Translate
Text Highlighter

Bookmark

PDF

Share

Report a problem
AMICUS AI
Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
  • George Rankin
  • Wright
Acts
  • Section 91B of the Indian Companies Act
  • Indian Companies Act,
Are you a practicing lawyer?
Enhance your digital presence and reach by creating a Casemine profile.
Upload pleading to use the new AI search
Click here to upload
Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
  • George Rankin
  • Wright
Acts
  • Section 91B of the Indian Companies Act
  • Indian Companies Act,
See more information ...
Smart Summary

Concise Analytical Summary of the Opinion

Factual and Procedural Background

The opinion arises from two consolidated appeals concerning the winding-up of T. R. Pratt (Bombay), Limited ("Pratts"), which was ordered to be wound up by the High Court of Bombay on June 22, 1932. The appealed order is dated September 18, 1935, being a decision of a division bench on appeal from Kania J. The proceedings in the winding-up involved two inter-related claims against Pratts:

  • A claim by E. D. Sassoon & Company, Limited ("the Sassoon company") to be admitted as a secured creditor for Rs. 4,91,284 by virtue of an equitable mortgage evidenced by an indenture dated February 28, 1928, and confirmed by another indenture dated August 11, 1931.
  • An alternative claim by M. T. Limited (in voluntary liquidation) that, if the Sassoon company failed to establish its secured claim, M. T. Limited should be admitted to rank as unsecured creditors in respect of the same sum.

Kania J. (at first instance, by order dated July 11, 1934) allowed the Sassoon company's claim and held the claim of M. T. Limited valid in the alternative. The division bench (Beaumont C.J. and B. J. Wadia J.) disallowed the Sassoon company's claim and accepted M. T. Limited's claim. The appellants before the Board were the Sassoon company (appealing the rejection of its claim) and the Official Liquidator of Pratts (who disputed both claims).

Background facts relevant to the dispute (as found in the opinion) include that from 1920 until Pratts' liquidation in 1932, Pratts was financed by loans from M. T. Limited, which in turn was financed by loans from the Sassoon company. There were overlapping directorates and shareholdings among Pratts, M. T. Limited and the Sassoon company; M. T. Limited held virtually all of Pratts' ordinary shares, and many directors of Pratts were also directors/shareholders of M. T. Limited.

Legal Issues Presented

  1. Whether the indentures of 28 February 1928 and 11 August 1931, which purported to give the Sassoon company an equitable mortgage over Pratts' property, were voidable under Section 91B of the Indian Companies Act because every director of Pratts was interested as a director and shareholder of M. T. Limited.
  2. Whether the Sassoon company must be treated as having notice of the directors' interest (so depriving it of protection as an innocent third party under the indoor management principle), and if notice is imputable, whether the Sassoon company's claim fails.
  3. Whether M. T. Limited was entitled to prove as unsecured creditors for the balance outstanding at the date of the winding-up, in view of Article 73 of Table A which limited directors' borrowing powers (the Official Liquidator contending that advances from 1921 to 1928 exceeded those powers).
  4. Whether interest charged on advances made in excess of the Article 73 limit should be disallowed by way of a reconstructed account (the Official Liquidator seeking elimination of such interest from the ledger accounts).

Arguments of the Parties

Sassoon company's contentions

  • The Sassoon company contended (implicitly through the issues contested) that it was entitled to the benefit of the indentures as a secured creditor and that it should not be deprived of that benefit if it had no notice of any defect in the authority of Pratts' directors under Section 91B.
  • Counsel for the Sassoon company (Mr. Romer and Mr. Russell) relied upon authorities including In re Hampshire Land Company [1896] 2 Ch. 743, Deep Sea Fishery Company's (Limited) Claim [1902] 1 Ch. 507 and Young v. David Payne & Co., Limited [1904] 2 Ch. 608 in support of their position (the opinion records that argument was addressed on these authorities).

