The High Court

1979 No. 102 Sp

Between
Northern Bank Finance Corporation Ltd.
Plaintiff
And
Bernard Fursey Quinn and Achates Investment Company
Defendants

[8th November, 1979]

KEANE J:

On 15 November 1973, the plaintiffs (whom I shall call 'the bank') wrote to the first-named defendant (whom I shall call 'Mr Quinn') informing him that they would make loan facilities available to him on the terms and conditions set out in the letter. The letter went on to state that the amount of the loan was £145,000.00 and that the rate of interest thereon would be 3% per annum over the average cost to the bank of raising funds on the inter bank market. It was also stated that the loan be repayable on demand, but that if no demand were made, it would be the bank's understanding that, with effect from 1 November 1974, monthly payments of £3,000 each would be made by Mr Quinn towards the payment of principal and interest.

The letter also stated that the loan was to be secured inter alia by the unconditional and continuing guarantee of the second-named defendant (whom I shall call 'the company') of the loan, interest and repayment arrangements, supported by a first legal mortgage on the title deeds and documents relating to 54 acres of land at Ratoath, County Meath and 56 acres at Jamestown, County Meath.

The bank's solicitor, Mr T.F. O'Connell, was asked by the bank to attend to the legal formalities necessary to complete the transaction; and on 29 November 1973 he sent to Mr Quinn's solicitors a number of documents, including requisitions on title relating to the properties which were to be the subject of the mortgage, a draft mortgage, a draft guarantee by the company and a draft resolution to be passed by the directors of the company empowering the company to guarantee the sum of £145,000 and the interest thereon. On 30 November 1973 the necessary resolution was passed by the directors of the company; and on the same day a guarantee was also executed by them in respect of the sum of £145,000 and interest thereon. The mortgage supporting the guarantee was executed by the company on 13 December 1973, the delay being due to the necessity to discharge a prior incumbrance on the land.

Mr O'Connell also received from Mr Quinn's solicitors a copy of the memorandum and articles of association of the company. It will be necessary to refer to these documents in more detail at a later stage.

Mr Quinn having failed to pay certain of the instalments of £3,000 as they fell due, the bank called in the balance of the loan and commenced these proceedings by way of special summons claiming as against Mr Quinn payment of the sum of £50,829.38 as due and owing by him on foot of a covenant in the mortgage; and as against the company an order declaring the same sum well charged upon the two properties already referred to together with the usual consequential relief.
The liability in principle of Mr Quinn on foot of the covenant in the mortgage was not disputed. Evidence was adduced on behalf of the bank that the amount due in respect of principal and interest calculated in accordance with paragraph 1 (1) (c) of the mortgage at the date of the hearing was £56,524.60. Counsel for Mr Quinn submitted that the bank had not properly proved the amount of interest properly payable having regard to the terms of paragraph 1 (1) (c) and that accordingly the summons should be dismissed against him. I rejected this submission and gave judgment against Mr Quinn for the sum of £56,524.60 and costs.

It was submitted on behalf of the company that the execution of the guarantee was ultra vires the memorandum and articles of association and that, accordingly, both the guarantee and the mortgage (insofar as it comprised the company's property) were void. Counsel for the bank submitted that the guarantee was intra vires the memorandum and articles of association; but that even it if were not, the bank were protected by the modification of the ultra vires rule effected by s. 8 of the Companies Act, 1963. He further submitted that, since the memorandum had been subsequently altered by a resolution of 18 May 1974, so as to put beyond doubt the power of the company to execute guarantees, the guarantee of 30 November 1973 was retrospectively validated and he relied in this connection on s. 10(1) of the Act. Counsel for the bank finally submitted that, in any event, the company were estopped from relying on the alleged lack of vires.

The company is an unlimited company having a share capital. Its objects are set out in paragraph 2 of the memorandum of association. The first of them, in truncated form, reads as follows:

To acquire and hold...shares and stocks of any class or description, debentures, debenture books, bonds, bills, mortgages, obligations, investments and securities of all descriptions and of any kind issued or guaranteed by any company, corporation or undertaking...and investments, securities and property of all descriptions and of any kind...

This, coupled with the fact that the company is an unlimited company, would suggest, so far as it is relevant, that the company was not intended to be a trading company in the ordinary sense but rather an investment company. Clause 2(f) empowers the company:

Incidentally to the objects aforesaid, but not as a primary object, to sell, exchange, mortgage (with or without power of sale), assign, turn to account or otherwise dispose of and generally deal with the whole or any part of the property, shares, stocks, securities, estates, rights or undertakings of the company...

