document to be borrowed by the company and for which
Sassoons received a security, the transaction appears to be within the
competence of the directors and is binding on the company. The borrowing in
excess by the directors from M.T. Ltd. does not touch the validity of the deed
of mortgage or the rights of Sassoons thereunder, because if the security is
treated as given for Rs. 4,50,000, out of Rs 9,00,000 it does not follow that
the security is given for the unauthorized portion of the borrowing. This is on
the ground that when a man has the power to do the right thing and does a thing
which is capable of being taken either as the right thing or in excess of his
power to do this right thing, it should be presumed the he had done the right
thing, especially when the rights of third parties would be adversely affected
on the other construction. In my opinion equity demands that it should be held
that the security so given was given in respect of the borrowing which the
directors were empowered to borrow under Article. 73. In respect of the excess,
the claim of the claimants must stand or fall on, its own merits.
The balance-sheets of the company do not show the name of Sassoons as
secured or unsecured creditors. Nor is it shown that at any stage the attention
of all the share-holders, viz., M.T. Ltd., the ten directors and Mr. F. E.
Dinshaw was drawn to the fact that the directors were doing something which
under the articles they were not authorized to do. Under the circumstances, as
I have pointed out before, no question of ratification by acquiescence arises.
On behalf of Sassoons it is contended that as M.T. Ltd. could have obtained the
deed of mortgage from the company and could in their turn have either assigned
it or executed another document of mortgage in favour of Sassoons, it is only a
question of form and not of substance, and the transaction, under the
circumstances, should be held to be binding on the company. For this contention
reliance is placed on the decision in Seligman v. Prince & Co. In that case
P assigned his business to the company and the company agreed to indemnify him
against the debts of his old business. To satisfy these debts the company
issued debentures and gave them to certain creditors of the old business of P.
It was held that the debentures were issued not for the purpose of paying the
debts of third parties but having regard to the agreement to indemnify P., the
debentures were binding on the company and the debenture-holders were entitled
to enforce their rights against the company. It is contended by the liquidator
that no such case of indemnity is proved here. In my opinion, having regard to
the express terms of the indemnity contained in that case, that decision is not
helpful to Sassoons. On the evidence on record and the recitals in the deed of
mortgage, it is difficult to find support for the contention that an agreement
of indemnity, as contemplated in that case, was entered into.
The contention of the liquidator, that if this is a fresh agreement there
was no fresh consideration and therefore it must fail, is untenable. The
recitals in the document coupled with the admission that the sum of Rs. 45,000
out of the sum of Rs. 9,00,000 borrowed by M.T. Ltd. from Sassoons was utilized
by the company shows the consideration which moved the company to execute this
document in favour of Sassoons. It should be remembered that under the Contract
Act if Sassoons give time to M.T. Ltd. to pay their debt to Sassoons, that
would be sufficient consideration in law to sustain the promise by the company
to pay to Sassoons Rs. 4,50,000 out of the sum of Rs. 9,00,000 under the
circumstances mentioned in the deed. It is next contended that the resolution
of the directors authorizing the execution of the document is bad, and in this
connection reliance is placed on Article 77 of Table A and Section 91-B,
Companies Act. It is pointed out that Mr. A. J. Raymond was a party to the
resolution and was the managing director of Sassoons and had the full powers of
the board of directors. It is further pointed out that Sassoons is a private
limited company and all the directors of M.T. Ltd. were parties, to this
resolution. It is argued that the deed of mortgage is a tripartite agreement in
which all the three companies and directors were interested and therefore there
was no independent person to vote at the meeting of the directors held on
February, 1928. Under these circumstances it is contended that the whole voting
is bad and the resolution is void. It is pointed out that the interest of a
person as a share-holder is sufficient to disqualify him for the voting under
Section 91-B, and that the transaction is of such a nature that the Court
should very minutely scrutinise the voting at the meeting.
The contention that Sassoons is a private limited company or that Mr.
Raymond as the managing director had all the powers is quite irrelevant. As
held in Salomon v. Salomon & Co. under the law, a joint stock company is a
distinct entity; and although all the shares may be practically controlled by
one person, in law a company is a distinct entity and it is not permissible or
relevant to inquire whether the directors belonged to the same family or
whether it is, as compendiously described, a "one man company." The
law having recognized joint stock companies as distinct entities, these
inquiries and suggestions are quite irrelevant to the present contention. In my
opinion the transaction is not at all unusual, because it is conceded that if
two different documents, one from the company to M.T. Ltd. and another from
M.T. Ltd. to Sassoons had been passed, it would have been a perfect business
transaction with no unusual character. A9 pointed out in the correspondence,
the attempt on the part of the three parties was to save costs of the two
documents being prepared, and merely
because the effect and result of the two documents is entered in one document,
I am unable to hold that the transaction became an unusual one. It is not a
case of one person giving security for the debt of another, because it is
admitted by the deed of mortgage that the company gave the security only in
respect of the sum of Rs. 4,50,000 admitted to be received by it out of the sum
which originally came from Sassoons.
It is contended on behalf of
Sassoons and M.T. Ltd. that the liquidator's contention in respect of the
voting at the directors' meeting is untenable because the transaction contained
in the deed of mortgage is not-of the kind suggested by the liquidator. It is a
transaction between M.T. Ltd. and the company on the one side and Sassoons on
the other side, but it is not a contract between the company and M.T. Ltd.
Under the circumstances the directors of Sassoons alone would be disqualified
to vote, but not the directors of M.T. Ltd. As against this, it is argued by
the liquidator that without there being contract between M.T. Ltd., and the
company, how can a contract, as contained in the deed of mortgage, come into
existence? In my opinion this last argument is futile. Because the contract
contained in the deed of mortgage exists between the company and M.T. Ltd. on the
one hand and Sassoons on the other hand, it is not necessary that the
arrangement or contract between M.T. Ltd, and the company must be contained in
the same document. It is further contended against the liquidator that the
interest mentioned in Article 77 and Section 91-B, Companies Act, is some
personal interest which is not in common with the other share holders. For that
purpose reliance is placed on the decision in Seligman v. Prince 6- Co., and
the remarks at p. 629 where it is pointed out that the interest should be one
not in common with the others. Reliance is also placed on behalf of the
claimants on the terms of Section 91-B.
