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In Re: Indian Companies' Act of 1866 and of the Media Tea Co., Limited. and Vs. Walton (12.07.1882 - CALHC) - Court Judgment

LegalCrystal Citation
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Reported in(1883)ILR9Cal14
AppellantIn Re: Indian Companies' Act of 1866 and of the Media Tea Co., Limited. and ;C. Kernot
- .....gave up their connection with the company, and it had risen to about 87,000 at the time when dr. kernot's mortgage was executed.20. dr. kernot's account of the arrangement is as follows: 'i say that there was an account-current between me and the company; that i provided funds for the management of the company's tea garden in assam, and other purposes of the company as required, all moneys received by the company being paid over to me in reduction of my advances; that interest was charged on the balance due to me at 10 per cent. per annum; that from the nature of the business it was impossible to foresee what amount might be required at any particular time; and that the state of the balance was also liable to be affected by the time of arrival of consignments of tea and the prices of.....

Richard Garth, C.J.

1. The question raised in this appeal is, whether Dr. Kernot is entitled to any larger portion of his claim against the Media Tea Company than has been allowed by the Court below, and to enforce that claim under a mortgage of the 22nd of December 1879, executed in his favour by three of the Directors of the Company in accordance with a special resolution passed on the 4th of October 1879, at an extraordinary general meeting, and confirmed on the 16th of October 1879.

2. The mortgage recites that the Media Tea Company, being in want of funds for and towards enabling them to work and carry on the tea gardens, Dr. Kernot had advanced various sums of money, and had received from and on their account various sums of money, leaving a sum of Rs. 87,353, including interest up to date, due to him; 'that they had asked Dr. Kernot to lend and advance from time to time such further sums as might be necessary for carrying on the gardens; that the mortgagee had consented on the express understanding that the loan and interest should never exceed one lac; and that it was agreed that the mortgage should be security for all such sums as Kernot had paid, laid out, advanced, or expended, or might from time to time pay, lay out, advance or expend, or engage so to do or otherwise become liable for, on account, or on credit of the Company. The mortgage then follows in these terms, with the provision that the sum due to Kernot should not at any time exceed one lac with interest. There is a covenant for repayment seven days after demand, a covenant to pay forthwith all law charges between attorney and client incidental to this mortgage security or to any proceedings which may be had either for sale, or attempted sale, or otherwise, of the mortgaged premises for procuring or obtaining payment of any moneys thereby received. The rate of interest is 7 per cent. with annual rests. There is power to enter and take possession on default and carry on; money advanced while so carrying on to be deemed advanced to the Company. Usual covenants, &c.;

3. The mortgage was sealed and signed by three Directors--Hart, Longmuir, and Barlow.

4. In July 1880 Kernot demanded payment within seven days, or, in default, possession of the mortgaged premises; and on the 28th of July took possession under the mortgage.

5. In December 1880 the Company went into liquidation, and Dr. Kernot advanced a claim for Rs. 1,20,787. In disposing of this claim the original Court (17th September 1881) declared him entitled to charge the Company (i) with advances made before the 16th of October 1879, but so that the whole of the principal due in respect of such advances should not, at any time prior to the 16th of October 1879, exceed Rs. 50,000; (ii) with advances subsequent to the 16th of October 1879, but so that the whole of the principle of such further advances should not, together with advances prior to the 16th of October 1879, exceed one lac; and ordered that the claim, as thus defined, should be allowed with interest at 10 per cent. to the 16th of October 1879, and thereafter at 7 per cent. on the aggregate amount; and that the rest of the claim be disallowed. If necessary, an account of sums laid out by Kernot in managing, &c;, was to be taken, and the Liquidator was to retain his costs,--claimant to bear his own costs.

5. From this order the claimant appeals on the following grounds:

1st.--That he was entitled to charge the Company in respect of advances made prior to the 16th of October 1879, not only to the extent of Rs. 50,000, principal, but to the entire extent of his advances;

2nd.--That he was entitled to charge the Company in respect of advances made subsequent to the 16th of October 1879, not only to the extent of Rs. 1,00,000, principal, inclusive of prior advances, but to the full extent of his advances;

3rd.--That the Company did not exceed their powers in borrowing beyond Rs. 50,000;

4th.--That there was a ratification of the loans in excess of Rs. 50,000;

5th.--That interest up to the 16th of October 1879 ought to have been allowed at the rate claimed;

6th.--That the claimant was ordered to pay his own costs;

7th.--That no part of the claim should have been disallowed.