This clause was not relied on by counsel for the bank as empowering the transaction in question, but was relied on by counsel for the company as indicating that the company was empowered to mortgage its property only where the execution of the mortgage was incidental to one of the objects of the company set out in sub-paragraphs (a) to (e).

Sub-paragraph (k) empowers the company:

to raise or borrow or secure the payment of money in such manner and on such terms as the directors may deem expedient and in particular by the issue of bonds, debentures or debenture stock, perpetual or redeemable, or by mortgage, charge, lien or pledge upon the whole or any part of the undertaking, property, assets and rights of the company, present or future, including its uncalled capital and generally in any other manner as the directors shall from time to time determine and to guarantee the liabilities of the company and any debentures, debenture stock or other securities may be issued at a discount, premium or otherwise, and with any special privileges as to redemption, surrender, transfer, drawings, allotments of shares, attending and voting at general meetings of the company, appointment of directors and otherwise.

This sub-paragraph- and in particular the words 'secure the payment of money'- was relied on by counsel for the bank as authorising the execution of the guarantee. It was accepted that the words 'to guarantee the liabilities of the company' in this clause were meaningless as they stood; but counsel for the bank submitted that the clear intention was to enable the company to guarantee the liabilities of third parties and that these words in the sub-paragraph should be so read. Counsel for the company submitted that, insofar as the words could be given any meaning, they should be read as empowering the company to procure the guaranteeing of its own liabilities by third parties.

Sub-paragraph (t) empowered the company:

to do and carry out all such other things as may be deemed by the company to be incidental or conducive to the attainment of the above objects or any of them or calculated to enhance the value of or render profitable any of the company's properties or rights.

It was submitted on behalf of the bank that this sub-paragraph was sufficiently wide-ranging in its terms to enable the company to execute the guarantee in question. It was submitted on behalf of the company that the sub-paragraph merely authorised the doing of such things as were incidental to the attainment of any of the preceding objects and that since it could not be shown that the execution of a guarantee was incidental or conducive to the attainment of any of the objects referred to in the preceding sub-paragraphs, of itself it could not render the transaction in question intra vires.

It is clear that sub-paragraph (f) did not authorise the execution of the guarantee in question and that, insofar as it authorized the company to execute a mortgage, this could only be done incidentally to the objects setout in sub-paragraphs (a) to (e). Counsel for the bank did not indeed advance any submission to the contrary. He did, however, as I have already indicated rely on sub-paragraph (k). I have set out that sub-paragraph in full, because I think the wording used plainly indicates that it was essentially intended to confer a power of borrowing on the company. Viewed in this context, the words 'secure the payment of money' could not reasonably be read, in my opinion, as conferring a power to execute guarantees. The words 'secure the payment of' are used disjunctively in opposition to 'raise' and 'borrow', clearly indicating that it was intended to confer on the company a power of obtaining money for its own purposes and not a power to guarantee advances made to other persons. Counsel also relied on the words 'to guarantee the liabilities of the company' and submitted that, as this phrase literally construed was meaningless, it should be construed as though, in place of the words 'the company', there appear the words 'other persons' or similar words. While I accept that the words, literally construed, are meaningless, since a company cannot guarantee its own liabilities, I see no warrant in the wording of sub-paragraph (k) as a whole for giving the expression in question the meaning contended for by Mr O'Neill SC. To give it such a meaning would not merely be to do violence to the actual language used but would also be inappropriate in any event in the context of a sub-paragraph which, as I have said, is essentially concerned with enabling the company, and not other persons, to borrow money .1t seems more likely to me that it was intended by the use of this phrase to enable the company to secure the guaranteeing by third parties of its own liabilities.

Sub-paragraph (t) was also relied on by counsel for the bank; but, in my view, the execution of a guarantee could not reasonably be regarded as 'incidental or conducive to the attainment of any of' the objects set our in the preceding sub-paragraphs. The sole object of executing the guarantee was to facilitate the borrowing by Mr Quinn of the sum of £145,000 from the bank. Only the bank and Mr Quinn could possibly derive any benefit from this transaction; the company could derive no benefit from the advancing or money to Mr Quinn. The securing by means of a guarantee of a loan to Mr Quinn could not properly be regarded as being fairly incidental to the objects expressly authorised by the memorandum within the meaning of the well known rule first laid down in Attorney General v Great Eastern Railway Co (1880) 5 App. Cas. 473. The effecting of such a transaction was not 'incidental or conducive to' the attainment of any of the expressly authorised objects within the meaning of sub-paragraph {t); nor was it 'calculated to enhance the value of or render profitable any of the company's properties or rights' within the meaning of that sub-paragraph.

