Interested directors and internal borrowing limits: equitable mortgage avoided, but repayment of funds actually received remained enforceable.

An equitable mortgage entered into through interested directors was voidable where the mortgagee had, or must be taken to have had, knowledge of the conflict and the borrowing company's lack of an independent board. The indoor management rule did not protect the mortgagee in those circumstances, so the liquidator could avoid the security and the secured claim failed. By contrast, advances made through the intermediary company remained recoverable in liquidation despite an internal borrowing ceiling in the articles, because the loans were not ultra vires the company, the money was received and applied for corporate purposes, and the account was not reopened to exclude interest on excess advances. The unsecured proof of debt succeeded.

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Issues: (i) Whether the equitable mortgage and its confirmation were voidable for breach of the rule against interested directors where the mortgagee had notice of the directors' interest in the borrowing company; (ii) Whether the loans advanced through the intermediary company could be disputed in liquidation on the ground that advances at one stage exceeded the directors' borrowing limit under the articles, and whether the account could be reopened to exclude interest on the excess.

Issue (i): Whether the equitable mortgage and its confirmation were voidable for breach of the rule against interested directors where the mortgagee had notice of the directors' interest in the borrowing company.

Analysis: A director who is also a shareholder or director of another company has a conflicting personal interest when that other company contracts with the company of which he is a director. Section 91-B embodied that equitable rule and made a contract or arrangement entered into by interested directors voidable by the company. The protection of the indoor management rule is unavailable where the third party cannot honestly claim ignorance of the underlying conflict. On the facts, the mortgagee could not disclaim knowledge that the borrowing company had no independent board and that its directors were interested in the intermediary company which controlled the transactions. The relevant information was materially apparent from the course of dealings and the surrounding corporate control structure.

Conclusion: The mortgage was voidable at the instance of the liquidator, and the secured claim failed.

Issue (ii): Whether the loans advanced through the intermediary company could be disputed in liquidation on the ground that advances at one stage exceeded the directors' borrowing limit under the articles, and whether the account could be reopened to exclude interest on the excess.

Analysis: Article 73 was construed as limiting the directors' borrowing authority so that the outstanding indebtedness should not exceed the prescribed ceiling. Even so, the loans were not ultra vires the company itself, the money was received and applied for corporate purposes, and the liquidator could not avoid repayment of the amounts advanced merely because the directors had exceeded their authority at an earlier stage. As to interest, the request to recast the account so as to eliminate interest on the excess advances was not entertained, and no basis for disturbing that discretionary refusal was shown.

Conclusion: The unsecured claim was maintainable, and no reopening of the account for exclusion of interest was ordered.

Final Conclusion: The equitable mortgage claim was rejected, while the unsecured proof of debt succeeded, and both appeals were dismissed.

Ratio Decidendi: A company transaction entered into by interested directors is voidable where the third party had or must be taken to have had knowledge of the conflict, but corporate borrowing beyond an internal limit does not defeat repayment of money actually received and applied for the company's purposes.

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