6. There is no dispute as to the regularity of the proceedings of the 4th and 16th of October 1879, at which the mortgage was sanctioned, or as to the due execution of the mortgage itself, or as to the meeting of the 13th of March 1880. The only questions are: (i) How far the sum which the mortgage purported to secure, and which is now claimed by Dr. Kernot, is legally due to him from the Company? and (ii) How far the Directors had power to mortgage the property of the Company to secure the sum, whatever it may be, due to Dr. Kernot

7. For the purpose of determining these questions it is material to premise the following facts:

8. The Company was registered in 1875. Its nominal capital was one and-a-half lacs, in 1,500 shares of Rs. 100 each. The objects of the Company are stated in the memorandum of association to be the purchase of certain tea estates, the manufacture and sale of tea, the leasing of the estates, and 'the doing of all other such things as are incidental or conducive to the attainment of the above objects.' Part of the estates purchased were bought from Mr. A.S. Campbell for Rs. 60,000, paid as agreed. Another portion was also bought from Mr. Campbell for Rs. 40,000 made up as follows:

Paid on Mr. Campbell's P.N. to the holder ... 11,000

240 paid-up shares in Campbell's name ... 24,000

50 paid-up shares to Barlow, at Campbell's request 5,000



9. The 60,000 and 11,000 were contributed by Messrs. J. Kingsley, R.S. Staunton, E.A. Thurburn, and J. Longmuir, in equal sums of 17,750, each of whom were allotted 177 shares of 100 rupees in respect of these contributions, and a further allotment of 100 paid-up shares. Thus the four contributories had 1,108 shares nominally worth Rs. 1,10,800, and the vendor and his nominee had 290 shares nominally worth Rs. 29,000.

10. Campbell was appointed manager, and it was agreed that if, within three years from January 1st, 1875, the shares were sold at 25 per cent. premium, 100 paid-up shares should be allotted to Campbell. This, with two shares allotted to Baroda Prosad Mitter made up the 1,500 shares, which constituted the nominal capital of the Company. Of Thurburn's 277 shares, 138 were, at his request, allotted to his partner J. Thomas. Messrs. Thomas and Co., financed the Company, and, by the close of 1877, the Company was indebted to them for Rs. 36,688.

11. At a meeting of the Directors held on the 14th January 1878, it was announced, that Messrs. Thomas and Co., refused to finance the Company any longer; the Secretary was authorized 'to make the necessary financial arrangements for 1878, not to pay more than 10 per cent. on advances.' A statement was submitted of liabilities and of certain debit entries carried forward to 1878-79, the estimated out-turn and a probable resulting debit balance for 1877 of Rs. 3,388.

12. On the 11th of January 1878 Kernot purchased Thomas's and Thurburn's 277 shares, and, at the meeting of the 14th of January 1878, Kernot and Longmuir were appointed Directors in the place of Thurburn and Kingsley. On 15th of January 1878 Kernot sold thirty shares to J. Hart, J. Majee, and J.M. Crowley, in equal lots of ten. It was then arranged that Kernot should finance the Company, and on the 16th of January he advanced Rs. 30,200, which was mainly appropriated to payment of the debt due to Thomas and Co.

13. On 12th of December 1878, at a meeting of the Directors, a statement was submitted, showing a probable debt at close of the year of Rs. 71,416. Another meeting of the Directors was held on the 14th of January 1879, at which Kernot showed a balance in his favour of Rs. 63,569, and an order was passed to get more power to borrow at the next share-holders' meeting. The ordinary general annual meeting was held on the 10th of April 1879, and it was resolved, that, in terms of the 13th article of association, the Directors are hereby empowered to borrow. This resolution does not appear to have been confirmed in the mode required by Article 51, and accordingly never to have become a special resolution.

14. At a meeting of the Directors in June 1879, it was recorded that the liability of the Company amounted to Rs. 80,061.