Official Liquidator's contentions

  • The Official Liquidator's primary objection to the Sassoon company's claim was that under Section 91B the directors of Pratts were disqualified from entering into the indentures on behalf of Pratts because they were all directors and shareholders of M. T. Limited.
  • As regards M. T. Limited's claim, the Official Liquidator resisted proof on the ground that from 1921 to 1928 the sums advanced exceeded the borrowing powers of Pratts' directors under Article 73 of Table A (being more than the company's issued share capital of five lacs of rupees), and advanced a contention that the ledger accounts should be revised to eliminate interest charged on advances beyond that limit.

M. T. Limited's contentions

  • M. T. Limited claimed to prove for sums as calculated on the basis of interest at six per cent per annum on half-yearly balances, in accordance with the course of dealing recorded in their books.
  • Mr. Buckley (for M. T. Limited) advanced arguments in defence of M. T. Limited's right to interest; those arguments were forcefully presented but the opinion records that it was unnecessary to examine them further once the Official Liquidator's appeal failed.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Transvaal Lands Company v. New Belgium (Transvaal) Land and Development Company [1914] 2 Ch. 488 Describes the equitable rule that a director who has an interest as a shareholder in another company (or a conflicting fiduciary duty) is within the rule treating him as personally interested; the validity of transactions cannot depend upon extent of adverse interest and no inquiry is permitted into whether terms were the best obtainable for the beneficiary. The court relied on this statement to hold that each director of Pratts was "concerned or interested" within the meaning of Section 91B by reason of being a director and shareholder in M. T. Limited; this supported the conclusion that the indentures were avoidable if the Sassoon company had notice.
Royal British Bank v. Turquand (1856) 6 El. & Bl. 327 Illustrates the indoor management rule (that a third party dealing with a company may assume internal formalities have been observed). The court noted the principle that Section 91B would not operate to deprive of the benefit of his contract a third party who had no notice of the defect in the directors' authority. However, the court found that the Sassoon company could not be regarded as ignorant of the directors' interests, so the Turquand principle did not protect the Sassoon company on these facts.
In re Hampshire Land Company [1896] 2 Ch. 743 Cited by counsel for the Sassoon company in support of their submissions (precise rule not restated in the opinion). The opinion records that this authority was relied upon by counsel, but the court found the facts of the present case could not be regarded as mere items of private information and therefore found those authorities not determinative of the result.
Deep Sea Fishery Company's (Limited) Claim [1902] 1 Ch. 507 Cited by counsel for the Sassoon company (precise rule not restated in the opinion). The court considered the argument based on this authority but concluded the factual circumstances here (publicly ascertainable control and interest) distinguished the case and did not support the Sassoon company's position.
Young v. David Payne & Co., Limited [1904] 2 Ch. 608 Cited by counsel for the Sassoon company (precise rule not restated in the opinion). The court acknowledged the citation but held that the facts which affect the validity of the mortgage in the present case could not be treated as private or extraneous information; consequently these authorities did not determine the outcome in favor of the Sassoon company.

Court's Reasoning and Analysis

The court proceeded in two main strands of analysis: (A) the validity of the indentures relied upon by the Sassoon company under Section 91B of the Indian Companies Act; and (B) the entitlement of M. T. Limited to prove as unsecured creditors and the effect of Article 73 on interest charged.

