Gillies v Craigton Garage Company

CourtCourt of Session (Inner House - First Division)
Judgment Date15 February 1935
Date15 February 1935
Docket NumberNo. 44.


Sheriff of Lanarkshire.

No. 44.
Craigton Garage Co

Company—Management—Liability ex contractu—Directors—Powers—Directors borrowing on security of company's property—Transaction ultra vires of directors—Whether binding on company in question with lender—Right of lender to assume transaction duly sanctioned.

The directors of a private company having obtained a loan on the security of the company's heritable property, the property was conveyed to the lender by ex facie absolute disposition. At the same time a minute of agreement was executed between the lender and the company, which narrated that the disposition, although ex facieabsolute, was truly granted in security, and that the company, on repaying the sums due, was to receive a reconveyance of the property. The minute of agreement also provided, inter alia, that the lender was to receive interest at the rate of 7½ per cent, and also 25 per cent of the company's profits, and was to be made a director of the company; that he was not to require repayment of the principal sum for five years; that he was to permit the company to remain in possession of the subjects until the happening of certain events, including the event of the company becoming notour bankrupt; and that, in that event, its right to reconveyance of the subjects should cease, and the company should vacate the subjects on due notice being given by the lender. The company having become notour bankrupt, the lender duly gave notice to vacate the subjects, and thereafter brought an action concluding for declarator that the company had forfeited the right to hold the subjects, and that he was freed from the obligation to reconvey, and for decree of removing.

In defence the company averred that the loan transaction was void as being ultra vires of its directors, in respect that, under the company's articles of association, the directors were prohibited from borrowing moneys in excess of the issued share capital, as had been done here, without the sanction of the company in general meeting; and that the company's sanction had not been obtained. The lender, however, maintained that, in accordance with the rule ofTurquand's case, as the sanction required did not involve any alteration in the constitution of the company which had to enter the Register, he was entitled to assume that, in negotiating the loan, the company's directors had obtained the necessary sanction. In reply, the company maintained that the circumstances of the transaction here were so unusual as to put the lender on his inquiry as to whether the necessary sanction had been obtained, and that the rule ofTurquand's case was accordingly inapplicable.

Held that, in the circumstances, the lender, in contracting with the directors of the company, was entitled to assume that they had the company's sanction for the loan, and, accordingly, that the defence to the action failed; and decree granted.

Royal British Bank v. TurquandENRENR, (1856) 6 El. & Bl. 327, (1855) 5 El. & Bl. 248, applied.

Irvine v. Union Bank of AustraliaELR, (1877) 2 App. Cas. 366, distinguished.

Robert Hill Richmond Gillies, heritable proprietor of the subjects, 20 Maryland Gardens, Paisley Road West, Glasgow, brought an action in the Sheriff Court of Lanarkshire at Glasgow against the Craigton Garage Company, Limited, a private company having its registered office at the said subjects, and occupying the subjects under a minute of agreement between the pursuer and itself, dated 29th March 1932. The pursuer craved the Court to find and declare that, in respect of the defenders' notour bankruptcy, they had forfeited the right to hold and enjoy the subjects, and that the pursuer was freed from an obligation under the said minute to reconvey the subjects to the defenders; and, further, to ordain the defenders summarily to remove from the subjects. The action was defended.

The following is a summary of the facts of the case, which will be found fully set forth in the opinion of Lord Blackburn:—In 1932 the subjects, 20 Maryland Gardens, Paisley Road West, Glasgow, where the defenders had their registered office and place of business, belonged to one of the defenders' directors, named Sharp. Mr Sharp desired to sell the subjects, and the defenders desired to acquire them. The defenders were a small company, with an authorised capital of only £1500, and an issued capital of £1035, and they had no funds with which to purchase the subjects. With a view to financing the purchase, their managing director, John Morgan, approached the pursuer and persuaded him to grant a loan of £750 to the defenders, who thereupon purchased the subjects. In consideration of this loan the defenders granted in the pursuer's favour a disposition of the subjects, dated 29th March 1932, and, at the same time, the pursuer and the defenders entered into a minute of agreement by which, on the narrative that the disposition, although ex facie absolute, was truly granted in security for the loan, they set forth the conditions on which the subjects were to be held by the pursuer.

