Case Summary
| Citation | |
| Keywords | |
| Facts | |
| Issues | |
| Contentions | |
| Law Points | |
| Judgement | |
| Ratio Decidendi & Case Authority |
Full Case Details
BANERJI and KING, JJ.:- This is a defendant’s appeal arising out of a suit for sale upon
the basis of a mortgage. The defendant is the Dehradun Mussoorie Electric Tramway
Company, Limited (in liquidation). This company was incorporated about the end of August,
1921, having a registered office at Dehradun. The plaintiffs are the proprietors of a Bank at
Dehradun and the company had an account with that Bank. On the 19th of January, 1923, the
plaintiffs allowed the company, at the request of their managing agent Mr. Beltie Shah Gilani,
an overdraft of Rs. 25,000. The mortgage deed in suit was executed on the 19th of June, 1923,
by Mr. Bertie Shah on behalf of the company in favour of the plaintiffs to secure the
overdraft. The defendants admit receipt of the consideration by the company. The overdraft of
Rs. 25,000 was undoubtedly utilised for the necessary purposes of the company. The
defendants have no objection to treating the plaintiffs as unsecured creditors, but plead that
the company is not bound by the mortgage deed for various reasons which we shall have to
consider in detail. The trial court held that the mortgage was valid and binding upon the
company and decreed the plaintiffs’ suit. The defendants in appeal have pressed the same
points that were taken in the court below in support of their contention that the mortgage deed
is not valid and binding upon the company.
- The first question is whether Mr. Beltie Shah had authority to borrow Rs. 25,000 from the
plaintiffs on behalf of the company. This question formed the subject of the first issue in the
trial court. - The Board of Directors undoubtedly had power under the Articles of Association to borrow
money for the purposes of the company and to secure tnhe loan by a mortgage. The appellants
rely upon article 104 of the Articles of Association which lays down that “The Board may
delegate any of their powers, other than powers to borrow and make calls, to Committees
consisting of such member or members of their body as they, think fit.” - Under this article the Board are expressly prohibited from delegating their power to borrow
money. Under article 120 the managing agent was given very extensive powers to conduct
and manage the business and affairs of the company and he was given power “to enter into all
contracts and do all other things usual, necessary or desirable in the management of the affairs
of the company”.
- The respondents contend that the power of entering into contracts would include the power
of contracting loans. In our opinion, however, this contention cannot be accepted. The articles
must be read as a whole and as article 104 restricts the Board from delegating its powers of
borrowing, we think that article 120 could not be interpreted so as to give the managing agent
unrestricted powers of borrowing money on behalf of the company. It is open to question,
however, whether under the ordinary rules of law relating to agency the managing agent
should not be held to have been authorised to obtain the overdraft in the circumstances of this
case. The loan was urgently required for the purposes of the company. Machinery and stores
had been ordered and had arrived from England and had to be paid for without delay. Under
sections 188 and 189 of the Indian Contract Act an agent has very extensive powers in an
emergency to do such acts as are necessary for the purpose of protecting his principal from
loss and for carrying on the business. Under article 120 of the Articles of Association also the
managing agent was given extensive powers to do anything necessary in the management of
the affairs of the company. In the circumstances of this case the managing agent might well
be regarded as being faced with an emergency and thus authorised under the ordinary rules of
agency to obtain temporary accommodation from the bank for the purpose of protecting the
interests of the company. It is not denied that the loan was necessary and that the money was
at once utilised for the purposes of the company. We think that although the managing agent
had no general power to borrow money on behalf of the company he was nevertheless
authorised to incur a temporary loan in the interests of the company in an emergency such as
arose in the present case. Article 104 prohibits the delegation of a general power of borrowing
but we think it does not prohibit the managing agent from incurring a temporary loan in an
emergency, for protecting the interests of the company. - Even if Mr. Beltie Shah acted ultra vires in obtaining this loan, it appears that his action
was clearly ratified by the Board of Directors. We cannot lay stress upon the resolution which
purports to have been passed, at a meeting of the Board on the 2nd of June, 1923, as it appears
to us (for reasons which we shall presently give) that this resolution was not passed by a
properly convened meeting of the Board. The Directors’ reports to the shareholders for the
period ending the 31st of March, 1923, submitting the audited accounts for that period, shows
the item of Rs. 24,454-3-8 as due to Bhagwan Das and Company (the plaintiffs) as an
unsecured loan. This report purports to be signed by four of the Directors of the company at a
meeting dated the 17th of September, 1923, and it has not been argued
that this meeting was not properly convened. We take it, therefore, that the Board of Directors
clearly ratified the loan to the plaintiffs in their report dated the 17th of September, 1923.
