1935 (9) TMI 6 - HC - Companies Law

Requirements with respect to memorandum, Director Interested, not to participate or vote in Board s proceedings, Managing director Tenure of appointment and Regsiter of directors, etc.

Issues Involved:
1. Power of the company and its directors to borrow money.
2. Validity of the borrowing in excess of the issued share capital.
3. Ratification of unauthorized borrowing by shareholders.
4. Validity of the mortgage deed executed by the company.
5. Directors' disqualification and the effect on the validity of the resolution.
6. Claim of M.T. Ltd. as creditors.
7. Claim of Sassoons as creditors.

Detailed Analysis:

1. Power of the company and its directors to borrow money:
The court examined the memorandum of association and found no limit to the borrowing power of the company. Clause 3(f) allowed the company to mortgage property or secure repayment of borrowed money in any manner deemed fit. However, the directors' power to borrow was governed by Article 73 of Table A, which limited borrowing to the issued share capital unless sanctioned by a general meeting.

2. Validity of the borrowing in excess of the issued share capital:
The court considered the proper construction of Article 73. It held that the article fixed a borrowing limit at any time, not just at the time of liquidation. The court rejected the argument that the initial borrowing was not subject to scrutiny, emphasizing that the borrowing must comply with the article's terms at all times.

3. Ratification of unauthorized borrowing by shareholders:
The court discussed whether the shareholders ratified the unauthorized borrowing by passing balance sheets showing the debt. It referred to cases like Irvine v. Union Bank of Australia and Sinclair v. Brougham, concluding that ratification requires shareholders to be aware of the unauthorized act and consciously adopt it. The court found no evidence that shareholders were aware of the directors' lack of authority to borrow in excess.

4. Validity of the mortgage deed executed by the company:
The court examined the mortgage deed executed on February 28, 1928, between M.T. Ltd., the company, and Sassoons. It found that the deed was not a suretyship transaction but a joint liability where the company acknowledged receiving Rs. 4,50,000 from M.T. Ltd., part of the Rs. 9,00,000 borrowed from Sassoons. The court held that the transaction was within the company's power under Clause 3(f) of the memorandum of association.

5. Directors' disqualification and the effect on the validity of the resolution:
The court considered Section 91-B of the Companies Act, which disqualifies directors from voting on contracts in which they have a personal interest. The court found that all directors of Pratts were interested in the resolution due to their positions in M.T. Ltd. and Sassoons. The court held that the resolution authorizing the mortgage deed was void due to the directors' disqualification.

6. Claim of M.T. Ltd. as creditors:
The court found that the amount claimed by M.T. Ltd. was within the authorized borrowing limit of Rs. 5,00,000. It rejected the liquidator's argument that the balance represented unauthorized borrowing, stating that repayments should be deemed to have repaid unauthorized borrowings first. The court held that M.T. Ltd. was entitled to claim the balance as unsecured creditors.

7. Claim of Sassoons as creditors:
The court found that the mortgage deed executed by Pratts in favor of Sassoons was invalid due to the directors' disqualification. It held that Sassoons had notice of the directors' disqualification through Mr. Raymond, the managing director of Sassoons. The court rejected the argument that the transaction was ratified by shareholders, finding no evidence of their awareness of the unauthorized act. Consequently, Sassoons' claim as secured creditors was dismissed.

Conclusion:
The court allowed the appeal against Sassoons, rejecting their claim as secured creditors, and dismissed the appeal against M.T. Ltd., allowing their claim as unsecured creditors. The court ordered Sassoons to return the title deeds to the liquidator and directed that the costs of the appeal against Sassoons be paid by them.

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