The Gazette 1985

GAZETTE

JANUARY/FEBRUARY 1985

powers of the directors and prescribe that the directors may not borrow more than the authorised or issued share capital without the consent of the company in general meeting and an application is made to a lender for a loan which will exceed that limit, he may assume that the necessary enabling resolution has been passed. 14 Re. Hampshire Land Co. It is submitted that to require proof of such matters would be to impose too onerous a burden on the business community. An outsider transacting business with a company in such a situation has no means of ensuring that there has been compliance with the conditions laid down in the articles of association. He is not required to look behind the public documents of a company. In Royal British Bank -v- Turquand itself, it was held that since, under the registered deed of settlement which was the predecessor of the modern memorandum and articles of association, the directors might have had authority, the third party was at liberty to assume that they had been authorised. 20 Jervis C.J. put the matter thus: We may now take for granted that the dealings with these companies are not like dealings with other partnerships and that the parties dealing with them are bound to read the statute and the deed of settlement. But they are not bound to do more. And the party here, on reading the deed of settlement, would find not a prohibition from borrowing, but a permission to do so on certain conditions. Finding that the authority might be made complete by a resolution, he would have a right to infer the fact of Walter Conan Ltd., Academic-Legal-Civil-Clerical Robemakers. Telephone - 971730 - 971887

before the board. Therefore a resolution passed at a meeting of three directors, two of whom were interested in the subject-matter of the vote, failed to pass muster. However, in the Cox case the debenture-holders could fall back on the "indoor management" rule which the Irish Court of Appeal had no hesitation in applying. Palles C.B. held that resolutions as to the issue of debentures fell within the scope of internal management. A person bona fide purchasing a debenture without notice of any invalidity or irregularity affecting its issue, was entitled to rely upon the seal of the company as evidencing that all matters of that nature had been duly performed. 13 Persons who are inside the company and act as insiders are, however, outside the pale of protection afforded by the rule. 14 There was some suggestion that the debenture holders had debarred themselves by acting as insiders but the judges had little difficulty in categorising them as outsiders. Molony L.J. pointed to the fact that while one of the holders was once a director of the company, he had long since ceased to hold such office nor did he participate actively incorporate management. 15 In examining the extent of the obligation to investigate matters of internal management in Ireland, mention must be made of Re Burke Clancy Ltdf Here Kenny J. resolved the controversy which had arisen over the validity of a debenture. However, the case is interesting not least because of what the learned judge omitted to say. The articles of association of a company prohibited the directors from borrowing in excess of a specified amount, unless with the consent of the company in general meeting. The directors purported to borrow more than the authorised amount without the consent of the company in general meeting first having been obtained. Kenny J. took the view, notwithstanding, that this omission was not fatal to the validity of a debenture which created a charge against the assets of the company. It was settled law that the members of a company may ratify acts which are outside the powers of the directors but are intra vires the company. Grant -v- U.K. Switchback Railway Co. 11 was cited in support of this proposition. There the articles authorised the sale of part of the company's undertaking to any other company but prohibited a director from voting in respect of any contract in which he was interested. The directors, acting on behalf of the company, contracted to sell part of its undertaking to another company in which all the directors of the first company, with the exception of one, were interested. The contract was ultra vires the directors because only one of them was competent to vote. However the approval of the company in general meeting made it binding on the company. This situation was obviously analogous to the matter which arose for determination in Re Burke Clancy Ltd. Kenny J. said that similarly, in this case, the approval of the accounts showing the amount borrowed was a ratification by the company of the action of the directors in borrowing an amount in excess of the issued share capital. 18 While this line of reasoning was dispositive, the bank, to whom the debenture had been issued, also invoked the authority of Turquand's case. The Judge appears to have regarded this submission as something in the nature of an afterthought, which indeed it may have been since no authorities were opened on this branch of the law. He reserved for future consideration the question whether when the articles of association limit the borrowing

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