1. 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.
2. 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 conten ded 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.
3. On behalf of the claimants it is contended that the article authorises 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 1. Royal British Bank v. Turquand (1856) 6 El 327. 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 authorising the making of the bond, and that it was given without the authority of the shareholders. 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 obligee having, on facts alleged, a right to presume that there had been a resolution at a general meeting, authorizing the borrowing 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 o 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.
4. 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 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 case 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.
5. This distinction is made clear and accepted by the decision in Irvine v. Union Bank of Australia (1877) 3 Cal 280. 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 shareholders 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, any 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 articles, was capable of being extended under the provisions of Article 31. But by that article one-half of the votes of the share-holders 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 1. Royal British Bank v. Turquand (1856) 6 El 327 and observed as follows (p. 99 of 4 I A):
The case of 1. Royal British Bank v. Turquand (1856) 6 El 327 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 1. Royal British Bank v. Turquand (1856) 6 El 327.
6. 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 (1877) 3 Cal 280 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 1. Royal British Bank v. Turquand (1856) 6 El 327. Under the circumstances, and it being common ground that no resolution at any general meeting of the company was passed, the directors were not authorised 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 Bank of Australia (1877) 3 Cal 280 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 unauthorised borrowing of the directors. In this connexion also the liquidator relies on the observations in Irvine v. Union Bank of Australia (1877) 3 Cal 280 to the effect that 1. Royal British Bank v. Turquand (1856) 6 El 327 does not apply. The liquidator further relies on the decision in Sinclair v. Brougham (1914) A C 398. in which it was held that if a company is not authorised 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 consideringan unauthorised borrowing by a company which was a statutory society and had no power to borrow, observed as follows (p. 414):
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 rem 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.
7. 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 (1914) A C 398 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 connexion 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 repay. This view is supported by the decisions in Reid v. Rigby and Co. (1894) 2 Q B 40 and Bannatyne v. Maclver (1906) 1 K B 103. 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 authorised 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, 1 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 (1914) A C 398 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.
8. I am further supported in this view by the decision in Troup's Case (1860) 29 Beav 353 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 (1861) 30 Beav 225. 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.
9. In British and American Telegraph Co. v. Albion Bank (1872) 7 Ex 119 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 plaintiffs' name; that the plaintiffs should guarantee to the defendants the repayment 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 S's name with a loan of 1,500 from the defendants. Sham 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 allotters, immediately after the shares were allotted, handed blank transfers to Section 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. S'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 authorised 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 repayment 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 unauthorised acts of the directors.
10. It is argued on behalf of the liquidator that Irvine v. Union Bank of Australia (1877) 3 Cal 280 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 23rd December 1867, the directors of the O.R. Company obtained from the bank a letter of credit, No. 150, for 10,000, and on 11th September 1868 a letter No. 141, for 5,000, and stated those facts in their report of 29th October 1868, which was ratified at the half yearly meeting of that date. Letter No. 150 expired on 29th March 1869, but was renewed. On 9th September 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 the 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 31st May 1872, at a sale by auction in execution of three decrees obtained by the Bank of Bengal and two 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 the 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.
11. The form of the order finally made also makes this clear. It was as follows (p. 100):
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 5th October 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 o the accumulations thereon, if any, be paid to the defendant-appellant.
12. 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 tracing 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 utilised for the business of the 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 the 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 utilised 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 unauthorised the directors' borrowings be, the share-holders of the company were aware of this and have ratified the same by their acquiescence. In this connexion M.T. Ltd. rely on the balance-sheets prepared by the directors and passed by the share-holders, year after the 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.
13. In Re The Magdalena Steam Navigation Co. (1860) 29 L J 667 by the deed of settlement of a joint stock company power was given to a meeting, consisting 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 share-holders holding 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 two 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 share-holders, 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 share-holder had contended that the borrowings were not binding on the company. On behalf of the liquidator reliance is placed on the decision in Houghton and Co. v. Nothard, Lowe and Wills (1927) 1KB 246 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 connexion 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. In 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.
