1956 (12) TMI 17 - HC - Companies Law

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

Summary

Issues Involved:
1. Nature of the transaction (loan vs. adjustable accommodation)
2. Negotiation of the loan on behalf of the defendant
3. Binding nature of the loan in law
4. Competency of Sri Gulab Chand Jain to borrow money on behalf of the defendant company
5. Plea of benefit and ratification
6. Claim of interest on the loan

Detailed Analysis:

1. Nature of the Transaction (Loan vs. Adjustable Accommodation):
The plaintiff's case was that the plaintiff company had advanced a loan of Rs. 1,50,000 to the defendant company with interest 1 percent higher than the current bank rate, to be repaid within six months. The defendant denied this, claiming the amount was an adjustable accommodation due to personal expenses of Sri Ram Ratan Gupta on behalf of Sir Padampat Singhania. However, the trial court found that the amount was indeed advanced as a loan, supported by a letter and a cheque. The defendant's counsel's statement that if Sir Padampat Singhania testified on special oath, the transaction would be deemed a loan, further narrowed the dispute. Sir Padampat Singhania's testimony confirmed the loan nature, thus establishing the transaction as a loan.

2. Negotiation of the Loan on Behalf of the Defendant:
The defendant initially contested that the loan was not negotiated on behalf of the defendant. However, the statement by the defendant's counsel on 11th February 1954, and the testimony of Sir Padampat Singhania, established that Sri Gulab Chand Jain negotiated the loan on behalf of the defendant. The trial court concluded that the loan was negotiated on behalf of the defendant, narrowing the dispute to the binding nature of the loan.

3. Binding Nature of the Loan in Law:
The defendant argued that the loan was not binding as no resolution sanctioning the loan was passed by the board of directors. The burden of proof lay on the defendant to show the absence of such a resolution. The defendant failed to produce any evidence, such as the minute book or testimony from Sri Gulab Chand Jain, to support this claim. The court held that even if no resolution was passed, the plaintiff would be protected by the legal doctrine of internal management, which allows a creditor to assume the existence of necessary formalities if the transaction appears legitimate and is within the company's powers.

4. Competency of Sri Gulab Chand Jain to Borrow Money on Behalf of the Defendant Company:
The court examined the competency of Sri Gulab Chand Jain, who held multiple roles: director of the defendant company, director of the managing agents (B.R. Sons Limited), and delegate of the managing agency's powers. The court found that the articles of association and the resolution passed by B.R. Sons Limited authorized him to act on behalf of the defendant company. The plaintiff creditor acted bona fide, with no reason to suspect the transaction's propriety. The court concluded that the transaction was binding, and the plaintiff was entitled to a decree.

5. Plea of Benefit and Ratification:
The plaintiff argued that the defendant company benefited from the loan, as the money was credited to the defendant's account and shown in the balance sheet. The defendant admitted receiving the cheque and crediting the amount. The court agreed that the receipt of money itself constituted a benefit to the company, regardless of subsequent use. Additionally, the balance sheet signed by the directors and approved by shareholders indicated ratification of the transaction. The court found the plea of benefit and ratification valid, further supporting the plaintiff's claim.

6. Claim of Interest on the Loan:
The plaintiff claimed interest based on a covering letter sent with the cheque, stating the loan carried interest 1 percent higher than the current bank rate. The trial court found the plaintiff's witnesses credible and disbelieved the defendant's rebuttal witness. The reminders sent by the plaintiff demanding interest were uncontroverted by the defendant before the suit. The court upheld the plaintiff's claim for interest, agreeing with the trial court's findings.

Conclusion:
The appeal was dismissed with costs, affirming the trial court's decree in favor of the plaintiff for Rs. 1,53,665-2-0 with pendente lite and future interest at 3 percent per annum. The court found the transaction to be a binding loan, negotiated on behalf of the defendant, and supported by the doctrines of internal management, benefit, and ratification.