1938 (3) TMI 14 - HC - Companies Law

Court dismisses appeals, rules against secured creditor due to conflict of interest, upholds unsecured creditor's right. Costs ordered.

The court dismissed both appeals, ruling that E.D. Sassoon & Company's claim as a secured creditor against T.R. Pratt (Bombay), Limited was invalid ... Director – Interested, not to participate or vote in Board’s proceedings Issues Involved:1. Validity of the equitable mortgage claimed by E.D. Sassoon & Company, Limited against T.R. Pratt (Bombay), Limited.2. Right of M.T. Limited to prove as unsecured creditors for the balance outstanding at the date of the winding-up order.3. Compliance with Section 91-B of the Companies Act by the directors of Pratts.4. Consequences of the directors of Pratts exceeding their borrowing powers under Article 73 of Table A.Detailed Analysis:1. Validity of the Equitable Mortgage Claimed by E.D. Sassoon & Company, LimitedThe Sassoon Company claimed to be a secured creditor of Pratts for Rs. 4,91,284 based on an equitable mortgage evidenced by indentures dated 28th February 1928 and 11th August 1931. The primary objection was that the directors of Pratts were disqualified under Section 91-B of the Companies Act from entering into these indentures since they were also directors and shareholders of M.T. Limited. The court found that the Sassoon Company had notice of this conflict of interest, making the indentures voidable by the Official Liquidator. The Sassoon Company could not disclaim knowledge of the directors' interest in M.T. Limited, thus invalidating their claim as a secured creditor.2. Right of M.T. Limited to Prove as Unsecured CreditorsM.T. Limited's claim to prove as unsecured creditors for the balance of Rs. 4,91,284 was affirmed by both courts in India. The Official Liquidator resisted this claim on the grounds that the advances from 1921 to 1928 exceeded the directors' borrowing powers under Article 73 of Table A. However, the court held that the loans were not ultra vires of the company, and the money was received and applied for the company's purposes. Therefore, the Official Liquidator could not dispute the liability of Pratts to repay the sums advanced. The court also refused to entertain the argument to revise the account to eliminate interest on advances exceeding five lacs, as it was not raised in the initial trial.3. Compliance with Section 91-B of the Companies ActSection 91-B prohibits directors from voting on contracts in which they have an interest. The court found that the directors of Pratts, being shareholders and directors of M.T. Limited, were directly concerned or interested in the indentures. The Sassoon Company, having knowledge of this interest, could not assume compliance with Section 91-B. The court held that the indentures were voidable due to this non-compliance, and the Sassoon Company was not entitled to the benefit of the contract with Pratts.4. Consequences of Directors Exceeding Borrowing Powers under Article 73 of Table AArticle 73 limits the directors' authority to borrow, requiring that the undischarged borrowing does not exceed the specified limit. The court construed this as a limitation on the directors' authority rather than a prohibition on borrowing beyond the limit. Despite the directors exceeding their authority from 1921 to 1928, the loans were not ultra vires, and the company had received and used the funds. Therefore, the Official Liquidator could not reduce the balance due at liquidation by disputing the liability for the sums advanced.ConclusionThe court dismissed both appeals, affirming that the Sassoon Company's claim as a secured creditor was invalid due to the directors' conflict of interest and non-compliance with Section 91-B. M.T. Limited's right to prove as unsecured creditors was upheld, and the Official Liquidator's attempt to revise the account to eliminate interest was rejected. The Sassoon Company was ordered to pay half of Pratts' costs in the consolidated appeal, and Pratts was to pay the costs of M.T. Limited.