1931 (5) TMI 25 - HC - Companies Law

General provisions with respect to memorandum and articles Effect of memorandum and articles, Execution of deeds,

Issues Involved:
1. Authority of the managing agent to borrow money on behalf of the company.
2. Validity of the mortgage deed under company law.
3. Proper execution of the mortgage deed.
4. Knowledge of the plaintiff regarding the resolution's validity.
5. Necessity of previous sanction by the Local Government for the mortgage.
6. Status of the company as a "promoter" under the Tramway Order.
7. Classification of the mortgaged land as part of the "undertaking."
8. Consequences of the mortgage being made without the previous sanction of the Local Government.

Detailed Analysis:

1. Authority of the managing agent to borrow money on behalf of the company:
The Board of Directors had the power under the articles of association to borrow money and secure loans by mortgage. Article 104 prohibited the delegation of borrowing powers, but Article 120 gave the managing agent extensive powers to manage the company's affairs. Despite this, the court found that the managing agent did not have unrestricted borrowing powers. However, under sections 188 and 189 of the Indian Contract Act, the agent had the authority to act in emergencies to protect the principal's interests. The court concluded that the managing agent was authorized to incur a temporary loan in the company's interest due to the emergency circumstances.

2. Validity of the mortgage deed under company law:
The mortgage deed was signed by the managing agent and bore the company's common seal. Article 98(t) required the document to be signed by at least one director and countersigned by an appointed officer. The court held that the affixation of the seal was not required by company law, and a defect in the manner of affixing the seal did not invalidate the document. The mortgage could be validly executed by any person acting under the company's authority.

3. Proper execution of the mortgage deed:
The resolution authorizing the mortgage was allegedly passed on June 2, 1923, but the court found no evidence of a properly convened meeting. The defendant's pleadings only challenged the proper convening of the meeting, not its occurrence. The court concluded that no properly convened meeting occurred, but the plaintiff had no reason to doubt the resolution's validity. The court applied the principle from Royal British Bank v. Turquand, allowing the plaintiff to assume that acts within the company's power were properly performed.

4. Knowledge of the plaintiff regarding the resolution's validity:
The court found that the plaintiff and his manager were likely deceived by the managing agent. The plaintiff had no reason to suspect the managing agent's reliability at the time, and subsequent events casting doubt on the agent's character were not relevant. The court concluded that the plaintiff acted in good faith, believing the resolution was valid.

5. Necessity of previous sanction by the Local Government for the mortgage:
Clause 37 of the Dehra Dun-Mussoorie Tramway Order required the Local Government's previous assent for transferring the undertaking. The court found that the mortgage was executed without such sanction, based on the plaintiff's admission and the absence of any allegation of obtained sanction. The court held that the mortgage was made in contravention of the Tramway Order and was therefore void.

6. Status of the company as a "promoter" under the Tramway Order:
The court examined whether the company legally became a "promoter" in place of the managing agent. The Local Government's formal sanction for the transfer was given on February 22, 1922, after a tentative permission letter dated July 9, 1921. The court held that the tentative permission was sufficient to convey the previous assent of the Government, making the company a "promoter."

7. Classification of the mortgaged land as part of the "undertaking":
The land was purchased for a tramway depot and was suitable and used for the tramway's purposes. The court found that the land was part of the "undertaking" as it was used to store tramway construction materials, making it suitable for the tramway's purposes.

8. Consequences of the mortgage being made without the previous sanction of the Local Government:
The court concluded that the mortgage was absolutely void due to the lack of previous sanction from the Local Government. The rules in the Tramway Order had the force of law, and any transfer made without the required sanction was void. The court referenced similar cases where unauthorized mortgages were held void.

Conclusion:
The appeal was allowed, and the decree of the trial court was varied. The plaintiffs were granted a simple money decree for Rs. 29,773-4-3 to be realized in due course of liquidation, ranking as unsecured creditors. Interest at the contractual rate would cease from January 29, 1926, with 6% interest payable out of any surplus assets until repayment. The appellants were awarded half the costs of the appeal and those in the court below, while the respondents would bear their own costs.

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