- Similarly the Directors’ report for the period ending the 31st of March, 1924, was signed by
the Directors on the 7th of January, 1925. This report submitted the audited accounts of the
company and the accounts clearly show a sum of Rs. 26,802-7-3 as due to Bhagwan Das and
Company secured by charge over the company’s lands. Even if Mr. Beltie Shah exceeded his
powers in obtaining the loan to meet an emergency his action was never repudiated, but on
the contrary was clearly ratified by the Board of Directors; so we hold that the company
cannot escape liability on the ground that their managing agent had no authority to raise the
loan. - The second question is whether the mortgage deed was executed in such a manner as to
bind the company under the provisions of Company law. - The mortgage deed was signed by Mr. Beltie Shah in his capacity as managing agent of the
company and it bears the common seal of the company. The appellants refer to article 98(t) of
the Articles of Association and argue that the execution of the mortgage deed is invalid
because under article 98(t) a document to which the common seal is affixed must also be
signed by at least one Director and countersigned by the agent or other officer appointed by
the Board for that purpose. Mr. Beltie Shah is an ex-officio Director as well as managing
agent, but it is clear that, even if he be considered to have signed the document in his capacity
as Director, article 98(t) requires countersignature by the agent or some other officer duly
appointed and the document in question bears no countersignature. - The respondent contends that there was no necessity for affixing the common seal to the
mortgage deed and the presence of the seal may be ignored. In our opinion the affixation of
the seal was not required by Company law. Under section 88 of the Companies Act the
mortgage could be validly executed by any person acting under the authority of the company.
No rule of law applicable to companies in general, or to this company in particular, has been
shown to us requiring a deed of mortgage to be executed on behalf of a company by affixation
of the common seal. If a document under seal is not necessary, then a mere defect in the
manner of affixing the seal will not render the document invalid. This was the view taken by
the Calcutta High Court in Prabodhchandra Mitra v. Road Oils (India) Ltd. A.I.R. 1930 Cal.
Their Lordships held that a mere defect in respect of the seal does not make the
document for all purposes bad, even if it was intended to be under seal.
The next question is whether Mr. Beltie Shah was authorised to execute the mortgage on
behalf of the company.
The minute book of the company (page 121 of the printed record) sets forth a resolution
which purports to have been passed by the Directors of the company at a meeting held on the
2nd of June, 1923, in these terms: “Resolved that the Board of Directors of the Dehradun
Mussoorie Electric Tramway Company, Limited, approve of the proposal of the managing
agents to the effect that in order to secure the overdraft of Rs. 25,000 obtained by the
company from Messrs Bhagwan Das and Company, Bankers at Dehradun, the company’s land
known as the Khazanchi Bagh near the Dehradun railway station be legally assigned to the
said Messrs Bhagwan Das and Company on such terms and conditions as may be settled
between the managing agents and Messrs Bhagwan Das and Company.
The Board of Directors authorise Mr. Beltie Shah to enter into the agreement and give, the
necessary deed to Messrs Bhagwan Das and Company, and to sign and seal and deliver the
deed on behalf of the Board.” This resolution purports to be signed by three directors, namely Bakhshish Singh, B.N.
Sen and Beltie Shah.It has been strenuously contended for the appellant that this is a mere bogus resolution as
no meeting of directors was in fact held on 2nd June 1923 and even if some directors did meet
together it was not a properly convened meeting in accordance with the procedure laid down
in the Articles of Association. It has been argued for the respondent that it is not open to the
defendant on the pleadings to argue that no meeting took place. Para. 16 of the additional
pleas at page 6 states:
That the directors’ meeting referred to in para. 7 of the plaint was not properly convened
inasmuch as due notice had not been given to all the directors and a ratification, if any, by any
such improperly convened meeting cannot legally bind the company.
