ATTYGALLE AND ANOTHER v. COMMERCIAL BANK OF CEYLON LTD

020-SLLR-SLLR-2002-V-1-ATTYGALLE-AND-ANOTHER-v.-COMMERCIAL-BANK-OF-CEYLON-LTD.pdf


176
Sri Lanka Law Reports
[2002] 1 Sri L.R.
ATTYGALLE AND ANOTHER
v.COMMERCIAL BANK OF CEYLON LTD.
COURT OF APPEALTILAKAWARDANE, J. ANDUDALAGAMA, J.
CA NO. 401/94DC COLOMBO NO. 1905/MAUGUST 23, 2000 ANDMARCH 30, 2001
Companies Act, No. 20 of 1982 – Account opened with Bank by sole Directors- Facilities obtained by the Directors – Company not incorporated – As thecompany was non-existent is the contract a nullity? – Liability of the "Directors"
The plaintiff-respondent instituted action against the defendant-appellants for therecovery of a certain sum with interest. The defendant-appellants entered into anagreement with the plaintiff-respondent Bank to open an account between theplaintiff Bank and A. D. R. Products, the 1st and 2nd defendants-appellants werenamed as Directors and they signed as Directors. The company was never formedand the Bank was not informed of this fact; overdraft facilities have been requestedfor and obtained by the 1st defendant-appellant purporting to act as the Directoron behalf of A. D. R. Products. It was contended that since no company wasformed, the contract was a nullity and could not be enforced. The District Courtheld in favour of the plaintiff-respondent.
On Appeal –
Held:
In pursuance of the agreement monies were released and accepted bythe defendant-appellants.
Sums of money released from time to time into the account was releasedonly because the defendants-appellants had duly completed and handedover the document P1, holding out that a company was in the processof being registered.
CA
Attygalle and Another v. Commercial Bank of Ceylon Ltd.
177
These monies had been depleted or used by the defendant-appellants,both had the sole authority and were the authorised signatories dulyrecognised by the Bank.
‘When a person contracts on behalf of a non-existent company hewas personally liable.'
Per Tilakawardane, J.
“Once monies were received there was an accountability on thoseactually receiving the monies to repay the same, and they could not seekprotection under legal fiction to avoid payment."
The rights and obligations of the parties to the contract, the Bank on theone hand and the defendant-appellants on the other cannot be transferredto a non-existent company, which in any event was not bound by the termsof the contract at the time it was made.
Notwithstanding the introduction of the words “Director", "Chairman” thedefendants-appellants were personally responsible and liable to pay the
monies outstanding on the account.
The corporate veil, which would have shielded them from liability cannotbe availed of as admittedly the body corporate A. D. R. Company Ltd.,was non-existent.
APPEAL from the judgment of the District Court of Colombo.
Cases referred to :
Newborne v. Sensolid – (GB) 1954 QB 45, 1953 1 ALL ER 708.
Kelner v. Baxter and Others – 1866 LR 2 Court of Common Pleas.
Ex parte Hartop -12 Ves 349 at 352.
Furnivall v. Coombes – 6 Scott NR 522.
Lalanath de Silva for defendant-appellants.
Ajantha Coorey with Nuwan Kodikara for plaintiff-respondent.
Cur. adv. vult.
178
Sri Lanka Law Reports
[2002] 1 Sri L.R.
May 23, 2001
SHIRANEE TILAKAWARDANE, J.
This appeal has been preferred by the defendant-appellants against 1the judgment of the Additional District Judge, Colombo, dated31. 03. 1994, wherein he had held in favour of the plaintiff-respondentand granted the reliefs prayed for with costs.
The plaintiff Bank instituted action against the defendants who werehusband and wife, jointly and severally for the recovery of a sum ofRs. 858,065/70 together with interest thereon at 30% per annum from1st May, 1986, until full and final settlement and turnover tax on suchinterest at 5% and costs.
Parties admitted the Contract (P1) which was an agreement dated 1022. 06. 1979 to 'comply with the rules for the time being for the conductof such accounts' and to open an account between the plaintiff Bankand A. D. R. Products. 1st and the 2nd defendant-appellants werenamed and they signed as the sole Directors of that company. The1st defendant-appellant admittedly signed this agreement as 'Director'on page (1) of the contract but on its reverse signed as the Chairman.The agreement also purported to carry a certification on its reversethat a Board meeting of the Board of Directors of A. D. R. Productshad been held on 20th, June, 1979, resolving : "that a Banking Accountin the name of the Company be opened with the Commercial Bank 20of Ceylon Limited and that the said Bank be and is authorised tohonour Cheques, Bills of Exchange and Promissory Notes drawnaccepted or made on behalf of the company by any one of theDirectors and to act on any instructions so given relating to theaccount, whether the account be overdrawn or not, or relating to thetransactions of the Company". This Board resolution had also been
CA
Attygalle and Another v. Commercial Bank of Ceylon Ltd.