14. The question of adopting the transaction by the share-holders passing the balance-sheets has been considered in some English cases. In Houldsworth v. Evans (1868) 3 H L 263 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 authorty or after full knowledge of the transaction which was being assented to. Even in the dissenting judgment of Lord Cranworth, who held that when the directors had exceeded their legal powers and the share-holders took no steps in the matter but allowed the things done to remain unimpeaehed 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 In Re Ry. and Gen. Light Improvement Co.Marzettis Case (1879) 42 L T 206 the emphasized. In Re Ry. and Gen. Light Improvement Co.Marzettis Case (1879) 42 L T 206 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 shareholders at their meeting. The item included was shown to be an unauthorized expenditure. Brett, L.J., in considering the question of ratification observed as follows (p. 208):
But it cannot ba said that the company ratified the payment by passing it unquestioned on tne 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 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.
15. In re Republic of Bolivia Exploration Syndicate, Ltd. (1914) 1 Ch 139 the question of waiver in respect of an ultra vires payment, by receiving and adopting the balance-sheet, came to be considered and at p. 176 it was observed as follows:
After they learned at the share-holders' meeting of 14th December 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 adiourned meeting..
16. 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 (1877) 3 Cal 280 makes the point still more clear. At p. 95 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.
17. The case of In Re The Magdalena Steam Navigation Co. (1860) 29 L J 667 decided nothing to the contrary. In that case also the share-holders 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.
18. 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 (1816) 1 Mar 572 does not apply. In this connexion reliance is placed on the decisions in Blackburn and District Benefit Building Society v. Cunliffe, Brooks and Co. (1882) 22 Ch D 61Cunliffe, Brooks and Co. v. Blackburn and District Benefit Building Society (1884) 9 A C 857 Blackburn and District Benefit Building Society v. Cunliffe, Brooks and Co. (1885) 29 Ch D 902 and Sinclair v. Brougham (1914) A C 398. 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 connexion 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 (1816) 1 Mar 572. In my opinion when out of the total sum advanced by the party if a portion is authorised and the rest unauthorised according to the principles discussed in Sinclair v. Brougham (1914) A C 398the 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 (p. 426):
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.
19. 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 authorised 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 unauthorised 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 Rs. 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 authorised borrowing, the unauthorised borrowing having been repaid during the interval by the directors. This contention of the liquidator therefore, if necessary to be considered, must also fail.
20. The observations and principles contained in Sinclair v. Brougham (1914) A C 398with 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 share-holders should be made. That contention is based on Sinclair v. Brougham (1914) A C 398. 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 shareholders 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 share-holders 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 28th February 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.
21. 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.
22. In this connection reliance is placed on the decision in Crenver, etc. Mining Co., (Ltd.) v. Willyams (1866) 35 Beav 353. 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 up-wards 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 1,272, 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 repayment 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.
23. 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 and Wheal Abrm. Untd. Mining Co. (Ltd.) v. Willyams, (1866) 14 W R 1003. 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 as 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 28th February 1928 it must fail because there was no fresh consideration.
24. 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 laces) 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 laces) on the mortgagor agreeing to repay the said sum with interest thereon, and to secure repayment of the moiety thereof by the mortgagor depositing the title-deeds relating to ... belonging to the mortgagor and to secure repayment 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 here-under written, and whereas the mortgagee hath already paid to the mortgagor the said sum of Rs. 19,00,000 (nine laces) 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 laces) 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 here-under written relating to lands . . . belonging to the surety to the intent that the said lands. . . may be equitably charged with the repayment to the mortgagee of the sum of Rupees. 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 1st July 1926 at the rate of 6 per cent . . . and the mortgagor and the surety do hereby jointly and severally agree to repay to the mortgagee on 31st October 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..
25. 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 1st July 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 31st October 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.
26. 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 C1. 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 hereunder, is not void under C1. 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 for 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 28th February 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 surety ship, is denned in Section 126, Contract Act, as 'a. contract to perform the promise, or discharge the liability, of a third person incase 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 in 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.
27. The difference between the position of a surety and a joint debtor is made clear and recognised so far back as 1866 in Buck v. Hurst and Bailey (1866) 1 C P 297. 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 and Co. v. Conrad (1894) 2 Q B 885 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 indemnify 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 surety ship 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.
28. The case of Crenver, etc. Mining Co., (Ltd.) v. Willyams (1866) 35 Beav 353 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.
29. 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 utilised 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 C1. 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 unauthorised 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 the right thing, it should be presumed that 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.
30. 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 authorised 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, if 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. Princo and Co. (1895) 2 Ch 617. 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.
31. 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. 4,50,000 out of the sum of Rs. 9,00,000 borrowed by M.T. Ltd. from Sassoons was utilised 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 authorising the execution of the document is bad, and in this connexion 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 he 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 23rd 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.
