LORD WILBERFORCE—Jupiter Cigarette dr Tobacco Co. Ltd. v. Soysa 2-i 1
1971 Present: Lord Hodson, Viscount Dilhorne, Lord Wllberforce,
Lord Diplock, Lord Cross ol Chelsea
THE JL'PITER CIGARETTE & TOBACCO CO., LTD., Appellant-,and H. G. HENRY SOYSA and others, RespondentsPrivy Councll .Appeal No. 40 of 1970
S. C. 1-561 GO—D. C. Colombo, 00301MB
Company law—Mortgage debt incurred by Company within the pouters oj the Company—Formalities required Jor the transaction—Sufficiency—Number of Directorswho should sign- the mortgage bond.
When} the borrowing of a sum of money is fully within tho powers of aCompany as such and does not, requiro a resolution of a general mooting of theCompany, a mort.gago debt incurred honestly and bona fido by tho Company,without causing any prejudice to tho shareholders, binds the Company notwith-standing that the number of Directors who have signed tho mortgage bondhappens to bo less than tho number required by tho Articles of tho Company.(In tho present coso tho mortgago bond was approved by only two instead ofthree Directors.)
_A.PPE.AL from a, judgment of the Supreme Court reported in(196S) 72 N. L. R. 12.
J. Fernando, for tho defendant-appellant.
11. iV. Jayeivardene, Q.C., with Ben Eliyatumby, for-the plaintiffs-respon dents.
Cur. adv. mill.
May 24, 1971. [Delivered by Lord Wileerforck]—
This is an appeal from tho Supreme Court of Ceylon which allowedan appeal from the judgment of the District Court of Colombo wherebya hypothecary action instituted by the respondents against the appellantwas dismissed with costs. Tho Supreme Court entered judgment fortho respondents in the terms sought by tho plaint.
Tho action was bro ught by tho respondents upon Mortgago Bond No. 432dated 13th August I960. This Bond was executed under seal by theappellant to secure repayment to the respondents of Rs. 125,000/- saidto have been lent by the respondents in specified amounts to tho appellant.Tho Bond chargod certain property of tho appellant by way of mortgagoto secure the loan. Tho appellant in its answer raised a number ofdefencos. It denied having borrowed and received the money : it pleadedthat tho alleged borrowing was not for the purposes of the Companyand .that, there'was no resolution or decision, in accordance' with . theArticlos. of tho appellant Company, to borrow tho-sum’ alleged or • 'LX XIV- -11
242 LORD WILBERFORCE—Jupiter Cigarette tfc Tobacco Co. Lut. v.
authorising the alleged execution of the Bond : it contended that-, forthose reasons, the alleged borrowing or tho alleged execution of the Bondwas ultra vire3 the Company. There was also a plea of misjoinder ofparties and causes of action.
At the trial in the District Court the execution of the Bond by thoappellant, under its seal, was established. It was proved that tho appellanthad received the sum of Rs. 125,000/- from the respondents and hadnot repaid it. But it was held that there was no resolution or decisionof the appellant Company to borrow tho sum, or for tho execution ofthe Bond, or authorising the borrowing or the execution of the Bond.It was further held that tho borrowing or execution of tho Bond wasultra vire3 the appellant.
On appoal, the Supreme Court decided that, under the terms of thoappellant’s articles, the borrowing in question did notrequiro a resolutionof a general meeting of tho Company and could be authorised by theDirectors. It held that as tho Bond was signed by two persons whowere Directors of the Company tho Company could not avoid liability.Even if there was some irregularity in the appointment of the Directors,the borrowing had been ratified by the Company.
The Supreme Court also decided that there had been no misjoinder ofparties or causes of action—a matter with which the District Court- hadnot found it necessary to deal. This point was not pursued before theBoard.
Thus the questions outstanding on the present appeal were —
whethor the borrowing was authorised by tho appellant Company,either through a resolution in general meeting, or by its Directors,or in some other manner,
whether, if not, the borrowing was capable of being and wasratified by the appellant Company,
whether the money was borrowed for the purposes of tho appellantCompany.
Before dealing with these issues it is necessary to refer to some factualmatters.
The appellant Company is a private Company tho shareholders inwhich boforo 13th August I960 were Messrs Edirisingho, Soysa.H. R. Fernando, Selvanathan and Chapman, as well as various associatesof these persons. The five porsons mentioned were also Directors of theCompany. One Sivadas was Secretary, and held ono share. TheCompany was to manufacture cigarettes but had not gono into productionfor lack of funds. 3Ir. Edirisingho therefore offered to acquire all thoshares of the other shareholders.
On or about 12th or 13th August I960, certain meetings took placebetween the shareholders or some of them and figures wero provided ina statement of affairs which were to form the basis of tho purchase.
1,01X1) W1L.HEKFOKCBJupiter Cigarette £ Tobacco Co. Lui. r.