It follows, in my view, that the memorandum conferred neither expressly nor by implication any power on the company to execute a guarantee for the purpose of securing the payment of a bank loan to Mr Quinn. In these circumstances, it is unnecessary to express any final opinion on a further submission advanced by Mr McCracken SC that, even were the memorandum to be read as conferring an express power on the company to execute such a guarantee, the transaction would nonetheless be ultra vires since no conceivable benefit could result to the company from it. The celebrated observations of Bowen LJ, in Hutton v West Cork Railway Co (1883) 23 Ch D 654 that 'charity cannot sit at the boardroom table' and 'there are to be no cakes and ale except for the benefit of the company' may have been extended too far in In re Lee, Behrens & Co [1932] 2 Ch 46; and while this latter decision might appear to afford support for Mr McCracken's proposition, its authority as a persuasive precedent would require reconsideration today in the light of the decision in Charterbridge Corporation Ltd v Lloyds Bank Ltd [1970] Ch 62. Having regard, however, to the conclusion I have arrived at, it is unnecessary that I should say anything more on this aspect of the case.

Counsel for the bank submitted that, even if the execution of the guarantee were ultra vires the memorandum, his clients were protected by s. 8(1) of the Companies. Act, 1963. That sub-section provides as follows:

Any act or thing done by a company which if the company had been empowered to do the same would have been lawfully and effectively done shall, notwithstanding that the company had not power to do such act or thing, be effective in favour of any person relying on such act or thing who is not shown to have been actually aware, at the time when he so relied thereon, that such act or thing was not within the powers of the company, but any director or officer of the company, who was responsible for the doing by the company of such act or thing shall be liable to the company for any loss or damage suffered by the company in consequence thereof.

Evidence was given on behalf of the bank by Mr T.F. O'Connell who was, in November 1973, the bank's solicitor. He said that he received the title documents relative to the transaction from the security department of the bank in November 1973, with instructions to prepare the necessary mortgage documentation in connection with the loan. He was furnished with the title deeds to the properties concerned and with the memorandum and articles of the company. He investigated the title in the normal manner and drew up the necessary resolution to be passed by the directors of the company, the mortgage and the guarantees. He also sent out the two sets of requisitions on title. He said that the first intimation that he had that there vas any doubt as to the power of. the company to execute the guarantee was contained in a letter from the company's solicitors to the bank dated 6 December 1978.

Mr O'Connell said that he did not specifically recall reading the memorandum and articles. His normal procedure, before drawing up the resolution of the directors, was to check the objects clause. He could not, however, recall checking the objects clause in the present case. He said that it did not occur to him that the transaction was not within the powers of the company. His normal practice was to mark the relevant objects in pencil, but he had not done so in this instance.

It is not surprising to find that Mr O'Connell had no positive recollection of reading the memorandum and articles, since, as he indicated, he has occasion to read so many documents of this nature that he can hardly be expected to remember each of them, particularly when the transaction in question took place nearly six years ago. I think that the probabilities are that Mr O'Connell did read the objects clause of the memorandum; it would be surprising if he did not, since it was furnished to him so that he could satisfy himself as to the existence in law of the company and its power to enter into the proposed transaction. It may well be that, as is not uncommon with busy practitioners when dealing with matters of this nature, his eye travelled reasonably rapidly over a number of the clauses. But I think that the probabilities are that he did read the memorandum and came to the conclusion that the execution of the guarantee and the mortgage was within the powers of the company. Had he come to any other conclusion, I have not the slightest doubt but that he would have advised his principals not to close the transaction until the necessary amendment had been effected to the memorandum. It follows that Mr O'Connell was aware of the contents of the objects clause of the memorandum, but must have mistakenly believed that they empowered the company to execute the guarantee and mortgage. It would not have been in accordance with his normal practice to dispense with reading the memorandum and I have no reason to suppose that he departed from his normal practice on this occasion. It is, of course, inconceivable that he appreciated the lack of vires but simply did not do anything about it.

The question accordingly arises as to whether, in these circumstances, the bank were 'actually aware', within the meaning of s. 8(1) of the lack of vires. Mr O'Neill SC submitted that the language of s. 8(1) clearly demonstrated that the onus of establishing actual knowledge within the meaning of the section is on the person who asserts that such knowledge existed and that, accordingly, the onus was on the company, to establish that the bank were 'actually aware' of the lack of vires . This may well be so, but I do not think it is material to the issue which has to be resolved in the present case. There is no conflict as to the facts in the present case; Mr O'Connell was the only witness on this issue and he was called by the bank. The only question that arises is as to whether, having regard to that evidence and the inferences, which, in my view, necessarily follow from it, the bank can be said to have been 'actually aware' of the lack of vires.

