1965 (1) TMI 26 - HC - Companies Law

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

Summary

Issues Involved:
1. Authority of the director to borrow money on behalf of the company.
2. Compliance with internal management procedures of the company.
3. Application of Sections 9 and 292 of the Companies Act, 1956.
4. Burden of proof regarding the absence of a resolution authorizing the borrowing.
5. The principle of internal management and its implications for third-party creditors.
6. Presentment of the hundi for payment.

Detailed Analysis:

1. Authority of the Director to Borrow Money on Behalf of the Company:
The main issue revolves around whether Naresh Chandra Mondal, the manager and director of the defendant company, had the authority to draw a hundi for Rs. 1,000 on behalf of the company. The trial court found that he did, based on the evidence presented, including the purchase of the stamp and the drawing of the hundi in the presence of the plaintiff. The Full Bench of the Small Cause Court, however, set aside the trial court's decree, concluding that there was no evidence of a resolution authorizing such borrowing, as required by Section 292 of the Companies Act, 1956.

2. Compliance with Internal Management Procedures of the Company:
The Full Bench of the Small Cause Court held that the articles of association of the defendant company were inconsistent with Section 292 of the Companies Act, which mandates that certain powers, including borrowing money, must be exercised by the board only through a resolution passed at a meeting. The judgment emphasized that the plaintiff failed to prove the existence of such a resolution.

3. Application of Sections 9 and 292 of the Companies Act, 1956:
The Full Bench relied on Section 9 of the Companies Act, which states that the provisions of the Act override any contrary provisions in the company's memorandum or articles of association. They concluded that the articles authorizing directors to borrow money were void to the extent of their repugnancy to Section 292. However, the High Court found this interpretation erroneous, clarifying that the articles did not conflict with Section 292 as they did not specify the procedure for exercising the borrowing power.

4. Burden of Proof Regarding the Absence of a Resolution Authorizing the Borrowing:
The High Court ruled that the burden of proving the absence of a resolution authorizing the borrowing lay with the defendant company, not the plaintiff. The minute books and the book of resolutions are within the special knowledge and possession of the company, and their non-production led to an adverse inference against the company. The High Court cited Section 106 of the Evidence Act, which places the burden of proof on the party with special knowledge of a fact.

5. The Principle of Internal Management and Its Implications for Third-Party Creditors:
The High Court emphasized the principle of internal management, which protects third-party creditors who lend money to a company based on the apparent authority of its directors and managers. The judgment referenced the case of Royal British Bank v. Turquand, which allows outsiders to assume that internal company procedures have been duly followed. The High Court held that the plaintiff, as a bona fide creditor, was entitled to rely on the apparent authority of Naresh Chandra Mondal to draw the hundi on behalf of the company.

6. Presentment of the Hundi for Payment:
The defendant company raised a last-minute argument that the hundi was not presented for payment. However, the High Court dismissed this claim, noting that it was not raised in the application under Section 38 of the Presidency Small Cause Courts Act and that the record showed a demand letter and a reply from the defendant company acknowledging the hundi.

Conclusion:
The High Court set aside the judgment of the Full Bench of the Small Cause Court and restored the decree of the trial court, which had ruled in favor of the plaintiff. The High Court held that the plaintiff had proven his case and that the defendant company failed to disprove the authority of Naresh Chandra Mondal to draw the hundi. The principle of internal management protected the plaintiff as a bona fide creditor, and the burden of proving the absence of a resolution lay with the defendant company. The suit was decreed in full with costs against the first defendant company.