32. 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 and Co. (1897) A C 22 under the law, a jointstock 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 recognised 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 perfectly business transaction with no unusual character. As pointed out in the correspondence, the attempt on the part of 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.
33. 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 a 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. Princo and Co. (1895) 2 Ch 617 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.
34. 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 re Hampshire Land Co. (1896) 2 Ch 743 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 (p. 747):
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 1. Royal British Bank v. Turquand (1856) 6 El 327 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 so ciety is not to rank..as a creditor for the amount lent.
35. 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 Nahony v. East Holyford Mining Co. (1875) 7 H L 869 as follows:
On the one hand, it is settled by a series of decisions, of which Ernest v. Nicholls (1857) 6 H L C 401 is one and 1. Royal British Bank v. Turquand (1856) 6 El 327 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 momorandum and articles of association; every joint-stock company, or nearly every one, I imagine (unless it adopts the form 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 raference 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.
36. 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 authorising 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 1. Royal British Bank v. Turquand (1856) 6 El 327 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 outside 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 28th February 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 28th February 1928 should be allowed.
37. 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 laces, 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 laces 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 22nd June 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 rupees nine laces 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 immoveable property known as the Collins Building, which was a part of the building in which Pratts carried on business, and Pratts had two immoveable 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 23rd February 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 28th February 1928, the security deed in question was executed.
38. 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 mortgagee 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 laces in order to enable them to lend money to Pratts. Then it recites that Sassoons had already paid to M.T.s rupees nine laces, out of which M.T.s had paid to Pratts rupees four and a half laces. 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 immoveable 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 laces out of the sum of rupees nine laces 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 laces with interest on 31st October 1931.
39. 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 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 deeds 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 to me 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 laces, and Sassoons were entitled to receive four-and-a-half laces. It seems to me clear that the transaction could have been carried out, as originally suggested, by two documents. Parts could have mortgaged their properties to M.T.s for four-and-a-half laces, 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. Princo and Co. 1895) 2 Ch 617 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 indemnify 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. Princo and Co. (1895) 2 Ch 617. 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.
40. 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 laces 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 surety ship 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 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.
41. 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 1924 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 Ex. 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 a part from their position as directors of Pratts, because they were directors of M.T.s and also share-holders 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.
42. 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 28th February 1928. An independent Board might very well have said that if Pratts were to give their property as 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.
43. 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 a 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 authorised 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 1. Royal British Bank v. Turquand (1856) 6 El 327 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 a 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 that 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.
44. It is argued however that that position does not apply in India, because the restriction against voting is a statutory disability, and noncompliance 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.
45. 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 Boards of the two companies were common, and that therefore all the directors of Pratts were personally concerned or interested in the contract.
46. 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 and Co.v. Moos 1926 Bom 28 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 ro Marseilles Extension Railway Co.: Ex parte Credit Foncier and Mobilier of England (1871) 7 Ch A 161 In re Hampshire Land Co. (1896) 2 Ch 743 and Duck v. Tower Galvanizing Co. (1901) 2KB 314. I may take the general rule as stated in re Hampshire Land Co. (1896) 2 Ch 743. 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.
47. 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. Honghton and Co. v. Nothard Lowe and Wills 1928 A C 1. 1936 B/U and 12 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 Jaw. 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 represent Sassoons and 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.
48. 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 28th 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 23rd February 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 diretors 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 28th February 1928, were also directors, and therefore shareholders 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 23rd February 1928 is void, and the execution of the mortgage in favour of Sassoons must also be void: see (1904) 1 Ch.32.
49. It was further argued by Mr. Munshi that even if the document was void, it had been ratified by all the share-holders of Pratts. So far as the holders of ordinary shares were concerned, there may have been 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 this 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 opinion 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.
50. 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 laces, 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 laces. 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 laces and reached, in the year 1922, thirteen laces, and it was gradually reduced, but remained over five laces 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 (1914) A C 398 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 repay, I do not know. It is quite clear that the rule in Clayton's case (1816) 1 Mar 572 has no application where the question is between moneys-borrowed intra 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 laces, the borrowing was authorized under Article 73. I entirely agree with the learned Judge that, in so far 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 (1914) A.C 398 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.
51. 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 liquidator 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 laces. 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 the ledgers of M.T.s, and counsel for Pratts admitted the correctness of the account, and no point was raised that any particular item 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.
