Conflict of interest and indoor management principles affect enforceability of a company security deed and borrowing liability.

A security deed described as a suretyship was treated according to its substance: it created a joint and several liability supported by consideration arising from the tripartite financing arrangement and implied forbearance to sue. The deed nevertheless could not be enforced by Sassoons because the authorising resolution was invalid where interested directors were disqualified from voting and the surrounding circumstances defeated reliance on indoor management. The article also notes that borrowings within the directors' authorised limit under Article 73 remained recoverable where the company had actually and bona fide received the funds for its business.

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Issues: (i) whether the security deed of 28 February 1928 created a valid and binding liability in favour of Sassoons or was void as a suretyship arrangement without effective authority or consideration; (ii) whether the resolution authorising the deed was invalid because the directors of Pratts were disqualified from voting under the companies legislation and whether Sassoons had notice of that disability; (iii) whether M.T. Ltd.'s claim fell within the directors' borrowing power under Article 73 and was recoverable against the company.

Issue (i): whether the security deed of 28 February 1928 created a valid and binding liability in favour of Sassoons or was void as a suretyship arrangement without effective authority or consideration.

Analysis: The deed, read as a whole, showed that Pratts acknowledged receipt of Rs. 4,50,000 out of the Rs. 9,00,000 advanced by Sassoons to M.T. Ltd., and undertook a joint and several liability with M.T. Ltd. for that amount. The transaction was not a guarantee for another's debt in the strict sense, but a tripartite arrangement in the nature of novation and indemnity, supported by the implied forbearance to sue and the time given to M.T. Ltd. The form of description in the deed as "surety" did not control its legal effect.

Conclusion: The deed was not void for want of consideration or as a mere suretyship transaction, but the claim of Sassoons nevertheless failed because the authorising resolution was held invalid.

Issue (ii): whether the resolution authorising the deed was invalid because the directors of Pratts were disqualified from voting under the companies legislation and whether Sassoons had notice of that disability.

Analysis: A director directly or indirectly interested in a contract could not vote on it. The directors of Pratts were also interested in M.T. Ltd., creating a conflict of interest in the very transaction under consideration. The invalidity arising from that statutory disability could be relied on against Sassoons because they were not protected by the rule of indoor management once the surrounding circumstances, the common directorship, and Mr. Raymond's position as managing director of Sassoons were considered. The deed's foundation therefore collapsed as against Sassoons, and ratification by shareholders was not established on the evidence.

Conclusion: The resolution was invalid as against Sassoons, and Sassoons had no enforceable secured claim under the deed.

Issue (iii): whether M.T. Ltd.'s claim fell within the directors' borrowing power under Article 73 and was recoverable against the company.

Analysis: Article 73 limited the amount borrowed by the directors to the company's issued capital. The claim due at liquidation was below that ceiling. The prior borrowings, though at one stage in excess of the limit, had been reduced, and the balance claimed represented money received and applied for the company's business. In those circumstances the company was liable to repay the amount actually and bona fide received within the authorised limit, and no further accounting was warranted on the state of the record.

Conclusion: M.T. Ltd.'s claim was allowed as a valid claim against the company.

Final Conclusion: The appeal succeeded in relation to Sassoons and failed in relation to M.T. Ltd.; the result was a partial allowance of the appeal with Sassoons' claim rejected and M.T. Ltd.'s claim admitted.

Ratio Decidendi: A third party cannot rely on the rule of indoor management where the company's articles and surrounding facts disclose a statutory or apparent conflict of interest invalidating the authorising resolution, but where borrowings are within the directors' power and money has been bona fide received for the company's business, the company remains liable to repay it.

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