A. Indentures and Section 91B — Sassoon company's claim

  1. The court first determined that the indentures of 28 February 1928 and 11 August 1931 did embody a contract or arrangement in which each director of Pratts was "concerned or interested" because each director was a shareholder and director in M. T. Limited. That conclusion invoked the equitable principle discussed in Transvaal Lands.
  2. The court then addressed whether the Sassoon company had notice of those facts in 1928 and 1931. If the Sassoon company had no notice, Section 91B would not deprive a bona fide third party of the benefit of the contract (applying the indoor management principle exemplified by Turquand). The court explicitly recognized that a third party without notice would be entitled to assume internal management was proper.
  3. On the facts, however, the court found it impossible to regard the Sassoon company as ignorant of Pratts' directors' interests. The court relied on a chain of facts: long-term financing of Pratts through M. T. Limited (since 1920), the Sassoon company's own decision in 1926 to obtain Pratts' property as security, the practical control of Pratts by M. T. Limited (M. T. Limited held all but ten ordinary shares), the overlapping directorates (including individuals who sat on the boards of multiple companies), meeting minutes and board resolutions, and the Sassoon company's familiarity with the corporate and financial arrangements over many years.
  4. The court emphasized that much of the material information was publicly ascertainable (reference to Section 87 of the Act) and that the Sassoon company, as a financier with ample opportunity to know these matters, could not disclaim knowledge of the directors' interest in 1928 or 1931. The court found no case of ratification by the preference shareholders of Pratts that could validate the mortgage.
  5. Accordingly, the court concluded that the indentures were voidable by the Official Liquidator and that the Sassoon company's equitable mortgage—its sole ground of claim in the winding-up—could be avoided.

B. M. T. Limited's claim, Article 73 and interest

  1. Both Indian courts below had affirmed M. T. Limited's right to prove as unsecured creditors for the balance outstanding at the date of the winding-up order. The Official Liquidator contested this, arguing that from 1921 to 1928 advances exceeded the limit imposed by Article 73 of Table A on the directors' power to borrow (the company's issued share capital being five lacs), and sought to have ledger accounts revised to eliminate interest charged on advances in excess of that limit.
  2. Their Lordships construed Article 73 as limiting the directors' authority to borrow such that the amount outstanding at any time should not exceed the specified limit. They rejected the interpretation that would permit further borrowings beyond the specified limit on the understanding that such extra borrowings would automatically be applied to reduce existing loans.
  3. Nevertheless, the court found that, even if the directors exceeded their authority between 1921 and 1928 insofar as advances exceeded five lacs, the loans were not ultra vires the company; concurrent findings by the Indian courts established that the company had received the money and applied it for its purposes. Consequently, the Official Liquidator could not reduce the balance outstanding at the date of liquidation by disputing Pratts' liability to repay the sums advanced.
  4. The court acknowledged that the question of interest on sums borrowed in excess of the five-lac limit was distinct from the principal liability. The Official Liquidator's contention that the entire account since 1920 should be reconstructed to eliminate such interest had not been advanced before Kania J. and had not been included in the memorandum of appeal to the division bench; moreover, the Official Liquidator's counsel had admitted the correctness of Pratts' account in the ledgers of M. T. Limited and consented to their admission as an exhibit without proof.
  5. Because the contention to reconstruct accounts and eliminate interest was first raised later in the proceedings, the division bench (and the Board) upheld the High Court's discretionary refusal to entertain that late claim. The Board found no error in that exercise of discretion and thus rejected the Official Liquidator's appeal on this point. As a result, it was unnecessary for their Lordships to decide the substantive arguments advanced by M. T. Limited in defense of their entitlement to interest.

Holding and Implications

HOLDING: Their Lordships will humbly advise His Majesty that both appeals should be dismissed.

Direct consequences and practical effects on the parties:

  • The equitable mortgage claimed by the Sassoon company is avoidable by the Official Liquidator because the Sassoon company must be regarded as having notice that every director of Pratts was interested in M. T. Limited; accordingly the Sassoon company's secured claim fails in the winding-up of Pratts.
  • M. T. Limited's right to prove as unsecured creditors for the balance outstanding at the date of the winding-up order is affirmed; the Official Liquidator's attempt to reduce the balance by reconstructing accounts to eliminate interest charged on advances beyond the Article 73 limit was not entertained and the Official Liquidator's appeal on that basis fails.
  • The costs in the consolidated appeal were apportioned: the Sassoon company will pay half of the costs of Pratts in the consolidated appeal, and Pratts will pay the costs of M. T. Limited.