52. 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 1 should come out of the assets, but we direct respondent 1 to pay the whole costs of the appeal against respondent 1 to the appellant.
B. J. Wadia, J.
53. I have come to the same conclusion. The question for decision, so far as the claim of the Sassoons is concerned, centres round the transaction contained in the deed of mortgage, dated 28th February 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 for rejection have not been clearly stated in his affidavit made in these proceedings on 13th July 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 surety ship 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 laces to the Sassoons and the security for the repayment of the same were without consideration; (4) 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.
54. With regard to the recitals in the deed of 1928 it was argued that the figures of nine laces and four and a half laces were entirely imaginary, that there was no evidence of a direct specifics loan of four and a half laces from the Sassoons to the Pratts, that there was no connexion 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 laces 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 laces 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 laces from the Sassoons, and Pratts acknowledged receipt of four and a half laces out of the nine laces advanced by Sassoons to M.T.s. 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 laces for the purpose of their business, that these four and a half laces were advanced for such purpose, and there is no evidence before us that the moneys 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.
55. I agree with the learned Judge in the Court below that this is not a surety ship 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.T.s to the Sassoons. They have acknowledged their own liability to the Sassoons for four-and-a-half laces, 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 laces, and the ruling in Crewer and Wheal Abrm Untd. Mining Co. (Ltd.) v. Willyams, (1866) 14 W R 1003 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 laces, 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 laces, 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 laces, at least not for three years.
56. The Sassoons gave time to M.T.s to pay their debt, and an implied forbearance to sue M.T.s is sufficient consideration in law to sustain the promise by Pratts to pay four-and-a-half-laces to Sassoons which is a part of the nine laces 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 23rd February 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 Act 77 of Table a Companies Act. Sections 91-A, 91-B, 91-C and 91-D have all been added by Act 11 of 1914. Section 149, English Companies Act, which was added in the Act of 1929, corresponds in effect to Section 91-A o 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 contract or 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.'
57. 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 recognised, and it is so strict and inflexible that even the fairness or unfairness of the transaction is immaterial. For instance, directors have been held to be incompetent to vote on giving a debenture security to two of themselves in consideration of a large sum of money owing to them: Greymouth Point Elizabeth Railway and Coal Co. Ltd., In re, (1904) 1 Ch 32. They cannot vote on an issue of debenture to secure an over-draft account with the bank which was guaranteed by themselves personally: Victors Ltd. v. Lingard, (1927) 1 Ch 323. A director cannot vote on an allotment of shares to himself: In re Hormusji A. Wadia, 1921 Bom 372. The reason in all these cases is that the company is entitled to the unbiassed judgment of its directors on matters affecting the interests of the company. As pointed out by the Vice-Chancellor in Benson v. Heathorn (1842) 1 Y C.C.C 326 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, etc., Mills Co., Ltd.v. Venkatachalapati 1932 P C 244 that the case to which it should be applied must fall strictly within its purview.
58. The liquidator contends that the resolution of 23rd February 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 23rd February 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 shareholders 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 a resolution of the Sassoons of 3rd February 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 Pratts' 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.
59. 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 indoor 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 1. Royal British Bank v. Turquand (1856) 6 El 327 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 1. Royal British Bank v. Turquand (1856) 6 El 327 namely, that all matters of internal or indoor 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.
60. 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-B of 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 23rd February 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. (1896) 2 Ch 743 In ro Marseilles Extension Railway Co.: Ex parte Credit Foncier and Mobilier of England (1871) 7 Ch A 161. But in J.C. Honghton and Co. v. Nothard Lowe and Wills 1928 A C 1. 1936 B/U and 12. 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 of 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 23rd February 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 it to the Sassoons. There were other circumstances surrounding the transaction which were sufficient to suggest further inquiry.
61. 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 23rd February 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 share-holders 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 and Co.v. Moos, 1926 Bom 28 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.
62. I do not agree with counsel for the Sassoons that the transaction was ratified by all the share-holders of Pratts by acquiescence. There can be 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 it 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 share-holder. Reference was made to two letters of 28th February and 3rd March 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.
63. 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 debt 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 7th July 1933, that in the event of the claim of Messrs. E.D. Sassoon & Co. Ltd., be. ing 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 the 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 13th July 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. Ltd., in order of time, the ultimate balance left unpaid represents the 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 represents unauthorized and ultra vires borrowings by which the company is not bound.
64. 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 amount 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 (1914) A C 398. 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.