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Charnock Collieries Co., Ld. v. Bholanath Dhar
Factual and Procedural Background
This opinion arises from a special case under Order XXXVI of Schedule I of the Civil Procedure Code involving the plaintiffs, the Charnock Collieries Co., Ltd., in liquidation, and their liquidators, Edward William Viney and John Woodhouse Thurston, against the defendant, Bholanath Dhar. The defendant claims to be a secured creditor for a sum of Rs. 7,117-8 under a hypothecation instrument dated 3rd January 1910, and also claims secured creditor status in respect of certain royalties and rents due under a kabuliat relating to the colliery held by the plaintiff company. The colliery was sold by agreement between the parties, and the sale proceeds are held by the liquidators' attorney. The court was asked to opine on the validity of the defendant's secured creditor claims under these two heads.
Legal Issues Presented
- Whether the defendant holds a valid charge on the company's property under the hypothecation instrument dated 3rd January 1910, despite non-compliance with certain articles of the company's articles of association.
- Whether the defendant is entitled to be a secured creditor in respect of royalties and rents due under the kabuliat both before and after the liquidation of the company.
Arguments of the Parties
Defendant's Arguments
- The defendant claims a secured creditor status for Rs. 7,117-8 based on the hypothecation instrument dated 3rd January 1910.
- He also claims secured creditor status for royalties and rents due under the kabuliat relating to the colliery.
Liquidators' Arguments
- The liquidators do not dispute the defendant's right to prove as an unsecured creditor but contend that the mortgage did not create a charge on the company's properties due to non-compliance with the company's articles of association.
- Specifically, they argue that the terms of articles 49, 50, 84, and 112 were not complied with, particularly regarding the attestation of the company seal on the hypothecation document.
- They deny the defendant's claim to secured creditor status in respect of royalties and rents under the kabuliat.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Royal British Bank v. Turquand | Indoor management rule: a person dealing with a company is entitled to assume internal company acts are regular and proper. | Supported the defendant's right to assume managing agents had authority and approval of the board of directors for borrowing money. |
| County of Gloucester Bank v. Rudry Merthyr Colliery Co. | Followed the principle in Royal British Bank v. Turquand regarding indoor management. | Reinforced the defendant's entitlement to rely on managing agents' authority. |
| In re Bank of Syria | Further authority on indoor management and corporate acts. | Supported the assumption of regularity in company internal management by outsiders. |
| In re County Life Assurance Co. | Clarified that a stranger is entitled to assume internal compliance absent knowledge to the contrary. | Applied to hold the defendant was entitled to assume managing agents had board approval. |
| In re Queensland Land and Coal Co. | Equity grants a charge on company property even if debenture is void, based on agreement to give security. | Supported the equitable principle that the defendant is entitled to a charge despite incomplete security. |
| Pegge v. Neath Tramways Co. Ltd. | Where a person lent money expecting security, he may call for that security even if not formally granted. | Affirmed the defendant's right to call for security on the loan advanced to the company. |
Court's Reasoning and Analysis
The court examined the terms of the relevant articles of association (Nos. 49, 50, 84, and 112) to determine whether the defendant's hypothecation document created a valid charge. Although the document was sealed by the company, it was only attested by the managing agents without the signature of a director, which the liquidators argued was non-compliant.
The court held that under article 50, managing agents have broad authority to secure money advanced to the company by issuing securities or mortgages on company property. The court applied the indoor management rule, as established in Royal British Bank v. Turquand and subsequent cases, allowing a third party dealing with the company to assume internal approvals had been obtained unless there was knowledge to the contrary.
Consequently, the defendant was entitled to assume that the managing agents had the board's approval to borrow money and grant security, making the hypothecation a valid charge. Even if the security was incomplete due to formal defects, equity would recognize a charge based on the agreement to give security, following precedents such as In re Queensland Land and Coal Co. and Pegge v. Neath Tramways Co.
Regarding the claim to royalties and rents under the kabuliat, the court applied the general rule that a landlord is entitled to prove for rent due prior to liquidation and to have rent accruing after liquidation paid if the liquidators remain in possession. Here, since the defendant had surrendered possession to the liquidators after liquidation with his acquiescence, he was not entitled to secured creditor status for rents accruing either before or after liquidation.