In my opinion there is
considerable force in the contentions urged on behalf of the claimants. I do
not think, however, that it is necessary to go into this part of the argument.
It is common ground that a resolution at a meeting of the board of directors of
the company was passed and the execution of the deed was sanctioned. The
correspondence further shows that Sassoons were informed of the board
meeting having been held. Under the circumstances the contention urged on
behalf of the liquidator is a contention in respect of the internal management
of the affairs of the company and must fail. In In re Hampshire Land Co., where
there was a common officer of the company who was present when the resolution
which was sought to be challenged as irregular was passed, this principle came
to be considered. Vaughan Williams, J., in delivering judgment observed as
follows:
"They (the share-holders) had no authority in the absence of a
properly passed resolution to borrow this money. But in that state of things,
the money having been lent by the society and received by the company, the
question which I have stated (viz., who is to bear the loss?) arises. It is not
disputed that the authority of Royal British Bank v. Tarquand is such that the
society had a right to assume in a case like this that all these essentials of
internal management had been carried out by the borrowing company, and that it
is only in case the law imputes to the society knowledge of these
irregularities that the society is not to rank……as a creditor for the amount
lent."
On the facts of the case, the learned Judge held that the knowledge of
the common officer could not be imputed to the society. Apart from the fact of
Mr. Raymond being a director of Sassoons the point is completely covered by the
remarks of Lord Hatherley in Mahony v. East Holyford Mining Co., as follows:
"On the one hand, it is settled by a series of decisions, of which
Earnest v. Nicholls is one and Royal British Bank v. Tarquand a later one, that
those who deal with joint stock companies are bound to take notice of that
which I may call the external position of the company. Every joint stock company
has its memorandum and articles of association; every joint stock company, or
nearly every one, I imagine (unless it adopts the forms provided by the
statute, and that comes to the same thing) has its partnership deed under which
it acts. Those articles of association and that partnership deed are open to
all who are minded to have any dealings whatsoever with the company, and those
who so deal with them must be affected with notice of all that is contained in
those two documents".
"After that, the company entering, upon its business and dealing
with persons external to it, is supposed on its part to have all those powers
and authorities which, by its articles of association and by its deed, it
appears to possess; and all that the directors do with reference to what I may
call the indoor management of their own concern, is a thing known to them and
known to them only; subject to this observation, that no person dealing with
them has a right to suppose that anything has been or can be done that is not
permitted by the articles of association or by the deed."
It is, therefore, not permissible in a case like this to inquire whether
there was a proper quorum for holding a meeting or whether the meeting of the
directors authorizing the execution of the deed of mortgage was properly
convened. These are matters of the internal management of the company, and
under the principles contained in Royal British Bank v. Tarquand the company is
bound by the resolution, so far as outsiders are concerned. No irregularity in
the internal management would therefore vitiate the transaction so far as an
outsider creditor is concerned. In this transaction there appears to be no such
irregularity as it was the duty of Mr. Raymond to convey to Sassoons and there
is nothing by which Sassoons could be held to be aware of any irregularity. In
my opinion, therefore, this contention of the liquidator must fail. On these
grounds, the deed of February 28, 1928, when executed, was valid, and Sassoons
have a right to recover the amount mentioned therein, according to the terms of
that deed. The result, therefore, will be that their claim as secured creditors
under the deed of February 28, 1928 should be allowed."
F.J. Collman and M.L. Manekshaw, for the Appellant.
K.M. Munshi and M.C. Setdlvad, for the Respondents.
Beaumont, C. J.—This is an appeal from an order of Kania, J., made
in the liquidation of T.R. Pratt (Bombay) Ltd. The claims in question were made
by E. D. Sassoon & Co., Ltd. and M.T. Ltd. For simplicity I will refer to
the three companies as Pratts, M.T. s, and Sassoons respectively. The learned
Judge held that the claim of Sassoons was proved, as also was the claim of M.
T, s.; admittedly, they were not additional but alternative claims, and it is
really not necessary to consider the claim of M.T. s if the claim of Sassoons
is allowed. The facts are not, I think, substantially in dispute. Pratts was
incorporated in the year 1919 with a capital of rupees five lacs, divided into
preference and ordinary shares. The memorandum of association contained power
to borrow and give security for the money borrowed, but there was no power to
give security for a debt of third parties. Originally articles of association
were prepared, but by some error they were not registered, so the company was regulated
by Table A; and under Article 73 of Table A the directors' power of borrowing
is limited, the article providing that the amount for the time being remaining
undischarged of moneys borrowed by the directors shall not exceed rupees five
lacs, i.e., the capital. M.T.s was incorporated in 1920. It was formed by
Messrs. Mehta & Co., who were the managing agents of Pratts, and by persons
interested in Sassoons; and the principal object of the company was to finance
Pratts, the view being that Pratts' capital was insufficient for the business
which they were capable of doing. M.T. s acquired practically the whole of the
ordinary share capital of Pratts, but the preference shares were held by
outside parties. At the date of the liquidation of Pratts, which was June 22,
1932, a sum of approximately Rs. 4,92,000 was due by Pratts to M.T.s. Sassoons
were in the habit of financing M.T. s., and in the years 1926 to 1928 there was
a sum of approximately Rs. 9,00,000 due by M.T. s to Sassoons. It appears from
the correspondence that in the year 1926 Sassoons commenced to press M.T.s for
security for the debt. M.T.s had an immovable property known as the Collins
Building, which was a part of the building in which Pratts carried on business
and Pratts had two immovable properties; and the correspondence shows that
Sassoons wanted to get a mortgage upon all those properties both of M.T.s and
Pratts, as security for the money due to Sassoons. Originally it was proposed
that there should be two documents—one between M.T.s and Pratts and the other
between M.T.s and Sassoons' but, in order to avoid expense it was arranged to
have one. Accordingly, on February 23, 1928, resolutions were passed by the boards, both of Pratts and of M.T.s., for
execution by the respective companies of a security deed in favour of Sassoons,
and on February 28, 1928 the security deed in question was executed.
