1946 (3) TMI 15 - HC - Companies Law

General provisions with respect to memorandum and articles - Effect of memorandum and articles and Directors Power of

Summary

Issues Involved:

1. Validity of the appointment of directors.
2. Validity of the issued shares.
3. Application of Section 143 of the Companies Act, 1929.
4. Application of Article 88 of Table A.
5. Rule in Turquand's case.
6. Laches and estoppel.

Detailed Analysis:

1. Validity of the Appointment of Directors:

The respondent, Kanssen, sought a declaration regarding the rightful directors of the company. The court found that neither Cromie nor Strelitz had been directors since the end of 1941 due to the expiration of their terms under Article 73 of Table A as varied by Article 22 of the company's articles. Morris's appointment as a director by Cromie and Strelitz on March 30, 1942, was also invalid as neither Cromie nor Strelitz had the authority to appoint him. The court concluded that all purported appointments of directors after 1941 were null and void.

2. Validity of the Issued Shares:

The court determined that the only validly issued shares were the two shares initially allotted to the subscribers and transferred to Cromie and Kanssen. The subsequent allotments of shares to Strelitz and Cromie on April 12, 1940, and later to Morris, Strelitz, and Cromie on March 30, 1942, were invalid. The register of the company was ordered to be rectified to reflect this, removing the names of all other persons except Cromie and Kanssen.

3. Application of Section 143 of the Companies Act, 1929:

Section 143 provides that the acts of a director are valid notwithstanding any defect discovered in their appointment or qualification. The court clarified that this section applies only where there is a defect in an appointment, not where there was no appointment at all. Since Strelitz was never validly appointed and Cromie's term had expired, their actions could not be validated under this section.

4. Application of Article 88 of Table A:

Article 88 similarly validates acts done by directors notwithstanding defects in their appointment or qualification. The court held that this article, like Section 143, applies only to defective appointments, not to situations where no valid appointment occurred. Thus, the actions of Cromie and Strelitz could not be validated under Article 88 because they were never validly appointed directors after 1941.

5. Rule in Turquand's Case:

The rule in Turquand's case allows persons contracting with a company to assume that acts within its powers have been properly performed. However, the court held that Morris, who acted as a director in the allotment of shares to himself, could not invoke this rule. As a director, he had a duty to ensure the regularity of the company's affairs and could not claim the protection of this rule for his own unauthorized actions.

6. Laches and Estoppel:

Morris argued that Kanssen was barred by laches from challenging the validity of the share issues. The court dismissed this argument, finding no justification for it. The court noted that neither Cohen, J., nor the Court of Appeal found this argument tenable, and it was incapable of serious argument upon the facts.

Conclusion:

The appeal was dismissed. The court held that the appointments of directors and the allotment of shares after 1941 were invalid. Neither Section 143 of the Companies Act, 1929, nor Article 88 of Table A could validate the actions of Cromie and Strelitz. Morris, acting as a director, could not invoke the rule in Turquand's case to validate the unauthorized allotment of shares. The register of the company was ordered to be rectified to reflect the validly issued shares and the rightful directors.