- We think there is much force in this objection. The defendants did not deny that a
meeting took place but they alleged that the meeting had not been properly convene as due
notice has not been given to all the directors. On these pleadings we think it was only open to
the defendant to contend and establish the fact that the meeting had not been properly
convened and therefore any resolution passed by such a meeting was not legally binding upon
the company. If the fact of a meeting had been expressly challenged then the plaintiff might
have called evidence to prove that in fact a meeting did take place. The defendant did not call
any director to prove that no meeting took place as alleged. The question however does not
appear to be of much importance since if the meeting of directors had not been properly
convened, after due notice, its proceedings would not have been valid and binding upon the
company. No trace has been found of any notice convening a meeting on 2nd June 1923 nor is
there any trace of the agenda of any such meeting.’ From the letter Ex. E. p. 127, dated 7th
June 1923 from Mr. Beltie Shah to Mr. Sen, one of the directors, it appears that al’ though M.
Beltie Shah, Mr. Narsingh Rao and Mr. Sen might have met together on 2nd June 1923 they
did not in fact pass the resolution which appears in the company’s minute book on that date.
The letter of 7th June states the fact of the overdraft having been obtained from Messrs.
Bhagwan Das & Co., who were pressing for repayment and wanting security. Mr. Beltie Shah
enclosed a draft resolution (to the same effect as the resolution appearing in the company’s
minute book on 2nd June 1923) asking Mr. Sen to sign it and to get it signed by Mr. Rao and
Sardar Bakhshish Singh. In view of this letter we think it is clear that there could not have
been a properly convened meeting of directors on 2nd June 1923 which passed the resolution
set forth above. - The next question is whether the plaintiff knew that there could have been no properly
convened meeting of Directors on the 2nd of June, which passed the resolution mentioned. - The appellant contends that the plaintiff Jagmandar Das knew perfectly well that no
meeting had been held on 2nd June and that the resolution was a mere bogus resolution. He
relies mainly on the letters Ex. Q and Ex. CC. Ex Q (p. 135) is a letter from Mr. Beltie Shah
to the plaintiff dated 12th June 1923 Mr. Beltie Shah complains that the plaintiff is
unreasonably impatient to” obtain security for his loan and states that the company are doing
everything in their power to meet the plaintiff’s wishes and adds:
You are perfectly well aware of the fact that in the case of a limited company the procedure
laid down by the Articles and law has to be gone through and the delay is only natural as all
our directors are nonresidents of Dehra Dun.
- The appellant argues that the plaintiff on receiving this letter must have known that no
resolution sanctioning the execution of a mortgage to secure the overdraft could have been
passed by a meeting of directors on 2nd June. Ex. CO (p.139) is a letter dated 16th June 1923
from the plaintiff to Mr. Beltie Shah. The plaintiff complains of the delay in adjusting the
overdraft or giving security for it and says:
Till now you ought to have got the matter settled by the directors by means of
correspondence. - This is interpreted by the appellant as showing that the plaintiff knew that no resolution
sanctioning the mortgage had been passed on 2nd June but he hoped that the business would
be settled by means of correspondence. For the respondent it is contended that although no
resolution may have been passed at a properly convened meeting of directors on 2nd June the
plaintiff was not aware of that fact. Ex. HH (p. 117), which is a letter written by the plaintiff
to Mr. Beltie Shah on 26th May 1923, shows that there was a talk about giving security for
the overdraft from about 25th May. It was possible therefore for the managing agent to have
given one week’s notice of a meeting to the directors before 2nd June. Ex. Q does not show
for certain that no resolution was passed on 2nd June nor does Ex. CC show for certain that
the plaintiff knew that no resolution could have been passed on 2nd June. Buggan Lal,
manager of the plaintiff’s bank, deposed that Mr. Beltie Shah had shown him the minute book
of the company, containing the resolution of 2nd June, a day or two before the execution of
the deed i.e., on 18th June. The question was expressly put to him that when he knew from
the letter of 12th June (Ex. Q) that Beltie Shah had spoken of the necessity of sanction by the
directors why did he not suspect Mr. Beltie Shah of being a tricky and unreliable man when
he showed the witness a resolution purporting to have been passed on 2nd June. The’witness
answered:
I took him to be extra honest because he had frankly shown me the minute book of the
company and because he had said that money, was being expected from Nabha every day.