That document, which is Exhibit J,
was made between M.T.s (thereinafter called the mortgagor of the first part),
Pratts (thereinafter called the surety of the second part) and Sassoons
(thereinafter called the mortgage of the third part). It recites the title to
the properties which were to be mortgaged, and then it recites that Pratts
required money for the purpose of their business and requested M.T.s to lend
them money, and that M.T.s, requested Sassoons to lend them rupees nine lacs,
in order to enable them to lend money to Pratts. Then it recites that Sassoons
had already paid to M.T.s rupees nine lacs, out of which M.T.s had paid to
Pratts rupees four and a half lacs. It is argued that in fact there is no
evidence on the record that that recital is true, namely, that the money
borrowed by M.T.s from Sassoons had to any extent gone to Pratts; but I see no
reason why we should not accept that recital as correct. There is no evidence
that it is untrue, and being an admission made by Pratts under their seal and
by the other parties, I think we can accept it as true. Then the document
recites deposits of the title deeds of the immovable properties both of M.T.s
and Pratts with Sassoons, and then the witnessing part states that Pratts have
already deposited with Sassoons the title deeds of the properties therein
mentioned with intent that the properties may be equitably charged with the
repayment to Sassoons of the sum of rupees four-and-a-half lacs out of the sum
of rupees nine lacs advanced to M.T.s by Sassoons with interest. Then M.T.s and
Pratts jointly and severally covenant with Sassoons to pay the said sum of
rupees four-and-a-half lacs with interest on October 31, 1931.
Now, we had a long and elaborate
argument from Mr. Coltman on behalf of the liquidator of the Pratts to the
effect that assuming that document was validly executed by Pratts, it was not
binding upon them. The argument is that Pratts by that document in effect
became surety for M.T.s and deposited their deed as security for M.T.s debt,
and that under the memorandum of association they had no power to do
that. It is also argued that there was no consideration in the deed in favour of
Pratts. It seems tome that the argument ignores the essential fact that as
between these three companies Pratts were primarily liable to pay at least
rupees four-and-a-half lacs, and Sassoons were entitled to receive
four-and-a-half lacs. It seems to me clear that the transaction could have been
carried out, as originally suggested by two documents. Pratts could have
mortgaged their properties to M.T.s for four-and-a-half lacs, part of the
moneys owing, and M.T.s could have assigned either absolutely by way of sale,
or by way of security, that mortgage to Sassoons and the actual result brought
about by this document could have been brought about in that way by two
documents and no question could have been raised. To hold that an arrangement
which could have been carried out by two documents cannot be carried out by one
document to which all the parties interested are parties, would be to sacrifice
substance to form. I think that the case of Seligman v. Prince & Co. is an
authority for that proposition. I agree with Mr. Coltman that that case is not
on all fours with the present case. It would be on all fours if Pratts had
agreed to indemnity M.T.s against their debt to Sassoons, but it seems to me
that that distinction is not an essential one. The essence of this case is that
as between the three parties to the deed Pratts were primarily liable to pay
and Sassoons were ultimately entitled to receive the money; and that was the
position also in Seligman v. Prince & Co. It is quite true that in the
document there is no consideration expressed in favour of Pratts. The
transaction is, I think, of the nature of a novation, that is to say a
substitution of the liability of Pratts to Sassoons for the liability of Pratts
to M.T.s and M.T.s to Sassoons; but it is not a complete novation, because
there is no release of Pratts' liability to M. T's and the subsequent books of
the companies show that Pratts were treated as debtors of M.T.s after this
document had been executed, and not as debtors of Sassoons.
But it seems to me that you cannot give effect to this document without
holding that there was an implied obligation on M.T.s part not to sue for the
amount of four-and-a-half lacs for which Pratts had given security to Sassoons
as long as this mortgage stood. It seems to me plain that if M.T.s had claimed
the money from Pratts, this mortgage, to which M.T.s were a party, would have
been a defence. I think that there was sufficient consideration in favour of
Pratts, in the implied covenant not to sue on the part of M.T.s coupled with
the fact that time was actually given. I agree, therefore, with the learned
Judge in thinking that if this document was properly executed on behalf of
Pratts, it was a valid contract. It is not in my opinion, a document of
suretyship at all. There is no ground suggested for that, except the mere
definition of Pratts as surety which amounts to very little. Then the second
point argued by Mr. Coltman on behalf of the liquidator of Pratts as against
Sassoons, though logically it comes first, is that this document was never
executed in such a way as to be binding upon Pratts. The objection arises in
this way: Section 91-A Indian Companies Act, provides that a director who is
directly or indirectly concerned or interested in any contract or arrangement
entered into by or on behalf of the company shall disclose the nature of his
interest: and Section 91-B provides that no director shall, as a director, vote
on any contract or arrangement in which he is either directly or indirectly
concerned or interested; and if he does so vote, his vote shall not be counted.
Section 91-B is not taken from the English Act. The subject-matter of
Section 91-A was for the first time included in the English Companies Act by
the Act of 1929; but there is no statutory provision in England corresponding
to Section 91-B though the subject-matter of that section, namely the right of
directors to enter into contracts on behalf of the company in which they have
some personal interest is frequently dealt, with in the articles of association.
Now, the position with regard to the directors of Pratts is this. There were
always a certain number of directors common to Pratts and M.T.s and from 1922
until 1931, that is to say, during the whole of the material period, the boards
of the two companies were common. There were in all seven directors of the two
companies. One of those directors was Mr. A. J. Raymond, and another Capt. E.
V. Sassoon, both of whom were directors of Sassoons. But Mr. Raymond was more
than a director. He was the Managing Director of Sassoons, and, under a power
in their articles Sassoons had delegated to him all the powers of the
directors. The resolution to that effect is Exhibit 9. Now it is alleged that
in 1928, when this mortgage was arranged and executed, all the directors of
Pratts were concerned or interested in the matter individually, that is to say,
apart from their position as directors of Pratts, because they were directors
of M.T.s and also shareholders in that company. The qualification for directors
of M.T.s was the holding of one hundred shares, so that all the directors of
Pratts were not only directors but also shareholders in M.T.s; and I think that
the argument that they were individually concerned or interested in this
mortgage is sound. The object of Section 91-B was clearly to ensure that a
company shall have the benefit of the judgment of an entirely independent
Board; and I do not think that the Board of Pratts was independent of M.T.s in
the matter of this contract, or that the interests of the two companies were
identical.
