Beaumont, C.J:—
This is an appeal from an order of Mr. Justice Kania made in the liquidation of T.R Pratt (Bombay) Ltd. The claims in question were made by E.D Sassoon & Co. Ltd. and M.T Ltd. For simplicity I will refer to the three companies as Pratts, M.T.s and Sassoons respectively. The learned Judge held that the claim of Sassoons was proved, as also was the claim of M.T.s; admittedly, they were not additional but alternative claims, and it is really not necessary to consider, the claim of M.T.s, if the claim of Sassoons is allowed.
The facts are not, I think, substantially in dispute. Pratts was incorporated in the year 1919 with a capital of rupees five lacs, divided into preference and ordinary shares. The memorandum of association contained power to borrow and give security for the money borrowed, but there was no power to give security for a debt of third parties. Originally articles of association were prepared, but by some error they were not registered, so the company was regulated by table A; and under article 73 of table A the directors' power of borrowing is limited, the article providing that the amount for the time being remaining undischarged of moneys borrowed by the directors shall not exceed rupees five lacs, i.e, the capital.
M.T.s was incorporated in 1920. It was formed by Messrs Mehta & Co., who were the managing agents of Pratts, and by persons interested in Sassoons; and the principal object of the company was to finance Pratts, the view being that Pratts' capital was insufficient for the business which they were capable of doing. M.T.s acquired practically the whole of the ordinary share Capital of Pratts, but the preference shares were held by outside parties. At the date of the liquidation of Pratts, which was June 22, 1932, a sum of approximately Rs. 4,92,000 was due by Pratts to M.T.s Sassoons were in the habit of financing M.T.s, and in the years 1926 to 1928 there was a sum of approximately rupees nine lacs due by M.T.s to Sassoons. It appears from the correspondence that in the year 1926 Sassoons commenced to press M.T.s for security for the debt. M.T.s had an immovable property known as the Collins Building, which was a part of the building in which Pratts carried on business, and Pratts had two immoveable properties; and the correspondence shows that Sassoons wanted to get a mortgage upon all those properties, both of M.T.s' and Pratts', as security for the money due to Sassoons. Originally it was proposed that there should be two documents—one between M.T.s and Pratts, and the other between M.T.s and Sassoons—, but in order to avoid expense it was arranged to have one. Accordingly, on February 23, 1928, resolutions were passed by the Boards, both of Pratts and of M.T.s, for execution by the respective companies of a security deed in favour of Sassoons, and on February 28, 1928, the security deed in question was executed.
That document, which is exhibit J, was made between M.T.s (thereinafter called the mortgagor of the first part), Pratts (thereinafter called the surety of the second part) and Sassoons (thereinafter called the mortgagee of the third part). It recites the title to the properties which were to be mortgaged, and then it recites that Pratts required money for the purpose of their business and requested M.T.s to lend them money, and that M.T.s requested Sassoons to lend them rupees nine lacs in order to enable them to lend money to Pratts. Then it recites that Sassoons had already paid to M.T.s rupees nine lacs, out of which M.T.s had paid to Pratts rupees four and a half lacs. It is argued that in fact there is no evidence on the record that recital is true, namely, that the money borrowed by M.T.s from Sassoons had to any extent gone to Pratts; but I see no reason why we should not accept that recital as correct. There is no evidence that it is untrue, and being an admission made by Pratts under their seal and by the other parties, I think we can accept it as true. Then the document recites deposits of the title deeds of the immoveable properties both of M.T.s and Pratts with Sassoons, and then the witnessing part states that Pratts have already deposited with Sassoons the title deeds of the properties therein mentioned with intent that the properties may be equitably charged with the repayment to Sassoons of the sum of rupees four and a half lacs out of the sum of rupees nine lacs advanced to M.T.s by Sassoons with interest. Then M.T.s and Pratts jointly and severally covenant with Sassoons to pay the said sum of rupees four and a half lacs with interest on October 31, 1931.
