The Gazette 1985

GAZETTE

JANUARY/FEBRUARY 1985

before the board. Therefore a resolution passed at a

meeting of three directors, two of whom were interested in

the subject-matter of the vote, failed to pass muster.

However, in the

Cox

case the debenture-holders could fall

back on the "indoor management" rule which the Irish

Court of Appeal had no hesitation in applying. Palles

C.B. held that resolutions as to the issue of debentures fell

within the scope of internal management. A person

bona

fide

purchasing a debenture without notice of any

invalidity or irregularity affecting its issue, was entitled to

rely upon the seal of the company as evidencing that all

matters of that nature had been duly performed.

Persons who are inside the company and act as insiders

are, however, outside the pale of protection afforded by

the rule.

There was some suggestion that the debenture

holders had debarred themselves by acting as insiders but

the judges had little difficulty in categorising them as

outsiders. Molony L.J. pointed to the fact that while one

of the holders was once a director of the company, he had

long since ceased to hold such office nor did he participate

actively incorporate management.

In examining the extent of the obligation to investigate

matters of internal management in Ireland, mention must

be made of

Re Burke Clancy Ltdf

Here Kenny J. resolved

the controversy which had arisen over the validity of a

debenture. However, the case is interesting not least

because of what the learned judge omitted to say. The

articles of association of a company prohibited the

directors from borrowing in excess of a specified amount,

unless with the consent of the company in general

meeting. The directors purported to borrow more than

the authorised amount without the consent of the

company in general meeting first having been obtained.

Kenny J. took the view, notwithstanding, that this

omission was not fatal to the validity of a debenture which

created a charge against the assets of the company. It was

settled law that the members of a company may ratify acts

which are outside the powers of the directors but are

intra

vires

the company.

Grant

-v-

U.K. Switchback Railway

Co.

was cited in support of this proposition. There the

articles authorised the sale of part of the company's

undertaking to any other company but prohibited a

director from voting in respect of any contract in which he

was interested. The directors, acting on behalf of the

company, contracted to sell part of its undertaking to

another company in which all the directors of the first

company, with the exception of one, were interested. The

contract was

ultra vires

the directors because only one of

them was competent to vote. However the approval of the

company in general meeting made it binding on the

company.

This situation was obviously analogous to the matter

which arose for determination in

Re Burke Clancy Ltd.

Kenny J. said that similarly, in this case, the approval of

the accounts showing the amount borrowed was a

ratification by the company of the action of the directors

in borrowing an amount in excess of the issued share

capital.

While this line of reasoning was dispositive, the bank,

to whom the debenture had been issued, also invoked the

authority of

Turquand's

case. The Judge appears to have

regarded this submission as something in the nature of an

afterthought, which indeed it may have been since no

authorities were opened on this branch of the law. He

reserved for future consideration the question whether

when the articles of association limit the borrowing

powers of the directors and prescribe that the directors

may not borrow more than the authorised or issued share

capital without the consent of the company in general

meeting and an application is made to a lender for a loan

which will exceed that limit, he may assume that the

necessary enabling resolution has been passed.

Re. Hampshire Land Co.

It is submitted that to require proof of such matters

would be to impose too onerous a burden on the business

community. An outsider transacting business with a

company in such a situation has no means of ensuring

that there has been compliance with the conditions laid

down in the articles of association. He is not required to

look behind the public documents of a company. In

Royal

British Bank

-v-

Turquand

itself, it was held that since,

under the registered deed of settlement which was the

predecessor of the modern memorandum and articles of

association, the directors might have had authority, the

third party was at liberty to assume that they had been

authorised.

Jervis C.J. put the matter thus:

We may now take for granted that the dealings with

these companies are not like dealings with other

partnerships and that the parties dealing with them

are bound to read the statute and the deed of

settlement. But they are not bound to do more. And

the party here, on reading the deed of settlement,

would find not a prohibition from borrowing, but a

permission to do so on certain conditions. Finding

that the authority might be made complete by a

resolution, he would have a right to infer the fact of

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