1937 (6) TMI 9 - HC - Companies Law

Bank ordered to account for cash balance to old Company post-Government claim. Court upholds company's legal entity.

EBM Co. Ltd. Versus Dominion Bank

EBM Co. Ltd. Versus Dominion Bank - [1937] 7 COMP. CAS. 448 (PC) Issues Involved:1. Validity of the hypothecation document executed by the old Company.2. Whether the old Company and the three partners were engaged in a common business venture.3. Whether the transaction was intra vires (within the powers) of the old Company.4. Whether the transaction was ultra vires (beyond the powers) of the directors of the old Company.5. Whether the transaction was ratified by the shareholders of the old Company.6. Whether the old Company derived any benefit from the transaction.Issue-wise Detailed Analysis:1. Validity of the Hypothecation Document:The old Company contested the validity of the hypothecation document, asserting it was not an effective security binding upon the old Company. The document was signed by the three partners and affixed with the old Company's seal by Charles Burns and Marco Leon. However, no resolution was passed by the directors or shareholders authorizing this charge. The Bank did not inquire about the authority for its execution, which was crucial in determining its validity.2. Common Business Venture:The trial judge, Kelly, J., concluded that the old Company and the three partners were engaged in a common business venture, implying a community of interest between them. However, this view was not supported by evidence. The old Company had ceased its brewing business in 1927 and was not involved in the real estate business of the three partners. The Court found no evidence that the old Company was concerned in the 'boot-legging' business or the real estate ventures of the partners.3. Intra Vires of the Old Company:The Court of Appeal diverged in their views. Masten, J.A., held that the transaction was intra vires the old Company, believing it was part of winding up a co-adventure with the partners. However, the evidence did not support that the old Company was involved in the 'boot-legging' business or had any interest in the real estate business. The assumption that the transaction was intra vires was not justified.4. Ultra Vires of the Directors:The directors of the old Company applied its assets for their personal benefit without the sanction of the Company in a general meeting. This misuse of powers rendered the transaction ultra vires the directors. The Court emphasized that directors cannot use their powers to benefit themselves, and such transactions are unenforceable against the Company, regardless of any perceived benefit to the Company.5. Ratification by Shareholders:The argument that the unanimous agreement of all shareholders could ratify the transaction was rejected. The Bank was aware that not all shareholders (specifically the wives of the partners) were beneficial owners of the shares. The Court found no evidence that the transaction was approved or authorized by all shareholders, making any alleged ratification invalid.6. Benefit to the Old Company:The Court found no benefit to the old Company from the transaction. The hypothecation deprived the old Company of its principal asset, which was crucial for its litigation with the Dominion Government. Even if some benefit had accrued, the overriding fact remained that the directors applied the Company's property for their benefit, making the transaction unenforceable.Conclusion:The appeal succeeded, with the Bank required to account to the old Company for the balance of cash remaining after paying the Government's claim. The Court emphasized the importance of maintaining the distinction between a company's legal entity and its shareholders, rejecting any notion that the Company was a sham or agent of the partners. The judgment of Kelly, J. was varied, and the Bank was ordered to pay the old Company's costs of the action and appeals.