The opinion does not frame or declare any novel binding principle beyond applying established equitable rules and statutory provisions (Section 91B and Article 73) to the facts; no broader or new precedent is stated by the court beyond the application of existing authorities to the factual situation before it.

Show full summary ...

    T.R. Pratt (Bombay) Limited v. M.T. Limited

    1. In this case two appeals have been consolidated. They arise out of proceedings taken in the winding-up of a company called T. R. Pratt (Bombay), Limited, (herein called " Pratts "), which was registered in 1919 under the Indian Companies Act, 1913.. On June 22, 1932, it was ordered by the High Court of Bombay to be wound up. The order appealed from is dated September 18, 1935, and was made by a division bench on appeal from Kania J. It dealt with two separate but inter-related claims against Pratts -one preferred by E. D. Sassoon & Company, Limited, and the other by M. T. Limited (in voluntary liquidation). The claim of the former (herein called "the Sassoon company") was to be a secured creditor of Pratts for Rs. 4,91,284 by virtue of an equitable mortgage evidenced by an indenture dated February 28, 1928, and confirmed by another indenture dated August 11, 1931. The claim of M. T. Limited was intended as an alternative to the claim of the Sassoon company : it was that if the latter failed to establish its claim, M. T. Limited should be admitted to rank as unsecured creditors in respect of the said sum of Rs. 4,91,284. Kanja J., by order dated July 11, 1934, allowed the claim of the Sassoon company and held that the claim of M. T. Limited was valid in the alternative. The division bench [Beaumont C.J. and B. J. Wadia J.(1935) 37 Bom. L. R. 978] disallowed the claim of the Sassoon company and accepted the claim of M. T. Limited. The appellants before the Board are the Sassoon company which appeals from the rejection of its claim and the Official Liquidator of Pratts, who disputes both claims.

    2. From 1920 until the liquidation in 1932, Pratts was financed by loans from M. T. Limited who in turn were financed by loans from the Sassoon company. The course of dealing between M. T. Limited and Pratts, as disclosed by their books, was for interest to be charged at six per cent. per annum on the half-yearly balances : on that basis the amount for which M. T. Limited claim to prove is correctly calculated. The Official Liquidator resists the claim of M. T. Limited on the ground that from 1920 to 1928 the sums advanced were in excess of the borrowing powers of the directors of Pratts under Article 73 of Table A being more than the amount of Pratts' issued share capital which was five lacs of rupees. The consequences of this breach of Article 73 need not, however, be considered until the claim of the Sassoon company has first been examined.

    3. There is no dispute as to the execution of the indentures of 1928 and 1931 to both of which all three companies-Pratts, M. T. Limited, and the Sassoon company-were parties. The main though not the sole objection taken to the Sassoon company's claim under these instruments is that the directors of Pratts were disqualified under Section 91B of the Indian Companies Act from entering into them on behalf of Pratts since they were all directors and shareholders of M. T. Limited. On this question it is important to enquire whether the Sassoon company is shown by the evidence to have had notice both in 1928 and in 1931 of the fact that all the directors of Pratts were interested in M. T. Limited. If not, it will be necessary to construe the indenture of February 28, 1928, to determine whether it was intra vires of Pratts and to ascertain the amount due thereunder in the events which have since happened. If, however, notice must be imputed to the Sassoon company of the fact that in 1928 and 1931 Pratts' directors were shareholders and directors of M. T. Limited, then the claim of the Sassoon company fails, and the claim of M. T. Limited must be examined.