- In all the circumstances of this case we think it was very possible that Buggan Lal and the
plaintiff were deceived by Mr. Beltie Shah. One must remember that in June, 1923, there was
no suspicion that the company would go into liquidation and the plaintiff had no reason to
suspect Mr. Beltie Shah of being a tricky and unreliable man. Subsequent events have no
doubt cast a lurid light upon his character and methods and in the light of such subsequent
events it may be argued that the plaintiff and Buggan Lal ought not to have put so much trust
in Mr. Beltie Shah. It is easy to be wise after the event, but in the circumstances we think that
Mr. Beltie Shah who appears to have been a very capable and plausible man persuaded the
plaintiff that the execution of the mortgage had really been sanctioned by a properly convened
meeting of the Directors. Buggan Lal and the plaintiff may have thought it strange that Mr.
Beltie Shah did not refer to the resolution in his letter of the 12th of June, but he seems to
have explained to them that he was in daily expectation of receiving large sums of money
from Nabha out of which he could repay the overdraft, thus rendering the execution of a
mortgage deed unnecessary, and therefore he made no previous mention of the resolution
sanctioning the mortgage. However this may be, when Mr. Beltie Shah showed Buggan Lal
the minute book of the company containing the resolution signed by three of the Directors, as
we believe he did, we think it would have been difficult for Buggan Lal to disbelieve the
representation that the resolution had been duly passed. Moreover, the conduct of the plaintiff
in accepting the mortgage supports the view that he believed that the execution of the
mortgage had been sanctioned by the Board of Directors. The plaintiff would not have been
likely to accept a mortgage which to his knowledge had not been sanctioned by the Directors
and was not binding upon the company. If the plaintiff had known or even strongly suspected
that the mortgage had not been sanctioned he would not have accepted it but would have sued
the company for recovery of the loan. - It has further been argued for the appellant that the Directors were not authorised under
the Articles of Association to empower Mr. Beltie Shah to execute the mortgage. The
argument is that, as the Directors cannot delegate their power to borrow they could not leave
the details of the mortgage transaction to be settled by the managing agent. The reply to this is
that the loan had already been incurred and there was no question of delegating the power of
borrowing any further sums. The only question for the Directors was whether they should
give the plaintiff a security for the loan which he had already advanced. Under article 104 we
think the Board could legally empower one of the Directors to execute the mortgage deed on
their behalf and to settle the details of the mortgage transaction.
- The result is that in our opinion the Board of Directors could legally authorise Mr. Beltie
Shah to execute the mortgage on behalf of the company by a resolution passed at a properly
convened meeting. As a matter of fact we hold that there was no properly convened meeting
which passed the resolution dated the 2nd of June, but the plaintiff had no reason to suppose
that the resolution had not been properly passed and was not binding upon the company. On
these facts we consider that the plaintiff is protected in spite of the defect in passing the
resolution, and the company is bound by the mortgage so far as Company law is concerned.
The law on this point is laid down in Halsbury’s “Laws of England”, volume 5, page 302, as
follows: “The persons contracting with a company and dealing in good faith may assume that
acts within the power of the company have been properly and duly performed and are not
bound to enquire whether acts of internal management have been regular.” - The case of the Royal British Bank v. Turquand [1856] 6 Ellis. & Bl. 327 is one of the
most important cases on this point. In that case the Directors of the company were authorised
in certain circumstances to give bonds, but the company sought to escape liability on the
ground that there had been no resolution authorising the making of the bond in suit. It was
held that the plaintiff was entitled to judgment, having a right to presume that there had been a
resolution at a general meeting authorising the borrowing of the money on the bond. - For an Indian decision on this point we may refer to the case of Ram Baran
Singh v. Mufassil Bank Limited A.I.R. 1925 All. 206 in which it was held that a company is
liable for all acts done by its Directors, even though unauthorised by it, provided such acts are
within the apparent authority of the Directors and
not ultra vires the company. Persons dealing bona fide with a Managing Director are entitled
to assume that he has all such, powers as he purports to exercise if they are powers which
according to the constitution of the company a Managing Director can have.