Thi3 statement, as at 31st May 19G0, showed the liabilities of the Company(apart from its capital) as amounting to Rs. 229,995. Of this Rs. 10S.252represented money duo to somo suppliers of machinery and Rs. 9,355sundry bills; so that the total of outstanding borrowing came toapproximately Rs. 112,000. The issued and paid up capital amounted,it appears, to Rs. 324,000.
The agreement reached was that Mr. Edirisingho should purchase allthe shares of the other shareholders for Rs. S4/75 jier share of Rs. 100/-,that the shareholders should lend the Company Rs. 125,000 on a mortgage,and that the Directors'' outstanding loans (amounting to Rs. S4,413)should be repaid. On 13fh August 1900 the shareholders executedtransfers of their shares, and received cheques' for the appropriate amounts(at Rs. S4/75 per share) from Mr. Edirisingho. All the shares weretransferred to Mr. Edirisingho personally. Mr. Edirisinghe at the samet ime transferred one share to each of Samel Appuhamy and O. Podihammewho were respectively the father and mother of Mr. Edirisinghe. Itseems clear that tho money for these shares was paid by Mr. Edirisinghoand that Appuhamy and Podihaminc acquired them as nominees forMr. Edirisinghe. Mr. Edirisinghe stated in evidence that the Companyt hereupon was a one man Compan y. Later annual returns of the appellantCom pan}- showed that tho transfers were registered on lGth August 19G0 :but tho position seems, clearly enough, to be that as from 13th August19G0 Mr. Edirisingho was, in equity, the beneficial owner of the entireshare capital.
The mortgage Bond, the subject of the action, was, as stated, executedon 13th August 19G0. It was sealed by the Company’s seal andwitnessed by Mr. Edirisinghe, who signed it, and Mr. S. Appuhamy whoaffixed liis mark. It. was attested by Mr. M. Eanganathan, Notary Public.Both Mr. Edirisinghe and Mr. Appuhamy were described as Directors.The Bond contained a recital that, the Mortgagor (sc. the appellantCompany) at a meeting of its members held on 12th August 19G0 hadresolved to borrow sums totalling Rs. 125.000 from the respondents onthe security of tho land and premises specified, and proceeded withappropriate clauses recording the loan and establishing tho mortgage.Particulars of the mortgage were duly registered on 22nd August 19G0in the Companies Registry pursuant to s. 7S of the Companies Ordinance.Tho registration is stated to have been effected by Mr. Edirisinghe.
The Bond having, on the face of if, been duly executed and notariallyattested, it was for the appellant Company to establish, to the satisfactionof the Court, that, notwithstanding this fact, and the recital abovomentioned, the Bond was invalid, or ullra vires the Company. At thetrial, the appellant Company concentrated its efforts towards provingfhat the recital was incorrect and that no meeting of shareholders hadtaken place to authorise tho borrowing. There wero produced at thotrial purported minutes of threo meetings supposedly held on 12thAugust 19G0. Tho first was a meeting of tho then Directors of theappellant Company at which it was stated that two transfers of shares
LORD WILBERFORCE—Jupiter Cigarette A Tobacco Co. Ltd. V.
were passed in favour of Appuharav and Podihamine. The second was' of an extraordinary general meeting of the shareholders at which twodirectors resigned and Appidtamy. was appointed a director and at whichthe transfer of sharos to Appuhamy and Podihamine was "ratified andconfirmed The third was of an extraordinary general meeting of theshareholders at which three of the former directors resigned .andPodihamine was appointed a director. There followed according to theminute' an authorisation of the borrowing of Rs. 12:3.000 from therespondents and a resolution that Edirisinghc and Appuhamy " two of theDirectors of the Company ” be authorised to execute the Bond under theseal of tho Company. The minute recorded the presence of all themain shareholdrcs, and of Appuhamy and Podihamine and stated thatMr. Aboywardone and Mr. Ranganathan. Proctors, were present oninvitation.
Tho learned trial judge heard witnesses with regard to those allegedmeetings. Those who gavo evidence wore Mr. Edirisingho, Mr. H. B.Fernando, Air. Abeywardeno and the son of Mr. Chapman. In hisjudgment the learned judge reviewed this evidence in detail and held thatno meeting of tho shareholders was hold on J 2th August 19G0 at whicha resolution was jJasscd with regard to the alleged loan. The appellantCompany hacl therefore no power to horror.- the money.
The Supreme Court, in their judgment delivered by Sirima-ne, J. dealtwith the matter on different lines. They held that the trial judge attachedtoo much importance to tho exact date of the meeting at which directors .were appointed. At the time the Bond was signed, Mr. Edirisingho wasadmittedly a Director, and Mr. Edirisingho in evidence had said thathis father—Appuhamy—was a director on 13th August 1000.‘‘ This
fact was never in dispute ”. There was no need for a shareholders’resolution, since, under the terms, of Article 09 of the appellant Company,the Directors had power to authorise the borrowing. The borrowingwas validly approved by two directors for the purposes of theCompany. No formal resolution was required. The Bond was thereforevalid and binding. In any event the Company had clearly ratified theborrowing.