    4. Pratts was incorporated in 1919, and by Clause 6 of its memorandum a firm called H. M. Mehta & Co. were appointed its managing agents for thirty years in consideration of their services as promoters. A written agreement dated July 5, 1924, shows the partners of the firm to be H. M. Mehta, Mani H. M. Mehta and F. H. Mehta. Though it was intended to adopt certain draft articles of association, no articles of association were adopted or filed and Table A accordingly applied. The authorised capital consisted of 2,000 preference and 3,000 ordinary shares of Rs. 100 each, making five lacs in all. The 2,000 preference shares were held by nominees of H. H. the Maharaja of Gwalior. By 1921, 2,990 ordinary shares came to be held by M. T. Limited, and ten by directors of Pratts, who from 1924 onwards also held some 400 shares, as nominees of M. T. Limited. The objects of the company were to deal in motor cars and other vehicles and appliances used therewith but power was taken to hold immoveable property to erect buildings and to borrow money.

    5. M. T. Limited was registered in 1920. Among the original subscribers to the memorandum appear the names of H. M. Mehta, F. H. Mehta, M. G, Parekh, C. G. Parekh, Sir Victor Sassoon and A. J. Raymond. The promoters were F. H. Mehta and Company, Limited, in which all these gentlemen were shareholders. F. H. Mehta and Co., Ltd., were by the memorandum of M. T. Limited, made their permanent managing agents. By Clause 3 D of the memorandum one of the objects of M. T. Limited was to purchase the ordinary shares of Pratts. The authorised capital was twenty lacs of rupees divided into 15,000 ordinary and 5,000 preference shares of Rs. 100 each.

    6. The Sassoon company is a private company limited by shares. The evidence of its head accountant is that the firm of E. D. Sassoon and Co. became a limited company in 1921. Its first directors were Sir Victor Sassoon, R. E. Sassoon, Albert Raymond and another gentleman of the name of Sassoon. In 1921 Mr. A. J. Raymond was added to the board. From 1924-28 the board consisted of Sir Victor Sassoon, Mr. R. E. Sassoon, Mr. A. J. Raymond and Mr. Albert Raymond. In 1928 Captain Derek Fitzgerald was added. According to a return dated November 13, 1931, Sir Victor Sassoon had ceased to be a director and a Mr. Fred Stones had joined the board. At the end of 1920 the Sassoon company was debited in the ledger of M. T. Limited with the cost of 5,000 shares in the latter company. On November 3, 1921, the board of the Sassoon company resolved that Mr. A. J. Raymond as managing director be authorised to exercise all the powers that the directors themselves are empowered to exercise as a board. On April 24, 1924, Mr. A. J. Raymond joined the board of Pratts. On April 3, 1928, the minute book of the Sassoon company records that Mr. A. J. Raymond resigned the office of managing director and also that Mr. Albert Raymond was appointed a managing director and invested with all powers that the directors were empowered to exercise as a board. On September 26, 1928, the minute book of Pratts records that Mr. A. J. Raymond was given leave of absence for six months and that Mr. Albert Raymond joined the board of Pratts.

    7. From 1921 onwards M.T. Limited held the whole of the ordinary shares (save ten) of Pratts and every director of Pratts was a shareholder in M.T. Limited. That the management and control of Pratts was in the hands of M.T, Limited is not in doubt as it was clearly the intention with which M.T. Limited was incorporated. According to the annual balance sheets of M.T. Limited the transactions between the three companies can be tabulated as shown hereunder. The Sassoon company was not treated as a creditor of Pratts but of M.T. Limited and the finance obtained by Pratts was treated as obtained from M.T Limited :-