It was vital to M.T.s that they should get for Sassoons the security
which Sassoons were asking for, which involved a mortgage of Pratts' property.
No doubt, Pratts were in a difficulty in resisting any claim by M.T.s because
they owed M.T.s money. But an independent Board theoretically might have taken
the view that it would be better that Pratts should be wound up rather than
give security for the debt, although experience shows that directors do not
usually take such a pessimistic view of the prospects of their company. But
there is practical force in the suggestion that an independent Board of Pratts
would not have agreed to a contract in the exact terms of the contract of
February 28, 1928. An independent Board might very well have said that if
Pratts were to give their property in security to Sassoons, at any rate they
must have an out-and-out release from M.T.s of a corresponding part of their
debt, and that Pratts should not be left to rely on an implied covenant not to
sue on the part of M.T.s. It seems to me impossible to say that there was no
conflict of interest in the matter of that mortgage between M.T.s and Pratts,
although to a certain extent their interests were common. In my opinion
therefore, by virtue of Section 91-B, none of the directors of Pratts was
competent to vote for the resolution to execute this mortgage in favour of
Sassoons.
Two further questions then arise: first, is it necessary to show that
Sassoons had notice of the disability arising under Section 91-B? Secondly, if
so, had Sassoons such notice? Now, it is very well settled law in the case of
English joint stock companies that people dealing with such a company are fixed
with notice of any limitations on the power of the company contained in the
statute under which it is incorporated or in the memorandum or articles of
association; but that if it is shown that a particular act was ostensibly
authorized by the statute and the memorandum or articles of association,
persons dealing with the company are not concerned to see that the company has
put itself into a position to exercise its power properly. That is the rule
recognized in Royal British Bank v. Tarquand and a great many other cases. It
is generally expressed by saying that outside parties are not concerned with
the internal management of the company. They are not, for instance, concerned
to see that there was proper quorum of directors present, or that persons who
were apparently directors of the company had in fact been validly appointed. Those
are matters of internal management: and I have no doubt if the disability of a
director to vote upon a contract in which he was personally interested were
imposed by the articles of association, the question whether he was personally
interested in, and entitled to vote upon, a particular contract would be
regarded as a matter of internal management, with which persons dealing with
the company would not be concerned.
It is argued, however, that that position does not apply in India,
because the restriction against voting is a statutory disability, and
non-compliance with a public statute can never be a matter of internal
management. At first sight there is, I think, force in that contention; but on
consideration, I agree with the argument of Mr. Munshi, that the principle of
the English cases as to internal management ought to be applied to a case of
disability of directors arising under Section 91-B. It is clear that the reason
for the rule applies as strongly in India as in England. The reason for the rule,
I take it, is that it would be disastrous in a business community if contracts
made with companies could be impeached on account of matters known to the
company but not to the other contracting party. Moreover, I think that the
distinction between the position in England, where the disability arises under
the articles, and in India, where it arises directly under the statute, is
really more apparent than real, because under Section 8, Companies Act, 1929,
and the corresponding sections in earlier Acts, the articles of association are
made the regulations of the company, so that they bind the company by virtue of
the statute, and the only real distinction between the position in England and
in India (apart, of course, from the fact that the articles can be altered by
the company whilst the statute cannot) is that in the one case the disability
of directors arises indirectly from the statute, whilst in the other it arises
directly from the statute. In my judgment, therefore, we ought to hold that if
Sassoons had no notice of the facts giving rise to the disability of the
directors of Pratts to vote on this contract, then the contract ought not to be
impeachable by reason of Section 91-B.
The question then arises whether Sassoons had notice. It is, of course,
clear that they had notice of the terms of the contract to which they were
parties, and, therefore, they had notice that there was a conflict of interest
in relation to that contract between Pratts and M.T.s; and the only real
question, is, whether they had notice that the Board of the two companies were
common, and that, therefore, all the directors of Pratts were personally
concerned or interested in the contract.
Mr. Coltman has relied on Section 87, Companies Act, which requires a
list of directors to be filed with the Registrar, and he says that Sassoons,
therefore, had notice of who the directors of Pratts and M.T.s were; but it has
never been held, as far as I know, in the English cases that people dealing
with companies have notice of the contents of all documents on the file of a
particular company; and this Court in Pudumjee & Co. v. Moos has expressed
an opinion against that view. I therefore do not rely on Section 87. Apart from
this the first point argued in favour of the view that Sassoons had notice of
the common directorship is that they had such notice through Mr. Raymond. Mr.
Munshi on behalf of Sassoons has referred us to a good many cases which
undoubtedly show that where you have a director common to two companies you
cannot impute to both those companies all matters within the private knowledge
of the director, The cases referred to are In re Marseilles Extension Railway
Co., Exparte Credit Fonder and Mobilier of England ; In re Hampshire Land Co.
and Duck v. Tower Galvanizing Co. I may take the general rule as stated in In
re Hampshire Land Co. There the headnote, which I think accurately represents
the decision says:
"Where one person is an officer of two companies his personal
knowledge is not necessarily the knowledge of both the companies. The knowledge
which he has acquired as officer of one company will not be imputed to the
other company unless he has some duty imposed on him to communicate his
knowledge to the company sought to be affected by the notice, and some duty
imposed on him by that company to receive the notice; and if the common officer
has been guilty of fraud, or even irregularity, the Court will not draw the
inference that he has fulfilled these duties."
That case was followed, as to the last portion of it, where the common
director had been guilty of fraud or irregularity, by the House of Lords in
J.C. Houghton & Co. v. Nothard Lowe and Wills and none of the learned Lords
in that case expressed any dissent from the earlier portion of the decision, so
that I think one may take that case as good law. I am unable to say in this
case that Mr. A. J. Raymond had no duty imposed upon him to communicate to
Sassoons matters within his knowledge as a director of Pratts or M.T.s. He was
more than a director of Sassoons, he was, as I have said, the managing director
with all the powers of the directors; and having regard to the relations
between the three companies, I think it is a fair inference that he was placed
on the boards of M.T.s and Pratts largely in order that he might protect their
interests, and I have not the slightest doubt that it was his duty to
communicate to Sassoons any material fact which came to his knowledge as
director of either of those companies. Whether he ever did communicate to
Sassoons, the fact that the boards of directors of the two companies were
common, I do not know. I should think probably he did. But if he omitted to do
so, it was not, I feel sure, because he considered that he owed no duty to
Sassoons to make the communication, but because he did not realize the
importance of the fact.