- We agree with the court below, therefore, in finding that the company is bound by the
mortgage so far as Company law is concerned. - The next question is whether the mortgage is void for want of previous sanction by the
Local Government. Under clause 37 of the Dehradun Mussoorie Tramway Order, 1921, it is
laid down that “the promoter shall have power to transfer the undertaking with the assent of
Government previously obtained, but not otherwise, to any person or persons or to a
company.” - It is argued that as the Local Government did not give their previous assent to the
mortgage it is void. - The respondent replies that the defendant has never proved that the mortgage was made
without the previous sanction of the Local Government, a fact which was within the
defendant’s special knowledge. In our opinion there is no force in this reply. Issue 3 at p. 20
implies that the mortgage had not been sanctioned by the Local Government. The plaintiff
never alleged that such sanction had been obtained. In our opinion the Court below wrongly
cast the onus upon the defendant of proving that in fact no sanction had been obtained for the
mortgage. The plaintiff himself admits in cross-examination that so far as he is aware no
permission or sanction was taken from the Government for the execution of the mortgagedeed; he did not know that any such sanction was necessary, nor did Beltie Shah ever tell him
that any such sanction had been obtained. In view of the plaintiff’s admissions and in view of
the fact that he never alleged that sanction had been obtained and allowed the issue to be
framed in such a manner as to imply the absence of sanction we consider that it must be held
that the mortgage was executed without previous sanction by the Local Government. The
question, however, remains whether the mortgage is void on that account and this raises
several points for determination. The first question is whether the company was a. “promoter”
within the meaning of the Indian Tramways 5 Act, 1886, and the Tramway Order of 1921,
made under sub-section (3) of section 6 of that Act by the Local Government. “Promoter” is
defined in the Act as meaning a local authority or person in whose favour an order has been
made and includes a local authority or person on whom the rights and liabilities conferred and
imposed on the promoter by this Act and by the Order and any rules made under this Act as to
the construction, maintenance and use of the Tramway have devolved. Beltie Shah was
undoubtedly a “promoter” and is expressly referred to as the promoter in the Tramway Order.
The question is whether the rights and liabilities conferred and imposed upon him have
legally devolved upon the company.
- It is argued for the respondent that they have not legally devolved upon the company
because the Local Government did not give their previous consent to the transfer of the
undertaking by Beltie Shah to the company. On 22nd December 1921 an agreement was
entered into between Beltie Shah and the company (Ex. H,P.53) whereby the company agreed
to take over the benefit and liability of Beltie Shah under the tramway order. It was argued
that there was no proof of any previous sanction of this transfer and therefore it was void and
the company never became a “promoter” and was not subject to the conditions laid down in
the tramway order. By consent of parties we allowed the appellant to file further evidence on
the question of the Local Government’s sanction of the transfer of the undertaking by Beltie
Shah to the company. It appears that on 27th May 1921 Mr. Beltie Shah first submitted his
formal application for permission to transfer the undertaking to a company. This application
was made before the concession had been granted to him. On 28th June 1921 Mr. Beltie Shah,
writing to Mr. Willmott, the Chief Engineer and Secretary to Government in the Public
Works Department, admits that strictly speaking he has not yet received the concession and
therefore he will content himself with a letter from Mr. Willmott to the effect that he will have
no objection to permit the transfer of the proposed concession for constructing the tramway.
He further says it must be understood that this tentative permission is merely to facilitate the
incorporation of the company under the Companies Act. Mr. Willmott replies by a letter dated
9th July 1921:
As regards the request made in para 6 of your letter I have to say that if the provisional order
becomes valid Government will have no objection to the transfer. - After the tramway order had become absolute Mr. Beltie Shah wrote again to Mr.
Willmott on 10th January 1922 referring to the previous letter (saying that Government will
have no objection to the transfer) and asking that official permission for the transfer shall now
be given. By a letter dated 22nd February 1922 the-formal sanction of the Local Government
to the transfer of the order, authorizing: the construction of a tramway, was conveyed to Mr.
Beltie Shah.