Now, we had a long and elaborate argument from Mr. Coltman on behalf of the liquidator of Pratts to the effect that, assuming that document was validly executed by Pratts, it was not binding upon them. The argument is that Pratts by that document in effect became surety for M.T.s and deposited their deeds as security for M.T.s' debt, and that under the memorandum of association they had no power to do that. It is also argued that there was no consideration in the deed in favour of Pratts. It seems to me that the argument ignores the essential fact that as between these three companies Pratts were primarily liable to pay at least rupees four and a half lacs, and Sassoons were entitled to receive four and a half lacs. It seems to me clear that the transaction could have been carried out, as originally suggested, by two documents. Pratts could have mortgaged their properties to M.T.s for four and a half lacs, Part of the moneys owing, and M.T.s could have assigned, either absolutely by way of sale, or by way of security, that mortgage to Sassoons, and the actual result brought about by this document could have been brought about in that way by two documents, and no question could have been raised. To hold that an arrangement which could have been carried out by two documents cannot be carried out by one document to which all the parties interested are parties, would be to sacrifice substance to form. I think that the case of Seligman v. Prince & Co. is an authority for that proposition. I agree with Mr. Coltman that case is not on all fours with the present case. It would be on all fours if Pratts had agreed to indemnify M.T.s against their debt to Sassoons, but it seems to me that distinction is not an essential one. The essence of this case is that as between the three parties to the deed Pratts were primarily liable to pay and Sassoons were ultimately entitled to receive the money; and that was the position also in Seligman v. Prince & Co. It is quite true that in the document there is no consideration expressed in favour of Pratts. The transaction is, I think, of the nature of a novation, that is to say, a substitution of the liability of Pratts to Sassoons for the liability of Pratts to M.T.s and M.T.s to Sassoons; but it is not a complete novation, because there is no release of Pratts' liability to M.T.s and the subsequent books of the companies show that Pratts were treated as debtors of M.T.s after this document had been executed, and not as debtors of Sassoons. But it seems to me that you cannot give effect to this document without holding that there was an implied obligation on M.T's part not to sue for the amount of four and a half lacs for which Pratts had given security to Sassoons as long as this mortgage stood. It seems to me plain that if M.T.s had claimed the money from Pratts, this mortgage, to which M.T.s were a party, would have been a defence. I think that there was sufficient consideration in favour of Pratts in the implied covenant not to sue on the part of M.T.s coupled with the fact that time was actually given. I agree, therefore, with the learned Judge in thinking that if this document was properly executed on behalf of Pratts, it was a valid contract. It is not, in my opinion, a document of suretyship at all. There is no ground suggested for that, except the mere definition of Pratts as surety, which amounts to very little.
Then the second point argued by Mr. Coltman on behalf of the liquidator of Pratts as against Sassoons, though logically it comes first, is that this document was never executed in such a way as to be binding upon Pratts. The objection arises in this way: Section 91A of the Indian Companies Act provides that a director who is directly or indirectly concerned or interested in any contract or arrangement entered into by or on behalf of the company shall disclose the nature of his interest; and section 91B provides that no director shall, as a director, vote on any contract or arrangement in which he is either directly or indirectly concerned or interested; and if he does so vote, his vote shall not be counted.
Section 91B is not taken from the English Act. The subject-matter of section 91A was for the first time included in the English Companies Acts by the Act of 1929; but there is no statutory provision in England corresponding to section 91B, though the subject-matter of that section, namely, the right of directors to enter into contracts on behalf of the company in which they have some personal interest is frequently dealt with in the articles of association.
Now, the position with regard to the directors of Pratts is this. There were always a certain number of directors common to Pratts and M.T.s, and from 1924 until 1931, that is to say during the whole of the material period, the Boards of the two companies were common. There were in all seven directors of the two companies. One of those directors was Mr. A.J Raymond, and another, Capt. E.V Sassoon, both of whom were directors of Sassoons. But Mr. Raymond was more than a director. He was the Managing Director of Sassoons, and, under a power in their articles, Sassoons had deligated to him all the powers of the directors. The resolution to that effect is exhibit 9.
Now it is alleged that in 1928, when this mortgage was arranged and executed, all the directors of Pratts were concerned or interested in the matter individually, that is to say apart from their position as directors of Pratts, because they were directors of M.T.s and also shareholders in that company. The qualification for directors of M.T.s was the holding of one hundred shares. So that all the directors of Pratts were not only directors but also shareholders in M.T.s; and I think that the argument that they were individually concerned or interested in this mortgage is sound.
The object of section 91B was clearly to ensure that a company shall have the benefit of the judgment of an entirely independent Board; and I do not think that the Board of Pratts was independent of M.T.s in the matter of this contract, or that the interests of the two companies were identical. It was vital to M.T.s that they should get for Sassoons the security which Sassoons were asking for, which involved a mortgage of Pratts' property. No doubt, Pratts were in a difficulty in resisting any claim by M.T.s because they owed M.T.s money. But an independent Board theoretically might have taken the view that it would be better that Pratts should be wound up rather than give security for the debt, although experience shows that directors do not usually take such a pessimistic view of the prospects of their company. But there is practical force in the suggestion that an independent Board of Pratts would not have agreed to a contract in the exact terms of the contract of February 28, 1928. An independent Board might very well have said that if Pratts were to give their property as security to Sassoons, at any rate they must have an out-and-out release from M.T.s of a corresponding part of their debt, and that Pratts should not be left to rely on an implied covenant not to sue on the part of M.T.s It seems to me impossible to say that there was no conflict of interest in the matter of that mortgage between M.T.s and Pratts, although to a certain extent their interests were common. In my opinion, therefore, by virtue of section 91B, none of the directors of Pratts was competent to vote for the resolution to execute this mortgage in favour of Sassoons.