    8. In 1926 the Sassoon company was minded to obtain security from M.T. Limited which owed money to the Calcutta and Rangoon " branches " as well as to the Bombay house-the total being over thirteen lacs of rupees. Mr. Albert Raymond and Sir Victor Sassoon having given " very careful consideration " to the points raised by M.T. Limited, the Sassoon company wrote to M.T. Limited insisting upon obtaining an equitable mortgage of " your Bombay properties" (March 8, 1926), a phrase which by April 15 of that year is found to include a property belonging to Pratts. On April 28 the directors of M.T. Limited not only resolved to grant a mortgage over a property known as Collings Building which belonged to M.T. Limited but passed a resolution that, by way of security for the nine lacs borrowed from the Sassoon company and advanced to Pratts, an equitable mortgage be created in favour of the Sassoon company of the property known as 100B, Hughes Road ("Pratts Building"), the property of Pratts. In the end, by way of a fair division between the two properties of the total amount of M.T. Limited's indebtedness to the Sassoon company, each building was charged for half, viz. four and a half lacs of rupees. On October 14, 1926, the mortgage of Collings Building was completed. As the leasehold title of Pratts to Pratts Building had to be perfected, the deeds were not deposited with the Sassoon company until November, 1927. After much correspondence between the Sassoon company and M. T. Limited and their agents, F. H. Mehta & Co., Ltd., the form of the agreement was settled, and on February 23, 1928, two board meetings were held, one at 5 p.m., and the other at 5-15 p.m. At the first the board of Pratts resolved upon the execution of the deed and authorised two of its members to affix the seal of the company. Five members were present, H. M. Mehta, A. J. Raymond, C. G. Parekh, Mani H. M. Mehta and F. H. Mehta. At the second the same persons as the board of M.T. Limited did the same on behalf of M.T. Limited. On February 28, the indenture was executed : the seal of each company being affixed by the same two directors C. G. Parekh and F. H. Mehta " pursuant to the resolution of the board of directors." In the cases of M.T, Limited, their secretary, Mr. S. M. Chothia, " countersigned " as part of the execution of the instrument : in the case of Pratts the signature of the two directors was witnessed by two persons, Mr. Satgar and Mr. Krishna Rao.

    9. In 1931 it was noticed that the articles of association which had been intended for Pratts had neither been adopted nor filed, so that Table A applied to the company. As the secretary of Pratts had not signed the indenture of February 28, 1928, it was doubted whether the execution was a sufficient compliance with Article 76 of Table A. The Sassoon company called for a deed of confirmation. Accordingly H. M. Mehta, M. H. Mehta and F, H. Mehta, on August 4, 1931, as the board of Pratts, and on August 11, 1931, as the board of M.T. Limited, passed the resolutions necessary in that behalf and both seals were duly affixed by M. H. Mehta and F. H. Mehta " pursuant to the resolution of the board of directors " in each case. Apart from the three gentlemen of the name of Mehta the board of Pratts in 1931 included Mr. Albert Raymond who was a member of the board of M.T, Limited as well as of the Sassoon company. Mr. M. G. Parekh had died on December 6, 1930. Mr. C. G. Parekh had been on the board of Pratts and of M.T. Limited since 1921 : he was a shareholder in M.T. Limited and of F. H. Mehta & Co., Ltd. He does not appear to have been a member of either board (Pratts or M.T. Limited) in August, 1931, though he was a member of both in the previous year and again in the following year.

    10. It may tend to clearness if the particulars as to the directorates of the three companies concerned are stated in tabular form : the figures of shares held are as at the time of the winding-up of Pratts in 1932. Since 1924 the boards of Pratts and of M. T. Limited had been constituted of the same persons as in February, 1928 :-

    12. Their Lordships are of opinion that the indentures of February 28, 1928, and August 11, 1931, embody a contract or arrangement in which each director of Pratts was concerned or interested within the meaning of the section by reason of his being a director and shareholder in M.T. Limited. The section is a concise statement of the general rale of equity which was fully considered and explained by the Court of Appeal (Cozens-Hardy M.R., Swinfen Eady L.J., and Pickford L.J.) in Transvaal Lands Company v. New Belgium (Transvaal) Land and Development Company [1914] 2 Ch. 488 (p. 503) :-

    Where a director of a company has an interest as shareholder in another company or is in a fiduciary position towards and owes a duty to another company which is proposing to enter into engagements with the company of which he is a director, he is in our opinion within this rule. He has a personal interest within this rule or owes a duty which conflicts with his duty to the company of which he is a director. It is immaterial whether this conflicting interest belongs to him beneficially or as trustee for others. He is bound to do as well for his cestui que trust as he would do for himself. Again the validity or invalidity of a transaction cannot depend upon the extent of the adverse interest of the fiducjary agent any more than upon how far in any particular case the terms of a contract have been the best obtainable for the interest of the cestui que trust, upon which subject no inquiry is permitted.