15. At an extraordinary meeting on the 4th of October 1869, the meeting sanctioned a mortgage to Dr. Kernot of the Company's property (except a specified garden) to secure payment of a sum not exceeding one lac for advances already made or to be made, and interest at 7 per cent. This resolution was confirmed at the extraordinary meeting on the 16th of October. On the 8th of November, Kernot resigned his seat in the Board.

16. At a meeting of the Directors on the 13th of December 1879, the mortgage was laid on the table, and the debit balance was stated to be Rs. 85,846.

17. On the 22nd of December 1879, Longmuir, Hart, and Barlow (holding 257+10+50=317 shares respectively) executed the mortgage.

18. On the 15th of February, Kernot resumed his seat at the Board, and was re-elected at the ordinary general meeting on the 13th of March 1880, and acted as such till the 10th of April, when he resigned on his departure for England.

19. These facts appear to establish that the Company was, from the outset, without any means of meeting the current expenses incidental to its business, payment of officers, outlay in plant, wages and food of coolies, etc., etc.; and that the course of business was, as it is we believe with the greater number of these Companies, that the concern should be 'financed,'--that is to say, that some agent in Calcutta or elsewhere should make the advances necessary to meet current expenses, soiling and giving credit for all sums received for sales of tea, and striking a balance at the close of the half-year. The result of this arrangement was a debit balance against the Company of Rs. 36,000 odd at the close of 1877, when Messrs. Thomas and Co., gave up their connection with the Company, and it had risen to about 87,000 at the time when Dr. Kernot's mortgage was executed.

20. Dr. Kernot's account of the arrangement is as follows: 'I say that there was an account-current between me and the Company; that I provided funds for the management of the Company's tea garden in Assam, and other purposes of the Company as required, all moneys received by the Company being paid over to me in reduction of my advances; that interest was charged on the balance due to me at 10 per cent. per annum; that from the nature of the business it was impossible to foresee what amount might be required at any particular time; and that the state of the balance was also liable to be affected by the time of arrival of consignments of tea and the prices of tea fetched at any sale. And 1 further say that the Company had to provide for the wages and rice for the coolies in the gardens, and the expenses of working in Assam; and the custom was for the manager to draw bills on the Secretary in Calcutta for moneys he required, which bills were negotiated with certain Marwari merchants or Kyahs at Debroghur in Assam. And I further say, that this custom is very general in. Assam owing to the difficulty in remitting money; and also that when these bills where presented to the Secretary, it was necessary for preserving the credit of the Company that they should be at once taken up; and that new funds not being immediately forthcoming to finance the gardens, the coolies under engagement there would have also broken their engagements and run away, and the property would have gone. I also say that money was also frequently required for the heavy litigation in which the Company was involved, and I was compelled for the preservation of the property of all concerned to continue making the advances. '

21. We believe that this statement is substantially true, and the point which we have now to decide is, whether the system of advances thus described was beyond the powers of the Directors so soon as the sum due from the Company to Dr. Kernot amounted to more than Rs. 50,000, no previous sanction having been given to the advances by any special resolution.

22. The articles of association embody those given in the first schedule to the Joint Stock Companies' Act, so far as they are consistent with the articles. Article 13 further provides, that the 'Directors may, from time to time, if they shall see fit, without any previous consent of the shareholders, borrow any sum or sums of money, not exceeding in the whole Rs. 50,000, on the bill, bond, note, or other security of the Company, at such rate of interest and upon such terms as they may think proper; and the Directors may, with the sanction of a special resolution of the Company, previously given in general meeting, borrow on mortgage of the Company's property or otherwise, any sum or sums of money, not exceeding in the whole, together with the said sum of Rs. 50,000, the sum of Rs. 1,00,000.'

23. The Official Liquidator contends that the effect of this article was to render illegal and irrecoverable as against the Company all advances made by Dr. Kernot, previous to the 16th of October 1879, in excess of Rs. 50,000.