Two further questions then arise. First, is it necessary to show that Sassoons had notice of the disability arising under section 91B? Secondly, if so, had Sassoons such notice? Now, it is very well settled law in the case of English joint stock companies that people dealing with such a company are fixed with notice of any limitations on the power of the company contained in the statute under which it is incorporated or in the memorandum or articles of association; but that if it is shown that a particular act was ostensibly authorised by the statute and the memorandum or articles of association, persons dealing with the company are not concerned to see that the company has put itself into a position to exercise its power properly. That is the rule recognized in Royal British Bank v. Turquand, and a great many other cases. It is generally expressed by saying that outside parties are not concerned with the internal management of the company. They are not, for instance, concerned to see that there was a proper quorum of directors present, or that persons who were apparently directors of the company had in fact been validly appointed. Those are matters of internal management; and I have no doubt that if the disability of a director to vote upon a contract in which he was personally interested were imposed by the articles of association, the question whether he was personally interested in, and entitled to vote upon, a particular contract would be regarded as matter of internal management, with which persons dealing with the company would not be concerned.
It is argued, however that position does not apply in India, because the restriction against voting is a statutory disability, and non-compliance with a public statute can never be a matter of internal management. At first sight there is, I think, force in that contention; but, on consideration, I agree with the argument of Mr. Munshi that the principle of the English cases as to internal management ought to be applied to a case of disability of directors arising under section 91B. It is clear that the reason for the rule applies as strongly in India as in England. The reason for the rule, I take it, is that it would be disastrous in a business community if contracts made with companies could be impeached on account of matters known to the company but not to the other contracting party. Moreover, I think that the distinction between the position in England, where the disability arises under the articles, and in India, where it arises directly under the statute, is really more apparent than real, because under section 8 of the Companies Act, 1929, and the corresponding sections in earlier Acts, the articles of association are made the regulations of the company, so that they bind the company by virtue of the statute, and the only real distinction between the position in England and in India (apart of course from the fact that the articles can be altered by the company whilst the statute cannot) is that in the one case the disability of directors arises indirectly from the statute, whilst in the other it arises directly from the statute. In my judgment, therefore, we ought to hold that if Sassoons had no notice of the facts giving rise to the disability of the directors of Pratts to vote on this contract, then the contract ought not to be impeachable by reason of section 91B.
The question then arises whether Sassoons had notice. It is, of course, clear that they had notice of the terms of the contract to which they were parties, and, therefore, they had notice that there was a conflict of interest in relation to that contract between Pratts and M.T.s; and the only real question is, whether they had notice that the Boards of the two companies were common, and that therefore all the directors of Pratts were personally concerned or interested in the contract.
Mr. Coltman has relied on section 87 of the Indian Companies Act, which requires a list of directors to be filed with the Registrar, and he says that Sassoons therefore had notice of who the directors of Pratts and M.T.s were; but it has never been held, as far as I know, in the English cases that people dealing with companies have notice of the contents of all documents on the file of a particular company; and this Court in Pudumjee & Co. v. Moos has expressed an opinion against that view. I, therefore, do not rely on section 87.
Apart from this the first point argued in favour of the view that Sassoons had notice of the common directorship is that they had such notice through Mr. Raymond. Mr. Munshi on behalf of Sassoons has referred us to a good many cases which undoubtedly show that where you have a director common to two companies you cannot impute to both those companies all matters within the private knowledge of the director. The cases referred to are: In re Marseilles Extension Railway Co.: Ex parte Credit Fonder and Mobilier of England. In re Hampshire Land Company and Duck v. Tower Galvanizing Company. I may take the general rule as stated in the case of In re Hampshire Pratt Land Company. There the head-note, which I think accurately represents the decision, says:—
“Where one Person is an officer of two companies his personal knowledge is no necessarily the knowledge of both the companies. The knowledge Which he has acquired as officer of one company will not be imputed to the other company unless he has some duty imposed on him to communicate his knowledge to the company sought to be affected by the notice, and some duty imposed on him by that company to receive the notice; and if the common officer has been guilty of fraud, or even irregularity, the Court will not draw the inference that he has fulfilled these duties.”