    13. Subject to the question whether the Sassoon company had notice of the facts as to the interest of the directors of Pratts, their Lordships think, therefore, that the indentures of February 28, 1928, and August 11, 1931, are voidable by the Official Liquidator. They are not of opinion that Section 91B would operate to deprive of the benefit of his contract with the company a third party who had no notice of the defect in the directors' authority. This would be contrary to principle : such a person would be entitled to assume that the internal management of the company had been properly conducted. [The Royal British Bank v. Turquand (1856) 6 El. & Bl. 327], But on the facts of the present case their Lordships think it impossible to regard the Sassoon company as ignorant that in any question between Pratts and M.T. Limited the former had no independent board and indeed no single director who was not interested on behalf of M.T. Limited. The fact that one of the directors taking part in the resolution of February 23, 1928, was their own managing director clothed with all the powers of their own board, is both a striking and important fact, but it is not by itself the determining feature of the case. At the meeting of August 4, 1931, no director of the Sassoon company was present. A careful and able argument was addressed to their Lordships by Mr. Romer and Mr. Russell based upon In re Hampshire Land Company [1896] 2 Ch. 743, Deep Sea Fishery Company's (Limited) Claim [1902] 1 Ch. 507 and David Payne & Co., Limited, In re : Young v. David Payne & Co., Limited [1904] 2 Ch. 608. But the facts which affect the validity of the mortgage here in question cannot be regarded as mere items of information which had been acquired by an individual director privately or in his capacity as director of Pratts and which he might or might not be expected to share with his co-directors on the board of the Sassoon company.

    14. The Sassoon company had for seven years been financing Pratts through M. T. Limited, and though the latter was their debtor, had determined in 1926 to obtain property of Pratts as security for their debt. Control of Pratts by M.T. Limited had been the basis.of their dealings. They were interested as financiers both in the extent and in the method of this control and there had been ample time and opportunity to acquire familiarity with these matters in detail.

    15. To what extent Mr. R. E. Sassoon was active as a director is left in doubt upon the evidence, but the case of the Sassoon company would not be improved by assuming that he left the direction of the company's affairs to his co-directors. Up to 1928 Mr. A. J. Raymond and thereafter Mr. Albert Raymond was in primary charge as managing director with full powers. Sir Victor Sassoon may have exercised a less detailed supervision but was certainly an active director. He and. Mr. A. J. Raymond were both original subscribers to the memorandum of M.T. Limited and to that of F. H. Mehta & Co., Ltd., the managing agents. Sir Victor himself was one of the first directors of the latter. He had been on the board of Pratts since 1922 and Mr. A. J. Raymond since 1924. He had been on the board of M.T. Limited since 1920 and Mr. A. J. Raymond since 1921. He went carefully into the question of security in 1926. It may safely be taken therefore that the Mehtas and the Parekhs and the interests they represented were as well known to the Sassoon directors as the Raymonds and Sassoons were to them. That M.T. Limited, which was putting forward Pratts' property as security, held all save ten of the ordinary shares in Pratts and that the directors of Pratts had for years been directors of M.T. Limited-these are facts which it was the business of the Sassoon company as financiers to know, and which as their Lordships think the directors came to know in the course of their business. There is no reason to suppose that Sir Victor Sassoon, Mr. Albert Raymond, Mr. A. J. Raymond or Mr. R. E. Sassoon (the directors of the Sassoon company in 1928) would have any difficulty in appreciating them ; or would fail to grasp the obvious facts that the directors of Pratts had no real interest in Pratts save through their interest in M.T. Limited, and that the Gwalior nominees were leaving the control of Pratts to M.T. Limited, the holder of the ordinary share capital. These facts cannot be regarded as extraneous information beyond the cognizance of the Sassoon company ; they are facts which had a direct and important bearing on its dealings throughout. All the information which is material was really public property as-certainable without difficulty by anyone under Section 87 of the Act. In their Lordships' opinion the Sassoon company cannot on the facts disclaim knowledge of the interest of the directors of Pratts in 1928 or 1931 and were not entitled to assume on either occasion that the provisions of section 91b had been complied with. No case of ratification by the preference shareholders of Pratts can be made out, and the result is that the Official Liquidator is entitled to avoid the equitable mortgage which is the Sassoon company's sole ground of claim in the winding-up of Pratts.