- For the respondent it is argued that as formal sanction for the transfer was only accorded
on the 22nd of February, 1922, the transfer effected by the agreement of the 22nd of
December, 1921, was void since there was no previous sanction. The appellant maintains that
the letter of the 9th July, 1921, intimating that Government will have no objection to the
transfer is sufficient authority for the transfer. In our opinion the appellant’s contention is
correct. The Tramway Order merely lays down in clause 37 that the undertaking can only be
transferred with the assent of Government previously obtained, but does not specify any form
in which such assent should be expressed. In our opinion a demi-official letter such as that of
the 9th of July, 1921, by a Secretary to Government in the Public Works Department,
intimating that Government will have no objection to the transfer is sufficient to convey the
previous assent of Government. We take it therefore that the company did become a
“promoter” in place of Beltie Shah. - The next question is whether the land mortgaged formed part of the “undertaking”. The
land was bought by the company on the 15th of May, 1922, for the purpose of a tramway
depot, that is, for administrative offices and a car shed. “Undertaking” is defined as including
all movable and immovable property of the promoter suitable to and used by him for the
purposes of the tramway. The fact that the land near the railway station was “suitable” for the
purposes of the tramway can hardly be disputed. It was obviously necessary that the Tramway
Company should have some administrative offices and a car shed, and a site near the railway
station was obviously suitable. It is argued, however, that at the time of the mortgage the
property was not used by the company for the purposes of the tramway. The evidence shows
that at that time some sleepers, intended for the construction of the tramway, were stacked
upon the land. In our opinion this indicates use of the land for the purposes of the tramway
sufficient to bring it within the definition of “undertaking”. The mere fact that the land was
not acquired under the Land Acquisition Act or with the concurrence of the Superintendent of
the Doon, as laid down in clause 13 of the Tramway Order, will not take the land out of the
category of “undertaking”. Undoubtedly the land was acquired for the purpose of the tramway
and the method of its acquisition is immaterial for the purpose of deciding whether it is part of
the company’s undertaking. We find that it is part of the “undertaking” because it belonged to
the company and was suitable for and used by the company for the purposes of the tramway.
- The mortgage, then, was made in contravention of clause 37 of the Tramway Orders as
having been made without the previous assent of Government. On these facts the respondent
argues that the transfer would only be voidable at the option of the Local Government and not
absolutely void. The appellant maintains that the mortgage is absolutely void and in our
opinion his contention is well founded. The rules laid down in the Tramway Order have the
force of law and in our opinion the transfer of part of the undertaking without the previous
sanction of Government must be held to be absolutely void. In the case of Gaurishankar
Balmukund v. Chinnumiya A.I.R. 1918 P.C. 168 it was held by their Lordships of the Privy
Council that a mortgage by a judgment-debtor in contravention of paragraph 11 of the third
schedule of the Code of Civil Procedure is void and not merely voidable. We may also refer
to the rulings in Dipan Rai v. Ram Khelawan [1910] 32 All. 383, and Har Prasad
Tiwari v. Sheo Gobind Tiwari A.I.R. 1922 All. 134 in which the mortgage of an occupancy
holding in contravention of the Agra Tenancy Act was held to be void. In our opinion the
same principles would apply to a mortgage in contravention of a clause of the Tramway
Order. If the mortgage is void it cannot be ratified nor can it be pleaded that the defendant is
estopped from denying his competence to create the mortgage. We hold, therefore, that the
mortgage is void. - The appellants being the Liquidators of the Dehradun Mussoorie Electric Tramway
Company and all the evidence having been taken in this case, we think that instead of the
plaintiffs proving their claim in the course of the liquidation proceedings they should be given
a decree for money as against the Liquidators. They will thus rank as unsecured creditors and
will get their money in due course of liquidation. - We allow the appeal and vary the decree of the trial court by granting to the plaintiffs a
simple money decree for Rs. 29,773-4-3 to be realised by them in due course of liquidation.
Interest at the contractual rate, will cease as from the 29th of January, 1926. If there are any
surplus assets interest at 6 per cent, per annum, will be payable out of the surplus up to the
date of repayment. The appellants will get half the costs of this appeal and those in the court
below from the respondents. The respondents will bear their own costs.