(Shiranee Tilakwardane, J.)
179
signed by the 1st defendant-appellant (as Chairman) and the 2nddefendant-respondent (as Director).
This agreement P1 had been tendered with P7 which was a letterdated 22. 06. 1979 sent by the 1 st defendant-appellant signed by him 30as Director of A. D. R. Products. This letter was a request to openthe account in the name of company A. D. R. Products, and informsthe Bank that "The Company is under incorporation and no soonerwe receive the Certificate of Registration and Articles of Memorandumwill be forwarded to you".
Admittedly, this company was never formed (vide admissions atpage 106 of the brief) and the Bank was not informed of this factby either of the Directors/Chairman. The reasons for not forming thecompany were never given as neither the 1 st nor the 2nd defendant-appellant had given evidence at the trial although, they had both 40admittedly signed the aforesaid agreement P1 with the Bank, as wellas the purported resolution of the Company, (contained in the reverseof P1).
Nevertheless, by letters dated 14. 09. 1981 (P6) and 15. 07. 1983(P5) repeated overdraft facilities have been requested for and obtainedby the 1st defendant-appellant purporting to act as the Director onbehalf of A. D. R. Products.
The Bank had by letter dated 24. 01. 1984 (P4) addressed to the1st defendant-appellant in his personal capacity, informed him thatthe overdraft facilities of several accounts including the aforesaid soaccount maintained in the name of A. D. R. Products were unsettledand requested him to regularise the accounts. The letter also referredto an earlier letter dated 10. 01. 1984 which had been sent to the1st defendant-appellant on the same subject. The letter P4 sent under
180
Sri Lanka Law Reports
[2002] 1 Sri L.R.
registered post had been addressed to the 1st defendant-respondentin his personal capacity. He had not informed the Bank that he wasnot liable or that such amounts were not due from him.
Two further letters dated 17. 07. 1987 were sent under registeredpost to both the 1st and the 2nd defendant-respondents by the saidBank demanding settlement but neither letter had been answered nor 60had the Bank been informed that the company had not beenregistered.
The document P2, which was also admitted, was an extract ofthe statement of accounts relating to the account bearing No. 269in the name of A. D. R. Products for the period 1. 10. 1981 to 27.
05. 1986. The statements revealed that the account had beenoverdrawn in a sum of Rs. 858,065.70 of 30. 04. 1986. The factthat this amount was outstanding to the Bank at all times and hasnot been settled to date was not challenged. Most importantly, thefact that these monies had been received personally by both the 1st 70and 2nd defendant-appellants had been admitted by admission (2)recorded on 16. 08. 1993. (vide page 105 of the brief).
According to the evidence of the witness for the plaintiff Bank,
B. Y. Ranjith Sebasthian, monthly statements had been sent to thetwo defendant-appellants, (page 113 of the brief). Neither of thedefendants had ever testitied that they had not received thesestatements nor that they had no knowledge of the monies paid outon the accounts. The evidence by this witness that neither of the twodefendants had ever denied receiving these monies therefore wentunchallenged (page 114).bo
Counsel for the defendant-appellants submitted that this witnesshad ". . . . plainly admitted that the 2nd defendant was not involved
CA
Attygalle and Another v. Commercial Bank of Ceylon Ltd.
(Shiranee Tilakwardane, J.)
181
at all" (page 124). This is incorrect, as the question that had beenput to the witness Ranjith Sebasthian was that there was noconnection between the personal accounts and the account that wasthe subject-matter of the case. It was to this question that the witnesshad replied that no monies from the impugned account had beenpaid into a personal account of the 2nd defendant-respondent (page124). The witness did not testify that 'the 2nd defendant was notinvolved at all'. Even an inference on this reply alone that the 2nd 90defendant was not involved at all cannot be made.
Importantly, this witness stated that unless both the Directors hadsigned the agreement the loan would not have been given pendingthe formation of the company, and the loan was granted to both ofthem jointly (page 115). The witness further stated that every changein address of the defendant-appellants had been informed to the Bank,and accordingly similar change in the address of the purported companyhad also simultaneously been requested (page 127). This witness alsostated that there was transference of monies between this accountand the other personal accounts of the 1st defendant-appellant (pages 100128 and 129). Significantly, in spite of the abovementioned evidenceof the witness for the Bank even the 2nd defendant-appellant did notgive any evidence disclaiming her accountability or liability.