Mr O'Neill SC submitted that actual, as distinguished from constructive, notice of the lack of vires was essential if a third party was to lose the protection of s. 8(1). I accept that this is so: altogether apart from authority, the language used would suggest that what the legislature had in mind was actual and not constructive notice. Moreover, to interpret the section in any other way would be to frustrate its manifest object. While there is no authority of which counsel were aware or which I have been able to discover on the section, the mischief which it was designed to avoid is clear. Prior to the enactment of the section, all persons dealing with a company were deemed to have notice of the contents of the company's public documents, including its memorandum and articles. If a transaction was ultra vires, the other party to it, speaking generally, had no rights at all. The manifest injustice and inconvenience which followed from this rule is amply illustrated by the decision in In Re Beauforte (Jon) (London) Ltd [1953] Ch 131, which was referred to in the argument.

But if constructive notice can still be relied on in answer to a party claiming the protection of this section, the protection in question would be, to a significant extent, eroded. It is clear, moreover, that the doctrine of constructive notice should not normally be applied to purely commercial transactions, such as the advancing of money: see the observations of Kenny J delivering the judgment of the Supreme Court in Bank of Ireland Ltd v Rockfield Ltd [1979] IR 21. 

But while I am satisfied that the doctrine of constructive notice does not apply to the sub-section under consideration, this does not dispose of the matter. The bank, because of the knowledge of their agent, Mr O'Connell, which must be imputed to them, were aware of the objects of the company. There were no further facts of which they could be put on notice. But they failed to draw the appropriate inference from those facts, i.e. that the transaction was ultra vires. Mr O'Neill SC submits that, even accepting this to be so, this is not the actual knowledge which the section contemplates.

A great number of transactions are entered into every day by companies, public and private, without any of the parties looking at the memorandum in order to see whether the transaction in question is in fact authorised by the memorandum. I think it probable that, on the occasions when the memorandum is looked at before a transaction is entered into, it is normally because the company's solicitor or a solicitor for a third party wishes to satisfy himself that the proposed transaction is intra vires the memorandum. I think it is clear that the section was designed to ensure that, in the first category of cases, persons who had entered into transactions in good faith with the company without ever reading the memorandum and accordingly with no actual knowledge that the transaction was ultra vires were not to suffer. I can see no reason in logic or justice why the legislature should have intended to afford the same protection to persons who had actually read the memorandum and simply failed to appreciate the lack of vires. The maxim ignorantia juris haud neminem excusat may not be of universal application, but this is certainly one situation where it seems fair that it should apply.

This is best illustrated by an example. The directors of a public company decide to invest the bulk of the company's resources in a disastrous property speculation as a result of which the company suffers enormous losses. The company in fact had no power to enter into any such transaction, but the vendor's solicitors, although furnished with the memorandum and articles, failed to appreciate this. If the submission advanced on behalf of the bank in this case is well founded, it would mean that, in such circumstances, the innocent shareholder would be the victims rather than the vendors. There seems no reason why the consequences of the vendors' failure to appreciate the lack of vires should be visited on the heads of the blameless shareholders. I do not overlook the fact that the sub-section gives the company a remedy against any director or officer of the company who is responsible for the ultra vires act; but such a remedy may not necessarily enable the innocent shareholder to recoup all his losses.

It is interesting in this context to note that in the United Kingdom the Jenkins Committee recommended that even actual knowledge of the contents of the memorandum should not deprive a third party of his right to enforce a contract if he honestly and reasonably failed to appreciate that they precluded the company or its officers from entering into the contract: see Cmnd. 1749, paras, 35-42. Writing in the early days of the operation of our Act, Mr Alexis Fitzgerald said of s. 8 (see 'A Consideration of the Companies Act...' 1 Ir. Jur. (n.s.) 16):

The draughtsmen wisely reject the advice of the Jenkins Committee, which would have given contractual rights even to third parties with actual knowledge, where such a third party could prove he honestly and reasonably failed to appreciate the effect of the lack of power. Acceptance of this recommendation would have created uncertain and therefore bad law

In England) the ultra vires rule was modified by s. 9(1) of the European Communities Act, 1972, and while the language of the section is different from that of s. 8 of our 1963 Act, the requirement being that the third party should have acted in good faith, it is interesting to note that the editors of the 22nd edition of Palmer's Company Law take the view that it would not protect the third party in circumstances such as the present: see Vol I, p. 97.

