Kotla Venkataswamy v. Chinta Ramamurthy (1934)

Turquand is easy to state and easy to over-state. Students who have learned that an outsider need not inquire into internal proceedings go on to conclude that an outsider need never inquire into anything. Kotla is the case that stops them.

Here a lender took a mortgage from a company. The company's own articles said, in words nobody had to interpret, that instruments were to be signed by three named officers. The bond carried two signatures. The lender lost her money. She lost it although she was honest, although the money reached the company, and although the missing officer was unavailable. The reason is that this was not an internal irregularity at all: it was a defect she could have seen by counting.

The plaintiff sued to enforce a mortgage bond for Rs. 1,000 purporting to have been executed on behalf of a company calling itself the South Indian Agricultural and Industrial Improvement Co. Ltd. The bond had been given to one Venkatamma, who assigned her interest to the plaintiff. The company afterwards went into voluntary liquidation, the mortgaged property was sold, and it was eventually purchased by the fourth defendant.

The mortgage deed was signed by the Working Director and the Secretary of the company — defendants 1 and 2. The plaint asserted that the debt "was regularly contracted in accordance with the powers and authority possessed by the said director and secretary under the articles of the said company and the special resolutions passed from time to time."

The fourth defendant, the purchaser, put the plaintiff to proof: he did not admit that the document had been executed by and on behalf of the company, defendants 1 and 2 not being competent to contract loans, much less to charge the property of the company.

The article. Article 15 of the company's articles of association provided:

"All deeds, hundies, cheques, certificates and other instruments shall be signed by the Managing Director, the Secretary and the working Director on behalf of the Company, and shall be considered valid."

The bond had the signatures of the Secretary and the Working Director. It did not have the signature of the Managing Director.

The excuse. It was said — but, as Curgenven J recorded, "not very satisfactorily proved" — that the Managing Director had been dismissed and was under prosecution on a criminal charge at the time the document was executed. The mortgage itself recited that part of the money was wanted for the costs of that case.

Both courts below held the bond not validly executed. In second appeal three arguments were pressed.

First, that article 15 governed only the formal process of signing and not the power of sanctioning on behalf of the company — so that the two officers might still have had authority to bind it.

Second, that the company had afterwards ratified the instrument, and that if the money was applied to the company's purposes the creditor would have an equitable charge on the company's property.

Third, that even if the execution was irregular, the mortgagee could enforce the bond on the general principle in Royal British Bank v. Turquand — that there was every reason to believe the officers who executed it had authority.

Second appeal dismissed with costs. The bond was invalid and the plaintiff could not recover on it.

The ratification and equitable-charge points were not open

Neither had been made the subject of an issue at the trial. The additional Subordinate Judge had thought himself concerned only with the validity and binding nature of the mortgage deed, and although traces of the alternative positions appeared in the plaint, no issues were sought on them.

Both, said Curgenven J, are questions of fact: whether the company's subsequent action amounted to ratification is a question of fact, and so is whether the fourth defendant took a sale of the property in circumstances that would let the plaintiff assert an equitable charge against him. No satisfactory explanation was offered for the failure to bring them to trial, and the judge declined to entertain them in second appeal.

This is a procedural point worth carrying: the Turquand argument had to be run on its own because the pleadings had shut out every alternative.

Article 15 governs authority, not merely form

The judge rejected the suggestion that the article was about signing rather than sanctioning. His reasoning is structural and shows how to read an article of this kind.

In the absence of a specific provision, the Companies Act then in force (Act 6 of 1882), s. 67, provided that a "contract by law required to be in writing signed by the parties may be made on behalf of the company in writing signed by any person acting under the express or implied authority of the company"; and the corresponding rule for the regulation of a limited company, applicable where the company had made no rules of its own, vested that power in the directors.

So the power to execute deeds resides in the body of directors as a whole unless the articles put it somewhere else. Article 15 either conferred the power on the three named officers, or it conferred nothing at all — in which case the two who signed had no authority either. Read either way, "the Secretary and the Working Director by themselves were not legally competent to execute the mortgage deed."

An attempt was made to show that the company had specially authorised the two officers to borrow. The District Judge found this not proved, and that finding of fact was final.

The Managing Director's unavailability is irrelevant

This is the sentence the case is quoted for: "The mere fact however that the services of the Managing Director were no longer available to the Company will not make execution by the remaining officers any the more valid."

The reasoning behind it is simple and should be stated. An article prescribing who may bind the company is a limit on capacity to act, not a preference about convenience. If the officers who remain could execute the deed whenever the third was unavailable, the article would protect the company only when protection was unnecessary. The company's answer to a missing signatory is to appoint a new one, or to alter its articles — not to sign anyway.

Why Turquand did not save the mortgagee

Curgenven J accepted the Turquand principle and then distinguished it precisely. In Turquand, "as between the directors and the share-holders the directors exceeded their authority, but this was not known to the plaintiffs and no illegality appeared on the face of the bond, nor were the share-holders prejudiced."

Then the limit: "If an illegality does appear on the face of the bond, the plaintiff will not be thus protected. He must be taken to have read the Companies Act and the Articles of Association of the company he is dealing with, and thus to have had constructive notice of their contents."

Applied to the facts, that is fatal. Had the mortgagee informed herself, "she would have discovered that a deed such as she took requires execution by the three specified officers of the company and she would have refrained from advancing her money upon a bond executed as is the suit bond." The bond contained only a vague recital of authority; proper practice would have been to refer to the article empowering the signatories to act.

And so, "Notwithstanding therefore that the mortgagee may have acted in good faith and that her money may have been applied to the purposes of the company", the bond was invalid.

Constructive notice of the memorandum and articles fixes an outsider with the contents of those documents. Where the articles prescribe the officers who must execute an instrument, an instrument executed by fewer of them is invalid, and the rule in Turquand's case does not assist the taker, because the defect appears on the face of the transaction and not in the company's internal proceedings. Neither good faith nor the application of the money to the company's purposes cures the invalidity.

The two cases are the two halves of one rule, and the line between them is the line between what is visible and what is invisible from outside.

| | Turquand | Kotla | |---|---|---| | What the public document showed | A permission to borrow on bond, subject to a general resolution | A requirement of three named signatures | | What the outsider could check | Nothing — whether a meeting was held is internal | Everything — he need only count the signatures | | Where the defect lay | Inside the company | On the face of the instrument | | Result | Company bound | Company not bound |

State the test in one sentence: the outsider must read the public documents, and is protected only against what those documents could not have told him. A condition whose satisfaction is invisible from outside may be assumed; a limit written on the face of the documents may not.

Section 10(1) makes the memorandum and articles bind the company and the members when registered, which is the statutory basis of constructive notice in India. The articles remain free, under s. 5(1), to contain "the regulations for management of the company", and an execution clause of the Kotla kind is exactly such a regulation. A company that wants to relax it must alter the articles under s. 14 — by special resolution — and not merely act as though it had.

Where the two-signature bond had been forged, or the signing officer had never been appointed at all, the outsider would fail for a different reason again: forgery is a nullity, not an irregularity, and no rule of assumption can validate it.