Moreover, apart from the notice which Sassoons acquired through Mr.
Raymond, I think they also had notice in another way. The attestation clause to
the mortgage deed of February 1928, shows that the common seals of M.T.s and of
Pratts respectively were fixed pursuant to resolutions of the respective boards
of directors passed at meetings held on February 23,1928. Sassoons were
concerned to see that those resolutions were in order, because they were the
foundation of their title, and if they had taken the trouble to look at the
resolutions, they would have seen that they were resolutions passed by the same
persons as directors of Pratts and also as directors of M.T.s. So that Sassoons
knew in that way that all the directors of Pratts who voted in favour of the
execution of the document of February 28, 1928, were also directors, and
therefore share-holders of M.T.s, and in that way had an interest conflicting
with that of the company, and that their votes therefore could not be counted
under Section 91-B. It seems to me, in the circumstances of this case,
impossible to hold otherwise than that Sassoons had notice that the votes of
the directors of Pratts in favour of the execution of this document, under
which they claim, ought not to have been counted by reason of the provisions of
Section 91-B. If that is so, the resolution of the directors of Pratts of
February 23, 1928 is void, and the execution of the mortgage in favour of
Sassoons must also be void: see In re Greymouth Point Elizabeth Railway and
Coal Co., Ltd.
It was further argued by Mr. Munshi that even if the document was void,
it had been ratified by all the shareholders of Pratts. So far as the holders
of ordinary shares were concerned, there may have been a ratification, because
all the ordinary shares were held either by M.T.s or by their directors, but
the preference shares were held by outside parties, one of whom was Mr. F.E.
Dinshaw, who alone is suggested to have had notice. It is said that Mr. F.E.
Dinshaw was informed that Pratts had mortgaged their property to Sassoons and
that he knew that the boards of Pratts and M.T.s were common ; but not only was
he not told that there was any question as to the validity of the mortgage, but
he was not told, as far as I can see, the fact that the mortgage was not made
directly to secure a debt due by Pratts to Sassoons, but to secure a debt due
by M.T.s to Sassoons. That is to say, he was not told anything to suggest that
there was any conflict of interest between Pratts and M.T.s, Or any reason why
the execution of the mortgage should be impeached under Section 91-B. That
being so, I am clearly of pinion that the view of the learned Judge was right as
to this, and there is no force in the contention that the document has been
ratified by the share-holders. In the result, therefore, the claim of Sassoons
fails. As they had no debt apart from the mortgage-deed, they have no equity to
retain the documents of title of Pratts which were deposited with them. These
will have to be returned to the liquidator.
Then the question arises as to the claim of M.T.s. As I have Said, the
power of the directors to borrow was limited by Article 73 under which the
amount borrowed by the directors for the time being remaining undischarged must
not exceed rupees five lacs, the capital of the company. I have also mentioned
that at the time of the liquidation the amount due to M.T.s was less than five
lacs. Therefore, prima facie, there seems to be no reason for challenging the
claim of M.T.s on the ground that the incurring of the debt was ultra vires.
But it appears from the accounts put in by M.T.s that in previous years the
borrowing did go beyond five iacs and reached, in the year 1922, thirteen lacs,
and it was gradually reduced, but remained over five lacs down to the year
1928. It was argued by Mr. Coltman that by the application of some of the many
equities discussed in Sinclair v. Brougham we ought to hold that the amounts
repaid were the authorized borrowing and not the unauthorized borrowing, and we
ought, therefore, to come to the conclusion that the whole amount due at the
date of the liquidation was the unauthorized borrowing. Why we should apply any
equity in favour of his clients who borrowed the money they do not wish to
re-pay, I do not know. It is quite clear that the rule in Clayton's case has no
application where the question is between moneys borrowed inira vires, and
moneys borrowed ultra vires in respect of which the relationship of debtor and
creditor never arises. It is clear also that Pratts had the benefit of all
these moneys, and as soon as the amount due came to below five lacs, the
borrowing was authorized under Article 73.1 entirely agree with the learned
Judge that, insofar as it is necessary to rely on any presumption, the
presumption would be that the moneys repaid represented in the first place
moneys borrowed ultra vires, which never became the property of the company,
but remained the property of the lenders. I am not sure that in this case it is
necessary to rely on any presumption, because at the material date, namely the
commencement of the liquidation, Article 73 had no application, because the
debt was under the limit. I agree also with the argument of Mr. Setalvad on
behalf of M.T.s that in a case where the borrowing is ultra vires the
directors, and not ultra vires the company, the money could be recovered in an
action for money had and received. As pointed out by the Lord Chancellor in Sinclair
v. Brougham where the borrowing was ultra vires the company, no action for
money had and received lies in such a case, because the action is based on the
fiction of a promise to pay, and you cannot have a fictional promise to pay
where the promisor is not competent to give an actual promise. But that
reasoning does not apply where the borrowing is only ultra vires the directors,
so that the company can ratify the borrowing and give a. valid promise to pay.
It has further been argued by Mr. Coltman in this Court, though the point
does not appear to have been taken in the Court below, nor is it directly taken
in the memorandum of appeal, that a part of the moneys due at the date of the
liquidation to M.T.s represents interest on moneys borrowed ultra vires. There
is, I think, some force in the contention that Pratts could not be charged with
interest on moneys which for the time being had not been properly borrowed, nor
I think could such interest be recovered in an action for moneys had and
received. If that point were to prevail, I think that the liquidato of Pratts
would be entitled to an account of the moneys due to M.T.s with a declaration
that nothing was to be allowed in respect of interest on moneys borrowed which
were for the time being in excess of five lacs. But, in my opinion, we ought
not to direct such an account in this case. The point, as I have said, was not
taken in the Court below, nor has it been directly taken in the memorandum of
appeal; and in the lower Court Counsel for Sassoons tendered an account of
pratts in that ledgers of M.T.s, and
Counsel for Pratts admitted the correctness of the account and no point was
raised that any particular issue in the account was wrong. No doubt it was said
that the whole amount due on the account was not properly payable because it
all represented moneys borrowed ultra vires. But no question was raised that a
part of the moneys due at the date of liquidation to M.T.s represented interest
on moneys borrowed ultra vires. I think, in view of the admission in the Court
below as to the correctness of the account, and the fact that this question as
to interest was not argued in the Court below nor taken in the memorandum of
appeal, we ought not to direct an account now.