Holding and Implications
Holding: The court held that the defendant is entitled to a charge on the monies held by the liquidators' attorney amounting to Rs. 7,417-8 under the hypothecation instrument. However, the defendant is not entitled to be a secured creditor in respect of any royalties or rents due under the kabuliat, either before or after liquidation.
Implications: The decision affirms the application of the indoor management rule protecting third parties dealing with companies in good faith, even where internal formalities are imperfectly observed. It also clarifies that landlord rights to secured claims on rents post-liquidation depend on possession and acquiescence. No new precedent was established; the ruling applies established equitable principles and company law doctrines to the facts at hand. The liquidators are ordered to pay the defendant's costs and retain their own, with the liquidators' costs assessed as between attorney and client.
Fletcher, J.:— This is a special case for the opinion of the Court under Order XXXVI of Schedule I of the Civil Procedure Code. The plaintiffs are the Charnock Collieries Co., Ld., in liquidation and Edward William Viney and John Woodhouse Thurston, the liquidators of the company; the defendant is Bholanath Dhar.
The matters in which the opinion of the Court is sought are under two headings. First, the defendant claims as a secured creditor in respect of a sum of Rs. 7,117-8 which is said to be due to him under a certain instrument of hypothecation dated the 3rd January 1910 expressed to have been made between the company of the one part and the defendant of the other part.
The second part of the claim is with reference to the right of the defendant to be a secured creditor in respect of certain royalties and rents due by the plaintiff company to the defendant under the authority of a kabuliat under which the plaintiff held the colliery.
This colliery was, by an agreement made between the company, the defendant, and the liquidators, sold, and the proceeds of the sale are now in the hands of the attorney to the liquidators.
The first point is a short one. It appears that Bholanath Dhar on the 3rd January 1910 lent to the plaintiff company the sum of Rs. 3,995-8. On that date there was also due to that gentleman on a promissory note executed by the company Rs. 2,001-8. Therefore the amount taken to be lent on the 3rd January 1910 was Rs. 6,000. That amount, it is not denied by the liquidators, went into the coffers of the company and was credited by the company or its managing agents in the loan account.
The liquidators do not dispute the right of the defendant to prove as an unsecured creditor, but they say that the terms of the articles of the company were not complied with and that therefore the mortgage did not create a charge on the properties of the company.
The only articles which are material to this matter are Nos. 49, 50, 84 and 112.
Article 49 authorises the managing agents with the approval of the directors to borrow from the members or other persons, and may themselves lend any sum or sums of money for the purposes of the company. Then follows a proviso which is not material to this case.
Article 50 says— “The managing agent may with such approval as aforesaid, raise or secure repayment of such money in such manner and upon such terms and conditions in all respects as they think fit, and in particular by the issue of debentures or bonds of the company or by the creation of debenture stock, or by making, drawing, accepting or endorsing on behalf of the company any promissory notes or bills of exchange, or giving or issuing any other security of the company, or by mortgage or charge of all or any part of the property of the company including its uncalled capital.”
Article 84 is material because by it a power which in England is confined to the board of directors is conferred on the managing agents. “Subject to the control and supervision of the directors the managing agents are by this article authorised to sign all such contracts, and to draw, accept, endorse and negotiate on behalf of the company all such bills of exchange, promissory notes, hundies, cheques, drafts and other instruments as shall be necessary for the carrying on of the business of the company, and to exercise all the powers, authorities and discretions of the company except only such of them as by the Company's Acts or these presents are expressly directed to be exercised by the board of directors or by the shareholders in general meeting. All monies belonging to the company shall be paid to such bankers as the managing agents, subject to the approval of the directors, shall deem expedient, and all receipts for monies paid to the company shall be signed by the managing agents whose receipts shall be an effectual discharge for the monies therein stated to have been received.”
Article 112 relates to the custody of the seal. It says— “The managing agent shall provide for the safe custody of the seal. Every instrument to which the seal is affixed shall be signed at least by one director and countersigned by the managing agents, provided that the signature of a director shall not be required to documents to which the seal is affixed and which are required for use only in connection with any civil and criminal proceedings in which the company is concerned or to documents which the managing agents are hereby expressly authorised to sign, but it shall be sufficient if such documents are signed by the managing agents only.”
Now, the facts in this case are that the document given to the defendants on the 3rd January 1910 was sealed by the company. The seal of the company was affixed, but it was only attested by the signature of the managing agents.
