The Gazette 1981

GAZETTE

DECEMBER 1981

Recent

Irish

Cases

COMPANY

Power to Guarantee Borrowing of a

Third Party — Doctrine of "Ultra

Vires".

The Plaintiffs agreed in November

1973 to lend money to the first

named

Defendant

partly

consideration of the second named

Defendants

("The

Company")

guaranteeing the loan, interest and

repayment arrangements supported

by a legal mortgage over the

company's lands. The necessary

resolution empowering the Company

to execute the guarantee and the

mortgage was passed and the

Guarantee and Mortgage were

executed by the Company.

The first named

Defendant

defaulted in the payment of certain

instalments

and

the

Plaintiffs

instituted

proceedings

claiming

payment of £50,829 by the first

named Defendant and sought an

Order

against

the

Company

declaring the lands well charged with

the said sum. Judgment was given

against the first named Defendant for

the sum claimed. The Company

claimed that the execution of the

Guarantee was ultra vires the

Company. The Plaintiffs submitted

that the Guarantee was ultra vires

but that even if it were not the bank

were protected by Section 8 of the

Companies Act, 1963, and further

that since the Company had altered

its Memorandum of Association on

the 18 May 1974 so as to put the

Company's

power

give

Guarantees beyond doubt the

Guarantee

was

retrospectively

validated and finally that the

Company was stopped from relying

on the lack of vires.

The first Objects Clause of the

Memorandum

Association

in truncated form read "to acquire

and hold . . . shares and stocks of

any class or description, Debentures,

Debenture Stock, 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 anykind . . .".

Clause

2 (0 empowered the

Company "incidentally to the objects

aforesaid, but not as a primary

object, to sell, exchange, mortgage,

(with or without power of sale),

.i' den, turn to account or otherwise

d'spose of and generally deal with the

whole or any part of the property,

shares, stocks, securities, estates,

rights or undertakings of the

Company . . . " Clause 2 (k)

empowered 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 any 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 Director shall from time to time

determine and to guarantee the

liabilities of the Company in 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

the

Company,

appointment of Directors and

otherwise".

The Court held that it was clear

that sub paragraph (k) did not

authorise the execution of the

Guarantee because it could be done

only incidentally to objects set out in

sub paragraphs (a) to (e), it held that

sub paragraph (k) was essentially

intended to confer a power of

borrowing and the words "secure the

payment of money", could not

reasonably be read as conferring a

power to execute Guarantees. The

Court could not accept that the

words "to guarantee the liabilities of

the Company" which literally

construed were meaningless, should

be construed as though in place of the

words

"the

Company"

there

appeared the words "other person"

or similar words. The Court held that

the execution of a guarantee could

not reasonably be regarded as

"indidcntal or conducive to the

attainment of "any of the objects set

out in the sub paragraphs preceding

sub paragraph (t); the sole object of

executing the Guarantee was to

facilitate the borrowing by the first

named defendant.

In holding that the exemption of

the guarantee was ultra vires the

Court found it unnecessary to decide

whether if the Memorandum had

conferred an express power to

execute

the

Guarantee

the

transaction would none the less be

ultra vires, since no conceivable

benefit could result to the Company

from it and indicated that the

decision in

Lee Behrens and Co.,

I 19321 2 Ch. 46 would require

reconsideration in the light of the

dec ision in

Charterbridge

Cor-

poration

Limited

v. Llovds

Bank

I 1970| Ch. 2.

The Court rejected the submission

that the Plaintiff was protected by

Section 8(1) of the Companies Act

1963. Accepting that actual, as

distinguished

from

constructive,

notice of the lack of vires as

essential if a third party was to lose

the protection of Section 8(1) the

Court held that the Plaintiff through

its Solicitor, to whom the

Memorandum and Articles of the

Company had been supplied prior to

the execution of the Guarantee, was

aware of the contents of the

Memorandum and could not rely on

Section 8(1).

The Court further held that

Section 10(1) of the Companies Act

which reads "subject to sub-section

(2) a Company may, by Special

Resolution, alter the provisions of its

Memorandum

abandoning,

restricting or amending any existing

object or by adopting a new object

and any alterations so made shall be

as valid as if originally contained

therein and be subject to alterations

and like manner" did not operate so

as to retrospectively validate a

transaction entered into prior to the

passing of the resolution.

Finally the Court held that the

Company was not estopped from

contesting the validity of the

xxxiii