That case was followed, as to the last portion of it, where the common director had been guilty of fraud or irregularity, by the House of Lords in the case of J.C Houghton & Co. v. Nothard, Lowe and Wills, and none of the learned Lords in that case expressed any dissent from the earlier portion of the decision, so that I think one may take that case as good law. I am unable to say in this case that Mr. A.J Raymond had no duty imposed upon him to communicate to Sassoons matters within his knowledge as a director of Pratts or M.T.s He was more than a director of Sassoons; he was, as I have said, the managing director with all the powers of the directors; and, having regard to the relations between the three companies, I think it is a fair inference that he was placed on the Boards of M.T.s and Pratts largely in order that he might represent Sassoons and might protect their interests, and I have not the slightest doubt that it was his duty to communicate to Sassoons any material fact which came to his knowledge as director of either of those companies. Whether he ever did communicate to Sassoons, the fact that the Boards of Directors of the two companies were common, I do not know. I should think probably he did. But if he omitted to do so, it was not, I feel sure, because he considered that he owed no duty to Sassoons to make the communication, but because he did not realize the importance of the fact.
Moreover, apart from the notice which Sassoons acquired through Mr. Raymond, I think they also had notice in another way. The attestation clause to the mortgage deed of February 28, 1928, shows that the common seals of M.T.s and of Pratts respectively were fixed pursuant to resolutions of the respective Boards of Directors passed at meetings held on February 23, 1928. Sassoons were concerned to see that those resolutions were in order, because they were the foundation of their title, and if they had taken the trouble to look at the resolutions, they would have seen that they were resolutions passed by the same persons as directors of Pratts and also as directors of M.T.s So that Sassoons knew in that way that all the directors of Pratts who voted in favour of the execution of the document of February 28, 1928, were also directors, and therefore shareholders, of M.T.s, and in that way had an interest conflicting with that of the company, and that their votes therefore could not be counted under section 91B. It seems to me, in the circumstances of this case, impossible to hold otherwise than that Sassoons had notice that the votes of the directors of Pratts in favour of the execution of this document, under which they claim, ought not to have been counted by reason of the provisions of section 91b. If that is so, the resolution of the directors of Pratts of February 23, 1928, is void, and the execution of the mortgage in favour of Sassoons must also be void. See Greymouth Point Elizabeth Railway and Coal Company, Limited, In re.
It was further argued by Mr. Munshi that even if the document was void, it had been ratified by all the shareholders of Pratts. So far as the holders of ordinary shares were concerned, there may have been a ratification, because all the ordinary shares were held either by M.T.s or by their directors, but the preference shares were held by outside parties, one of whom was Mr. F.E Dinshaw, who alone is suggested to have had notice. It is said that Mr. F.E Dinshaw was informed that Pratts had mortgaged their property to Sassoons and that he knew that the Boards of Pratts and M.T.s were common; but not only was he not told that there was any question as to the validity of this mortgage, but he was not told, as far as I can see, the fact that the mortgage was not made directly to secure a debt due by Pratts to Sassoons, but to secure a debt due by M.T.s to Sassoons. That is to say, he was not told anything to suggest that there was any conflict of interest between Pratts and M.T.s, or any reason why the execution of the mortgage should be impeached under section 91B. That being so, I am clearly of opinion that the view of the learned Judge was right as to this, and there is no force in the contention that the document has been ratified by the shareholders.
In the result, therefore, the claim of Sassoons fails. As they had no debt apart from the mortgage deed, they have no equity to retain the documents of title of Pratts which were deposited with them. These will have to be returned to the liquidator.
Then the question arises as to the claim of M.T.s As I have said, the power of the directors to borrow was limited by article 73, under which the amount borrowed by the directors for the time being remaining undischarged must not exceed rupees five lacs, the capital of the company. I have also mentioned that at the time of the liquidation the amount due to M.T.s was less than five lacs. Therefore, prima facie, there seems to be no reason for challenging the claim of M.T.s on the ground that the incurring of the debt was ultra vires. But it appears from the accounts put in by M.T.s that in previous years the borrowing did go beyond five lacs and reached, in the year 1922, thirteen lacs, and it was gradually reduced, but remained over five lacs down to the year 1928.
It was argued by Mr. Coltman that by the application of some of the many equities discussed in Sinclair v. Brougham we ought to hold that the amounts repaid were the authorised borrowing and not the unauthorised borrowing, and we ought, therefore, to come to the conclusion that the whole amount due at the date of the liquidation was the unauthorised borrowing. Why we should apply any equity in favour of his clients who borrowed the money they do not wish to repay I do not know. It is quite clear that the rule in Clayton's case has no application where the question is between moneys borrowed intra vires and moneys borrowed ultra vires, in respect of which the relationship of debtor and creditor never arises. It is clear also that Pratts had the benefit of all these moneys, and as soon as the amount due came to below five lacs, the borrowing was authorised under article 73. I entirely agree with the learned Judge that in so far as it is necessary to rely on any presumption, the presumption would be that the moneys repaid represented in the first place moneys borrowed ultra vires, which never became the property of the company, but remained the property of the lenders. I am not sure that in this case, it is necessary to rely on any presumption, because at the material date, namely the commencement of the liquidation, article 73 had no application, because the debt was under the limit.
