Re Introductions, Ltd.; Introductions, Ltd. v. National Provincial Bank Ltd. (1969)

This is the borrowing case, and it is the one that decides whether a charge is worth anything. A bank takes debentures over a company's assets, the company fails, the liquidator says the whole business was ultra vires — and the question is whether the security stands. The answer here is that it does not, and the reason is a proposition that no drafting can defeat: borrowing is never an end in itself.

It also puts a firm limit on Cotman v. Brougham. That case allowed a memorandum to declare every sub-clause an independent object. Introductions holds that the declaration does not convert a power into an object, and — more importantly — that it does not protect a lender who knows what the money is for.

The company began its career in 1951 in connection with the Festival of Britain, providing facilities for visitors from abroad. Its issued capital was £400. For some years after 1953 it carried on a business connected with deck chairs at a seaside resort. From 1958 to 1960 it carried on no business at all. In 1960 there was a transfer of shares, a new board was elected, and the new board decided to use the company for a venture connected with pigs.

There was, as Harman LJ put it, "one thing that this company could not do and that was to breed pigs." Pig-breeding was not within the objects — a finding of Buckley J from which there was no appeal, and which the bank ultimately acknowledged. The venture failed, and the company was ordered to be wound up in 1965.

The banking. In 1960 the new directors approached the defendant bank to open an account. The account became heavily overdrawn. The bank required security and was given two debentures secured on the company's assets.

What the bank knew. It was common ground that before the security was given the bank had been furnished with a copy of the memorandum and articles, and had become expressly aware that the company's sole business was pig-breeding.

The clauses relied on. Sub-clause (N) of the memorandum empowered the company in general terms:

"To borrow or raise money in such manner as the company shall think fit and in particular by the issue of debentures or debenture stock perpetual or otherwise and to secure the repayment of any money borrowed or raised by mortgage charge or lien upon the undertaking and the whole or any part of the company's property or assets whether present or future including its uncalled capital"

And the memorandum ended with the familiar independent-objects declaration:

"It is hereby expressly declared that each of the preceding sub-clauses shall be construed independently of and shall be in no way limited by reference to any other sub-clause and that the objects set out in each sub-clause are independent objects of the company."

The proceedings were on a summons in the liquidation: were the debentures held by the bank valid against the liquidator, or void as tainted by ultra vires? Put precisely — in borrowing the money, was the company acting within its powers, and could it give the bank a valid security?

That its only obligation was to satisfy itself that there was an express power to borrow; that the independent-objects declaration turned that power into an object; and that, this being so, it need enquire no further and was unaffected by its knowledge that the money was to be spent on an activity beyond the company's powers.

Appeal dismissed. The borrowing was not for a legitimate purpose of the company, the bank knew it, and the bank could not rely on its debentures.

A power to borrow, however widely expressed and however emphatically declared to be an independent object, is exercisable only for a purpose within the company's objects; "for the purposes of the company" is a necessarily implied addition to every power to borrow, express or implied. A lender who does not know the purpose of the borrowing need not enquire; a lender who does know that the purpose is ultra vires cannot enforce the loan or the security given for it.

You cannot convert a power into an object by saying so

Harman LJ accepted that counsel for the bank was right to concede that a power must be exercised for a purpose within the memorandum. The whole argument therefore rested on the claim that sub-clause (N) had been "elevated into an object" by the concluding declaration. The answer is one line: "you cannot convert a power into an object merely by saying so."

The judgment demonstrates it from the memorandum's own contents. Sub-clause (N) can no more stand by itself than sub-clause (D), which permits the company "To carry on any other trade or business... which can in the opinion of the board...be advantageously carried on... in connection with or as ancillary to any of the above businesses..." — a clause that on its face is ancillary — or sub-clause (I), a power to promote another company for the purpose of acquiring property or converting liabilities. These are "clearly ancillary powers although under the concluding words they are stated to be independent objects." A declaration that cannot make those clauses free-standing cannot make (N) free-standing either.

Buckley J's ground, which Harman LJ adopted, is the sentence to carry away: a power or object to borrow "cannot mean something in the air: borrowing is not an end in itself and must be for some purpose of the company; and as this borrowing was for an ultra vires purpose that is an end of the matter."

The limits of Cotman v. Brougham

The bank relied on Lord Parker of Waddington in Cotman v. Brougham:

"A person who deals with a company is entitled to assume that a company can do everything which it is expressly authorised to do by its memorandum of association, and need not investigate the equities between the company and its shareholders."

Harman LJ did not doubt the proposition; he confined it. "I would agree that if the defendant bank did not know what the purpose of the borrowing was it need not enquire, but it did know, and I can find nothing in Cotman v. Brougham to protect it notwithstanding that knowledge."

That is the whole distinction between the two cases, and it should be stated in exactly those terms: Cotman protects ignorance, not knowledge.

The lender's ordinary position — Re David Payne

The judgment sets the boundary from the lender's side by quoting the opening of the headnote in Re David Payne & Co. Ltd.:

"Where a company has a general power to borrow money for the purpose of its business, a lender is not bound to enquire into the purpose for which the money is intended to be applied, and the misapplication of the money by the company does not avoid the loan in the absence of knowledge on the part of the lender that the money was intended to be misapplied."

Read the two cases together and the rule for lenders becomes workable:

| What the lender knows | Result | |---|---| | Nothing about the purpose | No duty to enquire; loan and security good even if the money is misapplied | | That the purpose is beyond the company's objects | Loan not for a legitimate purpose of the company; security unenforceable |

The remark on objects clauses

Harman LJ's aside on drafting is quotable and shows the examiner you understand why Cotman clauses exist at all. It has always been the ambition of the commercial community "to stretch the objects clause, thus getting the advantage of limited liability with as little fetter on the activities of the company as possible", and Lord Davey's picture of the little grocer with power to bridge the Zambesi makes the point; "but still one cannot have an object to do every mortal thing one wants, because that is to have no object at all." The independent-objects declaration was invented to escape the older difficulty that a main objects clause made all the rest ancillary.

The practical lesson is about security, not about pigs. A charge is only as good as the transaction it secures. Before taking a debenture a lender must ask three questions in order:

1. Does the memorandum authorise borrowing at all?
2. Do I know what the money is for?
3. If I do, is that purpose within the company's objects?

A lender who answers "no" to question 2 is safe on David Payne. A lender who answers question 3 wrongly loses the security altogether, as this bank did, and ranks as an unsecured claimant in the liquidation — which is why the point arose on a summons in the winding up rather than in an ordinary action.

Under the Companies Act 2013 a charge created by a company must be registered under s. 77, and s. 77(3), as enacted, provides that "no charge created by a company shall be taken into account by the liquidator or any other creditor" unless it is duly registered under s. 77(1) and a certificate of registration is given by the Registrar under s. 77(2). Section 77(4) preserves the contract to repay: nothing in s. 77(3) "shall prejudice any contract or obligation for the repayment of the money secured by a charge." Registration answers a different objection from the one in this case: it makes the charge provable, not valid. Introductions is authority that a charge can be perfectly registered and still worthless because the borrowing it secures was outside the company's powers.