I am satisfied that, where a party is shown to have been actually aware of the contents of the memorandum but failed to appreciate that the company were not empowered thereby to enter into the transaction in issue, s. 8(1) has no application. It follows that, in the present case, the bank cannot successfully rely on s. 8(1).

Mr O'Neill SC next submitted that the execution of the guarantee was retrospectively validated by a special resolution of the company passed on 18 May 1974. It is conceded on behalf of the company that this resolution effectively amended the memorandum so as to enable a guarantee to be executed. Mr O'Neill SC relied on s. 10(1) of the Act of 1963, which provides that:

Subject to sub-section (2) a company may, by special resolution, alter the provisions of its memorandum by abandoning, restricting or amending any existing object or by adopting a new object and any alteration so made shall be as valid as if originally contained therein, and be subject to alteration in like manner.

He argued that the words 'shall be as valid as if originally contained therein' meant, in a case such as the present, that a transaction entered into prior to the passing of the resolution was, as it were, retrospectively validated:

I do not think that is correct. Were it so, the consequences would be strange indeed: as pointed out by Mr McCracken SC, if the company in the present case originally had power to execute a guarantee and deprived itself of that power by the passing of a subsequent resolution, it could hardly be said that the execution of the guarantee prior thereto was thereby invalidated. I think that the meaning of the words in question is quite clear, if one considers the provisions of s. 7 which provides that:

the memorandum must be printed, must bear the same stamp as if it were a deed, and must be signed by each subscriber in the presence of at least one witness who must attest the signature.

The words relied on by Mr O'Neill SC were clearly designed, in my view, to relieve the company from the necessity of having the memorandum in its altered form signed again by the subscribers and attesting witnesses and then reprinted. This is also the view taken in one of the leading English text books on the subject: see Gower's Principles of Modern Company Law (3rd ed.) at p. 90, n. 43.

Finally, Mr O'Neill SC submitted that the company were estopped at this stage from contesting the validity of the guarantee. He concedes that the doctrine of estoppel could not enable the company validly to perform an act which was ultra vires; but submits that as the company had been empowered since 18 May 1974, to enter into the transaction, they cannot now be heard to say that it is ultra vires. In particular, he relies on a letter written by the company to the bank on 31 December 1976, in which they said:

As you are aware, this company has guaranteed the borrowings from the corporation of Mr Fursey Quinn.
Please let us have details, in confidence, of the guaranteed borrowings in relation to the amount outstanding including interest, the amount and timing of repayments made and interest paid to date.

Mr O'Neill SC points out that the bank had power at any times to call in the amount of the loan; and that, following the receipt of this letter, they acted to their detriment by failing to call it in.

The ingredients of estoppel in pais are set out in Vol. 16 of Halsbury's Laws of England, 4th ed, para. 1505 as follows:

Where a person has by words or conduct made to another a clear and unequivocal representation of fact, either with knowledge of its falsehood or with the intention that it should be acted upon, or has so conducted himself that another would, as a reasonable man, understand that a certain representation of fact was intended to be acted on, and that [sic] the other has acted on the representation and thereby altered his position to his prejudice, an estoppel arises against the party who made the representation, and he is not allowed to aver that the fact is otherwise than he represented it to be.

Can it reasonably be said that, in the present case, the bank acted on the representation contained in the letter of 31 December- if representation it were- and thereby altered their position to their prejudice? There is no reason to suppose that at the date this letter was written the bank entertained the slightest doubts as to the validity of the guarantee or mortgage. Had they entertained any such doubts, they would have immediately required the re-execution of the guarantee and the mortgage before allowing any further interest to accumulate. There is nothing to suggest that this letter had any effect on the attitude of the bank towards calling in the loan. I do not think that it could be said that they in any way altered their position to their prejudice as a result of any representation that may have been contained in this letter. I think it is also clear that the mere fact that the company sent to the bank its memorandum and articles of association at the time of its application for a loan could not in any sense be said to constitute a representation which was subsequently acted on to their detriment by the bank. Their action in so doing was not a representation that the company had the power in question; it was no more than an invitation to the bank to satisfy themselves the the transaction was intra vires and there is no reason to suppose that any request to alter the memorandum would not have been immediately complied with. I am accordingly satisfied that this submission also fails.

In these circumstances, I am satisfied that the execution of the guarantee was ultra vires and that the bank cannot successfully rely on any of the grounds advanced by counsel. It is, I think, accepted that the mortgage is in turn dependent for its validity upon the guarantee; the company could not validly execute a mortgage in order to secure an obligation which they had no power to accept in the first place. This is, in any event, made clear by sub-paragraph (f) to which reference has already been made. The claim of the bank against the company will accordingly be dismissed.