The minute of agreement was in, inter alia, the following terms:—"(Third) The Company [i.e., the defenders] hereby binds and obliges itself as follows:—(1) During the not payment of the said principal sum of Seven hundred and fifty pounds sterling, that it will pay to the First Party [i.e., the pursuer] and charge as part of the ordinary working expenses of the Company interest on the said sum at the rate of seven and a half per centum per annum from the date hereof payable half yearly … (2) Further, that during the not payment of the said principal sum and over and above the interest provided for in the immediately preceding article, the Company will pay to the First Party in name of additional interest or consideration in respect of the said principal sum twenty five per centum of the net annual profits of the Company in each year of non payment of said principal sum. … Both parties hereby agree:—(1) That if the First Party shall cause to be given to the Company or left at the Company's usual or last known Registered Office in Scotland or upon any part of the Security Subjects six months' previous notice in writing requiring payment of the said principal sum, the Company will pay such money forthwith upon the expiration of said notice. It is hereby provided and agreed that the First Party shall not give such notice prior to the expiry of five years from the date hereof. … (3) That at the date of these presents the Company shall issue or cause to be transferred to and registered in the name of the First Party five fully paid up Shares in the Company at the price of one pound per Share (this price being agreed upon for the immediate purpose only) and in respect thereof the First Party shall on registration of such Shares be appointed a Director of the Company. … (Eighth) The First Party shall permit the Company to hold and enjoy the Security Subjects and to receive the rents and profits thereof until any of the events or defaults hereinafter referred to. (Ninth) In the event of the Company:—… (2) becoming insolvent or notour bankrupt, … then and in any such events the right to reconveyance of the Security Subjects hereinafter provided for shall cease and determine. (Tenth) The First Party undertakes upon due payment in accordance with the foregoing provisions of these presents of the whole moneys hereby secured and implement of the whole obligations of the Company hereunder to reconvey to the Company the Security Subjects under warrandice from his own facts and deeds only and subject to payment by the Company of the whole expenses of such reconveyance. … (Fourteenth) The Company agrees to vacate the Security Subjects in so far as occupied by it and to give the First Party immediate possession thereof on the expiry of a period of seven days after the posting of a notice by or on behalf of the First Party in a duly registered envelope addressed to the Company at its last known address given at any time after the First Party shall have become entitled to enter into possession of the said subjects as hereinbefore provided; and the Company hereby consents that a warrant of summary ejection may competently proceed against it in the Sheriff Court of the County in which the Security Subjects are situated at the instance of the First Party." It appeared from the minute of agreement that, in addition to the sum of £750 borrowed from the pursuer, the defenders had also on loan another sum of £500.

The pursuer averred, inter alia, that the defenders had become notour bankrupt since the date of the minute of agreement; that he had thereafter duly served upon them notice to vacate the subjects; that the defenders refused or delayed to do so; and that the action was, accordingly, necessary. The defenders, inter alia, denied that they had been notour bankrupt.

On 9th June 1933 the Sheriff-substitute (Welsh) allowed parties a proof of their respective averments dealing with the alleged notour bankruptcy of the defenders, and quoad ultra found the defenders' remaining averments to be irrelevant.

After proof had been led the interim Sheriff-substitute (Innes), on 24th November 1933, found that the defenders had become notour bankrupt, and found and declared and ordained as craved.

The defenders appealed to the Sheriff. They did not impugn the grounds of the Sheriff-substitute's interlocutor, but they moved the Sheriff to recall that interlocutor and to allow them to amend their record so as to introduce a new defence. On 1st May 1934 the Sheriff (Mercer) recalled the Sheriff-substitute's interlocutor of 24th November 1933, and allowed the proposed amendment.

In their defences, as amended, the defenders averred that their directors, in obtaining the said loan from the pursuer, had actedultra vires, and that the loan transaction and the security issued therefor were, accordingly, void.

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