The point really is whether, this document not having complied with the terms of the articles of association of the company, has the defendant a valid charge on the property of the company? In my opinion he has. This case is covered by authority starting, I think, with the case of The Royal British Bank v. Turquand. That has been followed by a long string of cases going down to the cases cited by Mr. Pugh: County of Gloucester Bank v. Rudry Merthyr Colliery Co. and In re Bank of Syria. The point is this, whether a person dealing with the company is bound to look into what Lord Halsbury calls the “indoor management” of the company, that is whether a person dealing with the company is bound to see whether the act of the company is not ultra vires, or whether he may assume that all the acts done by the company or on its behalf are regular and proper. In my opinion in this case the lender was entitled to assume that the managing agent had the authority or approval of the board of directors. It seems to me that the observation of Sir G.M Giffard in In re County Life Assurance Co. exactly fits this case. He says, “in the first place a stranger must be taken to have read the General Act under which the company is incorporated and also to have read the articles of association; but he is not to be taken to have read anything more, and if he knows nothing to the contrary he has a right to assume as against the company that all matters of internal management have been duly complied with.” That seems exactly to fit the case. The lender when he advanced money to the company was entitled to assume that the managing agent had obtained the approval of the board of directors to the borrowing of those sums. Then it is said that cannot be so in this case because on the document of hypothecation which was given to the defendant the seal of the company was only attested by the signature of the managing agents. With that argument I do not agree. Under article 50 managing agents are authorised to secure money advanced to the company by giving or issuing any security or by a mortgage or charge on all or any part of the company including its uncalled capital. It may be that the security is not complete, but the managing agents obviously have the power under article 50 to give a security on behalf of the company, and that security can be either by way of mortgage or a charge on any part of the property of the company.
It seems to me that under article 50 the managing agents have ample power to give a security. That being so, the affixing of the seal on the document was not necessary. The signature of the managing agent in my opinion was ample. If that was not so, I should have decided upon the well-known class of cases where a person who advanced money to a company upon the terms that security should be given to him, even if the security be not complete, he is nevertheless entitled under the rules of equity to have a charge on the property of the company. That class of case rests on the elementary maxim of equity, that equity looks upon that as done which is agreed to be done. If the money were borrowed on account of the company it is not open to the company to say that the person who lent the money is not entitled to a charge. It is only necessary to refer to the case of In re Queensland Land and Coal Co. in which North J. held that a person is entitled to a charge on the property of the company where the debenture was void. Mr. Pugh also cited Pegge v. Neath Tramways Co., Ld., which decided where a person who never had a debenture was entitled to call for the security because he lent money on the footing that he was to get the security.
It seems to me on all these grounds that the defendant is entitled to a charge upon the monies in the hands of the attorney of the liquidators for the sum of Rs. 7,417-8.
The other portion of the claim set up by the defendant is, I think, not well founded. That relates to certain monies that became due to the defendant in respect of rents and royalties under the lease under which the plaintiff company held the collieries.
The general rule is that the defendant would be entitled only to prove for the rent that became due prior to the liquidation and to claim to have the full rent paid subsequent to the liquidation if the liquidators remain in possession for the benefit of the company; but if the liquidators remain in possession after the liquidation with the acquiescence of the landlord then that right of the landholder to have the rent accruing due after the liquidation paid to him as a secured creditor would not stand, and he would be relegated to the position of having a right of proof as an unsecured creditor. In this case no difficulty arises because after the liquidation the defendant was in possession and it appears quite clear from a letter set out in exhibit E to the special case that possession was made over by the defendant to the liquidators subsequent to the liquidation.
The rule therefore that the landlord is entitled to be paid in full for rent accruing due subsequent to the liquidation should the liquidators remain in possession cannot be applied to this case, as the landlord acquiesced in the liquidator's possession; and therefore in so far as the special case asks for the opinion of the Court as to whether the defendant is entitled to claim as a secured creditor in respect of the rents which are due under the terms of the kabuliat either before or after the liquidation, I answer by saying he is a secured creditor in respect of no portion of that rent. Mr. Buckland has asked me not to say anything as to what the actual position of the defendant is, and I shall refrain from doing so.
The liquidators will pay the defendant's costs and retain their own costs. The liquidators' costs will be as between attorney and client.
C.B
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