I agree also with the argument of Mr. Setalvad on behalf of M.T.s that in a case where the borrowing is ultra vires the directors, and not ultra vires the company, the money could be recovered in an action for money had and received. As pointed out by the Lord Chancellor in Sinclair v. Brougham where the borrowing was ultra vires the company, no action for money had and received lies in such a case, because the action is based on the fiction of a promise to pay, and you cannot have a fictional promise to pay where the promisor is not competent to give an actual promise. But that reasoning does not apply where the borrowing is only ultra vires the directors, so that the company can ratify the borrowing and give a valid promise to pay.
It has further been argued by Mr. Coltman in this Court, though the point does not appear to have been taken in the Court below, nor is it directly taken in the memorandum of appeal, that a part of the moneys due at the date of the liquidation to M.T.s represents interest on moneys borrowed ultra vires. There is, I think, some force in the contention that Pratts could not be charged with interest on moneys which for the time being had not been properly borrowed, nor, I think, could such interest be recovered in an action for moneys had and received. If that point were to prevail, I think that the liquidator of Pratts would be entitled to an account of the moneys due to M.T.s with a declaration that nothing was to be allowed in respect of interest on moneys borrowed which were for the time being in excess of five lacs. But, in my opinion, we ought not to direct such an account in this case. The point, as I have said, was not taken in the Court below, nor has it been directly taken in the memorandum of appeal; and in the lower Court counsel for Sassoons tendered an account of Pratts in the ledgers of M.T.s, and counsel for Pratts admitted the correctness of the account, and no point was raised that any particular item in the account was wrong. No doubt it was said that the whole amount due on the account was not properly payable because it all represented moneys borrowed ultra vires. But no question was raised that a part of the moneys due at the date of liquidation to M.T.s represented interest on moneys borrowed ultra vires. I think, in view of the admission in the Court below as to the correctness of the account, and the fact that this question as to interest was not argued in the Court below nor taken in the memorandum of appeal, we ought not to direct an account now.
In the result, I agree with all the conclusions of the learned Judge in the Court below, except the conclusion that Sassoons were not fixed with notice of the disability of the directors of Pratts to vote on the resolution for the execution of the contract in suit.
That being so, the appeal against Sassoons will be allowed, and the appeal against M.T.s dismissed.
Declared that M.T.s are entitled to a certificate under rule 702 as unsecured creditors for the amount of their claim.
The appeal against M.T.s is dismissed with costs, and the liquidator of Pratts will have liberty to pay the costs out of the assets.
The appeal is allowed against Sassoons; but having regard to the fact that they have succeeded on certain issues in the lower Court and in this Court, they ought not to pay the whole of the costs in both the Courts. Instead of apportioning costs, we propose not to vary the order of the lower Court that the costs of respondent No. 1 should come out of the assets, but we direct respondent No. 1 to pay the whole costs of the appeal against respondent No. 1 to the appellant.
B.J Wadia, J. I have come to the same conclusion. The question for decision, so far as the claim of the Sassoons is concerned, centres round the transaction contained in the deed of mortgage dated February 28, 1928, made between M.T.s, the Pratts and the Sassoons. The claim of the Sassoons is based on this deed, and on the deed of 1931 between the same parties which was, however, only by way of confirmation. The claim was rejected by the liquidator, but the grounds for rejection have not been clearly stated in his affidavit made in these proceedings on July 13, 1933. His counsel, however, contended before us that the transaction was not binding on the company and the liquidator on the grounds, (1) that the recitals in the deed were not accurate and did not correctly represent the actual state of the dealings and business between the parties; (2) that the transaction was really a transaction of suretyship under which Pratts stood surety for payment of a debt due to the Sassoons not by themselves, but by M.T.s, and the giving of such guarantee was ultra vires the company; (3) that the covenant under which the Pratts and M.T.s jointly and severally promised to repay four and a half lacs to the Sassoons and the security for the repayment of the same were without consideration; (4) that the deeds were executed in pursuance of resolutions which were not valid and binding, and that therefore the deeds were void and of no effect.
With regard to the recitals in the deed of 1928 it was argued that the figures of nine lacs and four and a half lacs were entirely imaginary, that there was no evidence of a direct specific loan of four and a half lacs from the Sassoons to Pratts, that there was no connection between the account subsisting between Pratts and M.T.s on the one hand and the account between M.T.s and the Sassoons on the other, and that therefore no relationship of creditor and debtor had been established to justify the covenant to repay the four and a half lacs and the security for repayment of the sum. It is common ground that there is no account of the Sassoons in the books of Pratts showing the Sassoons as creditors, nor any account of Pratts in the books of the Sassoons showing Pratts as debtors. But the relationship of creditor and debtor in respect of the four and a half lacs is created by the deed itself, which has been formally signed and executed by all the three companies. In that document M.T.s have acknowledged receipt of nine lacs from the Sassoons, and Pratts acknowledged receipt of four and a half lacs out of the nine lacs advanced by Sassoons to M.T.s The recitals may not be literally correct in the sense that there is nothing on the record of the companies corresponding with what is stated in them, but they are not false in substance. To hold otherwise would be, in my opinion, to sacrifice substance to form. There is also a plain recital that Pratts required four and a half lacs for the purpose of their business, that these four and a half lacs were advanced for such purpose, and there is no evidence before us that the moneys which were within the authorized limit were not used and applied bona fide for the purposes of the company. When moneys borrowed or acknowledged to be due are within the authorized limit, there is no obligation upon the lending company to inquire how the moneys are about to be used nor how in fact they have been used. In my opinion, therefore, all the parties would be bound by this transaction, if it was otherwise valid.
