Dehradun-Mussoorie Electric Tramway Co. v. Jagmandar Das and Others (1932)

This is the Indian case that shows how the borrowing, security and indoor-management rules work together on one set of facts, and it is unusually instructive because the lender wins on company law and loses anyway. Three questions arise in sequence — was the borrowing authorised, was the mortgage authorised, and was the mortgage lawful — and the answers are yes, yes by presumption, and no.

For a student it does four things at once:

• it holds that an article forbidding the Board to delegate its power to borrow is read strictly, and article-wide construction defeats an argument built on one clause;
• it recognises an agent's emergency authority under ss. 188 and 189 of the Indian Contract Act;
• it applies Turquand in India, in a form quoted from a standard statement of English law;
• and it shows that all of that is worthless against a statutory prohibition, because a transfer made in breach of one is void and unratifiable.

The company was incorporated about the end of August 1921, with a registered office at Dehradun. The plaintiffs were the proprietors of a bank at Dehradun with which the company had an account.

• 19 January 1923 — the plaintiffs allowed the company an overdraft of Rs. 25,000 at the request of its managing agent, Mr Beltie Shah Gilani.
• The overdraft "was undoubtedly utilised for the necessary purposes of the company." Machinery and stores had been ordered and had arrived from England and had to be paid for without delay.
• 2 June 1923 — the company's minute book records a resolution of the directors approving the assignment of the company's land, Khazanchi Bagh near the Dehradun railway station, to the bank to secure the overdraft, and authorising Beltie Shah to enter into the agreement and to sign, seal and deliver the deed. It purports to be signed by three directors.
• 7 June 1923 — a letter from Beltie Shah to Mr Sen, a director, enclosing a draft resolution to the same effect and asking him to sign it and to get the other two to sign.
• 19 June 1923 — the mortgage deed was executed by Beltie Shah on behalf of the company.

The company went into liquidation. Receipt of the consideration was admitted, and the defendants had no objection to the plaintiffs ranking as unsecured creditors; what they denied was that the company was bound by the mortgage. The trial court upheld the mortgage and decreed the suit for sale. The company's liquidators appealed.

Article 104 provided: "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." Article 120 gave the managing agent extensive powers of management, including power to enter into all contracts and to do "all other things usual, necessary or desirable in the management of the affairs of the company".

The bank argued that a power to enter into all contracts includes a power to contract loans. The court rejected it on a principle of construction worth memorising: "The articles must be read as a whole", and since article 104 forbids the Board to delegate its borrowing power, article 120 cannot be read to give the managing agent unrestricted power to borrow.

But the bank won the point on agency. The loan was urgently required, the goods had arrived and had to be paid for, and under ss. 188 and 189 of the Indian Contract Act an agent has extensive powers in an emergency to do what is necessary to protect his principal from loss and to carry on the business. The court held that although the managing agent had no general power to borrow, he was authorised to incur a temporary loan in the interests of the company in an emergency. Article 104 prohibits delegation of a general power of borrowing; it does not prohibit a temporary emergency loan.

Two sub-questions arise, and the court separates them cleanly.

Could the Board have authorised it? Yes. The answer to the article-104 objection 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 left for the directors was whether to give security for money already advanced, and for that the Board could legally empower one of its own number to execute the deed and settle the details.

Was it in fact authorised? No. The court examined the pleadings — the defence had alleged only that the meeting was not properly convened for want of notice to all directors, not that no meeting took place, and on those pleadings only the former was open. It then found on the letter of 7 June, which forwarded a draft resolution for signature, that there could not have been a properly convened meeting on 2 June that passed the resolution. No notice convening such a meeting and no agenda were ever traced.

Did the bank know? The company pressed two letters. In one of 12 June Beltie Shah reminded the plaintiff 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." In one of 16 June the plaintiff himself wrote that "Till now you ought to have got the matter settled by the directors by means of correspondence." The court held neither showed for certain that the plaintiff knew no resolution had been passed. Security had been under discussion since about 25 May, so a week's notice was possible; and the bank's manager deposed that Beltie Shah had shown him the minute book containing the resolution a day or two before execution.

The holding. There was no properly convened meeting, "but the plaintiff had no reason to suppose that the resolution had not been properly passed and was not binding upon the company", and so "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 court took the rule in this form:

"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."

It cited Royal British Bank v. Turquand, and, for India, Ram Baran Singh v. Mufassil Bank Limited, in which it was held that a company is liable for acts of its directors even if unauthorised, "provided such acts are within the apparent authority of the Directors and not ultra vires the company", and that persons dealing bona fide with a managing director may assume he has such powers as he purports to exercise if they are powers a managing director can have under the company's constitution.

Clause 37 of the Dehradun Mussoorie Tramway Order, 1921 provided: "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."

The court held first, on the burden of proof, that the trial court had wrongly put the onus on the company. The plaintiff never alleged that sanction had been obtained, the issue was framed to imply its absence, and the plaintiff admitted in cross-examination that so far as he knew no sanction had been taken and he had not known any was necessary. The mortgage was therefore executed without previous sanction.

Was it then void or merely voidable at the Government's option? The court held it absolutely void. The rules in the Tramway Order have the force of law, and by analogy with Gaurishankar Balmukund v. Chinnumiya, where a mortgage by a judgment-debtor contrary to the Civil Procedure Code was void and not voidable, and with cases on the mortgage of an occupancy holding in breach of the Agra Tenancy Act, a transfer of part of the undertaking without previous sanction is void. And the consequence follows automatically: "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."

Appeal allowed and the decree varied. The mortgage was void. Instead of requiring the plaintiffs to prove their claim in the liquidation, the court gave them a simple money decree for Rs. 29,773-4-3, to be realised in due course of liquidation. They therefore ranked as unsecured creditors. Interest at the contractual rate ceased from 29 January 1926, with interest at 6 per cent out of any surplus assets. The appellants got half their costs.

An article prohibiting the Board from delegating its power to borrow prevents a general delegation, but does not prevent an agent from incurring a temporary loan in an emergency under the ordinary law of agency. A person contracting with a company in good faith may assume that acts within the company's powers have been duly performed and need not enquire into the regularity of internal management, so that a defectively passed board resolution does not avoid a mortgage as against a lender who had no reason to suppose it defective. But where a statutory instrument having the force of law forbids a transfer without the previous assent of Government, a transfer made without that assent is absolutely void, cannot be ratified, and no estoppel can be raised against the company; the lender is left to prove as an unsecured creditor.