Indoor management rule defeated by constructive notice of director disqualification, voiding the mortgage while company remains liable to repay bona fide advances.

The deed of 28 February 1928 was held impeachable because the mortgage, though creating a primary joint obligation for funds advanced, rested on board approval obtained by directors who were personally interested and therefore disqualified under statutory director disqualification rules; the outsider had constructive notice of that irregularity and could not invoke the indoor management rule, so the security is not binding on the company. Separately, advances by M.T. Ltd. that were received and bona fide applied by a company competent to borrow give rise to an enforceable obligation (money had and received or implied promise to repay); M.T. Ltd.'s admitted balance is recoverable as an unsecured claim.

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Issues: (i) Whether the mortgage deed dated 28 February 1928 executed by the company (Pratts), M.T. Ltd. and E.D. Sassoon & Co., Ltd. was valid and binding on the company; (ii) Whether the claim of M.T. Ltd. for monies advanced to the company is recoverable notwithstanding that directors had previously borrowed in excess of the limit in Article 73.

Issue (i): Whether the deed of 28 February 1928 created a binding obligation and security in favour of Sassoons enforceable against the company.

Analysis: The deed recited that Sassoons advanced Rs. 9,00,000 to M.T. Ltd., that Rs. 4,50,000 of that sum had been received by the company, and provided that M.T. Ltd. and the company would jointly and severally repay Rs. 4,50,000 secured by deposit of title deeds. The Court examined (a) the character of the transaction (suretyship v. joint liability/novation), (b) consideration and novation principles, (c) the directors' resolution authorising execution, and (d) the effect of statutory disqualification under Section 91-B (director interested in contract must not vote). Applying the indoor management rule (Royal British Bank v. Turquand) the Court held that outsiders are ordinarily entitled to assume internal regularity, but this protection is lost where the outsider has actual or constructive notice of the relevant irregularity. The Court found the deed was not in substance a mere suretyship but created a primary/joint obligation in respect of Rs. 4,50,000 and that there was consideration (including implied forbearing by M.T. Ltd.). However, because the directors of Pratts who voted were common with M.T. Ltd. and therefore personally interested, those votes were disqualified under Section 91-B. The Court concluded that Sassoons had constructive notice of the common directorship (through the attestation of board resolutions and the role of the common managing director) so as to put them on inquiry; accordingly the directors' resolution was void and the mortgage executed pursuant to it could be impeached by the company.

Conclusion: The deed of 28 February 1928 is not binding on the company in favour of Sassoons; Sassoons' claim under that deed is rejected.

Issue (ii): Whether M.T. Ltd.'s claim for monies advanced to the company is recoverable despite earlier borrowings by directors exceeding the Article 73 limit.

Analysis: Article 73 of Table A limited directors' borrowing without general meeting sanction to the issued share capital (Rs. 5,00,000). The Court distinguished borrowings ultra vires the directors (but within the company's powers) from borrowings ultra vires the company. Where the company itself has power to borrow and has received and applied the money for its business, equity and the law of agency support an action for money had and received or an implied promise to repay by the company even if directors lacked authority at the time. Authorities were examined on tracing, repayment sequence and application of Clayton's rule; the Court accepted the presumption that repayments were first of unauthorized borrowings and that at the liquidation date the outstanding balance fell within the authorised limit. The Court further noted that the accounts were admitted in the lower court and no challenge to quantum or to interest on unauthorized borrowings was properly raised on appeal.

Conclusion: M.T. Ltd.'s claim is allowed and the company is liable to repay the admitted balance; M.T. Ltd. is entitled to a certificate as unsecured creditor for the amount claimed.

Final Conclusion: The appeal is allowed insofar as it impugned the mortgage/deed in favour of Sassoons (Sassoons' claim dismissed) and is dismissed insofar as it challenged the claim of M.T. Ltd. (M.T. Ltd.'s claim allowed). The company remains liable to M.T. Ltd. for the admitted debt; the security claimed by Sassoons is not sustained against the company.

Ratio Decidendi: Outsiders dealing with a company are protected by the indoor management rule absent actual or constructive notice of internal irregularity; where directors are statutorily disqualified from voting (Section 91-B of the Companies Act, 1929) and the outsider has notice or is put on inquiry by surrounding circumstances, the outsider cannot claim protection and the transaction is impeachable, whereas borrowings made by agents without director authority but received and bona fide applied by a company competent to borrow give rise to an obligation enforceable against the company (recoverable as money had and received or by implied promise).

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