I agree with the learned Judge in the Court below that this is not a suretyship transaction. The fact of Pratts having been described as “surety” is not conclusive as to the nature of the transaction, any more than the stamp on the document is conclusive as to what the document really is. Our attention was drawn to certain correspondence that passed before the deed was executed. But all previous correspondence was in the nature of negotiations. The negotiations became merged in the deed which after execution was the sole repository of the terms of the transaction. Under this deed the Pratts have not guaranteed the payment of the moneys due by M.T.s to the Sassoons. They have acknowledged their own liability to the Sassoons for four and a half lacs, and secured repayment of that sum by deposit of title-deeds of their property. It cannot, therefore, be said that Pratts have made their own property security for somebody else's debt when they have themselves acknowledged that they are debtors to the extent of four and a half lacs and the ruling in Crewer and Wheal Abrm. Untd. Mininq Co. (Lmtd.) v. Willyams, on which counsel for the liquidator relies, therefore, does not apply. It was also argued that there was no novatio as to the four and a half lacs, because M.T.s have not released Pratts of their liability for that amount, nor have the Sassoons released M.T.s It is true that there is no express covenant in the deed that M.T.s will not sue Pratts for four and a half lacs, but such a covenant is implied in the deed, for as a result of the deed M.T.s could not have sued Pratts for four and a half lacs, at least not for three years. The Sassoons gave time to M.T.s to pay their debt, and an implied forbearance to sue M.T.s is sufficient consideration in law to sustain the promise by Pratts to pay four and a half lacs to Sassoons which is a part of the nine lacs advanced by the Sassoons to M.T.s There is a tripartite arrangement in the nature of a novatio, and it cannot be said that an arrangement of this kind is ultra vires the company.
This brings me to the resolution of February 23, 1928. The alleged invalidity of the resolution seems to be the only ground which has been forcibly urged by the liquidator in his affidavit. But it is a question which really goes to the root of the whole matter. Counsel for the liquidator relied on section 91B and the proviso to article 77 of Table A of the Indian Companies Act. Sections 91A, 91B, 91C, 91D have all been added by Act XI of 1914. Section 149 of the English Companies Act, which was added in the Act of 1929, corresponds in effect to section 91a of our act. There is no section in the english act corresponding to section 91b. section 91b provides that where a director is concerned or interested directly or indirectly in a contract or arrangement with the company, he cannot vote on that contract or arrangement; and the proviso to article 77 in Table A says in effect the same thing, except that the words in the section are “contract or arrangement”, and the words in the article are “contract or work”. It is clear that the interest of the director in the transaction must be personal, and either pecuniary or material. It may be direct or indirect, but it must be adverse to the company of which he is a director. The principle on which it is based has been well-recognised and it is so strict and inflexible that even the fairness or unfairness of the transaction is immaterial. For instance, directors have been held to be incompetent to vote on giving a debenture security to two of themselves in consideration of a large sum of money owing to them: Greymouth Point Elizabeth Railway and Coal Company, Limited, In re. They cannot vote on an issue of debenture to secure an over-draft account with the bank which was guranteed by themselves personally: Victors, Ld. v. Lingard. A director cannot vote on an allotment of shares to himself: In re Sir Hormusji A. Wadia. The reason in all these cases is that the company is entitled to the unbiassed judgment of its directors on matters affecting the interests of the company. As pointed out by the Vice-Chancellor in Benson v. Heathorn the company has a right to the entire services of its directors, a right to the voice of every director and a right to his advice in giving his opinion on matters which are brought before the board for consideration. Section 91B of the Indian Companies Act enforces a statutory prohibition which is somewhat stringent, and it was pointed out in argument in The Guntur Cotton, etc., Mills Co., Ltd. v. Venkatachalapati that the case to which it should be applied must fall strictly within its purview.