In their Lordships' opinion, the approach of the Supreme Court, to thequestion of the validity of the Bond was correct. They emphasised thatthe transaction was honest and ho'.ia fide, and that no shareholders woreprejudiced. Tho Company undoubtedly had received the money. TheCourt was clearly right in holding that tho money was borrowed for thepurposes of tho Company and in rejecting tho argument- that it wasborrowed for the purpose of purchasing the shares. ?[r. Edirisingho haclenough money of his own : tho Ks. 12:3.000/- was paid into thoCompany's account, whore it- remained for about a month, andMr. Edirisingho paid for his shares with his personal cheques. • Indeedthe trial judge himself seems tn have been of the same opinion onthis point.
LORD WILBERFORCE—Jupiter Cigarette d: Tobacco Co. Ltd. v.24 a
Equally, in their Lordships’ opinion, the Supreme Court correctlydecided that no resolution of a general meeting was required to authorisethe borrowing. Under Articlo 69, any borrowing could be authorised by;the Directors provided that the total amount borrowed>and thenoutstanding did not exceed the amount of the subscribed capfital of theCompany. The court had no difficulty from the statement of affairspreviously mentioned in showing that this condition was met. Therelevant figures have been set out above.
There remained however the difficulty that the Bond was approved onlyby two directors. Tho Articles requiro the Company to havo not lessthan three directors. Thero is no finding whether, on 13th August I960Podihamine was a director nor, if so, whether she approved tho Bond,The authority must therefore rest on that of either Air. Edirisinghehimself or that of Mr. Edirisinghe and Mr. Appuhamy jointly.
In considering tho question of authority, it has to be borne in mind thatthe act, whose validity is in question, namely the borrowing ofIts. 125,000/- was one fully within the powers of the Company as such.Tho Memorandum, Clause 3 (34) amply covers tho transaction. Thequestion therefore is whether the machinery used was such as to bindthe Company. In .considering questions such as this, which are of commonoccurrence, particularly in relation to private companies, tho Courts haveevolved principles, basically of common sense, which, while respectingtho separate corporate entity of the company concerned, enables it tobind itself, as against third parties, in the absence of technicality or theformalities of internal procedure. One example of this is furnished by therule known by the name of Boyal British Bank v. Turqvand1 (1S56)
6 E. & B. 327 namely that persons contracting with a company and dealingin good faith may assume that acts within its powers have been properlyand duly performed and are not bound to inquire whether acts ofinternal management hare been regular. Another is that an irtra viresact which has the approval or acquiescence of all tho shareholders may bevalid even in tho absence of a meeting of the shareholders'; andnotwithstanding that it is performed without the formality required byits articles.
It is clear that the Supreme Court had these principles in mind inrelation to tho facts of tho present case : cither would suffice to Validatetho loan and either is potentially relevant to a company, and a situation,such as we havo hero. Their Lordships have some doubt whether, on theevidence which was before the District Court, the proved facts were suchas to justify the application of the first; for it might bo said, and therewas no clear finding to the contrary, that the respondents, or one ormore of them, had sufficient notice that irregularities in the constitution oftho Board of Directors of tho appellant at tho relevant date may haveexisted. But, however that may bo, their Lordships are clearly of opinionthat the second principle may bo invokod by the respondents. The width' of cases to which it may bo applied is shown by tho case before tho
• (J856) 6 E. dr B. 327. . .
•K 6421 tS/71)
Lafeer v. The. Queen
Supremo Court of Canada of Wallon v. Bank of Nova Scotia el al.1 (19G6)62 D.L.R. vol. 2 p. 506 whoro numerous other authorities are reviewed.The present falls precisely into the category of cases in which the Courtshave applied the rule. Mr. Edirisingho (to uso tho words of the SupremeCourt of Canada) not only approved the borrowing : ho instigated itthroughout as part of the arrangements under which ho took over theCompany from tho prc-oxisting shareholders :In these circumstances
he was in no position to set up alleged irregularities in tho appointmentor proceedings of the Directors of the company as a defence to an actionupon tho loan of wliich the Company had tho benefit.
Their Lordships therefore find themselves in agreement with theSupremo Court in holding that the borrowing was authorised and thebond valid. The question of subsequent ratification does not ariso.
Their Lordships will hiunbly advise Her Majesty that tho appeal bedismissed : the appellant must pay tho costs of the appeal.
THE JUPITER CIGARETTE & TOBACCO CO., LTD., Appellant, and H. C. HENRY SOYSA and