    16. The right of M.T. Limited to prove as unsecured creditors for the balance outstanding at the date of the winding-up order was affirmed by both Courts in India. On the ground that from 1921 to 1928 their advances exceeded the limit imposed (by Article 73 of Table A) upon the powers of the directors of Pratts the Official Liquidator resists the proof, notwithstanding that at the time of the liquidation (and indeed for three years before) the balance due was within the limit. Their Lordships construe Article 73 as limiting the directors' authority to borrow. The requirement of the article is that the directors shall so restrict their borrowing that the amount for the time being remaining undischarged shall not exceed the limit specified. The intention of the article is not satisfied by treating it as a direction that beyond the specified limit further borrowings, though not prohibited, are to be expended in reduction of existing loans. Assuming, however, that the directors from 1921 to 1928 exceeded their authority in so far as the advances obtained from M.T. Limited exceeded five lacs of rupees, the loans were not ultra vires of the company, and there are concurrent findings of the Indian Courts that the money was received by the company and applied for its purposes. In these circumstances it is plain that the Official Liquidator cannot reduce the balance outstanding at the date of liquidation by disputing the liability of Pratts to repay the whole sums advanced. The question of interest on the sums borrowed in excess of the limit of five lacs is, however, another matter. Before their Lordships, as before the division bench of the High Court, it was contended for the Official Liquidator that the whole account since 1920 should be revised and reconstructed so as to eliminate all charges for interest upon advances in excess of five lacs. In the High Court Beaumont C.J. and B. J. Wadia J. refused to entertain this argument which had not been urged before Kania J. and was not mentioned in the memorandum of appeal to the division bench. They considered that the Official Liquidator was in great difficulty upon this point by reason that his counsel at the trial had stated that he did not dispute the correctness of Pratts' account in the ledgers of M.T. Limited and had consented to this being marked as an exhibit without any proof. In their discretion they refused to entertain the Liquidator's claim- then for the first time put forward-to have an account directed upon principles which would eliminate a portion of the interest which has been charged from 1921 onwards. Their Lordships desire to take every care that an admission should not be strained. Mr. Lionel Cohen's argument upon this point merited and has received particular attention. But their Lordships do not find that the High Court has erred in this respect, and see no reason for interfering with the discretion which they have exercised. The appeal of the Official Liquidator must accordingly fail and it becomes unnecessary that their Lordships should discuss the arguments forcefully advanced by Mr. Buckley on behalf of M.T. Limited in defence of their right to interest.

    17. Their Lordships will humbly advise His Majesty that both appeals should be dismissed. The Sassoon company will pay half of the costs of Pratts in this consolidated appeal and Pratts will pay the costs of M.T. Limited.

    Use AI to get other relevant cases.
    Try AI Pro free for 7 days Upgrade to AI Pro

    Comments

    T.R. Pratt (Bombay) Limited v. M.T. Limited
    (Mar 11, 1938)