The liquidator contends that the resolution of February 23, 1928, is invalid, because the directors of Pratts were not competent to vote on a resolution for executing the deed, having regard to their common interest in M.T.s, and that the Sassoons had notice, actual or constructive, of the facts going to invalidate the resolution. The five directors of Pratts, who were present at the meeting of February 23 and voted on the resolution of 5 p.m, passed exactly the same resolution as directors of M.T.s in the same building at 5-15 p.m Moreover, the directors of Pratts were interested in M.T's, either as shareholders or as directors of M.T.s One of the directors of Pratts was Mr. A.J Raymond, who was also the managing director of the Sassoons. Under a resolution of the Sassoons of February 3, 1921, he was empowered to exercise the full powers of the entire board of directors of the Sassoons, and, according to the evidence given in these proceedings by the head accountant of the Sassoons, he was in charge of the business of the Sassoons as managing director from its inception. There was no doubt a common board between M.T.s and Pratts, also a common secretary and a common management. It was argued on behalf of the liquidator that there was no independent person present to vote on the resolution giving the security of Pratts' property to the Sassoons, and that all the directors were therefore disqualified to vote. There was no quorum competent to transact business, and therefore the resolution was invalid, and the deed executed in pursuance thereof was a nullity. On the other hand counsel for the Sassoons argued that the question of the disqualification of the directors of Pratts, the question whether the meeting was properly called, the question whether there was a proper and competent quorum qualified to vote on the resolution, are all matters of internal or indoor management of the company, and do not affect the validity of the contract or transaction so far as outsiders are concerned under the ruling in the case of Royal British Bank v. Turquand, and a company is bound by its own resolution. A person dealing with limited liability companies is deemed to have notice of its memorandum and articles of association, but he is not bound to inquire into the internal management, and will not be affected by any irregularity of which he has had no notice. He has a right to assume that nothing has been done or permitted to be done which is not permitted by the memorandum and articles of association or by the statute incorporating the company itself. But actual or constructive notice of any irregularity prevents a third person contracting with the company from obtaining the protection of the rule in Turquand's case, namely, that all matters of internal or indoor management must be deemed by outsiders to have been duly and properly complied with. Such notice, as I have said, may be actual or constructive. If the outside party is put on inquiry by reason of the circumstances under which the transaction was put through or by the nature of the transaction itself, or by any other surrounding circumstances, and disregards the facts which put him on inquiry as to the irregularity, he cannot get the benefit of the rule.
The question, therefore, in this case is whether the Sassoons had notice of the irregularity, that is, notice of the disqualification of the directors of Pratts to vote on the resolution, under the terms of section 91B of the Act. Mr. A.J Raymond was a common director of all the three companies, but it was said that he was present at the meeting of February 23, 1928, in his capacity as director of Pratts only, and that he was not bound to communicate his knowledge of any irregularity derived in that capacity to the Sassoons. It has been laid down in numerous cases that the knowledge of the common officer of two companies is not necessarily the knowledge of both the companies, and counsel contended that it did not follow that the Sassoons therefore had notice of every fact that happened to be known to Mr. A.J Raymond: In re Hampshire Land Company; In re Marseilles Extension Railway Co.: Ex parte Credit Foncier and Mobilier of England. But in J.G Houghton & Co. v. Nothard, Lowe and Wills, Viscount Dunedin points out at p. 14 that it may be assumed that the knowledge of directors is in ordinary circumstances the knowledge of the company, and Viscount Sumner points out in the same case at page 19 that what a director knows or ought in the course of his duty to know may be the knowledge of the company, for it may be deemed to have been duly used so as to lead to the action, which a fully informed corporation would proceed to take on the strength of it. The position of Mr. A.J Raymond when he sat as a director of Pratts on February 23, 1928, is of importance in this connection. The Sassoons were vitally concerned in the equitable mortgage which Pratts were to give to them. There was previous correspondence between the companies about it. Mr. Raymond was not merely a common director, but he was also present there as manager of the business of the Sassoons, and this certainly was a business transaction, not of Mr. A.J Raymond personally, but of the Sassoons. He knew or must be presumed to have known that there was a common board of Pratts and M.T.s though he may not have appreciated the legal significance of that fact nor thought it his duty to communicate it to the Sassoons. There were other circumstances surrounding the transaction which were sufficient to suggest further inquiry. The two resolutions passed on the same day are mentioned under the seals of M.T.s and Pratts which were affixed to the deed itself. The learned Judge in the Court below has stated that if this transaction could have been put through by two documents, it might as well have been put through by one, and there was nothing unusual in its nature as a business transaction. The form may not be unusual, but the question is not one merely of form. A transaction which may be effected by two documents may well be effected by one, but the doubt as to the validity of the transaction as embodied either in one document or two documents will still remain under the circumstances which I have referred to before. In my opinion it was Mr. Raymond's duty as manager of Sassoons for all business purposes to act not merely for the purpose of receiving information but also for the purpose of communicating it. It is really difficult to believe that there was a situation on February 23 when it could be said that Mr. Raymond had notice only as a director of Pratts, and had no notice as managing director of the Sassoons and as manager of their business. The Sassoons also were bound to inquire into the title to their mortgage, and the title to the mortgage was based upon the validity of the resolution. There was no independent board, and no meeting of the shareholders was called to ratify the transaction. Therefore, under all the circumstances the Court can impute knowledge of the irregularity to Sassoons. Counsel for the liquidator also relied on section 87 of the Indian Companies Act under which the list of directors filed with the Registrar is open to inspection, but it was pointed out in Pudumjee & Co. v. Moos that notwithstanding section 87 the appointment of directors was still a matter of the internal management of the company, and an outsider could not be expected also to search the register for the list of directors.
