Albert Gardens (Manly) Pty Ltd v Mercantile Credits Ltd

[1973] HCA 60

HIGH COURT OF AUSTRALIA

Barwick C.J., McTiernan and Gibbs JJ.

ALBERT GARDENS (MANLY) PTY. LTD. v. MERCANTILE CREDITS LTD.

(1973) 131 CLR 60

21 December 1973

Companies

Companies—Directors—Shareholding qualification—Appointment as directors persons lacking share qualification—Validity of security documents executed by such persons on behalf of company—Limit on borrowing powers exercisable by directors imposed by articles of association—Limit imposed unless previous sanction given by general meeting—Whether sanction of specific borrowing required—Whether limit varied by general authority to borrow—Borrowing in excess of limit not invalid unless borrower had express notice—Companies Act, 1936 (NSW) s 124

Decisions

Dec. 21.
The following written judgments were delivered:-
BARWICK C.J. This suit, brought by the appellant company (the appellant), as matters now stand, asserts the invalidity of seven securities under some one or more of which the respondent claims to have validly appointed a receiver of the appellant's property. The grounds of invalidity propounded by the appellant are, first that those who executed the security documents either had not been duly appointed, or lacked qualification to be appointed, as directors of the appellant and, second, that the amounts for which the securities were given exceeded at the date of their execution the upward limit of the borrowing powers of the directors of the appellant fixed by its articles of association and that the respondent had express notice of that fact. (at p63)

2. The seven securities were executed in formal conformity with the articles of the appellant on the dates, for the amounts, and by the persons conveniently set out as under by the learned Chief Judge in Equity who heard and dismissed the suit:

Date Nature of

Instrument Amount of Principal Signatories (in Pounds) as Directors Signatories as Secretary

1/6/61 Mortgage 268,840/-/- S. P. Mathieson Phillip

J. W. Mathieson C. E. Cox

9/6/61 Debenture 3,172/13/9 S. P. Mathieson C. E. Cox

J. W. Mathieson

30/6/61 Debenture 6,282/16/- S. P. Mathieson R. B. Wallis

J. W. Mathieson

14/7/61 Debenture 3,729/1/4 J. W. Mathieson R. B. Wallis

S. P. Mathieson

16/8/61 Debenture 3,602/17/5 J. W. Mathieson Phillip

S. P. Mathieson C. E. Cox

15/9/61 Debenture 6,212/-/- S. P. Mathieson C. E. Cox

J. W. Mathieson

19/10/61 Debenture 3,295/4/9 S. P. Mathieson R. B. Wallis

G. Kelly

(at p63)

3. The Chief Judge found, and I see no reason to differ from him, that each of the named persons was appointed to that office by persons who had power to appoint a director or directors. None of the persons appointed as director and who executed the securities held at the material time the share qualification required by the articles of association of the appellant. But, as found by the Chief Judge, each purported to sign the securities as director, to which office each had in point of form been "appointed". Those signatories of the securities in question, with the exception of the debenture signed on 19th October 1961, had been re-elected as directors of the company at the annual meeting of the company held on 29th December 1960. Though their election was expressed as a re-election, they can be regarded for present purposes as in point of form elected by the annual meeting. The first of the seven securities was executed on 1st June 1961. Consequently I find no need to recite the history of the appointments of directors prior to the annual general meeting held in December 1960. One of these persons also executed the debenture on 19th October 1961 along with G. Kelly, whom the primary Judge found to have been appointed a director on 22nd May 1961. (at p63)

4. Article 109 of the appellant's articles of association is as follows:

"109. All acts done at any meeting of the Directors or of a committee of the Directors or by any person acting as a Director shall notwithstanding that it be afterwards discovered that there was some defect in the appointment of such Directors or person acting aforesaid or that they or any of them were disqualified be as valid as if every such person had been duly appointed and was qualified to be a Director."