In the result, I agree with all
the conclusions of the learned Judge in the Court below except the conclusion
that Sassoons were not fixed with notice of the disability of the directors of
Pratts to vote on the resolution for the execution of the contract in suit.
That being so, the appeal against Sassoons will be allowed, and the appeal
against M.T.s dismissed. Declared that M.T. s are entitled to a certificate
under Rule 702, as unsecured creditors for the amount of their claim. The
appeal against M.T. s is dismissed with costs, and the liquidator of Pratts
will have liberty to pay the costs out of the assets. The appeal is allowed
against Sassoons ; but having regard to the fact that they have succeeded on
certain issues in the lower Court and in this Court, they ought not to pay the
whole of the costs in both the Courts. Instead of apportioning costs, we
propose not to vary the order of the lower Court that the costs of respondent
No. 1 should come out of the assets, but we direct respondent No. 1 to pay the
whole costs of the appeal against respondent No. 1 to the appellant.
B.J. Wadia, J.—I have come to the same conclusion. The
question for decision so far as the claim of the Sassoons is concerned, centers
round the transaction contained in the deed on mortgage, dated February 28,
1928, made between M.T.s. the Pratts and the Sassoons. The claim of the
Sassoons is based on this deed, and on the deed of 1931 between the same
parties which was, however, only by way of confirmation. The claim was rejected
by the liquidator, but the grounds far rejection have not been clearly stated
in his affidavit made in these proceedings on July 13, 1933. His
Counsel, however, contended before us that the transaction was not binding on
the company and the liquidator on the grounds, (1) that the recitals in the
deed were not accurate and did not correctly represent the actual state of the
dealings and business between the parties: (2) that the transaction was really
a transaction of suretyship under which Pratts stood surety for payment of a
debt due to the Sassoons, not by themselves, but by M.T. s, and the giving of
such guarantee was ultra vires the company; (3) that the covenant under which
the Pratts and M.T.s jointly and severally promised to repay four and a half
lacs to the Sassoons and the security for the repayment of the same were
without consideration; that the deeds were executed in pursuance of resolutions
which were not valid and binding, and that therefore the deeds were void and of
no effect.
With regard to the recitals in the deed of 1928 it was argued that the
figures of nine lacs and four and a half lacs were entirely imaginary, that
there was no evidence of a direct specific loan of four and-a-half lacs from
the Sassoons to the Pratts, that there was no connection between the account
subsisting between Pratts and M.T.s on the one hand and the account between
M.T.s and the Sassoons on the other, and that therefore no relationship of
creditor and debtor had been established to justify the covenant to repay the
four and a half lacs and the security for repayment of the sum. It is common
ground that there is no account of the Sassoons in the books of Pratts showing
the Sassoons as creditors, nor any account of Pratts in the books of the
Sassoons showing Pratts as debtors. But the relationship of creditor and debtor
in respect of the four and a half lacs is created by the deed itself, which has
been formally signed and executed by all the three companies. In that document
M.T.s have acknowledged receipt of nine lacs from the Sassoons, and Pratts acknowledged
receipt of four and a half lacs out of the nine lacs advanced by Sassoons to M.
Ts. The recitals may not be literally correct in the sense that there is
nothing on the record of the companies corresponding with what is stated in
them, but they are not false in substance. To hold otherwise would be, in my
opinion, to sacrifice substance to form. There is also a plain recital that
Pratts required four and a half lacs for the purpose of their business, that
these four and a half lacs were advanced for such purpose, and there is no
evidence before us that the money which were within the authorized limit were
not used and applied bona fide for the purposes of the company. When moneys
borrowed or acknowledged to be due are within the authorized limit, there is no
obligation upon the lending company to inquire how the moneys are about to be
used nor how in fact they have been used. In my opinion, therefore, all the
parties would be bound by this transaction, if it was otherwise valid.
I agree with the learned Judge in the Court below that this is not a
suretyship transaction. The fact of Pratts having been described as
"surety" is not conclusive as to the nature of the transaction, any
more than the stamp on the document is conclusive as to what the document really
is. Our attention was drawn to certain correspondence that passed before the
deed was executed. But all previous correspondence was in the nature of
negotiations. The negotiations became merged in the deed which after execution
was the sole repository of the terms of the transaction. Under this deed the
Pratts have not guaranteed the payment of the moneys due by M. Ts. to the
Sassoons. They have acknowledged their own liability to the Sassoons for
four-and a-half lacs, and secured repayment of that sum by deposit of
title-deeds of their property. It cannot, therefore, be said that Pratts have
made their own property security for somebody-else's debt when they have
themselves acknowledged that they are debtors to the extent of four-and-a-half
lacs, and the ruling in Crewer & Wheal Abram United Mining Co., Ltd, v.
Willyams, on which Counsel for the liquidator relies, therefore, does not
apply. It was also argued that there was no novatio as to the four-and-a half
lacs, because M.T.s have not released Pratts of their liability for that
amount, nor have the Sassoons released M.T.s. It is true that there is no
express covenant in the deed that M.T.s will not sue Pratts for four-and-a-half
lacs, but such a covenant is implied in the deed, for as a result of the deed
M.T.s could not have sued Pratts for four-and-a half lacs, at least not for
three years.
The Sassoons gave time to M.T.s to pay their debt, and an implied
forbearnce to sue M.T.s is sufficient consideration in law to sustain the
promise by Pratts to pay four-and-a-half lacs, to Sassoons which is a part of
the nine lacs advanced by the; Sassoons to M.T.s. There is a
tripartite arrangement in the nature of a novatio, and it cannot be said that
an arrangement of this kind is ultra vires the company. This brings me to the
resolution of February 23, 1928. The alleged invalidity of the resolution seems
to be the only ground which has been forcibly urged by the liquidator in his
affidavit. But it is a question which really goes to the root of the whole matter.