I do not agree with counsel for the Sassoons that the transaction was ratified by all the shareholders of Pratts by acquiescence. There can be a ratification either with full knowledge of the transaction or with the intention to adopt the transaction under any circumstances. It cannot be said that Mr. F.E Dinshaw and two others who were joint holders of preference shares on behalf of the Grwalior State had full knowledge of all the circumstances attending the transaction or were put upon inquiry. It was argued that if he had not the knowledge, he had the means of knowledge. But a person can only be put on inquiry if there are facts communicated to him which may lead to a further inquiry. He was not put on inquiry merely as a shareholder. Reference was made to two letters of February 28 and March 3, 1928, written to him by H.M Mehta & Co., the managing agents, on behalf of Pratts. There was no reply to either of them; but from that it cannot be inferred that he manifested an intention to adopt the transaction. In my opinion the letters are not sufficient evidence on which any Court can base a finding of standing by or acquiescence on the part of Mr. F.E Dinshaw.
The claim of the Sassoons is based on the deeds. The deeds not being valid and binding for the reasons above stated, they cannot have any claim either as secured or unsecured creditors, for the debt as well as the security are created by the deed of 1928. This brings me to the claim of M.T.s which is really an alternative claim. It is stated in paragraph 7 of the affidavit of Mr. J.M Taleyarkhan dated July 7, 1933, that in the event of the claim of Messrs E.D Sassoon & Co. Ltd. being admitted, M.T.s will not claim the amount over again. Article 73 of Table A has already been referred to and I need not recite it again. It fixes the directors' limit of borrowing at five lacs. It was, however, argued that the borrowings by Pratts were far in excess of the limit of five lacs, but in my opinion there is no ground for assuming that the claim now made, which is below the limit, represents the balance of unauthorized borrowings. It was further argued that the Pratts should not in any event be charged with interest on that portion of the claim which may represent interest on their unauthorized borrowings. That contention, however, was never put forward in the Court below. It has not been mentioned in the judgment. It is not taken in the memorandum of appeal. Even in the affidavit of the liquidator himself of July 13 all that is stated is as follows:—
“The petitioners contend, and I am advised with reason, that as the payments made by the company from time to time to M.T Ltd. in liquidation of the accounts would discharge the borrowings from M.T Ltd. in order of time, the ultimate balance left unpaid represents the final borrowings, and therefore the balance shown as now due in account of M.T Ltd. represents the last borrowings by the management of M.T Ltd. in excess of the powers of the board of directors to borrow, and therefore represents unauthorized and ultra vires borrowings by which the company is not bound.”
The claim of M.T.s was disputed on principle, and not in respect of the quantum, in the course of the hearing, and no one contended in the Court below that an account should be taken of what was due to M.T.s in respect of their claim. The account of the Sassoons in the ledgers of M.T.s and the account of Pratts in the ledgers of M.T.s were put in, and their correctness was admitted. Counsel for the liquidator argued that all that was meant by the admission was that the accounts were not to be formally proved. If that was so, the note taken by the learned Judge would not have been in that form. The accounts would only have been put in by consent without proof. I, therefore, hold that the liquidator is not now entitled to have any account taken of the sum due to M.T.s in respect of their claim. The claim is within the authorized limit. The moneys were borrowed and used according to the balance-sheets of Pratts for their business. There was therefore, an implied promise by the Pratts to repay all that had gone into their coffers. In my opinion no account should now be ordered, and the amount of the claim should be taken as correct. It has been held that an account for money had and received cannot lie in the case of an ultra vires borrowing: Sinclair v. Brouqham. But the amount claimed by M.T.s is within the limit, and Pratts are bound to repay the sum.
For these reasons I agree with the conclusion that the claim of the Sassoons should be rejected, and the claim of M.T.s allowed. In the result the appeal would be allowed so far as the claim of the Sassoons is concerned and dismissed so far as the claim of M.T.s is concerned.
I agree with the order for costs made by the Chief Justice.
Attorneys for appellants: Messrs Payne & Co.
Attorneys for respondents: Messrs Ranga & Co.
Decree varied.
B.K.D