NOTES OF CASES
| Date | 01 January 1970 |
| DOI | http://doi.org/10.1111/j.1468-2230.1970.tb01255.x |
| Published date | 01 January 1970 |
NOTES
OF
CASES
OBJECTS,
POWER
AND
ULTRA VIRES
THE modern doctrine
of
ultra vires
is now almost a century old. It
is a reproach
to
Parliament that
it
still exists
in
its present form.
It
is
a
reproach
to
the courts that
it
is even now obscure in its
details and capricious in its incidence. One of the most obscure areas
concerns the application of the doctrine
to
corporate powers. Cases
such as
Parke
v.
Daily News
Ltd.'
treat exercises
of
powers directed
towards ends other than the financial prosperity
of
the company as
ultra vires
while others, treating improper exercises of powers as
ratifiable, appear to be developing a doctrine of
dktournement
de
pouvoir
in English company The latest such decision,
Char-
terbridge Corporation
v.
Lloyds Bank Ltds
makes
it
clear that the
cases
on
exercise of powers cannot all be subsumed under the head
of
ultra ~ires.~
What the decision fails to do is
to
resolve satisfac-
torily the relationship between express and implied powers in
relation
to
ultra vires.
In the
Charterbridge
case the Castleford company, one of a
group, had express power to secure
on
guarantee by mortgage the
performance
or
discharge of any contract of the company
or
of
any
other person
or
company with which Charterbridge had dealings
or
in whose business
it
was concerned. Its directors who were also
directors of the other companies in the group caused Castleford
to
grant a second mortgage in favour of the bank
to
guarantee the
indebtedness of other companies in the group. Later, Castlefmd
sold the mortgaged properties
to
the plaintiff company, but while
a
first mortgage
on
the property was discharged by the vendor, the
second mortgage
in
favour of the bank was not. Ultimately, the
plaintiff company discovered that Castleford could not make
good
title and the
bank
threatened
to
realise the security. The plaintiff
company, which by this time had paid
a
considerable sum
in
rela-
tion
to
the property, brought this action
for
a
declaration that the
legal charge in favour
of
the bank was void as being
ultra vires.
It
was found as a fact that the officers of Castleford
did
not consider
its interests separately from those of the group. Equally, they did
not believe that the transactions were prejudicial to Castleford.
The bank's officers did not give separate attention to the affairs
of
Castleford but were not aware that the transaction was one apt to
prejudice its interests.s
rig621
ch.
927.
he
t.
&
M.
Ra'tk
Ltd.
[1967]
1
W.L.R.
432.
[1969]
2
All
E.R.
1185.
Cf.
Palmer's
Company
Lam
(21sk
ed.,
19$8),
pp.
81-89.
[1969]
2
All
E.R.
1185,
1188
(G-H).
81
82
THE
MODERN
LAW
REVIEW
VOL.
33
In
the result Pennycuick
J.
upheld the mortgage. One ground
of decision is not the primary concern of this note, but is of some
interest.
His
Lordship held that while directors of a company in a
group do not satisfy their duty by looking only
to
the benefit
of
the
group alone, they are equally not obliged
to
consider the affairs of
the particular company
in
isolation from the group. The proper
test in the absence of actual separate consideration is
“
.
.
.
whether an intelligent and honest man in the position of
a
director
of
the company concerned, could,
in
the whole
of
the existing
circumstances, have reasonably believed that the transaction was
for the benefit of the company.” Such a view could plainly have
been taken here.
In
addition the bank’s officers, given the circum-
stances, could not be treated as knowing that the transactions were
not for Castleford’s benefit.‘ The case could,
on
the authority
of
Re David Payne
4
Co.
Ltd.,8
have been decided
on
this short
ground alone.
Before dealing with this point, Pennycuick
J.
rejected two
defence contentions and
it
is
his
Lordship’s discussion
of
these which
makes the case a particularly interesting one. The first was that in
granting the mortgage the directors were acting
for
purposes outside
the scope of the company’s business. Here, however, the evidence
was that the granting of the mortgage was reasonably connected
with the company’s business and the contention therefore failed.
The second contention was that the grant of the mortgage was
ultra vires
in that the directors
in
creating
it
had regard to the
interests of the group rather than
to
those
of
the company as such.
The claim was based
on
the principles respecting the exercise of
powers laid down in
Re Lee Behrens
S;.
Co.
Ltd.,s
namely, that the
validity
of
grants made under express
or
implied powers must be
determined by asking whether the transaction is (i) reasonably inci-
dental
to
the company’s business,
(ii)
bona fide, and (iii) done for
the benefit
of
and
to
promote the prosperity of the company.
Pennycuick
J.
treats (i) as an inappropriate question to ask in the
case of express powers, (ii) as relating primarily to directors’ duties
and perhaps
in
part
to
implied powers and (ii) as
“
.
.
.
quite
inappropriate to the scope of express powers.”
lo
The diaculties
arise from the treatment of considerations (i) and
(iii).
The treatment
of
(ii)
is,
it
is
submitted, correct. Bona fides is not a term which,
in
this field, has any precise connotation. Its absence clearly does
not imply the presence of dishonesty.
In
the allotment cases (under
express powers) the absence of
bona
fides need mean
no
more than
that the directors proceeded as they
did
simply because they paid
primary attention to the interest of persons other than the general
body of shareholders taken as a whole. Thus share allotments made
by directors in order merely to forestall a take-over which the
6
Ibid.
St
p.
1194
(C-E).
8
[1904]
2
Ch.
608.
9
[1932]
2
Ch.
46.
1
Ibid.
et
p.
1196
(A).
10
[1969]
2
All
E.R.
1186, 1191
(C-D).
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