Counsel for the liquidator relied on Section 91 B and the proviso to Article 77
of Table A, Companies Act. Sections 91-A, 91-B, 91-C and 19-D have all been
added by Act 11 of 1914. Section 14 of the English Companies Act, which was
added in the Act of 1929, corresponds in effect to Section 91-A of our Act.
There is no section in the English Act corresponding to Section 91-B. Section
91-B provides that where a director is concerned or interested directly or
indirectly in a contract or arrangement with the company; he cannot vote on
that contractor arrangement; and the proviso to Article 77 in Table A says in
effect the same thing, except that the words in the section are "contract
or arrangement" and the words in the article are 'contract or work.'
It is clear that the interest of the director in the transaction must be
personal, and either pecuniary or material. It may be direct or indirect, but
it must be adverse to the company of which he is a director. The principle on
which it is based has' been well recognized, and it is so direct and inflexible
that even the fairness or unfairness of the transaction is immaterial. For
instance, directors have been held to be incopmetent to vote on giving a
debenture security to two of themselves in consideration! of a large sum of
money owing to them : In re Greymouth Point Elizabeth Railway and Coal Co.,
Ltd. They cannot vote on an issue of debenture to secure an overdraft account
with the bank which was guaranteed by themselves personally : Victors, Ltd. v. Linggard.
A director cannot vote on an allotment of shares to himself: In Re Hormusji A.
Wadia. The reason in all these cases is that the company is entitled to the
unbiased judgment of its directors on matters affecting the interests of the
company. As pointed out by the Vice-Chancellor in Benson v. Heathorn, the
company has a right to the entire services of its directors, a right to the
voice of every director, and a right to his advice in giving his opinion on
matters which are brought before the Board for consideration. Section 91-B,
Companies Act, enforces a statutory prohibition which is somewhat stringent and
it was pointed out in argument in Guntur Cotton Jute and Paper Mills Co., Ltd.
v. Venkatachalapati at p. 128 that the case to which it should be applied must
fall strictly within its purview.
The liquidator contends that the resolution of February 23, 1928, is
invalid because the directors of Pratts were not competent to vote on a
resolution for executing the deed, having regard to their common interest in
M.T.s and that the Sassoons had notice, actual or constructive, of the facts
going to invalidate the resolution. The five directors of Pratts, who were
present at the meeting of February 23, and voted on the resolution of 5 p.m.,
passed exactly the same resolution as directors of M.T.s in the same building
at 5-15 p. m. Moreover, the directors of Pratts were interested in M.T.s.
either as share-holders or as directors of M.T.s. One of the directors of
Pratts was Mr. A. J. Raymond, who was also the managing director of the
Sassoons. Under resolution of the Sassoons of February 3,1921, he was empowered
to exercise the full powers of the entire Board of Directors of the Sassoons,
and according to the evidence given in these proceedings by the head accountant
of the Sassoons, he was in charge of the business of the Sassoons as managing
director from its inception. There was no doubt a common Board between M.T.s
and Pratts, also a common secretary and a common management. It was argued on
behalf of the liquidator that there was no independent person present to vote
on the resolution giving the security of Pratt's property to the Sassoons, and
that all the directors, were, therefore, disqualified to vote. There was no
quorum competent to transact business, and therefore, the resolution was
invalid, and the deed executed in pursuance thereof was a nullity.
On the other hand Counsel for the Sassoons argued that the question of
the disqualification of the directors of Pratts, the question whether the
meeting was properly called, the question whether there was a proper and
competent quorum qualified to vote on the resolution, are all matters of
internal or in door management of the company, and do not affect the validity
of the contract or transaction so far as outsiders are concerned, under the
ruling in Royal British Bank v. Tarquand and a company is bound by its own
resolution. A person dealing with limited liability companies is deemed to have
notice of its memorandum and articles of association, but he is not bound to
inquire into the internal management, and will not be affected by any
irregularity of which he has had no notice. He has a right to assume that
nothing has been done or permitted to be done which is not permitted by the
memorandum and articles of association or by the statute incorporating the
company itself. But actual or constructive notice of any irregularity prevents
a third person contracting with the company from obtaining the protection of
the rule in Royal British Bank v. Tarquand namely, that all matters of internal
or in-door management must be deemed by outsiders to have been duly and
properly complied with. Such notice, as I have said, may be actual or
constructive. If the outside party is put on inquiry by reason of the
circumstances under which the transaction was put through, or by the nature of
the transaction itself, or by any other surrounding circumstances, and
disregards the facts which put him on inquiry as to the irregularity, he cannot
get the benefit of the rule.
The question, therefore, in this case is whether the Sassoons had notice
of the irregularity, that is, notice of the disqualification of the directors
of Pratts to vote on the resolution, under the terms of Section 91-Bof the Act.
Mr. A.J. Raymond was a common director of all the three companies but it was
said that he was present at the meeting of February 23, 1928, in his capacity
as director of Pratts only, and that he was not bound to communicate his
knowledge of any irregularity derived in that capacity to the Sassoons. It has
been laid down in numerous cases that the knowledge of the common officer of
two companies is not necessarily the knowledge of both the companies, and
Counsel contended that it did not follow that the Sassoons therefore had notice
of every fact that happened to be known to Mr. A.J. Raymond : In re Hampshire
Land Co. In re Marseilles Extension Railway Co. Ex parte Credit Foncier and
Mobilier of England. But in J.C. Houghton & Co. v. Nothard Lowe and Wills,
Viscount Dunedin points out at p. 14 that it may be assumed that the knowledge
of directors is in ordinary circumstances the knowledge of the company, and
Viscount Sumner points out in the same case at p. 19 that what a director knows
or ought in the course of his duty to know may be the knowledge or the company,
for it may be deemed to have been duly used so as to lead to the action, which
a fully informed corporation would proceed to take on the strength of it. The
position of Mr. A. J. Raymond when he sat as a director of Pratts on February 23,
1928, is of importance in this connection. The Sassoons were vitally concerned
in the equitable mortgage which Pratts were to give to them. There was previous
correspondence between the companies about it. Mr. Raymond was not merely a
common director, but he was also present there as manager of the business of
the Sassoons, and this certainly was a business transaction, not of Mr. A. J.