Section 124 of the Companies Act, 1936 (N.S.W.) applicable in the Australian Capital Territory by the Companies Ordinance 1954 (A.C.T.) s. 9, provides: "The acts of a director shall be valid notwithstanding any defect that may afterwards be discovered in his appointment or qualification." (at p64)

5. The Chief Judge concluded that these provisions in the circumstances of the case inured to validate the execution of the securities by those who in fact did so, though none of them at any relevant time held the requisite share qualification. (at p64)

6. The appellant's submission was that, as the articles required that a person should have a stated share qualification before appointment as a director, a purported appointment of a person not so qualified was an appointment which there was no power to make. In consequence, it was said neither art. 109 nor s. 124 of the Companies Act, 1936 could validate acts of persons so appointed. It was said that the requirement of a share qualification at the time of appointment was a condition precedent to the exercise by the annual meeting of the power of appointment so that that body had no authority at all to appoint a person who at the moment of appointment did not have the requisite share qualification. It was said by counsel, in the language of Kitto J. in Grant v. John Grant &Sons Pty. Ltd. (1950) 82 CLR 1, at p 53 , that such an appointment was not a ". . . defective exercise of a power to appoint" but a case of ". . . non-existence of such a power". (at p64)

7. I do not so read the article or so regard such an appointment. In my opinion, it would be too narrow a construction of the articles which require the possession of a share qualification at the time of appointment to treat that requirement as a condition of the ability to appoint a director or directors. It would be destructive of the utility of an article such as art. 109, particularly in the case of companies prone to irregularity in respect of appointments, and would as well weaken the effect of the principle in Royal British Bank v. Turquand (1856) 6 E &B 327 (119 ER 886) . In my opinion, the power to appoint is not denied in the case of a person not then holding the share qualification though an appointment of such a person will be defective. It is quite true that, apart from the validating effect of such an article as art. 109, a person who is appointed as a director and who did not have at the time of his appointment the requisite share qualification would not be validly appointed: but this, in my opinion, would be because he lacked the share qualification and not because there was no power in the electing or appointing body or person to have appointed him without the share qualification. Consequently, in the case the general meeting which appointed directors in 1960 did not lack power to appoint as a director a person who did not at the time hold the requisite share qualification, and a purported appointment by the company in general meeting of a person lacking that qualification was but a defective appointment. I agree with the Chief Judge that the defect in the appointment of the person by the general meeting was "afterwards discovered" within the meaning of the article. There is here no question of lack of good faith on the part of the respondents who seek the benefit of the article and of the section. The respondents are not shown to have had any knowledge of the defect in the appointments. (at p65)

8. In my opinion, the settled view is that an article such as art. 109 and a section in terms of s. 124 is each effective to validate acts done as director on behalf of a company by a person appointed a director by a person a body with power under the articles to appoint directors. Consequently, upon the construction which I am of opinion the articles of the appellant should be given, the persons signing the seven securities were "appointed" by the general meeting, though they lacked qualifications. Such an "appointment" was merely defective and art. 109 and s. 124 each operated to validate the execution of the securities, notwithstanding the defect in the appointment or the lack of qualification as director of the signatories. In my opinion, disqualification as used in the article is apt to cover both in initial lack of qualification as well as a subsequent loss of qualification or a disqualification for conduct or other reason. (at p65)

9. But, in addition, having regard to the facts I have stated, the repondent was entitled to assume that acts have been taken by the appellant to have duly appointed the persons who signed the securities as directors on behalf of the appellant. See Halsbury's Laws of England, 3rd ed., vol. 6. par. 833; Royal British Bank v Turquand (1856) 6 E &B 327 (119 ER 886) . The principle of that case in apt to cover the circumstances of the present case. (at p65)

10. The second matter raised by the appellant was that the borrowing limit fixed by art. 115 of the appellant's articles was exceeded by the lending of the sums represented by the said securities and indeed was exceeded. I understand, by the loan of the first of the amounts lent under them. Article 115 is in the following terms:

"115. The Directors may from time to time at their discretion borrow or secure the payment of any sum or sums of money for the purposes of the company provided that the aggregate of the amounts borrowed for the purposes of the company and of the amounts borrowed by any subsidiary of the company for the time being and remaining outstanding at any one time (excluding inter-company loans) shall not, without the previous sanction of an Ordinary Resolution of the company, exceed seventy-five per centum of the amount of the ordinary share capital of the company for the time being paid-up and provided further that no such sanction shall be required to the borrowing of any sum of money intended to be applied in the repayment (with or without premium) of any moneys then already borrowed and outstanding notwithstanding that the same may result in such limit being exceeded. Nevertheless no lender or person dealing with the company shall be concerned to see or inquire whether this limit is observed. No debt incurred in excess of such limit shall be invalid and no security given for the same shall be invalid or ineffectual except in the case of express notice to the lender or the recipient at the time when the debt was incurred or security given that the limit hereby imposed had been or was thereby exceeded".