24. We think that this depends upon whether the advances so made can be regarded as a borrowing by the Directors within the meaning of Article 13. If they were, there is certainly some difficulty in saying' that the Directors had any power to contract the loans, or that the loans were ever legally ratified by the Company. But we have been referred to several cases, which do not appear to have been noticed by the learned Judge in the Court below, in which the English Courts have drawn a distinction between loans which a Company is empowered to raise under its borrowing powers, and debts which, in meeting its current liabilities and in the actual carrying on of its affairs, the Company or its agents on its behalf have contracted. In In re Cefn Cilcen Mining Company L.R., 7 Eq., 88, one Director had drawn bills which were accepted by another and endorsed by the Company to the Bank and discounted by the Bank. The proceeds were devoted partly to liquidating the Company's over-drawn account, about 200, and the residue to the purposes of the Company. At the date of the winding-up order, there was due to the Bank for bills so drawn, accepted, discounted and ultimately dishonoured 1,039. The Directors were precluded by their articles from borrowing more than 500, without special resolution. It was held by Stuart, V.C., that this transaction, though the benefit resulting to the Company was the same, was not borrowing and lending within the meaning of the articles of association, and that a debt due to a Bank by a Company which keeps an account with it is a debt, not a loan. The same view was expressed by Stuart, V.C. in Water low v. Sharp L.R. 8 Eq. 503. There a Banking Company had allowed a Railway Company to overdraw to the amount of 65,000, which was headed 'loan account,' and it was contended that this was a loan and ultra vires. It was, however, held, that a cash credit with a Bank is not a loan, and that this was so notwithstanding that the cash credit was headed loan account.'

25. The principle there laid down was applied in a somewhat different way In re The German Mining Company 4 De G.M. & N., 19, Ex parte Williamson L.R. 5 Ch., 313 and other cases, where it has been held that if money has been actually spent in defraying debts which were legally recoverable from the Company, the person who advances the money can claim to stand in the place of the creditors who have been so paid.

26. Now in this case, from the first moment the Company started, it was worked on this system of advances by Messrs. Thomas and Co., who set off the sums advanced against the proceeds of the sales as they accrued. After a while Messrs. Thomas and Co., refused to go on, whereupon Dr. Kernot, apparently with the consent of the Directors, paid off the debt balance of Thomas's account, and continued to advance funds from time to time as necessity arose for the purposes of meeting the expenses.

27. It seems to us impossible to distinguish this case from those which were decided by Stuart, V.C.; and as we do not find that the principle upon which those cases proceeded has ever been overruled, we gladly avail ourselves of those authorities for the purpose of doing what appears to us the most, palpable justice to Dr. Kernot. It has not been suggested before us that Dr. Kernot acted otherwise than in perfect good faith, or that the sums which he advanced were not necessary for the carrying on the business of the Company or not properly expended in that business.

28. Then the validity of Dr. Kernot's mortgage has been impugned upon the ground that the power conferred by Article 13 to borrow on bond, mortgage or other security, or otherwise, did not justify a mortgage, the object of which was in part to cover previously incurred liabilities. We think, however, that the English cases--The Birmingham Banking Company L.R., 6 Ch. Ap., 83 and the Inns of Court Hotel Company 6 Eq., 82--sufficiently dispose of this objection. There is nothing in the Companies' Act or in the articles of association, or memorandum of association, of the Company to render such a mortgage invalid. The system of financing' the current expenditure appears to have been from the outset the regular mode of transacting the Company's business, repeatedly brought to the knowledge of the shareholders, and the mortgage, to cover those advances made, appears to us to be one of those things which was expedient and necessary under the circumstances for attaining the objects of the Company, which are declared by Article 4 to be included in the business of the Company.

29. The decree must accordingly be amended, so far as it disallows that portion of the principal debt due to Dr. Kernot which was incurred previously to October, 16th, 1879, in excess of Rs. 50,000; and it must be declared that the claimant is entitled under the mortgage to charge the Company with all advances made by him; but that he is only entitled to avail himself of his mortgage-security to the extent of a principal sum of one lac of rupees.

30. The fifth ground of appeal is as to interest, but we find that the decree allows 10 per cent., the rate at which we understand the advances to have been made.

31. The sixth ground is as to costs. As we hold the advances not to have been ultra vires, and as the Liquidator raised the objection of a fraudulent preference, we think that Dr. Kernot is entitled to his costs, especially having regard to the covenant on this point in the mortgage-deed. The order of the Original Court is modified accordingly, and Dr. Kernot is entitled to his costs in this Court and the Court below on scale 2. The Official Liquidator will have his costs here, as in the Court below, out of the estate.

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