Raymond, personally, but of the Sassoons. He knew or must be presumed to have
known that there was a common board of Pratts and M.T.s., though he may not
have appreciated the legal significance of that fact nor thought it his duty to
communicate to the Sassoons. There were other circumstances surrounding the
transaction which were sufficient to suggest further inquiry.
The two resolutions passed on the same day are mentioned under the seals
of M.T.s and Pratts which were affixed to the deed itself. The learned Judge in
the Court below has stated that if this transaction could have been put through
by two documents, it might as well have been put through by one, and there was
nothing unusual in its nature as a business transaction. The form may not be
unusual, but the question is not one merely of form. A transaction which may be
effected by two documents may well be effected by one, but the doubt as to the
validity of the transaction as embodied either in one document or two documents
will still remain under the circumstances which I have referred to before. In
my opinion it was Mr. Raymond's duty as manager of Sassoons for all business
purposes to act not merely for the purposes of receiving information but also
for the purpose of communicating it. It is really difficult to believe that
there was a situation on February 23, when it could be said that Mr. Raymond
had notice only as a director of Pratts and had no notice as managing director
of the Sassoons and as manager of their business. The Sassoons also were bound
to inquire into the title to their mortgage, and the title to the mortgage was
based upon the validity of the resolution. There was no independent board, and
no meeting of the shareholders was called to ratify the transaction. Therefore,
under all the circumstances, the Court can impute knowledge of the irregularity
to Sassoons. Counsel for the liquidator also relied on Section 87, Companies
Act, under which the list of directors filed with the Registrar is open to
inspection, but it was pointed out in Pudumjee & Co. v. Moos that
notwithstanding Section 87 the appointment of directors was still a matter of
the internal management of the company, and an outsider could not be expected
also to search the register for the list of directors.
I do not agree with counsel for the Sassoons that the transaction was
ratified by all the shareholders of Pratts by acquiescence. There can be a
ratification either with full knowledge of the transaction or with the
intention to adopt the transaction under any circumstances. It cannot be said
that Mr. F.E. Dinshaw, and two others who were joint holders of preference
shares on behalf of the Gwalior State had full knowledge of all the
circumstances attending the transaction or were put upon inquiry. It was argued
that if he had not the knowledge, he had the means of knowledge. But a person
can only be put on inquiry if there are facts communicated to him which may
lead to a further inquiry. He was not put on inquiry merely as a shareholder.
Reference was made to two letters of February 28, and March 3, 1928, written to
him by H.M. Mehta & Co., the managing agents, on behalf of Pratts. There
was no reply to either of them; but from that it cannot be inferred that he
manifested an intention to adopt the transaction. In my opinion the letters are
not sufficient evidence on which any Court can base a finding of standing by or
acquiescence on the part of Mr. F. E. Dinshaw.
The claim of the Sassoons is based on the deeds. The deeds not being
valid and binding for the reasons above stated, they cannot have any claim
either as secured or unsecured creditors, for the debts as well as the security
are created by the deed of 1928. This brings me to the claim of M.T.s which is
really an alternative claim. It is stated in para. 7 of the affidavit of Mr.
J.M. Taleyarkhan, dated July 7, 1933, that in the event of the claim of Messrs.
E.D. Sassoon & Co., Ltd., being admitted, M.T.s will not claim the amount
over again. Article 73 of Table A has already been referred to and I need not
recite it again. It fixes the directors' limit of borrowing at five lacs. It
was, however, argued that borrowings by Pratts were far in excess of the limit
of five lacs, but in my opinion there is no ground for assuming that the claim
now made, which is below the limit, represents the balance of unauthorized
borrowings. It was further argued that the Pratts should not, in any event, be
charged with interest on that portion of the claim, which may represent
interest on their unauthorized borrowings. That contention, however, was never
put forward in the Court below. It has not been mentioned in the judgment. It
is not taken in the memorandum of appeal. Even in the affidavit of the
liquidator himself of July 13, all that is stated is as follows :
"The petitioners contend, and I am advised with reason, that as the
payments made by the company from time to time to M. T., Ltd., in liquidation
of the account would discharge the borrowings from M.T.s Ltd., in order of
time, the ultimate balance left unpaid represents that final borrowings, and
therefore the balance shown as now due in the account of M.T. Ltd., represents
the last borrowings by the management of M. T., Ltd., in excess of the powers
of the board of directors to borrow, and therefore represent unauthorized and
ultra vires borrowings by which the company is not bound."
The claim of M.T.s was disputed on principle, and not in respect of the
quantum, in the course of the hearing, and no one contended in the Court below
that an account should be taken of what was due to M.T.s in respect of their
claim. The account of the Sassoons in the ledgers of M.T.s and the account of
Pratts in the ledgers of M.T.s were put in, and their correctness was admitted.
Counsel for the liquidator argued that all that was meant by the admission was
that the accounts were not to be formally proved. If that was so, the note
taken by the learned Judge would not have been in that form. The accounts would
only have been put in by consent without proof. I therefore hold that the
liquidator is not now entitled to have any account taken of the sum due to
M.T.s in respect of their claim. The claim is within the authorized limit. The
moneys were borrowed and used according to the balance sheets of Pratts for
their business. There was, therefore, an implied promise by the Pratts to repay
all that had gone into their coffers. In my opinion no account should now be ordered,
and the account of the claim should be taken as correct. It has been held that
an account for money had and received cannot lie in the case of an ultra vires
borrowing: Sinclair v. Brougham. But the amount claimed by M.T.s is within the
limit, and Pratts are bound to repay the sum. For these reasons I agree with
the conclusion that the claim of the Sassoons should be rejected, and the claim
of M.T.s allowed. In the result the appeal would be allowed so far as the claim
of the Sassoons is concerned, and dismissed so far as the claim of M.T.s is
concerned. I agree with the order for costs made by the Chief Justice.