It was established that the respondent was actually aware of the terms of this article and that it required the appellant to pass a resolution which would authorize the borrowing represented by the securities in question. The Chief Judge found, and I see no reason not to accept his finding, that the company did pass a resolution at an extraordinary general meeting of the company held on 18th May 1961 in the following terms:

"Borrowings. It was moved by Mr. H. M. Barrie and seconded by Mr. P. E. C. Cox that the Directors be authorised to from time to time at their discretion borrow or secure the payment of any sum or sums of money in excess of the limit imposed by Article 115 of the company's Articles of Association".

The effectiveness of this resolution to satisfy the terms of art. 115 was challenged by the appellant. However, it seems to me that the first question, having regard to the last sentence of art. 115, is whether it was established that express notice had been received by the respondent at the time when the security was given that the limit imposed by the article was thereby exceeded. To my mind it is quite clear that no such express notice was established. The most that was established was that the respondent was aware of the terms of the article and had received information that a resolution in the terms I have quoted had been duly passed by the company. But the sum of this knowledge does not amount, in my opinion, to express notice at the time of the execution of the security that the limit on borrowing imposed by the article had been exceeded. (at p67)

11. In any case, I am of opinion that the figure mentioned in or calculated according to the article was not operative at the time of the execution of the securities as the limit imposed by the article. The article provided that the amounts borrowed should not, without the previous sanction of an ordinary resolution of the company, exceed seventy-five per cent of the amount of the ordinary share captial. It is clear that the article does not contemplate that such a resolution of the company would fix some other limit expressed either as a percentage of the paid up capital or as a fixed money sum. Nor does it contemplate only a resolution authorizing a particular borrowing. What is contemplated by the article, in my opinion, is that the stated limit shall be operative if there is no previous sanction of the ordinary resolution of the company to borrowing without regard to that limit. That to my mind is the exact function of the resolution which was in fact passed. It dispensed with the limit fixed by the article, not substituting therefor any other limit but freeing the directors entirely from the limitation. I see no reason to doubt the validity or the effectiveness of such a resolution and therefore of the resolution of 18th May. Consequently I am of opinion that art. 115 was not breached by the execution of the securities. (at p67)

12. For the reason, therefore, that the limit of seventy-five per cent. of the amount of the ordinary share capital was not in fact operative at the time of the execution of the securities and for the further reason that, in any case, it was not established that the respondent had received express notice that the limit was being exceeded by the lending with respect to which security was executed, none of the seven securities are, in my opinion, invalid by reason of the terms of art. 115. (at p67)

13. In my opinion, this appeal should be dismissed. (at p67)

Mc TIERNAN J. I. concur in the reasons of the Chief Justice and I agree that the appeal should be dismissed. (at p67)

GIBBS J. I have had the advantage of reading the reasons for judgment prepared by the Chief Justice, and am in agreement with them, but would add one or two observations of my own. (at p68)

2. The appellant, in support of the argument that the securities were invalid because the directors who signed them has not been validly appointed, submitted that neither art. 109 nor s. 124 could be called in aid by a person who had been put on enquiry as to the validity of the appointments. I find it unnecessary to consider whether the remarks of Lord Greene M. R. in Kanssen v. Rialto (West End) Ltd. (1944) 1 Ch, 346, at p 357 upon which Lord Simonds in Morris v. Kanssen (1946) AC 459, at p 473 declined to express a final view, can be reconciled with other authorities. In my opinion the most that could be said in the present case was that the respondent had notice of the existence of the facts which led to the disqualification of the directors, and the authorities show that that is not enough to disentitle the respondent to the protection of the section or the article, when the respondent was not aware of the disqualification: A. M. Spicer &Son Pty Ltd. (In Liq.) v. Spicer and Howie (1931) 47 CLR 151 at p 186 and cases there cited. (at p68)

3. I am unable to accept the appellant's argument that art. 115 contemplates a sanction to a particular borrowing, and that a general sanction, such as that given on 18th May 1961, would amount to a purported amendment of the article. It seems to me that the article empowers the company by ordinary resolution to sanction borrowing generally in excess of the limit fixed by the article, and leaves it entirely to the company to give, or decline to give, a general rather than a particular sanction. (at p68)

4. I would dismiss the appeal. (at p68)

Orders

Appeal dismissed with costs.