%
The position of the defendant-appellants was that in consideringthe privity of the contract, the Court must bear in mind that thedefendant-appellants had at all times acted as Directors/Chairman ofthe ”A. D. R. Products Ltd.”. Since no company by that name wasformed, they claimed that A. D. R. Products Ltd. was non-existentand therefore the contract was a nullity and could not be enforced.Counsel cited the case of Newborne v. Sensolicf'* in support of his noproposition that an unformed company was not liable. In that casea contract for the sale of goods by a company was signed by the
182
Sri Lanka Law Reports
[2002] 1 Sri L.R.
sellers as "yours faithfully, Leopold Newborne (London) Limited", afterwhich the name of Leopold Newborne was written. The Courts heldthat the contract could not be enforced because the company hadnever been formed, as evidently the contracting party was the com-pany. Leopold Newborne could not prove that he was the seller ofthe goods and therefore he could not sue the buyer for non-acceptanceof the goods. The legal principal enunciated by Lord Goddard wasthat he could not enforce his contract when he purported to sell not120his goods but goods belonging to a company. He could not claimit to be "his contract", "when he never signed on behalf of the companyor as an agent of the company but as the company. The documenton which he was suing was held to be a nullity. The nexus of LeopoldNewborne to the goods he claimed could not be established. The legalprincipal contained in that case was different and has no relevanceto the present case.
In England the law relating to non-existent companies was alteredby legislative intervention in 1972 by section 9 (2) of the EuropeanCommunities Act of 1972. Now Companies Act of Engalnd 1975 isosection 36 (c). This section reads as follows :
"Where a contract purports to be made by a company or bya person as agent for a company, at a time when the companyhas not been formed, then subject to any agreement to the contrarythe contract shall have effect as a contract entered into by theperson purporting to act for the company or as agent for it andhe shall be personally liable on the contract accordingly."
The Sri Lanka Companies Act, No. 17 of 1982 does not have asimilar provision.
In the present case in pursuance of the agreement P1 monies were noreleased and accepted by the defendant-appellants. The sums of
CA
Attygalle and Another v. Commercial Bank of Ceylon Ltd.
(Shiranee Tilakwardane, J.)
183
money released, from time to time, into the account P2 was soreleased only because the defendant-appellants had duly completedand handed over the document P1, holding out that a company wasin the process of being registered. (P7) These monies had beendepleted or used up by the defendant-appellants. Both had the soleauthority and were the authorised signatories duly recognised by theBank. No tangible evidence had been given that anyone of themhad not operated the account or did not receive any benefit. Eventhough the opportunity was afforded to the defendant-appellants neither 150gave evidence.
The case of Kelner v. Baxter and Others had set down theprinciple that when a person contracts on behalf of a non-existentcompany he was personally liable.
In the same case (page 180) reference had been made to
(3)
ex parte Hartop at 352 where Lord Erskine stated that ". . . Themere fact of a person professing to sign a contract for or on behalfof or as an agent for another will not per se prevent responsibilityas a contracting party to attach to the former".
fa)
In the case of Furnivall v. Coombes a clause to exclude personal160responsibility was included and was held to be repugnant andvoid, even though the company could not be held liable due to itsnon-existence.
The principle that underlay these cases was that once monies werereceived there was an accountability on those actually receiving themonies to repay the same, and they could not seek protection underlegal fiction to avoid repayment.
On the face of P1 it was clear that the intention of the partieswho signed it was to be liable for the monies that had been received.
184
Sri Lanka Law Reports
[2002] 1 Sri L.R.
There was no doubt that the monies were received and spent by itodefendant-appellants and no others. The rights and obligations of theparties to the contract, the Bank on the one hand and the defendant-appellants on the other cannot be transferred to a non-existent com-pany, which in any event was not bound by the terms of the contractat the time it was made. The defendant-appellants were personallybound under the obligations created in terms of the contract P1 signedby them. Notwithstanding, the introduction of the words “Director","Chairman" the defendant-appellants in the circumstances of thiscase were personally responsible and liable thereto. The defendant-appellants were therefore personally liable to pay the monies 180outstanding on the account.
The corporate veil which would have shielded them from liability,cannot be availed of, as admittedly the body corporate A. D. R.Company Ltd. was non-existent. I see no reason to interfere with thefindings of the Additional District Judge holding them liable to repaythe said monies.
Accordingly, the appeal is dismissed with incurred costs payableby the defendant-appellants to the plaintiff-respondent Bank.
UDALAGAMA, J. – I agree.
Appeal dismissed.